UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the Quarterly Period Ended
OR
For the transition period from to
Commission file number
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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(Zip code) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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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.
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).
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 ☐ |
Smaller reporting company |
Emerging growth company |
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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 November 10, 2023, was
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Form 10-Q
INDEX
2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
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September 30, |
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December 31, |
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(Unaudited) |
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Assets |
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Investment securities: |
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Debt securities, at fair value (amortized cost of $ |
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$ |
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$ |
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Equity securities, at fair value (cost of $ |
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Short-term investments, at fair value |
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Total investments |
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Cash and cash equivalents |
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Premiums and agents' balances receivable, net |
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Receivable from Affiliate |
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Reinsurance recoverables on unpaid losses |
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Reinsurance recoverables on paid losses |
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Prepaid reinsurance premiums |
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Deferred policy acquisition costs |
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Other assets |
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Total assets |
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$ |
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$ |
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Liabilities and Shareholders' Equity |
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Liabilities: |
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Unpaid losses and loss adjustment expenses |
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$ |
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$ |
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Unearned premiums |
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Reinsurance premiums payable |
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Debt |
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Funds held under reinsurance agreements |
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Accounts payable and accrued expenses |
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Total liabilities |
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Shareholders' equity: |
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Common stock, |
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Accumulated deficit |
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( |
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( |
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Accumulated other comprehensive income (loss) |
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( |
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( |
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Total shareholders' equity |
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Total liabilities and shareholders' equity |
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$ |
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$ |
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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)
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Three Months Ended |
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Nine Months Ended |
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2023 |
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2022 |
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2023 |
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2022 |
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Revenue and Other Income |
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Premiums |
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Gross earned premiums |
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$ |
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$ |
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$ |
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Ceded earned premiums |
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( |
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( |
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( |
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( |
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Net earned premiums |
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Net investment income |
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Net realized investment gains (losses) |
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( |
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Change in fair value of equity securities |
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( |
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Gain from sale of renewal rights |
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Other gains (losses) |
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Other income |
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Total revenue and other income |
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Expenses |
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Losses and loss adjustment expenses, net |
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Policy acquisition costs |
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Operating expenses |
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Interest expense |
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Total expenses |
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Income (loss) before equity earnings in Affiliate and income taxes |
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( |
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( |
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( |
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Equity earnings (loss) in Affiliate, net of tax |
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( |
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Income tax expense (benefit) |
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( |
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Net income (loss) |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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Earnings (loss) per common share, basic and diluted |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Weighted average common shares outstanding, basic and diluted |
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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)
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Three Months Ended |
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Nine Months Ended September 30, |
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2023 |
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2022 |
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2023 |
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2022 |
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Net income (loss) |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Other comprehensive income (loss), net of tax: |
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Unrealized investment gains (losses): |
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Unrealized investment gains (losses) during the period |
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( |
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( |
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( |
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Income tax (benefit) expense |
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Unrealized investment gains (losses), net of tax |
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( |
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( |
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( |
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( |
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Less: reclassification adjustments to: |
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Net realized investment gains (losses) included in net income (loss) |
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Income tax (benefit) expense |
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Total reclassifications included in net income (loss), net of tax |
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Other comprehensive income (loss) |
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( |
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( |
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( |
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( |
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Total comprehensive income (loss) |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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The accompanying notes are an integral part of the Consolidated Financial Statements.
5
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
(dollars in thousands)
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No Par, Common Stock |
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Accumulated |
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Accumulated |
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Total |
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Shares |
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Amount |
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Deficit |
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Income (Loss) |
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Equity |
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Balances at June 30, 2023 |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Net income (loss) |
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— |
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— |
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( |
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— |
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( |
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Stock-based compensation expense |
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— |
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— |
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— |
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Other comprehensive income (loss) |
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— |
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— |
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— |
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( |
) |
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( |
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Balances at September 30, 2023 |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Balances at June 30, 2022 |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Net income (loss) |
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— |
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— |
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( |
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— |
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( |
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Issuance of common stock private placement |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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Other comprehensive income (loss) |
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— |
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— |
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— |
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( |
) |
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( |
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Balances at September 30, 2022 |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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No Par, Common Stock |
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Accumulated |
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Accumulated |
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Total |
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Shares |
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Amount |
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Deficit |
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Income (Loss) |
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Equity |
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Balances at December 31, 2022 |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Net income (loss) |
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— |
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— |
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( |
) |
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— |
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( |
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Repurchase of common stock |
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( |
) |
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( |
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— |
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— |
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( |
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Issuance of common stock private placement |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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Other comprehensive income (loss) |
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— |
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— |
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— |
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( |
) |
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( |
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Balances at September 30, 2023 |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Balances at December 31, 2021 |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Net income (loss) |
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— |
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— |
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( |
) |
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— |
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( |
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Repurchase of common stock |
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( |
) |
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— |
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— |
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Issuance of common stock private placement |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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Other comprehensive income (loss) |
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— |
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— |
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— |
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( |
) |
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( |
) |
Balances at September 30, 2022 |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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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)
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Nine Months Ended September 30, |
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2023 |
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2022 |
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Cash Flows From Operating Activities |
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Net income (loss) |
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$ |
( |
) |
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$ |
( |
) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
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Proceeds from sale of renewal rights |
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( |
) |
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— |
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Depreciation and amortization |
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Amortization of bond premium and discount, net |
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( |
) |
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Net realized investment (gains) losses |
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— |
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Change in fair value of equity securities |
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( |
) |
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( |
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Stock-based compensation expenses |
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Equity loss (earnings) in Affiliate, net of tax |
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( |
) |
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Other (gains) losses |
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— |
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Changes in operating assets and liabilities: |
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(Increase) decrease in: |
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Premiums and agents' balances and other receivables |
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( |
) |
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( |
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Reinsurance recoverables |
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( |
) |
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Prepaid reinsurance premiums |
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( |
) |
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( |
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Deferred policy acquisition costs |
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Other assets |
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( |
) |
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Increase (decrease) in: |
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Unpaid losses and loss adjustment expenses |
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( |
) |
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Unearned premiums |
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Reinsurance premiums payable |
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( |
) |
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Accounts payable and other liabilities |
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( |
) |
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Net cash provided by (used in) operating activities |
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( |
) |
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( |
) |
Cash Flows From Investing Activities |
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Purchase of investments |
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( |
) |
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( |
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Proceeds from maturities and redemptions of investments |
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Proceeds from sales of investments |
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Proceeds from sale of renewal rights |
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— |
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Obligation to SSU |
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( |
) |
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— |
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Net cash provided by (used in) investing activities |
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( |
) |
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Cash Flows From Financing Activities |
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Proceeds from issuance of common stock |
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— |
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Proceeds from issuance of long-term debt |
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— |
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Repurchase of common stock |
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( |
) |
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Borrowings under line of credit |
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— |
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|
Borrowings under Federal Home Loan Bank of Indianapolis |
|
|
— |
|
|
|
|
|
Repayment of long-term debt |
|
|
( |
) |
|
|
— |
|
Repayment of borrowings under debt arrangements |
|
|
— |
|
|
|
( |
) |
Debt issuance costs |
|
|
( |
) |
|
|
— |
|
Net cash provided by (used in) financing activities |
|
|
( |
) |
|
|
|
|
Net increase (decrease) in cash |
|
|
( |
) |
|
|
|
|
Cash at beginning of period |
|
|
|
|
|
|
||
Cash at end of period |
|
$ |
|
|
$ |
|
||
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
||
Interest paid |
|
$ |
|
|
$ |
|
||
Income taxes paid (refunded), net |
|
|
( |
) |
|
|
( |
) |
Non cash debt activity see Note 8 ~ Debt |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
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"), Conifer Insurance Services ("CIS") formerly known as Sycamore Insurance Agency, Inc. ("Sycamore"), and VSRM, Inc. ("VSRM"). 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." VSRM owns a
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, 2022, as filed with the SEC.
The results of operations for the nine months ended September 30, 2023, are not necessarily indicative of the results expected for the year ended December 31, 2023.
Business
The Company is engaged in the sale of property and casualty insurance products and has organized its principal operations into
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.
Recently Adopted Accounting Pronouncements
Effective January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which introduces a new process for recognizing credit losses on financial instruments based on expected credit losses. This new standard replaces the incurred loss methodology and the concept of Other-than-Temporary Impairment (or “OTTI”) with an expected credit loss methodology that is sometimes referred to as the Current Expected Credit Loss (CECL) methodology. The guidance applies to Conifer's reinsurance
8
recoverables, premium receivable, and debt securities. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. The adoption of ASC 326 did not have a material impact on the Company's financial statements.
Among other updates which management deems to have no material impact, ASC 326 made changes to the accounting for available-for-sale debt securities. At each quarter-end, for available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through earnings.
For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Recently Issued Accounting Guidance
In January 2021, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848). This guidance provides optional expedients and exceptions that are intended to ease the burden of updating contracts to contain a new reference rate due to the discontinuation of the London Inter-Bank Offered Rate (LIBOR). This guidance is available immediately and may be implemented in any period prior to the guidance expiration on December 31, 2024. Management does not expect the new guidance to have a material impact on the Company’s consolidated financial statements.
Liquidity and Management's Plans
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 holding company for management, administrative, and information technology services provided to the Insurance Company Subsidiaries by the Parent Company. The Parent Company may receive dividends from the Insurance Company Subsidiaries; however, this is not the primary means in which the holding company supports its funding as state insurance laws restrict the ability of our Insurance Company Subsidiaries to declare dividends to the Parent Company. Parent Company is required to pay certain intercompany obligations before December 31, 2023.
In September 2023, the Company repaid its $
Management is anticipating there will be a current potential cash short fall over the next several months. To alleviate any concern as to whether the Company will have enough funds to satisfy its near term obligations, a member of the Company’s board of directors has pledged to fund up to $
As a result of this additional capital commitment, management believes that the Parent Company will have adequate cash flow to fund operations, service debt and fund its other obligations going forward through at least November 2024.
2. Sale of Renewal Rights
In September 2023, the Company sold the renewal rights of one of its insurance programs to another insurer for $
9
2023. The buyer began writing new and renewal policies for this program as of September 15, 2023. Under a related 100% quota share reinsurance agreement, the Company also ceded $
3. Investments
Results for reporting periods occurring before January 1, 2023 continue to be reported in accordance with previously applicable U.S. GAAP and note presented under ASC 326, which was adopted by the Company on January 1, 2023. The Company analyzed its investment portfolio in accordance with its credit loss review policy and determined it did not need to record a credit loss for the three and nine months ended September 30, 2023. The Company holds only investment grade securities from high credit quality issuers. The gross unrealized losses of $
The cost or amortized cost, gross unrealized gains or losses, and estimated fair value of the investments in securities classified as available for sale at September 30, 2023 and December 31, 2022 were as follows (dollars in thousands):
|
|
September 30, 2023 |
|
|||||||||||||
|
|
Cost or |
|
|
Gross Unrealized |
|
|
Estimated |
|
|||||||
|
|
Amortized Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
||||
Debt Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. Government |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
State and local government |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Corporate debt |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Asset-backed securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Total debt securities available for sale |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
|
|
December 31, 2022 |
|
|||||||||||||
|
|
Cost or |
|
|
Gross Unrealized |
|
|
Estimated |
|
|||||||
|
|
Amortized Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
||||
Debt Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. Government |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
State and local government |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Corporate debt |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Asset-backed securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Total debt securities available for sale |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
10
The following table summarizes the aggregate fair value and gross unrealized losses, by security type, of the available-for-sale securities in unrealized loss positions. The table segregates the holdings based on the length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands):
|
|
September 30, 2023 |
|
|||||||||||||||||||||||||||||||||
|
|
Less than 12 months |
|
|
Greater than 12 months |
|
|
Total |
|
|||||||||||||||||||||||||||
|
|
No. of |
|
|
Fair Value of |
|
|
Gross |
|
|
No. of |
|
|
Fair Value of |
|
|
Gross |
|
|
No. of |
|
|
Fair Value of |
|
|
Gross |
|
|||||||||
Debt Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
U.S. Government |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
|
|
|
$ |
|
|
$ |
( |
) |
||||||
State and local government |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||||||
Corporate debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|||||||
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|||||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||||||
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|||||||
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|||||||
Total debt securities available for sale |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
|
|
|
$ |
|
|
$ |
( |
) |
||||||
|
|
December 31, 2022 |
|
|||||||||||||||||||||||||||||||||
|
|
Less than 12 months |
|
|
Greater than 12 months |
|
|
Total |
|
|||||||||||||||||||||||||||
|
|
No. of |
|
|
Fair Value of |
|
|
Gross |
|
|
No. of |
|
|
Fair Value of |
|
|
Gross |
|
|
No. of |
|
|
Fair Value of |
|
|
Gross |
|
|||||||||
Debt Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
U.S. Government |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
|
|
|
$ |
|
|
$ |
( |
) |
||||||
State and local government |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||||||
Corporate debt |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||||||
Asset-backed securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||||||
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||||||
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||||||
Total debt securities available for sale |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
|
|
|
$ |
|
|
$ |
( |
) |
||||||
11
The Company’s sources of net investment income and losses are as follows (dollars in thousands):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Debt securities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash, cash equivalents and short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total investment income |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Investment expenses |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net investment income |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
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 |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross realized gains |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Gross realized losses |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Total debt securities |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross realized gains |
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
||||
Gross realized losses |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Total equity securities |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Total net realized investment gains (losses) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|||
Proceeds from available-for-sale debt securities were $
There were
As of September 30, 2023 and 2022, there were $
The Company's gross unrealized gains related to its equity investments were $
12
The table below summarizes the amortized cost and fair value of available-for-sale debt securities by contractual maturity at September 30, 2023. 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 |
|
|
Estimated |
|
||
Due in one year or less |
|
$ |
|
|
$ |
|
||
Due after one year through five years |
|
|
|
|
|
|
||
Due after five years through ten years |
|
|
|
|
|
|
||
Due after ten years |
|
|
|
|
|
|
||
Securities with contractual maturities |
|
|
|
|
|
|
||
Asset-backed securities |
|
|
|
|
|
|
||
Mortgage-backed securities |
|
|
|
|
|
|
||
Commercial mortgage-backed securities |
|
|
|
|
|
|
||
Collateralized mortgage obligations |
|
|
|
|
|
|
||
Total debt securities |
|
$ |
|
|
$ |
|
||
At September 30, 2023 and December 31, 2022, the Insurance Company Subsidiaries had $
13
4. Fair Value Measurements
The Company’s financial instruments include assets carried at fair value, as well as debt carried at face value, net of unamortized debt issuance costs, and are disclosed at fair value in this note. All fair values disclosed in this note are determined on a recurring basis other than the debt which is a non-recurring fair value measure. Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principal 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.
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 and mutual funds 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.
The following tables present the Company’s assets and liabilities measured at fair value, classified by the valuation hierarchy as of September 30, 2023 and December 31, 2022 (dollars in thousands):
|
|
September 30, 2023 |
|
|||||||||||||
|
|
Fair Value Measurements |
|
|||||||||||||
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Debt Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. Government |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
State and local government |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Corporate debt |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equity Securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total marketable investments measured at fair value |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Investments measured at NAV: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Investment in limited partnership |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total assets measured at fair value |
|
$ |
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Senior unsecured notes * |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Senior secured notes * |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Liabilities (non-recurring fair value measure) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
* Carried at face value of debt net of unamortized debt issuance costs on the consolidated balance sheets
14
|
|
December 31, 2022 |
|
|||||||||||||
|
|
Fair Value Measurements |
|
|||||||||||||
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Debt Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. Government |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
State and local government |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Corporate debt |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total marketable investments measured at fair value |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Investments measured at NAV: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Investment in limited partnership |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total assets measured at fair value |
|
$ |
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Senior unsecured notes * |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Subordinated notes * |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Liabilities (non-recurring fair value measure) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
* 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
Level 2 investments include debt securities and equity 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
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.
As of September 30, 2023, the fair value of the senior secured notes was $
As of December 31, 2022, the fair value of the subordinated debt reported at amortized cost was considered a Level 3 liability in the fair value hierarchy and is entirely comprised of the Company's Subordinated Notes. In determining the fair
15
value of the Subordinated Notes at December 31, 2022, the security attributes (issue date, maturity, coupon, calls, etc.) and market rates on September 24, 2018 (the date of the restated and amended agreement which was repriced at that time) were entered into a valuation model. A lognormal trinomial interest rate lattice was created within the model to compute the option adjusted spread (“OAS”) which is the amount, in basis points, of interest rate required to be paid under the debt agreement over the risk-free U.S. Treasury rates. The OAS was then entered back into the model along with the December 31, 2022 U.S. Treasury rates, respectively. A new lattice was generated and the fair value was computed from the OAS. There were no changes in assumptions of credit risk from the issuance date.
The Company's policy on recognizing transfers between hierarchies is applied at the end of each reporting period. There were
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 nine months ended September 30, 2023 and 2022.
|
|
Three Months Ended |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Balance at beginning of period |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Deferred policy acquisition costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amortization of policy acquisition costs |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Impact from renewal rights sale |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Net change |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Balance at end of period |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
6
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 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.
16
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 |
|
|
Nine months ended |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Gross reserves - beginning of period |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Less: reinsurance recoverables on unpaid losses |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net reserves - beginning of period |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Add: incurred losses and LAE, net of reinsurance: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Current period |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Prior period |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total net incurred losses and LAE |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Deduct: loss and LAE payments, net of reinsurance: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Current period |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Prior period |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total net loss and LAE payments |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net reserves - end of period |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Plus: reinsurance recoverables on unpaid losses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross reserves - end of period |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Net losses and LAE increased by $
The Company’s incurred losses during the three and nine months ended September 30, 2023 included prior-year adverse reserve development of $
The Company’s incurred losses during the three and nine months ended September 30, 2022 included prior-year adverse reserve development of $
Of the $
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 ceded primarily all specific commercial liability risks in excess of $
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.
17
Reinsurance does not discharge the direct insurer from liability to its policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors the concentration of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. To date, the Company has not experienced any significant difficulties in collecting reinsurance recoverables.
The Company assumes written premiums under a few fronting arrangements. The fronting arrangements are with unaffiliated insurers who write on behalf of the Company in markets that require a higher A.M. Best rating than the Company’s current rating, where the policies are written in a state where the Company is not licensed or for other strategic reasons.
On September 30, 2023, the Company entered into a 100% quota share reinsurance agreement with the buyer of the renewal rights described in Note 2 ~ Sale of Renewal Rights. The Company ceded $
On November 1, 2022, the Company entered into a loss portfolio transfer (“LPT”) reinsurance agreement with Fleming Reinsurance Ltd (“Fleming Re”). Under the agreement, Fleming Re will cover an aggregate limit of $
As of September 30, 2023, the Company has recorded losses through the $
As of September 30, 2023, the Consolidated Balance Sheet included $
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 |
|
|
Nine months ended |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Written premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Direct |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Assumed |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Ceded |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net written premiums |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Earned premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Direct |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Assumed |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Ceded |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net earned premiums |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Losses and LAE: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Direct |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Assumed |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Ceded |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Net Losses and LAE |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
18
Ceded losses and LAE for the three and nine months ended September 30, 2023, were negative due to a reduction in ceded IBNR during 2023.
8. Debt
As of September 30, 2023, the Company's debt is comprised of two instruments: $
|
|
As of September 30, 2023 |
|
|
As of December 31, 2022 |
|
||||||||||||||||||
|
|
Gross Debt |
|
|
Unamortized |
|
|
Net Debt |
|
|
Gross Debt |
|
|
Unamortized |
|
|
Net Debt |
|
||||||
Senior unsecured notes |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Senior secured notes |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|||
Subordinated notes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Note extinguishment and new issuance
The Company extinguished all $
In August and September of 2023, the Company raised $
Non-cash Exchange: The Company also raised $
Senior unsecured notes
The Company issued $
Senior secured notes
The Company paid down $
The Company incurred $
As of September 30, 2023, the carrying value of the new notes and the senior secured notes are offset by $
The senior secured 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
19
capital ratios. As of September 30, 2023, the Company was in compliance with all of its financial covenants. The senior secured notes also require that any net proceeds the Company receives from asset sales be used to pay down the principal.
The following table shows the scheduled principal payments of the Company's debt as of September 30, 2023 (dollars in thousands):
Year |
|
Senior unsecured notes |
|
|
Senior secured notes |
|
||
2023 |
|
$ |
|
|
$ |
— |
|
|
2024 |
|
|
|
|
|
— |
|
|
2025 |
|
|
|
|
|
— |
|
|
2026 |
|
|
|
|
|
— |
|
|
2027 |
|
|
|
|
|
— |
|
|
2028 |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
9
On August 10, 2022, the Company issued $
For the three months ended September 30, 2023 and 2022, the Company had
As of September 30, 2023 and December 31, 2022, the Company had
10
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.
|
|
Three Months Ended |
|
|
Nine months ended |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Net income (loss) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average common shares, basic and diluted * |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings (loss) per common share, basic and diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
*
11. Stock-based Compensation
On March 8, 2022, the Company issued options to purchase
20
On June 30, 2020, the Company issued options to purchase
In 2016 and 2018, the Company issued
The Company recorded $
The Company recorded $
12. Commitments and Contingencies
Legal proceedings
The Company and its subsidiaries are subject at times to various claims, lawsuits and proceedings relating principally to alleged errors or omissions in the placement of insurance, claims administration, and other business transactions arising in the ordinary course of business. Where appropriate, the Company vigorously defends such claims, lawsuits and proceedings. Some of these claims, lawsuits and proceedings seek damages, including consequential, exemplary or punitive damages, in amounts that could, if awarded, be significant. Most of the claims, lawsuits and proceedings arising in the ordinary course of business are covered by the insurance policy at issue. We account for such activity through the establishment of unpaid losses and LAE reserves. In accordance with accounting guidance, if it is probable that a liability has been incurred as of the date of the financial statements and the amount of loss is reasonably estimable; then an accrual for the costs to resolve these claims is recorded by the Company in the accompanying consolidated financial statements. Periodic expenses related to the defense of such claims are included in the accompanying consolidated statements of operations. On the basis of current information, the Company does not believe that there is a reasonable possibility that any material loss exceeding amounts already accrued, if any, will result from any of the claims, lawsuits and proceedings to which the Company is subject to, either individually or in the aggregate.
13. Segment Information
The Company is engaged in the sale of property and casualty insurance products and has organized its business model around
The Company defines its operating segments as components of the business where separate financial information is available and used by the co-chief operating decision makers in deciding how to allocate resources to its segments and in assessing its performance. In assessing performance of its operating segments, the Company’s co-chief operating decision makers, the Co-Chief Executive Officers, review a number of financial measures including gross written premiums, net earned premiums, losses and LAE, net of reinsurance recoveries, and other revenue and expenses. The primary measure used for making decisions about resources to be allocated to an operating segment and assessing its performance is segment underwriting gain or loss which is defined as segment revenues, consisting of net earned premiums and other income, less segment expenses, consisting of losses and LAE, policy acquisition costs and operating expenses of the operating segments. Operating expenses primarily include compensation and related benefits for personnel, policy issuance and claims systems, rent and utilities. The Company markets, distributes and sells its insurance products through its own insurance agencies and a network of independent agents. All of the Company’s insurance activities are conducted in the United States with a concentration of activity in Michigan, Texas, Oklahoma and California. For the nine months ended September 30, 2023 and
21
2022, gross written premiums attributable to these four states were
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.
22
The following tables present information by reportable operating segment (dollars in thousands):
Three months ended |
|
Commercial Lines |
|
|
Personal |
|
|
Total |
|
|
Wholesale |
|
|
Corporate |
|
|
Eliminations |
|
|
Total |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Gross written premiums |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net written premiums |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net earned premiums |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||||
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
Segment revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Losses and LAE, net |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Policy acquisition costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
|||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||||
Segment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Segment gain (loss) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
Investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Change in fair value of equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||||
Gain from sale of renewal rights |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Other gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|||||
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||||
Income (loss) before equity earnings in Affiliate and income taxes |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
||
Three months ended |
|
Commercial |
|
|
Personal |
|
|
Total |
|
|
Wholesale |
|
|
Corporate |
|
|
Eliminations |
|
|
Total |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Gross written premiums |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net written premiums |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net earned premiums |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||||
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
Segment revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Losses and LAE, net |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Policy acquisition costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
|||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||||
Segment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Segment gain (loss) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
Investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Change in fair value of equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||||
Other gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||||
Income (loss) before equity earnings in Affiliate and income taxes |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
23
Nine months ended |
|
Commercial |
|
|
Personal |
|
|
Total |
|
|
Wholesale |
|
|
Corporate |
|
|
Eliminations |
|
|
Total |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Gross written premiums |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net written premiums |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net earned premiums |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||||
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
Segment revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Losses and LAE, net |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Policy acquisition costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
|||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||||
Segment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Segment gain (loss) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
Investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Change in fair value of equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Gain from sale of renewal rights |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Other gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|||||
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||||
Income (loss) before equity earnings in Affiliate and income taxes |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
||
Nine months ended |
|
Commercial |
|
|
Personal |
|
|
Total |
|
|
Wholesale |
|
|
Corporate |
|
|
Eliminations |
|
|
Total |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Gross written premiums |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net written premiums |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net earned premiums |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||||
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
Segment revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Losses and LAE, net |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Policy acquisition costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
|||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||||
Segment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Segment gain (loss) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
Investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net realized investment gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||||
Change in fair value of equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Other gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||||
Income (loss) before equity earnings in Affiliate and income taxes |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
24
14. Subsequent Events
The Company performed an evaluation of subsequent events through the date the financial statements were issued and determined there were no recognized or unrecognized subsequent events that would require an adjustment or additional disclosure in the condensed consolidated financial statements as of September 30, 2023.
25
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Periods Ended September 30, 2023 and 2022
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 27, 2023 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 27, 2023 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
Sale of Renewal Rights
In September 2023, the Company sold the renewal rights of one of its insurance programs to another insurer for $2.5 million in cash. The program provided mostly liability insurance to the security guard and alarm installation industries. This program produced $41.0 million of gross earned premiums in 2022 and $41.4 million for the nine months ended September 30, 2023. The buyer began writing new and renewal policies for this program as of September 15, 2023. Under a related 100% quota share reinsurance agreement, the Company also ceded $30.9 million of its gross unearned premium in the program to the buyer on September 30, 2023, net of a 27% ceding commission. The Company retained the $22.6 million of the net cash owed to the buyer under a funds withheld provision within the agreement which increased the funds held under reinsurance agreements on the Consolidated Balance Sheets as of September 30. 2023. The Company incurred $135,000 in expense related to this transaction. As part of this transaction, five claims staff transferred employment to the buyer. The buyer will handle all of the Company’s run-off claims for this program under a related claims administration agreement. The buyer also participated in the Company’s issuance of new public debt by purchasing $5.0 million of the new debt.
The Company recognized a net gain of $2.3 million, which is reflected in Gain from sale of renewal rights on the Consolidated Statements of Operations.
Debt Restructuring
The Company extinguished all of the $24.4 million of public notes that matured on September 30, 2023. The Company funded this through a combination of newly issued public notes as well as exchanging the maturing notes for new notes. The Company also restructured its $10.5 million subordinated under a new amended and restated agreement in which the Company paid down $500,000 of the outstanding debt, changed the priority to a senior secured position, and changed the maturity from September 30, 2038, to September 30, 2028. There is also a new provision requiring $250,000 quarterly principal payments with the remainder due upon maturity and a requirement that net proceeds from any asset sales be applied against the principal balance of the senior secured notes. See Note 8 ~ Debt for further details.
VSRM Transaction
Prior to October 13, 2022, Sycamore owned 50% of Venture Agency Holdings, Inc. ("Venture") and has accounted for its ownership under the equity method of accounting. On October 13, 2022, Sycamore purchased the other 50% of Venture from an individual for $9.7 million. Following this purchase, Sycamore owned 100% of Venture, which was then renamed to
26
VSRM, Inc. ("VSRM"). VRSM and its two wholly owned subsidiaries, The Roots Insurance Agency, Inc. ("Roots") and Mitzel Insurance Agency, Inc. ("Mitzel") were incorporated into the Company's consolidated financial statements as of the date of the acquisition.
The Company recognized Sycamore's purchase of the individual's shares of VSRM as a step acquisition and revalued all assets and liabilities upon the acquisition date.
On October 14, 2022, VSRM sold all of its security guard and alarm installation insurance brokerage business (the "Security & Alarm Business") to a third party insurance brokerage firm for $38.2 million. As part of the transaction, the individual who previously owned 50% of VSRM transitioned employment to the buyer, along with a team of approximately eight other employees of VSRM. The Company recognized this transaction as the sale of a business.
On December 30, 2022, VSRM contributed its remaining business, including its two wholly owned subsidiaries (Mitzel and Roots) to a new wholly owned subsidiary, Sycamore Specialty Underwriters, LLC ("SSU"). The business contributed to SSU consisted of 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 VSRM produced for third-party insurers, other than the security guard and alarm installation brokerage business previously sold.
On December 31, 2022, Andrew D. Petcoff purchased 50% of SSU from VSRM, Inc. for $1,000. As a result, SSU and its two wholly owned subsidiaries, Roots and Mitzel, are no longer consolidated in the Company's consolidated financial statements as of December 31, 2022, and VSRM's investment in SSU is accounted for using the equity method.
Loss Portfolio Transfer
On November 1, 2022, the Company entered into a loss portfolio transfer (“LPT”) reinsurance agreement with Fleming Reinsurance Ltd (“Fleming Re”). Under the agreement, Fleming Re covers an aggregate limit of $66.3 million of paid losses on $40.8 million of stated net reserves as of June 30, 2022, relating to accident years 2019 and prior. This covers substantially all of the commercial liability lines underwritten by the Company. Within the aggregate limit, there is a $5.5 million loss corridor in which the Company retains losses in excess of $40.8 million. Fleming Re is then responsible to cover paid losses in excess of $46.3 million up to $66.3 million. Accordingly, there is $20.0 million of adverse development cover for accident years 2019 and prior. Under the agreement, Fleming Re was paid $40.8 million for stated net reserves as of June 30, 2022, plus a one-time risk fee of $5.4 million. Recoverables due to the Company under this agreement are recorded as reinsurance recoverables. The agreement is between CIC and WPIC and Fleming Re.
As of September 30, 2023, the Company has recorded losses through the $5.5 million corridor and $4.5 million into the $20.0 million layer. As of December 31, 2022, the Company recorded losses through the $5.5 million corridor and $644,000 into the $20.0 million layer.
The Company paid $25.0 million in cash on October 14, 2022, which was offset for claims paid through September 30, 2022 and $13.6 million of funds withheld.
A.M. Best
On April 21, 2022, A.M. Best downgraded the Company’s Long-Term Issuer Credit Rating (Long-Term ICR) from “bb” (Fair) to “bb-” (Fair), and downgraded the Company’s insurance subsidiaries Financial Strength Rating from “B++” (Good) to “B+” (Good) and the Long-Term ICR from “bbb” (Good) to “bbb-” (Good). The outlook assigned to all these ratings by A.M. Best was Stable. We do not believe the rating changes will have a material effect on our business.
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 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 in three insurance businesses: commercial insurance lines, personal lines, and agency business. Together, the commercial and personal lines refer to “underwriting” operations that take insurance risk, and the agency business refers to non-risk insurance business.
27
Through our commercial insurance 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 lines, we offer homeowners insurance and dwelling fire insurance products 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.
Through our wholesale agency business segment, we offer commercial and personal lines insurance products for our Insurance Company Subsidiaries as well as a small number of third-party insurers. The wholesale agency business segment provides our agents with more insurance product options.
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 operations will not be affected by accounting adjustments needed to reflect changes in these estimates and assumptions. During the nine months ended September 30, 2023, 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 27, 2023.
Executive Overview
The Company reported $38.5 million of gross written premiums in the third quarter of 2023, representing a 16.5% increase as compared to the same period in 2022. Our commercial lines gross written premiums increased by $857,000, or 3.1%, to $28.5 million in the third quarter of 2023, compared to $27.6 million for the same period in 2022. Personal lines gross written premiums increased by $4.6 million, or 84.4%, to $10.1 million in the third quarter of 2023, compared to $5.5 million for the same period in 2022.
The Company reported $119.4 million of gross written premiums for the nine months ended September 30, 2023, compared to $103.5 million for the same period in 2022.
The Company reported a net loss of $2.7 million, or $0.22 per share, and a net loss of $6.4 million, or $0.53 per share, for the three and nine months ended September 30, 2023, respectively. The Company reported a net loss of $1.5 million, or $0.14 per share, and a net loss of $12.8 million, or $1.26 per share, for the three and nine months ended September 30, 2022, respectively.
Adjusted operating loss per share is a non-GAAP measure that represent net loss allocable to common shareholders excluding net realized investment gains or losses, other gains or losses, and changes in fair value of equity securities; all net of tax. Adjusted operating loss was $5.0 million, or $0.41 per share, for the three months ended September 30, 2023. Adjusted operating loss was $9.4 million, or $0.77 per share, for the nine months ended September 30, 2023. Adjusted operating loss was $1.4 million, or $0.13 per share, for the three months ended September 30, 2022. Adjusted operating loss was $11.8 million, or $1.16 per share for the nine months ended September 30, 2022.
Our underwriting combined ratio was 120.8% and 114.1% for the three and nine months ended September 30, 2023, compared to 106.5% and 116.0% for the three and nine months ended September 30, 2022.
28
Results of Operations For The Three Months Ended September 30, 2023 and 2022
The following table summarizes our operating results for the periods indicated (dollars in thousands):
Summary of Operating Results
|
|
Three Months Ended |
|
|
|
|
|
|
|
|||||||
|
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
||||
Gross written premiums |
|
$ |
38,548 |
|
|
$ |
33,088 |
|
|
$ |
5,460 |
|
|
|
16.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net written premiums |
|
$ |
5,689 |
|
|
$ |
23,693 |
|
|
$ |
(18,004 |
) |
|
|
(76.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net earned premiums |
|
$ |
23,979 |
|
|
$ |
24,958 |
|
|
$ |
(979 |
) |
|
|
(3.9 |
)% |
Other income |
|
|
439 |
|
|
|
603 |
|
|
|
(164 |
) |
|
|
(27.2 |
%) |
Losses and loss adjustment expenses, net |
|
|
20,911 |
|
|
|
16,671 |
|
|
|
4,240 |
|
|
|
25.4 |
% |
Policy acquisition costs |
|
|
4,725 |
|
|
|
6,230 |
|
|
|
(1,505 |
) |
|
|
(24.2 |
)% |
Operating expenses |
|
|
4,403 |
|
|
|
4,380 |
|
|
|
23 |
|
|
|
0.5 |
% |
Underwriting gain (loss) |
|
|
(5,621 |
) |
|
|
(1,720 |
) |
|
|
(3,901 |
) |
|
* |
|
|
Net investment income |
|
|
1,450 |
|
|
|
860 |
|
|
|
590 |
|
|
|
68.6 |
% |
Change in fair value of equity securities |
|
|
(87 |
) |
|
|
(151 |
) |
|
|
64 |
|
|
|
42.4 |
% |
Gain from sale of renewal rights |
|
|
2,335 |
|
|
|
— |
|
|
|
2,335 |
|
|
* |
|
|
Other gains (losses) |
|
|
— |
|
|
|
66 |
|
|
|
(66 |
) |
|
* |
|
|
Interest expense |
|
|
855 |
|
|
|
778 |
|
|
|
77 |
|
|
|
9.9 |
% |
Income (loss) before equity earnings in Affiliate, net of tax |
|
|
(2,778 |
) |
|
|
(1,723 |
) |
|
|
(1,055 |
) |
|
* |
|
|
Equity earnings (loss) in Affiliate, net of tax |
|
|
72 |
|
|
|
199 |
|
|
|
(127 |
) |
|
* |
|
|
Income tax expense |
|
|
— |
|
|
|
(1 |
) |
|
|
1 |
|
|
* |
|
|
Net income (loss) |
|
$ |
(2,706 |
) |
|
$ |
(1,523 |
) |
|
$ |
(1,183 |
) |
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Book value per common share outstanding |
|
$ |
0.96 |
|
|
$ |
1.32 |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Underwriting Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loss ratio (1) |
|
|
86.9 |
% |
|
|
66.6 |
% |
|
|
|
|
|
|
||
Expense ratio (2) |
|
|
33.9 |
% |
|
|
39.9 |
% |
|
|
|
|
|
|
||
Combined ratio (3) |
|
|
120.8 |
% |
|
|
106.5 |
% |
|
|
|
|
|
|
||
* 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.
29
Our premiums are presented below for the three months ended September 30, 2023 and 2022 (dollars in thousands):
Summary of Premium Revenue
|
|
Three Months Ended |
|
|
|
|
|
|
|
|||||||
|
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
||||
Gross written premiums |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commercial lines |
|
$ |
28,492 |
|
|
$ |
27,635 |
|
|
$ |
857 |
|
|
|
3.1 |
% |
Personal lines |
|
|
10,056 |
|
|
|
5,453 |
|
|
|
4,603 |
|
|
|
84.4 |
% |
Total |
|
$ |
38,548 |
|
|
$ |
33,088 |
|
|
$ |
5,460 |
|
|
|
16.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net written premiums |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commercial lines |
|
$ |
(3,155 |
) |
|
$ |
18,730 |
|
|
$ |
(21,885 |
) |
|
|
(116.8 |
)% |
Personal lines |
|
|
8,844 |
|
|
|
4,963 |
|
|
|
3,881 |
|
|
|
78.2 |
% |
Total |
|
$ |
5,689 |
|
|
$ |
23,693 |
|
|
$ |
(18,004 |
) |
|
|
(76.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net earned premiums |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commercial lines |
|
$ |
17,315 |
|
|
$ |
20,789 |
|
|
$ |
(3,474 |
) |
|
|
(16.7 |
)% |
Personal lines |
|
|
6,664 |
|
|
|
4,169 |
|
|
|
2,495 |
|
|
|
59.8 |
% |
Total |
|
$ |
23,979 |
|
|
$ |
24,958 |
|
|
$ |
(979 |
) |
|
|
(3.9 |
)% |
Gross written premiums increased $5.5 million, or 16.5%, to $38.5 million for the three months ended September 30, 2023, as compared to $33.1 million for the same period in 2022.
Commercial lines gross written premiums increased $857,000, or 3.1%, to $28.5 million in the third quarter of 2023, as compared to $27.6 million for the third quarter of 2022. The increased gross written premiums were due to $2.0 million of quarter-over-quarter premium growth in the Company's small business programs. This increase was offset by a $1.1 million quarter-over-quarter decrease in the Company's hospitality programs.
Personal lines gross written premiums increased $4.6 million, or 84.4%, to $10.1 million in the third quarter of 2023, as compared to $5.5 million for the same period in 2022. The increase was due to the organic growth in the low-value dwelling book of business in Texas and Oklahoma.
Net written premiums decreased $18.0 million, or 76.0%, to $5.7 million for the three months ended September 30, 2023, as compared to $23.7 million for the same period in 2022. As part of the renewal rights sale, the Company ceded to the buyer 100% of its gross unearned premium, or $30.9 million, related to its security guard and alarm installation program as of September 30, 2023. There was $12.3 million of previously ceded written premium relating to other reinsurance treaties that was reversed this quarter so that 100% of the unearned premiums could be ceded to the buyer. As a result, the Company's ceded written premiums increased by $18.6 million during the quarter relating to the renewal rights sale.
Net written premiums in commercial lines, before the impact of the renewal rights transaction, was $15.5 million, or a $3.3 million decrease. This decrease was due, in part, to a 50% quota share reinsurance agreement, effective January 1, 2023 that applies to a subset of our commercial business that represents approximately 10.4% of our gross written premiums in the third quarter of 2023. The Company ceded $1.7 million of written premium related to this quota share reinsurance agreement during the third quarter of 2023. Additional reductions in net written premiums were largely due to increases in reinsurance rates in 2023 as compared to 2022.
Net written premiums in personal lines grew commensurate with the gross written premiums, offset by slightly higher reinsurance rates.
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 agency for writing policies for third-party insurance companies. Other income decreased by $164,000, or 27.2%, to $439,000 for the three months ended September 30, 2023, compared to $603,000 for the same period in 2022. The decrease was due to the Company's Wholesale Agency business revenue decreasing by $204,000, or 25.7%, to $589,000 for three months ended September 30, 2023, compared to $793,000 for the same period in 2022. A majority of the decrease in Wholesale Agency revenue was because of the business contributed to SSU, which was then deconsolidated as of December 31, 2022, and thus not reflected in the Company's consolidated income.
30
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 September 30, 2023 and 2022 (dollars in thousands):
Three months ended September 30, 2023 |
|
Commercial |
|
|
Personal |
|
|
Total |
|
|||
Accident year net losses and LAE |
|
$ |
11,380 |
|
|
$ |
5,901 |
|
|
$ |
17,281 |
|
Net (favorable) adverse development |
|
|
4,044 |
|
|
|
(414 |
) |
|
|
3,630 |
|
Calendar year net losses and LAE |
|
$ |
15,424 |
|
|
$ |
5,487 |
|
|
$ |
20,911 |
|
|
|
|
|
|
|
|
|
|
|
|||
Accident year loss ratio |
|
|
65.5 |
% |
|
|
88.3 |
% |
|
|
71.9 |
% |
Net (favorable) adverse development |
|
|
23.3 |
% |
|
|
(6.3 |
)% |
|
|
15.0 |
% |
Calendar year loss ratio |
|
|
88.8 |
% |
|
|
82.0 |
% |
|
|
86.9 |
% |
Three months ended September 30, 2022 |
|
Commercial |
|
|
Personal |
|
|
Total |
|
|||
Accident year net losses and LAE |
|
$ |
10,599 |
|
|
$ |
2,942 |
|
|
$ |
13,541 |
|
Net (favorable) adverse development |
|
|
2,749 |
|
|
|
381 |
|
|
|
3,130 |
|
Calendar year net losses and LAE |
|
$ |
13,348 |
|
|
$ |
3,323 |
|
|
$ |
16,671 |
|
|
|
|
|
|
|
|
|
|
|
|||
Accident year loss ratio |
|
|
50.8 |
% |
|
|
70.1 |
% |
|
|
54.0 |
% |
Net (favorable) adverse development |
|
|
13.2 |
% |
|
|
9.1 |
% |
|
|
12.6 |
% |
Calendar year loss ratio |
|
|
64.0 |
% |
|
|
79.2 |
% |
|
|
66.6 |
% |
Net losses and LAE increased by $4.2 million, or 25.4%, to $20.9 million during the third quarter of 2023, compared to $16.7 million for the same period in 2022. The increase was attributable to a $3.7 million increase in current accident year losses during the third quarter of 2023, compared to the same period in 2022. There was $2.5 million of additional homeowners loss emergence in the third quarter related to the second quarter storm activity.
The Company’s incurred losses during the three and nine months ended September 30, 2023 included prior-year adverse reserve development of $3.6 million and $2.9 million, respectively. For the quarter, the Company recognized $4.0 million of reserve development in the commercial liability lines of business relating to accident years 2020 through 2022, offset by $414,000 of favorable development in the personal lines segment. For the nine months ended September 30, 2023, the Company recognized $4.1 million of adverse development in the commercial liability lines of business, related to accident years 2020 through 2022, offset by $1.2 million of favorable development in the personal lines segment.
Net losses and LAE were $16.7 million during the third quarter of 2022. Of the $3.1 million of adverse development that occurred for the three months ended September 30, 2022, $2.3 million was related to 2019 and prior accident years and $1.8 million was related to the 2021 accident year. This was offset by $958,000 of favorable development experienced in the 2020 accident year. Of the $3.1 million of adverse development, $2.7 million was related to the commercial lines of business, while $381,000 was related to the personal lines of business.
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.
31
The table below provides the expense ratio by major component.
|
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Commercial Lines |
|
|
|
|
|
|
||
Policy acquisition costs |
|
|
14.8 |
% |
|
|
23.8 |
% |
Operating expenses |
|
|
16.9 |
% |
|
|
15.8 |
% |
Total |
|
|
31.7 |
% |
|
|
39.6 |
% |
Personal Lines |
|
|
|
|
|
|
||
Policy acquisition costs |
|
|
27.1 |
% |
|
|
28.9 |
% |
Operating expenses |
|
|
12.6 |
% |
|
|
12.4 |
% |
Total |
|
|
39.7 |
% |
|
|
41.3 |
% |
Total Underwriting |
|
|
|
|
|
|
||
Policy acquisition costs |
|
|
18.2 |
% |
|
|
24.6 |
% |
Operating expenses |
|
|
15.7 |
% |
|
|
15.3 |
% |
Total |
|
|
33.9 |
% |
|
|
39.9 |
% |
Our expense ratio decreased by 6.0% during the third quarter of 2023, compared to the same period in 2022.
Policy acquisition costs are costs we incur to issue policies, which include commissions, premium taxes, underwriting reports and underwriter compensation costs. The Company offsets direct commissions with ceding commissions from reinsurers. The percentage of policy acquisition costs to net earned premiums and other income decreased by 6.4%, from 24.6% in the third quarter of 2022, to 18.2% for the same period in 2023. The decrease was primarily related to additional ceding commissions, which reduces commission expense, as a result of the new quota share reinsurance treaty mentioned above.
Operating expenses consist primarily of employee compensation, information technology and occupancy costs, such as rent and utilities. Operating expenses as a percent of net earned premiums and other underwriting income increased by 0.4% during the third quarter of 2023 to 15.7%, compared to 15.3% for the same period in 2022. The main reason for the increase was due to a combination of some higher non-recurring expenses and lower net earned premiums as a result of the increased reinsurance costs.
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 September 30, 2023 and 2022 (dollars in thousands):
Segment Gain (Loss)
|
|
Three Months Ended |
|
|
|
|
||||||
|
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|||
Commercial Lines |
|
$ |
(3,559 |
) |
|
$ |
(749 |
) |
|
$ |
(2,810 |
) |
Personal Lines |
|
|
(1,457 |
) |
|
|
(861 |
) |
|
|
(596 |
) |
Total Underwriting |
|
|
(5,016 |
) |
|
|
(1,610 |
) |
|
|
(3,406 |
) |
Wholesale Agency |
|
|
(327 |
) |
|
|
50 |
|
|
|
(377 |
) |
Corporate |
|
|
(296 |
) |
|
|
(206 |
) |
|
|
(90 |
) |
Eliminations |
|
|
18 |
|
|
|
46 |
|
|
|
(28 |
) |
Total segment gain (loss) |
|
$ |
(5,621 |
) |
|
$ |
(1,720 |
) |
|
$ |
(3,901 |
) |
32
Results of Operations For The Nine Months Ended September 30, 2023 and 2022
The following table summarizes our operating results for the periods indicated (dollars in thousands):
|
|
Nine months ended |
|
|
|
|
|
|
|
|||||||
|
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
||||
Gross written premiums |
|
$ |
119,436 |
|
|
$ |
103,470 |
|
|
$ |
15,966 |
|
|
|
15.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net written premiums |
|
$ |
53,359 |
|
|
$ |
68,980 |
|
|
$ |
(15,621 |
) |
|
|
(22.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net earned premiums |
|
$ |
69,114 |
|
|
$ |
73,489 |
|
|
$ |
(4,375 |
) |
|
|
(6.0 |
)% |
Other income |
|
|
1,463 |
|
|
|
1,964 |
|
|
|
(501 |
) |
|
|
(25.5 |
)% |
Losses and loss adjustment expenses, net |
|
|
53,943 |
|
|
|
56,940 |
|
|
|
(2,997 |
) |
|
|
(5.3 |
)% |
Policy acquisition costs |
|
|
13,859 |
|
|
|
17,419 |
|
|
|
(3,560 |
) |
|
|
(20.4 |
)% |
Operating expenses |
|
|
13,796 |
|
|
|
13,010 |
|
|
|
786 |
|
|
|
6.0 |
% |
Underwriting gain (loss) |
|
|
(11,021 |
) |
|
|
(11,916 |
) |
|
|
895 |
|
|
|
7.5 |
% |
Net investment income |
|
|
4,111 |
|
|
|
1,931 |
|
|
|
2,180 |
|
|
|
112.9 |
% |
Net realized investment gains (losses) |
|
|
— |
|
|
|
(1,505 |
) |
|
|
1,505 |
|
|
* |
|
|
Change in fair value of equity securities |
|
|
595 |
|
|
|
446 |
|
|
|
149 |
|
|
|
33.4 |
% |
Gain from sale of renewal rights |
|
|
2,335 |
|
|
|
— |
|
|
|
2,335 |
|
|
* |
|
|
Other gains (losses) |
|
|
— |
|
|
|
60 |
|
|
|
(60 |
) |
|
* |
|
|
Interest expense |
|
|
2,361 |
|
|
|
2,216 |
|
|
|
145 |
|
|
|
6.5 |
% |
Income (loss) before equity earnings in Affiliate and income taxes |
|
|
(6,341 |
) |
|
|
(13,200 |
) |
|
|
6,859 |
|
|
* |
|
|
Equity earnings (loss) in Affiliate, net of tax |
|
|
(103 |
) |
|
|
368 |
|
|
|
(471 |
) |
|
* |
|
|
Income tax expense |
|
|
— |
|
|
|
(40 |
) |
|
|
40 |
|
|
* |
|
|
Net income (loss) |
|
$ |
(6,444 |
) |
|
$ |
(12,792 |
) |
|
$ |
6,348 |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Book value per common share outstanding |
|
$ |
0.96 |
|
|
$ |
1.32 |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Underwriting Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loss ratio (1) |
|
|
77.8 |
% |
|
|
77.2 |
% |
|
|
|
|
|
|
||
Expense ratio (2) |
|
|
36.3 |
% |
|
|
38.8 |
% |
|
|
|
|
|
|
||
Combined ratio (3) |
|
|
114.1 |
% |
|
|
116.0 |
% |
|
|
|
|
|
|
||
* 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.
33
Our premiums are presented below for the nine months ended September 30, 2023 and 2022 (dollars in thousands):
|
|
Nine months ended |
|
|
|
|
|
|
|
|||||||
|
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
||||
Gross written premiums |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commercial lines |
|
$ |
92,228 |
|
|
$ |
88,297 |
|
|
$ |
3,931 |
|
|
|
4.5 |
% |
Personal lines |
|
|
27,208 |
|
|
|
15,173 |
|
|
|
12,035 |
|
|
|
79.3 |
% |
Total |
|
$ |
119,436 |
|
|
$ |
103,470 |
|
|
$ |
15,966 |
|
|
|
15.4 |
% |
Net written premiums |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commercial lines |
|
$ |
29,571 |
|
|
$ |
55,456 |
|
|
$ |
(25,885 |
) |
|
|
(46.7 |
)% |
Personal lines |
|
|
23,788 |
|
|
|
13,524 |
|
|
|
10,264 |
|
|
|
75.9 |
% |
Total |
|
$ |
53,359 |
|
|
$ |
68,980 |
|
|
$ |
(15,621 |
) |
|
|
(22.6 |
)% |
Net earned premiums |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commercial lines |
|
$ |
51,925 |
|
|
$ |
62,097 |
|
|
$ |
(10,172 |
) |
|
|
(16.4 |
)% |
Personal lines |
|
|
17,189 |
|
|
|
11,392 |
|
|
|
5,797 |
|
|
|
50.9 |
% |
Total |
|
$ |
69,114 |
|
|
$ |
73,489 |
|
|
$ |
(4,375 |
) |
|
|
(6.0 |
)% |
Gross written premiums increased $16.0 million, or 15.4%, to $119.4 million for the nine months ended September 30, 2023, as compared to $103.5 million for the same period in 2022.
Commercial lines gross written premiums increased $3.9 million, or 4.5%, to $92.2 million for the nine months ended September 30, 2023, as compared to $88.3 million in the same period of 2022. The increase was due to $8.3 million of premium growth in the Company’s small business programs, partially offset by a $4.4 million reduction of gross written premium in the Company’s hospitality programs.
Personal lines gross written premiums increased $12.0 million, or 79.3%, to $27.2 million for the nine months ended September 30, 2023, as compared to $15.2 million for the same period in 2022. The increased gross written premiums were due to $7.0 million of premium growth in the Company’s low-value dwelling book of business.
Net written premiums decreased $15.6 million, or 22.6%, to $53.4 million for the nine months ended September 30, 2023, as compared to $69.0 million for the same period in 2022. The Company's gross unearned premium related to its security guard and alarm program was $30.9 million as of September 30, 2023. As part of the Core Specialty transaction, the Company ceded 100% of its gross unearned premium related to its security guard and alarm book of business to Core Specialty as of September 30, 2023. This increased the Company's net ceded written premium by $18.6 million in its commercial lines of business for the nine months ended September 30, 2023. Commercial lines net written premiums further decreased due to more ceded premiums as a result of a higher reinsurance cost and the Company entered into a new quota share reinsurance agreement, effective January 1, 2023. The new 50% quota share treaty applies to a subset of our commercial business that represents approximately 11.0% of our gross written premiums for the nine months ended September 30, 2023. The Company ceded $8.7 million of written premium related to this quota share reinsurance agreement for the nine months ended September 30, 2023.
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 agency for writing policies for third-party insurance companies. Other income decreased by $501,000, or 25.5%, to $1.5 million, for the nine months ended September 30, 2023, compared to $2.0 million for the same period in 2022. The decrease was due to the Company's Wholesale Agency business revenue decreasing by $907,000, or 30.6%, to $2.1 million for the nine months ended September 30, 2023, compared to $3.0 million for the same period in 2022. A majority of the decrease in Wholesale Agency revenue was because of the business contributed to SSU, which was then deconsolidated as of December 31, 2022, and thus not reflected in the Company's consolidated income.
34
Losses and Loss Adjustment Expenses
The tables below detail our losses and loss adjustment expenses and loss ratios in our underwriting business for the nine months ended September 30, 2023 and 2022(dollars in thousands).
Nine months ended September 30, 2023 |
|
Commercial |
|
|
Personal |
|
|
Total |
|
|||
Accident year net losses and LAE |
|
$ |
35,455 |
|
|
$ |
15,549 |
|
|
$ |
51,004 |
|
Net (favorable) adverse development |
|
|
4,113 |
|
|
|
(1,174 |
) |
|
|
2,939 |
|
Calendar year net losses and LAE |
|
$ |
39,568 |
|
|
$ |
14,375 |
|
|
$ |
53,943 |
|
|
|
|
|
|
|
|
|
|
|
|||
Accident year loss ratio |
|
|
68.1 |
% |
|
|
90.1 |
% |
|
|
73.6 |
% |
Net (favorable) adverse development |
|
|
7.9 |
% |
|
|
(6.8 |
)% |
|
|
4.2 |
% |
Calendar year loss ratio |
|
|
76.0 |
% |
|
|
83.3 |
% |
|
|
77.8 |
% |
Nine months ended September 30, 2022 |
|
Commercial |
|
|
Personal |
|
|
Total |
|
|||
Accident year net losses and LAE |
|
$ |
32,119 |
|
|
$ |
6,646 |
|
|
$ |
38,765 |
|
Net (favorable) adverse development |
|
|
17,745 |
|
|
|
430 |
|
|
|
18,175 |
|
Calendar year net losses and LAE |
|
$ |
49,864 |
|
|
$ |
7,076 |
|
|
$ |
56,940 |
|
|
|
|
|
|
|
|
|
|
|
|||
Accident year loss ratio |
|
|
51.6 |
% |
|
|
58.0 |
% |
|
|
52.6 |
% |
Net (favorable) adverse development |
|
|
28.4 |
% |
|
|
3.8 |
% |
|
|
24.6 |
% |
Calendar year loss ratio |
|
|
80.0 |
% |
|
|
61.8 |
% |
|
|
77.2 |
% |
Net losses and LAE decreased by $3.0 million, or 5.3%, to $53.9 million for the nine months ended September 30, 2023, compared to $56.9 million for the same period in 2022. The decrease in losses was driven by a $15.2 million decrease in adverse development quarter-over-quarter. This decrease was partially offset by a $12.2 million increase in current accident year losses, driven by the storm losses described above.
For the nine months ended September 30, 2023, the Company recognized $4.1 million of adverse development in the commercial liability lines of business, related to accident years 2020 through 2022, offset by $1.2 million of favorable development in the personal lines segment.
Of the $18.2 million of adverse development experienced in the first nine months of 2022, $14.3 million was related to 2019 and prior accident years, $2.2 million was related to the 2020 accident year, and $1.7 million was related to the 2021 accident year. Substantially all of the $18.2 million of adverse development was related to the Company’s commercial lines of business.
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.
35
The table below provides the expense ratio by major component.
|
|
Nine months ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Commercial Lines |
|
|
|
|
|
|
||
Policy acquisition costs |
|
|
16.8 |
% |
|
|
22.0 |
% |
Operating expenses |
|
|
18.3 |
% |
|
|
16.0 |
% |
Total |
|
|
35.1 |
% |
|
|
38.0 |
% |
Personal Lines |
|
|
|
|
|
|
||
Policy acquisition costs |
|
|
27.0 |
% |
|
|
30.8 |
% |
Operating expenses |
|
|
12.9 |
% |
|
|
12.3 |
% |
Total |
|
|
39.9 |
% |
|
|
43.1 |
% |
Total Underwriting |
|
|
|
|
|
|
||
Policy acquisition costs |
|
|
19.3 |
% |
|
|
23.4 |
% |
Operating expenses |
|
|
17.0 |
% |
|
|
15.4 |
% |
Total |
|
|
36.3 |
% |
|
|
38.8 |
% |
Our expense ratio decreased 2.5% during the first nine months of 2023, compared to the same period in 2022.
Policy acquisition costs are costs we incur to issue policies, which include commissions, premium taxes, underwriting reports and underwriter compensation costs. The Company offsets direct commissions with ceded commissions from reinsurers. The percentage of policy acquisition costs to net earned premiums and other income decreased by 4.1%, from 23.4% in the first nine months of 2022, to 19.3% for the same period in 2023. The decrease was primarily related to additional ceding commissions, which reduces commission expense, as a result of the new quota share reinsurance treaty mentioned above.
Operating expenses consist primarily of employee compensation, information technology and occupancy costs, such as rent and utilities. Operating expenses as a percent of net earned premiums and other underwriting income increased by 1.6% to 17.0% for the nine months ended September 30, 2023, as compared to 15.4% for the same period in 2022. The operating expense ratios are higher primarily due to increased reinsurance costs which have lowered net earned premiums.
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 nine months ended September 30, 2023 and 2022 (dollars in thousands):
|
|
Nine months ended |
|
|
|
|
||||||
|
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|||
Commercial Lines |
|
$ |
(5,775 |
) |
|
$ |
(11,255 |
) |
|
$ |
5,480 |
|
Personal Lines |
|
|
(4,000 |
) |
|
|
(561 |
) |
|
|
(3,439 |
) |
Total Underwriting |
|
|
(9,775 |
) |
|
|
(11,816 |
) |
|
|
2,041 |
|
Wholesale Agency |
|
|
(468 |
) |
|
|
132 |
|
|
|
(600 |
) |
Corporate |
|
|
(814 |
) |
|
|
(421 |
) |
|
|
(393 |
) |
Eliminations |
|
|
36 |
|
|
|
189 |
|
|
|
(153 |
) |
Total segment gain (loss) |
|
$ |
(11,021 |
) |
|
$ |
(11,916 |
) |
|
$ |
895 |
|
Liquidity and Capital Resources
Sources and Uses of Funds
At September 30, 2023, the Company had $54.9 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.
36
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 holding 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 holding company supports its funding as state insurance laws restrict the ability of our Insurance Company Subsidiaries to declare dividends to the Parent Company. Generally, the limitations are based on the greater of statutory net income for the preceding year or 10% of statutory surplus at the end of the preceding year. No dividends were paid from our Insurance Company Subsidiaries during the nine months ended September 30, 2023 and 2022.
On November 2, 2023, CIC purchased $4.0 million of the Company’s new public notes providing another means in which the holding company can source cash. This will be not be reflected as outstanding debt on a consolidated basis.
In September 2023, the Company repaid its $24.4 million of senior public debt and funded it, in part, with issuing new public debt in the amount of $17.9 million with a 9.75% interest rate, or three percentage points higher than the old public notes. This new public debt has a five year term and all other terms and conditions are substantially the same as the old public debt. The Company also refinanced its subordinated debt into a senior secured note, paying down $500,000 of the debt resulting in a remaining $10.0 million of a senior secured note outstanding with a 12.5% interest rate. This rate is five percentage points higher than the historical rate on the subordinated debt of 7.5%. The maturity of the new senior secured note was shortened to five years (maturing on September 30, 2028) from 15 years (maturing on September 30, 2038) and there are now required quarterly principal payments of $250,000 with the balance due at maturity.
The changes to the debt structure will result in $1.0 million per year of principal to be paid on the senior secured debt that previously was not required. And the first year interest payments will be approximately $400,000 greater than with the subordinated debt. The interest payments on the public debt will be approximately $100,000 greater going forward. Management believes that there will be continued sufficient cash flow to the Parent Company to service these additional interest and principal payments.
Parent Company is required to pay certain intercompany obligations before December 31, 2023. Management believes that the Parent Company will have adequate cash flow to fund operations and service debt going forward. However, there is a current potential short fall over the next several months. To alleviate any concern as to whether the Company will have enough funds to satisfy its near term obligations, a member of the Company’s board of directors has pledged to fund up to $6.0 million in capital, by December 15, 2023, which could be used to fund these obligations or other cash needs. The member’s funding was conditioned on 1) the contribution would be in the form of a preferred stock with a dividend equal to the prime rate plus 2%, and is redeemable at the option of the company in 24 months with a redemption premium of $1.5 million. If the preferred is not redeemed, the preferred will convert into common stock at a price of $1.25 per share. And, 2) the member would have the right to nominate an additional board member.
Cash Flows
Operating Activities. Cash used in operating activities for the nine months ended September 30, 2023 was $729,000 compared to $14.1 million for the same period in 2022. The $13.5 million decrease in cash used in operating activities was primarily due a $9.3 million decrease in paid losses, a $6.0 million decrease in acquisition costs paid, and a $15.4 million increase in the funds held under reinsurance agreements liability account during the period. These amounts were offset by a $16.1 million decrease in net premiums collected for the first nine months of 2023, compared to the same period in 2022.
Investing Activities. Cash used in investing activities for the nine months ended September 30, 2023 was $4.0 million, compared to $20.1 million of cash provided by investing activities for the same period in 2022. The $24.3 million decrease in cash provided by investing activities was driven by a $78.0 million decrease in proceeds from sales of investments. This was partially offset by $62.5 million decrease in purchases of investments during the first nine months of 2023.
Financing Activities. Cash used in financing activities for the nine months ended September 30, 2023 was $8.9 million compared to $19.5 million of cash provided by financing activities in the same period of 2022. The $28.4 million decrease in cash provided by financing activities was mostly attributable to the Company paying down $13.7 million of its long-term debt during the third quarter of 2023, and the Company borrowing $14.5 million from the Federal Home Loan Bank of Indianapolis during the first nine months of 2022.
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
37
Subsidiaries’ state of domiciliary, rather than GAAP. The Insurance Company Subsidiaries’ aggregate statutory capital and surplus (which is a statutory measure of equity) was $53.2 million and $59.9 million at September 30, 2023 and December 31, 2022, respectively.
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, the gain from the sale of the renewal rights business, and other gains and 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 |
|
|
Nine months ended |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Net income (loss) |
|
$ |
(2,706 |
) |
|
$ |
(1,523 |
) |
|
$ |
(6,444 |
) |
|
$ |
(12,792 |
) |
Exclude: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net realized investment gains (losses), net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,505 |
) |
Change in fair value of equity securities, net of tax |
|
|
(87 |
) |
|
|
(151 |
) |
|
|
595 |
|
|
|
446 |
|
Gain from sale of renewal rights |
|
|
2,335 |
|
|
|
— |
|
|
|
2,335 |
|
|
|
— |
|
Other gains (losses), net of tax |
|
|
— |
|
|
|
66 |
|
|
|
— |
|
|
|
60 |
|
Adjusted operating income (loss) |
|
$ |
(4,954 |
) |
|
$ |
(1,438 |
) |
|
$ |
(9,374 |
) |
|
$ |
(11,793 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average common shares diluted |
|
|
12,222,881 |
|
|
|
11,101,194 |
|
|
|
12,219,713 |
|
|
|
10,178,975 |
|
Diluted income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) |
|
$ |
(0.22 |
) |
|
$ |
(0.14 |
) |
|
$ |
(0.53 |
) |
|
$ |
(1.26 |
) |
Exclude: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net realized investment gains (losses), net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.15 |
) |
Change in fair value of equity securities, net of tax |
|
|
— |
|
|
|
(0.01 |
) |
|
|
0.05 |
|
|
|
0.04 |
|
Gain from sale of renewal rights |
|
|
0.19 |
|
|
|
— |
|
|
|
0.19 |
|
|
|
— |
|
Other gains (losses), net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.01 |
|
Adjusted operating income (loss) per share |
|
$ |
(0.41 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.77 |
) |
|
$ |
(1.16 |
) |
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.
38
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.
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 September 30, 2023. 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 September 30, 2023, the fair value of our investment portfolio, excluding cash and cash equivalents, was $144.6 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 September 30, 2023 and December 31, 2022 was 2.8 and 3.5 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 September 30, 2023. 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 |
|
|||||||
Hypothetical Change in Interest Rates |
|
Estimated |
|
|
Change in |
|
|
|
|
|
Shareholders' |
|
||||
As of September 30, 2023 |
|
Fair Value |
|
|
Fair Value |
|
|
Fair Value |
|
|
Equity |
|
||||
200 basis point increase |
|
$ |
134,842 |
|
|
$ |
(7,426 |
) |
|
|
(5.2 |
)% |
|
|
(63.0 |
)% |
100 basis point increase |
|
|
138,413 |
|
|
|
(3,855 |
) |
|
|
(2.7 |
)% |
|
|
(32.7 |
)% |
No change |
|
|
142,268 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
100 basis point decrease |
|
|
146,436 |
|
|
|
4,168 |
|
|
|
2.9 |
% |
|
|
35.4 |
% |
200 basis point decrease |
|
|
150,946 |
|
|
|
8,678 |
|
|
|
6.1 |
% |
|
|
73.6 |
% |
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 September 30, 2023, the net amount due to the Company from reinsurers, including prepaid reinsurance premiums, was $92.1 million. We believe all amounts recorded as due from reinsurers are recoverable.
Effects of Inflation
39
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.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s management, including its Co-Chief Executive Officers 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 September 30, 2023. Based on such evaluations, the Co-Chief Executive Officers 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 Co-Company’s Chief Executive Officers 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 September 30, 2023, 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 reasonably likely to materially affect the Company's internal control over financial reporting.
40
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this item is included under Note 12 ~ Commitments and Contingencies of the Notes to the Consolidated Financial Statements of the Company’s Form 10-Q for the nine months ended September 30, 2023, 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 27, 2023.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
41
ITEM 6. EXHIBITS
|
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|
|
Incorporated by Reference |
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Exhibit Number |
|
Exhibit Description |
|
Form |
|
Period Ending |
|
Exhibit / Appendix Number |
|
Filing Date |
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10.30 |
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31.1 |
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31.2 |
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31.3 |
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32.1* |
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32.2* |
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32.3* |
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101.INS |
|
inline XBRL Instance Document |
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101.SCH |
|
inline XBRL Taxonomy Extension Schema Document |
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|
101.CAL |
|
inline XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF |
|
inline XBRL Taxonomy Extension Definition Linkbase |
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|
101.LAB |
|
inline XBRL Taxonomy Extension Label Linkbase |
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101.PRE |
|
inline XBRL Taxonomy Extension Presentation Linkbase |
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|
104 |
|
Cover Page Interactive Date File (embedded within the Inline XBRL document) |
|
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|
* 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.
42
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: November 10, 2023
43