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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2023

OR

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

For the transition period from to

Commission file number 001-37536

 

Conifer Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Michigan

 

27-1298795

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

3001 West Big Beaver Road, Suite 200

 

 

Troy, Michigan

 

48084

(Address of principal executive offices)

 

(Zip code)

 

(248) 559-0840

(Registrant’s telephone number, including area code)

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

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, no par value

 

CNFR

 

The Nasdaq Stock Market LLC

9.75% Senior Notes due 2028

 

CNFRZ

 

The Nasdaq Stock Market LLC

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

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

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

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

 

 

 

 

 

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

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

The number of outstanding shares of the registrant’s common stock, no par value, as of November 10, 2023, was 12,222,881.

 

 


 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Form 10-Q

INDEX

 

 

Page No.

Part I — Financial Information

 

Item 1 — Financial Statements

3

Consolidated Balance Sheets (Unaudited)

3

Consolidated Statements of Operations (Unaudited)

4

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

5

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

6

Consolidated Statements of Cash Flows (Unaudited)

7

Notes to Consolidated Financial Statements (Unaudited)

8

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

26

Item 3 — Quantitative and Qualitative Disclosures about Market Risk

39

Item 4 — Controls and Procedures

40

Part II — Other Information

 

Item 1 — Legal Proceedings

41

Item 1A — Risk Factors

41

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

41

Item 6 — Exhibits

42

Signatures

43

 

 

 

2


 

PART 1 - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(dollars in thousands)

 

 

 

September 30,
2023

 

 

December 31,
2022

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Investment securities:

 

 

 

 

 

 

Debt securities, at fair value (amortized cost of $119,499 and $127,119, respectively)

 

$

101,745

 

 

$

110,201

 

Equity securities, at fair value (cost of $2,387 and $1,905, respectively)

 

 

2,345

 

 

 

1,267

 

Short-term investments, at fair value

 

 

40,523

 

 

 

25,929

 

Total investments

 

 

144,613

 

 

 

137,397

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

14,361

 

 

 

28,035

 

Premiums and agents' balances receivable, net

 

 

24,512

 

 

 

21,802

 

Receivable from Affiliate

 

 

889

 

 

 

1,261

 

Reinsurance recoverables on unpaid losses

 

 

46,766

 

 

 

82,651

 

Reinsurance recoverables on paid losses

 

 

6,959

 

 

 

6,653

 

Prepaid reinsurance premiums

 

 

43,132

 

 

 

16,399

 

Deferred policy acquisition costs

 

 

5,737

 

 

 

10,290

 

Other assets

 

 

6,474

 

 

 

7,862

 

Total assets

 

$

293,443

 

 

$

312,350

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Unpaid losses and loss adjustment expenses

 

$

139,214

 

 

$

165,539

 

Unearned premiums

 

 

78,865

 

 

 

67,887

 

Reinsurance premiums payable

 

 

4,727

 

 

 

6,144

 

Debt

 

 

25,264

 

 

 

33,876

 

Funds held under reinsurance agreements

 

 

26,541

 

 

 

11,084

 

Accounts payable and accrued expenses

 

 

7,041

 

 

 

8,870

 

Total liabilities

 

 

281,652

 

 

 

293,400

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

Common stock, no par value (100,000,000 shares authorized; 12,222,881 and 12,215,849 issued and outstanding, respectively)

 

 

98,057

 

 

 

97,913

 

Accumulated deficit

 

 

(67,204

)

 

 

(60,760

)

Accumulated other comprehensive income (loss)

 

 

(19,062

)

 

 

(18,203

)

Total shareholders' equity

 

 

11,791

 

 

 

18,950

 

Total liabilities and shareholders' equity

 

$

293,443

 

 

$

312,350

 

 

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

3


 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)

(dollars in thousands, except per share data)

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Revenue and Other Income

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

 

 

 

 

 

 

 

 

 

 

 

 

Gross earned premiums

 

$

38,150

 

 

 

34,401

 

 

$

108,457

 

 

$

100,947

 

Ceded earned premiums

 

 

(14,171

)

 

 

(9,443

)

 

 

(39,343

)

 

 

(27,458

)

Net earned premiums

 

 

23,979

 

 

 

24,958

 

 

 

69,114

 

 

 

73,489

 

Net investment income

 

 

1,450

 

 

 

860

 

 

 

4,111

 

 

 

1,931

 

Net realized investment gains (losses)

 

 

 

 

 

 

 

 

 

 

 

(1,505

)

Change in fair value of equity securities

 

 

(87

)

 

 

(151

)

 

 

595

 

 

 

446

 

Gain from sale of renewal rights

 

 

2,335

 

 

 

 

 

 

2,335

 

 

 

 

Other gains (losses)

 

 

 

 

 

66

 

 

 

 

 

 

60

 

Other income

 

 

439

 

 

 

603

 

 

 

1,463

 

 

 

1,964

 

Total revenue and other income

 

 

28,116

 

 

 

26,336

 

 

 

77,618

 

 

 

76,385

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses, net

 

 

20,911

 

 

 

16,671

 

 

 

53,943

 

 

 

56,940

 

Policy acquisition costs

 

 

4,725

 

 

 

6,230

 

 

 

13,859

 

 

 

17,419

 

Operating expenses

 

 

4,403

 

 

 

4,380

 

 

 

13,796

 

 

 

13,010

 

Interest expense

 

 

855

 

 

 

778

 

 

 

2,361

 

 

 

2,216

 

Total expenses

 

 

30,894

 

 

 

28,059

 

 

 

83,959

 

 

 

89,585

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(2,778

)

 

 

(1,723

)

 

 

(6,341

)

 

 

(13,200

)

Equity earnings (loss) in Affiliate, net of tax

 

 

72

 

 

 

199

 

 

 

(103

)

 

 

368

 

Income tax expense (benefit)

 

 

 

 

 

(1

)

 

 

 

 

 

(40

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(2,706

)

 

$

(1,523

)

 

$

(6,444

)

 

$

(12,792

)

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share, basic and diluted

 

$

(0.22

)

 

$

(0.14

)

 

$

(0.53

)

 

$

(1.26

)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic and diluted

 

 

12,222,881

 

 

 

11,101,194

 

 

 

12,219,713

 

 

 

10,178,975

 

 

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

4


 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(dollars in thousands)

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net income (loss)

 

$

(2,706

)

 

$

(1,523

)

 

$

(6,444

)

 

$

(12,792

)

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized investment gains (losses):

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized investment gains (losses) during the period

 

 

(2,404

)

 

 

(4,347

)

 

 

(859

)

 

 

(16,641

)

Income tax (benefit) expense

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized investment gains (losses), net of tax

 

 

(2,404

)

 

 

(4,347

)

 

 

(859

)

 

 

(16,641

)

 

 

 

 

 

 

 

 

 

 

 

 

Less: reclassification adjustments to:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

70

 

Income tax (benefit) expense

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

70

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

(2,404

)

 

 

(4,347

)

 

 

(859

)

 

 

(16,711

)

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$

(5,110

)

 

$

(5,870

)

 

$

(7,303

)

 

$

(29,503

)

 

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

5


 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders' Equity (Unaudited)

(dollars in thousands)

 

 

No Par, Common Stock

 

 

Accumulated

 

 

Accumulated
Other
Comprehensive

 

 

Total
Shareholders'

 

 

 

Shares

 

 

Amount

 

 

Deficit

 

 

Income (Loss)

 

 

Equity

 

Balances at June 30, 2023

 

 

12,222,881

 

 

$

98,013

 

 

$

(64,498

)

 

$

(16,658

)

 

$

16,857

 

Net income (loss)

 

 

 

 

 

 

 

 

(2,706

)

 

 

 

 

 

(2,706

)

Stock-based compensation expense

 

 

 

 

 

44

 

 

 

 

 

 

 

 

 

44

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

(2,404

)

 

 

(2,404

)

Balances at September 30, 2023

 

 

12,222,881

 

 

$

98,057

 

 

$

(67,204

)

 

$

(19,062

)

 

$

11,791

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at June 30, 2022

 

 

9,715,324

 

 

$

92,799

 

 

$

(61,348

)

 

$

(14,474

)

 

$

16,977

 

Net income (loss)

 

 

 

 

 

 

 

 

(1,523

)

 

 

 

 

 

(1,523

)

Issuance of common stock private placement

 

 

2,500,000

 

 

 

5,000

 

 

 

 

 

 

 

 

 

5,000

 

Stock-based compensation expense

 

 

 

 

 

58

 

 

 

 

 

 

 

 

 

58

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

(4,347

)

 

 

(4,347

)

Balances at September 30, 2022

 

 

12,215,324

 

 

$

97,857

 

 

$

(62,871

)

 

$

(18,821

)

 

$

16,165

 

 

 

 

No Par, Common Stock

 

 

Accumulated

 

 

Accumulated
Other
Comprehensive

 

 

Total
Shareholders'

 

 

 

Shares

 

 

Amount

 

 

Deficit

 

 

Income (Loss)

 

 

Equity

 

Balances at December 31, 2022

 

 

12,215,849

 

 

$

97,913

 

 

$

(60,760

)

 

$

(18,203

)

 

$

18,950

 

Net income (loss)

 

 

 

 

 

 

 

 

(6,444

)

 

 

 

 

 

(6,444

)

Repurchase of common stock

 

 

(1,968

)

 

 

(3

)

 

 

 

 

 

 

 

 

(3

)

Issuance of common stock private placement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

9,000

 

 

 

147

 

 

 

 

 

 

 

 

 

147

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

(859

)

 

 

(859

)

Balances at September 30, 2023

 

 

12,222,881

 

 

$

98,057

 

 

$

(67,204

)

 

$

(19,062

)

 

$

11,791

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2021

 

 

9,707,817

 

 

$

92,692

 

 

$

(50,079

)

 

$

(2,110

)

 

$

40,503

 

Net income (loss)

 

 

 

 

 

 

 

 

(12,792

)

 

 

 

 

 

(12,792

)

Repurchase of common stock

 

 

(1,493

)

 

 

11

 

 

 

 

 

 

 

 

 

11

 

Issuance of common stock private placement

 

 

2,500,000

 

 

 

5,000

 

 

 

 

 

 

 

 

 

5,000

 

Stock-based compensation expense

 

 

9,000

 

 

 

154

 

 

 

 

 

 

 

 

 

154

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

(16,711

)

 

 

(16,711

)

Balances at September 30, 2022

 

 

12,215,324

 

 

$

97,857

 

 

$

(62,871

)

 

$

(18,821

)

 

$

16,165

 

 

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

 

6


 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

Cash Flows From Operating Activities

 

 

 

 

 

 

Net income (loss)

 

$

(6,444

)

 

$

(12,792

)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

Proceeds from sale of renewal rights

 

 

(2,500

)

 

 

 

Depreciation and amortization

 

 

392

 

 

 

306

 

Amortization of bond premium and discount, net

 

 

(736

)

 

 

292

 

Net realized investment (gains) losses

 

 

 

 

 

1,505

 

Change in fair value of equity securities

 

 

(595

)

 

 

(446

)

Stock-based compensation expenses

 

 

147

 

 

 

154

 

Equity loss (earnings) in Affiliate, net of tax

 

 

103

 

 

 

(368

)

Other (gains) losses

 

 

 

 

 

93

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

(Increase) decrease in:

 

 

 

 

 

 

Premiums and agents' balances and other receivables

 

 

(2,534

)

 

 

(737

)

Reinsurance recoverables

 

 

35,579

 

 

 

(2,547

)

Prepaid reinsurance premiums

 

 

(26,733

)

 

 

(7,032

)

Deferred policy acquisition costs

 

 

4,553

 

 

 

1,784

 

Other assets

 

 

241

 

 

 

(469

)

Increase (decrease) in:

 

 

 

 

 

 

Unpaid losses and loss adjustment expenses

 

 

(26,325

)

 

 

5,472

 

Unearned premiums

 

 

10,978

 

 

 

2,523

 

Reinsurance premiums payable

 

 

14,024

 

 

 

(1,966

)

Accounts payable and other liabilities

 

 

(879

)

 

 

137

 

Net cash provided by (used in) operating activities

 

 

(729

)

 

 

(14,091

)

Cash Flows From Investing Activities

 

 

 

 

 

 

Purchase of investments

 

 

(172,143

)

 

 

(234,620

)

Proceeds from maturities and redemptions of investments

 

 

7,467

 

 

 

17,638

 

Proceeds from sales of investments

 

 

159,070

 

 

 

237,062

 

Proceeds from sale of renewal rights

 

 

2,500

 

 

 

 

Obligation to SSU

 

 

(934

)

 

 

 

Net cash provided by (used in) investing activities

 

 

(4,040

)

 

 

20,080

 

Cash Flows From Financing Activities

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

 

 

 

5,000

 

Proceeds from issuance of long-term debt

 

 

6,727

 

 

 

 

Repurchase of common stock

 

 

(3

)

 

 

11

 

Borrowings under line of credit

 

 

 

 

 

5,000

 

Borrowings under Federal Home Loan Bank of Indianapolis

 

 

 

 

 

14,500

 

Repayment of long-term debt

 

 

(13,721

)

 

 

 

Repayment of borrowings under debt arrangements

 

 

 

 

 

(5,000

)

Debt issuance costs

 

 

(1,908

)

 

 

 

Net cash provided by (used in) financing activities

 

 

(8,905

)

 

 

19,511

 

Net increase (decrease) in cash

 

 

(13,674

)

 

 

25,500

 

Cash at beginning of period

 

 

28,035

 

 

 

9,913

 

Cash at end of period

 

$

14,361

 

 

$

35,413

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

Interest paid

 

$

2,491

 

 

$

2,196

 

Income taxes paid (refunded), net

 

 

(17

)

 

 

(12

)

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 50% non-controlling interest in Sycamore Specialty Underwriters, LLC ("SSU" or "Affiliate").

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

These consolidated financial statements and the notes thereto should be read in conjunction with the Company's audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 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 three types of insurance businesses: commercial lines, personal lines, and agency business. The Company underwrites a variety of specialty insurance products, including property, general liability, liquor liability, automobile, and homeowners and dwelling policies. The Company markets and sells its insurance products through a network of independent agents, including managing general agents, whereby policies are written in all 50 states in the United States of America (“U.S.”). The Company’s corporate headquarters are located in Troy, Michigan with additional office facilities in Florida and Michigan.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes the amounts included in the consolidated financial statements reflect management's best estimates and assumptions, actual results may differ from these estimates.

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 $24.4 million of senior public debt and funded it, in part, with issuing new public debt in the amount of $17.9 million. 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. 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.

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 $6.0 million in capital 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.

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 $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,

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 $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 funds withheld balance is expected to be paid out over the next four quarters as the ceded unearned premium is earned. 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.

 

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 $17.8 million as of September 30, 2023, from the Company's available-for-sale securities are due to market conditions and interest rate changes.

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

 

$

6,410

 

 

$

 

 

$

(272

)

 

$

6,138

 

State and local government

 

 

25,016

 

 

 

 

 

 

(4,951

)

 

 

20,065

 

Corporate debt

 

 

34,024

 

 

 

 

 

 

(4,898

)

 

 

29,126

 

Asset-backed securities

 

 

19,956

 

 

 

 

 

 

(837

)

 

 

19,119

 

Mortgage-backed securities

 

 

27,306

 

 

 

 

 

 

(6,115

)

 

 

21,191

 

Commercial mortgage-backed securities

 

 

3,386

 

 

 

 

 

 

(138

)

 

 

3,248

 

Collateralized mortgage obligations

 

 

3,401

 

 

 

 

 

 

(543

)

 

 

2,858

 

Total debt securities available for sale

 

$

119,499

 

 

$

 

 

$

(17,754

)

 

$

101,745

 

 

 

 

December 31, 2022

 

 

 

Cost or

 

 

Gross Unrealized

 

 

Estimated

 

 

 

Amortized Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

$

7,833

 

 

$

 

 

$

(335

)

 

$

7,498

 

State and local government

 

 

25,487

 

 

 

1

 

 

 

(4,672

)

 

 

20,816

 

Corporate debt

 

 

35,347

 

 

 

 

 

 

(4,788

)

 

 

30,559

 

Asset-backed securities

 

 

21,742

 

 

 

 

 

 

(1,246

)

 

 

20,496

 

Mortgage-backed securities

 

 

29,194

 

 

 

 

 

 

(5,157

)

 

 

24,037

 

Commercial mortgage-backed securities

 

 

3,414

 

 

 

 

 

 

(186

)

 

 

3,228

 

Collateralized mortgage obligations

 

 

4,102

 

 

 

 

 

 

(535

)

 

 

3,567

 

Total debt securities available for sale

 

$

127,119

 

 

$

1

 

 

$

(16,919

)

 

$

110,201

 

 

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
Issues

 

 

Fair Value of
Investments
with Unrealized
Losses

 

 

Gross
Unrealized
Losses

 

 

No. of
Issues

 

 

Fair Value of
Investments
with Unrealized
Losses

 

 

Gross
Unrealized
Losses

 

 

No. of
Issues

 

 

Fair Value of
Investments
with Unrealized
Losses

 

 

Gross
Unrealized
Losses

 

Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

 

3

 

 

$

1,808

 

 

$

(45

)

 

 

10

 

 

$

4,330

 

 

$

(227

)

 

 

13

 

 

$

6,138

 

 

$

(272

)

State and local government

 

 

3

 

 

 

1,179

 

 

 

(23

)

 

 

117

 

 

 

18,686

 

 

 

(4,928

)

 

 

120

 

 

 

19,865

 

 

 

(4,951

)

Corporate debt

 

 

 

 

 

 

 

 

 

 

 

66

 

 

 

29,126

 

 

 

(4,898

)

 

 

66

 

 

 

29,126

 

 

 

(4,898

)

Asset-backed securities

 

 

 

 

 

 

 

 

 

 

 

24

 

 

 

19,119

 

 

 

(837

)

 

 

24

 

 

 

19,119

 

 

 

(837

)

Mortgage-backed securities

 

 

6

 

 

 

39

 

 

 

(2

)

 

 

63

 

 

 

21,152

 

 

 

(6,113

)

 

 

69

 

 

 

21,191

 

 

 

(6,115

)

Commercial mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

3,248

 

 

 

(139

)

 

 

4

 

 

 

3,248

 

 

 

(139

)

Collateralized mortgage obligations

 

 

2

 

 

 

14

 

 

 

 

 

 

31

 

 

 

2,844

 

 

 

(542

)

 

 

33

 

 

 

2,858

 

 

 

(542

)

Total debt securities available for sale

 

 

14

 

 

$

3,040

 

 

$

(70

)

 

 

315

 

 

$

98,505

 

 

$

(17,684

)

 

 

329

 

 

$

101,545

 

 

$

(17,754

)

 

 

 

December 31, 2022

 

 

 

Less than 12 months

 

 

Greater than 12 months

 

 

Total

 

 

 

No. of
Issues

 

 

Fair Value of
Investments
with Unrealized
Losses

 

 

Gross
Unrealized
Losses

 

 

No. of
Issues

 

 

Fair Value of
Investments
with Unrealized
Losses

 

 

Gross
Unrealized
Losses

 

 

No. of
Issues

 

 

Fair Value of
Investments
with Unrealized
Losses

 

 

Gross
Unrealized
Losses

 

Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

 

8

 

 

$

3,534

 

 

$

(135

)

 

 

5

 

 

$

3,964

 

 

$

(200

)

 

 

13

 

 

$

7,498

 

 

$

(335

)

State and local government

 

 

77

 

 

 

12,966

 

 

 

(2,318

)

 

 

45

 

 

 

7,147

 

 

 

(2,354

)

 

 

122

 

 

 

20,113

 

 

 

(4,672

)

Corporate debt

 

 

27

 

 

 

10,069

 

 

 

(1,373

)

 

 

42

 

 

 

20,890

 

 

 

(3,415

)

 

 

69

 

 

 

30,959

 

 

 

(4,788

)

Asset-backed securities

 

 

6

 

 

 

3,188

 

 

 

(76

)

 

 

20

 

 

 

17,308

 

 

 

(1,170

)

 

 

26

 

 

 

20,496

 

 

 

(1,246

)

Mortgage-backed securities

 

 

57

 

 

 

4,006

 

 

 

(573

)

 

 

12

 

 

 

20,031

 

 

 

(4,584

)

 

 

69

 

 

 

24,037

 

 

 

(5,157

)

Commercial mortgage-backed securities

 

 

4

 

 

 

3,205

 

 

 

(186

)

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

3,205

 

 

 

(186

)

Collateralized mortgage obligations

 

 

26

 

 

 

1,789

 

 

 

(196

)

 

 

9

 

 

 

1,802

 

 

 

(339

)

 

 

35

 

 

 

3,591

 

 

 

(535

)

Total debt securities available for sale

 

 

205

 

 

$

38,757

 

 

$

(4,857

)

 

 

133

 

 

$

71,142

 

 

$

(12,062

)

 

 

338

 

 

$

109,899

 

 

$

(16,919

)

 

11


 

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

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Debt securities

 

$

1,130

 

 

$

636

 

 

$

3,009

 

 

$

1,814

 

Equity securities

 

 

9

 

 

 

3

 

 

 

27

 

 

 

41

 

Cash, cash equivalents and short-term investments

 

 

360

 

 

 

279

 

 

 

1,244

 

 

 

316

 

Total investment income

 

 

1,499

 

 

 

918

 

 

 

4,280

 

 

 

2,171

 

Investment expenses

 

 

(49

)

 

 

(58

)

 

 

(169

)

 

 

(240

)

Net investment income

 

$

1,450

 

 

$

860

 

 

$

4,111

 

 

$

1,931

 

 

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

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

Gross realized gains

 

$

 

 

$

 

 

$

 

 

$

6

 

Gross realized losses

 

 

 

 

 

 

 

 

 

 

 

(155

)

Total debt securities

 

 

 

 

 

 

 

 

 

 

 

(149

)

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

Gross realized gains

 

$

 

 

$

 

 

$

 

 

 

375

 

Gross realized losses

 

 

 

 

 

 

 

 

 

 

 

(1,731

)

Total equity securities

 

 

 

 

 

 

 

 

 

 

 

(1,356

)

Total net realized investment gains (losses)

 

$

 

 

$

 

 

$

 

 

$

(1,505

)

 

Proceeds from available-for-sale debt securities were $86.1 million and $29.3 million for the nine months ended September 30, 2023 and 2022, respectively.

There were no gross realized gains or losses from the sale of available-for-sale debt securities for the three and nine months ended September 30, 2023. There were no gross realized gains and losses from the sale of available-for-sale debt securities for three months ended September 30, 2022. The gross realized gains and losses from the sale of available-for-sale debt securities for nine months ended September 30, 2022, were $5,000 and $155,000, respectively.

As of September 30, 2023 and 2022, there were $0 of payables from securities purchased, respectively. There were $0 of receivables from securities sold as of September 30, 2023, and 2022, respectively.

The Company's gross unrealized gains related to its equity investments were $507,000 and $0 as of September 30, 2023 and December 31, 2022, respectively. The Company’s gross unrealized losses related to its equity investments were $549,000 and $638,000 as of September 30, 2023 and December 31, 2022, respectively. The Company also carries other equity investments that do not have a readily determinable fair value at cost, less impairment or observable changes in price. We review these investments for impairment during each reporting period. There were no impairments or observable changes in price recorded during 2023 and 2022 related to the Company's equity securities without readily determinable fair value. These investments are included in Other Assets in the Consolidated Balance Sheets and amounted to $1.4 million as of September 30, 2023 and $1.8 million as of December 31, 2022.

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
Cost

 

 

Estimated
Fair Value

 

Due in one year or less

 

$

3,765

 

 

$

3,712

 

Due after one year through five years

 

 

31,155

 

 

 

28,381

 

Due after five years through ten years

 

 

19,574

 

 

 

15,640

 

Due after ten years

 

 

10,956

 

 

 

7,596

 

Securities with contractual maturities

 

 

65,450

 

 

 

55,329

 

Asset-backed securities

 

 

19,956

 

 

 

19,119

 

Mortgage-backed securities

 

 

27,306

 

 

 

21,191

 

Commercial mortgage-backed securities

 

 

3,386

 

 

 

3,248

 

Collateralized mortgage obligations

 

 

3,401

 

 

 

2,858

 

Total debt securities

 

$

119,499

 

 

$

101,745

 

 

At September 30, 2023 and December 31, 2022, the Insurance Company Subsidiaries had $7.8 million and $8.0 million, respectively, on deposit in trust accounts to meet the deposit requirements of various state insurance departments. At September 30, 2023 and December 31, 2022, the Company had $116.2 million and $95.7 million, respectively, held in trust accounts to meet collateral requirements with other third-party insurers, relating to various fronting arrangements. There are withdrawal and other restrictions on these deposits, including the type of investments that may be held, however, the Company may generally invest in high-grade bonds and short-term investments and earn interest on the funds.

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

 

$

6,138

 

 

$

 

 

$

6,138

 

 

$

 

State and local government

 

 

20,065

 

 

 

 

 

 

20,065

 

 

 

 

Corporate debt

 

 

29,126

 

 

 

 

 

 

29,126

 

 

 

 

Asset-backed securities

 

 

19,119

 

 

 

 

 

 

19,119

 

 

 

 

Mortgage-backed securities

 

 

21,191

 

 

 

 

 

 

21,191

 

 

 

 

Commercial mortgage-backed securities

 

 

3,248

 

 

 

 

 

 

3,248

 

 

 

 

Collateralized mortgage obligations

 

 

2,858

 

 

 

 

 

 

2,858

 

 

 

 

Total debt securities

 

 

101,745

 

 

 

 

 

 

101,745

 

 

 

 

Equity Securities

 

 

883

 

 

 

126

 

 

 

757

 

 

 

 

Short-term investments

 

 

40,523

 

 

 

40,523

 

 

 

 

 

 

 

Total marketable investments measured at fair value

 

$

143,151

 

 

$

40,649

 

 

$

102,502

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments measured at NAV:

 

 

 

 

 

 

 

 

 

 

 

 

Investment in limited partnership

 

 

1,462

 

 

 

 

 

 

 

 

 

 

Total assets measured at fair value

 

$

144,613

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Senior unsecured notes *

 

$

17,887

 

 

$

 

 

$

17,887

 

 

$

 

Senior secured notes *

 

 

10,000

 

 

 

 

 

 

 

 

 

10,000

 

Total Liabilities (non-recurring fair value measure)

 

$

27,887

 

 

$

 

 

$

17,887

 

 

$

10,000

 

* 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

 

$

7,498

 

 

$

 

 

$

7,498

 

 

$

 

State and local government

 

 

20,816

 

 

 

 

 

 

20,816

 

 

 

 

Corporate debt

 

 

30,559

 

 

 

 

 

 

30,559

 

 

 

 

Asset-backed securities

 

 

20,496

 

 

 

 

 

 

20,496

 

 

 

 

Mortgage-backed securities

 

 

24,037

 

 

 

 

 

 

24,037

 

 

 

 

Commercial mortgage-backed securities

 

 

3,228

 

 

 

 

 

 

3,228

 

 

 

 

Collateralized mortgage obligations

 

 

3,567

 

 

 

 

 

 

3,567

 

 

 

 

Total debt securities

 

 

110,201

 

 

 

 

 

 

110,201

 

 

 

 

Equity securities

 

 

917

 

 

 

160

 

 

 

757

 

 

 

 

Short-term investments

 

 

25,929

 

 

 

25,929

 

 

 

 

 

 

 

Total marketable investments measured at fair value

 

$

137,047

 

 

$

26,089

 

 

$

110,958

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments measured at NAV:

 

 

 

 

 

 

 

 

 

 

 

 

Investment in limited partnership

 

 

350

 

 

 

 

 

 

 

 

 

 

Total assets measured at fair value

 

$

137,397

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Senior unsecured notes *

 

$

22,430

 

 

$

 

 

$

22,430

 

 

$

 

Subordinated notes *

 

 

11,300

 

 

 

 

 

 

 

 

 

11,300

 

Total Liabilities (non-recurring fair value measure)

 

$

33,730

 

 

$

 

 

$

22,430

 

 

$

11,300

 

 

* 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 28% and 19% of the fair value of the total marketable investments measured at fair value as of September 30, 2023 and December 31, 2022, respectively.

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 72% and 81% of the fair value of the total marketable investments measured at fair value as of September 30, 2023 and December 31, 2022, respectively.

The Company obtains pricing for each security from independent pricing services, investment managers or consultants to assist in determining fair value for its Level 2 investments. To validate that these quoted prices are reasonable estimates of fair value, the Company performs various quantitative and qualitative procedures, such as (i) evaluation of the underlying methodologies, (ii) analysis of recent sales activity, (iii) analytical review of our fair values against current market prices and (iv) comparison of the pricing services’ fair value to other pricing services’ fair value for the same investment. No markets for the investments were determined to be inactive at period-ends. Based on these procedures, the Company did not adjust the prices or quotes provided from independent pricing services, investment managers or consultants.

As of September 30, 2023, the fair value of the senior secured notes was $10.0 million, which is equal to the face value of the senior secured notes that were issued on September 30, 2023. The senior secured notes were considered a Level 3 liability in the fair value hierarchy as of September 30, 2023. The Company determined the fair value of the senior secured notes based on the fact that the transaction occurred on the same day as the balance sheet date, in an arms-length transaction. The price at this time was deemed to be at fair value.

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 no transfers in or out of Level 3 for the three and nine months ended September 30, 2023 and 2022.

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. The activity in deferred policy acquisition costs, net of reinsurance transactions, is as follows (dollars in thousands):

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Balance at beginning of period

 

$

9,500

 

 

$

10,747

 

 

$

10,290

 

 

$

12,267

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred policy acquisition costs

 

 

4,292

 

 

 

5,966

 

 

 

12,636

 

 

 

15,635

 

Amortization of policy acquisition costs

 

 

(3,752

)

 

 

(6,230

)

 

 

(12,886

)

 

 

(17,419

)

Impact from renewal rights sale

 

 

(4,303

)

 

 

 

 

 

(4,303

)

 

 

 

Net change

 

 

(3,763

)

 

 

(264

)

 

 

(4,553

)

 

 

(1,784

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

 

$

5,737

 

 

$

10,483

 

 

$

5,737

 

 

$

10,483

 

 

6. Unpaid Losses and Loss Adjustment Expenses

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

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

Management believes that the reserve for losses and LAE 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
September 30,

 

 

Nine months ended
September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Gross reserves - beginning of period

 

$

145,004

 

 

$

140,996

 

 

$

165,539

 

 

$

139,085

 

Less: reinsurance recoverables on unpaid losses

 

 

(56,505

)

 

 

(37,769

)

 

 

(82,651

)

 

 

(40,344

)

Net reserves - beginning of period

 

 

88,499

 

 

 

103,227

 

 

 

82,888

 

 

 

98,741

 

Add: incurred losses and LAE, net of reinsurance:

 

 

 

 

 

 

 

 

 

 

 

 

Current period

 

 

17,281

 

 

 

13,541

 

 

 

51,004

 

 

 

38,765

 

Prior period

 

 

3,630

 

 

 

3,130

 

 

 

2,939

 

 

 

18,175

 

Total net incurred losses and LAE

 

 

20,911

 

 

 

16,671

 

 

 

53,943

 

 

 

56,940

 

Deduct: loss and LAE payments, net of reinsurance:

 

 

 

 

 

 

 

 

 

 

 

 

Current period

 

 

9,194

 

 

 

5,634

 

 

 

18,635

 

 

 

13,313

 

Prior period

 

 

7,768

 

 

 

11,456

 

 

 

25,748

 

 

 

39,560

 

Total net loss and LAE payments

 

 

16,962

 

 

 

17,090

 

 

 

44,383

 

 

 

52,873

 

Net reserves - end of period

 

 

92,448

 

 

 

102,808

 

 

 

92,448

 

 

 

102,808

 

Plus: reinsurance recoverables on unpaid losses

 

 

46,766

 

 

 

41,749

 

 

 

46,766

 

 

 

41,749

 

Gross reserves - end of period

 

$

139,214

 

 

$

144,557

 

 

$

139,214

 

 

$

144,557

 

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.

The Company’s incurred losses during the three and nine months ended September 30, 2022 included prior-year adverse reserve development of $3.1 million and $18.2 million, respectively. Of the $3.1 million of adverse development, $2.3 million was related to 2019 and prior accident years and $1.8 million was related to the 2021 accident year. This was offset by $958,000 of favorable development experienced in the 2020 accident year. Of the $3.1 million of adverse development $2.7 million was related to the commercial lines of business, while $381,000 was related to the personal lines of business.

Of the $18.2 million of adverse development for the nine months ended September 30, 2022, $14.3 million was related to 2019 and prior accident years, $2.2 million was related to 2020 accident year, and $1.7 million was related to the 2021 accident year. Of the $18.2 million of adverse development, $17.7 million was related to the commercial lines of business, while $430,000 came from the personal lines of business.

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 $400,000 in 2023, and $340,000 in 2022. The Company ceded specific commercial property risks in excess of $400,000 in 2023, and $300,000 in 2022. The Company ceded homeowners specific risks in excess of $300,000 in both 2023 and 2022.

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 $30.9 million of its gross unearned premiums relating to the security guard and alarm installation program in exchange for a 27% ceding commission.

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 $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 compensated with $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.

As of September 30, 2023, the Consolidated Balance Sheet included $3.5 million of reinsurance recoverables on paid losses related to the LPT, and $13.7 million of reinsurance recoverables on unpaid losses related to the LPT. As of December 31, 2022, the Consolidated Balance Sheet included $3.8 million of reinsurance recoverables on paid losses related to the LPT, and $25.9 million of reinsurance recoverables on unpaid losses related to the LPT.

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

 

 

 

Three Months Ended
September 30,

 

 

Nine months ended
September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Written premiums:

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

$

25,589

 

 

$

22,682

 

 

$

77,113

 

 

$

73,789

 

Assumed

 

 

12,959

 

 

 

10,406

 

 

 

42,323

 

 

 

29,681

 

Ceded

 

 

(32,859

)

 

 

(9,395

)

 

 

(66,077

)

 

 

(34,490

)

Net written premiums

 

$

5,689

 

 

$

23,693

 

 

$

53,359

 

 

$

68,980

 

 

 

 

 

 

 

 

 

 

 

 

 

Earned premiums:

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

$

24,725

 

 

$

24,679

 

 

$

71,637

 

 

$

73,667

 

Assumed

 

 

13,425

 

 

 

9,722

 

 

 

36,820

 

 

 

27,280

 

Ceded

 

 

(14,171

)

 

 

(9,443

)

 

 

(39,343

)

 

 

(27,458

)

Net earned premiums

 

$

23,979

 

 

$

24,958

 

 

$

69,114

 

 

$

73,489

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and LAE:

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

$

13,337

 

 

$

15,837

 

 

$

39,876

 

 

$

46,375

 

Assumed

 

 

7,314

 

 

 

7,225

 

 

 

13,072

 

 

 

26,136

 

Ceded

 

 

260

 

 

 

(6,391

)

 

 

995

 

 

 

(15,571

)

Net Losses and LAE

 

$

20,911

 

 

$

16,671

 

 

$

53,943

 

 

$

56,940

 

 

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: $17.9 million of publicly traded 9.75% senior unsecured notes (the "new notes") which were issued during the third quarter of 2023, and $10.0 million of privately placed 12.5% senior secured notes, which were issued on September 30, 2023. The new notes have substantially the same terms as the existing notes, except for the coupon. A summary of the Company's outstanding debt is as follows (dollars in thousands):

 

 

 

As of September 30, 2023

 

 

As of December 31, 2022

 

 

 

Gross Debt

 

 

Unamortized
Debt Issuance
Costs

 

 

Net Debt

 

 

Gross Debt

 

 

Unamortized
Debt Issuance
Costs

 

 

Net Debt

 

Senior unsecured notes

 

$

17,887

 

 

$

1,679

 

 

$

16,208

 

 

$

24,381

 

 

$

195

 

 

$

24,186

 

Senior secured notes

 

 

10,000

 

 

 

944

 

 

 

9,056

 

 

 

 

 

 

 

 

 

 

Subordinated notes

 

 

 

 

 

 

 

 

 

 

 

10,500

 

 

 

810

 

 

 

9,690

 

Total

 

$

27,887

 

 

$

2,623

 

 

$

25,264

 

 

$

34,881

 

 

$

1,005

 

 

$

33,876

 

 

Note extinguishment and new issuance

The Company extinguished all $24.4 million of its 6.75% senior unsecured notes (the “old notes”) which matured on September 30, 2023, by paying off $13.2 million in cash and exchanging $11.2 million for the new notes. The new notes have substantially the same terms as the existing notes, except for the coupon.

In August and September of 2023, the Company raised $6.7 million in cash under and S-1 registration statement for the new notes.

Non-cash Exchange: The Company also raised $6.2 million under an S-4 registration statement exchange offering for the new notes and Company's lender of its subordinated notes also exchanged its $5.0 million holding of the Company's old notes for $5.0 million of the new notes under the S-1 registration statement. As such, there was a non-cash exchange of $11.2 million of old notes for new notes. The remaining $6.5 million of cash needed to pay down the old notes was provided with cash on hand.

 

Senior unsecured notes

The Company issued $17.9 million of new notes during the third quarter of 2023. The new notes bear an interest rate of 9.75% per annum, payable quarterly at the end of March, June, September and December and mature on September 30, 2028. The Company may redeem the new notes, in whole or in part, at face value at any time after September 30, 2025.

 

Senior secured notes

The Company paid down $500,000 of principal on its subordinated notes on September 29, 2023. The Company then restructured its existing $10.0 million of subordinated notes to senior secured notes with its lender as of September 30, 2023. The senior secured notes mature on September 30, 2028. The senior secured notes bear an interest rate of 12.5% per annum. Interest is payable quarterly at the end of March, June, September, and December. The senior secured notes require $250,000 of principal payments quarterly starting on December 31, 2023 through September 30, 2028. The Company may redeem the senor secured notes, in whole or in part, for a call premium of $1.8 million less 22% of the interest payment amounts that were paid prior to the date of redemption. The Company accounted for this debt restructuring as a modification because there was no concession made to the lender.

The Company incurred $173,000 of restructuring costs from the lender related to the senior secured notes. These costs were capitalized as debt issuance costs as of September 30, 2023.

As of September 30, 2023, the carrying value of the new notes and the senior secured notes are offset by $1.7 million and $944,000, respectively, by capitalized debt issuance costs. The debt issuance costs will be amortized through interest expense over the life of the loans.

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

 

$

250

 

 

$

 

2024

 

 

1,000

 

 

 

 

2025

 

 

1,000

 

 

 

 

2026

 

 

1,000

 

 

 

 

2027

 

 

1,000

 

 

 

 

2028

 

 

5,750

 

 

 

17,887

 

Total

 

$

10,000

 

 

$

17,887

 

 

 

9. Shareholder’s Equity

On August 10, 2022, the Company issued $5.0 million of equity through a private placement for 2,500,000 shares priced at $2.00 per share. The participants in the private placement consisted of members of the Company's Board of Directors. The Company used the proceeds for growth capital in the Company's specialty core business segments.

For the three months ended September 30, 2023 and 2022, the Company had no restricted stock units vest, and made no repurchases of stock related to the vesting of the Company's restricted stock units. For the nine months ended September 30, 2023 and 2022, the Company had 1,968 and 1,493 shares of stock valued at approximately $3,000 and $3,000, respectively. Upon the repurchase of the Company's shares, the shares remain authorized, but not issued or outstanding.

As of September 30, 2023 and December 31, 2022, the Company had 12,222,881 and 12,215,849 issued and outstanding shares of common stock, respectively. Holders of common stock are entitled to one vote per share and to receive dividends only when and if declared by the board of directors. The holders have no preemptive, conversion or subscription rights.

10. Earnings Per Share

Basic and diluted earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. The following table presents the calculation of basic and diluted earnings (loss) per common share, as follows (dollars in thousands, except per share and share amounts):

 

 

 

Three Months Ended
September 30,

 

 

Nine months ended
September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net income (loss)

 

$

(2,706

)

 

$

(1,523

)

 

$

(6,444

)

 

$

(12,792

)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares, basic and diluted *

 

 

12,222,881

 

 

 

11,101,194

 

 

 

12,219,713

 

 

 

10,178,975

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share, basic and diluted

 

$

(0.22

)

 

$

(0.14

)

 

$

(0.53

)

 

$

(1.26

)

 

* The non-vested shares of the restricted stock units and stock options were anti-dilutive as of September 30, 2023 and 2022. Therefore, the basic and diluted weighted average common shares are equal for the three and nine months ended September 30, 2023 and 2022.

11. Stock-based Compensation

On March 8, 2022, the Company issued options to purchase 630,000 shares of the Company’s common stock to two named executive officers. The right to exercise the options will vest over a five-year period on a straight-line basis. The options have a strike price of $4.53 per share and will expire on March 8, 2032. The estimated value of these options is $612,000, which is being expensed ratably over the vesting period. A Black Scholes model was used to determine the fair value of the options at the time the options were issued, using the Company’s historical 5-year market price of its stock to determine volatility (equating to 65.04%), an estimated 5-year term to exercise the options, a 5-year risk-free rate of return of 1.8%, and the market price for the Company’s stock of $2.40 per share.

20


 

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

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

The Company recorded $0 and $14,000 of compensation expense related to the RSUs for the three months ended September 30, 2023 and 2022, respectively. The Company recorded $17,000 and $43,000 of compensation expense related to the RSUs for the nine months ended September 30, 2023 and 2022, respectively. There were no unvested RSUs remaining as of September 30, 2023.

The Company recorded $44,000 of compensation expense related to the stock options for the three months ended September 30, 2023 and 2022. The Company recorded $130,000 and $111,000 of compensation expense related to the stock options for the nine months ended September 30, 2023 and 2022, respectively. There were 604,000 unvested options as of September 30, 2023, which will generate an estimated future expense of $508,000 through February 2027.

 

12. Commitments and Contingencies

 

Legal proceedings

 

The Company and its subsidiaries are subject at times to various claims, lawsuits and proceedings relating principally to alleged errors or omissions in the placement of insurance, claims administration, and other business transactions arising in the ordinary course of business. Where appropriate, the Company vigorously defends such claims, lawsuits and proceedings. Some of these claims, lawsuits and proceedings seek damages, including consequential, exemplary or punitive damages, in amounts that could, if awarded, be significant. Most of the claims, lawsuits and proceedings arising in the ordinary course of business are covered by the insurance policy at issue. We account for such activity through the establishment of unpaid losses and LAE reserves. In accordance with accounting guidance, if it is probable that a liability has been incurred as of the date of the financial statements and the amount of loss is reasonably estimable; then an accrual for the costs to resolve these claims is recorded by the Company in the accompanying consolidated financial statements. Periodic expenses related to the defense of such claims are included in the accompanying consolidated statements of operations. On the basis of current information, the Company does not believe that there is a reasonable possibility that any material loss exceeding amounts already accrued, if any, will result from any of the claims, lawsuits and proceedings to which the Company is subject to, either individually or in the aggregate.

13. Segment Information

The Company is engaged in the sale of property and casualty insurance products and has organized its business model around three classes of insurance businesses: commercial lines, personal lines, and wholesale agency business. Within these three businesses, the Company offers various insurance products and insurance agency services. Such insurance businesses are engaged in underwriting and marketing insurance coverages, and administering claims processing for such policies. The Company views the commercial and personal lines segments as underwriting business (business that takes on insurance underwriting risk). The wholesale agency business provides non-risk bearing revenue through commissions and policy fees. The wholesale agency business increases the product options to the Company’s independent retail agents by offering both insurance products from the Insurance Company Subsidiaries as well as products offered by other insurers.

The Company defines its operating segments as components of the business where separate financial information is available and used by the co-chief operating decision makers in deciding how to allocate resources to its segments and in assessing its performance. In assessing performance of its operating segments, the Company’s co-chief operating decision makers, the Co-Chief Executive Officers, review a number of financial measures including gross written premiums, net earned premiums, losses and LAE, net of reinsurance recoveries, and other revenue and expenses. The primary measure used for making decisions about resources to be allocated to an operating segment and assessing its performance is segment underwriting gain or loss which is defined as segment revenues, consisting of net earned premiums and other income, less segment expenses, consisting of losses and LAE, policy acquisition costs and operating expenses of the operating segments. Operating expenses primarily include compensation and related benefits for personnel, policy issuance and claims systems, rent and utilities. The Company markets, distributes and sells its insurance products through its own insurance agencies and a network of independent agents. All of the Company’s insurance activities are conducted in the United States with a concentration of activity in Michigan, Texas, Oklahoma and California. For the nine months ended September 30, 2023 and

21


 

2022, gross written premiums attributable to these four states were 56.6% and 54.0%, respectively, of the Company’s total gross written premiums.

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

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

22


 

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

 

Three months ended
September 30, 2023

 

Commercial Lines

 

 

Personal
Lines

 

 

Total
Underwriting

 

 

Wholesale
Agency

 

 

Corporate

 

 

Eliminations

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross written premiums

 

$

28,492

 

 

$

10,056

 

 

$

38,548

 

 

$

 

 

$

 

 

$

 

 

$

38,548

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net written premiums

 

$

(3,155

)

 

$

8,844

 

 

$

5,689

 

 

$

 

 

$

 

 

$

 

 

$

5,689

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earned premiums

 

$

17,315

 

 

$

6,664

 

 

$

23,979

 

 

$

 

 

$

 

 

$

 

 

$

23,979

 

Other income

 

 

61

 

 

 

24

 

 

 

85

 

 

 

589

 

 

 

24

 

 

 

(259

)

 

 

439

 

Segment revenue

 

 

17,376

 

 

 

6,688

 

 

 

24,064

 

 

 

589

 

 

 

24

 

 

 

(259

)

 

 

24,418

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and LAE, net

 

 

15,424

 

 

 

5,487

 

 

 

20,911

 

 

 

 

 

 

 

 

 

 

 

 

20,911

 

Policy acquisition costs

 

 

2,583

 

 

 

1,813

 

 

 

4,396

 

 

 

606

 

 

 

 

 

 

(277

)

 

 

4,725

 

Operating expenses

 

 

2,928

 

 

 

845

 

 

 

3,773

 

 

 

310

 

 

 

320

 

 

 

 

 

 

4,403

 

Segment expenses

 

 

20,935

 

 

 

8,145

 

 

 

29,080

 

 

 

916

 

 

 

320

 

 

 

(277

)

 

 

30,039

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment gain (loss)

 

$

(3,559

)

 

$

(1,457

)

 

$

(5,016

)

 

$

(327

)

 

$

(296

)

 

$

18

 

 

$

(5,621

)

Investment income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,450

 

 

 

 

 

 

1,450

 

Change in fair value of equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(87

)

 

 

 

 

 

(87

)

Gain from sale of renewal rights

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,335

 

 

 

 

 

 

2,335

 

Other gains (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(855

)

 

 

 

 

 

(855

)

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

 

$

(3,559

)

 

$

(1,457

)

 

$

(5,016

)

 

$

(327

)

 

$

2,547

 

 

$

18

 

 

$

(2,778

)

 

Three months ended
September 30, 2022

 

Commercial
Lines

 

 

Personal
Lines

 

 

Total
Underwriting

 

 

Wholesale
Agency

 

 

Corporate

 

 

Eliminations

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross written premiums

 

$

27,635

 

 

$

5,453

 

 

$

33,088

 

 

$

 

 

$

 

 

$

 

 

$

33,088

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net written premiums

 

$

18,730

 

 

$

4,963

 

 

$

23,693

 

 

$

 

 

$

 

 

$

 

 

$

23,693

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earned premiums

 

$

20,789

 

 

$

4,169

 

 

$

24,958

 

 

$

 

 

$

 

 

$

 

 

$

24,958

 

Other income

 

 

57

 

 

 

26

 

 

 

83

 

 

 

793

 

 

 

113

 

 

 

(386

)

 

 

603

 

Segment revenue

 

 

20,846

 

 

 

4,195

 

 

 

25,041

 

 

 

793

 

 

 

113

 

 

 

(386

)

 

 

25,561

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and LAE, net

 

 

13,348

 

 

 

3,323

 

 

 

16,671

 

 

 

 

 

 

 

 

 

 

 

 

16,671

 

Policy acquisition costs

 

 

4,950

 

 

 

1,214

 

 

 

6,164

 

 

 

498

 

 

 

 

 

 

(432

)

 

 

6,230

 

Operating expenses

 

 

3,297

 

 

 

519

 

 

 

3,816

 

 

 

245

 

 

 

319

 

 

 

 

 

 

4,380

 

Segment expenses

 

 

21,595

 

 

 

5,056

 

 

 

26,651

 

 

 

743

 

 

 

319

 

 

 

(432

)

 

 

27,281

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment gain (loss)

 

$

(749

)

 

$

(861

)

 

$

(1,610

)

 

$

50

 

 

$

(206

)

 

$

46

 

 

$

(1,720

)

Investment income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

860

 

 

 

 

 

 

860

 

Change in fair value of equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(151

)

 

 

 

 

 

(151

)

Other gains (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

66

 

 

 

 

 

 

66

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(778

)

 

 

 

 

 

(778

)

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

 

$

(749

)

 

$

(861

)

 

$

(1,610

)

 

$

50

 

 

$

(209

)

 

$

46

 

 

$

(1,723

)

 

23


 

 

Nine months ended
September 30, 2023

 

Commercial
Lines

 

 

Personal
Lines

 

 

Total
Underwriting

 

 

Wholesale
Agency

 

 

Corporate

 

 

Eliminations

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross written premiums

 

$

92,228

 

 

$

27,208

 

 

$

119,436

 

 

$

 

 

$

 

 

$

 

 

$

119,436

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net written premiums

 

$

29,571

 

 

$

23,788

 

 

$

53,359

 

 

$

 

 

$

 

 

$

 

 

$

53,359

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earned premiums

 

$

51,925

 

 

$

17,189

 

 

$

69,114

 

 

$

 

 

$

 

 

$

 

 

$

69,114

 

Other income

 

 

169

 

 

 

70

 

 

 

239

 

 

 

2,062

 

 

 

170

 

 

 

(1,008

)

 

 

1,463

 

Segment revenue

 

 

52,094

 

 

 

17,259

 

 

 

69,353

 

 

 

2,062

 

 

 

170

 

 

 

(1,008

)

 

 

70,577

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and LAE, net

 

 

39,568

 

 

 

14,375

 

 

 

53,943

 

 

 

 

 

 

 

 

 

 

 

 

53,943

 

Policy acquisition costs

 

 

8,745

 

 

 

4,655

 

 

 

13,400

 

 

 

1,503

 

 

 

 

 

 

(1,044

)

 

 

13,859

 

Operating expenses

 

 

9,556

 

 

 

2,229

 

 

 

11,785

 

 

 

1,027

 

 

 

984

 

 

 

 

 

 

13,796

 

Segment expenses

 

 

57,869

 

 

 

21,259

 

 

 

79,128

 

 

 

2,530

 

 

 

984

 

 

 

(1,044

)

 

 

81,598

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment gain (loss)

 

$

(5,775

)

 

$

(4,000

)

 

$

(9,775

)

 

$

(468

)

 

$

(814

)

 

$

36

 

 

$

(11,021

)

Investment income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,111

 

 

 

 

 

 

4,111

 

Change in fair value of equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

595

 

 

 

 

 

 

595

 

Gain from sale of renewal rights

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,335

 

 

 

 

 

 

2,335

 

Other gains (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,361

)

 

 

 

 

 

(2,361

)

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

 

$

(5,775

)

 

$

(4,000

)

 

$

(9,775

)

 

$

(468

)

 

$

3,866

 

 

$

36

 

 

$

(6,341

)

 

Nine months ended
September 30, 2022

 

Commercial
Lines

 

 

Personal
Lines

 

 

Total
Underwriting

 

 

Wholesale
Agency

 

 

Corporate

 

 

Eliminations

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross written premiums

 

$

88,297

 

 

$

15,173

 

 

$

103,470

 

 

$

 

 

$

 

 

$

 

 

$

103,470

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net written premiums

 

$

55,456

 

 

$

13,524

 

 

$

68,980

 

 

$

 

 

$

 

 

$

 

 

$

68,980

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earned premiums

 

$

62,097

 

 

$

11,392

 

 

$

73,489

 

 

$

 

 

$

 

 

$

 

 

$

73,489

 

Other income

 

 

195

 

 

 

58

 

 

 

253

 

 

 

2,969

 

 

 

407

 

 

 

(1,665

)

 

 

1,964

 

Segment revenue

 

 

62,292

 

 

 

11,450

 

 

 

73,742

 

 

 

2,969

 

 

 

407

 

 

 

(1,665

)

 

 

75,453

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and LAE, net

 

 

49,864

 

 

 

7,076

 

 

 

56,940

 

 

 

 

 

 

 

 

 

 

 

 

56,940

 

Policy acquisition costs

 

 

13,717

 

 

 

3,530

 

 

 

17,247

 

 

 

2,026

 

 

 

 

 

 

(1,854

)

 

 

17,419

 

Operating expenses

 

 

9,966

 

 

 

1,405

 

 

 

11,371

 

 

 

811

 

 

 

828

 

 

 

 

 

 

13,010

 

Segment expenses

 

 

73,547

 

 

 

12,011

 

 

 

85,558

 

 

 

2,837

 

 

 

828

 

 

 

(1,854

)

 

 

87,369

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment gain (loss)

 

$

(11,255

)

 

$

(561

)

 

$

(11,816

)

 

$

132

 

 

$

(421

)

 

$

189

 

 

$

(11,916

)

Investment income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,931

 

 

 

 

 

 

1,931

 

Net realized investment gains (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,505

)

 

 

 

 

 

(1,505

)

Change in fair value of equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

446

 

 

 

 

 

 

446

 

Other gains (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

60

 

 

 

 

 

 

60

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,216

)

 

 

 

 

 

(2,216

)

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

 

$

(11,255

)

 

$

(561

)

 

$

(11,816

)

 

$

132

 

 

$

(1,705

)

 

$

189

 

 

$

(13,200

)

 

 

24


 

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
September 30,

 

 

 

 

 

 

 

 

 

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

%

 

 

 

 

 

 

 

(1)
The loss ratio is the ratio, expressed as a percentage, of net losses and loss adjustment expenses to net earned premiums and other income from underwriting operations.
(2)
The expense ratio is the ratio, expressed as a percentage, of policy acquisition costs and other underwriting expenses to net earned premiums and other income from underwriting operations.
(3)
The combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100% indicates an underwriting profit. A combined ratio over 100% indicates an underwriting loss.

* Percentage change is not meaningful.

Premiums

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

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
September 30,

 

 

 

 

 

 

 

 

 

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
Lines

 

 

Personal
Lines

 

 

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
Lines

 

 

Personal
Lines

 

 

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
September 30,

 

 

 

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
September 30,

 

 

 

 

 

 

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
September 30,

 

 

 

 

 

 

 

 

 

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

%

 

 

 

 

 

 

 

(1)
The loss ratio is the ratio, expressed as a percentage, of net losses and loss adjustment expenses to net earned premiums and other income from underwriting operations.
(2)
The expense ratio is the ratio, expressed as a percentage, of policy acquisition costs and other underwriting expenses to net earned premiums and other income from underwriting operations.
(3)
The combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100% indicates an underwriting profit. A combined ratio over 100% indicates an underwriting loss.

* Percentage change is not meaningful.

Premiums

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

33


 

Our premiums are presented below for the nine months ended September 30, 2023 and 2022 (dollars in thousands):

 

 

 

Nine months ended
September 30,

 

 

 

 

 

 

 

 

 

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
Lines

 

 

Personal
Lines

 

 

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
Lines

 

 

Personal
Lines

 

 

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
September 30,

 

 

 

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
September 30,

 

 

 

 

 

 

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
September 30,

 

 

Nine months ended
September 30,

 

 

 

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
Increase (Decrease) in

 

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

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

 

 

 

 

 

Incorporated by Reference

Exhibit

Number

 

Exhibit Description

 

Form

 

Period

Ending

 

Exhibit /

Appendix

Number

 

Filing Date

 

 

 

 

 

 

 

 

 

 

 

10.30

 

Second Amended and Restated Note Purchase Agreement dated as of September 30, 2023 between the Company and Elanus Capital Investments Master SP Series 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31.1

 

Section 302 Certification — Co-CEO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31.2

 

Section 302 Certification — Co-CEO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31.3

 

Section 302 Certification — CFO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32.1*

 

Section 906 Certification — Co-CEO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32.2*

 

Section 906 Certification — Co-CEO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32.3*

 

Section 906 Certification — CFO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.INS

 

inline XBRL Instance Document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.SCH

 

inline XBRL Taxonomy Extension Schema Document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.CAL

 

inline XBRL Taxonomy Extension Calculation Linkbase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.DEF

 

inline XBRL Taxonomy Extension Definition Linkbase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.LAB

 

inline XBRL Taxonomy Extension Label Linkbase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.PRE

 

inline XBRL Taxonomy Extension Presentation Linkbase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

104

 

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

 

 

 

 

 

 

 

 

 

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

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