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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to          

Commission file number 001-37536

 

Conifer Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Michigan

 

27-1298795

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

550 West Merrill Street, Suite 200

 

 

Birmingham, Michigan

 

48009

(Address of principal executive offices)

 

(Zip code)

 

(248) 559-0840

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, no par value

 

CNFR

 

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes No

The number of outstanding shares of the registrant’s common stock, no par value, as of August 11, 2021, was 9,689,421.

 

 

 

 


 

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Form 10-Q

INDEX

 

 

Page No.

Part I — Financial Information

 

Item 1 — Financial Statements

3

Consolidated Balance Sheets (Unaudited)

3

Consolidated Statements of Operations (Unaudited)

4

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

5

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

6

Consolidated Statements of Cash Flows (Unaudited)

7

Notes to Consolidated Financial Statements (Unaudited)

8

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3 — Quantitative and Qualitative Disclosures about Market Risk

36

Item 4 — Controls and Procedures

37

Part II — Other Information

 

Item 1 — Legal Proceedings

38

Item 1A — Risk Factors

38

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

38

Item 6 — Exhibits

39

Signatures

40

 

 

 

2


 

 

PART 1 - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(dollars in thousands)

 

 

 

June 30,

2021

 

 

December 31,

2020

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Investment securities:

 

 

 

 

 

 

 

 

Debt securities, at fair value (amortized cost of $148,699 and $149,954, respectively)

 

$

149,188

 

 

$

151,999

 

Equity securities, at fair value (cost of $20,080 and $16,912, respectively)

 

 

19,994

 

 

 

17,891

 

Short-term investments, at fair value

 

 

11,435

 

 

 

13,317

 

Total investments

 

 

180,617

 

 

 

183,207

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

4,668

 

 

 

8,193

 

Premiums and agents' balances receivable, net

 

 

22,887

 

 

 

20,162

 

Receivable from Affiliate

 

 

9,002

 

 

 

8

 

Reinsurance recoverables on unpaid losses

 

 

22,824

 

 

 

24,218

 

Reinsurance recoverables on paid losses

 

 

3,269

 

 

 

2,138

 

Prepaid reinsurance premiums

 

 

4,964

 

 

 

1,316

 

Deferred policy acquisition costs

 

 

13,121

 

 

 

12,243

 

Other assets

 

 

8,383

 

 

 

10,112

 

Total assets

 

$

269,735

 

 

$

261,597

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Unpaid losses and loss adjustment expenses

 

$

117,852

 

 

$

111,270

 

Unearned premiums

 

 

63,103

 

 

 

56,224

 

Debt

 

 

37,153

 

 

 

40,997

 

Accounts payable and accrued expenses

 

 

7,743

 

 

 

8,693

 

Total liabilities

 

 

225,851

 

 

 

217,184

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Common stock, no par value (100,000,000 shares authorized; 9,689,421 and 9,681,728 issued and outstanding, respectively)

 

 

92,612

 

 

 

92,486

 

Accumulated deficit

 

 

(48,069

)

 

 

(48,985

)

Accumulated other comprehensive income (loss)

 

 

(659

)

 

 

912

 

Total shareholders' equity

 

 

43,884

 

 

 

44,413

 

Total liabilities and shareholders' equity

 

$

269,735

 

 

$

261,597

 

 

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

3


 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)

(dollars in thousands, except per share data)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Revenue and Other Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross earned premiums

 

$

30,228

 

 

 

25,959

 

 

$

58,475

 

 

$

52,012

 

Ceded earned premiums

 

 

(5,390

)

 

 

(4,201

)

 

 

(10,802

)

 

 

(8,237

)

Net earned premiums

 

 

24,838

 

 

 

21,758

 

 

 

47,673

 

 

 

43,775

 

Net investment income

 

 

503

 

 

 

863

 

 

 

1,035

 

 

 

1,817

 

Net realized investment gains

 

 

1,060

 

 

 

245

 

 

 

3,984

 

 

 

1,173

 

Change in fair value of equity securities

 

 

(525

)

 

 

1,576

 

 

 

(1,065

)

 

 

(1,510

)

Other gains

 

 

8,910

 

 

 

145

 

 

 

8,910

 

 

 

260

 

Other income

 

 

666

 

 

 

713

 

 

 

1,222

 

 

 

1,371

 

Total revenue and other income

 

 

35,452

 

 

 

25,300

 

 

 

61,759

 

 

 

46,886

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses, net

 

 

17,926

 

 

 

11,945

 

 

 

37,288

 

 

 

26,214

 

Policy acquisition costs

 

 

6,896

 

 

 

6,395

 

 

 

13,646

 

 

 

12,698

 

Operating expenses

 

 

4,342

 

 

 

4,859

 

 

 

8,691

 

 

 

9,904

 

Interest expense

 

 

732

 

 

 

731

 

 

 

1,453

 

 

 

1,462

 

Total expenses

 

 

29,896

 

 

 

23,930

 

 

 

61,078

 

 

 

50,278

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

5,556

 

 

 

1,370

 

 

 

681

 

 

 

(3,392

)

Equity earnings in Affiliate, net of tax

 

 

180

 

 

 

179

 

 

 

428

 

 

 

229

 

Income tax expense

 

 

184

 

 

 

44

 

 

 

193

 

 

 

57

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

5,552

 

 

$

1,505

 

 

$

916

 

 

$

(3,220

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share, basic and diluted

 

$

0.57

 

 

$

0.16

 

 

$

0.09

 

 

$

(0.34

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic and diluted

 

 

9,686,631

 

 

 

9,595,668

 

 

 

9,684,193

 

 

 

9,594,221

 

 

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

4


 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(dollars in thousands)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net income (loss)

 

$

5,552

 

 

$

1,505

 

 

$

916

 

 

$

(3,220

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized investment gains (losses):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized investment gains (losses) during the period

 

 

394

 

 

 

5,017

 

 

 

(1,530

)

 

 

3,702

 

Income tax (benefit) expense

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized investment gains (losses), net of tax

 

 

394

 

 

 

5,017

 

 

 

(1,530

)

 

 

3,702

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: reclassification adjustments to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized investment gains (losses) included in net income (loss)

 

 

(902

)

 

 

2

 

 

 

41

 

 

 

386

 

Income tax (benefit) expense

 

 

 

 

 

 

 

 

 

 

 

 

Total reclassifications included in net income (loss), net of tax

 

 

(902

)

 

 

2

 

 

 

41

 

 

 

386

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

1,296

 

 

 

5,015

 

 

 

(1,571

)

 

 

3,316

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$

6,848

 

 

$

6,520

 

 

$

(655

)

 

$

96

 

 

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

5


 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders' Equity (Unaudited)

(dollars in thousands)

 

 

 

No Par, Common Stock

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Shareholders'

 

 

 

Shares

 

 

Amount

 

 

Deficit

 

 

Income (Loss)

 

 

Equity

 

Balances at March 31, 2021

 

 

9,681,728

 

 

$

92,552

 

 

$

(53,621

)

 

$

(1,955

)

 

$

36,976

 

Net income (loss)

 

 

 

 

 

 

 

 

5,552

 

 

 

 

 

 

5,552

 

Repurchase of common stock

 

 

(2,307

)

 

 

(7

)

 

 

 

 

 

 

 

 

(7

)

Stock-based compensation expense

 

 

10,000

 

 

 

67

 

 

 

 

 

 

 

 

 

67

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

1,296

 

 

 

1,296

 

Balances at June 30, 2021

 

 

9,689,421

 

 

$

92,612

 

 

$

(48,069

)

 

$

(659

)

 

$

43,884

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at March 31, 2020

 

 

9,592,161

 

 

$

92,053

 

 

$

(54,305

)

 

$

(1,210

)

 

$

36,538

 

Net income (loss)

 

 

 

 

 

 

 

 

1,505

 

 

 

 

 

 

1,505

 

Repurchase of common stock

 

 

(4,006

)

 

 

(14

)

 

 

 

 

 

 

 

 

(14

)

Restricted stock unit expense

 

 

10,000

 

 

 

236

 

 

 

 

 

 

 

 

 

236

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

5,015

 

 

 

5,015

 

Balances at June 30, 2020

 

 

9,598,155

 

 

$

92,275

 

 

$

(52,800

)

 

$

3,805

 

 

$

43,280

 

 

 

 

No Par, Common Stock

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Shareholders'

 

 

 

Shares

 

 

Amount

 

 

Deficit

 

 

Income (Loss)

 

 

Equity

 

Balances at December 31, 2020

 

 

9,681,728

 

 

$

92,486

 

 

$

(48,985

)

 

$

912

 

 

$

44,413

 

Net income (loss)

 

 

 

 

 

 

 

 

916

 

 

 

 

 

 

916

 

Repurchase of common stock

 

 

(2,307

)

 

 

(7

)

 

 

 

 

 

 

 

 

(7

)

Stock-based compensation expense

 

 

10,000

 

 

 

133

 

 

 

 

 

 

 

 

 

133

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

(1,571

)

 

 

(1,571

)

Balances at June 30, 2021

 

 

9,689,421

 

 

 

92,612

 

 

 

(48,069

)

 

 

(659

)

 

 

43,884

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2019

 

 

9,592,861

 

 

$

91,816

 

 

$

(49,580

)

 

$

489

 

 

$

42,725

 

Net income (loss)

 

 

 

 

 

 

 

 

(3,220

)

 

 

 

 

 

(3,220

)

Repurchase of common stock

 

 

(4,706

)

 

 

(16

)

 

 

 

 

 

 

 

 

(16

)

Restricted stock unit expense, net

 

 

10,000

 

 

 

475

 

 

 

 

 

 

 

 

 

475

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

3,316

 

 

 

3,316

 

Balances at June 30, 2020

 

 

9,598,155

 

 

 

92,275

 

 

 

(52,800

)

 

 

3,805

 

 

 

43,280

 

 

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

 

6


 

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

 

Net income (loss)

 

 

916

 

 

$

(3,220

)

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

 

 

217

 

 

 

255

 

Amortization of bond premium and discount, net

 

 

255

 

 

 

301

 

Net realized investment (gains) losses

 

 

(3,984

)

 

 

(1,173

)

Change in fair value of equity securities

 

 

1,065

 

 

 

1,510

 

Stock-based compensation expenses

 

 

133

 

 

 

475

 

Equity earnings in Affiliate, net of tax

 

 

(428

)

 

 

(229

)

Other

 

 

17

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

(Increase) decrease in:

 

 

 

 

 

 

 

 

Premiums and agents' balances and other receivables

 

 

(2,719

)

 

 

(2,075

)

Reinsurance recoverables

 

 

263

 

 

 

1,379

 

Prepaid reinsurance premiums

 

 

(3,648

)

 

 

(2,944

)

Deferred policy acquisition costs

 

 

(878

)

 

 

213

 

Other assets

 

 

344

 

 

 

(202

)

Increase (decrease) in:

 

 

 

 

 

 

 

 

Unpaid losses and loss adjustment expenses

 

 

6,582

 

 

 

(512

)

Unearned premiums

 

 

6,879

 

 

 

617

 

Accounts payable and other liabilities

 

 

(564

)

 

 

1,004

 

Net cash provided by (used in) operating activities

 

 

(4,460

)

 

 

(4,601

)

Cash Flows From Investing Activities

 

 

 

 

 

 

 

 

Purchase of investments

 

 

(112,849

)

 

 

(160,445

)

Proceeds from maturities and redemptions of investments

 

 

11,793

 

 

 

10,476

 

Proceeds from sales of investments

 

 

104,118

 

 

 

149,156

 

Proceeds from sale of agency business

 

 

1,000

 

 

 

 

Dividends from Affiliate

 

 

900

 

 

 

 

Purchases of property and equipment

 

 

(20

)

 

 

(48

)

Net cash provided by (used in) investing activities

 

 

4,942

 

 

 

(861

)

Cash Flows From Financing Activities

 

 

 

 

 

 

 

 

Repurchase of common stock

 

 

(7

)

 

 

(16

)

Repurchase of senior unsecured notes

 

 

 

 

 

(919

)

Borrowings under debt arrangements

 

 

3,000

 

 

 

3,745

 

Repayment of borrowings under debt arrangements

 

 

(7,000

)

 

 

 

Net cash provided by (used in) financing activities

 

 

(4,007

)

 

 

2,810

 

Net increase (decrease) in cash

 

 

(3,525

)

 

 

(2,652

)

Cash at beginning of period

 

 

8,193

 

 

 

7,464

 

Cash at end of period

 

$

4,668

 

 

$

4,812

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

Interest paid

 

$

1,450

 

 

$

535

 

Note receivable from sale of agency business

 

 

9,000

 

 

 

 

Payable from purchase of agency

 

 

1,051

 

 

 

 

 

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

 

 

7


 

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

1. Summary of Significant Accounting Policies

Basis of Presentation and Management Representation

The consolidated financial statements include accounts, after elimination of intercompany accounts and transactions, of Conifer Holdings, Inc. (the “Company” or “Conifer”), its wholly owned subsidiaries, Conifer Insurance Company ("CIC"), White Pine Insurance Company ("WPIC"), Red Cedar Insurance Company ("RCIC"), and Sycamore Insurance Agency, Inc. ("Sycamore").  CIC, WPIC, and RCIC are collectively referred to as the "Insurance Company Subsidiaries." On a stand-alone basis, Conifer Holdings, Inc. is referred to as the "Parent Company."  Sycamore owns a 50% non-controlling interest in Venture Holdings, Inc. (“Venture” or “Affiliate”).  

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which differ from statutory accounting practices prescribed or permitted for insurance companies by regulatory authorities.  The Company has applied the rules and regulations of the United States Securities and Exchange Commission (“SEC”) regarding interim financial reporting and therefore the consolidated financial statements do not include all of the information and notes required by GAAP for annual financial statements.  In the opinion of management, all adjustments, consisting of items of a normal recurring nature, necessary for a fair presentation of the consolidated interim financial statements, have been included.

These consolidated financial statements and the notes thereto should be read in conjunction with the Company's audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC.  

The results of operations for the six months ended June 30, 2021, are not necessarily indicative of the results expected for the year ended December 31, 2021.  In addition, there are risks and uncertainties associated with the novel coronavirus ("COVID-19") and the impact it may have on our business, results of operations and financial condition. The COVID-19 pandemic has negatively impacted the U.S. and global economies, created significant volatility and disruption in the capital markets, dramatically increased unemployment levels and has fueled concerns that it has led to a global recession. Depending on the duration and severity of the pandemic, we foresee the potential for adverse impacts related to, among other things: (i) sales results; (ii) insurance product margin; (iii) net investment income; (iv) invested assets; (v) regulatory capital; (vi) liabilities for insurance products; (vii) access to capital markets; and (viii) the present value of future profits. The full extent to which COVID-19 will impact our business, results of operations and financial condition remains uncertain.

Business

 

The Company is engaged in the sale of property and casualty insurance products and has organized its principal operations into three types of insurance businesses: commercial lines, personal lines, and agency business. The Company underwrites a variety of specialty insurance products, including property, general liability, liquor liability, automobile, and homeowners and dwelling policies. The Company markets and sells its insurance products through a network of independent agents, including managing general agents, whereby policies are written in all 50 states in the United States of America (“U.S.”). The Company’s corporate headquarters are located in Birmingham, Michigan with additional office facilities in Florida, Michigan and Pennsylvania.

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.

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.

8


 

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: Facilitation of the Effects of Reference Rate Reform on Financial Reporting.  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. Sale of Certain Agency Business

On June 30, 2021, Sycamore Insurance Agency sold to Venture Holdings, Inc. the customer accounts and other related assets of some of its personal and commercial lines of business.  The customer accounts consist substantially of new and renewal rights and customer lists of the agency.  Sycamore will continue to produce various personal and commercial lines that it did not sell to Venture, which is substantially all produced for, and underwritten by, the Insurance Company Subsidiaries.  The Company recognized an $8.9 million gain on the sale which is reflected in Other Gains on the Consolidated Statements of Operations.

The purchase price was $10.0 million of which $1.0 million was paid in cash on June 30, 2021, and $9.0 million was in the form of two promissory notes (one for $6.0 million and one for $3.0 million).  Both notes require interest-only quarterly payments at a per annum rate of 7.0%, with a five-year maturity.  There are no prepayment penalties.

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

The transaction included the transition of 21 employees from Conifer to Venture as well as necessary systems and office functions to operate the business.  Venture is not assuming any in-force business or liabilities.  

3. Investments

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

 

 

 

June 30, 2021

 

 

 

Cost or

 

 

Gross Unrealized

 

 

Estimated

 

 

 

Amortized Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

$

21,936

 

 

$

148

 

 

$

(27

)

 

$

22,057

 

State and local government

 

 

31,467

 

 

 

778

 

 

 

(74

)

 

 

32,171

 

Corporate debt

 

 

19,989

 

 

 

162

 

 

 

(208

)

 

 

19,943

 

Asset-backed securities

 

 

31,691

 

 

 

28

 

 

 

(92

)

 

 

31,627

 

Mortgage-backed securities

 

 

34,811

 

 

 

145

 

 

 

(499

)

 

 

34,457

 

Commercial mortgage-backed securities

 

 

1,844

 

 

 

62

 

 

 

 

 

 

1,906

 

Collateralized mortgage obligations

 

 

6,961

 

 

 

90

 

 

 

(24

)

 

 

7,027

 

Total debt securities available for sale

 

$

148,699

 

 

$

1,413

 

 

$

(924

)

 

$

149,188

 

9


 

 

 

 

 

December 31, 2020

 

 

 

Cost or

 

 

Gross Unrealized

 

 

Estimated

 

 

 

Amortized Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

$

30,743

 

 

$

225

 

 

$

(1

)

 

$

30,967

 

State and local government

 

 

32,253

 

 

 

1,040

 

 

 

(28

)

 

 

33,265

 

Corporate debt

 

 

19,015

 

 

 

311

 

 

 

(23

)

 

 

19,303

 

Asset-backed securities

 

 

20,987

 

 

 

49

 

 

 

(73

)

 

 

20,963

 

Mortgage-backed securities

 

 

38,512

 

 

 

345

 

 

 

(3

)

 

 

38,854

 

Commercial mortgage-backed securities

 

 

2,083

 

 

 

65

 

 

 

(22

)

 

 

2,126

 

Collateralized mortgage obligations

 

 

6,361

 

 

 

161

 

 

 

(1

)

 

 

6,521

 

Total debt securities available for sale

 

$

149,954

 

 

$

2,196

 

 

$

(151

)

 

$

151,999

 

 

 

The following table summarizes the aggregate fair value and gross unrealized losses, by security type, of the available-for-sale securities in unrealized loss positions. The table segregates the holdings based on the length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands):

 

 

 

June 30, 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

 

 

5

 

 

$

10,610

 

 

$

(27

)

 

 

 

 

$

 

 

$

 

 

 

5

 

 

$

10,610

 

 

$

(27

)

State and local government

 

 

35

 

 

 

6,081

 

 

 

(74

)

 

 

 

 

 

 

 

 

 

 

 

35

 

 

 

6,081

 

 

 

(74

)

Corporate debt

 

 

17

 

 

 

10,853

 

 

 

(208

)

 

 

 

 

 

 

 

 

 

 

 

17

 

 

 

10,853

 

 

 

(208

)

Asset-backed securities

 

 

13

 

 

 

16,064

 

 

 

(89

)

 

 

5

 

 

 

3,906

 

 

 

(3

)

 

 

18

 

 

 

19,970

 

 

 

(92

)

Mortgage-backed securities

 

 

8

 

 

 

28,500

 

 

 

(499

)

 

 

 

 

 

 

 

 

 

 

 

8

 

 

 

28,500

 

 

 

(499

)

Commercial mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations

 

 

8

 

 

 

2,473

 

 

 

(23

)

 

 

1

 

 

 

51

 

 

 

(1

)

 

 

9

 

 

 

2,524

 

 

 

(24

)

Total debt securities available for sale

 

 

86

 

 

$

74,581

 

 

$

(920

)

 

 

6

 

 

$

3,957

 

 

$

(4

)

 

 

92

 

 

$

78,538

 

 

$

(924

)

10


 

 

 

 

 

December 31, 2020

 

 

 

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

 

 

2

 

 

$

6,764

 

 

$

(1

)

 

 

 

 

$

 

 

$

 

 

 

2

 

 

$

6,764

 

 

$

(1

)

State and local government

 

 

16

 

 

 

3,905

 

 

 

(28

)

 

 

 

 

 

 

 

 

 

 

 

16

 

 

 

3,905

 

 

 

(28

)

Corporate debt

 

 

2

 

 

 

1,051

 

 

 

(23

)

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

1,051

 

 

 

(23

)

Asset-backed securities

 

 

7

 

 

 

6,050

 

 

 

(34

)

 

 

11

 

 

 

6,551

 

 

 

(39

)

 

 

18

 

 

 

12,601

 

 

 

(73

)

Mortgage-backed securities

 

 

2

 

 

 

1,652

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

1,652

 

 

 

(3

)

Commercial mortgage-backed securities

 

 

1

 

 

 

899

 

 

 

(22

)

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

899

 

 

 

(22

)

Collateralized mortgage obligations

 

 

2

 

 

 

195

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

195

 

 

 

(1

)

Total debt securities available for sale

 

 

32

 

 

$

20,516

 

 

$

(112

)

 

 

11

 

 

$

6,551

 

 

$

(39

)

 

 

43

 

 

$

27,067

 

 

$

(151

)

 

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

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

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Debt securities

 

$

554

 

 

$

929

 

 

$

1,154

 

 

$

1,796

 

Equity securities

 

 

55

 

 

 

53

 

 

 

103

 

 

 

108

 

Cash, cash equivalents and short-term investments

 

 

 

 

 

24

 

 

 

1

 

 

 

143

 

Total investment income

 

 

609

 

 

 

1,006

 

 

 

1,258

 

 

 

2,047

 

Investment expenses

 

 

(106

)

 

 

(143

)

 

 

(223

)

 

 

(230

)

Net investment income

 

$

503

 

 

$

863

 

 

$

1,035

 

 

$

1,817

 

 

The following table summarizes the gross realized gains and losses from sales, calls and maturities of available-for-sale debt and equity securities (dollars in thousands):

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross realized gains

 

$

 

 

$

 

 

$

27

 

 

$

720

 

Gross realized losses

 

 

 

 

 

 

 

 

(6

)

 

 

(4

)

Total debt securities

 

 

 

 

 

 

 

 

21

 

 

 

716

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross realized gains

 

 

1,105

 

 

 

604

 

 

 

4,008

 

 

 

948

 

Gross realized losses

 

 

(45

)

 

 

(359

)

 

 

(45

)

 

 

(491

)

Total equity securities

 

 

1,060

 

 

 

245

 

 

 

3,963

 

 

 

457

 

Total net realized investment gains (losses)

 

$

1,060

 

 

$

245

 

 

$

3,984

 

 

$

1,173

 

 

Proceeds from the sales of available-for-sale debt securities were $20.0 million and $23.9 million for the six months ended June 30, 2021 and 2020, respectively.  There were no gross realized gains or losses from the sales of available-for-sale securities for the three months ended June 30, 2021.  The gross realized gains and losses from the sales of available-for-sale debt securities for the six months ended June 30, 2021, were $27,000 and $6,000, respectively.  The gross realized gains and losses from the sales of available-for-sale debt securities for the three months ended June 30, 2020 were $3,000 and $0,

11


 

respectively.  The gross realized gains and losses from the sales of available-for-sale debt securities for the six months ended June 30, 2020, were $722,000 and $0, respectively.  

As of June 30, 2021 and 2020, there were $249,000 and $125,000 of payables from securities purchased, respectively.  There were $11,000 and $17,000 of receivables from securities sold as of June 30, 2021, and 2020, respectively.

The Company carries other equity investments that do not have a readily determinable fair value at cost, less impairment or observable changes in price.  We review these investments for impairment during each reporting period.  There were no impairments or observable changes in price recorded during 2021 related to the Company's equity securities without readily determinable fair value.  These investments are included in Other Assets in the Consolidated Balance Sheets and amounted to $1.2 million as of June 30, 2021 and December 31, 2020.  

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

 

$

13,861

 

 

$

13,944

 

Due after one year through five years

 

 

26,881

 

 

 

27,319

 

Due after five years through ten years

 

 

15,191

 

 

 

15,234

 

Due after ten years

 

 

17,459

 

 

 

17,674

 

Securities with contractual maturities

 

 

73,392

 

 

 

74,171

 

Asset-backed securities

 

 

31,691

 

 

 

31,627

 

Mortgage-backed securities

 

 

34,811

 

 

 

34,457

 

Commercial mortgage-backed securities

 

 

1,844

 

 

 

1,906

 

Collateralized mortgage obligations

 

 

6,961

 

 

 

7,027

 

Total debt securities

 

$

148,699

 

 

$

149,188

 

At June 30, 2021 and December 31, 2020, the Insurance Company Subsidiaries had $9.7 million and $8.8 million, respectively, on deposit in trust accounts to meet the deposit requirements of various state insurance departments.  At June 30, 2021 and December 31, 2020, the Company had $65.7 million and $67.6 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.

 

4. 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 and our Paycheck Protection Program loan.  

Level 3—Unobservable inputs that are supported by little or no market activity.  The unobservable inputs represent the Company’s best assumption of how market participants would price the assets or liabilities.

Net Asset Value (NAV)—The fair values of investment company limited partnership investments are based on the capital account balances reported by the investment funds subject to their management review and adjustment. These capital account balances reflect the fair value of the investment funds.

12


 

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

 

 

 

June 30, 2021

 

 

 

Fair Value Measurements

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

$

22,057

 

 

$

 

 

$

22,057

 

 

$

 

State and local government

 

 

32,171

 

 

 

 

 

 

32,171

 

 

 

 

Corporate debt

 

 

19,943

 

 

 

 

 

 

19,943

 

 

 

 

Asset-backed securities

 

 

31,627

 

 

 

 

 

 

31,627

 

 

 

 

Mortgage-backed securities

 

 

34,457

 

 

 

 

 

 

34,457

 

 

 

 

Commercial mortgage-backed securities

 

 

1,906

 

 

 

 

 

 

1,906

 

 

 

 

Collateralized mortgage obligations

 

 

7,027

 

 

 

 

 

 

7,027

 

 

 

 

Total debt securities

 

 

149,188

 

 

 

 

 

 

149,188

 

 

 

 

Equity Securities

 

 

19,314

 

 

 

19,031

 

 

 

283

 

 

 

 

Short-term investments

 

 

11,435

 

 

 

11,435

 

 

 

 

 

 

 

Total marketable investments measured at fair value

 

$

179,937

 

 

$

30,466

 

 

$

149,471

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments measured at NAV:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in limited partnership

 

 

680

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets measured at fair value

 

$

180,617

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior Unsecured Notes *

 

$

24,283

 

 

$

 

 

$

24,283

 

 

$

 

Subordinated Notes *

 

 

11,604

 

 

 

 

 

 

 

 

 

11,604

 

Line of credit *

 

 

1,000

 

 

 

 

 

 

1,000

 

 

 

 

Paycheck Protection Program loan *

 

 

2,745

 

 

 

 

 

 

2,745

 

 

 

 

Total Liabilities measured at fair value

 

$

39,632

 

 

$

 

 

$

28,028

 

 

$

11,604

 

 

*

Carried at face value of debt net of unamortized debt issuance costs on the consolidated balance sheets

13


 

 

 

 

 

December 31, 2020

 

 

 

Fair Value Measurements

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

$

30,967

 

 

$

 

 

$

30,967

 

 

$

 

State and local government

 

 

33,265

 

 

 

 

 

 

33,265

 

 

 

 

Corporate debt

 

 

19,303

 

 

 

 

 

 

19,303

 

 

 

 

Asset-backed securities

 

 

20,963

 

 

 

 

 

 

20,963

 

 

 

 

Mortgage-backed securities

 

 

38,854

 

 

 

 

 

 

38,854

 

 

 

 

Commercial mortgage-backed securities

 

 

2,126

 

 

 

 

 

 

2,126

 

 

 

 

Collateralized mortgage obligations

 

 

6,521

 

 

 

 

 

 

6,521

 

 

 

 

Total debt securities

 

 

151,999

 

 

 

 

 

 

151,999

 

 

 

 

Equity securities

 

 

17,336

 

 

 

17,053

 

 

 

283

 

 

 

 

Short-term investments

 

 

13,317

 

 

 

13,317

 

 

 

 

 

 

 

Total marketable investments measured at fair value

 

$

182,652

 

 

$

30,370

 

 

$

152,282

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments measured at NAV:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in limited partnership

 

 

555

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets measured at fair value

 

$

183,207

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior Unsecured Notes *

 

$

20,675

 

 

$

 

 

$

20,675

 

 

$

 

Subordinated Notes *

 

 

11,616

 

 

 

 

 

 

 

 

 

11,616

 

Line of Credit *

 

 

5,000

 

 

 

 

 

 

5,000

 

 

 

 

Paycheck Protection Program loan *

 

 

2,745

 

 

 

 

 

 

2,745

 

 

 

 

Total Liabilities measured at fair value

 

$

40,036

 

 

$

 

 

$

28,420

 

 

$

11,616

 

 

*

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 16.9% of the fair value of the total investment portfolio as of June 30, 2021.

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 82.8% of the fair value of the total investment portfolio as of June 30, 2021.

The Company obtains pricing for each security from independent pricing services, investment managers or consultants to assist in determining fair value for its Level 2 investments.  To validate that these quoted prices are reasonable estimates of fair value, the Company performs various quantitative and qualitative procedures, such as (i) evaluation of the underlying methodologies, (ii) analysis of recent sales activity, (iii) analytical review of our fair values against current market prices and (iv) comparison of the pricing services’ fair value to other pricing services’ fair value for the same investment.  No markets for the investments were determined to be inactive at period-ends.  Based on these procedures, the Company did not adjust the prices or quotes provided from independent pricing services, investment managers or consultants.  The Level 2 financial instruments also include the Company's senior debt. The fair value of the borrowings under the senior revolving credit facility approximates its carrying amount because interest is based on a short-term, variable, market-based rate.

As of June 30, 2021 and December 31, 2020, Level 3 is entirely comprised of the Company's subordinated debt.  In determining the fair value of the subordinated debt outstanding at June 30, 2021 and December 31, 2020, the security attributes (issue date, maturity, coupon, calls, etc.) and market rates on September 24, 2018 (the date of the restated and amended agreement which was repriced at that time) were entered into a valuation model.  A lognormal trinomial interest rate lattice was

14


 

created within the model to compute the option adjusted spread (“OAS”) which is the amount, in basis points, of interest rate required to be paid under the debt agreement over the risk-free U.S. Treasury rates.  The OAS was then fed back into the model along with the June 30, 2021 and December 31, 2020 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.

5. Deferred Policy Acquisition Costs

The Company defers costs incurred which are incremental and directly related to the successful acquisition of new or renewal insurance business, net of corresponding amounts of ceded reinsurance commissions.  Net deferred policy acquisition costs are amortized and charged to expense in proportion to premium earned over the estimated policy term.  The Company anticipates that its deferred policy acquisition costs will be fully recoverable and there were no premium deficiencies for the six months ended June 30, 2021 and 2020.  The activity in deferred policy acquisition costs, net of reinsurance transactions, is as follows (dollars in thousands):

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Balance at beginning of period

 

$

12,459

 

 

$

11,508

 

 

$

12,243

 

 

$

11,906

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred policy acquisition costs

 

 

7,558

 

 

 

6,580

 

 

 

14,524

 

 

 

12,485

 

Amortization of policy acquisition costs

 

 

(6,896

)

 

 

(6,395

)

 

 

(13,646

)

 

 

(12,698

)

Net change

 

 

662

 

 

 

185

 

 

 

878

 

 

 

(213

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

 

$

13,121

 

 

$

11,693

 

 

$

13,121

 

 

$

11,693

 

 

6. Unpaid Losses and Loss Adjustment Expenses

The Company establishes reserves for unpaid losses and loss adjustment expenses ("LAE") which represent the estimated ultimate cost of all losses incurred that were both reported and unreported (i.e., incurred but not yet reported losses; or “IBNR”) and LAE incurred that remain unpaid at the balance sheet date.  The Company’s reserving process takes into account known facts and interpretations of circumstances and factors including the Company’s experience with similar cases, actual claims paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management programs, product mix and contractual terms, changes in law and regulation, judicial decisions, and economic conditions. In the normal course of business, the Company may also supplement its claims processes by utilizing third party adjusters, appraisers, engineers, inspectors, and other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims. The effects of inflation are implicitly considered in the reserving process.

Reserves are estimates of unpaid portions of losses that have occurred, including IBNR losses; therefore, the establishment of appropriate reserves is an inherently uncertain and complex process. The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimates. The highest degree of uncertainty is associated with reserves for losses incurred in the current reporting period as it contains the greatest proportion of losses that have not been reported or settled. The Company regularly updates its reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in reserve estimates, which may be material, are reported in the results of operations in the period such changes are determined to be needed and recorded.

Management believes that the reserve for losses and LAE, net of reinsurance recoverables, is appropriately established in the aggregate and adequate to cover the ultimate net cost of reported and unreported claims arising from losses which had occurred by the date of the consolidated financial statements based on available facts and in accordance with applicable laws and regulations.

15


 

The table below provides the changes in the reserves for losses and LAE, net of reinsurance recoverables, for the periods indicated as follows (dollars in thousands):

 

 

 

Three months ended

June 30,

 

 

Six months ended

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Gross reserves - beginning of period

 

$

118,676

 

 

$

109,657

 

 

$

111,270

 

 

$

107,246

 

Less: reinsurance recoverables on unpaid losses

 

 

(26,559

)

 

 

(22,022

)

 

 

(24,218

)

 

 

(22,579

)

Net reserves - beginning of period

 

 

92,117

 

 

 

87,635

 

 

 

87,052

 

 

 

84,667

 

Add: incurred losses and LAE, net of reinsurance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current period

 

 

11,716

 

 

 

8,908

 

 

 

25,300

 

 

 

19,428

 

Prior period

 

 

6,210

 

 

 

3,037

 

 

 

11,988

 

 

 

6,786

 

Total net incurred losses and LAE

 

 

17,926

 

 

 

11,945

 

 

 

37,288

 

 

 

26,214

 

Deduct: loss and LAE payments, net of reinsurance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current period

 

 

5,120

 

 

 

3,044

 

 

 

8,300

 

 

 

3,918

 

Prior period

 

 

9,895

 

 

 

10,694

 

 

 

21,012

 

 

 

21,121

 

Total net loss and LAE payments

 

 

15,015

 

 

 

13,738

 

 

 

29,312

 

 

 

25,039

 

Net reserves - end of period

 

 

95,028

 

 

 

85,842

 

 

 

95,028

 

 

 

85,842

 

Plus: reinsurance recoverables on unpaid losses

 

 

22,824

 

 

 

20,892

 

 

 

22,824

 

 

 

20,892

 

Gross reserves - end of period

 

$

117,852

 

 

$

106,734

 

 

$

117,852

 

 

$

106,734

 

 

Net losses and LAE increased by $6.0 million, or 50.1%, to $17.9 million during the second quarter of 2021, compared to $11.9 million for the same period in 2020.  The increase in losses was driven by adverse development that occurred during the second quarter of 2021.  The Company experienced $6.2 million of adverse development for the three months ended June 30, 2021.  Of the $6.2 million in adverse development, $1.9 million was related to 2017 and prior accident years, $2.4 million was related to the 2018 accident year, and $1.9 million was related to the 2019 and 2020 accident years.  Substantially all of the development was from the Company’s commercial lines of business.      

Net losses and LAE increased by $11.1 million, or 42.2%, to $37.3 million for the six months ended June 30, 2021, compared to $26.2 million for the same period in 2020.  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.  Of the $12.0 million in adverse development, $11.4 million was related to commercial lines, while $636,000 was related to personal lines.  The adverse development was mostly attributable to the 2018 and 2017 and prior accident years.  

The Company’s incurred losses during the three and six months ended June 30, 2020 included prior-year adverse reserve development of $3.0 million and $6.7 million, respectively.  These losses were related to the Company’s commercial lines of business.

7. 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 primarily ceded all specific commercial liability risks in excess of $400,000 in 2021 and 2020.  The Company ceded specific commercial property risks in excess of $200,000 in 2021.  The Company ceded 40% of specific commercial property risks in excess of $400,000, and 60% in excess of $300,000 in 2020.  The Company ceded homeowners specific risks in excess of $300,000 in both 2021 and 2020.  

A "treaty" is a reinsurance agreement in which coverage is provided for a class of risks and does not require policy by policy underwriting of the reinsurer. "Facultative" reinsurance is where a reinsurer negotiates an individual reinsurance agreement for every policy it will reinsure on a policy by policy basis. A loss is covered under a reinsurance contract if the loss occurs within the effective dates of the agreement notwithstanding when the loss is reported.

Reinsurance does not discharge the direct insurer from liability to its policyholders.  Failure of reinsurers to honor their obligations could result in losses to the Company.  The Company evaluates the financial condition of its reinsurers and monitors the concentration of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies.  To date, the Company has not experienced any significant difficulties in collecting reinsurance recoverables.

16


 

The Company assumes written premiums under a few fronting arrangements. The fronting arrangements are with unaffiliated insurers who write on behalf of the Company in markets that require a higher A.M. Best rating than the Company’s current rating, where the policies are written in a state where the Company is not licensed or for other strategic reasons.

The following table presents the effects of reinsurance and assumption transactions on written premiums, earned premiums and losses and LAE (dollars in thousands):

 

 

 

Three Months Ended

June 30,

 

 

Six months ended

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Written premiums:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

$

26,153

 

 

$

19,595

 

 

$

49,586

 

 

$

39,225

 

Assumed

 

 

8,828

 

 

 

7,950

 

 

 

15,768

 

 

 

13,404

 

Ceded

 

 

(6,449

)

 

 

(4,480

)

 

 

(12,339

)

 

 

(8,513

)

Net written premiums

 

$

28,532

 

 

$

23,065

 

 

$

53,015

 

 

$

44,116

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earned premiums:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

$

22,607

 

 

$

17,913

 

 

$

43,597

 

 

$

35,371

 

Assumed

 

 

7,621

 

 

 

8,046

 

 

 

14,878

 

 

 

16,641

 

Ceded

 

 

(5,390

)

 

 

(4,201

)

 

 

(10,802

)

 

 

(8,237

)

Net earned premiums

 

$

24,838

 

 

$

21,758

 

 

$

47,673

 

 

$

43,775

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and LAE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

$

15,367

 

 

$

10,739

 

 

$

36,117

 

 

$

23,065

 

Assumed

 

 

48

 

 

 

4,347

 

 

 

6,829

 

 

 

9,969

 

Ceded

 

 

2,511

 

 

 

(3,141

)

 

 

(5,658

)

 

 

(6,820

)

Net Losses and LAE

 

$

17,926

 

 

$

11,945

 

 

$

37,288

 

 

$

26,214

 

 

8. Debt

The Company's debt is comprised of four instruments: $24.4 million of publicly traded senior unsecured notes which were issued in September and October of 2018, a $10.0 million line of credit which commenced in June 2018, $10.5 million of privately placed subordinated notes (the “Subordinated Notes”), and a $2.7 million Paycheck Protection Program loan (the “PPP loan”) issued as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  A summary of the Company's outstanding debt is as follows (dollars in thousands):

 

 

 

June 30,

2021

 

 

December 31,

2020

 

Senior unsecured notes

 

$

23,795

 

 

$

23,665

 

Subordinated notes

 

 

9,613

 

 

 

9,587

 

Line of credit

 

 

1,000

 

 

 

5,000

 

Paycheck Protection Program loan *

 

 

2,745

 

 

 

2,745

 

Total

 

$

37,153

 

 

$

40,997

 

*

The PPP loan was embedded into the line of credit facility.  See below.

 

Senior unsecured notes

The Company issued $25.3 million of public senior unsecured notes (the "Notes") in 2018.  The Notes bear an interest rate of 6.75% per annum, payable quarterly at the end of March, June, September and December and mature on September 30, 2023.  The Company may redeem the Notes, in whole or in part, at face value at any time after September 30, 2021.

 

The Company did not repurchase any of the Notes for the three and six months ended June 30, 2021.  For the three and six months ended June 30, 2020, the Company repurchased in the public market 9,761 and 36,761 units of the Notes with a face value of $244,000 and $919,000, respectively. The Notes were repurchased at a discount to face value, which resulted in a $145,000 and $260,000 gain on extinguishment for the three and six months ended June 30, 2020.

 


17


 

 

Subordinated notes

The Company also has outstanding $10.5 million of Subordinated Notes maturing on September 30, 2038.  The Subordinated Notes bear an interest rate of 7.5% per annum until September 30, 2023, and 12.5% thereafter, and allow for four quarterly interest payment deferrals.  Interest is payable quarterly at the end of March, June, September and December.  Beginning September 30, 2021, the Company may redeem the Subordinated Notes, in whole or in part, for a call premium of $1.1 million.  The call premium escalates each quarter to ultimately $1.75 million on September 30, 2023, then steps up to $3.05 million on December 31, 2023, and increases quarterly at a 12.5% per annum rate thereafter.  

As of June 30, 2021, the carrying value of the Notes and Subordinated Notes are offset by $585,000 and $887,000 of debt issuance costs, respectively.  The debt issuance costs will be amortized through interest expense over the life of the loans.

The Subordinated Notes contain various restrictive financial debt covenants that relate to the Company’s minimum tangible net worth, minimum fixed-charge coverage ratios, dividend paying capacity, reinsurance retentions, and risk-based capital ratios.  At June 30, 2021, 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.  The agreement includes several financial debt covenants, including a minimum tangible net worth, a minimum fixed-charge coverage ratio, and minimum statutory risk-based capital levels.  As of June 30, 2021, the Company had $3.7 million outstanding on the line of credit (including the PPP loan described below), and was in compliance with all of its financial debt covenants.  On June 18, 2021, the line of credit was renewed with a maturity of December 1, 2022.

 

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 PPP loan was incorporated into the existing line of credit facility and utilizes a portion of the line of credit’s limit.  However, the PPP loan has a different maturity date (April 24, 2022) in accordance with the SBA requirements and bears interest at a rate of 1.0% per annum.  The Company amended its $10.0 million line of credit facility with the Lender to incorporate this loan as a reduction of the available line of credit.  The loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties.  The Company applied for forgiveness of the loan in 2020, at which point the principal and interest payments were deferred until the SBA remits the loan forgiveness amount to the Lender.  As of June 30, 2021, the loan remains on the Company’s balance sheet as a liability.  The Company received notice from the SBA that the loan was 100% forgiven on July 8, 2021.  The Company will recognize the forgiveness of the loan in the Other Gains section of the Consolidated Statement of Operations in the third quarter of 2021.  

9. Shareholders’ Equity

On December 5, 2018, the Company's Board of Directors authorized a stock repurchase program, under which the Company may repurchase up to one million shares of the Company's common stock. The Company did not repurchase any shares of stock for the three and six months ended June 30, 2021 related to the stock repurchase program.  For the three and six months ended June 30, 2020, the Company repurchased 1,698 and 2,398 shares of stock valued at $6,000 and $8,000, respectively, related to the stock repurchase program.

For the three months ended June 30, 2021, and 2020, the Company repurchased 2,307 and 2,308 shares of stock valued at approximately $7,000 and $8,000, respectively, related to the vesting of the Company’s restricted stock units.  The Company made no repurchases of stock relating to the vesting of restricted stock units during the first quarters of 2021 and 2020.  Upon the repurchase of the Company’s shares, the shares remain authorized, but not issued or outstanding.

As of June 30, 2021 and December 31, 2020, the Company had 9,689,421 and 9,681,728 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.

18


 

10. Accumulated Other Comprehensive Income (Loss)

The following table presents changes in accumulated other comprehensive income (loss) for unrealized gains and losses on available-for-sale securities (dollars in thousands):

 

 

 

Three months ended

June 30,

 

 

Six months ended

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Balance at beginning of period

 

$

(1,955

)

 

$

(1,210

)

 

$

912

 

 

$

489

 

Other comprehensive income (loss) before reclassifications

 

 

394

 

 

 

5,017

 

 

 

(1,530

)

 

 

3,702

 

Less:  amounts reclassified from accumulated other comprehensive income (loss)

 

 

(902

)

 

 

2

 

 

 

41

 

 

 

386

 

Net other comprehensive income (loss)

 

 

1,296

 

 

 

5,015

 

 

 

(1,571

)

 

 

3,316

 

Balance at end of period

 

$

(659

)

 

$

3,805

 

 

$

(659

)

 

$

3,805

 

 

11. 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 amounts):

 

 

 

Three Months Ended

June 30,

 

 

Six months ended

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net income (loss)

 

$

5,552

 

 

$

1,505

 

 

$

916

 

 

$

(3,220

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares, basic and diluted *

 

 

9,686,631

 

 

 

9,595,668

 

 

 

9,684,193

 

 

 

9,594,221

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share, basic and diluted

 

$

0.57

 

 

$

0.16

 

 

$

0.09

 

 

$

(0.34

)

 

*

The non-vested shares of the restricted stock units and stock options were anti-dilutive as of June 30, 2021 and 2020.  Therefore, the basic and diluted weighted average common shares are equal for the three and six months ended June 30, 2021 and 2020.

12. Stock-based Compensation

On June 30, 2020, the Company issued options to purchase 280,000 shares of the Company’s common stock, to certain executive officers and other employees.  The right to exercise the options will vest over a five-year period on a straight-line basis. The options have a strike price of $3.81 per share and expire on June 30, 2030.  The estimated value of these options is $290,000, which is being expensed ratably over the vesting period.  

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

The Company recorded $108,000 and $475,000 of compensation expense related to the RSUs for the six months ended June 30, 2021 and 2020, respectively. There were 41,941 unvested RSUs as of June 30, 2021, which will generate an estimated future expense of $150,000.

 

The Company recorded $25,000 of compensation expense for the six months ended June 30, 2021 related to the stock options granted on June 30, 2020. There were 209,000 unvested options as of June 30, 2021, which will generate an estimated future expense of $219,000.

 

 


19


 

 

13. 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 balance sheets. 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.

14. 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 chief operating decision maker in deciding how to allocate resources to its segments and in assessing its performance. In assessing performance of its operating segments, the Company’s chief operating decision maker, the Chief Executive Officer, reviews a number of financial measures including gross written premiums, net earned premiums, losses and LAE, net of reinsurance recoveries, and other revenue and expenses. The primary measure used for making decisions about resources to be allocated to an operating segment and assessing its performance is segment underwriting gain or loss which is defined as segment revenues, consisting of net earned premiums and other income, less segment expenses, consisting of losses and LAE, policy acquisition costs and operating expenses of the operating segments. Operating expenses primarily include compensation and related benefits for personnel, policy issuance and claims systems, rent and utilities. The Company markets, distributes and sells its insurance products through its own insurance agencies and a network of independent agents. All of the Company’s insurance activities are conducted in the United States with a concentration of activity in Michigan, Florida, Texas and California. For the six months ended June 30, 2021 and 2020 gross written premiums attributable to these four states were 51.7% and 50.5%, respectively, of the Company’s total gross written premiums.

The Wholesale Agency business sells insurance products on behalf of the Company’s commercial and personal lines businesses as well as to third-party insurers.  Certain acquisition costs incurred by the commercial and personal lines businesses are reflected as commission revenue for the Wholesale Agency business and are eliminated in the Eliminations category.  

In addition to the reportable operating segments, the Company maintains a Corporate category to reconcile segment results to the consolidated totals. The Corporate category includes: (i) corporate operating expenses such as salaries and related benefits of the Company’s executive management team and finance and information technology personnel, and other corporate headquarters expenses, (ii) interest expense on the Company’s debt obligations; (iii) depreciation and amortization on property and equipment, and (iv) all investment income activity. All investment income activity is reported within net investment income, net realized investment gains, and change in fair value of equity securities on the consolidated statements of operations.  The Company’s assets on the consolidated balance sheet are not allocated to the reportable segments.

 


20


 

 

The following tables present information by reportable operating segment (dollars in thousands):

 

Three months ended

June 30, 2021

 

Commercial Lines

 

 

Personal

Lines

 

 

Total

Underwriting

 

 

Wholesale

Agency

 

 

Corporate

 

 

Eliminations

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross written premiums

 

$

30,947

 

 

$

4,034

 

 

$

34,981

 

 

$

 

 

$

 

 

$

 

 

$

34,981

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net written premiums

 

$

24,672

 

 

$

3,860

 

 

$

28,532

 

 

$

 

 

$

 

 

$

 

 

$

28,532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earned premiums

 

$

22,188

 

 

$

2,650

 

 

$

24,838

 

 

$

 

 

$

 

 

$

 

 

$

24,838

 

Other income

 

 

52

 

 

 

44

 

 

 

96

 

 

 

1,971

 

 

 

28

 

 

 

(1,429

)

 

 

666

 

Segment revenue

 

 

22,240

 

 

 

2,694

 

 

 

24,934

 

 

 

1,971

 

 

 

28

 

 

 

(1,429

)

 

 

25,504

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and LAE, net

 

 

16,940

 

 

 

986

 

 

 

17,926

 

 

 

 

 

 

 

 

 

 

 

 

17,926

 

Policy acquisition costs

 

 

6,326

 

 

 

740

 

 

 

7,066

 

 

 

1,242

 

 

 

 

 

 

(1,412

)

 

 

6,896

 

Operating expenses

 

 

2,852

 

 

 

391

 

 

 

3,243

 

 

 

816

 

 

 

283

 

 

 

 

 

 

4,342

 

Segment expenses

 

 

26,118

 

 

 

2,117

 

 

 

28,235

 

 

 

2,058

 

 

 

283

 

 

 

(1,412

)

 

 

29,164

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment gain (loss)

 

$

(3,878

)

 

$

577

 

 

$

(3,301

)

 

$

(87

)

 

$

(255

)

 

$

(17

)

 

$

(3,660

)

Investment income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

503

 

 

 

 

 

 

 

503

 

Net realized investment gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,060

 

 

 

 

 

 

 

1,060

 

Change in fair value of equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(525

)

 

 

 

 

 

 

(525

)

Other gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,910

 

 

 

 

 

 

 

8,910

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(732

)

 

 

 

 

 

 

(732

)

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

 

$

(3,878

)

 

$

577

 

 

$

(3,301

)

 

$

(87

)

 

$

8,961

 

 

$

(17

)

 

$

5,556

 

 

Three months ended

June 30, 2020

 

Commercial

Lines

 

 

Personal

Lines

 

 

Total

Underwriting

 

 

Wholesale

Agency

 

 

Corporate

 

 

Eliminations

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross written premiums

 

$

25,600

 

 

$

1,945

 

 

$

27,545

 

 

$

 

 

$

 

 

$

 

 

$

27,545

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net written premiums

 

$

21,377

 

 

$

1,688

 

 

$

23,065

 

 

$

 

 

$

 

 

$

 

 

$

23,065

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earned premiums

 

$

20,105

 

 

$

1,653

 

 

$

21,758

 

 

$

 

 

$

 

 

$

 

 

$

21,758

 

Other income

 

 

82

 

 

 

36

 

 

 

118

 

 

 

2,081

 

 

 

132

 

 

 

(1,618

)

 

 

713

 

Segment revenue

 

 

20,187

 

 

 

1,689

 

 

 

21,876

 

 

 

2,081

 

 

 

132

 

 

 

(1,618

)

 

 

22,471

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and LAE, net

 

 

11,275

 

 

 

670

 

 

 

11,945

 

 

 

 

 

 

 

 

 

 

 

 

11,945

 

Policy acquisition costs

 

 

6,119

 

 

 

506

 

 

 

6,625

 

 

 

1,448

 

 

 

 

 

 

(1,678

)

 

 

6,395

 

Operating expenses

 

 

3,145

 

 

 

272

 

 

 

3,417

 

 

 

736

 

 

 

706

 

 

 

 

 

 

4,859

 

Segment expenses

 

 

20,539

 

 

 

1,448

 

 

 

21,987

 

 

 

2,184

 

 

 

706

 

 

 

(1,678

)

 

 

23,199

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment gain (loss)

 

$

(352

)

 

$

241

 

 

$

(111

)

 

$

(103

)

 

$

(574

)

 

$

60

 

 

$

(728

)

Investment income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

863

 

 

 

 

 

 

 

863

 

Net realized investment gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

245

 

 

 

 

 

 

 

245

 

Change in fair value of equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,576

 

 

 

 

 

 

 

1,576

 

Other gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

145

 

 

 

 

 

 

 

145

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(731

)

 

 

 

 

 

 

(731

)

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

 

$

(352

)

 

$

241

 

 

$

(111

)

 

$

(103

)

 

$

1,524

 

 

$

60

 

 

$

1,370

 

21


 

 

 

Six months ended

June 30, 2021

 

Commercial

Lines

 

 

Personal

Lines

 

 

Total

Underwriting

 

 

Wholesale

Agency

 

 

Corporate

 

 

Eliminations

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross written premiums

 

$

58,168

 

 

$

7,186

 

 

$

65,354

 

 

$

 

 

$

 

 

$

 

 

$

65,354

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net written premiums

 

$

46,229

 

 

$

6,786

 

 

$

53,015

 

 

$

 

 

$

 

 

$

 

 

$

53,015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earned premiums

 

$

42,894

 

 

$

4,779

 

 

$

47,673

 

 

$

 

 

$

 

 

$

 

 

$

47,673

 

Other income

 

 

108

 

 

 

84

 

 

 

192

 

 

 

3,697

 

 

 

71

 

 

 

(2,738

)

 

 

1,222

 

Segment revenue

 

 

43,002

 

 

 

4,863

 

 

 

47,865

 

 

 

3,697

 

 

 

71

 

 

 

(2,738

)

 

 

48,895

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and LAE, net

 

 

33,895

 

 

 

3,393

 

 

 

37,288

 

 

 

 

 

 

 

 

 

 

 

 

37,288

 

Policy acquisition costs

 

 

12,644

 

 

 

1,340

 

 

 

13,984

 

 

 

2,369

 

 

 

 

 

 

(2,707

)

 

 

13,646

 

Operating expenses

 

 

5,807

 

 

 

740

 

 

 

6,547

 

 

 

1,560

 

 

 

584

 

 

 

 

 

 

8,691

 

Segment expenses

 

 

52,346

 

 

 

5,473

 

 

 

57,819

 

 

 

3,929

 

 

 

584

 

 

 

(2,707

)

 

 

59,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment gain (loss)

 

$

(9,344

)

 

$

(610

)

 

$

(9,954

)

 

$

(232

)

 

$

(513

)

 

$

(31

)

 

$

(10,730

)

Investment income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,035

 

 

 

 

 

 

 

1,035

 

Net realized investment gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,984

 

 

 

 

 

 

 

3,984

 

Change in fair value of equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,065

)

 

 

 

 

 

 

(1,065

)

Other gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,910

 

 

 

 

 

 

 

8,910

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,453

)

 

 

 

 

 

 

(1,453

)

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

 

$

(9,344

)

 

$

(610

)

 

$

(9,954

)

 

$

(232

)

 

$

10,898

 

 

$

(31

)

 

$

681

 

 

Six months ended

June 30, 2020

 

Commercial

Lines

 

 

Personal

Lines

 

 

Total

Underwriting

 

 

Wholesale

Agency

 

 

Corporate

 

 

Eliminations

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross written premiums

 

$

49,044

 

 

$

3,585

 

 

$

52,629

 

 

$

 

 

$

 

 

$

 

 

$

52,629

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net written premiums

 

$

41,064

 

 

$

3,052

 

 

$

44,116

 

 

$

 

 

$

 

 

$

 

 

$

44,116

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earned premiums

 

$

40,536

 

 

$

3,239

 

 

$

43,775

 

 

$

 

 

$

 

 

$

 

 

$

43,775

 

Other income

 

 

156

 

 

 

72

 

 

 

228

 

 

 

4,015

 

 

 

163

 

 

 

(3,035

)

 

 

1,371

 

Segment revenue

 

 

40,692

 

 

 

3,311

 

 

 

44,003

 

 

 

4,015

 

 

 

163

 

 

 

(3,035

)

 

 

45,146

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and LAE, net

 

 

24,736

 

 

 

1,478

 

 

 

26,214

 

 

 

 

 

 

 

 

 

 

 

 

26,214

 

Policy acquisition costs

 

 

12,283

 

 

 

995

 

 

 

13,278

 

 

 

2,656

 

 

 

 

 

 

(3,236

)

 

 

12,698

 

Operating expenses

 

 

6,648

 

 

 

547

 

 

 

7,195

 

 

 

1,641

 

 

 

1,068

 

 

 

 

 

 

9,904

 

Segment expenses

 

 

43,667

 

 

 

3,020

 

 

 

46,687

 

 

 

4,297

 

 

 

1,068

 

 

 

(3,236

)

 

 

48,816

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment gain (loss)

 

$

(2,975

)

 

$

291

 

 

$

(2,684

)

 

$

(282

)

 

$

(905

)

 

$

201

 

 

$

(3,670

)

Investment income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,817

 

 

 

 

 

 

 

1,817

 

Net realized investment gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,173

 

 

 

 

 

 

 

1,173

 

Change in fair value of equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,510

)

 

 

 

 

 

 

(1,510

)

Other gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

260

 

 

 

 

 

 

 

260

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,462

)

 

 

 

 

 

 

(1,462

)

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

 

$

(2,975

)

 

$

291

 

 

$

(2,684

)

 

$

(282

)

 

$

(627

)

 

$

201

 

 

$

(3,392

)

22


 

 

 

15. Subsequent Events

On July 8, 2021, the Company received forgiveness under the CARES Act from the SBA for the entire amount of its $2.7 million PPP loan.  The Company will recognize the forgiveness of the loan in the Other Gains section of the Consolidated Statement of Operations in the third quarter of 2021.

 

 

 

 

 


23


 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the Periods Ended June 30, 2021 and 2020

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

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q, which are not statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, as Section 21E of the Securities Exchange Act of 1934, as amended.  Forward-looking statements give current expectations or forecasts of future events or our future financial or operating performance.  Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek” and similar terms and phrases, or the negative thereof, may be used to identify forward-looking statements.

The forward-looking statements contained in this report are based on management’s good-faith belief and reasonable judgment based on current information.  The forward-looking statements are qualified by important factors, risks and uncertainties, many of which are beyond our control, that could cause our actual results to differ materially from those in the forward-looking statements, including those described in our Form 10-K (“Item 1A Risk Factors”) filed with the SEC on March 11, 2021 and subsequent reports filed with or furnished to the SEC.  Any forward-looking statement made by us in this report speaks only as of the date hereof or as of the date specified herein.  We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by any applicable laws or regulations.

Recent Developments

COVID-19

COVID-19 (the “Pandemic”) continues to cause 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.

Sale of Certain Agency Business

On June 30, 2021, our agency (Sycamore Insurance Agency) sold to Venture Holdings, Inc. the customer accounts and other related assets of some of its personal and commercial lines of business.  Sycamore will continue to produce various personal and commercial lines that it did not sell which is substantially all produced for, and underwritten by, our Insurance Company Subsidiaries. We recognized an $8.9 million gain on the sale which is reflected in Other Gains on the Consolidated Statement of Operations.

The purchase price was $10.0 million of which $1 million was paid in cash on June 30, 2021, and $9 million was in the form of two promissory notes (one for $6 million and one for $3 million).  Both notes require interest-only quarterly payments at a per annum rate of 7.0%, with a five-year maturity.  However, we expect the $3 million note to be paid in full within the next quarter.  There are no prepayment penalties.

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

24


 

transition of 21 employees from CHI to Venture as well as necessary systems and office functions to operate the business.  Venture did not assume any in-force business or liabilities.  The business will roll over to Venture as it produces new or renewal business effective July 1, 2021.  We expect our Insurance Company Subsidiaries will continue to underwrite substantially all of the business we sold to Venture that we underwrote prior to the transaction.  We expect Venture to be able to grow both the business we underwrite plus the third-party business more effectively as a separate entity outside of CHI’s group.  As of June 30, 2021, we had a non-controlling 50% interest in Venture.

Business Overview

We are an insurance holding company that markets and services our product offerings through specialty commercial and specialty personal insurance business lines.  Our growth has been significant since our founding in 2009.  Currently, we are authorized to write insurance as an excess and surplus lines carrier in 45 states, including the District of Columbia.  We are also licensed to write insurance as an admitted carrier in 42 states, including the District of Columbia, and we offer our insurance products in all 50 states.

Our revenues are primarily derived from premiums earned from our insurance operations.  We also generate other revenues through investment income and other income which mainly consists of installment fees and policy issuance fees generally related to the policies we write.

Our expenses consist primarily of losses and loss adjustment expenses, agents’ commissions, and other underwriting and administrative expenses.  We organize our operations into three insurance businesses: commercial insurance lines, personal insurance lines, and wholesale agency business.  Together, the commercial and personal lines refer to "underwriting" operations that take insurance risk, and the wholesale agency business refers to non-risk insurance business.

Through our commercial insurance product lines, we offer coverage for both commercial property and commercial liability.  We also offer coverage for commercial automobiles and workers’ compensation.  Our insurance policies are sold to targeted small and mid-sized businesses on a single or multiple-coverage basis.

Through our personal insurance product lines, we offer homeowners insurance and dwelling fire insurance policies to individuals in several states.  Our specialty homeowners insurance product line is primarily comprised of low-value dwelling insurance tailored for owners of lower valued homes, which we offer in Illinois, Indiana and Texas.  Due to recent Florida-based industry events, we have been de-emphasizing our Florida homeowners' business and reducing our exposures in that state, as well as other wind-exposed states like Texas and Hawaii.

Through our wholesale agency business segment, we offer commercial and personal lines insurance products for our Insurance Company Subsidiaries as well as third-party insurers.  We have expanded the wholesale agency business to develop more non-risk revenue streams, and provide our agents with more insurance product options.  However, as a result of the sale of certain agency business on June 30, 2021, going forward, our agency segment will not be producing any significant amounts of business for third party insurers and will produce approximately 50% less business for the Insurance Company Subsidiaries.    

Critical Accounting Policies and Estimates

In certain circumstances, we are required to make estimates and assumptions that affect amounts reported in our consolidated financial statements and related footnotes.  We evaluate these estimates and assumptions periodically on an on-going basis based on a variety of factors.  There can be no assurance, however, that actual results will not be materially different than our estimates and assumptions, and that reported results of operation will not be affected by accounting adjustments needed to reflect changes in these estimates and assumptions.  During the six months ended June 30, 2021, there were no material changes to our critical accounting policies and estimating methodologies, which are disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2021.

Executive Overview

The Company reported $35.0 million of gross written premiums in the second quarter of 2021, representing a 27.0% increase as compared to the same period in 2020.  Gross written premiums were $65.4 million for the six months ended June 30, 2021, representing a 24.2% increase as compared to the same period in 2020.  The increase in both periods was the result of growth in both commercial and personal lines business as we continue to penetrate markets where we have been the most successful while still reducing exposure to less profitable lines.

The Company reported net income of $5.6 million, or $0.57 per share, and net income of $916,000, or $0.09 per share, for the three and six months ended June 30, 2021, respectively.  The Company reported net income of $1.5 million, or $0.16 per share, and a net loss of $3.2 million, or $0.34 per share, for three and six months ended June 30, 2020, respectively.  

25


 

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.  Adjusted operating loss was $461,000, or $0.04 per share for the three months ended June 30, 2020. Adjusted operating loss was $3.1 million, or $0.33 per share for the six months ended June 30, 2020.

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

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

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

Summary of Operating Results

 

 

 

Three Months Ended

June 30,

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

$ Change

 

 

% Change

 

Gross written premiums

 

$

34,981

 

 

$

27,545

 

 

$

7,436

 

 

 

27.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net written premiums

 

$

28,532

 

 

$

23,065

 

 

$

5,467

 

 

 

23.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earned premiums

 

$

24,838

 

 

$

21,758

 

 

$

3,080

 

 

 

14.2

%

Other income

 

 

666

 

 

 

713

 

 

 

(47

)

 

 

(6.6

%)

Losses and loss adjustment expenses, net

 

 

17,926

 

 

 

11,945

 

 

 

5,981

 

 

 

50.1

%

Policy acquisition costs

 

 

6,896

 

 

 

6,395

 

 

 

501

 

 

 

7.8

%

Operating expenses

 

 

4,342

 

 

 

4,859

 

 

 

(517

)

 

 

(10.6

)%

Underwriting gain (loss)

 

 

(3,660

)

 

 

(728

)

 

 

(2,932

)

 

*

 

Net investment income

 

 

503

 

 

 

863

 

 

 

(360

)

 

 

(41.7

)%

Net realized investment gains

 

 

1,060

 

 

 

245

 

 

 

815

 

 

*

 

Change in fair value of equity securities

 

 

(525

)

 

 

1,576

 

 

 

(2,101

)

 

*

 

Other gains

 

 

8,910

 

 

 

145

 

 

 

8,765

 

 

*

 

Interest expense

 

 

732

 

 

 

731

 

 

 

1

 

 

 

0.1

%

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

 

 

5,556

 

 

 

1,370

 

 

 

4,186

 

 

*

 

Equity earnings in Affiliate, net of tax

 

 

180

 

 

 

179

 

 

 

1

 

 

*

 

Income tax expense

 

 

184

 

 

 

44

 

 

 

140

 

 

*

 

Net income (loss)

 

$

5,552

 

 

$

1,505

 

 

$

4,047

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Book value per common share outstanding

 

$

4.53

 

 

$

4.51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio (1)

 

 

71.9

%

 

 

54.6

%

 

 

 

 

 

 

 

 

Expense ratio (2)

 

 

41.3

%

 

 

45.9

%

 

 

 

 

 

 

 

 

Combined ratio (3)

 

 

113.2

%

 

 

100.5

%

 

 

 

 

 

 

 

 

 

(1)

The loss ratio is the ratio, expressed as a percentage, of net losses and loss adjustment expenses to net earned premiums and other income from underwriting operations.

(2)

The expense ratio is the ratio, expressed as a percentage, of policy acquisition costs and other underwriting expenses to net earned premiums and other income from underwriting operations.

(3)

The combined ratio is the sum of the loss ratio and the expense ratio.  A combined ratio under 100% indicates an underwriting profit.  A combined ratio over 100% indicates an underwriting loss.

*

Percentage change is not meaningful.

Premiums

Premiums are earned ratably over the term of the policy, whereas written premiums are reflected on the effective date of the policy.  Almost all commercial lines and homeowners products have annual policies, under which premiums are earned

26


 

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

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

Summary of Premium Revenue

 

 

 

Three Months Ended

June 30,

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

$ Change

 

 

% Change

 

Gross written premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial lines

 

$

30,947

 

 

$

25,600

 

 

$

5,347

 

 

 

20.9

%

Personal lines

 

 

4,034

 

 

 

1,945

 

 

 

2,089

 

 

 

107.4

%

Total

 

$

34,981

 

 

$

27,545

 

 

$

7,436

 

 

 

27.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net written premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial lines

 

$

24,672

 

 

$

21,377

 

 

$

3,295

 

 

 

15.4

%

Personal lines

 

 

3,860

 

 

 

1,688

 

 

 

2,172

 

 

 

128.7

%

Total

 

$

28,532

 

 

$

23,065

 

 

$

5,467

 

 

 

23.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earned premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial lines

 

$

22,188

 

 

$

20,105

 

 

$

2,083

 

 

 

10.4

%

Personal lines

 

 

2,650

 

 

 

1,653

 

 

 

997

 

 

 

60.3

%

Total

 

$

24,838

 

 

$

21,758

 

 

$

3,080

 

 

 

14.2

%

 

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

Commercial lines gross written premiums increased $5.3 million, or 20.9%, to $30.9 million in the second quarter of 2021, as compared to $25.6 million for the second quarter of 2020. The increase was due to $7.1 million of additional gross written premium in the Company’s small business programs during the second quarter of 2021, as compared the second quarter of 2020.  This increase was offset by a $1.8 million reduction of gross written premium in the Company’s hospitality programs during the second quarter of 2021, as compared to the second quarter of 2020.  

Personal lines gross written premiums increased $2.1 million, or 107.4%, to $4.0 million in the second quarter of 2021, as compared to $1.9 million for the same period in 2020.  The increased gross written premiums were due to continued growth in the Company’s low-value dwelling book of business.  

Net written premiums increased $5.5 million, or 23.7%, to $28.5 million for the three months ended June 30, 2021, as compared to $23.1 million for the same period in 2020.  Net written premiums did not increase as much as gross written premiums due to a combination of factors that increased our ceded premium rates.  Our blended ratio of ceded earned premiums to gross earned premiums increased from 16.2% to 17.8% in the second quarters of 2020 and 2021, respectively.  The increase was due to a combination of: 1) a change in the mix of business to more property exposure which has a higher ceding rate; 2) general reinsurance rate increases; 3) we purchased more reinsurance as of January 1, 2021 to reduce our commercial property specific loss retention to $200,000, from $340,000, and we are writing more business in select areas that are mostly ceded under quota share agreements that skew the blended ceded earned premium to gross earned premium ratio.

Other Income

Other income consists primarily of fees charged to policyholders by the Company for services outside of the premium charge, such as installment billings and policy issuance costs.  Commission income is also received by the Company’s insurance agencies for writing policies for third party insurance companies.  Other income for the three months ended June 30, 2021, decreased $47,000, or 6.6%, to $666,000 as compared to $713,000 for the same period in 2020.  The decrease in other income was primarily due to a one-time item in 2020 that did not occur in 2021.  However, revenue in the Agency operations in the second quarter of 2021 continued to grow moderately, compared to the same period in 2020.  

 

Other Gains

Other gains were $8.9 million for the three months ended June 30, 2021, compared to $145,000 for the same period in 2020.  The Company sold a portion of its Agency business during the second quarter of 2021, resulting in an $8.9 million gain.  

27


 

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

Losses and Loss Adjustment Expenses

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

 

Three months ended June 30, 2021

 

Commercial

Lines

 

 

Personal

Lines

 

 

Total

 

Accident year net losses and LAE

 

$

10,754

 

 

$

962

 

 

$

11,716

 

Net (favorable) adverse development

 

 

6,186

 

 

 

24

 

 

 

6,210

 

Calendar year net losses and LAE

 

$

16,940

 

 

$

986

 

 

$

17,926

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accident year loss ratio

 

 

48.4

%

 

 

35.7

%

 

 

47.0

%

Net (favorable) adverse development

 

 

27.8

%

 

 

0.9

%

 

 

24.9

%

Calendar year loss ratio

 

 

76.2

%

 

 

36.6

%

 

 

71.9

%

 

Three months ended June 30, 2020

 

Commercial

Lines

 

 

Personal

Lines

 

 

Total

 

Accident year net losses and LAE

 

$

8,218

 

 

$

690

 

 

$

8,908

 

Net (favorable) adverse development

 

 

3,057

 

 

 

(20

)

 

 

3,037

 

Calendar year net losses and LAE

 

$

11,275

 

 

$

670

 

 

$

11,945

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accident year loss ratio

 

 

40.7

%

 

 

40.8

%

 

 

40.7

%

Net (favorable) adverse development

 

 

15.2

%

 

 

(1.2

)%

 

 

13.9

%

Calendar year loss ratio

 

 

55.9

%

 

 

39.6

%

 

 

54.6

%

 

Net losses and LAE increased by $6.0 million, or 50.1%, to $17.9 million during the second quarter of 2021, compared to $11.9 million for the same period in 2020.  The increase in losses was driven by adverse development that occurred during the second quarter of 2021.  The Company experienced $6.2 million of adverse development for the three months ended June 30, 2021.  Of the $6.2 million in adverse development, $1.9 million was related to 2017 and prior accident years, $2.4 million was related to the 2018 accident year, and $1.9 million was related to the 2019 and 2020 accident years.  Substantially all of the development was from the Company’s commercial lines of business.      

 

The Company's incurred losses during the three months ended June 30, 2020, included adverse prior-year reserve development of $3.0 million. The Commercial lines experienced $3.1 million of unfavorable reserve development mostly attributable to small business lines in 2018 and 2017 and prior accident years, most notably in commercial auto lines.

 

Expense Ratio

Our expense ratio is a measure of the efficiency and performance of the commercial and personal lines of business (our risk-bearing underwriting operations).  It is calculated by dividing the sum of policy acquisition costs and other underwriting expenses by the sum of net earned premiums and other income of the underwriting business.  Costs that cannot be readily identifiable as a direct cost of a segment or product line remain in Corporate for segment reporting purposes.  The expense ratio excludes wholesale agency and Corporate expenses.  

28


 

The table below provides the expense ratio by major component.

 

 

 

Three Months Ended

June 30,

 

 

 

2021

 

 

2020

 

Commercial Lines

 

 

 

 

 

 

 

 

Policy acquisition costs

 

 

28.4

%

 

 

30.3

%

Operating expenses

 

 

12.8

%

 

 

15.5

%

Total

 

 

41.2

%

 

 

45.8

%

Personal Lines

 

 

 

 

 

 

 

 

Policy acquisition costs

 

 

27.5

%

 

 

30.0

%

Operating expenses

 

 

14.5

%

 

 

16.1

%

Total

 

 

42.0

%

 

 

46.1

%

Total Underwriting

 

 

 

 

 

 

 

 

Policy acquisition costs

 

 

28.3

%

 

 

30.3

%

Operating expenses

 

 

13.0

%

 

 

15.6

%

Total

 

 

41.3

%

 

 

45.9

%

 

Our expense ratio decreased by 4.6 percentage points in the second quarter of 2021 as compared to the same period of 2020.  The decrease was largely due to underwriting revenue, which consists of net earned premiums and other underwriting income, increasing by $3.0 million, or 14.0% to $24.9 million for the three months ended June 30, 2021, compared to $21.9 million during the same period in 2020.  

Policy acquisition costs are costs we incur to issue policies, which include commissions, premium taxes, underwriting reports and underwriter compensation costs.  The Company offsets direct commissions with ceded commissions from reinsurers.  For the three months ended June 30, 2021 and 2020, the percentage of policy acquisition costs to net earned premiums and other underwriting income decreased by 2.0 percentage points to 28.3% compared to 30.3%, respectively.  Acquisition costs are lower due to a combination of a change in mix of business with lower average acquisition costs, less expensive fronting arrangements, and more ceding commissions in select areas that are mostly ceded under quota share agreements.  

Operating expenses consist primarily of employee compensation, information technology and occupancy costs, such as rent and utilities.  Operating expenses as a percent of net earned premiums and other underwriting income were 13.0% and 15.6% for the three months ended June 30, 2021 and 2020, respectively.  The operating expense ratio was lower due to our expense reduction efforts, where there has been a real nominal dollar decrease in operating expenses, coupled with net earned premium growth.  

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, 2021 and 2020 (dollars in thousands):

Segment Gain (Loss)

 

 

 

Three Months Ended

June 30,

 

 

 

 

 

 

 

2021

 

 

2020

 

 

$ Change

 

Commercial Lines

 

$

(3,878

)

 

$

(352

)

 

$

(3,526

)

Personal Lines

 

 

577

 

 

 

241

 

 

 

336

 

Total Underwriting

 

 

(3,301

)

 

 

(111

)

 

 

(3,190

)

Wholesale Agency

 

 

(87

)

 

 

(103

)

 

 

16

 

Corporate

 

 

(255

)

 

 

(574

)

 

 

319

 

Eliminations

 

 

(17

)

 

 

60

 

 

 

(77

)

Total segment gain (loss)

 

$

(3,660

)

 

$

(728

)

 

$

(2,932

)

 


29


 

 

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

 

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

 

 

 

Six months ended

June 30,

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

$ Change

 

 

% Change

 

Gross written premiums

 

$

65,354

 

 

$

52,629

 

 

$

12,725

 

 

 

24.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net written premiums

 

$

53,015

 

 

$

44,116

 

 

$

8,899

 

 

 

20.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earned premiums

 

$

47,673

 

 

$

43,775

 

 

$

3,898

 

 

 

8.9

%

Other income

 

 

1,222

 

 

 

1,371

 

 

 

(149

)

 

 

(10.9

)%

Losses and loss adjustment expenses, net

 

 

37,288

 

 

 

26,214

 

 

 

11,074

 

 

 

42.2

%

Policy acquisition costs

 

 

13,646

 

 

 

12,698

 

 

 

948

 

 

 

7.5

%

Operating expenses

 

 

8,691

 

 

 

9,904

 

 

 

(1,213

)

 

 

(12.2

)%

Underwriting gain (loss)

 

 

(10,730

)

 

 

(3,670

)

 

 

(7,060

)

 

 

(192.4

)%

Net investment income

 

 

1,035

 

 

 

1,817

 

 

 

(782

)

 

 

(43.0

)%

Net realized investment gains

 

 

3,984

 

 

 

1,173

 

 

 

2,811

 

 

 

239.6

%

Change in fair value of equity securities

 

 

(1,065

)

 

 

(1,510

)

 

 

445

 

 

*

 

Other gains

 

 

8,910

 

 

 

260

 

 

 

8,650

 

 

*

 

Interest expense

 

 

1,453

 

 

 

1,462

 

 

 

(9

)

 

 

(0.6

)%

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

 

 

681

 

 

 

(3,392

)

 

 

4,073

 

 

*

 

Equity earnings in Affiliate, net of tax

 

 

428

 

 

 

229

 

 

 

199

 

 

*

 

Income tax expense

 

 

193

 

 

 

57

 

 

 

136

 

 

*

 

Net income (loss)

 

$

916

 

 

$

(3,220

)

 

$

4,136

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Book value per common share outstanding

 

$

4.53

 

 

$

4.51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio (1)

 

 

77.9

%

 

 

59.6

%

 

 

 

 

 

 

 

 

Expense ratio (2)

 

 

42.9

%

 

 

46.5

%

 

 

 

 

 

 

 

 

Combined ratio (3)

 

 

120.8

%

 

 

106.1

%

 

 

 

 

 

 

 

 

 

(1)

The loss ratio is the ratio, expressed as a percentage, of net losses and loss adjustment expenses to net earned premiums and other income from underwriting operations.

(2)

The expense ratio is the ratio, expressed as a percentage, of policy acquisition costs and other underwriting expenses to net earned premiums and other income from underwriting operations.

(3)

The combined ratio is the sum of the loss ratio and the expense ratio.  A combined ratio under 100% indicates an underwriting profit.  A combined ratio over 100% indicates an underwriting loss.

*

Percentage change is not meaningful.

Premiums

Premiums are earned ratably over the term of the policy, whereas written premiums are reflected on the effective date of the policy.  Almost all commercial lines and homeowners products have annual policies, under which premiums are earned evenly over one year.  The resulting net earned premiums are impacted by the gross and ceded written premiums, earned ratably over the terms of the policies.


30


 

 

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

 

 

 

Six months ended

June 30,

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

$ Change

 

 

% Change

 

Gross written premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial lines

 

$

58,168

 

 

$

49,044

 

 

$

9,124

 

 

 

18.6

%

Personal lines

 

 

7,186

 

 

 

3,585

 

 

 

3,601

 

 

 

100.4

%

Total

 

$

65,354

 

 

$

52,629

 

 

$

12,725

 

 

 

24.2

%

Net written premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial lines

 

$

46,229

 

 

$

41,064

 

 

$

5,165

 

 

 

12.6

%

Personal lines

 

 

6,786

 

 

 

3,052

 

 

 

3,734

 

 

 

122.3

%

Total

 

$

53,015

 

 

$

44,116

 

 

$

8,899

 

 

 

20.2

%

Net earned premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial lines

 

$

42,894

 

 

$

40,536

 

 

$

2,358

 

 

 

5.8

%

Personal lines

 

 

4,779

 

 

 

3,239

 

 

 

1,540

 

 

 

47.5

%

Total

 

$

47,673

 

 

$

43,775

 

 

$

3,898

 

 

 

8.9

%

 

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

Commercial lines gross written premiums increased $9.1 million, or 18.6%, to $58.2 million for the six months ended June 30, 2021, as compared to $49.0 million for the same period in 2020.  There was a $12.2 million increase in the small business programs particularly in areas we have seen the most profitability.  This was offset by a $2.8 million, or 48.9%, decrease in our quick service restaurant line which has seen some of the larger losses within the hospitality lines of business.

The increase was due to $12.3 million of additional gross written premium in the Company’s small business programs during the six months ended June 30, 2021, as compared to the same period in 2020.  This increase was offset by a reduction in gross written premium of $3.1 million in the Company’s hospitality programs during the six months ended June 30, 2021, as compared to the same period in 2020.    

Personal lines gross written premiums increased $3.6 million, or 100.4%, to $7.2 million for the six months ended June 30, 2021, as compared to $3.6 million for the same period in 2020.  The increased gross written premiums were due to continued growth in the Company’s low-value dwelling book of business.  

Net written premiums increased $8.9 million, or 20.2%, to $53.0 million for the six months ended June 30, 2021, as compared to $44.1 million for the same period in 2020.  Net written premiums did not increase as much as gross written premiums due to a combination of factors that increased our ceded premium rates.  Our blended ratio of ceded earned premiums to gross earned premiums increased from 15.8% to 18.5% in six months ended June 30, 2020 and 2021, respectively.  

The increase in the ceded earned premium to gross earned premium ratio was due to a number of factors.  There was a $1.1 million increase in gross earned premiums relating to additional premiums generated from a commercial umbrella liability program that is almost entirely ceded under a quota share agreement. This increased the ratio by 1.3 percentage points.  However, we also received a ceding commission from this business that has reduced our acquisition costs.  There was also $201,000 more reinstatement costs on catastrophe reinsurance in the first six months of 2021 as compared to the same period in 2020, which increased the ratio by 30 basis points.  The additional reinstatement costs were due to Winter Storm Uri during the first quarter of 2021.  The remainder of the increase was due to a combination of: 1) a change in the mix of business to more property exposure which has a higher ceding rate; 2) general reinsurance rate increases; and 3) we purchased more reinsurance as of January 1, 2021 to reduce our commercial property specific loss retention to only $200,000, from $340,000.

 

Other Income

Other income consists primarily of fees charged to policyholders by the Company for services outside of the premium charge, such as installment billings and policy issuance costs.  Commission income is also received by the Company’s insurance agencies for writing policies for third party insurance companies.  Other income for the six months ended June 30, 2021, decreased $149,000, or 10.9%, to $1.2 million, as compared to $1.4 million for the same period in 2020.  The decrease in other income was primarily due to a one-time item in 2020 that did not occur in 2021.  However, revenue in the Agency operations for the six months ended June 30, 2021 continued to grow moderately, compared to the same period in 2020.  


31


 

 

Other Gains

Other gains were $8.9 million for the six months ended June 30, 2021, compared to $260,000 for the same period in 2020.  The Company sold a portion of its Agency business during the second quarter of 2021, resulting in an $8.9 million gain.  The $260,000 gain for the six months ended June 30, 2020 was due to the repurchase of 36,761 units of the Notes at a discount to face value.  

Losses and Loss Adjustment Expenses

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

 

Six months ended June 30, 2021

 

Commercial

Lines

 

 

Personal

Lines

 

 

Total

 

Accident year net losses and LAE

 

$

22,543

 

 

$

2,757

 

 

$

25,300

 

Net (favorable) adverse development

 

 

11,352

 

 

 

636

 

 

 

11,988

 

Calendar year net losses and LAE

 

$

33,895

 

 

$

3,393

 

 

$

37,288

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accident year loss ratio

 

 

52.4

%

 

 

56.7

%

 

 

52.9

%

Net (favorable) adverse development

 

 

26.4

%

 

 

13.1

%

 

 

25.0

%

Calendar year loss ratio

 

 

78.8

%

 

 

69.8

%

 

 

77.9

%

 

Six months ended June 30, 2020

 

Commercial

Lines

 

 

Personal

Lines

 

 

Total

 

Accident year net losses and LAE

 

$

17,996

 

 

$

1,432

 

 

$

19,428

 

Net (favorable) adverse development

 

 

6,740

 

 

 

46

 

 

 

6,786

 

Calendar year net losses and LAE

 

$

24,736

 

 

$

1,478

 

 

$

26,214

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accident year loss ratio

 

 

44.2

%

 

 

43.2

%

 

 

44.2

%

Net (favorable) adverse development

 

 

16.6

%

 

 

1.4

%

 

 

15.4

%

Calendar year loss ratio

 

 

60.8

%

 

 

44.6

%

 

 

59.6

%

 

Net losses and LAE increased by $11.1 million, or 42.2%, to $37.3 million for the six months ended June 30, 2021, compared to $26.2 million for the same period in 2020.  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.  Of the $12.0 million in adverse development, $11.4 million was related to commercial lines, while $636,000 was related to personal lines.  The adverse development was mostly attributable to the 2018 and 2017 and prior accident years.  

 

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

development of $6.8 million. The Commercial lines experienced $6.7 million of unfavorable reserve development for the six

months ended June 30, 2020. Of the $6.7 million in adverse development experienced in commercial lines, $5.6 million was

incurred in our hospitality programs, while $1.1 million was experienced in our small business programs. The adverse development was mostly attributable to the 2018 and 2017 and prior accident years.

 

Expense Ratio

Our expense ratio is a measure of the efficiency and performance of the commercial and personal lines of business (our risk-bearing underwriting operations).  It is calculated by dividing the sum of policy acquisition costs and other underwriting expenses by the sum of net earned premiums and other income of the underwriting business.  Costs that cannot be readily identifiable as a direct cost of a segment or product line remain in Corporate for segment reporting purposes.  The expense ratio excludes wholesale agency and Corporate expenses.  

 


32


 

 

The table below provides the expense ratio by major component.

 

 

 

Six months ended

June 30,

 

 

 

2021

 

 

2020

 

Commercial Lines

 

 

 

 

 

 

 

 

Policy acquisition costs

 

 

29.4

%

 

 

30.2

%

Operating expenses

 

 

13.5

%

 

 

16.3

%

Total

 

 

42.9

%

 

 

46.5

%

Personal Lines

 

 

 

 

 

 

 

 

Policy acquisition costs

 

 

27.6

%

 

 

30.1

%

Operating expenses

 

 

15.2

%

 

 

16.5

%

Total

 

 

42.8

%

 

 

46.6

%

Total Underwriting

 

 

 

 

 

 

 

 

Policy acquisition costs

 

 

29.2

%

 

 

30.2

%

Operating expenses

 

 

13.7

%

 

 

16.3

%

Total

 

 

42.9

%

 

 

46.5

%

 

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

Policy acquisition costs are costs we incur to issue policies, which include commissions, premium taxes, underwriting reports and underwriter compensation costs.  The Company offsets direct commissions with ceded commissions from reinsurers.  For the six months ended June 30, 2021 and 2020, the percentage of policy acquisition costs to net earned premiums and other underwriting income decreased by 1.0 percentage points to 29.2% compared to 30.2%, respectively.  Acquisition costs are lower due to a combination of a change in mix of business with lower average acquisition costs, less expensive fronting arrangements, and more ceding commissions in select areas that are mostly ceded under quota share agreements.  

Operating expenses consist primarily of employee compensation, information technology and occupancy costs, such as rent and utilities.  Operating expenses as a percent of net earned premiums and other underwriting income were 13.7% and 16.3% for the six months ended June 30, 2021 and 2020, respectively.  The operating expense ratio was lower due to our expense reduction efforts.  The operating expense ratio was lower due to our expense reduction efforts, where there has been a real nominal dollar decrease in operating expenses, coupled with net earned premium growth.  

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, 2021 and 2020 (dollars in thousands):

Segment Gain (Loss)

 

 

 

Six months ended

June 30,

 

 

 

 

 

 

 

2021

 

 

2020

 

 

$ Change

 

Commercial Lines

 

$

(9,344

)

 

$

(2,975

)

 

$

(6,369

)

Personal Lines

 

 

(610

)

 

 

291

 

 

 

(901

)

Total Underwriting

 

 

(9,954

)

 

 

(2,684

)

 

 

(7,270

)

Wholesale Agency

 

 

(232

)

 

 

(282

)

 

 

50

 

Corporate

 

 

(513

)

 

 

(905

)

 

 

392

 

Eliminations

 

 

(31

)

 

 

201

 

 

 

(232

)

Total segment gain (loss)

 

$

(10,730

)

 

$

(3,670

)

 

$

(7,060

)

 


33


 

 

Liquidity and Capital Resources

Sources and Uses of Funds

At June 30, 2021, we had $16.1 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.

We conduct our business operations primarily through our Insurance Company Subsidiaries.  Our ability to service debt, and pay administrative expenses is primarily reliant upon our intercompany service fees paid by the Insurance Company Subsidiaries to the Parent Company for management, administrative, and information technology services provided to the Insurance Company Subsidiaries by the Parent Company. Secondarily, the Parent Company may receive dividends from the Insurance Company Subsidiaries; however, this is not the primary means in which the Parent Company supports its funding as state insurance laws restrict the ability of our Insurance Company Subsidiaries to declare dividends to the Parent Company.  There were no dividends paid from our Insurance Company Subsidiaries during the six months ended June 30, 2021 and 2020.

Cash Flows

Operating Activities. Cash used in operating activities for the six months ended June 30, 2021, was $4.5 million, compared to $4.6 million used for the same period in 2020.   There was $8.7 million more premiums collected, net of reinsurance costs, in 2021, compared to 2020, as we continue to increase gross written premiums.  This was offset by $5.1 million more claim payments made in 2021, net of reinsurance recovered (in part due to Winter Storm Uri), $2.8 million more acquisition costs paid in 2021, compared to 2020, as gross written premiums increased.  Investment income decreased by $782,000 for the six months ended June 30, 2021, as compared to the same period in 2020, due to lower yields on the bond portfolio.  

Investing Activities.  Cash provided by investing activities for the six months ended June 30, 2021, was $4.9 million, as compared to $861,000 of cash used in investing activities for the same period in 2020.  The $5.8 million increase in cash provided by investing activities was driven by a reduction in the purchases of investments in the first six months of 2021, compared to the same period in 2020.  There was a significant repositioning of the Company’s portfolio during the six months of 2020 from the COVID-19 pandemic, which caused an increase in the purchases of investments.  

Financing Activities.  Cash used in financing activities for the six months ended June 30, 2021, was $4.0 million, compared to $2.8 million of cash provided by financing activities for the same period in 2020.  The $6.8 million decrease in cash provided by financing activities was mostly due to the Company paying down a net amount of $4.0 million of its outstanding balance on its line of credit during the first six months of 2021.

 

Statutory Capital and Surplus

Our Insurance Company Subsidiaries are required to file quarterly and annual financial reports with state insurance regulators.  These financial reports are prepared using statutory accounting practices promulgated by the Insurance Company Subsidiaries’ state of domiciliary, rather than GAAP.  The Insurance Company Subsidiaries’ aggregate statutory capital and surplus (which is a statutory measure of equity) was $62.5 million and $64.1 million at June 30, 2021 and December 31, 2020, respectively.

 


34


 

 

Non-GAAP Financial Measures

Adjusted Operating Income and Adjusted Operating Income Per Share

Adjusted operating income and adjusted operating income per share are non-GAAP measures that represent net income allocable to common shareholders excluding net realized investment gains or losses, changes in fair value of equity securities, and other gains or losses; all net of tax.  The most directly comparable financial GAAP measures to adjusted operating income and adjusted operating income per share are net income and net income per share, respectively.  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.  Our definition of adjusted operating income may be different from that used by other companies.  The following is a reconciliation of net income (loss) to adjusted operating income (loss) (dollars in thousands), as well as net income (loss) per share to adjusted operating income (loss) per share:

 

 

 

Three Months Ended

June 30,

 

 

Six months ended

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net income (loss)

 

$

5,552

 

 

$

1,505

 

 

$

916

 

 

$

(3,220

)

Exclude:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized investment gains and other gains, net of tax

 

 

9,970

 

 

 

390

 

 

 

12,894

 

 

 

1,433

 

Change in fair value of equity securities, net of tax

 

 

(525

)

 

 

1,576

 

 

 

(1,065

)

 

 

(1,510

)

Adjusted operating income (loss)

 

$

(3,893

)

 

$

(461

)

 

$

(10,913

)

 

$

(3,143

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares diluted

 

 

9,686,631

 

 

 

9,595,668

 

 

 

9,684,193

 

 

 

9,594,221

 

Diluted income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

0.57

 

 

$

0.16

 

 

$

0.09

 

 

$

(0.34

)

Exclude:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized investment gains and other gains, net of tax

 

 

1.03

 

 

 

0.04

 

 

 

1.33

 

 

 

0.15

 

Change in fair value of equity securities, net of tax

 

 

(0.06

)

 

 

0.16

 

 

 

(0.11

)

 

 

(0.16

)

Adjusted operating income (loss) per share

 

$

(0.40

)

 

$

(0.04

)

 

$

(1.13

)

 

$

(0.33

)

 

We use adjusted operating income and adjusted operating income per share to assess our performance and to evaluate the results of our overall business.  We believe these measures provide investors with valuable information relating to our ongoing performance that may be obscured by the net effect of realized gains and losses as a result of our market risk sensitive instruments, which primarily relate to debt securities that are available for sale and not held for trading purposes.  The change in fair value of equity securities and realized gains and losses may vary significantly between periods and are generally driven by external economic developments, such as capital market conditions. Accordingly, adjusted operating income excludes the effect of items that tend to be highly variable from period to period and highlights the results from our ongoing business operations and the underlying results of our business.  We believe that it is useful for investors to evaluate adjusted operating income and adjusted operating income per share, along with net income and net income per share, when reviewing and evaluating our performance.

Recently Issued Accounting Pronouncements

Refer to Note 1 ~ Summary of Significant Accounting Policies – Recently Issued Accounting Guidance of the Notes to the Consolidated Financial Statements for detailed information regarding recently issued accounting pronouncements.

 


35


 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in market rates and prices such as interest rates, other relevant market rates or price changes. The volatility and liquidity in the markets in which the underlying assets are traded directly influence market risk. The following is a discussion of our primary market risk exposures and how those exposures are currently managed as of June 30, 2021. Our market risk sensitive instruments are primarily related to fixed income securities, which are available-for-sale and not held for trading purposes.

Interest Rate Risk

At June 30, 2021, the fair value of our investment portfolio, excluding cash and cash equivalents, was $180.6 million. Our investment portfolio consists principally of investment-grade, fixed-income securities, all of which are classified as available for sale. Accordingly, the primary market risk exposure to our debt securities is interest rate risk. In general, the fair market value of a portfolio of debt securities increases or decreases inversely with changes in market interest rates, while net investment income realized from future investments in debt securities increases or decreases along with interest rates. We attempt to mitigate interest rate risks by investing in securities with varied maturity dates and by managing the duration of our investment portfolio to a defined range of three to four years.  The effective duration of our portfolio as of June 30, 2021 and December 31, 2020 was 3.7 and 3.6 years, respectively.

The table below illustrates the sensitivity of the fair value of our debt investments, classified as debt securities and short-term investments, to selected hypothetical changes in interest rates as of June 30, 2021.  The selected scenarios are not predictions of future events, but rather illustrate the effect that events may have on the fair value of the debt portfolio and shareholders’ equity (dollars in thousands).

 

 

 

 

 

 

 

Estimated

 

 

Hypothetical Percentage

Increase (Decrease) in

 

Hypothetical Change in Interest Rates

 

Estimated

 

 

Change in

 

 

 

 

 

 

Shareholders'

 

As of June 30, 2021

 

Fair Value

 

 

Fair Value

 

 

Fair Value

 

 

Equity

 

200 basis point increase

 

$

148,624

 

 

$

(11,999

)

 

 

(7.47

)%

 

 

(27.34

)%

100 basis point increase

 

 

154,535

 

 

 

(6,088

)

 

 

(3.79

)%

 

 

(13.87

)%

No change

 

 

160,623

 

 

 

 

 

 

 

 

 

 

100 basis point decrease

 

 

164,542

 

 

 

3,919

 

 

 

2.44

%

 

 

8.93

%

200 basis point decrease

 

 

166,181

 

 

 

5,558

 

 

 

3.46

%

 

 

12.66

%

 

Credit Risk

An additional exposure to our debt securities portfolio is credit risk. We manage our credit risk by investing only in investment-grade securities. In addition, we comply with applicable statutory requirements, which limit the portion of our total investment portfolio that we can invest in any one security.

We are subject to credit risks with respect to our reinsurers. Although a reinsurer is liable for losses to the extent of the coverage which it assumes, our reinsurance contracts do not discharge our insurance companies from primary liability to each policyholder for the full amount of the applicable policy, and consequently our insurance companies remain obligated to pay claims in accordance with the terms of the policies regardless of whether a reinsurer fulfills or defaults on its obligations under the related reinsurance agreement. To mitigate our credit risk to reinsurance companies, we attempt to select financially strong reinsurers with an A.M. Best rating of “A-” or better and continue to evaluate their financial condition throughout the duration of our agreements.

At June 30, 2021, the net amount due to the Company from reinsurers, including prepaid reinsurance premiums, was $31.1 million.  We believe all amounts recorded as due from reinsurers are recoverable.

Effects of Inflation

We do not believe that inflation has a material effect on our results of operations, except for the effect that inflation may have on interest rates and claims costs. We consider the effects of inflation in pricing and estimating reserves for unpaid losses and LAE. The actual effects of inflation on our results are not known until claims are ultimately settled. In addition to general price inflation, we are exposed to a long-term upward trend in the cost of judicial awards for damages.


36


 

 

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

 

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of June 30, 2021. Based on such evaluations, the Chief Executive Officer and Chief Financial Officer have concluded the Company’s disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, and that information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

For the three months ended June 30, 2021, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that have materially affected, or are reasonable likely to materially affect the Company's internal control over financial reporting.

37


 

PART II - OTHER INFORMATION

The information required by this item is included under Note 13 ~ Commitments and Contingencies of the Notes to the Consolidated Financial Statements of the Company’s Form 10-Q for the six months ended June 30, 2021, which is hereby incorporated by reference.

ITEM 1A. RISK FACTORS

 

There were no material changes to the risk factors disclosed in our Annual Report on Form 10-K (“Item 1A Risk Factors”) filed with the SEC on March 11, 2021.  

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.   

38


 

ITEM 6.  EXHIBITS

 

 

 

 

 

Incorporated by Reference

Exhibit

Number

 

Exhibit Description

 

Form

 

Period

Ending

 

Exhibit /

Appendix

Number

 

Filing Date

 

 

 

 

 

 

 

 

 

 

 

10.27

 

Amendment to Promissory Note dated as of June 18, 2021 between the company and the Huntington National Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.28

 

Fifth Amendment to Credit Agreement dated as of June 18, 2021 between the company and the Huntington National Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31.1

 

Section 302 Certification — CEO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31.2

 

Section 302 Certification — CFO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32.1*

 

Section 906 Certification — CEO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32.2*

 

Section 906 Certification — CFO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.INS

 

inline XBRL Instance Document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.SCH

 

inline XBRL Taxonomy Extension Schema Document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.CAL

 

inline XBRL Taxonomy Extension Calculation Linkbase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.DEF

 

inline XBRL Taxonomy Extension Definition Linkbase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.LAB

 

inline XBRL Taxonomy Extension Label Linkbase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.PRE

 

inline XBRL Taxonomy Extension Presentation Linkbase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

104

 

Cover Page Interactive Date File (embedded within the Inline XBRL document)

 

 

 

 

 

 

 

 

 

*

This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

39


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

CONIFER HOLDINGS, INC.

 

 

 

 

By:

/s/ Harold J. Meloche

 

 

Harold J. Meloche

 

 

Chief Financial Officer,

 

 

Principal Financial Officer,

 

 

Principal Accounting Officer

 

Dated: August 11, 2021

40