What changed in this filing

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Item 1. Financial Statements

2022-05-12 compared with 2021-11-10 · 91 added, 184 removed, 504 unchanged (35% of the section changed)

4 unchanged sentences

(dollars in thousands)

September 30,

Investment securities:

19 unchanged sentences

Common stock, no par value ( 100,000,000 shares authorized;

9,706,156 and 9,681,728 issued and outstanding, respectively)

9,707,817 issued and outstanding, respectively)

Accumulated deficit

8 unchanged sentences

Three Months Ended

September 30,

Nine Months Ended

September 30,

Revenue and Other Income

5 unchanged sentences

Change in fair value of equity securities

Other gains (losses)

Total revenue and other income

16 unchanged sentences

Three Months Ended

September 30,

Nine Months Ended September 30,

Net income (loss)

19 unchanged sentences

Income (Loss)

Balances at June 30, 2021

Net income (loss)

Repurchase of common stock

Stock-based compensation expense

Other comprehensive income (loss)

Balances at September 30, 2021

Balances at June 30, 2020

Net income (loss)

Repurchase of common stock

Restricted stock unit expense

Other comprehensive income (loss)

Balances at September 30, 2020

No Par, Common Stock

Comprehensive

Shareholders'

Income (Loss)

Balances at December 31, 2021

Net income (loss)

Repurchase of common stock

Stock-based compensation expense

Other comprehensive income (loss)

Balances at September 30, 2021

Balances at March 31, 2022

Balances at December 31, 2020

Net income (loss)

Repurchase of common stock

Restricted stock unit expense, net

Stock-based compensation expense

Other comprehensive income (loss)

Balances at September 30, 2020

Balances at March 31, 2021

The accompanying notes are an integral part of the Consolidated Financial Statements.

3 unchanged sentences

(dollars in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash Flows From Operating Activities

1 unchanged sentence

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Gain on sale of agency business

Depreciation and amortization

20 unchanged sentences

Proceeds from sales of investments

Proceeds from sale of agency business

Dividends from Affiliate

Other purchases

Purchases of property and equipment

1 unchanged sentence

Cash Flows From Financing Activities

Repurchase of common stock

Repurchase of senior unsecured notes

Borrowings under debt arrangements

6 unchanged sentences

Interest paid

Note receivable from sale of agency business

Payable from purchase of agency

Income taxes paid (refunded), net

The accompanying notes are an integral part of the Consolidated Financial Statements.

3 unchanged sentences

Summary of Significant Accounting Policies

Recent Developments

COVID-19 (the “Pandemic”) caused significant disruption to public health, the global economy, financial markets, and commercial, social and community activity in general.

As there has been a significant reduction in reported cases and correspondingly a reduction in government restrictions, we see reduced risk to our business.

We continue to monitor potential risks the Pandemic may present including a potential resurgence.

Our exposure to the Pandemic is manifold.

The majority of our employees continue to work remotely however strict “shelter-in-place” or “stay-at-home” orders have been lifted.

A significant portion of our revenues are generated from the hospitality sector within the U.S.

which remains under stress due to the threats of resurgence and resource shortages that resulted from the Pandemic.

We have continued to provide customer service, process new and renewal business, handle claims and otherwise manage all operations even though the vast majority of the staff is working remotely.

To date, we have not seen a major disruption in our business as a result of the Pandemic and currently do not expect to see a material negative impact to our financial position or results of operations as a result of the Pandemic.

Basis of Presentation and Management Representation

9 unchanged sentences

These consolidated financial statements and the notes thereto should be read in conjunction with the Company's audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC.

The results of operations for the nine months ended September 30, 2021, are not necessarily indicative of the results expected for the year ended December 31, 2021.

In addition, there are risks and uncertainties associated with the novel coronavirus (" COVID -19") and the impact it may have on our business, results of operations and financial condition.

The COVID -19 pandemic has negatively impacted the U.S.

and global economies, created significant volatility and disruption in the capital markets, dramatically increased unemployment levels and has fueled concerns that it has led to a global recession.

Depending on the duration and severity of the pandemic, we foresee the potential for adverse impacts related to, among other things:

(i) sales results;

(ii) insurance product margin;

(iii) net investment income;

(iv) invested assets;

(v) regulatory capital;

(vi) liabilities for insurance products;

(vii) access to capital markets;

and (viii) the present value of future profits.

The full extent to which COVID -19 will impact our business, results of operations and financial condition remains uncertain.

The results of operations for the three months ended March 31, 2022, are not necessarily indicative of the results expected for the year ended December 31, 2022.

The Company is engaged in the sale of property and casualty insurance products and has organized its principal operations into three types of insurance businesses:

18 unchanged sentences

The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform:

Facilitation of the Effects of Reference Rate Reform on Financial Reporting .

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) .

This guidance provides optional expedients and exceptions that are intended to ease the burden of updating contracts to contain a new reference rate due to the discontinuation of the London Inter-Bank Offered Rate (LIBOR).

1 unchanged sentence

Management does not expect the new guidance to have a material impact on the Company’s consolidated financial statements.

Sale of Certain Agency Business

On June 30, 2021, 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, hereby referred to as the (“Venture Transaction”).

The customer accounts consist substantially of new and renewal rights and customer lists of the agency.

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

The Company recognized an $ 8.9 million gain on the sale which is reflected in Other Gains on the Consolidated Statements of Operations.

The purchase price was $ 10.0 million of which $ 1.0 million was paid in cash on June 30, 2021, and $ 9.0 million was in the form of two promissory notes (one for $ 6.0 million and one for $ 3.0 million).

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

There are no prepayment penalties.

The assets sold included the customer accounts of substantially all of the personal lines business and a small subset of the commercial lines business underwritten by the Insurance Company Subsidiaries, and all of the customer accounts Sycamore produced for third-party insurers.

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

Venture is not assuming any in-force business or liabilities.

The cost or amortized cost, gross unrealized gains or losses, and estimated fair value of the investments in securities classified as available for sale at September 30, 2021 and December 31, 2020, were as follows (dollars in thousands):

September 30, 2021

The cost or amortized cost, gross unrealized gains or losses, and estimated fair value of the investments in securities classified as available for sale at March 31, 2022 and December 31, 2021, were as follows (dollars in thousands):

March 31, 2022

Gross Unrealized

21 unchanged sentences

The table segregates the holdings based on the length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands):

September 30, 2021

March 31, 2022

Less than 12 months

31 unchanged sentences

Total debt securities available for sale

The Company analyzed its investment portfolio in accordance with its other-than-temporary impairment ("OTTI") review procedures and determined the Company did not need to record a credit-related OTTI loss in net income, nor recognize a non-credit related OTTI loss in other comprehensive income for the three and nine months ended September 30, 2021 and 2020 .

The Company’s sources of net investment income and losses are as follows (dollars in thousands):

Three Months Ended

September 30,

Nine Months Ended September 30,

Debt securities

6 unchanged sentences

Three Months Ended

September 30,

Nine Months Ended September 30,

Debt securities:

7 unchanged sentences

Total net realized investment gains (losses)

Proceeds from the sales of available-for-sale debt securities were $ 25.6 million and $ 58.3 million for the nine months ended September 30, 2021 and 2020, respectively.

There were no gross realized gains or losses from the sales of available-for-sale securities for the three months ended September 30, 2021.

The gross realized gains and losses from the sales of available-for-sale debt securities for the nine months ended September 30, 2021, were $ 27,000 and $ 6,000 , respectively.

The gross realized gains and losses from the sales of available-for-sale debt securities for the three months ended September 30, 2020 were $ 2.0 million and $ 0 , respectively.

The gross realized gains and losses from the sales of available-for-sale debt securities for the nine months ended September 30, 2020, were $ 2.8 million and $ 0 , respectively.

As of September 30, 2021 and 2020, there were $ 43,000 and $ 10.8 million of payables from securities purchased, respectively.

There were $ 3,000 and $ 3.5 million of receivables from securities sold as of September 30, 2021, and 2020, respectively.

Proceeds from available-for-sale debt securities were $ 6.7 million and $ 14.2 million for the three months ended March 31, 2022 and 2021, respectively.

There were no gross realized gains or losses from the sales of available-for-sale securities for the three months ended March 31, 2022.

The gross realized gains and losses from the sales of available-for-sale debt securities for the three months ended March 31, 2021, were $ 27,000 and $ 6,000 , respectively.

As of March 31, 2022 and 2021, there were $ 750,000 and $ 0 of payables from securities purchased, respectively.

There were $ 1.3 million and $ 3,000 of receivables from securities sold as of March 31, 2022, and 2021, respectively.

The Company carries other equity investments that do not have a readily determinable fair value at cost, less impairment or observable changes in price.

1 unchanged sentence

There were no impairments or observable changes in price recorded during 2022 related to the Company's equity securities without readily determinable fair value.

These investments are included in Other Assets in the Consolidated Balance Sheets and amounted to $ 1.2 million as of September 30, 2021 and December 31, 2020.

The table below summarizes the amortized cost and fair value of available-for-sale debt securities by contractual maturity at September 30, 2021.

These investments are included in Other Assets in the Consolidated Balance Sheets and amounted to $ 1.2 million as of March 31, 2022 and December 31, 2021.

The table below summarizes the amortized cost and fair value of available-for-sale debt securities by contractual maturity at March 31, 2022.

Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties (dollars in thousands):

9 unchanged sentences

Total debt securities

At September 30, 2021 and December 31, 2020, the Insurance Company Subsidiaries had $ 8.6 million and $ 8.8 million, respectively, on deposit in trust accounts to meet the deposit requirements of various state insurance departments.

At September 30, 2021 and December 31, 2020, the Company had $ 65.6 million and $ 67.6 million, respectively, held in trust accounts to meet collateral requirements with other third-party insurers, relating to various fronting arrangements.

At March 31, 2022 and December 31, 2021, the Insurance Company Subsidiaries had $ 8.2 million and $ 8.5 million, respectively, on deposit in trust accounts to meet the deposit requirements of various state insurance departments.

At March 31, 2022 and December 31, 2021, the Company had $ 78.0 million and $ 76.1 million, respectively, held in trust accounts to meet collateral requirements with other third-party insurers, relating to various fronting arrangements.

There are withdrawal and other restrictions on these deposits, including the type of investments that may be held, however, the Company may generally invest in high-grade bonds and short-term investments and earn interest on the funds.

15 unchanged sentences

These capital account balances reflect the fair value of the investment funds.

The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis, classified by the valuation hierarchy as of September 30, 2021 and December 31, 2020 (dollars in thousands):

September 30, 2021

The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis, classified by the valuation hierarchy as of March 31, 2022 and December 31, 2021 (dollars in thousands):

March 31, 2022

Fair Value Measurements

36 unchanged sentences

Subordinated Notes *

Line of Credit *

Paycheck Protection Program loan *

Total Liabilities measured at fair value

3 unchanged sentences

Level 1 also includes money market funds and other interest-bearing deposits at banks, which are reported as short-term investments.

The fair value measurements that were based on Level 1 inputs comprise 16.4 % of the fair value of the total investment portfolio as of September 30, 2021.

The fair value measurements that were based on Level 1 inputs comprise 16.4 % of the fair value of the total investment portfolio as of March 31, 2022.

Level 2 investments include debt securities, which consist of U.S.

2 unchanged sentences

The third-party pricing service monitors market indicators, as well as industry and economic events.

The fair value measurements that were based on Level 2 inputs comprise 83.3 % of the fair value of the total investment portfolio as of September 30, 2021.

The fair value measurements that were based on Level 2 inputs comprise 83.4 % of the fair value of the total investment portfolio as of March 31, 2022.

The Company obtains pricing for each security from independent pricing services, investment managers or consultants to assist in determining fair value for its Level 2 investments.

4 unchanged sentences

The fair value of the borrowings under the senior revolving credit facility approximates its carrying amount because interest is based on a short-term, variable, market-based rate.

As of September 30, 2021 and December 31, 2020, Level 3 is entirely comprised of the Company's subordinated debt.

In determining the fair value of the subordinated debt outstanding at September 30, 2021 and December 31, 2020, the security attributes (issue date, maturity, coupon, calls, etc.) and market rates on September 24, 2018 (the date of the restated and amended agreement which was repriced at that time) were entered into a valuation model.

A lognormal trinomial interest rate

lattice was created within the model to compute the option adjusted spread (“OAS”) which is the amount, in basis points, of interest rate required to be paid under the debt agreement over the risk-free U.S .

As of March 31, 2022 and December 31, 2021, Level 3 is entirely comprised of the Company's subordinated debt.

In determining the fair value of the subordinated debt outstanding at March 31, 2022 and December 31, 2021, the security attributes (issue date, maturity, coupon, calls, etc.) and market rates on September 24, 2018 (the date of the restated and amended agreement which was repriced at that time) were entered into a valuation model.

A lognormal trinomial interest rate lattice was created within the model to compute the option adjusted spread (“OAS”) which is the amount, in basis points, of interest rate required to be paid under the debt agreement over the risk-free U.S.

Treasury rates.

The OAS was then fed back into the model along with the September 30, 2021 and December 31, 2020 U.S .

The OAS was then used in the

model along with the March 31, 2022 and December 31, 2021 U.S .

Treasury rates .

4 unchanged sentences

Net deferred policy acquisition costs are amortized and charged to expense in proportion to premium earned over the estimated policy term.

The Company anticipates that its deferred policy acquisition costs will be fully recoverable and there were no premium deficiencies for the nine months ended September 30, 2021 and 2020.

The Company anticipates that its deferred policy acquisition costs will be fully recoverable and there were no premium deficiencies for the three months ended March 31, 2022 and 2021.

The activity in deferred policy acquisition costs, net of reinsurance transactions, is as follows (dollars in thousands):

Three Months Ended

September 30,

Nine Months Ended September 30,

Balance at beginning of period

17 unchanged sentences

Three months ended

September 30,

Nine months ended

September 30,

Gross reserves - beginning of period

10 unchanged sentences

Gross reserves - end of period

Net losses and LAE was $ 16.2 million during the third quarter of 2021.

Adverse development contributed $ 3.6 million to the total incurred losses in the third quarter of 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.

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

Net losses and LAE were $ 53.4 million for the nine months ended September 30, 2021.

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 $ 15.6 million of adverse development for the nine months ended September 30, 2021.

Of the $15.6 million in adverse development, $ 5.0 million was related to 2017 and prior accident years, $ 4.8 million was related to the 2018 accident year, $ 3.4 million was related to the 2019 accident year, and $ 2.4 million was related to the 2020 accident year.

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

The Company’s incurred losses during the three and nine months ended September 30, 2020 included prior-year adverse reserve development of $ 4.7 million and $ 11.5 million, respectively.

The adverse development mostly came from commercial liability lines within the hospitality businesses.

Net losses and LAE was $ 18.0 million for the three months ended March 31, 2022.

Adverse development contributed $ 5.5 million to the total incurred losses in the first quarter of 2022, of which $ 1.5 million was related to 2017 and prior accident years, $ 1.3 million was related to the 2018 accident year, $ 1.3 million was related to the 2019 accident year, and $ 1.5 million was related to the 2020 accident year.

In the first quarter of 2022, $ 5.7 million of the adverse development came from the commercial lines of business, mostly from liability lines, while our personal lines of business had $ 219,000 favorable development.

The Company’s incurred losses during the three months ended March 31, 2021 included prior-year adverse reserve development of $ 5.8 million.

Of the $ 5.8 million of adverse development, $ 5.2 million was related to the Company’s commercial lines of business, while $ 612,000 was related to the Company’s personal lines of business.

Of the $ 5.2 million of adverse development in the Company’s commercial lines of business, $ 2.7 million was experienced in the Company’s hospitality lines of business, while $ 2.5 million was experienced in the company’s small business lines of business.

In the normal course of business, the Company participates in reinsurance agreements in order to limit losses that may arise from catastrophes or other individually severe events.

The Company ceded 40 % of specific commercial liability risks in excess of $ 400,000 , and 60 % in excess of $ 300,000 in 2022.

The Company primarily ceded all specific commercial liability risks in excess of $ 400,000 in 2021 and 2020.

The Company ceded specific commercial property risks in excess of $ 300,000 in 2022.

The Company ceded specific commercial property risks in excess of $ 200,000 in 2021.

The Company ceded 40 % of specific commercial property risks in excess of $ 400,000 , and 60 % in excess of $ 300,000 in 2020.

12 unchanged sentences

Three Months Ended

September 30,

Nine months ended

September 30,

Written premiums:

4 unchanged sentences

Net Losses and LAE

The Company's debt is comprised of four instruments:

$ 24.4 million of publicly traded senior unsecured notes which were issued in September and October of 2018, a $ 10.0 million line of credit which commenced in June 2018, $ 10.5 million of privately placed subordinated notes (the “Subordinated Notes”), and a $ 2.7 million Paycheck Protection Program loan (the “PPP loan”) issued as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Some of the excess of loss treaties that renewed on December 31, 2021 and January 1, 2022, included ceding commissions equal to 40 % of the ceded premiums.

The ceding commission is reflected as a reduction in acquisition costs and amounted to $ 2.2 million for the three months ended March 31, 2022.

There were no ceding commissions on the excess of loss treaties during 2021.

As of March 31, 2022, the Company's debt is comprised of three instruments:

$ 24.4 million of publicly traded senior unsecured notes which were issued in 2018, a $ 10.0 million line of credit which commenced in June 2018, and $ 10.5 million of privately placed subordinated notes.

A summary of the Company's outstanding debt is as follows (dollars in thousands):

September 30,

Senior unsecured notes

7 unchanged sentences

The Company may redeem the Notes, in whole or in part, at face value at any time after September 30, 2021.

The Company did no t repurchase any of the Notes for the three and nine months ended September 30, 2021.

The Company did no t repurchase any of the Notes for the three months ended September 30, 2020.

For the nine months ended September 30, 2020, the Company repurchased 36,761 units of the Notes with a face value of $ 919,000 in the public market.

The Notes were repurchased at a discount to face value, which resulted in a $ 260,000 gain on extinguishment.

This gain was reflected in the Consolidated Statement of Operations as Other gains.

The Company did no t repurchase any of the Notes for the three months ended March 31, 2022 and 2021.

Subordinated notes

4 unchanged sentences

The call premium escalates each quarter to ultimately $ 1.75 million on September 30, 2023, then steps up to $ 3.05 million on December 31, 2023, and increases quarterly at a 12.5 % per annum rate thereafter.

As of September 30, 2021, the carrying value of the Notes and Subordinated Notes are offset by $ 520,000 and $ 875,000 of debt issuance costs, respectively.

As of March 31, 2022, the carrying value of the Notes and Subordinated Notes are offset by $ 390,000 and $ 849,000 of debt issuance costs, respectively.

The debt issuance costs will be amortized through interest expense over the life of the loans.

The Subordinated Notes contain various restrictive financial debt covenants that relate to the Company’s minimum tangible net worth, minimum fixed-charge coverage ratios, dividend paying capacity, reinsurance retentions, and risk-based capital ratios.

At September 30, 2021, the Company was in compliance with all of its financial covenants.

Line of credit

2 unchanged sentences

The agreement includes several financial debt covenants, including a minimum tangible net worth, a minimum fixed-charge coverage ratio, and minimum statutory risk-based capital levels.

As of September 30, 2021, the Company had $ 1.0 million outstanding on the line of credit, and was in compliance with all of its financial debt covenants.

As of March 31, 2022, the Company had $ 5.0 million outstanding on the line of credit.

On June 18, 2021, the line of credit was renewed with a maturity of December 1, 2022.

Financial debt covenants

The Subordinated Notes and the line of credit contain identical restrictive financial debt covenants that relate to the Company’s minimum tangible net worth, minimum fixed-charge coverage ratios, dividend paying capacity, reinsurance retentions, risk-based capital ratios, and debt to total capital.

As of March 31, 2022, the Company was not in compliance with the tangible net worth and the debt to total capital financial covenants.

On May 9, 2022, the holders of the Subordinated Notes waived the March 31, 2022 tangible net worth and debt to total capital requirements.

On May 11, 2022, the holders of the line of credit waived the March 31, 2022 tangible net worth and total debt to capital requirements.

Management expects to be in compliance with all debt covenants in future periods.

On May 9, 2022, the Subordinated Notes agreement was amended to exclude changes in unrealized gains or losses in the debt securities investment portfolio of the Company subsequent to December 31, 2021, when calculating the debt covenant ratios.

With this amendment, the Company would not have breached the Subordinated Notes covenants at March 31, 2022.

Paycheck Protection Program loan

2 unchanged sentences

The Company received notice from the SBA that the 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.

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

Shareholder’s Equity

On December 5, 2018, the Company's Board of Directors authorized a stock repurchase program, under which the Company may repurchase up to one million shares of the Company's common stock.

The Company did no t repurchase any shares of stock for the three and nine months ended September 30, 2021 related to the stock repurchase program.

The Company did no t purchase any shares of stock for the three months ended September 30, 2020.

For the nine months ended September 30, 2020, the Company repurchased 2,398 shares of stock valued at $ 8,000 , related to the stock repurchase program.

For the three months ended September 30, 2021 and 2020, the Company repurchased 1,240 and 6,505 shares of stock valued at approximately $ 4,000 and $ 19,000 , respectively, related to the vesting of the Company’s restricted stock units.

For the nine months ended September 30, 2021 and 2020, the Company repurchased 3,547 and 8,813 shares of stock valued at approximately $ 11,000 and $ 27,000 , respectively.

Upon the repurchase of the Company’s shares, the shares remain authorized, but not issued or outstanding.

As of September 30, 2021 and December 31, 2020, the Company had 9,706,156 and 9,681,728 issued and outstanding shares of common stock, respectively.

As of March 31, 2022 and December 31, 2021, the Company had 9,707,817 issued and outstanding shares of common stock, respectively.

Holders of common stock are entitled to one vote per share and to receive dividends only when and if declared by the board of directors.

3 unchanged sentences

Three months ended

September 30,

Nine months ended

September 30,

Balance at beginning of period

7 unchanged sentences

Three Months Ended

September 30,

Nine months ended

September 30,

Net income (loss)

1 unchanged sentence

Earnings (loss) per common share, basic and diluted

The non-vested shares of the restricted stock units and stock options were anti-dilutive as of September 30, 2021 and 2020.

Therefore, the basic and diluted weighted average common shares are equal for the three and nine months ended September 30, 2021 and 2020 .

The non-vested shares of the restricted stock units and stock options were anti-dilutive as of March 31, 2022 and 2021.

Therefore, the basic and diluted weighted average common shares are equal for the three months ended March 31, 2022 and 2021 .

Stock-based Compensation

On March 8, 2022, the Company issued options to purchase 630,000 shares of the Company’s common stock to two named executive officers.

The right to exercise the options will vest over a five-year period on a straight-line basis.

The options will have a strike price of $ 4.53 per share and will expire on March 8, 2032 .

The estimated value of these options is $ 612,000 , which is being expensed ratably over the vesting period.

On June 30, 2020, the Company issued options to purchase 280,000 shares of the Company’s common stock, to certain executive officers and other employees.

3 unchanged sentences

In 2015, 2016, and 2018, the Company issued 390,352 , 111,281 , and 70,000 , respectively, of restricted stock units (“RSUs”) to various employees to be settled in shares of common stock, which were valued at $ 4.1 million, $ 909,000 , and $ 404,000 , respectively, on the dates of grant.

The Company recorded $ 145,000 and $ 622,000 of compensation expense related to the RSUs for the nine months ended September 30, 2021 and 2020, respectively.

There were 20,000 unvested RSUs as of September 30, 2021, which will generate an estimated future expense of $ 87,000 .

The Company recorded $ 39,000 and $ 14,000 of compensation expense related to the stock options for the nine months ended September 30, 2021 and 2020, respectively.

There were 199,000 unvested options as of September 30, 2021, which will generate an estimated future expense of $ 198,000 .

The Company recorded $ 14,000 and $ 54,000 of compensation expense related to the RSUs for the three months ended March 31, 2022 and 2021, respectively.

There were 19,000 unvested RSUs as of March 31, 2022, which will generate an estimated future expense of $ 59,000 .

The Company recorded $ 24,000 and $ 12,000 of compensation expense related to the stock options for the three months ended March 31, 2022 and 2021, respectively.

There were 834,000 unvested options as of March 31, 2022, which will generate an estimated future expense of $ 773,000 .

Commitments and Contingencies

17 unchanged sentences

The wholesale agency business increases the product options to the Company’s independent retail agents by offering both insurance products from the Insurance Company Subsidiaries as well as products offered by other insurers.

The Company defines its operating segments as components of the business where separate financial information is available and used by the chief operating decision maker in deciding how to allocate resources to its segments and in assessing its performance.

In assessing performance of its operating segments, the Company’s chief operating decision maker, the Chief Executive Officer, reviews a number of financial measures including gross written premiums, net earned premiums, losses and LAE, net of reinsurance recoveries, and other revenue and expenses.

The Company defines its operating segments as components of the business where separate financial information is available and used by the co-chief operating decision makers in deciding how to allocate resources to its segments and in assessing its performance.

In assessing performance of its operating segments, the Company’s co-chief operating decision makers, the Co-Chief Executive Officers, review a number of financial measures including gross written premiums, net earned premiums, losses and LAE, net of reinsurance recoveries, and other revenue and expenses.

The primary measure used for making decisions about resources to be allocated to an operating segment and assessing its performance is segment underwriting gain or loss which is defined as segment revenues, consisting of net earned premiums and other income, less segment expenses, consisting of losses and LAE, policy acquisition costs and operating expenses of the operating segments.

2 unchanged sentences

All of the Company’s insurance activities are conducted in the United States with a concentration of activity in Michigan, Florida, Texas and California.

For the nine months ended September 30, 2021 and 2020, gross written premiums attributable to these four states were 51.4 % and 49.9 %, respectively, of the Company’s total gross written premiums.

For the three months ended March 31, 2022 and 2021, gross written premiums attributable to these four states were 59.2 % and 53.5 %, respectively, of the Company’s total gross written premiums.

The Wholesale Agency business sells insurance products on behalf of the Company’s commercial and personal lines businesses as well as to third-party insurers.

8 unchanged sentences

Three months ended

September 30, 2021

March 31, 2022

Commercial Lines

11 unchanged sentences

Change in fair value of equity securities

Other gains (losses)

Interest expense

1 unchanged sentence

Three months ended

September 30, 2020

Gross written premiums

Net written premiums

Net earned premiums

Segment revenue

Losses and LAE, net

Policy acquisition costs

Operating expenses

Segment expenses

Segment gain (loss)

Investment income

Net realized investment gains

Change in fair value of equity securities

Interest expense

Income (loss) before equity earnings in Affiliate and income taxes

Nine months ended

September 30, 2021

Gross written premiums

Net written premiums

Net earned premiums

Segment revenue

Losses and LAE, net

Policy acquisition costs

Operating expenses

Segment expenses

Segment gain (loss)

Investment income

Net realized investment gains

Change in fair value of equity securities

Interest expense

Income (loss) before equity earnings in Affiliate and income taxes

Nine months ended

September 30, 2020

March 31, 2021

Gross written premiums

12 unchanged sentences

Income (loss) before equity earnings in Affiliate and income taxes

Subsequent Events

On May 11, 2022, the Company entered into a subscription agreement to issue $ 5.0 million of equity.

Pricing terms are still pending.

Related to this subscription agreement, the Company received $ 1.5 million of equity and paid down the line of credit by $ 1.5 million.

This remediated the March 31, 2022 debt covenant breaches described in the Financial debt covenants section of Note 7 ~ Debt .

As discussed in Note 7, with this amendment the Company would not have breached the Subordinated Notes covenants at March 31, 2022.

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 1. Financial Statements