Item 1. Financial Statements
ITEM 1 - FINANCIAL STATEMENTS
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
June 30,
2022
December 31,
2021
(Unaudited)
Assets
Investment securities:
Debt securities, at fair value (amortized cost of $ 132,427 and $ 150,732 , respectively)
$
119,207
$
149,783
Equity securities, at fair value (cost of $ 1,433 and $ 10,972 , respectively)
990
9,931
Short-term investments, at fair value
28,001
23,013
Total investments
148,198
182,727
Cash and cash equivalents
13,148
9,913
Premiums and agents' balances receivable, net
24,701
21,197
Receivable from Affiliate
5,216
5,784
Reinsurance recoverables on unpaid losses
37,769
40,344
Reinsurance recoverables on paid losses
4,479
1,347
Prepaid reinsurance premiums
15,381
8,301
Deferred policy acquisition costs
10,747
12,267
Other assets
15,416
8,524
Total assets
$
275,055
$
290,404
Liabilities and Shareholders' Equity
Liabilities:
Unpaid losses and loss adjustment expenses
$
140,996
$
139,085
Unearned premiums
69,104
65,269
Reinsurance premiums payable
3,711
5,318
Debt
33,720
33,564
Accounts payable and accrued expenses
10,547
6,665
Total liabilities
258,078
249,901
Commitments and contingencies
Shareholders' equity:
Common stock, no par value ( 100,000,000 shares authorized; 9,715,324 and
9,707,817 issued and outstanding, respectively)
92,799
92,692
Accumulated deficit
( 61,348
)
( 50,079
)
Accumulated other comprehensive income (loss)
( 14,474
)
( 2,110
)
Total shareholders' equity
16,977
40,503
Total liabilities and shareholders' equity
$
275,055
$
290,404
The accompanying notes are an integral part of the Consolidated Financial Statements.
3
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(dollars in thousands, except per share data)
Three Months Ended
June 30,
Six Months Ended
June 30,
2022
2021
2022
2021
Revenue and Other Income
Premiums
Gross earned premiums
$
33,782
30,228
$
66,546
$
58,475
Ceded earned premiums
( 9,206
)
( 5,390
)
( 18,015
)
( 10,802
)
Net earned premiums
24,576
24,838
48,531
47,673
Net investment income
564
503
1,071
1,035
Net realized investment gains (losses)
( 1,436
)
1,060
( 1,505
)
3,984
Change in fair value of equity securities
317
( 525
)
597
( 1,065
)
Other gains (losses)
( 1
)
8,910
( 6
)
8,910
Other income
663
666
1,361
1,222
Total revenue and other income
24,683
35,452
50,049
61,759
Expenses
Losses and loss adjustment expenses, net
22,251
17,926
40,269
37,288
Policy acquisition costs
5,725
6,896
11,189
13,646
Operating expenses
4,470
4,342
8,630
8,691
Interest expense
727
732
1,438
1,453
Total expenses
33,173
29,896
61,526
61,078
Income (loss) before equity earnings in Affiliate and income taxes
( 8,490
)
5,556
( 11,477
)
681
Equity earnings in Affiliate, net of tax
93
180
169
428
Income tax expense (benefit)
2
184
( 39
)
193
Net income (loss)
$
( 8,399
)
$
5,552
$
( 11,269
)
$
916
Earnings (loss) per common share, basic and diluted
$
( 0.86
)
$
0.57
$
( 1.16
)
$
0.09
Weighted average common shares outstanding, basic and diluted
9,712,602
9,686,631
9,710,223
9,684,193
The accompanying notes are an integral part of the Consolidated Financial Statements.
4
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(dollars in thousands)
Three Months Ended
June 30,
Six Months Ended June 30,
2022
2021
2022
2021
Net income (loss)
$
( 8,399
)
$
5,552
$
( 11,269
)
$
916
Other comprehensive income (loss), net of tax:
Unrealized investment gains (losses):
Unrealized investment gains (losses) during the period
( 5,007
)
394
( 12,294
)
( 1,530
)
Income tax (benefit) expense
—
—
—
—
Unrealized investment gains (losses), net of tax
( 5,007
)
394
( 12,294
)
( 1,530
)
Less: reclassification adjustments to:
Net realized investment gains (losses) included in net income (loss)
70
( 902
)
70
41
Income tax (benefit) expense
—
—
—
—
Total reclassifications included in net income (loss), net of tax
70
( 902
)
70
41
Other comprehensive income (loss)
( 5,077
)
1,296
( 12,364
)
( 1,571
)
Total comprehensive income (loss)
$
( 13,476
)
$
6,848
$
( 23,633
)
$
( 655
)
The accompanying notes are an integral part of the Consolidated Financial Statements.
5
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
(dollars in thousands)
No Par, Common Stock
Accumulated
Accumulated
Other
Comprehensive
Total
Shareholders'
Shares
Amount
Deficit
Income (Loss)
Equity
Balances at March 31, 2022
9,707,817
$
92,730
$
( 52,949
)
$
( 9,397
)
$
30,384
Net income (loss)
—
—
( 8,399
)
—
( 8,399
)
Repurchase of common stock
( 1,493
)
11
—
—
11
Stock-based compensation expense
9,000
58
—
—
58
Other comprehensive income (loss)
—
—
—
( 5,077
)
( 5,077
)
Balances at June 30, 2022
9,715,324
$
92,799
$
( 61,348
)
$
( 14,474
)
$
16,977
Balances at March 31, 2021
9,681,728
$
92,552
$
( 53,621
)
$
( 1,955
)
$
36,976
Net income (loss)
—
—
5,552
—
5,552
Repurchase of common stock
( 2,307
)
( 7
)
—
—
( 7
)
Stock-based compensation expense
10,000
67
—
—
67
Other comprehensive income (loss)
—
—
—
1,296
1,296
Balances at June 30, 2021
9,689,421
$
92,612
$
( 48,069
)
$
( 659
)
$
43,884
No Par, Common Stock
Accumulated
Accumulated
Other
Comprehensive
Total
Shareholders'
Shares
Amount
Deficit
Income (Loss)
Equity
Balances at December 31, 2021
9,707,817
$
92,692
$
( 50,079
)
$
( 2,110
)
$
40,503
Net income (loss)
—
—
( 11,269
)
—
( 11,269
)
Repurchase of common stock
( 1,493
)
11
—
—
11
Stock-based compensation expense
9,000
96
—
—
96
Other comprehensive income (loss)
—
—
—
( 12,364
)
( 12,364
)
Balances at June 30, 2022
9,715,324
$
92,799
$
( 61,348
)
$
( 14,474
)
$
16,977
Balances at December 31, 2020
9,681,728
$
92,486
$
( 48,985
)
$
912
$
44,413
Net income (loss)
—
—
916
—
916
Repurchase of common stock
( 2,307
)
( 7
)
—
—
( 7
)
Stock-based compensation expense
10,000
133
—
—
133
Other comprehensive income (loss)
—
—
—
( 1,571
)
( 1,571
)
Balances at June 30, 2021
9,689,421
$
92,612
$
( 48,069
)
$
( 659
)
$
43,884
The accompanying notes are an integral part of the Consolidated Financial Statements.
6
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
Six Months Ended June 30,
2022
2021
Cash Flows From Operating Activities
Net income (loss)
$
( 11,269
)
$
916
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Gain on sale of agency business
—
( 8,910
)
Depreciation and amortization
205
217
Amortization of bond premium and discount, net
217
255
Net realized investment (gains) losses
1,505
( 3,984
)
Change in fair value of equity securities
( 597
)
1,065
Stock-based compensation expenses
96
133
Equity earnings in Affiliate, net of tax
( 169
)
( 428
)
Other
—
17
Changes in operating assets and liabilities:
(Increase) decrease in:
Premiums and agents' balances and other receivables
( 2,936
)
( 2,719
)
Reinsurance recoverables
( 557
)
263
Prepaid reinsurance premiums
( 7,080
)
( 3,648
)
Deferred policy acquisition costs
1,520
( 878
)
Other assets
( 454
)
344
Increase (decrease) in:
Unpaid losses and loss adjustment expenses
1,911
6,582
Unearned premiums
3,835
6,879
Reinsurance premiums payable
( 1,607
)
—
Accounts payable and other liabilities
( 94
)
( 564
)
Net cash provided by (used in) operating activities
( 15,474
)
( 4,460
)
Cash Flows From Investing Activities
Purchase of investments
( 151,809
)
( 112,849
)
Proceeds from maturities and redemptions of investments
15,015
11,793
Proceeds from sales of investments
150,492
104,118
Proceeds from sale of agency business
—
1,000
Dividends from Affiliate
—
900
Purchases of property and equipment
—
( 20
)
Net cash provided by (used in) investing activities
13,698
4,942
Cash Flows From Financing Activities
Proceeds received from common stock subscription agreement
5,000
—
Repurchase of common stock
11
( 7
)
Borrowings under debt arrangements
5,000
3,000
Repayment of borrowings under debt arrangements
( 5,000
)
( 7,000
)
Net cash provided by (used in) financing activities
5,011
( 4,007
)
Net increase (decrease) in cash
3,235
( 3,525
)
Cash at beginning of period
9,913
8,193
Cash at end of period
$
13,148
$
4,668
Supplemental Disclosure of Cash Flow Information:
Interest paid
$
1,429
$
1,450
Income taxes paid (refunded), net
( 12
)
( 9
)
Note receivable from sale of agency business
—
9,000
Payable from purchase of agency
—
1,051
The accompanying notes are an integral part of the Consolidated Financial Statements.
7
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. 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
The consolidated financial statements include accounts, after elimination of intercompany accounts and transactions, of Conifer Holdings, Inc. (the “Company” or “Conifer”), its wholly owned subsidiaries, Conifer Insurance Company ("CIC"), White Pine Insurance Company ("WPIC"), Red Cedar Insurance Company ("RCIC"), and Sycamore Insurance Agency, Inc. ("Sycamore"). CIC, WPIC, and RCIC are collectively referred to as the "Insurance Company Subsidiaries." On a stand-alone basis, Conifer Holdings, Inc. is referred to as the "Parent Company." Sycamore owns a 50 % non-controlling interest in Venture Holdings, Inc. (“Venture” or “Affiliate”).
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which differ from statutory accounting practices prescribed or permitted for insurance companies by regulatory authorities. The Company has applied the rules and regulations of the United States Securities and Exchange Commission (“SEC”) regarding interim financial reporting and therefore the consolidated financial statements do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of management, all adjustments, consisting of items of a normal recurring nature, necessary for a fair presentation of the consolidated interim financial statements, have been included.
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 six months ended June 30, 2022, are not necessarily indicative of the results expected for the year ended December 31, 2022.
Business
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: commercial lines, personal lines, and agency business. The Company underwrites a variety of specialty insurance products, including property, general liability, liquor liability, automobile, and homeowners and dwelling policies. The Company markets and sells its insurance products through a network of independent agents, including managing general agents, whereby policies are written in all 50 states in the United States of America (“U.S.”). The Company’s corporate headquarters are located in Birmingham, Michigan with additional office facilities in Florida and Michigan.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes the amounts included in the consolidated financial statements reflect management's best estimates and assumptions, actual results may differ from these estimates.
8
Cash, Cash Equivalents, and Short-term Investments
Cash consists of cash deposits in banks, generally in operating accounts. Cash equivalents consist of money-market funds that are specifically used as overnight investments tied to cash deposit accounts. Short-term investments, consisting of money market funds, are classified as investments in the consolidated balance sheets as they relate to the Company’s investment activities.
Recently Issued Accounting Guidance
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) , which amends the current methodology and timing for recognizing credit losses. This amendment will replace the current GAAP "incurred loss" methodology for credit losses with a methodology based on expected credit losses. The new guidance will also require expanded consideration of a broader range of reasonable and increased supportable information for the credit loss estimates. This ASU is effective for annual and interim reporting periods beginning after December 15, 2022. Management is currently evaluating the impact of the guidance. 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 (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). This guidance is available immediately and may be implemented in any period prior to the guidance expiration on December 31, 2022. Management does not expect the new guidance to have a material impact on the Company’s consolidated financial statements.
2. Investments
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 June 30, 2022 and December 31, 2021, were as follows (dollars in thousands):
June 30, 2022
Cost or
Gross Unrealized
Estimated
Amortized Cost
Gains
Losses
Fair Value
Debt Securities:
U.S. Government
$
7,833
$
—
$
( 259
)
$
7,574
State and local government
26,530
24
( 3,382
)
23,172
Corporate debt
35,570
—
( 4,086
)
31,484
Asset-backed securities
23,885
—
( 1,040
)
22,845
Mortgage-backed securities
30,724
3
( 4,021
)
26,706
Commercial mortgage-backed securities
3,421
—
( 152
)
3,269
Collateralized mortgage obligations
4,464
1
( 308
)
4,157
Total debt securities available for sale
$
132,427
$
28
$
( 13,248
)
$
119,207
December 31, 2021
Cost or
Gross Unrealized
Estimated
Amortized Cost
Gains
Losses
Fair Value
Debt Securities:
U.S. Government
$
20,723
$
74
$
( 77
)
$
20,720
State and local government
30,063
555
( 189
)
30,429
Corporate debt
30,808
88
( 550
)
30,346
Asset-backed securities
28,652
10
( 224
)
28,438
Mortgage-backed securities
33,178
105
( 762
)
32,521
Commercial mortgage-backed securities
1,659
31
0
1,690
Collateralized mortgage obligations
5,649
35
( 45
)
5,639
Total debt securities available for sale
$
150,732
$
898
$
( 1,847
)
$
149,783
9
The following table summarizes the aggregate fair value and gross unrealized losses, by security type, of the available-for-sale securities in unrealized loss positions. 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):
June 30, 2022
Less than 12 months
Greater than 12 months
Total
No. of
Issues
Fair Value of
Investments
with Unrealized
Losses
Gross
Unrealized
Losses
No. of
Issues
Fair Value of
Investments
with Unrealized
Losses
Gross
Unrealized
Losses
No. of
Issues
Fair Value of
Investments
with Unrealized
Losses
Gross
Unrealized
Losses
Debt Securities:
U.S. Government
9
$
3,818
$
( 91
)
4
$
3,756
$
( 168
)
13
$
7,574
$
( 259
)
State and local government
108
19,316
( 3,194
)
8
800
( 188
)
116
20,116
( 3,382
)
Corporate debt
55
23,297
( 2,797
)
13
7,837
( 1,289
)
68
31,134
( 4,086
)
Asset-backed securities
18
9,225
( 158
)
12
13,620
( 882
)
30
22,845
( 1,040
)
Mortgage-backed securities
45
6,227
( 612
)
7
20,338
( 3,409
)
52
26,565
( 4,021
)
Commercial mortgage-backed securities
4
3,243
( 152
)
—
—
—
4
3,243
( 152
)
Collateralized mortgage obligations
26
2,865
( 187
)
5
1,131
( 121
)
31
3,996
( 308
)
Total debt securities available for sale
265
$
67,991
$
( 7,191
)
49
$
47,482
$
( 6,057
)
314
$
115,473
$
( 13,248
)
December 31, 2021
Less than 12 months
Greater than 12 months
Total
No. of
Issues
Fair Value of
Investments
with Unrealized
Losses
Gross
Unrealized
Losses
No. of
Issues
Fair Value of
Investments
with Unrealized
Losses
Gross
Unrealized
Losses
No. of
Issues
Fair Value of
Investments
with Unrealized
Losses
Gross
Unrealized
Losses
Debt Securities:
U.S. Government
6
$
10,323
$
( 47
)
1
$
4,728
$
( 30
)
7
$
15,051
$
( 77
)
State and local government
41
8,875
( 172
)
4
446
( 17
)
45
9,321
( 189
)
Corporate debt
41
22,748
( 505
)
1
705
( 45
)
42
23,453
( 550
)
Asset-backed securities
24
24,305
( 219
)
2
1,893
( 5
)
26
26,198
( 224
)
Mortgage-backed securities
12
27,034
( 762
)
—
—
—
12
27,034
( 762
)
Commercial mortgage-backed securities
—
—
—
—
—
—
—
—
—
Collateralized mortgage obligations
10
2,638
( 45
)
2
29
—
12
2,667
( 45
)
Total debt securities available for sale
134
$
95,923
$
( 1,750
)
10
$
7,801
$
( 97
)
144
$
103,724
$
( 1,847
)
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 six months ended June 30, 2022 and December 31, 2021.
10
The Company’s sources of net investment income and losses are as follows (dollars in thousands):
Three Months Ended
June 30,
Six Months Ended June 30,
2022
2021
2022
2021
Debt securities
$
596
$
554
$
1,178
$
1,154
Equity securities
10
55
38
103
Cash, cash equivalents and short-term investments
36
—
37
1
Total investment income
642
609
1,253
1,258
Investment expenses
( 78
)
( 106
)
( 182
)
( 223
)
Net investment income
$
564
$
503
$
1,071
$
1,035
The following table summarizes the gross realized gains and losses from sales, calls and maturities of available-for-sale debt and equity securities (dollars in thousands):
Three Months Ended
June 30,
Six Months Ended June 30,
2022
2021
2022
2021
Debt securities:
Gross realized gains
$
6
$
—
$
6
$
27
Gross realized losses
( 155
)
—
( 155
)
( 6
)
Total debt securities
( 149
)
—
( 149
)
21
Equity securities:
Gross realized gains
356
1,105
375
4,008
Gross realized losses
( 1,643
)
( 45
)
( 1,731
)
( 45
)
Total equity securities
( 1,287
)
1,060
( 1,356
)
3,963
Total net realized investment gains (losses)
$
( 1,436
)
$
1,060
$
( 1,505
)
$
3,984
Proceeds from available-for-sale debt securities were $ 27.2 million and $ 20.0 million for the six months ended June 30, 2022 and 2021, respectively.
The gross realized gains and losses from the sale of available-for-sale debt securities for three months and six months ended June 30, 2022, were $ 5,000 and $ 155,000 , respectively.
There were no gross realized gains or losses from the sales of available-for-sale securities for the three months ended June 30, 2021. The gross realized gains and losses from the sales of available-for-sale debt securities for the six months ended June 30, 2021, were $ 27,000 and $ 6,000 , respectively.
As of June 30, 2022 and 2021, there were $ 0 and $ 249,000 of payables from securities purchased, respectively. There were $ 6.9 million and $ 11,000 of receivables from securities sold as of June 30, 2022, and 2021, respectively.
The Company’s gross unrealized losses related to its equity investments were $ 443,000 and $ 1.0 million as of June 30, 2022 and December 31, 2021, respectively. The Company also carries other equity investments that do not have a readily determinable fair value at cost, less impairment or observable changes in price. We review these investments for impairment during each reporting period. 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 June 30, 2022 and December 31, 2021.
11
The table below summarizes the amortized cost and fair value of available-for-sale debt securities by contractual maturity at June 30, 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):
Amortized
Cost
Estimated
Fair Value
Due in one year or less
$
3,514
$
3,460
Due after one year through five years
28,744
26,948
Due after five years through ten years
23,894
20,717
Due after ten years
13,781
11,105
Securities with contractual maturities
69,933
62,230
Asset-backed securities
23,885
22,845
Mortgage-backed securities
30,724
26,706
Commercial mortgage-backed securities
3,421
3,269
Collateralized mortgage obligations
4,464
4,157
Total debt securities
$
132,427
$
119,207
At June 30, 2022 and December 31, 2021, the Insurance Company Subsidiaries had $ 8.6 million and $ 8.5 million, respectively, on deposit in trust accounts to meet the deposit requirements of various state insurance departments. At June 30, 2022 and December 31, 2021, the Company had $ 81.2 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.
3. Fair Value Measurements
The Company’s financial instruments include assets and liabilities carried at fair value, as well as assets and liabilities carried at cost or amortized cost but disclosed at fair value in these consolidated financial statements. Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principally most advantageous market for the asset or liability in an orderly transaction between market participants. In determining fair value, the Company applies the market approach, which uses prices and other relevant data based on market transactions involving identical or comparable assets and liabilities. The inputs to valuation techniques used to measure fair value are prioritized into a three-level hierarchy. The hierarchy gives the highest priority to quoted prices from sources independent of the reporting entity (“observable inputs”) and the lowest priority to prices determined by the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”). The fair value hierarchy is as follows:
Level 1 —Valuations that are based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 —Valuations that are based on observable inputs (other than Level 1 prices) such as quoted prices for similar assets or liabilities at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability. The Level 2 financial instruments also include our line of credit.
Level 3 —Unobservable inputs that are supported by little or no market activity. The unobservable inputs represent the Company’s best assumption of how market participants would price the assets or liabilities.
Net Asset Value (NAV) —The fair values of investment company limited partnership investments are based on the capital account balances reported by the investment funds subject to their management review and adjustment. These capital account balances reflect the fair value of the investment funds.
12
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 June 30, 2022 and December 31, 2021 (dollars in thousands):
June 30, 2022
Fair Value Measurements
Total
Level 1
Level 2
Level 3
Assets:
Debt Securities:
U.S. Government
$
7,574
$
—
$
7,574
$
—
State and local government
23,172
—
23,172
—
Corporate debt
31,484
—
31,484
—
Asset-backed securities
22,845
—
22,845
—
Mortgage-backed securities
26,706
—
26,706
—
Commercial mortgage-backed securities
3,269
—
3,269
—
Collateralized mortgage obligations
4,157
—
4,157
—
Total debt securities
119,207
—
119,207
—
Equity Securities
537
255
282
—
Short-term investments
28,001
28,001
—
—
Total marketable investments measured at fair value
$
147,745
$
28,256
$
119,489
$
—
Investments measured at NAV:
Investment in limited partnership
453
Total assets measured at fair value
$
148,198
Liabilities:
Senior Unsecured Notes *
$
20,821
$
—
$
20,821
$
—
Subordinated Notes *
11,517
—
—
11,517
Total Liabilities measured at fair value
$
32,338
$
—
$
20,821
$
11,517
*
Carried at face value of debt net of unamortized debt issuance costs on the consolidated balance sheets
13
December 31, 2021
Fair Value Measurements
Total
Level 1
Level 2
Level 3
Assets:
Debt Securities:
U.S. Government
$
20,720
$
—
$
20,720
$
—
State and local government
30,429
—
30,429
—
Corporate debt
30,346
—
30,346
—
Asset-backed securities
28,438
—
28,438
—
Mortgage-backed securities
32,521
—
32,521
—
Commercial mortgage-backed securities
1,690
—
1,690
—
Collateralized mortgage obligations
5,639
—
5,639
—
Total debt securities
149,783
—
149,783
—
Equity securities
9,437
9,154
283
—
Short-term investments
23,013
23,013
—
—
Total marketable investments measured at fair value
$
182,233
$
32,167
$
150,066
$
—
Investments measured at NAV:
Investment in limited partnership
494
Total assets measured at fair value
$
182,727
Liabilities:
Senior Unsecured Notes *
$
24,118
$
—
$
24,118
$
—
Subordinated Notes *
11,704
—
—
11,704
Total Liabilities measured at fair value
$
35,822
$
—
$
24,118
$
11,704
*
Carried at face value of debt net of unamortized debt issuance costs on the consolidated balance sheets
Level 1 investments consist of equity securities traded in an active exchange market. The Company uses unadjusted quoted prices for identical instruments to measure fair value. 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 19.1 % and 17.6 % of the fair value of the total investment portfolio as of June 30, 2022 and December 31, 2021, respectively.
Level 2 investments include debt securities, which consist of U.S. government agency securities, state and local municipal bonds (including those held as restricted securities), corporate debt securities, mortgage-backed and asset-backed securities. The fair value of securities included in the Level 2 category were based on the market values obtained from a third-party pricing service that were evaluated using pricing models that vary by asset class and incorporate available trade, bid and other observable market information. 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 80.6 % and 82.1 % of the fair value of the total investment portfolio as of June 30, 2022 and December 31, 2021, respectively.
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. To validate that these quoted prices are reasonable estimates of fair value, the Company performs various quantitative and qualitative procedures, such as (i) evaluation of the underlying methodologies, (ii) analysis of recent sales activity, (iii) analytical review of our fair values against current market prices and (iv) comparison of the pricing services’ fair value to other pricing services’ fair value for the same investment. No markets for the investments were determined to be inactive at period-ends. Based on these procedures, the Company did not adjust the prices or quotes provided from independent pricing services, investment managers or consultants. The Level 2 financial instruments also include the Company's senior debt. 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 June 30, 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 June 30, 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
14
required to be paid under the debt agreement over the risk-free U.S . Treasury rates . The OAS was then used in the model along with the June 30, 2022 and December 31, 2021 U.S . Treasury rates . A new lattice was generated and the fair value was computed from the OAS . There were no changes in assumptions of credit risk from the issuance date.
4. Deferred Policy Acquisition Costs
The Company defers costs incurred which are incremental and directly related to the successful acquisition of new or renewal insurance business, net of corresponding amounts of ceded reinsurance commissions. 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 six months ended June 30, 2022 and 2021. The activity in deferred policy acquisition costs, net of reinsurance transactions, is as follows (dollars in thousands):
Three Months Ended
June 30,
Six Months Ended June 30,
2022
2021
2022
2021
Balance at beginning of period
$
10,124
$
12,459
$
12,267
$
12,243
Deferred policy acquisition costs
6,348
7,558
9,669
14,524
Amortization of policy acquisition costs
( 5,725
)
( 6,896
)
( 11,189
)
( 13,646
)
Net change
623
662
( 1,520
)
878
Balance at end of period
$
10,747
$
13,121
$
10,747
$
13,121
5. Unpaid Losses and Loss Adjustment Expenses
The Company establishes reserves for unpaid losses and loss adjustment expenses ("LAE") which represent the estimated ultimate cost of all losses incurred that were both reported and unreported (i.e., incurred but not yet reported losses; or “IBNR”) and LAE incurred that remain unpaid at the balance sheet date. The Company’s reserving process takes into account known facts and interpretations of circumstances and factors including the Company’s experience with similar cases, actual claims paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management programs, product mix and contractual terms, changes in law and regulation, judicial decisions, and economic conditions. In the normal course of business, the Company may also supplement its claims processes by utilizing third-party adjusters, appraisers, engineers, inspectors, and other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims. The effects of inflation are implicitly considered in the reserving process.
Reserves are estimates of unpaid portions of losses that have occurred, including IBNR losses; therefore, the establishment of appropriate reserves is an inherently uncertain and complex process. The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimates. The highest degree of uncertainty is associated with reserves for losses incurred in the current reporting period as it contains the greatest proportion of losses that have not been reported or settled. The Company regularly updates its reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in reserve estimates, which may be material, are reported in the results of operations in the period such changes are determined to be needed and recorded.
Management believes that the reserve for losses and LAE, net of reinsurance recoverables, is appropriately established in the aggregate and adequate to cover the ultimate net cost of reported and unreported claims arising from losses which had occurred by the date of the consolidated financial statements based on available facts and in accordance with applicable laws and regulations.
15
The table below provides the changes in the reserves for losses and LAE, net of reinsurance recoverables, for the periods indicated as follows (dollars in thousands):
Three months ended
June 30,
Six months ended
June 30,
2022
2021
2022
2021
Gross reserves - beginning of period
$
140,938
$
118,676
$
139,085
$
111,270
Less: reinsurance recoverables on unpaid losses
( 40,605
)
( 26,559
)
( 40,344
)
( 24,218
)
Net reserves - beginning of period
100,333
92,117
98,741
87,052
Add: incurred losses and LAE, net of reinsurance:
Current period
12,727
11,716
25,224
25,300
Prior period
9,524
6,210
15,045
11,988
Total net incurred losses and LAE
22,251
17,926
40,269
37,288
Deduct: loss and LAE payments, net of reinsurance:
Current period
5,167
5,120
7,679
8,300
Prior period
14,190
9,895
28,104
21,012
Total net loss and LAE payments
19,357
15,015
35,783
29,312
Net reserves - end of period
103,227
95,028
103,227
95,028
Plus: reinsurance recoverables on unpaid losses
37,769
22,824
37,769
22,824
Gross reserves - end of period
$
140,996
$
117,852
$
140,996
$
117,852
The Company’s incurred losses during the three and six months ended June 30, 2022 included prior-year adverse reserve development of $ 9.5 million and $ 15.0 million, respectively. Of the $9.5 million of adverse development, $ 4.3 million was related to 2018 and prior accident years, $ 3.6 million was related to the 2019 accident year, and $ 1.6 million was related to the 2020 accident year, substantially all attributable to the commercial lines of business.
Of the $15.0 million of adverse development for the six months ended June 30, 2022, $ 7.1 million was related to 2018 and prior accident years, $ 4.9 million was related to 2019 accident year, and $ 3.1 million was related to the 2020 accident year, substantially all attributable to the commercial lines of business.
The Company’s incurred losses during the three and six months ended June 30, 2021 included prior-year adverse reserve development of $6.2 million and $ 12.0 million, respectively. Of the $ 6.2 million of adverse development, $ 1.9 million was related 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.
Of the $12.0 million of adverse development for the six months ended June 30, 2021, $ 11.4 million was related to commercial lines, while $ 636,000 was related to personal lines. The adverse development was mostly attributable to the 2018 and 2017 and prior accident years.
6. Reinsurance
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. 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 homeowners specific risks in excess of $ 300,000 in both 2022 and 2021.
A "treaty" is a reinsurance agreement in which coverage is provided for a class of risks and does not require policy by policy underwriting of the reinsurer. "Facultative" reinsurance is where a reinsurer negotiates an individual reinsurance agreement for every policy it will reinsure on a policy by policy basis. A loss is covered under a reinsurance contract if the loss occurs within the effective dates of the agreement notwithstanding when the loss is reported.
Reinsurance does not discharge the direct insurer from liability to its policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors the concentration of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. To date, the Company has not experienced any significant difficulties in collecting reinsurance recoverables.
16
The Company assumes written premiums under a few fronting arrangements. The fronting arrangements are with unaffiliated insurers who write on behalf of the Company in markets that require a higher A.M. Best rating than the Company’s current rating, where the policies are written in a state where the Company is not licensed or for other strategic reasons.
The following table presents the effects of reinsurance and assumption transactions on written premiums, earned premiums and losses and LAE (dollars in thousands):
Three Months Ended
June 30,
Six months ended
June 30,
2022
2021
2022
2021
Written premiums:
Direct
$
26,311
$
26,153
$
51,107
$
49,586
Assumed
11,107
8,828
19,275
15,768
Ceded
( 10,152
)
( 6,449
)
( 25,095
)
( 12,339
)
Net written premiums
$
27,266
$
28,532
$
45,287
$
53,015
Earned premiums:
Direct
$
24,865
$
22,607
$
48,988
$
43,597
Assumed
8,917
7,621
17,558
14,878
Ceded
( 9,206
)
( 5,390
)
( 18,015
)
( 10,802
)
Net earned premiums
$
24,576
$
24,838
$
48,531
$
47,673
Losses and LAE:
Direct
$
17,472
$
15,367
$
30,538
$
36,117
Assumed
11,503
48
18,911
6,829
Ceded
( 6,724
)
2,511
( 9,180
)
( 5,658
)
Net Losses and LAE
$
22,251
$
17,926
$
40,269
$
37,288
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 $ 2.1 million and $ 4.3 million for the three and six months ended June 30, 2022. There were no ceding commissions on the excess of loss treaties during 2021.
7. Debt
As of June 30, 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):
June 30,
2022
December 31,
2021
Senior unsecured notes
$
24,056
$
23,926
Subordinated notes
9,664
9,638
Total
$
33,720
$
33,564
Senior unsecured notes
The Company issued $ 25.3 million of public senior unsecured notes (the "Notes") in 2018. The Notes bear an interest rate of 6.75 % per annum, payable quarterly at the end of March, June, September and December and mature on September 30, 2023 . 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 six months ended June 30, 2022 and 2021.
17
Subordinated notes
The Company also has outstanding $ 10.5 million of Subordinated Notes maturing on September 30, 2038 . The Subordinated Notes bear an interest rate of 7.5 % per annum until September 30, 2023, and 12.5 % thereafter, and allow for four quarterly interest payment deferrals. Interest is payable quarterly at the end of March, June, September and December. Beginning September 30, 2021, the Company may redeem the Subordinated Notes, in whole or in part, for a call premium of $ 1.1 million. 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 June 30, 2022, the carrying value of the Notes and Subordinated Notes are offset by $ 325,000 and $ 836,000 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 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, principally due to changes in unrealized fair values of the bond portfolio resulting from the significant increase in the interest rate environment. On May 9, 2022, the holders of the Subordinated Notes waived the March 31, 2022 tangible net worth and debt-to-total capital requirements and the 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.
As of June 30, 2022, the Company was not in compliance on the tangible net worth covenant of the Subordinated Notes. On August 8, 2022, the holders of the Subordinated Notes waived the June 30, 2022 tangible net worth requirement. The $ 5.0 million contribution to the Company on August 10, 2022 (see Note 14 ~ Subsequent Events ), increased the net worth sufficiently to bring the Company back into compliance. Management expects to be in compliance with all debt covenants in future periods.
Line of credit
The Company maintains a $ 10.0 million line of credit with a national bank (the “Lender”). The line of credit bears interest at the London Interbank rate ("LIBOR") plus 2.75 % per annum, payable monthly. On June 18, 2021, the line of credit was renewed with a maturity of December 1, 2022. The line of credit contains 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 of the line of credit. 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.
As of June 30, 2022, the Company had no balance outstanding on the line of credit but was not in compliance with the tangible net worth and debt-to-total capital debt covenants. On August 8, 2022, the Company entered into an amendment with the Lender which waived the June 30, 2022 debt covenant requirements, eliminated the financial debt covenant requirements going forward and requires prior bank approval for any future draws on the line of credit. Management expects to be in compliance with all debt covenants in future periods.
Paycheck Protection Program loan
On April 24, 2020, the Company received a $ 2.7 million loan from the line of credit Lender pursuant to the Paycheck Protection Program of the CARES Act administered by the U.S. Small Business Administration (“SBA”). 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 was included in Other Gains on the Consolidated Statement of Operations in the third quarter of 2021.
8. Shareholder’s Equity
On May 11, 2022, the Company entered into a subscription agreement to issue $ 5.0 million of equity. The Company received the $5.0 million of cash in the second quarter of 2022, however, pricing and terms were pending as of June 30, 2022. The $5.0 million of cash was converted into 2,500,000 shares of common stock, at a price of $ 2.00 per share in August 2022. See Note 14 ~ Subsequent Events , for further details. Accordingly, the Company’s total equity is higher by $ 5.0 million as of the date of the filing of this Form 10-Q.
For the three months ended June 30, 2022, and 2021, the Company repurchased 1,493 and 2,307 shares of stock valued at approximately $ 3,000 and $ 7,000 , respectively, related to the vesting of the Company’s restricted stock units. The Company made no repurchases of stock relating to the vesting of restricted stock units during the first quarters of 2022 and 2021. Upon the repurchase of the Company’s shares, the shares remain authorized, but not issued or outstanding.
18
As of June 30, 2022 and December 31, 2021, the Company had 9,715,324 and 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. The holders have no preemptive, conversion or subscription rights.
9. Accumulated Other Comprehensive Income (Loss)
The following table presents changes in accumulated other comprehensive income (loss) for unrealized gains and losses on available-for-sale securities (dollars in thousands):
Three months ended
June 30,
Six months ended
June 30,
2022
2021
2022
2021
Balance at beginning of period
$
( 9,397
)
$
( 1,955
)
$
( 2,110
)
$
912
Other comprehensive income (loss) before reclassifications, net of tax
( 5,007
)
394
( 12,294
)
( 1,530
)
Less: amounts reclassified from accumulated other comprehensive income (loss), net of tax
70
( 902
)
70
41
Net other comprehensive income (loss)
( 5,077
)
1,296
( 12,364
)
( 1,571
)
Balance at end of period
$
( 14,474
)
$
( 659
)
$
( 14,474
)
$
( 659
)
10. Earnings Per Share
Basic and diluted earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. The following table presents the calculation of basic and diluted earnings (loss) per common share, as follows (dollars in thousands, except per share and share amounts):
Three Months Ended
June 30,
Six months ended
June 30,
2022
2021
2022
2021
Net income (loss)
$
( 8,399
)
$
5,552
$
( 11,269
)
$
916
Weighted average common shares, basic and diluted *
9,712,602
9,686,631
9,710,223
9,684,193
Earnings (loss) per common share, basic and diluted
$
( 0.86
)
$
0.57
$
( 1.16
)
$
0.09
*
The non-vested shares of the restricted stock units and stock options were anti-dilutive as of June 30, 2022 and 2021. Therefore, the basic and diluted weighted average common shares are equal for the three months and six months ended June 30, 2022 and 2021 .
11. 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. The right to exercise the options will vest over a five-year period on a straight-line basis. The options have a strike price of $ 3.81 per share and expire on June 30, 2030 . The estimated value of these options is $ 290,000 , which is being expensed ratably over the vesting period.
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 $ 29,000 and $ 108,000 of compensation expense related to the RSUs for the six months ended June 30, 2022 and 2021, respectively. There were 10,000 unvested RSUs as of June 30, 2022, which will generate an estimated future expense of $ 44,000 .
19
The Company recorded $ 67,000 and $ 25,000 of compensation expense related to the stock options for the six months ended June 30, 2022 and 2021, respectively. There were 783,000 unvested options as of June 30, 2022, which will generate an estimated future expense of $ 729,000 .
12. Commitments and Contingencies
Legal proceedings
The Company and its subsidiaries are subject at times to various claims, lawsuits and proceedings relating principally to alleged errors or omissions in the placement of insurance, claims administration, and other business transactions arising in the ordinary course of business. Where appropriate, the Company vigorously defends such claims, lawsuits and proceedings. Some of these claims, lawsuits and proceedings seek damages, including consequential, exemplary or punitive damages, in amounts that could, if awarded, be significant. Most of the claims, lawsuits and proceedings arising in the ordinary course of business are covered by the insurance policy at issue. We account for such activity through the establishment of unpaid losses and LAE reserves. In accordance with accounting guidance, if it is probable that a liability has been incurred as of the date of the financial statements and the amount of loss is reasonably estimable; then an accrual for the costs to resolve these claims is recorded by the Company in the accompanying consolidated financial statements. Periodic expenses related to the defense of such claims are included in the accompanying consolidated statements of operations. On the basis of current information, the Company does not believe that there is a reasonable possibility that any material loss exceeding amounts already accrued, if any, will result from any of the claims, lawsuits and proceedings to which the Company is subject to, either individually or in the aggregate.
13. Segment Information
The Company is engaged in the sale of property and casualty insurance products and has organized its business model around three classes of insurance businesses: commercial lines, personal lines, and wholesale agency business. Within these three businesses, the Company offers various insurance products and insurance agency services. Such insurance businesses are engaged in underwriting and marketing insurance coverages, and administering claims processing for such policies. The Company views the commercial and personal lines segments as underwriting business (business that takes on insurance underwriting risk). The wholesale agency business provides non-risk bearing revenue through commissions and policy fees. 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 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. Operating expenses primarily include compensation and related benefits for personnel, policy issuance and claims systems, rent and utilities. The Company markets, distributes and sells its insurance products through its own insurance agencies and a network of independent agents. 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 six months ended June 30, 2022 and 2021, gross written premiums attributable to these four states were 57.0 % and 51.7 %, 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. Certain acquisition costs incurred by the commercial and personal lines businesses are reflected as commission revenue for the Wholesale Agency business and are eliminated in the Eliminations category.
In addition to the reportable operating segments, the Company maintains a Corporate category to reconcile segment results to the consolidated totals. The Corporate category includes: (i) corporate operating expenses such as salaries and related benefits of the Company’s executive management team and finance and information technology personnel, and other corporate headquarters expenses, (ii) interest expense on the Company’s debt obligations; (iii) depreciation and amortization on property and equipment, and (iv) all investment income activity. All investment income activity is reported within net investment income, net realized investment gains, and change in fair value of equity securities on the consolidated statements of operations. The Company’s assets on the consolidated balance sheet are not allocated to the reportable segments.
20
The following tables present information by reportable operating segment (dollars in thousands):
Three months ended
June 30, 2022
Commercial Lines
Personal
Lines
Total
Underwriting
Wholesale
Agency
Corporate
Eliminations
Total
Gross written premiums
$
32,076
$
5,342
$
37,418
$
—
$
—
$
—
$
37,418
Net written premiums
$
22,386
$
4,880
$
27,266
$
—
$
—
$
—
$
27,266
Net earned premiums
$
20,784
$
3,792
$
24,576
$
—
$
—
$
—
$
24,576
Other income
67
26
93
1,064
147
( 641
)
663
Segment revenue
20,851
3,818
24,669
1,064
147
( 641
)
25,239
Losses and LAE, net
19,906
2,345
22,251
—
—
—
22,251
Policy acquisition costs
4,410
1,223
5,633
770
—
( 678
)
5,725
Operating expenses
3,508
484
3,992
274
204
—
4,470
Segment expenses
27,824
4,052
31,876
1,044
204
( 678
)
32,446
Segment gain (loss)
$
( 6,973
)
$
( 234
)
$
( 7,207
)
$
20
$
( 57
)
$
37
$
( 7,207
)
Investment income
564
564
Net realized investment gains (losses)
( 1,436
)
( 1,436
)
Change in fair value of equity securities
317
317
Other gains (losses)
( 1
)
( 1
)
Interest expense
( 727
)
( 727
)
Income (loss) before equity earnings in Affiliate and income taxes
$
( 6,973
)
$
( 234
)
$
( 7,207
)
$
20
$
( 1,340
)
$
37
$
( 8,490
)
Three months ended
June 30, 2021
Commercial
Lines
Personal
Lines
Total
Underwriting
Wholesale
Agency
Corporate
Eliminations
Total
Gross written premiums
$
30,947
$
4,034
$
34,981
$
—
$
—
$
—
$
34,981
Net written premiums
$
24,672
$
3,860
$
28,532
$
—
$
—
$
—
$
28,532
Net earned premiums
$
22,188
$
2,650
$
24,838
$
—
$
—
$
—
$
24,838
Other income
52
44
96
1,971
28
( 1,429
)
666
Segment revenue
22,240
2,694
24,934
1,971
28
( 1,429
)
25,504
Losses and LAE, net
16,940
986
17,926
—
—
—
17,926
Policy acquisition costs
6,326
740
7,066
1,242
—
( 1,412
)
6,896
Operating expenses
2,852
391
3,243
816
283
—
4,342
Segment expenses
26,118
2,117
28,235
2,058
283
( 1,412
)
29,164
Segment gain (loss)
$
( 3,878
)
$
577
$
( 3,301
)
$
( 87
)
$
( 255
)
$
( 17
)
$
( 3,660
)
Investment income
503
503
Net realized investment gains
1,060
1,060
Change in fair value of equity securities
( 525
)
( 525
)
Other gains
8,910
8,910
Interest expense
( 732
)
( 732
)
Income (loss) before equity earnings in Affiliate and income taxes
$
( 3,878
)
$
577
$
( 3,301
)
$
( 87
)
$
8,961
$
( 17
)
$
5,556
21
Six months ended
June 30, 2022
Commercial
Lines
Personal
Lines
Total
Underwriting
Wholesale
Agency
Corporate
Eliminations
Total
Gross written premiums
$
60,662
$
9,720
$
70,382
$
—
$
—
$
—
$
70,382
Net written premiums
$
36,726
$
8,561
$
45,287
$
—
$
—
$
—
$
45,287
Net earned premiums
$
41,308
$
7,223
$
48,531
$
—
$
—
$
—
$
48,531
Other income
138
32
170
2,176
294
( 1,279
)
1,361
Segment revenue
41,446
7,255
48,701
2,176
294
( 1,279
)
49,892
Losses and LAE, net
36,516
3,753
40,269
—
—
—
40,269
Policy acquisition costs
8,767
2,316
11,083
1,528
—
( 1,422
)
11,189
Operating expenses
6,669
886
7,555
566
509
—
8,630
Segment expenses
51,952
6,955
58,907
2,094
509
( 1,422
)
60,088
Segment gain (loss)
$
( 10,506
)
$
300
$
( 10,206
)
$
82
$
( 215
)
$
143
$
( 10,196
)
Investment income
1,071
1,071
Net realized investment gains
( 1,505
)
( 1,505
)
Change in fair value of equity securities
597
597
Other gains
( 6
)
( 6
)
Interest expense
( 1,438
)
( 1,438
)
Income (loss) before equity earnings in Affiliate and income taxes
$
( 10,506
)
$
300
$
( 10,206
)
$
82
$
( 1,496
)
$
143
$
( 11,477
)
Six months ended
June 30, 2021
Commercial
Lines
Personal
Lines
Total
Underwriting
Wholesale
Agency
Corporate
Eliminations
Total
Gross written premiums
$
58,168
$
7,186
$
65,354
$
—
$
—
$
—
$
65,354
Net written premiums
$
46,229
$
6,786
$
53,015
$
—
$
—
$
—
$
53,015
Net earned premiums
$
42,894
$
4,779
$
47,673
$
—
$
—
$
—
$
47,673
Other income
108
84
192
3,697
71
( 2,738
)
1,222
Segment revenue
43,002
4,863
47,865
3,697
71
( 2,738
)
48,895
Losses and LAE, net
33,895
3,393
37,288
—
—
—
37,288
Policy acquisition costs
12,644
1,340
13,984
2,369
—
( 2,707
)
13,646
Operating expenses
5,807
740
6,547
1,560
584
—
8,691
Segment expenses
52,346
5,473
57,819
3,929
584
( 2,707
)
59,625
Segment gain (loss)
$
( 9,344
)
$
( 610
)
$
( 9,954
)
$
( 232
)
$
( 513
)
$
( 31
)
$
( 10,730
)
Investment income
1,035
1,035
Net realized investment gains
3,984
3,984
Change in fair value of equity securities
( 1,065
)
( 1,065
)
Other gains
8,910
8,910
Interest expense
( 1,453
)
( 1,453
)
Income (loss) before equity earnings in Affiliate and income taxes
$
( 9,344
)
$
( 610
)
$
( 9,954
)
$
( 232
)
$
10,898
$
( 31
)
$
681
22
14. Subsequent Events
On May 11, 2022, the Company entered into a subscription agreement to issue $ 5.0 million of equity. While the cash was received by June 30, 2022, pricing and terms were still pending. On August 10, 2022, the terms were finalized and the Company issued 2,500,000 shares of common stock at $ 2.00 per share. The additional equity will increase the June 30, 2022 total shareholders’ equity from $ 17.0 million to $ 22.0 million.
One of the Company’s Insurance Company Subsidiaries borrowed $ 14.5 million from the Federal Home Loan Bank of Indiana on July 7, 2022. It matures on January 9, 2023 , and has a floating interest rate that was initially 1.93 % per annum. This fully-collateralized loan was drawn for short-term cash needs to avoid realized losses on a statutory accounting basis due to temporary market-timing issues caused by the recent fluctuations in the interest rate markets.
23
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.