What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-09 compared with 2022-08-11 · 117 added, 91 removed, 299 unchanged (41% of the section changed)

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

For the Periods Ended June 30, 2022 and 2021

For the Periods Ended September 30, 2022 and 2021

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements (Unaudited), related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K, filed on March 10, 2022 with the U.

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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.

Private Placement

On August 10, 2022, the Company issued $5.0 million of equity through a private placement for 2,500,000 shares priced at $2.00 per share.

The participants in the private placement consisted of members of the Company's Board of Directors.

The Company used the proceeds for growth capital in the Company's specialty core business segments.

Sale of Certain Agency Business

On October 14, 2022, Venture completed the sale of certain producer business assets with Whitetail Insurance Services, LLC (the “Buyer”), a wholly-owned subsidiary of Acrisure, LLC (“Acrisure”), for a purchase price of $38.2 million.

The effective date of the asset purchase agreement is October 1, 2022.

There is no material relationship between the Company or any director or officer of the Company, or any associate of any director or officer of the Company, and the Buyer, other than with respect to the Company's disposition of assets to the Buyer.

The assets involved in this transaction relate to Venture Agency Holdings, Inc.

insurance brokerage and associated services provided largely to the security sector.

This sale, along with related transactions including the cost of the Company purchasing the other 50% of Venture, is expected to generate approximately $8.0 million of non-operating gains for the Company, net of taxes, in the fourth quarter of 2022.

On June 30, 2021, our agency (Sycamore Insurance Agency) sold to Venture Agency Holdings, Inc., a related party, the customer accounts and other related assets of some of its personal and commercial lines of business (the “Venture Transaction”).

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On December 14, 2021, Venture paid off the $3.0 million note.

The assets sold included the customer accounts (mainly agency-related new and renewal rights) of substantially all of the personal lines business and a small subset of the commercial lines business underwritten by our Insurance Company

Subsidiaries, and all of the customer accounts Sycamore produced for third-party insurers.

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

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We expect Venture to be able to grow both the business we underwrite as well as the third-party business more effectively as a separate entity outside of Conifer.

As of June 3 0 , 2022 , the Company had a non-controlling 50% interest in Venture.

As of September 30, 2022, the Company had a non-controlling 50% interest in Venture.

Loss Portfolio Transfer

On November 1, 2022, the Company entered into an LPT reinsurance agreement with Fleming Re.

Under the agreement, Fleming Re will cover an aggregate limit of $66.3 million of paid losses on $40.8 million of stated net reserves as of June 30, 2022, relating to accident years 2019 and prior.

Within the aggregate limit, there is a $5.5 million loss corridor in which the Company and WPIC retains losses in excess of $40.8 million.

Fleming Re is then responsible to cover paid losses in excess of $46.3 million up to $66.3 million.

Accordingly, there is $20.0 million of adverse development cover for accident years 2019 and prior.

Under the agreement, Fleming Re retains $40.8 million for stated net reserves as of June 30, 2022, plus a one-time risk fee of $5.4 million.

The agreement is between CIC and WPIC and Fleming Re.

On April 21, 2022, A.M.

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

During the six months ended June 30, 2022, there were no material changes to our critical accounting policies and estimating methodologies, which are disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form 10-K filed with the SEC on March 10, 2022.

During the nine months ended September 30, 2022, there were no material changes to our critical accounting policies and estimating methodologies, which are disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form 10-K filed with the SEC on March 10, 2022.

Executive Overview

The Company reported $37.4 million of gross written premiums in the second quarter of 2022, representing a 7.0% increase as compared to the same period in 2021.

Our commercial lines gross written premiums increased by $1.1 million, or 3.6%, to $32.1 million in the second quarter of 2022, compared to $30.9 million for the same period in 2021.

Personal lines gross written premiums increased by $1.3 million, or 32.4%, to $5.3 million in the second quarter of 2022, compared to $4.0 million for the same period in 2021.

The Company reported $70.4 million of gross written premiums for the six months ended June 30, 2022, compared to $65.4 million for the same period in 2021.

The Company reported a net loss of $8.4 million, or $0.86 per share, and a net loss of $11.3 million, or $1.16 per share, for the three and six months ended June 30, 2022, respectively.

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

Adjusted operating loss, a non-GAAP measure, was $7.3 million, or $0.75 per share for the three months ended June 30, 2022.

Adjusted operating loss was $10.4 million, or $1.07 per share for the six months ended June 30, 2022.

Adjusted operating loss, a non-GAAP measure, was $3.9 million, or $0.40 per share for the three months ended June 30, 2021.

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

Our underwriting combined ratio was 129.2% and 121.0% for the three and six months ended June 30, 2022, compared to 113.2% and 120.8% for the three and six months ended June 30, 2021, respectively.

Results of Operations For The Three Months Ended June 30, 2022 and 2021

The Company reported $33.1 million of gross written premiums in the third quarter of 2022, representing a 1.8% decrease as compared to the same period in 2021.

Our commercial lines gross written premiums decreased by $2.2 million, or 7.4%, to $27.6 million in the third quarter of 2022, compared to $29.8 million for the same period in 2021.

Personal lines gross written premiums increased by $1.6 million, or 41.5%, to $5.5 million in the third quarter of 2022, compared to $3.9 million for the same period in 2021.

The Company reported $103.5 million of gross written premiums for the nine months ended September 30, 2022, compared to $99.1 million for the same period in 2021.

The Company reported a net loss of $1.5 million, or $0.14 per share, and a net loss of $12.8 million, or $1.26 per share, for the three and nine months ended September 30, 2022, respectively.

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

Adjusted operating loss, a non-GAAP measure, was $1.4 million, or $0.13 per share, and $11.8 million, or $1.16 per share, for the three and nine months ended September 30, 2022, respectively.

Adjusted operating loss was $1.7 million, or $0.18 per share, and $12.6 million, or $1.30 per share, for the three and nine months ended September 30, 2021.

Our underwriting combined ratio was 106.5% and 116.0% for the three and nine months ended September 30, 2022, compared to 106.9 and 116.0% for the three and nine months ended September 30, 2021, respectively.

Results of Operations For The Three Months Ended September 3 0 , 20 2 2 and 20 2 1

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

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Three Months Ended

September 30,

Gross written premiums

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

Our premiums are presented below for the three months ended June 30, 2022 and 2021 (dollars in thousands):

Our premiums are presented below for the three months ended September 3 0 , 20 2 2 and 20 2 1 (dollars in thousands):

Summary of Premium Revenue

Three Months Ended

September 30,

Gross written premiums

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Personal lines

Gross written premiums increased $2.4 million, or 7.0%, to $37.4 million for the three months ended June 30, 2022, as compared to $35.0 million for the same period in 2021.

Commercial lines gross written premiums increased $1.1 million, or 3.6%, to $32.1 million in the second quarter of 2022, as compared to $30.9 million for the second quarter of 2021.

Personal lines gross written premiums increased $1.3 million, or 32.4%, to $5.3 million in the second quarter of 2022, as compared to $4.0 million for the same period in 2021.

The increased gross written premiums were due to $950,000 of premium growth in the Company’s low-value dwelling book of business.

Net written premiums decreased $1.3 million, or 4.4%, to $27.3 million for the three months ended June 30, 2022, as compared to $28.5 million for the same period in 2021.

Gross written premiums decreased $616,000, or 1.8%, to $33.1 million for the three months ended September 30, 2022, as compared to $33.7 million for the same period in 2021.

Commercial lines gross written premiums decreased $2.2 million, or 7.4%, to $27.6 million in the third quarter of 2022, as compared to $29.8 million for the third quarter of 2021.

Personal lines gross written premiums increased $1.6 million, or 41.5%, to $5.5 million in the third quarter of 2022, as compared to $3.9 million for the same period in 2021.

The increased gross written premiums were due to $1.0 million of quarter-over-quarter premium growth in the Company’s low-value dwelling book of business.

Net written premiums decreased $2.4 million, or 9.1%, to $23.7 million for the three months ended September 30, 2022, as compared to $26.1 million for the same period in 2021.

The Company entered into new specific loss reinsurance treaties on December 31, 2021 and January 1, 2022, which included a 40% ceding commission.

This increased ceded written premiums by $2.2 million in the second quarter of 2022.

This increased ceded written premiums by $1.7 million in the third quarter of 2022.

There was no ceding commission on excess of loss treaties during 2021.

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The increase in ceded earned premiums was offset by the same increase in ceding commissions, which reduced acquisition costs.

Ceded earned premiums also increased by $950,000 in the second quarter of 2022 as compared to 2021 due to growth in umbrella insurance premiums which are 94.0% ceded under existing quota share reinsurance agreements.

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

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

Other income remained consistent quarter-over-quarter and was $663,000 and $666,000 for the three months ended June 30, 2022 and June 30, 2021, respectively.

Other income decreased by $149,000, or 19.8%, to $603,000 for the three months ended September 30, 2022, as compared to $752,000 for the same period in 2021.

Losses and Loss Adjustment Expenses

The tables below detail our losses and loss adjustment expenses and loss ratios in our underwriting business for the three months ended June 30, 2022 and 2021 (dollars in thousands).

Three months ended June 30, 2022

The tables below detail our losses and loss adjustment expenses and loss ratios in our underwriting business for the three months ended September 30, 2022 and 2021 (dollars in thousands).

Three months ended September 30, 2022

Accident year net losses and LAE

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Calendar year loss ratio

Three months ended June 30, 2021

Three months ended September 30, 2021

Accident year net losses and LAE

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Calendar year loss ratio

Net losses and LAE increased by $4.3 million, or 24.1%, to $22.3 million during the second quarter of 2022, compared to $17.9 million for the same period in 2021.

The increase in losses was driven by adverse development in the commercial lines of business that occurred during the second quarter of 2022, of which $4.3 million, $3.6 million, and $1.6 million occurred in the 2018 and prior, 2019 and 2020 accident years, respectively.

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

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

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

Net losses and LAE increased by $512,000, or 3.2%, to $16.7 million during the third quarter of 2022, compared to $16.2 million for the same period in 2021.

The increase in losses was driven by current accident year losses increasing by $1.8 million during the third quarter of 2022 in the Company’s personal lines, compared to the same period in 2021.

The Company experienced $3.1 million of adverse development for the three months ended September 30, 2022, of which $2.3 million was related to 2019 and prior accident years and $1.8 million was related to the 2021 accident year.

This was offset by $958,000 of favorable development experienced in the 2020 accident year.

Of the $3.1 million of adverse development, $2.7 million was related to the commercial lines of business, while $381,000 was related to the personal lines of business.

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

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

Expense Ratio

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Three Months Ended

September 30,

Commercial Lines

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Operating expenses

Our expense ratio decreased by 2.3 percentage points in the second quarter of 2022 as compared to the same period in 2021.

Our expense ratio decreased by 2.4 percentage points in the third quarter of 2022 as compared to the same period in 2021.

The decrease was largely due to a reduction in policy acquisition costs attributable to $1.7 million of ceding commission from new excess of loss reinsurance treaties.

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The Company offsets direct commissions with ceding commissions from reinsurers.

The percentage of policy acquisition costs to net earned premiums and other income decreased by 5.5%, from 28.3% in the second quarter of 2021, to 22.8% for the same period in 2022, mostly due to the new ceding commission mentioned above.

The percentage of policy acquisition costs to net earned premiums and other income decreased by 4.6%, from 29.2% in the third quarter of 2021, to 24.6% for the same period in 2022, mostly due to the new ceding commission mentioned above.

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

Operating expenses as a percent of net earned premiums and other underwriting income increased by 3.2% during the second quarter of 2022 to 16.2%, compared to 13.0% for the same period in 2021.

Operating expenses as a percent of net earned premiums and other underwriting income increased by 2.2% during the third quarter of 2022 to 15.3%, compared to 13.1% for the same period in 2021.

While overall operating expenses were fairly consistent quarter-over-quarter, the new excess of loss reinsurance treaties with the ceding commission drove net earned premiums lower, resulting in a slightly higher operating expense ratio.

The personal lines operating expense ratio was lower in the second quarter of 2022 due to significant growth in premium volume on substantially the same operating expense base.

Segment Results

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

The following table provides the underwriting gain or loss for the three months ended June 30, 2022 and 2021 (dollars in thousands):

The following table provides the underwriting gain or loss for the three months ended September 30, 2022 and 2021 (dollars in thousands):

Segment Gain (Loss)

Three Months Ended

September 30,

Commercial Lines

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Total segment gain (loss)

Results of Operations For The Six Months Ended June 30, 2022 and 2021

Results of Operations For The Nine Months Ended September 30, 2022 and 2021

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

Six months ended

Nine months ended

September 30,

Gross written premiums

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Net investment income

Net realized investment gains

Net realized investment gains (losses)

Change in fair value of equity securities

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

Our premiums are presented below for the six months ended June 30, 2022 and 2021 (dollars in thousands):

Six months ended

Our premiums are presented below for the nine months ended September 30, 2022 and 2021 (dollars in thousands):

Nine months ended

September 30,

Gross written premiums

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Personal lines

Gross written premiums increased $5.0 million, or 7.7%, to $70.4 million for the six months ended June 30, 2022, as compared to $65.4 million for the same period in 2021.

Commercial lines gross written premiums increased $2.5 million, or 4.3%, to $60.7 million for the six months ended June 30, 2022, as compared to $58.2 million in the same period of 2021.

The increase was due to $4.0 million of premium growth in the Company’s small business programs, partially offset by a $1.5 million reduction of gross written premium in the Company’s hospitality programs.

Personal lines gross written premiums increased $2.5 million, or 35.3%, to $9.7 million for the six months ended June 30, 2022, as compared to $7.2 million for the same period in 2021.

The increased gross written premiums were due to $2.0 million of premium growth in the Company’s low-value dwelling book of business.

Net written premiums decreased $7.7 million, or 14.6%, to $45.3 million for the six months ended June 30, 2022, as compared to $53.0 million for the same period in 2021.

Gross written premiums increased $4.4 million, or 4.5%, to $103.5 million for the nine months ended September 30, 2022, as compared to $99.1 million for the same period in 2021.

Commercial lines gross written premiums increased $280,000, or 0.3%, and was $88.3 million for the nine months ended September 30, 2022, as compared to $88.0 million for the same period in 2021.

Personal lines gross written premiums increased $4.1 million, or 37.4%, to $15.2 million for the nine months ended September 30, 2022, as compared to $11.0 million for the same period in 2021.

The increased gross written premiums were due to $3.0 million of premium growth in the Company’s low-value dwelling book of business for the nine months ended September 30, 2022 compared to the same period in 2021.

Net written premiums decreased $10.1 million, or 12.8%, to $69.0 million for the nine months ended September 30, 2022, as compared to $79.1 million for the same period in 2021.

The Company entered into new specific loss reinsurance treaties on December 31, 2021 and January 1, 2022, which included a 40% ceding commission.

This increased ceded written premiums by approximately $6.6 million for the six months ended June 30, 2022.

This increased ceded written premiums by approximately $8.4 million for the nine months ended September 30, 2022.

There was no ceding commission on excess of loss treaties during 2021.

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The increase in ceded earned premiums was offset by the same increase in ceding commissions, which reduced acquisition costs.

Ceded earned premiums also increased by $7.2 million for the six months ended June 30, 2022, as compared to the same period in 2021 due to growth in umbrella insurance premiums which are 94.0% ceded under existing quota share reinsurance agreements.

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

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

Other income for the six months ended June 30, 2022, increased by $139,000, or 11.4%, to $1.4 million as compared to $1.2 million for the same period in 2021.

Other income relating to installment billings and policy issuance costs was lower in the first six months of 2022, as the business that was sold to Venture at June 30, 2021, no longer produces other income for the Company.

This was more than offset by an increase in the interest income of $210,000 for the six months ended June 30, 2022, from the $6.0 promissory note receivable from Venture from the Venture Transaction.

Other income remained consistent and was $2.0 million for the nine months ended September 30, 2022 and September 30, 2021, respectively.

Losses and Loss Adjustment Expenses

The tables below detail our losses and loss adjustment expenses and loss ratios in our underwriting business for the six months ended June 30, 2022 and 2021 (dollars in thousands).

Six months ended June 30, 2022

The tables below detail our losses and loss adjustment expenses and loss ratios in our underwriting business for the nine months ended September 30, 2022 and 2021 (dollars in thousands).

Nine months ended September 30, 2022

Accident year net losses and LAE

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Calendar year loss ratio

Six months ended June 30, 2021

Nine months ended September 30, 2021

Accident year net losses and LAE

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Calendar year loss ratio

Net losses and LAE decreased by $3.0 million, or 8.0%, to $40.3 million for the six months ended June 30, 2022, compared to $37.3 million for the same period in 2021.

The increase in losses was driven by adverse development that occurred during the first six months of 2022.

The Company experienced $15.0 million of adverse development for the six months ended June 30, 2022, as compared to $12.0 million of adverse development for the same period in 2021.

Of the $15.0 million of adverse development experienced in the first six months of 2022, $7.1 million was related to 2018 and prior accident years, $4.9 million was related to the 2019 accident year, and $3.1 million was related to the 2020 accident year.

Net losses and LAE increased by $3.5 million, or 6.5%, to $56.9 million for the nine months ended September 30, 2022, compared to $53.4 million for the same period in 2021.

The increase in losses was driven by adverse development that occurred during the first nine months of 2022.

The Company experienced $18.2 million of adverse development for the nine months ended September 30, 2022, as compared to $15.6 million of adverse development for the same period in 2021.

Of the $18.2 million of adverse development experienced in the first nine months of 2022, $14.3 million was related to 2019 and prior accident years, $2.2 million was related to the 2020 accident year, and $1.7 million was related to the 2021 accident year.

Substantially all of the $18.2 million of adverse development was related to the Company’s commercial lines of business.

Net losses and LAE increased were $37.3 million for the six months ended June 30, 2021.

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

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

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

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

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

Expense Ratio

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The table below provides the expense ratio by major component.

Six months ended

Nine months ended

September 30,

Commercial Lines

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Operating expenses

Our expense ratio decreased by 4.6 percentage points for the six months ended June 30, 2022, as compared to the same period in 2021.

Our expense ratio decreased by 3.9 percentage points for the nine months ended September 30, 2022, as compared to the same period in 2021.

The decrease was largely due to a reduction in policy acquisition costs attributable to $8.4 million of ceding commission from new excess of loss reinsurance treaties.

There were no commissions on excess of loss treaties in 2021.

The expense ratio also decreased as a result of a $836,000 increase in underwriting revenue for the six months ended June 30, 2022, as compared to the same period in 2021, while operating expenses were slightly higher in 2022.

The expense ratio also decreased as a result of a $865,000 increase in underwriting revenue for the nine months ended September 30, 2022, as compared to the same period in 2021, while operating expenses were slightly higher in 2022.

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

The Company offsets direct commissions with ceded commissions from reinsurers.

The percentage of policy acquisition costs to net earned premiums and other income decreased by 6.4%, from 29.2% in the first six months of 2021, to 22.8% for the same period in 2022, mostly due to the new ceding commission mentioned above.

The percentage of policy acquisition costs to net earned premiums and other income decreased by 5.8%, from 29.2% in the first nine months of 2021, to 23.4% for the same period in 2022, mostly due to the new ceding commission mentioned above.

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

Operating expenses as a percent of net earned premiums and other underwriting income increased by 1.8% to 15.5% for the six months ended June 30, 2022, as compared to 13.7% for the same period in 2021.

Operating expenses as a percent of net earned premiums and other underwriting income increased by 1.9% to 15.4% for the nine months ended September 30, 2022, as compared to 13.5% for the same period in 2021.

The new excess of loss reinsurance treaties with the ceding commission drove net earned premiums lower, resulting in a slightly higher operating expense ratio.

The personal lines operating expense ratio was lower for the six months ended June 30, 2022 due to significant growth in premium volume on substantially the same operating expense base.

The personal lines operating expense ratio was lower for the nine months ended September 30, 2022 due to significant growth in premium volume on substantially the same operating expense base.

Segment Results

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

The following table provides the underwriting gain or loss for the six months ended June 30, 2022 and 2021 (dollars in thousands):

The following table provides the underwriting gain or loss for the nine months ended September 30, 2022 and 2021 (dollars in thousands):

Segment Gain (Loss)

Six months ended

Nine months ended

September 30,

Commercial Lines

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Sources and Uses of Funds

At June 30, 2022, we had $41.1 million in cash, cash equivalents and short-term investments.

At September 30, 2022, we had $66.0 million in cash, cash equivalents and short-term investments.

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

These funds are primarily used to pay claims, commissions, employee compensation, taxes and other operating expenses, and service debt.

We believe that our existing cash, cash equivalents, short-term investments and investment securities balances will be adequate to meet our capital and liquidity needs and the needs of our subsidiaries on a short-term and long-term basis.

Management plans to issue new public debt that will provide sufficient cash flow to pay off the senior unsecured notes that are coming due within the next twelve months.

We believe it is probable that we will be able to issue new public debt and repay the senior unsecured notes by September 30, 2023.

We believe that our existing cash, cash equivalents, short-term investments and investment securities balances will be adequate to meet our operating liquidity needs and the needs of our subsidiaries on a short-term and long-term basis.

With the expected execution of the senior debt refinancing, we believe we can meet our capital needs as well over the next twelve months.

We conduct our business operations primarily through our Insurance Company Subsidiaries.

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

There were no dividends paid from our Insurance Company Subsidiaries during the six months ended June 30, 2022 and 2021.

There were no dividends paid from our Insurance Company Subsidiaries during the nine months ended September 30, 2022 and 2021.

The FHLB of Indianapolis loan matures on January 9, 2023.

It is 100% collateralized with high quality readily marketable securities and cash.

Management plans to repay this debt by year end with existing cash and investments.

However, we also believe the FHLB of Indianapolis would refinance this debt if we chose to keep it for a longer period, due to the very low risk associated with a fully collateralized loan.

Operating Activities .

Cash used in operating activities for the six months ended June 30, 2022 was $15.5 million compared to $4.5 million for the same period in 2021.

The $11.0 million increase was primarily due to a $8.1 million increase in ceded premiums paid during the six months ended June 30, 2022, compared to the same period in 2021.

Cash used in operating activities for the nine months ended September 30, 2022 was $14.1 million compared to $2.0 million for the same period in 2021.

The $12.1 million increase was primarily due to a $16.7 million increase in ceded premiums paid during the nine months ended September 30, 2022, compared to the same period in 2021.

This was due to the new specific commercial liability treaty the Company entered into as of December 31, 2021, which includes a 40% ceding commission.

The increase in ceded premiums paid was offset by a $5.1 million decrease in acquisition costs paid for the six months ended June 30, 2022, compared to the same period in 2021.

The increase in ceded premiums paid was offset by a $6.7 million decrease in acquisition costs paid for the nine months ended September 30, 2022, compared to the same period in 2021.

This decrease was also related to the new specific commercial liability treaty the Company entered into on December 31, 2021.

There was also an $8.5 million increase in paid losses as the Company has accelerated closing claims which resulted in a significant decline in outstanding cases.

There was also an $8.1 million increase in paid losses as the Company has accelerated closing outstanding claims.

Investing Activities.

Cash provided by investing activities for the six months ended June 30, 2022 was $13.7 million, compared to $4.9 million in the same period in 2021.

The $8.8 million increase of cash provided by investing activities was driven by a $46.4 million increase in the sales of investment during the first six months of 2022, compared to the same period in 2021.

This was offset by an increase of $39.0 million increase in the purchases of investment for the six months ended June 30, 2022, compared to the same period in 2021.

Cash provided by investing activities for the nine months ended September 30, 2022 was $20.1 million, compared to $5.3 million in the same period in 2021.

The $14.8 million increase of cash provided by investing activities was driven by a $101.5 million increase in the sales of investment during the first nine months of 2022, compared to the same period in 2021.

This was offset by an increase of $85.1 million increase in the purchases of investment for the nine months ended September 30, 2022, compared to the same period in 2021.

Financing Activities.

Cash provided by financing activities for the six months ended June 30, 2022 was $5.0 million compared to $4.0 million of cash used in the same period in 2021.

The $9.0 million increase was driven by the Company paying down a net amount of $0 on the line of credit during the first six months of 2022, compared to the Company paying down a net amount of $4.0 million during the first six months of 2021.

The Company also received proceeds of $5.0 million of common equity which was effective on August 10, 2022.

The was no balance outstanding on the line of credit as of June 30, 2022.

Cash provided by financing activities for the nine months ended September 30, 2022 was $19.5 million compared to $4.0 million of cash used in the same period in 2021.

The $23.5 million increase was driven by the Company borrowing an additional $14.5 million related to the FHLB of Indianapolis loan during the third quarter of 2022.

The Company also raised $5.0 million through the issuance of additional common stock on August 8, 2022.

Statutory Capital and Surplus

1 unchanged sentence

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

The Insurance Company Subsidiaries’ aggregate statutory capital and surplus (which is a statutory measure of equity) was $58.0 million and $63.9 million at June 30, 2022 and December 31, 2021, respectively.

The Insurance Company Subsidiaries’ aggregate statutory capital and surplus (which is a statutory measure of equity) was $58.9 million and $63.9 million at September 30, 2022 and December 31, 2021, respectively.

Non-GAAP Financial Measures

4 unchanged sentences

Adjusted operating income and adjusted operating income per share are intended as supplemental information and are not meant to replace net income or net income per share.

Adjusted operating income and adjusted operating income per share should be read in conjunction with the

GAAP financial results .

Adjusted operating income and adjusted operating income per share should be read in conjunction with the GAAP financial results.

Our definition of adjusted operating income may be different from that used by other companies.

1 unchanged sentence

Three Months Ended

Six months ended

September 30,

Nine months ended

September 30,

Net income (loss)

18 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis