UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the Quarterly Period Ended
OR
For the transition period from to
Commission file number
(Exact name of registrant as specified in its charter)
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ |
Accelerated filer ☐ |
Smaller reporting company |
Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
The number of outstanding shares of the registrant’s common stock, no par value, as of May 14, 2024, was
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Form 10-Q
INDEX
2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
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March 31, |
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December 31, |
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(Unaudited) |
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Assets |
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Investment securities: |
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Debt securities, at fair value (amortized cost of $ |
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$ |
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$ |
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Equity securities, at fair value (cost of $ |
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Short-term investments, at fair value |
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Total investments |
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Cash and cash equivalents |
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Premiums and agents' balances receivable, net |
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Receivable from Affiliate |
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Reinsurance recoverables on unpaid losses |
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Reinsurance recoverables on paid losses |
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Prepaid reinsurance premiums |
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Deferred policy acquisition costs |
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Other assets |
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Total assets |
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$ |
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$ |
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Liabilities and Shareholders' Equity |
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Liabilities: |
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Unpaid losses and loss adjustment expenses |
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$ |
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$ |
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Unearned premiums |
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Reinsurance premiums payable |
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Debt |
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Funds held under reinsurance agreements |
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Premiums payable to other insureds |
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Accounts payable and accrued expenses |
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Total liabilities |
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Shareholders' equity: |
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Preferred stock, |
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Common stock, |
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Accumulated deficit |
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( |
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Accumulated other comprehensive income (loss) |
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( |
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( |
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Total shareholders' equity |
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Total liabilities and shareholders' equity |
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$ |
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$ |
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The accompanying notes are an integral part of the Consolidated Financial Statements.
3
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(dollars in thousands, except per share data)
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Three Months Ended |
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2024 |
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2023 |
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Revenue and Other Income |
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Premiums |
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Gross earned premiums |
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$ |
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Ceded earned premiums |
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( |
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Net earned premiums |
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Net investment income |
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Net realized investment gains (losses) |
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Change in fair value of equity securities |
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Other gains (losses) |
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Agency commission income |
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Other income |
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Total revenue and other income |
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Expenses |
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Losses and loss adjustment expenses, net |
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Policy acquisition costs |
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Operating expenses |
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Interest expense |
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Total expenses |
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Income (loss) before equity earnings in Affiliate and income taxes |
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Equity earnings (loss) in Affiliate, net of tax |
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Income tax expense (benefit) |
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Net income (loss) |
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$ |
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$ |
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Preferred stock dividends |
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Net income (loss) allocable to common shareholders |
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$ |
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$ |
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Earnings (loss) per common share, basic and diluted |
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$ |
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$ |
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Weighted average common shares outstanding, basic and diluted |
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The accompanying notes are an integral part of the Consolidated Financial Statements.
4
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(dollars in thousands)
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Three Months Ended |
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2024 |
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2023 |
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Net income (loss) |
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$ |
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$ |
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Other comprehensive income (loss), net of tax: |
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Unrealized investment gains (losses): |
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Unrealized investment gains (losses) during the period |
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( |
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Income tax (benefit) expense |
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Unrealized investment gains (losses), net of tax |
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Less: reclassification adjustments to: |
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Net realized investment gains (losses) included in net income (loss) |
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Income tax (benefit) expense |
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Total reclassifications included in net income (loss), net of tax |
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Other comprehensive income (loss) |
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( |
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Total comprehensive income (loss) |
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$ |
( |
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$ |
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The accompanying notes are an integral part of the Consolidated Financial Statements.
5
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
(dollars in thousands)
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No Par, Preferred Stock |
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No Par, Common Stock |
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Accumulated |
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Accumulated |
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Total |
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Shares |
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Amount |
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Shares |
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Amount |
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Deficit |
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Income (Loss) |
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Equity |
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Balances at December 31, 2023 |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Net income (loss) |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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— |
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Cash dividends paid on preferred stock |
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— |
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— |
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— |
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— |
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( |
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— |
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( |
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Other comprehensive income (loss) |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Balances at March 31, 2024 |
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$ |
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$ |
( |
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$ |
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$ |
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No Par, Common Stock |
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Accumulated |
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Accumulated |
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Total |
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Shares |
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Amount |
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Deficit |
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Income (Loss) |
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Equity |
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Balances at December 31, 2022 |
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$ |
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$ |
( |
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$ |
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$ |
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Net income (loss) |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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Other comprehensive income (loss) |
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— |
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— |
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— |
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Balances at March 31, 2023 |
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$ |
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$ |
( |
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$ |
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$ |
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The accompanying notes are an integral part of the Consolidated Financial Statements.
6
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
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Three Months Ended March 31, |
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2024 |
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2023 |
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Cash Flows From Operating Activities |
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Net income (loss) |
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$ |
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$ |
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Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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Amortization of bond premium and discount, net |
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( |
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( |
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Change in fair value of equity securities |
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( |
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Stock-based compensation expenses |
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Equity loss (earnings) in Affiliate, net of tax |
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Changes in operating assets and liabilities: |
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(Increase) decrease in: |
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Premiums and agents' balances and other receivables |
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Reinsurance recoverables |
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Prepaid reinsurance premiums |
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Deferred policy acquisition costs |
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Other assets |
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( |
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Increase (decrease) in: |
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Unpaid losses and loss adjustment expenses |
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Unearned premiums |
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( |
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Funds held under reinsurance agreements |
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( |
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Reinsurance premiums payable |
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Premiums payable to other insureds |
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( |
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— |
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Accounts payable and other liabilities |
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Net cash provided by (used in) operating activities |
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Cash Flows From Investing Activities |
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Purchase of investments |
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Proceeds from maturities and redemptions of investments |
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Proceeds from sales of investments |
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Obligation to SSU |
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— |
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Net cash provided by (used in) investing activities |
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Cash Flows From Financing Activities |
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Dividends paid to shareholders |
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— |
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Repayment of long-term debt |
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— |
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Net cash provided by (used in) financing activities |
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( |
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Net increase (decrease) in cash |
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Cash at beginning of period |
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Cash at end of period |
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$ |
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$ |
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Supplemental Disclosure of Cash Flow Information: |
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Interest paid |
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$ |
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$ |
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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"), which is our managing general agency ("MGA"), formerly known as Sycamore Insurance Agency, Inc. ("Sycamore"), and VSRM, Inc. ("VSRM"). CIC, WPIC, and RCIC are collectively referred to as the "Insurance Company Subsidiaries." On a stand-alone basis, Conifer Holdings, Inc. is referred to as the "Parent Company." VSRM owns a
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which differ from statutory accounting practices prescribed or permitted for insurance companies by regulatory authorities. The Company has applied the rules and regulations of the United States Securities and Exchange Commission (“SEC”) regarding interim financial reporting and therefore the consolidated financial statements do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of management, all adjustments, consisting of items of a normal recurring nature, necessary for a fair presentation of the consolidated interim financial statements, have been included.
These consolidated financial statements and the notes thereto should be read in conjunction with the Company's audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC.
The results of operations for the three months ended March 31, 2024, are not necessarily indicative of the results expected for the year ended December 31, 2024.
Business
The Company is engaged in the sale of property and casualty insurance products and has organized its principal operations into
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes the amounts included in the consolidated financial statements reflect management's best estimates and assumptions, actual results may differ from these estimates.
Cash, Cash Equivalents, and Short-term Investments
Cash consists of cash deposits in banks, generally in operating accounts. Cash equivalents consist of money-market funds that are specifically used as overnight investments tied to cash deposit accounts. Short-term investments, consisting of money market funds, are classified as investments in the consolidated balance sheets as they relate to the Company’s investment activities.
Accounting Guidance Not Yet Adopted
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
8
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.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280). This guidance is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses, allowing financial statement users to better understand the components of a segment's profit or loss to assess potential future cash flows for each reportable segment and the entity as a whole. The amendments expand a public entity's segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker ("CODM"), clarifying when an entity may report one or more additional measures to assess segment performance, requiring enhanced interim disclosures, providing new disclosure requirements for entities with a single reportable segment, and requiring other new disclosures. ASU 2023-07 is effective for fiscal years beginning after December 31, 2024. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740). ASU 2023-09 requires public business entities to disclose additional information with respect to the reconciliation of the effective tax rate to the statutory rate. Additionally, public business entities will need to disaggregate federal, state and foreign taxes paid in their financial statements. ASU 2023-09 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2024. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.
Company Liquidity
We conduct our business operations primarily through our Insurance Company Subsidiaries and MGA. Our ability to service debt, and pay administrative expenses is primarily reliant upon our intercompany service fees paid by the Insurance Company Subsidiaries and MGA to the holding company for management, administrative, and information technology services provided to the Insurance Company Subsidiaries and MGA 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, and we do not anticipate any dividends being paid to us from our Insurance Company Subsidiaries during 2024 and 2025. The Parent Company may receive dividends from our MGA without regulatory restrictions.
Due to significant losses in 2023, much of which was attributable to strengthening reserves and severe storm activity affecting the Oklahoma homeowners business, both Insurance Company Subsidiaries lack sufficient capital to continue to underwrite the volume of business they have historically written. Accordingly, in the first quarter of 2024, management implemented a strategic shift in which the Company began utilizing third-party insurers to mostly rely on commission revenues generated by our MGA to fund operations and service debt, going forward. Substantially all of our commercial lines business will no longer be written by our Insurance Company Subsidiaries by the end of the second quarter of 2024. However, we do plan to continue to write a limited amount of the personal lines on CIC. We do not expect to be writing any business in WPIC by the end of the second quarter of 2024. The Company may need to contribute more capital into WPIC before the end of the year in order to maintain its licenses, however, since the Company will no longer be writing business in WPIC, this will not have a material impact on the Company's operations or cash flows. We expect to be able to fund any needed contributions with existing cash and investments at the Parent Company.
The Company will expect to generate the vast majority of its revenue from commissions from third-party insurers, going forward. The Company has executed multiple producer agreements that will underwrite a majority of the Company’s commercial lines business. We expect to continue to underwrite the existing personal lines business within our Insurance Company Subsidiaries. Management may also consider the sale of other assets to generate additional cash resources available to the Company. 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 over the next twelve months.
2. Investments
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 months ended March 31, 2024. The Company holds only investment grade securities from high credit quality issuers. The gross unrealized losses of $
9
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 March 31, 2024 and December 31, 2023 were as follows (dollars in thousands):
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March 31, 2024 |
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Cost or |
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Gross Unrealized |
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Estimated |
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Amortized Cost |
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Gains |
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Losses |
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Fair Value |
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Debt Securities: |
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|
||||
U.S. Government |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
State and local government |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Corporate debt |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Asset-backed securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Total debt securities available for sale |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
|
|
December 31, 2023 |
|
|||||||||||||
|
|
Cost or |
|
|
Gross Unrealized |
|
|
Estimated |
|
|||||||
|
|
Amortized Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
||||
Debt Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. Government |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
State and local government |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Corporate debt |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Asset-backed securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Total debt securities available for sale |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
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):
|
|
March 31, 2024 |
|
|||||||||||||||||||||||||||||||||
|
|
Less than 12 months |
|
|
Greater than 12 months |
|
|
Total |
|
|||||||||||||||||||||||||||
|
|
No. of |
|
|
Fair Value of |
|
|
Gross |
|
|
No. of |
|
|
Fair Value of |
|
|
Gross |
|
|
No. of |
|
|
Fair Value of |
|
|
Gross |
|
|||||||||
Debt Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
U.S. Government |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
|
|
|
$ |
|
|
$ |
( |
) |
||||||
State and local government |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||||||
Corporate debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|||||||
Asset-backed securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||||||
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|||||||
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|||||||
Total debt securities available for sale |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
|
|
|
$ |
|
|
$ |
( |
) |
||||||
10
|
|
December 31, 2023 |
|
|||||||||||||||||||||||||||||||||
|
|
Less than 12 months |
|
|
Greater than 12 months |
|
|
Total |
|
|||||||||||||||||||||||||||
|
|
No. of |
|
|
Fair Value of |
|
|
Gross |
|
|
No. of |
|
|
Fair Value of |
|
|
Gross |
|
|
No. of |
|
|
Fair Value of |
|
|
Gross |
|
|||||||||
Debt Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
U.S. Government |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
|
|
|
$ |
|
|
$ |
( |
) |
||||||
State and local government |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||||||
Corporate debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|||||||
Asset-backed securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||||||
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|||||||
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|||||||
Total debt securities available for sale |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
|
|
|
$ |
|
|
$ |
( |
) |
||||||
11
The Company’s sources of net investment income and losses are as follows (dollars in thousands):
|
|
Three Months Ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Debt securities |
|
$ |
|
|
$ |
|
||
Equity securities |
|
|
|
|
|
|
||
Cash, cash equivalents and short-term investments |
|
|
|
|
|
|
||
Total investment income |
|
|
|
|
|
|
||
Investment expenses |
|
|
( |
) |
|
|
( |
) |
Net investment income |
|
$ |
|
|
$ |
|
||
The Company had
Proceeds from available-for-sale debt securities were $
There were
The Company's gross unrealized gains related to its equity investments were $
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
The table below summarizes the amortized cost and fair value of available-for-sale debt securities by contractual maturity at March 31, 2024. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties (dollars in thousands):
|
|
Amortized |
|
|
Estimated |
|
||
Due in one year or less |
|
$ |
|
|
$ |
|
||
Due after one year through five years |
|
|
|
|
|
|
||
Due after five years through ten years |
|
|
|
|
|
|
||
Due after ten years |
|
|
|
|
|
|
||
Securities with contractual maturities |
|
|
|
|
|
|
||
Asset-backed securities |
|
|
|
|
|
|
||
Mortgage-backed securities |
|
|
|
|
|
|
||
Commercial mortgage-backed securities |
|
|
|
|
|
|
||
Collateralized mortgage obligations |
|
|
|
|
|
|
||
Total debt securities |
|
$ |
|
|
$ |
|
||
12
3. 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 March 31, 2024 and December 31, 2023 (dollars in thousands):
|
|
March 31, 2024 |
|
|||||||||||||
|
|
Fair Value Measurements |
|
|||||||||||||
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Debt Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. Government |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
State and local government |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Corporate debt |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equity Securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total marketable investments measured at fair value |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Investments measured at NAV: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Investment in limited partnership |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total assets measured at fair value |
|
$ |
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Senior unsecured notes * |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Senior secured notes * |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Liabilities (non-recurring fair value measure) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
* Carried at face value of debt net of unamortized debt issuance costs on the consolidated balance sheets
13
|
|
December 31, 2023 |
|
|||||||||||||
|
|
Fair Value Measurements |
|
|||||||||||||
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Debt Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. Government |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
State and local government |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Corporate debt |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total marketable investments measured at fair value |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Investments measured at NAV: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Investment in limited partnership |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total assets measured at fair value |
|
$ |
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Senior unsecured notes * |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Subordinated notes * |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Liabilities (non-recurring fair value measure) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
* Carried at face value of debt net of unamortized debt issuance costs on the consolidated balance sheets
Level 1 investments consist of equity securities traded in an active exchange market. The Company uses unadjusted quoted prices for identical instruments to measure fair value. Level 1 also includes money market funds and other interest-bearing deposits at banks, which are reported as short-term investments. The fair value measurements that were based on Level 1 inputs comprise
Level 2 investments include debt securities and equity securities, which consist of U.S. government agency securities, state and local municipal bonds (including those held as restricted securities), corporate debt securities, mortgage-backed and asset-backed securities. The fair value of securities included in the Level 2 category were based on the market values obtained from a third-party pricing service that were evaluated using pricing models that vary by asset class and incorporate available trade, bid and other observable market information. The third-party pricing service monitors market indicators, as well as industry and economic events. The fair value measurements that were based on Level 2 inputs comprise
The Company obtains pricing for each security from independent pricing services, investment managers or consultants to assist in determining fair value for its Level 2 investments. To validate that these quoted prices are reasonable estimates of fair value, the Company performs various quantitative and qualitative procedures, such as (i) evaluation of the underlying methodologies, (ii) analysis of recent sales activity, (iii) analytical review of our fair values against current market prices and (iv) comparison of the pricing services’ fair value to other pricing services’ fair value for the same investment. No markets for the investments were determined to be inactive at period-ends. Based on these procedures, the Company did not adjust the prices or quotes provided from independent pricing services, investment managers or consultants.
As of March 31, 2024 and December 31, 2023, the fair value of the Senior Secured Notes reported at amortized cost was considered a Level 3 liability in the fair value hierarchy and is entirely comprised of the Company's Senior Secured Notes. In determining the fair value of the Senior Secured Notes outstanding at March 31, 2024 and December 31, 2023, the security attributes (issue date, maturity, coupon, calls, etc.) 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 March 31, 2024 and December 31, 2023 U.S. Treasury rates, respectively. A new lattice was
14
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
4. Deferred Policy Acquisition Costs
The Company defers costs incurred which are incremental and directly related to the successful acquisition of new or renewal insurance business, net of corresponding amounts of ceded reinsurance commissions. Net deferred policy acquisition costs are amortized and charged to expense in proportion to premium earned over the estimated policy term. The Company anticipates that its deferred policy acquisition costs will be fully recoverable and there were no premium deficiencies for the three months ended March 31, 2024 and 2023.
|
|
Three Months Ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Balance at beginning of period |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Deferred policy acquisition costs |
|
|
|
|
|
|
||
Amortization of policy acquisition costs |
|
|
( |
) |
|
|
( |
) |
Net change |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
||
Balance at end of period |
|
$ |
|
|
$ |
|
||
5. Unpaid Losses and Loss Adjustment Expenses
The Company establishes reserves for unpaid losses and loss adjustment expenses ("LAE") which represent the estimated ultimate cost of all losses incurred that were both reported and unreported (i.e., incurred but not yet reported losses; or “IBNR”) and LAE incurred that remain unpaid at the balance sheet date. The Company’s reserving process takes into account known facts and interpretations of circumstances and factors including the Company’s experience with similar cases, actual claims paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management programs, product mix and contractual terms, changes in law and regulation, judicial decisions, and economic conditions. In the normal course of business, the Company may also supplement its claims processes by utilizing third-party adjusters, appraisers, engineers, inspectors, and other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims. The effects of inflation are implicitly considered in the reserving process.
Reserves are estimates of unpaid portions of losses that have occurred, including IBNR losses; therefore, the establishment of appropriate reserves is an inherently uncertain and complex process. The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimates. The highest degree of uncertainty is associated with reserves for losses incurred in the current reporting period as it contains the greatest proportion of losses that have not been reported or settled. The Company regularly updates its reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in reserve estimates, which may be material, are reported in the results of operations in the period such changes are determined to be needed and recorded.
Management believes that the reserve for losses and LAE is appropriately established in the aggregate and adequate to cover the ultimate net cost of reported and unreported claims arising from losses which had occurred by the date of the consolidated financial statements based on available facts and in accordance with applicable laws and regulations.
15
The table below provides the changes in the reserves for losses and LAE, net of reinsurance recoverables, for the periods indicated as follows (dollars in thousands):
|
|
Three months ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Gross reserves - beginning of period |
|
$ |
|
|
$ |
|
||
Less: reinsurance recoverables on unpaid losses |
|
|
( |
) |
|
|
( |
) |
Net reserves - beginning of period |
|
|
|
|
|
|
||
Add: incurred losses and LAE, net of reinsurance: |
|
|
|
|
|
|
||
Current period |
|
|
|
|
|
|
||
Prior period |
|
|
( |
) |
|
|
( |
) |
Total net incurred losses and LAE |
|
|
|
|
|
|
||
Deduct: loss and LAE payments, net of reinsurance: |
|
|
|
|
|
|
||
Current period |
|
|
|
|
|
|
||
Prior period |
|
|
|
|
|
|
||
Total net loss and LAE payments |
|
|
|
|
|
|
||
Net reserves - end of period |
|
|
|
|
|
|
||
Plus: reinsurance recoverables on unpaid losses |
|
|
|
|
|
|
||
Gross reserves - end of period |
|
$ |
|
|
$ |
|
||
Net losses and LAE decreased by $
The Company’s incurred losses during the three months ended March 31, 2024 included prior-year favorable development of $
Net losses and LAE were $
6. Reinsurance
In the normal course of business, the Company participates in reinsurance agreements in order to limit losses that may arise from catastrophes or other individually severe events. The Company ceded primarily all specific commercial liability risks in excess of $
A "treaty" is a reinsurance agreement in which coverage is provided for a class of risks and does not require policy by policy underwriting of the reinsurer. "Facultative" reinsurance is where a reinsurer negotiates an individual reinsurance agreement for every policy it will reinsure on a policy by policy basis. A loss is covered under a reinsurance contract if the loss occurs within the effective dates of the agreement notwithstanding when the loss is reported.
Reinsurance does not discharge the direct insurer from liability to its policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors the concentration of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. To date, the Company has not experienced any significant difficulties in collecting reinsurance recoverables.
16
The Company assumes written premiums under a few fronting arrangements. The fronting arrangements are with unaffiliated insurers who write on behalf of the Company in markets that require a minimum A.M. Best rating, or 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 of the Security Program. The Company ceded $
On November 1, 2022, the Company entered into a loss portfolio transfer (“LPT”) reinsurance agreement. As of March 31, 2024, the Company has recorded losses through the $
As of March 31, 2024, the Consolidated Balance Sheets included $
The following table presents the effects of reinsurance and assumption transactions on written premiums, earned premiums and losses and LAE (dollars in thousands):
|
|
Three Months Ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Written premiums: |
|
|
|
|
|
|
||
Direct |
|
$ |
|
|
$ |
|
||
Assumed |
|
|
|
|
|
|
||
Ceded |
|
|
( |
) |
|
|
( |
) |
Net written premiums |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Earned premiums: |
|
|
|
|
|
|
||
Direct |
|
$ |
|
|
$ |
|
||
Assumed |
|
|
|
|
|
|
||
Ceded |
|
|
( |
) |
|
|
( |
) |
Net earned premiums |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Losses and LAE: |
|
|
|
|
|
|
||
Direct |
|
$ |
|
|
$ |
|
||
Assumed |
|
|
( |
) |
|
|
|
|
Ceded |
|
|
( |
) |
|
|
|
|
Net Losses and LAE |
|
$ |
|
|
$ |
|
||
7. Debt
As of March 31, 2024, the Company’s debt was comprised of two instruments: $
|
|
As of March 31, 2024 |
|
|
As of December 31, 2023 |
|
||||||||||||||||||
|
|
Gross Debt |
|
|
Unamortized |
|
|
Net Debt |
|
|
Gross Debt |
|
|
Unamortized |
|
|
Net Debt |
|
||||||
Senior unsecured notes |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Senior secured notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
17
New Public Notes
The Company issued $
Senior Secured Notes
The Company restructured its subordinated notes to Senior Secured Notes with its lender on September 30, 2023. The Senior Secured Notes mature on
Debt issuance costs
The Company incurred $
As of March 31, 2024, the carrying value of the New Public Notes and Senior Secured Notes were offset by $
Debt covenants
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 capital ratios. The Senior Secured Notes also require that any proceeds the Company receives from asset sales be used to pay down the principal. Debt covenants have been waived for violation of compliance as of December 31, 2023 and any potential future violations through May 31, 2025.
The following table shows the scheduled principal payments of the Company's debt as of March 31, 2024 (dollars in thousands):
Year |
|
Senior unsecured notes |
|
|
Senior secured notes |
|
||
2024 |
|
|
|
|
|
— |
|
|
2025 |
|
|
|
|
|
— |
|
|
2026 |
|
|
|
|
|
— |
|
|
2027 |
|
|
|
|
|
— |
|
|
2028 |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
8. Shareholder’s Equity
Preferred Stock
On December 20, 2023, the Company issued $
The Preferred Stock requires quarterly dividend payments. The Preferred Stock dividend rate is equal to the prime rate of Waterford Bank, N.A. ("Waterford Bank"), or
18
On the maturity date, each outstanding share of the Preferred Stock, that has not otherwise been redeemed, shall, without any further action by the holders, automatically convert into
As of March 31, 2024 and December 31, 2023, the Company had
Common Stock
As of March 31, 2024 and December 31, 2023, the Company had
9. Earnings Per Share
Basic and diluted earnings (loss) per share are computed by dividing net income allocable to common shareholders by the weighted average number of common shares outstanding during the period. The dividends on preferred stock are deducted from the net income to arrive at net income allocable to common shareholders.
|
|
Three Months Ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Net income (loss) |
|
$ |
|
|
$ |
|
||
Preferred stock dividends |
|
|
|
|
|
— |
|
|
Net income (loss) allocable to common shareholders |
|
$ |
|
|
$ |
|
||
Weighted average common shares, basic and diluted * |
|
|
|
|
|
|
||
Earnings (loss) per common share, basic and diluted |
|
$ |
|
|
$ |
|
||
* The preferred shares that may be convertible into a total of
10. Stock-based Compensation
On March 8, 2022 the Company issued options to purchase
On June 30, 2020, the Company issued options to purchase
In 2018, the Company issued
The Company recorded $
The Company recorded $
The Company recorded $
19
11. 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.
12. Segment Information
The Company is engaged in the sale of property and casualty insurance products and has organized its business model around
The Company defines its operating segments as components of the business where separate financial information is available and used by the 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 chief operating decision maker, the Chief Executive Officer, 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 Ohio. For the three months ended March 31, 2024 and 2023, gross written premiums attributable to these four states were
The wholesale agency business sells insurance products on behalf of the Company’s commercial and personal lines businesses as well as to third-party insurers. Certain acquisition costs incurred by the commercial and personal lines businesses are reflected as commission revenue for the wholesale agency business and are eliminated in the Eliminations category.
In addition to the reportable segments, the Company maintains a Corporate and Other category to reconcile segment results to the consolidated totals. The Corporate and Other category includes: (i) corporate operating expenses such as salaries and related benefits of the Company’s executive management team, some finance and information technology personnel, and other corporate headquarters expenses, (ii) interest expense on the Company’s debt obligations; (iii) depreciation and amortization on property and equipment, and (iv) all investment income activity. All investment income activity is reported within net investment income, net realized investment gains, and change in fair value of equity securities on the consolidated statements of operations. The Company’s assets on the consolidated balance sheet are not allocated to the reportable segments.
20
The following tables present information by reportable operating segment (dollars in thousands):
Three months ended |
|
Commercial Lines |
|
|
Personal |
|
|
Total |
|
|
Wholesale |
|
|
Corporate |
|
|
Eliminations |
|
|
Total |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Gross written premiums |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net written premiums |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net earned premiums |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||||
Agency commission income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
Segment revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Losses and LAE, net |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Policy acquisition costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
|||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||||
Segment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Segment gain (loss) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
||
Investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Change in fair value of equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||||
Income (loss) before equity earnings in Affiliate and income taxes |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
Three months ended |
|
Commercial |
|
|
Personal |
|
|
Total |
|
|
Wholesale |
|
|
Corporate |
|
|
Eliminations |
|
|
Total |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Gross written premiums |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net written premiums |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net earned premiums |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||||
Agency commission income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
Segment revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Losses and LAE, net |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Policy acquisition costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
|||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||||
Segment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Segment gain (loss) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||
Investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Change in fair value of equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||||
Income (loss) before equity earnings in Affiliate and income taxes |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|||||
13. Subsequent Events
21
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 March 31, 2024.
22
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Periods Ended March 31, 2024 and 2023
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 April 1, 2024 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 April 1, 2024 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
Strategic Shift from Premium Revenues to Commission Revenues
In the first quarter of 2024, the Company began a strategic shift that will reduce premiums revenues from underwriting operations and increase commission revenues from policy production within the MGA. The Company began utilizing one third-party insurer for the underwriting capacity in one program, but is expected to see significant expansion of the use of two third-party insurers during the second quarter of 2024. By the third quarter of 2024, we expect that almost all commercial lines business previously underwritten by the Company’s Insurance Company Subsidiaries will be written by third-party insurers. The Company expects to continue to directly write the Midwest and Texas homeowners business.
A.M. Best and Kroll
On March 25, 2024, Kroll downgraded the financial strength ratings of CIC and WPIC. Kroll has given CIC an insurance financial strength rating of BB- with a negative outlook. Kroll has given WPIC an insurance financial strength rating of B with a negative outlook. A BB- and a B rating indicates that the insurer's financial condition is low quality. Concurrently, the Company withdrew its participation in the rating process, and shall be non-rated by Kroll going forward.
On March 14, 2024, A.M. Best downgraded the financial strength ratings of CIC and WPIC to C. A rating of C means A.M. Best considers both companies to have a "weak" ability to meet ongoing financial obligations. Concurrently, the Company withdrew its participation in the rating process, and shall be non-rated by A.M. Best going forward.
Business Overview
We are an insurance holding company that markets and services our product offerings through specialty commercial and specialty personal insurance business lines. Currently, we are authorized to write insurance as an excess and surplus lines carrier in 44 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 almost 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,
23
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.
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 MGA, CIS operates through our wholesale agency business segment. Through CIS, we offer commercial and personal lines insurance products for our Insurance Company Subsidiaries as well as third-party insurers. The wholesale agency business segment provides our agents with more insurance product options. We expect the wholesale agency segment to become more prominent going forward as substantially all of our commercial lines business will be produced by our MGA and underwritten by third-party insurers.
An advantage of using these third-party insurers is they will both have a minimum of an A- A.M. Best rating, which greatly improves our competitive edge in the marketplace.
As we transition to more of a MGA operation, more revenues will be derived from commissions while insurance premiums and investment income will diminish over time. Cash flows from written premiums will decline quickly over the next two quarters and will be almost entirely comprised of the homeowners business by the third quarter of 2024. Concurrently, cash flows from commissions revenues will increase. As claims are settled, claim payments will be funded from the sale of investments within the Insurance Company Subsidiaries. Such claims payments will reduce cash flows provided by operating activities and will be offset by an increase in cash flows from investing activities as the investment portfolio is liquidated over time to fund the claim payments. Management may consider the sale of other assets to generate additional cash resources available to the Company.
There will be fewer claim payments as loss reserves run off. Other operating costs and commissions to retail agencies will fluctuate relatively similarly to the premiums produced by the MGA as they did when the premiums were written by the insurance companies. However, certain insurance company specific costs will decrease as the premium volume in the insurance company subsidiaries decreases. We expect that the net revenues generated in the MGA will provide the majority of the cash flows needed to cover operating and debt service costs going forward.
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 three months ended March 31, 2024, 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 April 1, 2024.
Executive Overview
The Company reported $24.3 million of gross written premiums in the first quarter of 2024, representing a 32.9% decrease as compared to the same period in 2023. Our commercial lines gross written premiums decreased by $16.2 million, or 56.0%, to $12.8 million in the first quarter of 2024, compared to $29.0 million for the same period in 2023. Personal lines gross written premiums increased by $4.3 million, or 59.6%, to $11.6 million in the first quarter of 2024, compared to $7.2 million for the same period in 2023.
The Company reported net income allocable to common shareholders of $74,000, or $0.01 per share for the three months ended March 31, 2024. The Company reported net income of $1.0 million, or $0.08 per share, for the three months ended March 31, 2023.
Adjusted operating income per share is a non-GAAP measure that represents net income allocable to common shareholders excluding net realized investment gains or losses, change in fair value of equity securities, and other gains or losses. Adjusted operating income was $188,000, or $0.02 per share, for the three months ended March 31, 2024. Adjusted operating income was $307,000, or $0.03 per share, for the three months ended March 31, 2023.
24
Our underwriting combined ratio was 96.7% and 99.5% for the three months ended March 31, 2024 and 2023, respectively.
Results of Operations For The Three Months Ended March 31, 2024 and 2023
The following table summarizes our operating results for the periods indicated (dollars in thousands):
Summary of Operating Results
|
|
Three Months Ended |
|
|
|
|
|
|
|
|||||||
|
|
2024 |
|
|
2023 |
|
|
$ Change |
|
|
% Change |
|
||||
Gross written premiums |
|
$ |
24,313 |
|
|
$ |
36,214 |
|
|
$ |
(11,901 |
) |
|
|
(32.9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net written premiums |
|
$ |
15,391 |
|
|
$ |
18,342 |
|
|
$ |
(2,951 |
) |
|
|
(16.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net earned premiums |
|
$ |
16,887 |
|
|
$ |
21,952 |
|
|
$ |
(5,065 |
) |
|
|
(23.1 |
)% |
Agency commission income |
|
|
4,336 |
|
|
|
430 |
|
|
|
3,906 |
|
|
* |
|
|
Other income |
|
|
260 |
|
|
|
196 |
|
|
|
64 |
|
|
|
32.7 |
% |
Losses and loss adjustment expenses, net |
|
|
10,520 |
|
|
|
13,713 |
|
|
|
(3,193 |
) |
|
|
(23.3 |
)% |
Policy acquisition costs |
|
|
7,013 |
|
|
|
4,721 |
|
|
|
2,292 |
|
|
|
48.5 |
% |
Operating expenses |
|
|
4,495 |
|
|
|
4,279 |
|
|
|
216 |
|
|
|
5.0 |
% |
Underwriting gain (loss) |
|
|
(545 |
) |
|
|
(135 |
) |
|
|
(410 |
) |
|
* |
|
|
Net investment income |
|
|
1,552 |
|
|
|
1,307 |
|
|
|
245 |
|
|
|
18.7 |
% |
Change in fair value of equity securities |
|
|
43 |
|
|
|
694 |
|
|
|
(651 |
) |
|
|
(93.8 |
)% |
Interest expense |
|
|
877 |
|
|
|
686 |
|
|
|
191 |
|
|
|
27.8 |
% |
Income (loss) before equity earnings in Affiliate, net of tax |
|
|
173 |
|
|
|
1,180 |
|
|
|
(1,007 |
) |
|
* |
|
|
Equity earnings (loss) in Affiliate, net of tax |
|
|
58 |
|
|
|
(179 |
) |
|
|
237 |
|
|
* |
|
|
Income tax expense (benefit) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
* |
|
|
Net income (loss) |
|
$ |
231 |
|
|
$ |
1,001 |
|
|
$ |
(770 |
) |
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Book value per common share outstanding |
|
$ |
0.21 |
|
|
$ |
1.82 |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Underwriting Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loss ratio (1) |
|
|
62.0 |
% |
|
|
62.2 |
% |
|
|
|
|
|
|
||
Expense ratio (2) |
|
|
34.7 |
% |
|
|
37.3 |
% |
|
|
|
|
|
|
||
Combined ratio (3) |
|
|
96.7 |
% |
|
|
99.5 |
% |
|
|
|
|
|
|
||
* Percentage change is not meaningful.
Premiums
Premiums are earned ratably over the term of the policy, whereas written premiums are reflected on the effective date of the policy. Almost all commercial lines and homeowners products have annual policies, under which premiums are earned evenly over one year. The resulting net earned premiums are impacted by the gross and ceded written premiums, earned ratably over the terms of the policies.
25
Our premiums are presented below for the three months ended March 31, 2024 and 2023 (dollars in thousands):
Summary of Premium Revenue
|
|
Three Months Ended |
|
|
|
|
|
|
|
|||||||
|
|
2024 |
|
|
2023 |
|
|
$ Change |
|
|
% Change |
|
||||
Gross written premiums |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commercial lines |
|
$ |
12,762 |
|
|
$ |
28,975 |
|
|
$ |
(16,213 |
) |
|
|
(56.0 |
)% |
Personal lines |
|
|
11,551 |
|
|
|
7,239 |
|
|
|
4,312 |
|
|
|
59.6 |
% |
Total |
|
$ |
24,313 |
|
|
$ |
36,214 |
|
|
$ |
(11,901 |
) |
|
|
(32.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net written premiums |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commercial lines |
|
$ |
8,287 |
|
|
$ |
12,241 |
|
|
$ |
(3,954 |
) |
|
|
(32.3 |
)% |
Personal lines |
|
|
7,104 |
|
|
|
6,101 |
|
|
|
1,003 |
|
|
|
16.4 |
% |
Total |
|
$ |
15,391 |
|
|
$ |
18,342 |
|
|
$ |
(2,951 |
) |
|
|
(16.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net earned premiums |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commercial lines |
|
$ |
8,797 |
|
|
$ |
17,123 |
|
|
$ |
(8,326 |
) |
|
|
(48.6 |
)% |
Personal lines |
|
|
8,090 |
|
|
|
4,829 |
|
|
|
3,261 |
|
|
|
67.5 |
% |
Total |
|
$ |
16,887 |
|
|
$ |
21,952 |
|
|
$ |
(5,065 |
) |
|
|
(23.1 |
)% |
Gross written premiums decreased $11.9 million, or 32.9%, to $24.3 million for the three months ended March 31, 2024, as compared to $36.2 million for the same period in 2023.
Commercial lines gross written premiums decreased $16.2 million, or 56.0%, to $12.8 million in the first quarter of 2024, as compared to $29.0 million for the first quarter of 2023. There was a $13.5 million decrease in premiums due to the sale of the Security Program in September 2023, as well as continued reductions in certain hospitality lines as we exited less profitable states. To a lesser degree, some of the premium reduction was due to our MGA beginning to shift business from our Insurance Company Subsidiaries to the third-party insurers. This impact will be significantly greater in the second and third quarters of 2024.
Personal lines gross written premiums increased $4.3 million, or 59.6%, to $11.6 million in the first quarter of 2024, as compared to $7.2 million for the same period in 2023. The increase was due to the organic growth in the low-value dwelling book of business in Texas and Oklahoma. The Company is expected to discontinue writing in Oklahoma in the second quarter of 2024, while Texas homeowners is expected to continue to grow.
Net written premiums decreased $3.0 million, or 16.1%, to $15.4 million for the three months ended March 31, 2024, as compared to $18.3 million for the same period in 2023. Net written premiums declined as a result of the Company's reduction in gross written premiums during the first quarter of 2024.
Agency Commission Income
Commission income is received by the Company’s insurance agency for writing policies for third-party insurance companies. Agency commission income increased by $3.9 million to $4.3 million during the first quarter of 2024, compared to $430,000 for the same period in 2023. The increase was due to the Company's Security Program transaction in September of 2023. As part of the arrangement with the buyer, our MGA was appointed as the producer for this business, for approximately a two-year transition period. During this time our MGA will receive a commission from the buyer, and pay a sub-producer substantially the same commission. This will result in higher consolidated Agency Commission Income for the Company. Policy acquisition costs will remain substantially the same amount for the period of this agreement. In the first quarter of 2024, the Company recorded $3.6 million of commission revenue and $3.6 million of commission expense as a result of this arrangement. Going forward, as our MGA produces more business for third-party insurers, we expect that commission revenue, net of expense, is to grow significantly.
26
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 March 31, 2024 and 2023 (dollars in thousands):
Three months ended March 31, 2024 |
|
Commercial |
|
|
Personal |
|
|
Total |
|
|||
Accident year net losses and LAE |
|
$ |
6,719 |
|
|
$ |
4,262 |
|
|
$ |
10,981 |
|
Net (favorable) adverse development |
|
|
47 |
|
|
|
(508 |
) |
|
|
(461 |
) |
Calendar year net losses and LAE |
|
$ |
6,766 |
|
|
$ |
3,754 |
|
|
$ |
10,520 |
|
|
|
|
|
|
|
|
|
|
|
|||
Accident year loss ratio |
|
|
76.0 |
% |
|
|
52.5 |
% |
|
|
64.7 |
% |
Net (favorable) adverse development |
|
|
0.5 |
% |
|
|
(6.3 |
)% |
|
|
(2.7 |
)% |
Calendar year loss ratio |
|
|
76.5 |
% |
|
|
46.2 |
% |
|
|
62.0 |
% |
Three months ended March 31, 2023 |
|
Commercial |
|
|
Personal |
|
|
Total |
|
|||
Accident year net losses and LAE |
|
$ |
11,364 |
|
|
$ |
3,562 |
|
|
$ |
14,926 |
|
Net (favorable) adverse development |
|
|
(817 |
) |
|
|
(396 |
) |
|
|
(1,213 |
) |
Calendar year net losses and LAE |
|
$ |
10,547 |
|
|
$ |
3,166 |
|
|
$ |
13,713 |
|
|
|
|
|
|
|
|
|
|
|
|||
Accident year loss ratio |
|
|
66.2 |
% |
|
|
73.4 |
% |
|
|
67.8 |
% |
Net (favorable) adverse development |
|
|
(4.8 |
)% |
|
|
(8.1 |
)% |
|
|
(5.6 |
)% |
Calendar year loss ratio |
|
|
61.4 |
% |
|
|
65.3 |
% |
|
|
62.2 |
% |
Net losses and LAE decreased by $3.2 million, or 23.3%, to $10.5 million during the first quarter of 2024, compared to $13.7 million for the same period in 2023. The decrease was attributable to a $3.9 million decrease in current accident year losses during the first quarter of 2024, compared to the same period in 2023.
The Company’s incurred losses during the three months ended March 31, 2024 included prior-year favorable development of $461,000. Of the $461,000 of favorable development experience during the first quarter of 2024, $508,000 of favorable development was experienced in the Company's personal lines of business, mostly related to accident year 2023. The $508,000 of favorable development in the Company's personal lines was offset by $47,000 of adverse development in the Company's commercial lines of business, mostly related to accident year 2022.
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.
27
The table below provides the expense ratio by major component.
|
|
Three Months Ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Commercial Lines |
|
|
|
|
|
|
||
Policy acquisition costs |
|
|
13.0 |
% |
|
|
18.6 |
% |
Operating expenses |
|
|
19.7 |
% |
|
|
17.6 |
% |
Total |
|
|
32.7 |
% |
|
|
36.2 |
% |
Personal Lines |
|
|
|
|
|
|
||
Policy acquisition costs |
|
|
24.8 |
% |
|
|
28.6 |
% |
Operating expenses |
|
|
12.0 |
% |
|
|
12.2 |
% |
Total |
|
|
36.8 |
% |
|
|
40.8 |
% |
Total Underwriting |
|
|
|
|
|
|
||
Policy acquisition costs |
|
|
18.7 |
% |
|
|
20.8 |
% |
Operating expenses |
|
|
16.0 |
% |
|
|
16.5 |
% |
Total |
|
|
34.7 |
% |
|
|
37.3 |
% |
Our expense ratio decreased by 2.6% during the first quarter of 2024, compared to the same period in 2023.
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 2.1% during the first quarter of 2024 to 18.7%, compared to 20.8% during the same period in 2023. The decrease was primarily related to the impact from the ceding commissions received from the unearned premium transfer of the Security Program effective September 30, 2023.
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 decreased by 0.5% during the first quarter of 2024 to 16.0%, compared to 16.5% for the same period in 2023. The decrease was primarily due to cost-reducing measures taken by management throughout the year.
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 March 31, 2024 and 2023 (dollars in thousands):
Segment Gain (Loss)
|
|
Three Months Ended |
|
|
|
|
||||||
|
|
2024 |
|
|
2023 |
|
|
$ Change |
|
|||
Commercial Lines |
|
$ |
(814 |
) |
|
$ |
404 |
|
|
$ |
(1,218 |
) |
Personal Lines |
|
|
1,380 |
|
|
|
(295 |
) |
|
|
1,675 |
|
Total Underwriting |
|
|
566 |
|
|
|
109 |
|
|
|
457 |
|
Wholesale Agency |
|
|
(47 |
) |
|
|
(21 |
) |
|
|
(26 |
) |
Corporate |
|
|
(72 |
) |
|
|
(235 |
) |
|
|
163 |
|
Eliminations * |
|
|
(992 |
) |
|
|
12 |
|
|
|
(1,004 |
) |
Total segment gain (loss) |
|
$ |
(545 |
) |
|
$ |
(135 |
) |
|
$ |
(410 |
) |
* Elimination amounts are a result of more intercompany commission revenue being generated in the Wholesale Agency, which is recognized when the premiums are written, while the Insurance Company Subsidiaries recognize the intercompany commission expense when the premiums are earned. This timing difference between two consolidating companies is adjusted through Eliminations.
Liquidity and Capital Resources
Sources and Uses of Funds
At March 31, 2024, the Company had $41.0 million in cash, cash equivalents and short-term investments. Our principal sources of funds are insurance premiums, investment income, proceeds from maturities and sales of invested assets and
28
installment fees. These funds are primarily used to pay claims, commissions, employee compensation, taxes and other operating expenses, and service debt.
For the next twelve months, based on the capital structure as of March 31, 2024, the Company will be required to make $1.0 million of principal payments on the senior secured notes, $630,000 of preferred dividend payments and approximately $2.9 million of interest on all of the Company's debt instruments, all of which are paid quarterly.
We conduct our business operations primarily through our Insurance Company Subsidiaries and our MGA. Our ability to service debt, and pay administrative expenses is primarily reliant upon our intercompany service fees paid by the Insurance Company Subsidiaries and MGA to the holding company for management, administrative, and information technology services provided to the Insurance Company Subsidiaries and MGA 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. There were no dividends paid from our Insurance Company Subsidiaries for the three months ended March 31, 2024 and 2023, respectively. We do not anticipate any dividends being paid to us from our insurance subsidiaries in the near term. The MGA may pay dividends to the Parent without regulatory restrictions, and we believe is will be utilized as the MGA begins to produce more business for third-party insurers.
Due to significant losses in 2023, much of which was attributable to strengthening reserves and severe storm activity affecting the Oklahoma homeowners business, both Insurance Company Subsidiaries lack sufficient capital to continue to underwrite the volume of business they have historically written. Also, both CIC and WPIC fell below critical statutory capital and surplus minimum requirements including the Risk Based Capital (“RBC”) ratio. CIC’s and WPIC’s RBC ratios at December 31, 2023, were 169% and 142%, respectively. The Insurance Company Subsidiaries submitted an action plan with the state of domicile insurance regulator on April 1, 2024, to remediate certain statutory capital and surplus regulatory deficiencies. As part of the plan, WPIC will no longer write any business after June 30, 2024, and CIC will only write a small amount of commercial business as well as the homeowners business after June 30, 2024. These actions were part of a strategic shift implemented by management to utilize third-party insurers and to mostly rely on commission revenues generated by our MGA to fund operations and service debt, going forward.
With the producer agreements currently executed, the Company expects to be able to generate the needed revenues to meet our obligations as they become due over the next twelve months. Management believes the actions that were executed to implement the planned strategic shift coupled with additional available sources of available liquidity, will be sufficient to enable the Company to meet its obligations for the foreseeable future.
Our outstanding public debt securities are currently trading at a discount to their face amount. In order to reduce future cash interest payments, as well as future amounts due at maturity or upon redemption, we may, from time to time, purchase such debt for cash, in exchange for common stock, or for a combination of cash and common stock, in open market or privately negotiated transactions. We will evaluate any such transactions in light of then-existing market conditions, taking into account our current liquidity and prospects for future access to capital. The amounts involved in such transactions, individually or in the aggregate, may be material.
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.
Cash Flows
Operating Activities. Cash provided by operating activities for the three months ended March 31, 2024 was $8.2 million compared to cash used in operating activities of $6.0 million for the same period in 2023. The $14.2 million increase in cash provided by operating activities was primarily due a $12.4 million decrease in total net losses paid and a $4.0 million increase in other income received during the period. These amounts were offset by a $2.4 million increase in acquisition costs paid during the first three months of 2024, compared to the same period in 2023.
Investing Activities. Cash used in investing activities for the three months ended March 31, 2024 was $1.6 million, compared to $468,000 for the same period in 2023. The $1.1 million increase in cash used by investing activities was driven by a $9.3 million decrease in proceeds from sales of investment during the period. This amount was offset by a $7.7 million decrease in purchases of investments during the period.
Financing Activities. Cash used in financing activities for the three months ended March 31, 2024 was $426,000 compared to $0 for the same period in 2023. The $426,000 increase in cash used for financing activities was attributable to $176,000 of preferred stock dividends paid during the first quarter of 2024, and a $250,000 principal payment towards the Company's senior secured notes during the first quarter of 2024. The Company did not have the Senior Secured Notes or the preferred stock in the first quarter of 2023.
29
Statutory Capital and Surplus
Our Insurance Company Subsidiaries are required to file quarterly and annual financial reports with state insurance regulators. These financial reports are prepared using statutory accounting practices promulgated by the Insurance Company Subsidiaries’ state of domiciliary, rather than GAAP. The Insurance Company Subsidiaries’ aggregate statutory capital and surplus (which is a statutory measure of equity) was $34.0 million and $32.8 million at March 31, 2024 and December 31, 2023, 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 and other gains and losses. 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 |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Net income (loss) |
|
$ |
231 |
|
|
$ |
1,001 |
|
Less: |
|
|
|
|
|
|
||
Change in fair value of equity securities |
|
|
43 |
|
|
|
694 |
|
Impact of income tax expense (benefit) from adjustments * |
|
|
— |
|
|
|
— |
|
Adjusted operating income (loss) |
|
$ |
188 |
|
|
$ |
307 |
|
|
|
|
|
|
|
|
||
Weighted average common shares diluted |
|
|
12,222,881 |
|
|
|
12,215,849 |
|
Diluted income (loss) per common share: |
|
|
|
|
|
|
||
Net income (loss) |
|
$ |
0.02 |
|
|
$ |
0.08 |
|
Less: |
|
|
|
|
|
|
||
Change in fair value of equity securities |
|
|
— |
|
|
|
0.05 |
|
Impact of income tax expense (benefit) from adjustments * |
|
|
— |
|
|
|
— |
|
Adjusted operating income (loss) per share |
|
$ |
0.02 |
|
|
$ |
0.03 |
|
* The Company has recorded a full valuation allowance against its deferred tax assets as of March 31, 2024 and March 31, 2023, respectively. As a result, there were no taxable impacts to adjusted operating income from the adjustments to net income (loss) in the table above after taking into account the use of NOLs and the change in the valuation allowance.
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.
30
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 March 31, 2024. 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 March 31, 2024, the fair value of our investment portfolio, excluding cash and cash equivalents, was $146.6 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 March 31, 2024 and December 31, 2023 was 2.7 and 2.9 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 March 31, 2024. The selected scenarios are not predictions of future events, but rather illustrate the effect that events may have on the fair value of the debt portfolio and shareholders’ equity (dollars in thousands).
|
|
|
|
|
Estimated |
|
|
Hypothetical Percentage |
|
|||||||
Hypothetical Change in Interest Rates |
|
Estimated |
|
|
Change in |
|
|
|
|
|
Shareholders' |
|
||||
As of March 31, 2024 |
|
Fair Value |
|
|
Fair Value |
|
|
Fair Value |
|
|
Equity |
|
||||
200 basis point increase |
|
$ |
136,973 |
|
|
$ |
(7,285 |
) |
|
|
(5.1 |
)% |
|
|
(284.7 |
)% |
100 basis point increase |
|
|
140,478 |
|
|
|
(3,780 |
) |
|
|
(2.6 |
)% |
|
|
(147.7 |
)% |
No change |
|
|
144,258 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
100 basis point decrease |
|
|
148,326 |
|
|
|
4,068 |
|
|
|
2.8 |
% |
|
|
159.0 |
% |
200 basis point decrease |
|
|
152,654 |
|
|
|
8,396 |
|
|
|
5.8 |
% |
|
|
328.1 |
% |
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 March 31, 2024, the net amount due to the Company from reinsurers, including prepaid reinsurance premiums, was $72.8 million. We believe all amounts recorded as due from reinsurers are recoverable.
31
Effects of Inflation
We do not believe that inflation has a material effect on our results of operations, except for the effect that inflation may have on interest rates and claims costs. We consider the effects of inflation in pricing and estimating reserves for unpaid losses and LAE. The actual effects of inflation on our results are not known until claims are ultimately settled. In addition to general price inflation, we are exposed to a long-term upward trend in the cost of judicial awards for damages.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of March 31, 2024. Based on such evaluations, the Executive Officer and Chief Financial Officer have concluded the Company’s disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, and that information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
For the three months ended March 31, 2024, 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.
32
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this item is included under Note 11 ~ Commitments and Contingencies of the Notes to the Consolidated Financial Statements of the Company’s Form 10-Q for the three months ended March 31, 2024, 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 April 1, 2024.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
ITEM 5. OTHER INFORMTION
During the three months ended March 31, 2024, none of the Company's directors or Section 16 officers
33
ITEM 6. EXHIBITS
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Incorporated by Reference |
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Exhibit Number |
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Exhibit Description |
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Form |
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Period Ending |
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Exhibit / Appendix Number |
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Filing Date |
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|
|
10.1 |
|
Limited Waiver Regarding Second Amended and Restated Note Purchase Agreement |
|
10-K |
|
December 31, 2023 |
|
10.8 |
|
April 1, 2024 |
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|
31.1 |
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31.2 |
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32.1* |
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32.2* |
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101.INS |
|
inline XBRL Instance Document |
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|
101.SCH |
|
inline XBRL Taxonomy Extension Schema Document |
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|
|
104 |
|
Cover Page Interactive Date File (embedded within the Inline XBRL document) |
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|
* This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
34
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: May 14, 2024
35