Item 1. Financial Statements
ITEM 1 - FINANCIAL STATEMENTS
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
September 30,
2022
December 31,
2021
(Unaudited)
Assets
Investment securities:
Debt securities, at fair value (amortized cost of $ 129,372 and $ 150,732 , respectively)
$
111,847
$
149,783
Equity securities, at fair value (cost of $ 1,906 and $ 10,972 , respectively)
1,312
9,931
Short-term investments, at fair value
30,562
23,013
Total investments
143,721
182,727
Cash and cash equivalents
35,413
9,913
Premiums and agents' balances receivable, net
21,856
21,197
Receivable from Affiliate
5,862
5,784
Reinsurance recoverables on unpaid losses
41,749
40,344
Reinsurance recoverables on paid losses
2,489
1,347
Prepaid reinsurance premiums
15,333
8,301
Deferred policy acquisition costs
10,483
12,267
Other assets
9,096
8,524
Total assets
$
286,002
$
290,404
Liabilities and Shareholders' Equity
Liabilities:
Unpaid losses and loss adjustment expenses
$
144,557
$
139,085
Unearned premiums
67,792
65,269
Reinsurance premiums payable
3,352
5,318
Debt
48,298
33,564
Accounts payable and accrued expenses
5,838
6,665
Total liabilities
269,837
249,901
Commitments and contingencies
Shareholders' equity:
Common stock, no par value ( 100,000,000 shares authorized; 12,215,324 and
9,707,817 issued and outstanding, respectively)
97,857
92,692
Accumulated deficit
( 62,871
)
( 50,079
)
Accumulated other comprehensive income (loss)
( 18,821
)
( 2,110
)
Total shareholders' equity
16,165
40,503
Total liabilities and shareholders' equity
$
286,002
$
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
September 30,
Nine Months Ended
September 30,
2022
2021
2022
2021
Revenue and Other Income
Premiums
Gross earned premiums
$
34,401
31,770
$
100,947
$
90,245
Ceded earned premiums
( 9,443
)
( 6,829
)
( 27,458
)
( 17,631
)
Net earned premiums
24,958
24,941
73,489
72,614
Net investment income
860
514
1,931
1,549
Net realized investment gains (losses)
—
( 101
)
( 1,505
)
3,883
Change in fair value of equity securities
( 151
)
( 2,169
)
446
( 3,234
)
Other gains (losses)
66
2,778
60
11,688
Other income
603
752
1,964
1,974
Total revenue and other income
26,336
26,715
76,385
88,474
Expenses
Losses and loss adjustment expenses, net
16,671
16,159
56,940
53,447
Policy acquisition costs
6,230
7,173
17,419
20,819
Operating expenses
4,380
4,077
13,010
12,768
Interest expense
778
701
2,216
2,154
Total expenses
28,059
28,110
89,585
89,188
Income (loss) before equity earnings in Affiliate and income taxes
( 1,723
)
( 1,395
)
( 13,200
)
( 714
)
Equity earnings in Affiliate, net of tax
199
184
368
612
Income tax expense (benefit)
( 1
)
( 2
)
( 40
)
191
Net income (loss)
$
( 1,523
)
$
( 1,209
)
$
( 12,792
)
$
( 293
)
Earnings (loss) per common share, basic and diluted
$
( 0.14
)
$
( 0.12
)
$
( 1.26
)
$
( 0.03
)
Weighted average common shares outstanding, basic and diluted
11,101,194
9,692,150
10,178,975
9,686,874
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
September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Net income (loss)
$
( 1,523
)
$
( 1,209
)
$
( 12,792
)
$
( 293
)
Other comprehensive income (loss), net of tax:
Unrealized investment gains (losses):
Unrealized investment gains (losses) during the period
( 4,347
)
( 570
)
( 16,641
)
( 2,100
)
Income tax (benefit) expense
—
—
—
—
Unrealized investment gains (losses), net of tax
( 4,347
)
( 570
)
( 16,641
)
( 2,100
)
Less: reclassification adjustments to:
Net realized investment gains (losses) included in net income (loss)
—
44
70
85
Income tax (benefit) expense
—
—
—
—
Total reclassifications included in net income (loss), net of tax
—
44
70
85
Other comprehensive income (loss)
( 4,347
)
( 614
)
( 16,711
)
( 2,185
)
Total comprehensive income (loss)
$
( 5,870
)
$
( 1,823
)
$
( 29,503
)
$
( 2,478
)
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 June 30, 2022
9,715,324
$
92,799
$
( 61,348
)
$
( 14,474
)
$
16,977
Net income (loss)
—
—
( 1,523
)
—
( 1,523
)
Repurchase of common stock
—
—
—
—
—
Issuance of common stock private placement
2,500,000
5,000
—
—
5,000
Stock-based compensation expense
—
58
—
—
58
Other comprehensive income (loss)
—
—
—
( 4,347
)
( 4,347
)
Balances at September 30, 2022
12,215,324
$
97,857
$
( 62,871
)
$
( 18,821
)
$
16,165
Balances at June 30, 2021
9,689,421
$
92,612
$
( 48,069
)
$
( 659
)
$
43,884
Net income (loss)
—
—
( 1,209
)
—
( 1,209
)
Repurchase of common stock
( 1,240
)
( 4
)
—
—
( 4
)
Stock-based compensation expense
17,975
51
—
—
51
Other comprehensive income (loss)
—
—
—
( 614
)
( 614
)
Balances at September 30, 2021
9,706,156
$
92,659
$
( 49,278
)
$
( 1,273
)
$
42,108
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)
—
—
( 12,792
)
—
( 12,792
)
Repurchase of common stock
( 1,493
)
11
—
—
11
Issuance of common stock private placement
2,500,000
5,000
—
—
5,000
Stock-based compensation expense
9,000
154
—
—
154
Other comprehensive income (loss)
—
—
—
( 16,711
)
( 16,711
)
Balances at September 30, 2022
12,215,324
$
97,857
$
( 62,871
)
$
( 18,821
)
$
16,165
Balances at December 31, 2020
9,681,728
$
92,486
$
( 48,985
)
$
912
$
44,413
Net income (loss)
—
—
( 293
)
—
( 293
)
Repurchase of common stock
( 3,547
)
( 11
)
—
—
( 11
)
Stock-based compensation expense
27,975
184
—
—
184
Other comprehensive income (loss)
—
—
—
( 2,185
)
( 2,185
)
Balances at September 30, 2021
9,706,156
$
92,659
$
( 49,278
)
$
( 1,273
)
$
42,108
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)
Nine Months Ended September 30,
2022
2021
Cash Flows From Operating Activities
Net income (loss)
$
( 12,792
)
$
( 293
)
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
306
320
Amortization of bond premium and discount, net
292
388
Net realized investment (gains) losses
1,505
( 3,917
)
Change in fair value of equity securities
( 446
)
3,234
Stock-based compensation expenses
154
184
Equity earnings in Affiliate, net of tax
( 368
)
( 612
)
Other gains/losses
93
( 2,728
)
Changes in operating assets and liabilities:
(Increase) decrease in:
Premiums and agents' balances and other receivables
( 737
)
( 2,022
)
Reinsurance recoverables
( 2,547
)
( 1,040
)
Prepaid reinsurance premiums
( 7,032
)
( 2,909
)
Deferred policy acquisition costs
1,784
( 1,368
)
Other assets
( 469
)
408
Increase (decrease) in:
Unpaid losses and loss adjustment expenses
5,472
8,584
Unearned premiums
2,523
8,812
Reinsurance premiums payable
( 1,966
)
750
Accounts payable and other liabilities
137
( 869
)
Net cash provided by (used in) operating activities
( 14,091
)
( 1,988
)
Cash Flows From Investing Activities
Purchase of investments
( 234,620
)
( 149,486
)
Proceeds from maturities and redemptions of investments
17,638
17,859
Proceeds from sales of investments
237,062
135,591
Proceeds from sale of agency business
—
1,000
Dividends from Affiliate
—
900
Other purchases
—
( 531
)
Purchases of property and equipment
—
( 20
)
Net cash provided by (used in) investing activities
20,080
5,313
Cash Flows From Financing Activities
Proceeds from issuance of common stock
5,000
—
Repurchase of common stock
11
( 11
)
Borrowings under line of credit
5,000
3,000
Borrowings under Federal Home Loan Bank of Indianapolis
14,500
—
Repayment of borrowings under debt arrangements
( 5,000
)
( 7,000
)
Net cash provided by (used in) financing activities
19,511
( 4,011
)
Net increase (decrease) in cash
25,500
( 686
)
Cash at beginning of period
9,913
8,193
Cash at end of period
$
35,413
$
7,507
Supplemental Disclosure of Cash Flow Information:
Interest paid
$
2,196
$
2,183
Income taxes paid (refunded), net
( 12
)
140
Note receivable from sale of agency business
—
9,000
Payable from purchase of agency
—
520
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 Agency 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 nine months ended September 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 Troy, 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 September 30, 2022 and December 31, 2021, were as follows (dollars in thousands):
September 30, 2022
Cost or
Gross Unrealized
Estimated
Amortized Cost
Gains
Losses
Fair Value
Debt Securities:
U.S. Government
$
7,830
$
—
$
( 367
)
$
7,463
State and local government
25,661
—
( 4,516
)
21,145
Corporate debt
35,544
—
( 5,398
)
30,146
Asset-backed securities
22,896
—
( 1,173
)
21,723
Mortgage-backed securities
29,772
—
( 5,442
)
24,330
Commercial mortgage-backed securities
3,418
—
( 181
)
3,237
Collateralized mortgage obligations
4,251
—
( 448
)
3,803
Total debt securities available for sale
$
129,372
$
—
$
( 17,525
)
$
111,847
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):
September 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
$
3,746
$
( 161
)
4
$
3,717
$
( 206
)
13
$
7,463
$
( 367
)
State and local government
93
16,323
( 3,165
)
32
4,518
( 1,351
)
125
20,841
( 4,516
)
Corporate debt
42
16,035
( 2,568
)
28
14,111
( 2,830
)
70
30,146
( 5,398
)
Asset-backed securities
16
8,267
( 162
)
12
13,456
( 1,011
)
28
21,723
( 1,173
)
Mortgage-backed securities
60
4,947
( 780
)
9
19,347
( 4,662
)
69
24,294
( 5,442
)
Commercial mortgage-backed securities
4
3,212
( 181
)
—
—
—
4
3,212
( 181
)
Collateralized mortgage obligations
26
2,397
( 239
)
7
1,370
( 209
)
33
3,767
( 448
)
Total debt securities available for sale
250
$
54,927
$
( 7,256
)
92
$
56,519
$
( 10,269
)
342
$
111,446
$
( 17,525
)
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 nine months ended September 30, 2022 and 2021.
10
The Company’s sources of net investment income and losses are as follows (dollars in thousands):
Three Months Ended
September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Debt securities
$
636
$
562
$
1,814
$
1,716
Equity securities
3
63
41
166
Cash, cash equivalents and short-term investments
279
1
316
2
Total investment income
918
626
2,171
1,884
Investment expenses
( 58
)
( 112
)
( 240
)
( 335
)
Net investment income
$
860
$
514
$
1,931
$
1,549
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
September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Debt securities:
Gross realized gains
$
—
$
2
$
6
$
29
Gross realized losses
—
—
( 155
)
( 6
)
Total debt securities
—
2
( 149
)
23
Equity securities:
Gross realized gains
$
—
55
375
4,063
Gross realized losses
—
( 158
)
( 1,731
)
( 203
)
Total equity securities
—
( 103
)
( 1,356
)
3,860
Total net realized investment gains (losses)
$
—
$
( 101
)
$
( 1,505
)
$
3,883
Proceeds from available-for-sale debt securities were $ 29.3 million and $ 25.6 million for the nine months ended September 30, 2022 and 2021, respectively.
There were no gross realized gains or losses from the sale of available-for-sale debt securities for the three months ended September 30, 2022. The gross realized gains and losses from the sale of available-for-sale debt securities for the nine months ended September 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 September 30, 2021. The gross realized gains and losses from the sales of available-for-sale debt securities for the nine months ended September 30, 2021, were $ 27,000 and $ 6,000 , respectively.
As of September 30, 2022 and 2021, there were $ 0 and $ 43,000 of payables from securities purchased, respectively. There were $ 0 and $ 3,000 of receivables from securities sold as of September 30, 2022, and 2021, respectively.
The Company’s gross unrealized losses related to its equity investments were $ 595,000 and $ 1.0 million as of September 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 $ 1.7 million as of September 30, 2022 and $ 1.2 million as of December 31, 2021.
11
The table below summarizes the amortized cost and fair value of available-for-sale debt securities by contractual maturity at September 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
$
3,955
$
3,886
Due after one year through five years
28,544
25,944
Due after five years through ten years
23,584
19,261
Due after ten years
12,952
9,663
Securities with contractual maturities
69,035
58,754
Asset-backed securities
22,896
21,723
Mortgage-backed securities
29,772
24,330
Commercial mortgage-backed securities
3,418
3,237
Collateralized mortgage obligations
4,251
3,803
Total debt securities
$
129,372
$
111,847
At September 30, 2022 and December 31, 2021, the Insurance Company Subsidiaries had $ 7.9 million and $ 8.5 million, respectively, on deposit in trust accounts to meet the deposit requirements of various state insurance departments. At September 30, 2022 and December 31, 2021, the Company had $ 99.9 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 September 30, 2022 and December 31, 2021 (dollars in thousands):
September 30, 2022
Fair Value Measurements
Total
Level 1
Level 2
Level 3
Assets:
Debt Securities:
U.S. Government
$
7,463
$
—
$
7,463
$
—
State and local government
21,145
—
21,145
—
Corporate debt
30,146
—
30,146
—
Asset-backed securities
21,723
—
21,723
—
Mortgage-backed securities
24,330
—
24,330
—
Commercial mortgage-backed securities
3,237
—
3,237
—
Collateralized mortgage obligations
3,803
—
3,803
—
Total debt securities
111,847
—
111,847
—
Equity Securities
947
190
757
—
Short-term investments
30,562
30,562
—
—
Total marketable investments measured at fair value
$
143,356
$
30,752
$
112,604
$
—
Investments measured at NAV:
Investment in limited partnership
365
Total assets measured at fair value
$
143,721
Liabilities:
Senior Unsecured Notes *
$
23,113
$
—
$
23,113
$
—
Subordinated Notes *
11,186
—
—
11,186
FHLB of Indianapolis
14,500
—
14,500
—
Total Liabilities measured at fair value
$
48,799
$
—
$
37,613
$
11,186
*
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 21.4 % and 17.6 % of the fair value of the total investment portfolio as of September 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 78.4 % and 82.1 % of the fair value of the total investment portfolio as of September 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 and its loan with the FHLB of Indianapolis. The fair value of the borrowings under the senior revolving credit facility, and the FHLB of Indianapolis loan, approximates its carrying amount because interest is based on a short-term, variable, market-based rate.
As of September 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 September 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
14
lattice was created within the model to compute the option adjusted spread (“OAS”) which is the amount, in basis points, of interest rate required to be paid under the debt agreement over the risk-free U.S . Treasury rates . The OAS was then used in the model along with the September 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.
The Company did no t have any assets or liabilities that were measured at fair value on a nonrecurring basis at September 30, 2022 or December 31, 2021.
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 nine months ended September 30, 2022 and 2021. The activity in deferred policy acquisition costs, net of reinsurance transactions, is as follows (dollars in thousands):
Three Months Ended
September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Balance at beginning of period
$
10,747
$
13,121
$
12,267
$
12,243
Deferred policy acquisition costs
5,966
7,663
15,635
22,187
Amortization of policy acquisition costs
( 6,230
)
( 7,173
)
( 17,419
)
( 20,819
)
Net change
( 264
)
490
( 1,784
)
1,368
Balance at end of period
$
10,483
$
13,611
$
10,483
$
13,611
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
September 30,
Nine months ended
September 30,
2022
2021
2022
2021
Gross reserves - beginning of period
$
140,996
$
117,852
$
139,085
$
111,270
Less: reinsurance recoverables on unpaid losses
( 37,769
)
( 22,824
)
( 40,344
)
( 24,218
)
Net reserves - beginning of period
103,227
95,028
98,741
87,052
Add: incurred losses and LAE, net of reinsurance:
Current period
13,541
12,513
38,765
37,813
Prior period
3,130
3,646
18,175
15,634
Total net incurred losses and LAE
16,671
16,159
56,940
53,447
Deduct: loss and LAE payments, net of reinsurance:
Current period
5,634
5,802
13,313
14,102
Prior period
11,456
8,587
39,560
29,599
Total net loss and LAE payments
17,090
14,389
52,873
43,701
Net reserves - end of period
102,808
96,798
102,808
96,798
Plus: reinsurance recoverables on unpaid losses
41,749
23,056
41,749
23,056
Gross reserves - end of period
$
144,557
$
119,854
$
144,557
$
119,854
Net losses and LAE were $ 16.7 million during the third quarter of 2022. Adverse development contributed $ 3.1 million to the total incurred losses in the third quarter of 2022. Of the $ 3.1 million of adverse development, $ 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.
Net losses and LAE were $ 56.9 million for the nine months ended September 30, 2022. Adverse development contributed $ 18.2 million to the total incurred losses during the nine months ended September 30, 2022. Of the $ 18.2 million of adverse development, $ 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. Of the $ 18.2 million of adverse development, $ 17.7 million was related to the commercial lines of business, while $ 430,000 came from the personal lines of business.
Net losses and LAE were $ 16.2 million during the third quarter of 2021. Adverse development contributed $ 3.6 million to the total incurred losses in the third quarter of 2021, of which $ 1.1 million was related to 2017 and prior accident years, $ 1.4 million was related to the 2018 accident year, and $ 1.0 million was related to the 2019. In the third quarter, $ 3.4 million of the adverse development came from the commercial lines of business, mostly from liability lines, while $ 290,000 was related to the personal lines of business.
Net losses and LAE were $ 53.4 million for the nine months ended September 30, 2021. The Company experienced $ 2.0 million of catastrophe losses, net of reinsurance recoverables, during the first quarter of 2021 from Winter Storm Uri. The Company also experienced $ 15.6 million of adverse development for the nine months ended September 30, 2021. Of the $15.6 million in adverse development, $ 5.0 million was related to 2017 and prior accident years, $ 4.8 million was related to the 2018 accident year, $ 3.4 million was related to the 2019 accident year, and $ 2.4 million was related to the 2020 accident year. Of the $15.6 million in adverse development, $ 14.7 million was related to commercial lines, mostly from liability lines, while $ 926,000 was related to personal lines.
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 primarily all specific commercial liability risks in excess of $ 340,000 in 2022, and $ 400,000 in 2021. The Company ceded specific commercial property risks in excess of $ 300,000 in 2022 and 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.
16
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 .
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
September 30,
Nine months ended
September 30,
2022
2021
2022
2021
Written premiums:
Direct
$
22,682
$
24,239
$
73,789
$
73,825
Assumed
10,406
9,465
29,681
25,233
Ceded
( 9,395
)
( 7,635
)
( 34,490
)
( 19,974
)
Net written premiums
$
23,693
$
26,069
$
68,980
$
79,084
Earned premiums:
Direct
$
24,679
$
23,858
$
73,667
$
67,455
Assumed
9,722
7,912
27,280
22,790
Ceded
( 9,443
)
( 6,829
)
( 27,458
)
( 17,631
)
Net earned premiums
$
24,958
$
24,941
$
73,489
$
72,614
Losses and LAE:
Direct
$
15,837
$
14,511
$
46,375
$
50,628
Assumed
7,225
4,422
26,136
11,251
Ceded
( 6,391
)
( 2,774
)
( 15,571
)
( 8,432
)
Net Losses and LAE
$
16,671
$
16,159
$
56,940
$
53,447
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 $ 6.4 million for the three and nine months ended September 30, 2022. There were no ceding commissions reflected in the Consolidated Statements of Operations in 2021, relating to the excess of loss reinsurance treaties during 2021.
7. Debt
As of September 30, 2022, the Company's debt is comprised of four 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, $ 10.5 million of privately placed subordinated notes, and a loan of $ 14.5 million from the Federal Home Loan Bank (“FHLB”) of Indianapolis, which commenced in July 2022. A summary of the Company's outstanding debt is as follows (dollars in thousands):
September 30,
2022
December 31,
2021
Senior unsecured notes *
$
24,121
$
23,926
Subordinated notes *
9,677
9,638
FHLB of Indianapolis
14,500
—
Total
$
48,298
$
33,564
*Net of unamortized debt issuance costs
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.
17
The Company did no t repurchase any of the Notes for the three and nine months ended September 30, 2022 and 2021.
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. Management believes it is probable that it will be able to issue new public debt and repay the senior unsecured notes by September 30, 2023.
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 September 30, 2022, the carrying value of the Notes and Subordinated Notes are offset by $ 260,000 and $ 823,000 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 8 ~ Shareholder’s Equity ), increased the net worth sufficiently to bring the Company back into compliance. At September 30, 2022, the Company was in compliance with all of its financial covenants.
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. On August 8, 2022, the Company entered into an amendment with the Lender which eliminated the financial debt covenant requirements if there is no outstanding balance going forward, and requires prior bank approval for any future draws on the line of credit. As of September 30, 2022, the Company had no balance outstanding on the line of credit.
FHLB of Indianapolis loan
On July 7, 2022, the Company borrowed $ 14.5 million from the FHLB of Indianapolis. The loan is fully collateralized with high-quality federally guaranteed debt securities and cash. The loan was drawn for short-term cash needs to avoid realizing losses on a statutory accounting basis due to temporary market-timing issues caused by the recent fluctuations in the interest rate markets. The loan has a daily floating interest rate that was 3.45 % per annum as of September 30, 2022. The loan matures on January 9, 2023 .
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.
18
8. Shareholder’s Equity
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.
For the three months ended September 30, 2022, the Company had no restricted stock units vest, and made no repurchases of stock. For the three months ended September 30, 2021, the Company repurchase 1,240 shares of stock valued at approximately $ 4,000 , related to the vesting of the Company’s restricted stock units. For the nine months ended September 30, 2022 and 2021, the Company repurchased 1,493 and 3,547 shares of stock valued at approximately $ 3,000 and $ 11,000 , respectively. Upon the repurchase of the Company’s shares, the shares remain authorized, but not issued or outstanding.
As of September 30, 2022 and December 31, 2021, the Company had 12,215,324 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
September 30,
Nine months ended
September 30,
2022
2021
2022
2021
Balance at beginning of period
$
( 14,474
)
$
( 659
)
$
( 2,110
)
$
912
Other comprehensive income (loss) before reclassifications, net of tax
( 4,347
)
( 570
)
( 16,641
)
( 2,100
)
Less: amounts reclassified from accumulated other comprehensive income (loss), net of tax
—
44
70
85
Net other comprehensive income (loss)
( 4,347
)
( 614
)
( 16,711
)
( 2,185
)
Balance at end of period
$
( 18,821
)
$
( 1,273
)
$
( 18,821
)
$
( 1,273
)
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
September 30,
Nine months ended
September 30,
2022
2021
2022
2021
Net income (loss)
$
( 1,523
)
$
( 1,209
)
$
( 12,792
)
$
( 293
)
Weighted average common shares, basic and diluted *
11,101,194
9,692,150
10,178,975
9,686,874
Earnings (loss) per common share, basic and diluted
$
( 0.14
)
$
( 0.12
)
$
( 1.26
)
$
( 0.03
)
*
The non-vested shares of the restricted stock units and stock options were anti-dilutive as of September 30, 2022 and 2021. Therefore, the basic and diluted weighted average common shares are equal for the three months and nine months ended September 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.
19
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 2016 and 2018, the Company issued 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 $ 909,000 and $ 404,000 , respectively, on the dates of grant.
The Company recorded $ 43,000 and $ 145,000 of compensation expense related to the RSUs for the nine months ended September 30, 2022 and 2021, respectively. There were 10,000 unvested RSUs as of September 30, 2022, which will generate an estimated future expense of $ 30,000 .
The Company recorded $ 111,000 and $ 39,000 of compensation expense related to the stock options for the nine months ended September 30, 2022 and 2021, respectively. There were 783,000 unvested options as of September 30, 2022, which will generate an estimated future expense of $ 685,000 .
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 nine months ended September 30, 2022 and 2021, gross written premiums attributable to these four states were 56.2 % and 51.4 %, respectively, of the Company’s total gross written premiums.
20
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.
21
The following tables present information by reportable operating segment (dollars in thousands):
Three months ended
September 30, 2022
Commercial Lines
Personal
Lines
Total
Underwriting
Wholesale
Agency
Corporate
Eliminations
Total
Gross written premiums
$
27,635
$
5,453
$
33,088
$
—
$
—
$
—
$
33,088
Net written premiums
$
18,730
$
4,963
$
23,693
$
—
$
—
$
—
$
23,693
Net earned premiums
$
20,789
$
4,169
$
24,958
$
—
$
—
$
—
$
24,958
Other income
57
26
83
793
113
( 386
)
603
Segment revenue
20,846
4,195
25,041
793
113
( 386
)
25,561
Losses and LAE, net
13,348
3,323
16,671
—
—
—
16,671
Policy acquisition costs
4,950
1,214
6,164
498
—
( 432
)
6,230
Operating expenses
3,297
519
3,816
245
319
—
4,380
Segment expenses
21,595
5,056
26,651
743
319
( 432
)
27,281
Segment gain (loss)
$
( 749
)
$
( 861
)
$
( 1,610
)
$
50
$
( 206
)
$
46
$
( 1,720
)
Investment income
860
860
Net realized investment gains (losses)
—
—
Change in fair value of equity securities
( 151
)
( 151
)
Other gains (losses)
66
66
Interest expense
( 778
)
( 778
)
Income (loss) before equity earnings in Affiliate and income taxes
$
( 749
)
$
( 861
)
$
( 1,610
)
$
50
$
( 209
)
$
46
$
( 1,723
)
22
Three months ended
September 30, 2021
Commercial
Lines
Personal
Lines
Total
Underwriting
Wholesale
Agency
Corporate
Eliminations
Total
Gross written premiums
$
29,849
$
3,855
$
33,704
$
—
$
—
$
—
$
33,704
Net written premiums
$
22,456
$
3,613
$
26,069
$
—
$
—
$
—
$
26,069
Net earned premiums
$
21,975
$
2,966
$
24,941
$
—
$
—
$
—
$
24,941
Other income
50
29
79
1,235
148
( 710
)
752
Segment revenue
22,025
2,995
25,020
1,235
148
( 710
)
25,693
Losses and LAE, net
14,697
1,462
16,159
—
—
—
16,159
Policy acquisition costs
6,458
838
7,296
778
—
( 901
)
7,173
Operating expenses
2,954
336
3,290
500
287
—
4,077
Segment expenses
24,109
2,636
26,745
1,278
287
( 901
)
27,409
Segment gain (loss)
$
( 2,084
)
$
359
$
( 1,725
)
$
( 43
)
$
( 139
)
$
191
$
( 1,716
)
Investment income
514
514
Net realized investment gains (losses)
( 101
)
( 101
)
Change in fair value of equity securities
( 2,169
)
( 2,169
)
Other gains
2,778
2,778
Interest expense
( 701
)
( 701
)
Income (loss) before equity earnings in Affiliate and income taxes
$
( 2,084
)
$
359
$
( 1,725
)
$
( 43
)
$
182
$
191
$
( 1,395
)
23
Nine months ended
September 30, 2022
Commercial
Lines
Personal
Lines
Total
Underwriting
Wholesale
Agency
Corporate
Eliminations
Total
Gross written premiums
$
88,297
$
15,173
$
103,470
$
—
$
—
$
—
$
103,470
Net written premiums
$
55,456
$
13,524
$
68,980
$
—
$
—
$
—
$
68,980
Net earned premiums
$
62,097
$
11,392
$
73,489
$
—
$
—
$
—
$
73,489
Other income
195
58
253
2,969
407
( 1,665
)
1,964
Segment revenue
62,292
11,450
73,742
2,969
407
( 1,665
)
75,453
Losses and LAE, net
49,864
7,076
56,940
—
—
—
56,940
Policy acquisition costs
13,717
3,530
17,247
2,026
—
( 1,854
)
17,419
Operating expenses
9,966
1,405
11,371
811
828
—
13,010
Segment expenses
73,547
12,011
85,558
2,837
828
( 1,854
)
87,369
Segment gain (loss)
$
( 11,255
)
$
( 561
)
$
( 11,816
)
$
132
$
( 421
)
$
189
$
( 11,916
)
Investment income
1,931
1,931
Net realized investment gains (losses)
( 1,505
)
( 1,505
)
Change in fair value of equity securities
446
446
Other gains
60
60
Interest expense
( 2,216
)
( 2,216
)
Income (loss) before equity earnings in Affiliate and income taxes
$
( 11,255
)
$
( 561
)
$
( 11,816
)
$
132
$
( 1,705
)
$
189
$
( 13,200
)
24
Nine months ended
September 30, 2021
Commercial
Lines
Personal
Lines
Total
Underwriting
Wholesale
Agency
Corporate
Eliminations
Total
Gross written premiums
$
88,017
$
11,041
$
99,058
$
—
$
—
$
—
$
99,058
Net written premiums
$
68,685
$
10,399
$
79,084
$
—
$
—
$
—
$
79,084
Net earned premiums
$
64,869
$
7,745
$
72,614
$
—
$
—
$
—
$
72,614
Other income
158
113
271
4,932
219
( 3,448
)
1,974
Segment revenue
65,027
7,858
72,885
4,932
219
( 3,448
)
74,588
Losses and LAE, net
48,592
4,855
53,447
—
—
—
53,447
Policy acquisition costs
19,102
2,178
21,280
3,147
—
( 3,608
)
20,819
Operating expenses
8,761
1,076
9,837
2,060
871
—
12,768
Segment expenses
76,455
8,109
84,564
5,207
871
( 3,608
)
87,034
Segment gain (loss)
$
( 11,428
)
$
( 251
)
$
( 11,679
)
$
( 275
)
$
( 652
)
$
160
$
( 12,446
)
Investment income
1,549
1,549
Net realized investment gains (losses)
3,883
3,883
Change in fair value of equity securities
( 3,234
)
( 3,234
)
Other gains
11,688
11,688
Interest expense
( 2,154
)
( 2,154
)
Income (loss) before equity earnings in Affiliate and income taxes
$
( 11,428
)
$
( 251
)
$
( 11,679
)
$
( 275
)
$
11,080
$
160
$
( 714
)
14. Subsequent Events
On October 13, 2022, the Company purchased the 50 % ownership interest in Venture that was owned by a third party for $ 9.7 million, resulting in Venture being owned 100 % by the Company.
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. This sale is not expected to result in discontinued operations related to agency business.
On November 1, 2022, Conifer Holdings, Inc. (the “Company”), entered into a loss portfolio transfer (“LPT”) reinsurance agreement with Fleming Reinsurance Ltd (“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. Recoverables due to the Company under this agreement will be recorded as reinsurance recoverables. The agreement is between CIC and WPIC and Fleming Re.
25
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.