What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-10 compared with 2021-08-11 · 117 added, 108 removed, 283 unchanged (44% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the Periods Ended June 30, 2021 and 2020

For the Periods Ended September 30, 2021 and 2020

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements (Unaudited), related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K, filed on March 11, 2021 with the U.

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Sale of Certain Agency Business

On June 30, 2021, our agency (Sycamore Insurance Agency) sold to Venture Holdings, Inc.

the customer accounts and other related assets of some of its personal and commercial lines of business.

On June 30, 2021, our agency (Sycamore Insurance Agency) sold to Venture Agency Holdings, Inc.

the customer accounts and other related assets of some of its personal and commercial lines of business (the “Venture Transaction”).

Sycamore will continue to produce various personal and commercial lines that it did not sell which is substantially all produced for, and underwritten by, our Insurance Company Subsidiaries.

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Both notes require interest-only quarterly payments at a per annum rate of 7.0%, with a five-year maturity.

However, we expect the $3 million note to be paid in full within the next quarter.

There are no prepayment penalties.

The assets sold included the customer accounts (mainly agency-related new and renewal rights) of substantially all of the personal lines business and a small subset of the commercial lines business underwritten by our Insurance Company Subsidiaries, and all of the customer accounts Sycamore produced for third-party insurers.

The transaction included the

transition of 21 employees from CHI to Venture as well as necessary systems and office functions to operate the business.

The Venture Transaction included the transition of 21 employees from CHI to Venture as well as necessary systems and office functions to operate the business.

Venture did not assume any in-force business or liabilities.

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We expect our Insurance Company Subsidiaries will continue to underwrite substantially all of the business we sold to Venture that we underwrote prior to the transaction.

W e expect Venture to be able to grow both the business we underwrite plus the third-party business more effectively as a separate entity outside of CHI’s group.

As of June 3 0 , 202 1 , we had a non-controlling 50% interest in Venture.

W e expect Venture to be able to grow both the business we underwrite plus the third-party business more effectively as a separate entity outside of CHI’s grou p.

As of June 3 0 , 202 1 and September 30, 2021 , we had a non-controlling 50% interest in Venture.

Business Overview

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We have expanded the wholesale agency business to develop more non-risk revenue streams, and provide our agents with more insurance product options.

However, as a result of the sale of certain agency business on June 30, 2021, going forward, our agency segment will not be producing any significant amounts of business for third party insurers and will produce approximately 50% less business for the Insurance Company Subsidiaries.

However, as a result of the sale of certain agency business on September 30, 2021, going forward, our agency segment will not be producing any significant amounts of business for third-party insurers and will produce approximately 50% less business for the Insurance Company Subsidiaries.

Critical Accounting Policies and Estimates

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We evaluate these estimates and assumptions periodically on an on-going basis based on a variety of factors.

There can be no assurance, however, that actual results will not be materially different than our estimates and assumptions, and that reported results of operation will not be affected by accounting adjustments needed to reflect changes in these estimates and assumptions.

During the six months ended June 30, 2021, there were no material changes to our critical accounting policies and estimating methodologies, which are disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2021.

There can be no assurance, however, that actual results will not be materially different than our estimates and assumptions, and that reported results of operations will not be affected by accounting adjustments needed to reflect changes in these estimates and assumptions.

During the nine months ended September 30, 2021, there were no material changes to our critical accounting policies and estimating methodologies, which are disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2021.

Executive Overview

The Company reported $35.0 million of gross written premiums in the second quarter of 2021, representing a 27.0% increase as compared to the same period in 2020.

Gross written premiums were $65.4 million for the six months ended June 30, 2021, representing a 24.2% increase as compared to the same period in 2020.

The Company reported $33.7 million of gross written premiums in the third quarter of 2021, representing a 12.9% increase as compared to the same period in 2020.

Gross written premiums were $99.1 million for the nine months ended September 30, 2021, representing a 20.1% increase as compared to the same period in 2020.

The increase in both periods was the result of growth in both commercial and personal lines business as we continue to penetrate markets where we have been the most successful while still reducing exposure to less profitable lines.

The Company reported net income of $5.6 million, or $0.57 per share, and net income of $916,000, or $0.09 per share, for the three and six months ended June 30, 2021, respectively.

The Company reported net income of $1.5 million, or $0.16 per share, and a net loss of $3.2 million, or $0.34 per share, for three and six months ended June 30, 2020, respectively.

The Company reported a net loss of $1.2 million, or $0.12 per share, and a net loss of $293,000, or $0.03 per share, for the three and nine months ended September 30, 2021, respectively.

The Company reported net income of $541,000, or $0.06 per share, and a net loss of $2.7 million, or $0.28 per share, for three and nine months ended September 30, 2020, respectively.

Adjusted operating loss , a non-GAAP measure, was $ 1.7 million , or $0.

4 0 per share for the three months ended June 30 , 2021 .

Adjusted operating loss was $10.9 million, or $1.13 per share for the six months ended June 30, 2021.

Adjusted operating loss was $461,000, or $0.0 4 per share for the three months ended June 30, 2020.

Adjusted operating loss was $3.1 million, or $0.33 per share for the six months ended June 30, 2020.

Our underwriting combined ratio was 113.2% and 120.8% for the three and six months ended June 30, 2021, compared to 100.5% and 106.1% for the three and six months ended June 30, 2020, respectively.

Results of Operations For The Three Months Ended June 30, 2021 and 2020

18 per share for the three months ended September 30 , 2021 .

Adjusted operating loss was $1 2 .

6 million, or $1.

30 per share for the nine months ended September 3 0, 2021.

Adjusted operating loss was $ 2.4 million , or $0.

24 per share for the three months ended September 30, 2020.

Adjusted operating loss was $ 5.6 million , or $0.

58 per share for the nine months ended September 30, 2020.

Our underwriting combined ratio was 106.9% and 116.0% for the three and nine months ended September 30, 2021, compared to 110.7% and 107.7% for the three and nine months ended September 30, 2020, respectively.

Results of Operations For The Three Months Ended September 30, 2021 and 2020

The following table summarizes our operating results for the periods indicated (dollars in thousands):

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Three Months Ended

September 30,

Gross written premiums

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The resulting net earned premiums are impacted by the gross and ceded written premiums, earned ratably over the terms of the policies.

Our premiums are presented below for the three months ended June 30, 2021 and 2020 (dollars in thousands):

Our premiums are presented below for the three months ended September 30, 2021 and 2020 (dollars in thousands):

Summary of Premium Revenue

Three Months Ended

September 30,

Gross written premiums

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Personal lines

Gross written premiums increased $7.4 million, or 27.0%, to $35.0 million for the three months ended June 30, 2021, as compared to $27.5 million for the same period in 2020.

Commercial lines gross written premiums increased $5.3 million, or 20.9%, to $30.9 million in the second quarter of 2021, as compared to $25.6 million for the second quarter of 2020.

The increase was due to $7.1 million of additional gross written premium in the Company’s small business programs during the second quarter of 2021, as compared the second quarter of 2020.

This increase was offset by a $1.8 million reduction of gross written premium in the Company’s hospitality programs during the second quarter of 2021, as compared to the second quarter of 2020.

Personal lines gross written premiums increased $2.1 million, or 107.4%, to $4.0 million in the second quarter of 2021, as compared to $1.9 million for the same period in 2020.

Gross written premiums increased $3.9 million, or 12.9%, to $33.7 million for the three months ended September 30, 2021, as compared to $29.8 million for the same period in 2020.

Commercial lines gross written premiums increased $2.6 million, or 9.3%, to $29.8 million in the third quarter of 2021, as compared to $27.3 million for the third quarter of 2020.

The increase was due to $4.8 million of premium growth in the small business programs, partially offset by a $2.3 million reduction of gross written premium in the Company’s hospitality programs.

Personal lines gross written premiums increased $1.3 million, or 51.5%, to $3.9 million in the third quarter of 2021, as compared to $2.5 million for the same period in 2020.

The increased gross written premiums were due to continued growth in the Company’s low-value dwelling book of business.

Net written premiums increased $5.5 million, or 23.7%, to $28.5 million for the three months ended June 30, 2021, as compared to $23.1 million for the same period in 2020.

Net written premiums increased $1.0 million, or 4.1%, to $26.1 million for the three months ended September 30, 2021, as compared to $25.0 million for the same period in 2020.

Net written premiums did not increase as much as gross written premiums due to a combination of factors that increased our ceded premium rates.

Our blended ratio of ceded earned premiums to gross earned premiums increased from 16.2% to 17.8% in the second quarters of 2020 and 2021, respectively.

Our blended ratio of ceded earned premiums to gross earned premiums increased from 17.3% to 21.5% in the third quarters of 2020 and 2021, respectively.

The increase was due to a combination of:

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Other income consists primarily of fees charged to policyholders by the Company for services outside of the premium charge, such as installment billings and policy issuance costs.

Commission income is also received by the Company’s insurance agencies for writing policies for third party insurance companies.

Other income for the three months ended June 30, 2021, decreased $47,000, or 6.6%, to $666,000 as compared to $713,000 for the same period in 2020.

The decrease in other income was primarily due to a one-time item in 2020 that did not occur in 2021.

However, revenue in the Agency operations in the second quarter of 2021 continued to grow moderately, compared to the same period in 2020.

Other gains were $8.9 million for the three months ended June 30, 2021, compared to $145,000 for the same period in 2020.

The Company sold a portion of its Agency business during the second quarter of 2021, resulting in an $8.9 million gain.

The $145,000 gain in the second quarter of 2020 was due to the repurchase of 9,761 units of the Notes at a discount to face value.

Other income also includes the interest income from the $9.0 million of the notes payable from Venture relating to the Venture Transaction.

Commission income is also received by the Company’s insurance agency for writing policies for third-party insurance companies.

All of the third-party business was sold to Venture at June 30, 2021.

Accordingly, other income from that business will diminish over the next few quarters as it transitions over to Venture, and will ultimately no longer occur.

Other income for the three months ended September 30, 2021, increased by $110,000, or 17.1%, to $752,000 as compared to $642,000 for the same period in 2020.

Other income relating to installment billings and policy issuance costs was lower in 2021, particularly in the third quarter, as the business that was sold to Venture at June 30, 2021, no longer produces other income for the Company.

This was more than offset by an increase in the interest income from the notes payable of $158,000 in the third quarter of 2021.

Other gains were $2.8 million for the three months ended September 30, 2021, compared to $0 for the same period in 2020.

The Company received notice from the SBA that the PPP loan was 100% forgiven, including accrued interest, on July 8, 2021.

This resulted in a $2.8 million gain that is included in Other Gains on the Consolidated Statement of Operations in the third quarter of 2021.

Losses and Loss Adjustment Expenses

The tables below detail our losses and loss adjustment expenses and loss ratios in our underwriting business for the three months ended June 30, 2021 and 2020 (dollars in thousands).

Three months ended June 30, 2021

The tables below details our losses and loss adjustment expenses and loss ratios in our underwriting business for the three months ended September 30, 2021 and 2020 (dollars in thousands).

Three months ended September 30, 2021

Accident year net losses and LAE

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Calendar year loss ratio

Three months ended June 30, 2020

Three months ended September 30, 2020

Accident year net losses and LAE

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Calendar year loss ratio

Net losses and LAE increased by $6.0 million, or 50.1%, to $17.9 million during the second quarter of 2021, compared to $11.9 million for the same period in 2020.

The increase in losses was driven by adverse development that occurred during the second quarter of 2021.

The Company experienced $6.2 million of adverse development for the three months ended June 30, 2021.

Of the $6.2 million in adverse development, $1.9 million was related to 2017 and prior accident years, $2.4 million was related to the 2018 accident year, and $1.9 million was related to the 2019 and 2020 accident years.

Substantially all of the development was from the Company’s commercial lines of business.

The Company's incurred losses during the three months ended June 30, 2020, included adverse prior-year reserve development of $3.0 million.

The Commercial lines experienced $3.1 million of unfavorable reserve development mostly attributable to small business lines in 2018 and 2017 and prior accident years, most notably in commercial auto lines.

Net losses and LAE increased by $1.6 million, or 11.0%, to $16.2 million during the third quarter of 2021, compared to $14.6 million for the same period in 2020.

The increase in losses was driven by current accident year losses increasing $3.6 million to $12.5 million for the three months ended September 30, 2021, compared to $8.9 million for the same period in 2020.

The Company experienced $3.6 million of adverse development for the three months ended September 30, 2021, of which $1.1 million was related to 2017 and prior accident years, $1.4 million was related to the 2018 accident year, and $1.0 million was related to the 2019 accident year.

In the third quarter of 2021, $3.4 million of the adverse development was related to the commercial lines of business, mostly from the liability lines, while $290,000 was related to the personal lines of business.

The Company's incurred losses during the three months ended September 30, 2020, included adverse prior-year reserve

development of $4.7 million.

The commercial lines experienced $4.6 million of unfavorable reserve development of which

$2.9 million was incurred in our hospitality programs, and $1.7 million was from our small business programs (mostly in the liability coverages).

The adverse development was attributable to the 2018 and prior accident years.

Expense Ratio

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Three Months Ended

September 30,

Commercial Lines

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Operating expenses

Our expense ratio decreased by 4.6 percentage points in the second quarter of 2021 as compared to the same period of 2020.

The decrease was largely due to underwriting revenue, which consists of net earned premiums and other underwriting income, increasing by $3.0 million, or 14.0% to $24.9 million for the three months ended June 30, 2021, compared to $21.9 million during the same period in 2020.

Our expense ratio decreased by 3.2 percentage points in the third quarter of 2021 as compared to the same period in 2020.

The decrease was largely due to underwriting revenue, which consists of net earned premiums and other underwriting income, increasing by $2.8 million, or 12.3% to $25.7 million for the three months ended September 30, 2021, compared to $22.9 million during the same period in 2020.

Policy acquisition costs are costs we incur to issue policies, which include commissions, premium taxes, underwriting reports and underwriter compensation costs.

The Company offsets direct commissions with ceded commissions from reinsurers.

For the three months ended June 30, 2021 and 2020, the percentage of policy acquisition costs to net earned premiums and other underwriting income decreased by 2.0 percentage points to 28.3% compared to 30.3%, respectively.

For the three months ended September 30, 2021 and 2020, the percentage of policy acquisition costs to net earned premiums and other underwriting income decreased by 0.9 percentage points to 29.2% compared to 30.1%, respectively.

Acquisition costs are lower due to a combination of a change in mix of business with lower average acquisition costs, less expensive fronting arrangements, and more ceding commissions in select areas that are mostly ceded under quota share agreements.

Operating expenses consist primarily of employee compensation, information technology and occupancy costs, such as rent and utilities.

Operating expenses as a percent of net earned premiums and other underwriting income were 13.0% and 15.6% for the three months ended June 30, 2021 and 2020, respectively.

Operating expenses as a percent of net earned premiums and other underwriting income were 13.1% and 15.4% for the three months ended September 30, 2021 and 2020, respectively.

The operating expense ratio was lower due to our expense reduction efforts, where there has been a real nominal dollar decrease in operating expenses, coupled with net earned premium growth.

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We measure the performance of our consolidated results, in part, based on our underwriting gain or loss.

The following table provides the underwriting gain or loss for the three months ended June 30, 2021 and 2020 (dollars in thousands):

The following table provides the underwriting gain or loss for the three months ended September 30, 2021 and 2020 (dollars in thousands):

Segment Gain (Loss)

Three Months Ended

September 30,

Commercial Lines

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Total segment gain (loss)

Results of Operations For The Six Months Ended June 30, 2021 and 2020

Results of Operations For The Nine Months Ended September 30, 2021 and 2020

The following table summarizes our operating results for the periods indicated (dollars in thousands):

Six months ended

Nine months ended

September 30,

Gross written premiums

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The resulting net earned premiums are impacted by the gross and ceded written premiums, earned ratably over the terms of the policies.

Our premiums are presented below for the six months ended June 30, 2021 and 2020 (dollars in thousands):

Six months ended

Our premiums are presented below for the nine months ended September 30, 2021 and 2020 (dollars in thousands):

Nine months ended

September 30,

Gross written premiums

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Personal lines

Gross written premiums increased $12.7 million, or 24.2%, to $65.4 million for the six months ended June 30, 2021, as compared to $52.6 million for the same period in 2020.

Commercial lines gross written premiums increased $9.1 million, or 18.6%, to $58.2 million for the six months ended June 30, 2021, as compared to $49.0 million for the same period in 2020.

There was a $12.2 million increase in the small business programs particularly in areas we have seen the most profitability.

This was offset by a $2.8 million, or 48.9%, decrease in our quick service restaurant line which has seen some of the larger losses within the hospitality lines of business.

The increase was due to $12.3 million of additional gross written premium in the Company’s small business programs during the six months ended June 30, 2021, as compared to the same period in 2020.

This increase was offset by a reduction in gross written premium of $3.1 million in the Company’s hospitality programs during the six months ended June 30, 2021, as compared to the same period in 2020.

Personal lines gross written premiums increased $3.6 million, or 100.4%, to $7.2 million for the six months ended June 30, 2021, as compared to $3.6 million for the same period in 2020.

The increased gross written premiums were due to continued growth in the Company’s low-value dwelling book of business.

Net written premiums increased $8.9 million, or 20.2%, to $53.0 million for the six months ended June 30, 2021, as compared to $44.1 million for the same period in 2020.

Gross written premiums increased $16.6 million, or 20.1%, to $99.1 million for the nine months ended September 30, 2021, as compared to $82.5 million for the same period in 2020.

Commercial lines gross written premiums increased $11.7 million, or 15.3%, to $88.0 million for the nine months ended September 30, 2021, as compared to $76.3 million for the same period in 2020.

There was a $17.0 million increase in the small business programs, which was partially offset by a $5.4 million reduction of gross written premium in the Company’s hospitality programs.

Of the $5.4 million decrease in gross written premium in the hospitality programs, $5.1 million was from our quick service restaurant line, which has seen some of the larger losses within the hospitality lines of business.

Personal lines gross written premiums increased $4.9 million, or 80.1%, to $11.0 million for the nine months ended September 30, 2021, as compared to $6.1 million for the same period in 2020.

The increase was due to continued growth in the Company’s low-value dwelling book of business.

Net written premiums increased $9.9 million, or 14.4%, to $79.1 million for the nine months ended September 30, 2021, as compared to $69.2 million for the same period in 2020.

Net written premiums did not increase as much as gross written premiums due to a combination of factors that increased our ceded premium rates.

Our blended ratio of ceded earned premiums to gross earned premiums increased from 15.8% to 18.5% in six months ended June 30, 2020 and 2021, respectively.

The increase in the ceded earned premium to gross earned premium ratio was due to a number of factors.

There was a $1.1 million increase in gross earned premiums relating to additional premiums generated from a commercial umbrella liability program that is almost entirely ceded under a quota share agreement.

Our blended ratio of ceded earned premiums to gross earned premiums increased from 16.3% to 19.5% in nine months ended September 30, 2020 and 2021, respectively.

The increase in the ceded earned premium-to-gross earned premium ratio was due, in part, to a $2.3 million increase in gross earned premiums relating to a growing commercial umbrella liability program that is almost entirely ceded under a quota share agreement.

This increased the ratio by 2.4 percentage points.

However, we also received a ceding commission from this business that has reduced our acquisition costs.

There was also $201,000 more reinstatement costs on catastrophe reinsurance in the first six months of 2021 as compared to the same period in 2020, which increased the ratio by 30 basis points.

The additional reinstatement costs were due to Winter Storm Uri during the first quarter of 2021.

The remainder of the increase was due to a combination of:

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Other income consists primarily of fees charged to policyholders by the Company for services outside of the premium charge, such as installment billings and policy issuance costs.

Commission income is also received by the Company’s insurance agencies for writing policies for third party insurance companies.

Other income for the six months ended June 30, 2021, decreased $149,000, or 10.9%, to $1.2 million, as compared to $1.4 million for the same period in 2020.

The decrease in other income was primarily due to a one-time item in 2020 that did not occur in 2021.

However, revenue in the Agency operations for the six months ended June 30, 2021 continued to grow moderately, compared to the same period in 2020.

Other gains were $8.9 million for the six months ended June 30, 2021, compared to $260,000 for the same period in 2020.

Other income also includes the interest income from the $9.0 million of notes payable from Venture relating to the Venture Transaction.

Commission income is also received by the Company’s insurance agency for writing policies for third-party insurance companies.

All of the third-party business was sold to Venture at June 30, 2021.

Accordingly, other income from that business will diminish over the next few quarters as it transitions over to Venture, and will ultimately no longer occur.

Other income remained flat at $2.0 million for both the nine months ended September 30, 2021 and 2020.

This was partially offset by an increase in the interest income from the notes payable of $158,000 in the third quarter of 2021.

Other gains were $11.7 million for the nine months ended September 30, 2021, compared to $260,000 for the same period in 2020.

The Company sold a portion of its Agency business during the second quarter of 2021, resulting in an $8.9 million gain.

The $260,000 gain for the six months ended June 30, 2020 was due to the repurchase of 36,761 units of the Notes at a discount to face value.

Additionally, the Company received notice from the SBA that the PPP loan was 100% forgiven, including accrued interest, on July 8, 2021.

This resulted in a $2.8 million gain that is included in Other Gains on the Consolidated Statement of Operations in the third quarter of 2021.

The $260,000 gain for the nine months ended September 30, 2020 was due to the repurchase of 36,761 units of the Notes at a discount to face value.

Losses and Loss Adjustment Expenses

The tables below detail our losses and loss adjustment expenses and loss ratios in our underwriting business for the six months ended June 30, 2021 and 2020 (dollars in thousands).

Six months ended June 30, 2021

The tables below detail our losses and loss adjustment expenses and loss ratios in our underwriting business for the nine months ended September 30, 2021 and 2020 (dollars in thousands).

Nine months ended September 30, 2021

Accident year net losses and LAE

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Calendar year loss ratio

Six months ended June 30, 2020

Nine months ended September 30, 2020

Accident year net losses and LAE

4 unchanged sentences

Calendar year loss ratio

Net losses and LAE increased by $11.1 million, or 42.2%, to $37.3 million for the six months ended June 30, 2021, compared to $26.2 million for the same period in 2020.

Net losses and LAE increased by $12.7 million, or 31.1%, to $53.4 million for the nine months ended September 30, 2021, compared to $40.8 million for the same period in 2020.

The Company experienced $2.0 million of catastrophe losses, net of reinsurance recoverables, during the first quarter of 2021 from Winter Storm Uri.

The Company also experienced $12.0 million of adverse development for the six months ended June 30, 2021, which increased losses further.

The Company also experienced $15.6 million of adverse development for the nine months ended September 30, 2021, which increased losses further.

Of the $15.6 million in adverse development, $14.7 million was related to commercial lines, while $926,000 was related to personal lines.

The adverse development was mostly attributable to the 2018 and 2017 and prior accident years.

The Company's incurred losses during the six months ended June 30, 2020, included adverse prior-year reserve

development of $6.8 million.

The Commercial lines experienced $6.7 million of unfavorable reserve development for the six

months ended June 30, 2020.

Of the $6.7 million in adverse development experienced in commercial lines, $5.6 million was

incurred in our hospitality programs, while $1.1 million was experienced in our small business programs.

The adverse development was mostly attributable to the 2018 and 2017 and prior accident years.

The adverse development was mostly attributable to the 2019, 2018 and 2017 and prior accident years, and mostly related to commercial liability lines.

The Company's incurred losses during the nine months ended September 30, 2020, included adverse prior-year reserve development of $11.5 million.

The Commercial lines experienced $11.4 million of unfavorable reserve development for the nine months ended September 30, 2020, of which $8.5 million was incurred in our hospitality programs, while $2.9 million was from our small business programs (mostly in the liability coverages).

The adverse development was mostly attributable to the 2018 and prior accident years.

Expense Ratio

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The table below provides the expense ratio by major component.

Six months ended

Nine months ended

September 30,

Commercial Lines

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Operating expenses

Our expense ratio decreased by 3.6 percentage points for the six months ended June 30, 2021, as compared to the same period in 2020.

Our expense ratio decreased by 3.5 percentage points for the nine months ended September 30, 2021, as compared to the same period in 2020.

Policy acquisition costs are costs we incur to issue policies, which include commissions, premium taxes, underwriting reports and underwriter compensation costs.

The Company offsets direct commissions with ceded commissions from reinsurers.

For the six months ended June 30, 2021 and 2020, the percentage of policy acquisition costs to net earned premiums and other underwriting income decreased by 1.0 percentage points to 29.2% compared to 30.2%, respectively.

For the nine months ended September 30, 2021 and 2020, the percentage of policy acquisition costs to net earned premiums and other underwriting income decreased by 1.0 percentage point to 29.2% compared to 30.2%, respectively.

Operating expenses consist primarily of employee compensation, information technology and occupancy costs, such as rent and utilities.

Operating expenses as a percent of net earned premiums and other underwriting income were 13.7% and 16.3% for the six months ended June 30, 2021 and 2020, respectively.

The operating expense ratio was lower due to our expense reduction efforts.

Total underwriting operating expenses as a percent of net earned premiums and other underwriting income were 13.5% and 16.0% for the nine months ended September 30, 2021 and 2020, respectively.

The operating expense ratio was lower due to our expense reduction efforts, where there has been a real nominal dollar decrease in operating expenses, coupled with net earned premium growth.

1 unchanged sentence

We measure the performance of our consolidated results, in part, based on our underwriting gain or loss.

The following table provides the underwriting gain or loss for the six months ended June 30, 2021 and 2020 (dollars in thousands):

The following table provides the underwriting gain or loss for the nine months ended September 30, 2021 and 2020 (dollars in thousands):

Segment Gain (Loss)

Six months ended

Nine months ended

September 30,

Commercial Lines

5 unchanged sentences

Sources and Uses of Funds

At June 30, 2021, we had $16.1 million in cash, cash equivalents and short-term investments.

At September 30, 2021, we had $17.6 million in cash, cash equivalents and short-term investments.

Our principal sources of funds are insurance premiums, investment income, proceeds from maturities and sales of invested assets and installment fees.

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however, this is not the primary means in which the Parent Company supports its funding as state insurance laws restrict the ability of our Insurance Company Subsidiaries to declare dividends to the Parent Company.

There were no dividends paid from our Insurance Company Subsidiaries during the six months ended June 30, 2021 and 2020.

There were no dividends paid from our Insurance Company Subsidiaries during the nine months ended September 30, 2021 and 2020.

Operating Activities .

Cash used in operating activities for the six months ended June 30, 2021, was $4.5 million, compared to $4.6 million used for the same period in 2020.

Cash used in operating activities for the nine months ended September 30, 2021, was $2.0 million, compared to $3.0 million used for the same period in 2020.

There was $12.2 million more premiums collected, net of reinsurance costs, in 2021, compared to 2020, as we continue to increase gross written premiums.

This was offset by $5.1 million more claim payments made in 2021, net of reinsurance recovered (in part due to Winter Storm Uri), $2.8 million more acquisition costs paid in 2021, compared to 2020, as gross written premiums increased.

Investment income decreased by $782,000 for the six months ended June 30, 2021, as compared to the same period in 2020, due to lower yields on the bond portfolio.

This was offset by $7.2 million more claim payments made in 2021, net of reinsurance recovered (in part due to Winter Storm Uri), $3.0 million more acquisition costs paid in 2021, compared to 2020, as gross written premiums increased, and $1.1 million decrease in investment income received.

Investing Activities.

Cash provided by investing activities for the six months ended June 30, 2021, was $4.9 million, as compared to $861,000 of cash used in investing activities for the same period in 2020.

The $5.8 million increase in cash provided by investing activities was driven by a reduction in the purchases of investments in the first six months of 2021, compared to the same period in 2020.

There was a significant repositioning of the Company’s portfolio during the six months of 2020 from the COVID-19 pandemic, which caused an increase in the purchases of investments.

Cash provided by investing activities for the nine months ended September 30, 2021, was $5.3 million, as compared to $2.0 million of cash used in investing activities for the same period in 2020.

The $7.3 million increase in cash provided by investing activities was driven by a reduction in the purchases of investments in the first nine months of 2021, compared to the same period in 2020.

There was a significant repositioning of the Company’s portfolio during the nine months of 2020 from the COVID-19 pandemic, which caused an increase in the purchases of investments.

Financing Activities.

Cash used in financing activities for the six months ended June 30, 2021, was $4.0 million, compared to $2.8 million of cash provided by financing activities for the same period in 2020.

The $6.8 million decrease in cash provided by financing activities was mostly due to the Company paying down a net amount of $4.0 million of its outstanding balance on its line of credit during the first six months of 2021.

Cash used in financing activities for the nine months ended September 30, 2021, was $4.0 million, compared to $5.1 million of cash provided by financing activities for the same period in 2020.

The $9.1 million decrease in cash provided by financing activities was mostly due to the Company paying down a net amount of $4.0 million of its outstanding balance on its line of credit during the first nine months of 2021.

Statutory Capital and Surplus

1 unchanged sentence

These financial reports are prepared using statutory accounting practices promulgated by the Insurance Company Subsidiaries’ state of domiciliary, rather than GAAP.

The Insurance Company Subsidiaries’ aggregate statutory capital and surplus (which is a statutory measure of equity) was $62.5 million and $64.1 million at June 30, 2021 and December 31, 2020, respectively.

The Insurance Company Subsidiaries’ aggregate statutory capital and surplus (which is a statutory measure of equity) was $57.8 million and $64.1 million at September 30, 2021 and December 31, 2020, respectively.

Non-GAAP Financial Measures

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Three Months Ended

Six months ended

September 30,

Nine months ended

September 30,

Net income (loss)

16 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis