Notes to Consolidated Financial Statements

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ

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

For the Fiscal Year EndedDecember 31 2017

, 2023

OR

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


For the transition period from to

Commission file number 001-37536

Conifer Holdings, Inc.

(Exact name of registrant as specified in its charter)

Michigan

27-1298795

Michigan27-1298795

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

550

3001 West Merrill Street, Big Beaver Road, Suite 200

Birmingham,

Troy, Michigan

48009

48084

(Address of principal executive offices)

(Zip code)

(248)

(248) 559-0840

(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, no par value

CNFR

The Nasdaq Stock Market LLC

9.75% Senior Notes due 2028

CNFRZ

The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes Noþ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes Noþ

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. Yesþ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yesþ No


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

Large accelerated filer

Accelerated filer

Non-accelerated filer ☐

(Do not check if a smaller
reporting company)

Smaller reporting company þ

Emerging growth company þ

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. þ

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.



Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).

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

The aggregate market value of the registrant’s Common Stock held by non-affiliates at June 30, 2023 was approximately $5.4 million, based on the Nasdaq closing price for such shares on that date. The registrant has no non-voting common equity.

The number of outstanding shares of the registrant’s common stock, no par value, as of March 15, 2018,28, 2024, was 8,520,328.12,222,881.

Documents Incorporated by Reference

Portions of the registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the registrant’s 2024 Annual Meeting of Stockholders, to be filed subsequent to the date hereof, are incorporated by reference into Part III of this report. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the registrant’s fiscal year ended December 31, 2023.




CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Form 10-K

INDEX

Page No.

Part I

Item 1.

Page No.

Business

3

Item 1A.

Risk Factors

14

Business1
Risk Factors12

Unresolved Staff Comments

25

32

1C.

Properties

25

Cybersecurity

32

2.

Legal Proceedings

25

Properties

32

3.

Legal Proceedings

32

Item 4.

Mine Safety Disclosures

25

32

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

26

33

Item 6.

Selected Consolidated Financial Data

28

[Reserved]

34

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

30

35

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

50

55

Financial Statements and Supplementary Data

51

56

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

51

56

Controls and Procedures

51

56

Other Information

51

57

Item 9C.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

57

Item 10-14.

Part III

52

58

Item 15.

Exhibits and Financial Statement Schedules

53

59

Item 16.

103

Form 10-K Summary

109

Signatures

110



CONIFER HOLDINGS, INC. AND SUBSIDIARIES


PART I


Forward-Looking Statements

Certain statements contained in this Annual Report on Form 10-K, 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,” "will," “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, which could cause our actual results to differ materially from those in the forward-looking statements, including those described above in Item 1A Risk Factors 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.

ITEM 1. BUSINESS

Legal Organization

Conifer Holdings, Inc. (Nasdaq: CNFR) is a Michigan‑domiciled insurance holding company formed in 2009. Our principal executive offices are located at 550 W. Merrill,3001 West Big Beaver Road, Suite 200, Birmingham,Troy, MI 4800948084 (telephone number: (248) 559-0840). Our corporate website address is www.cnfrh.com.

As used in this Form 10-K, references to “Conifer,” “Conifer Holdings,” “the Company,” “our Company,” “we,” “us,” and “our” refer to Conifer Holdings, Inc., a Michigan corporation, and its wholly owned subsidiaries Conifer Insurance Company (“CIC”), White Pine Insurance Company ("WPIC"), Red Cedar Insurance Company (“RCIC”), White Pine Insurance Company (“WPIC”), American ColonialConifer Insurance Services (“ACIS”("CIS") andformerly known as Sycamore Insurance Agency, Inc. (“SIA”("Sycamore") and, as of October 13, 2022, VSRM, Inc. ("VSRM"). CIC, RCICWPIC and WPICRCIC are collectively referred to as the "Insurance Company Subsidiaries." On a stand-alone basis Conifer Holdings, IncInc. is referred to as the "Parent Company." On December 30, 2016,VSRM owns a 50% non-controlling interest in Sycamore Specialty Underwriters, LLC ("SSU" or "Affiliate").

Business Overview

Historically, the Company's wholly owned subsidiary, American Colonial Insurance Company ("ACIC") was merged into WPIC.

Business Overview
has engaged in the sale of property and casualty insurance products and has organized its business model around three classes of insurance businesses: commercial lines, personal lines, and wholesale agency business. Within these three businesses, the Company offers various insurance products and insurance agency services.

Through our Insurance Company Subsidiaries, we offer insurance coverage in both specialty commercial and specialty personal product lines. Currently, we are authorized to write insurance as an excess and surplus lines (“E&S”) carrier in 4445 states including the District of Columbia. We are also licensed to write insurance as an admitted carrier in 42 states, including the District of Columbia, as an admitted carrier and we offer our insurance products in all 50 states.

Our revenues are primarily derived from premiums earned from our insurance operations. We also generate other revenues through investment income and other income which mainly consists of: installment fees and policy issuance fees generally related to the policies we write. Prior to June 30, 2021, we also generated commission and fee revenue in our wholesale agency business from third-party insurers.

Many of our products are targeted to traditionally profitable classes of policyholders that we believe are underservedunder-served by other insurers. We market and sell these insurance products through a growing network of over 6,7004,400 independent agents that

3


distribute our policies through approximately 2,200950 sales offices. We are focused on growing our business in non‑commoditized property and casualty insurance markets, while maintaining underwriting discipline and a conservative investment strategy.

We have substantial expertise in serving the unique commercial insurance needs of owner‑operated businesses in the following markets:

Hospitality, such as restaurants, bars, taverns, and bowling centers (that require, among other lines, liquor liability insurance), as well as small grocery and convenience stores;
Artisan contractors, such as plumbers, painters, carpenters, electricians and other independent contractors; and
Security service providers, such as companies that provide security guard services, security alarm products and services, and private investigative services.

In our commercial lines business, we seek to differentiate ourselves and provide value to small business owner‑operators by bundling different insurance products that meet a significant portion of their insurance needs. For example, in the hospitality market we offer property, casualty, and liquor liability, as well as, in some jurisdictions, workers’ compensation coverage. The breadth of our specialty commercial insurance products enables our agents and their small business clients to avoid the administrative costs and time required to seek coverage for each of these items from separate insurers. As such, we compete for commercial lines business based on our flexible product offerings and customer service, rather than on pricing alone. Our targetOf the commercial lines customer haspolicies that were in-force on December 31, 2023, the average premium amount of an average account size of $4,800 in premium.

individual policy was $6,900.

We also have substantial expertise in providing specialty homeowners insurance products to targeted customers that are often underservedunder-served by other homeownershomeowners' insurance carriers. Our personal lines products primarily include the following:

Low-valuelow-value dwelling insurance tailored for owners of lower valued homes, which we currently offer in Illinois, Indiana, Louisiana and Texas; and
Wind-exposed catastrophe coverage, including hurricane and wind coverage, to under-served homeowners in Hawaii, Texas and Florida.
Texas.

In our personal lines business, we largely target homeowners in need of specific catastrophe coverage or dwelling insurance that areis currently underservedunder-served by the insurance market, due to the modest value of their homes or the


exposure to natural catastrophes in their geographic area. Because these homeowners are underserved,under-served, this portion of the market is typically subject to less pricing pressure from larger nationwide insurers that offer a more commoditized product. We believe our underwriting expertise enables us to compete effectively in these markets by evaluating and appropriately pricing risk. In addition, we believe our willingness to meet these underservedunder-served segments of the personal lines insurance market fosters deeper relationships with, and increased loyalty from, the agents who distribute our products. Our targetOf the personal lines customer haspolicies that were in-force on December 31, 2023, the average premium amount of an average account size of $1,200 in premium.
individual policy was $1,500.

Overall, we structure the multi-line distribution of our premium between commercial and personal lines to better diversify our business and mitigate the potential cyclical nature of either market. In serving these markets, we write business on both an admitted and excess and surplus lines (“E&S”) basis. As of December 31, 2023, approximately 48.0% of our gross written premiums were admitted, and approximately 52.0% were E&S. Insurance companies writing on an admitted basis are licensed by the states in which they sell policies and are required to offer policies using premium rates and forms that are typically filed with and approved by the state insurance regulators. Carriers writing in the E&S market are not bound by most of the rate and form regulations imposed on standard market (admitted) companies, allowing them the flexibility to change the coverage offered and the rate charged without the time constraints and financial costs associated with the filing and approval process subject to admitted business. Our corporate structure allows us to offer both admitted and E&S products in select markets through either CIC or WPIC. Our experience with specialty insurance products enables us to react to new market opportunities and underwrite multiple specialty lines.

The wholesale agency business provides non-risk bearing revenue through commissions and policy fees. The wholesale agency business has provided more product options to the Company’s independent retail agents by offering both insurance products from the Insurance Company Subsidiaries as well as products offered by other insurers.

Strategic Shift to Non Risk-Bearing Revenue

4


Historically, our wholesale agency segment produced only a small portion of our gross written premiums. Beginning in 2024, our wholesale agency segment is being converted into a full managing general agency (“MGA”) and is expected to produce almost 100% of the Company’s gross written premiums. More importantly, as a result of the Insurance Company Subsidiaries lacking sufficient capital to continue to underwrite the volume of business they have historically written, we plan to utilize third-party insurers and rely mostly on commission revenues in our MGA, CIS. Substantially all of the Company's commercial lines business will be directly written by third-party insurers with A.M. Best ratings of A- or better by the end of the second quarter of 2024. We expect to continue to underwrite the low-value homeowners business written in Texas and the Midwest, however, we will be non-renewing all homeowners business written in Oklahoma by the end of the second half of 2024.

Utilizing third-party insurers as underwriters of our MGA-produced business will provide a much broader reach for our existing profitable programs and we expect this to result in the production of substantially more premium volume for the agency segment generating more commission revenue. This shift will significantly reduce revenues from earned premiums in the near term and investment income, over time, for the Insurance Company Subsidiaries. Cash from operating activities will shift from premiums and investment income to revenues from commissions. Over time, cash from operating activities will be reduced as losses are paid on existing loss reserves which will be offset by cash flows increasing from investing activities as we sell investments to fund the loss payments. We believe this strategic shift is the best path forward to profitability for the Company.

Geographic Diversity and Mix of Business

While

Over the past several years, we pursue top linehave increased our focus on specific core commercial lines of business. We have shifted our focus to low-value dwelling lines of business in order to bring personal lines premium growth, we do not do so at the expenselevels back up and to maintain a strategic balance of losing underwriting discipline. Our underwriters have the experiencecommercial and institutional flexibility to recognize when to exit certain products in favorpersonal lines of more profitable opportunities as insurance market conditions dictate. business.

The following tables summarize our gross written premiums by segment and state for the years indicated therein (dollars in thousands):

 

Gross Written Premium by Segment

 

 

2023

 

%

 

 

2022

 

%

 

Commercial

$

107,078

 

 

74

%

 

$

116,868

 

 

85

%

Personal

 

36,756

 

 

26

%

 

 

21,151

 

 

15

%

Total

$

143,834

 

 

100

%

 

$

138,019

 

 

100

%

 

 

Gross Written Premiums by State

 

 

 

2023

 

%

 

 

2022

 

%

 

Michigan

 

$

34,996

 

 

24.3

%

 

$

33,739

 

 

24.5

%

Texas

 

 

21,783

 

 

15.1

%

 

 

14,236

 

 

10.3

%

Oklahoma

 

 

17,972

 

 

12.5

%

 

 

11,882

 

 

8.6

%

California

 

 

11,479

 

 

8.0

%

 

 

12,967

 

 

9.4

%

New York

 

 

9,269

 

 

6.4

%

 

 

10,622

 

 

7.7

%

Florida

 

 

7,632

 

 

5.3

%

 

 

13,705

 

 

9.9

%

Ohio

 

 

4,996

 

 

3.5

%

 

 

4,378

 

 

3.2

%

Pennsylvania

 

 

4,314

 

 

3.0

%

 

 

4,499

 

 

3.3

%

Illinois

 

 

3,839

 

 

2.7

%

 

 

2,644

 

 

1.9

%

Indiana

 

 

3,422

 

 

2.4

%

 

 

3,232

 

 

2.3

%

Colorado

 

 

2,723

 

 

1.9

%

 

 

3,010

 

 

2.2

%

All Other States

 

 

21,409

 

 

14.9

%

 

 

23,105

 

 

16.7

%

Total

 

$

143,834

 

 

100.0

%

 

$

138,019

 

 

100.0

%

5


 Gross Written Premium by Segment
 2017% 2016% 2015%
Commercial$92,112
81% $88,242
77% $68,197
73%
Personal22,172
19% 26,681
23% 25,553
27%
Total$114,284
100% $114,923
100% $93,750
100%

 Gross Written Premiums by State
 2017% 2016% 2015%
Florida$26,562
23.1% $23,910
20.7% $23,048
24.6%
Michigan21,099
18.5% 17,572
15.4% 16,074
17.1%
Texas12,910
11.3% 12,993
11.3% 10,381
11.1%
Pennsylvania8,859
7.8% 10,718
9.3% 12,931
13.8%
Hawaii4,774
4.2% 3,885
3.4% 2,661
2.8%
Indiana4,356
3.8% 4,582
4.0% 6,068
6.5%
New Jersey3,960
3.5% 978
0.9% 980
1.0%
Ohio3,850
3.4% 3,556
3.1% 3,693
3.9%
New York3,095
2.7% 
% 589
0.6%
Colorado2,998
2.6% 2,544
2.2% 1,249
1.3%
Montana2,409
2.1% 3,041
2.6% 2,945
3.1%
All Other States19,412
17.0% 31,144
27.1% 13,131
14.2%
Total$114,284
100.0% $114,923
100.0% $93,750
100.0%

The Conifer Approach

We have built our business in a manner that is designed to adapt to changing market conditions and deliver predictable results over time. The following highlights key aspects of our model that contribute to our balanced approach:

Focus on under-served markets. We focus on providing specialty insurance products to targeted policyholders in under-served markets. We believe that most of our small business customers, many of which are owner‑operated, value the efficiency of dealing with a single insurer for multiple products. By targeting small- to medium-sized accounts, we add value to the business owner directly without competing solely on price.
Strong relationships with our agents. We develop strong relationships with our independent agents providing them with responsive service, attractive commissions and competitive products to offer policyholders. We believe our

agents understand that we view them as key partners in risk selection that help us serve our ultimate client-theclient - the insured.
Deep understanding of the business and regulatory landscapes of our markets. The competition for insurance business and the regulatory operating environment vary significantly from state to state. We focus on tailoring our business to concentrate on the geographic markets and regulatory environments with the greatest opportunities for growth and profitability. Our business plan centers on identification of market opportunities in jurisdictions where our insurance products can profitably suit the needs of our potential customers.
Emphasis on flexibility. We offer coverage to our insureds both on an E&S and admitted basis. We believe this flexibility enables us to pivot effectively between E&S and admitted policies as customer needs and regulatory conditions dictate.
Conservative risk management with an emphasis on lowering volatility. We focus on the risk/reward of insurance underwriting, while maintaining a prudent investment policy. We employ conservative risk management practices and opportunistically purchase reinsurance to minimize our exposure to liability for individual risks. In addition, we seek to maintain a diversified liquid investment portfolio to reduce overall balance sheet volatility. As of December 31, 2017, our investments primarily consisted of fixed income investments with an average credit rating of “AA” and a duration-to-worst average of 3.2 years.

Our Competitive Strengths

We believe the following competitive strengths have allowed us to grow our business and will continue to support our strategic growth initiatives:

business:

Talented underwriters with broad expertise. Our underwriters have significant experience managing account profitability across market cycles. With an average of over 27 years of experience, our senior underwriters possess the required expertise to respond appropriately to market forces.
Controlled and disciplined underwriting. We underwrite substantially all policies to our specific guidelines with our experienced, in-house underwriting team. We customize the coverages we offer, and continually monitor our markets and respond to changes in our markets by adjusting our pricing, product structures and underwriting guidelines. By tailoring the terms and conditions of our policies, we align our actual underwriting risk with the profit of each insurance account that we write.write or produce.
Proactive claims handling. We employ a proactive claims handling philosophy that utilizes an internal team of experienced in-house attorneys to manage and supervise our claims from inception until resolution. We pay what we owe, contest what we don't, and make sound judgment for those claims that fall in between. Our proactive handling of claims reinforces our relationships with our customers and agents by demonstrating our willingness to defend our insureds aggressively and help them mitigate losses.
Proven management team. Our senior management team has an average of over 2329 years of experience in the insurance industry. Our senior management team has successfully created, managed and grown numerous insurance companies and books of business, and has longstanding relationships with many independent agents and policyholders in our targeted markets.
Ability to leverage technology to drive efficiency. We utilize a web‑based information technology system that creates greater organizational efficiency in our company. Leveraging the infrastructure of programmers and support staff of third‑party vendors allows our in‑house business analysts to focus on new product development and roll‑out. We believe this capability reduces our time to market for new products, enhances services for insureds, increases our ability to capture data, and reduces cost.

Marketing and Distribution

Independent agents arehave been our main distribution source. The selection of an insurance company by a business or individual is strongly influenced by the business or individual’s agent. We seek to maintain favorable relationships with our

6


select group of agents. Our distribution philosophy is to treat our agents as partners, and we provide them with competitive products, personal service and attractive commissions. We believe these factors contribute to our positive agency retention.

In 2017,2023, our top sixfour independent agencies accounted for approximately 33%35% of our gross written premiums in our commercial lines, and our top four independent agencies accounted for approximately 41%62% of our gross written premiums in our personal lines. We have long term relationships with each of these agencies. We anticipate our concentration in these agencies will decrease in future periods as we establish relationships with additional agencies, as part of our strategic growth


plan. Our Insurance Company Subsidiaries market and distribute their products mainly through an independent agency network, however we utilize managing general agents and certain key wholesalers when appropriate.

We recruit our producers through referrals from our existing network of agents, word‑of‑mouth,word-of-mouth, advertisement, as well as direct contacts initiated by potential agents. Our marketing efforts are directed through our offices in Michigan, Florida, Pennsylvania and Tennessee.

Michigan.

We view our agents as key partners in risk selection. We actively solicit their input regarding potential improvements to our business methods and consult with them in developing new products and entering new customer markets. At the same time, we take careful measure to appropriately control and monitor our agents’ operations. Controls include frequent review of the quality of business, loss experience and other mechanisms. We retain sole binding authority on the majority of our business. Binding authority is only granted to select long-term agents. When binding authority is granted, we restrict this authority to a specific set of guidelines that are provided to each agent. Moreover, our experienced underwriters review each risk to ensure the guidelines are followed.

In addition to marketing to individual agents, we formed Sycamore Insurance Agency to reviewCIS reviews specific opportunities to write select business on a direct basis. SIA also owns 50% of a small insurance agency that places small commercial risks, mainly for alarm and security guard markets.

Underwriting

We are

Historically, we have been focused on underwriting profitability and effective enterprise risk management. With an average of over 27 years of experience, our senior underwriters have the experience to properly manage account profitability across market cycles.

Our underwriting philosophy for our specialty commercial risks in the hospitality industry ishas been to look at each risk individually and selectively before writing any policies. We remain focused on the smallsmall- to medium-sized well-operated business,businesses where the owner is often on site and in a better position to efficiently and safely run the overall operations. We understand the risks associated with the smaller enterprises and, due to lighter competition, believe we can receive a fair premium to compensate for the risk taken.

With respect to commercial property coverages, we believe it is important to focus on the profitability of the insureds’ business, as well as the traditional risk factors. Therefore, in addition to obtaining inspections on commercial risks, we strive to understand the insureds’ business operations and bottom line to verify the underlying business is an acceptable risk.

All commercial and personal policy applications arehave been underwritten according to established guidelines that have been provided to our independent agency force. These guidelines have been integrated into our information technology system framework and only policies that meet our guidelines are accepted by our system. Our underwriting staff has substantial industry experience in matching policy terms, conditions, and pricing to the risk profiles of our policyholders and therefore strengthens our ability to achieve profitability in the product lines we write.

Commercial Lines. In writing commercial lines policies, we frequently employ tailored limiting endorsements, rating surcharges and customized limits to align our product offerings to the risk profile of the class and the specific policyholder being underwritten. Furthermore, we consistently monitor our markets so that we are able to quickly implement changes in pricing, underwriting guidelines and product offerings as necessary to remain competitive. We do not pursue commercial product lines where competition is based primarily on price. We augment our own internally developed pricing models with benchmark rates and policy terms set forth by the Insurance Services Office, or ISO. The ISO system is a widely recognized industry resource for common and centralized rates and forms. It provides advisory ratings, statistical and actuarial services, sample policy provisions and other services to its members.

Personal Lines. We employ internal product managers to review our position relative to our competition, create better segmentation of pricing and originate premium rate changes as appropriate. Consistent with industry practice, we grant our personal lines agents limited binding authority within our specific guidelines. Once a completed application and premium payment are submitted to us, the application is placed in a bound status, and reviewed for final approval. If the agent has underwritten and submitted the account according to our guidelines, we process the application as complete. If our guidelines have not been followed, the application may be cancelled or updated and re‑submitted for further underwriting review.

7


Claims

We believe that effective claims management is vitally important to our success, allowing us to cost effectively pay valid claims, while vigorously defending those claims that lack merit. Our claims department consists of experienced claims professionals located in Michigan, Florida, Oklahoma, Pennsylvania and Tennessee.Texas. We utilize a proactive claims handling philosophy to internally manage or supervise all of our claims from inception through final disposition. By handling our claims


internally, we can quickly assess claims, improve communication with our policyholders and claimants and better control our claims management costs.

We have several in‑house attorneys with considerable legal experience in trying cases in the lines of business we write. Included among these attorneys is our head in‑house litigator, who consults on all trials and has 2429 years of litigation experience. We also have numerous seasoned property and liability adjusters which allow us to manage our claims exposures more carefully, across all markets. In addition, our claims professionals utilize a network of independent local adjusters and appraisers to assist with specific aspects of claims investigations, such as securing witness statements and conducting initial appraisals in states where it is practical to do so. These outside vendors are mainly compensated based on pre‑negotiated fee schedules to control overall costs.

Claims personnel are organized by line of business, with specific managers assigned as supervisors for each line of business. Reserving and payment authority levels of claims personnel are set by our Senior Vice President of claims and our Executive Vice President. Those limits of authority are integrated into our claims information technology systems to ensure strict compliance.

Initial claim reserves are determined and set using our statistical averages of paid indemnity and loss adjustment expenses by line of business. After reviewing statistical data and consulting with our internal actuary, our senior vice presidentSenior Vice President of claims, together with other members of management, set initial reserves by line of business. Once initial reserves have been set, reserves are evaluated periodically as specific claim information changes to generate management’s overall best estimate of reserves. In addition, claim reviews with in‑house adjusters and attorneys provide a regular opportunity to review the adequacy of reserves. Changes to claims reserves are made by senior management based on claim developments and input from these attorneys and adjusters. We utilize an in‑house experienced and fully credentialed actuary to support our financial efforts.

Reinsurance

We routinely purchase reinsurance for our commercial and personal lines to reduce volatility by limiting our exposure to large losses and to provide capacity for growth. In a reinsurance transaction, an insurance company transfers, or cedes, all or part of its exposure in return for a portion of the premium. We remain legally responsible for the entire obligation to policyholders, irrespective of any reinsurance coverage we may purchase.

Information relating to our reinsurance structure and treaty information is included within Note 69 ~ Reinsurance.

8



Loss Reserve Development

The following table presents the development of our loss and loss adjustment expenses ("LAE") reserves from 20092013 through 2017,2023, net of reinsurance recoverables (dollars in thousands).

 

 

 

 

 

Year Ended December 31,

 

 

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022 (1)

 

 

2023 (1)

 

Net liability for losses and loss expenses

 

$

24,956

 

 

$

28,307

 

 

$

30,017

 

 

$

47,993

 

 

$

67,830

 

 

$

63,122

 

 

$

84,667

 

 

$

87,052

 

 

$

98,741

 

 

$

82,888

 

 

$

103,805

 

Liability re-estimated as of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One year later

 

 

23,763

 

 

 

29,321

 

 

 

40,239

 

 

 

57,452

 

 

 

71,186

 

 

 

79,351

 

 

 

100,261

 

 

 

106,482

 

 

 

123,668

 

 

 

100,698

 

 

 

 

Two years later

 

 

25,521

 

 

 

33,274

 

 

 

52,321

 

 

 

60,453

 

 

 

87,536

 

 

 

94,786

 

 

 

118,116

 

 

 

129,665

 

 

 

144,116

 

 

 

 

 

 

 

Three years later

 

 

26,560

 

 

 

38,569

 

 

 

58,251

 

 

 

69,833

 

 

 

95,367

 

 

 

108,022

 

 

 

137,327

 

 

 

143,307

 

 

 

 

 

 

 

 

 

 

Four years later

 

 

27,784

 

 

 

40,822

 

 

 

62,185

 

 

 

74,381

 

 

 

102,335

 

 

 

117,607

 

 

 

146,027

 

 

 

 

 

 

 

 

 

 

 

 

 

Five years later

 

 

27,920

 

 

 

42,274

 

 

 

64,547

 

 

 

76,860

 

 

 

106,705

 

 

 

122,597

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six years later

 

 

28,339

 

 

 

42,967

 

 

 

66,072

 

 

 

79,622

 

 

 

109,865

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seven years later

 

 

28,655

 

 

 

43,341

 

 

 

66,883

 

 

 

80,235

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Eight years later

 

 

28,880

 

 

 

43,771

 

 

 

67,020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine years later

 

 

29,487

 

 

 

43,712

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ten years later

 

 

29,396

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cumulative redundancy (deficiency)

 

$

(4,440

)

 

$

(15,405

)

 

$

(37,003

)

 

$

(32,242

)

 

$

(42,035

)

 

$

(59,475

)

 

$

(61,360

)

 

$

(56,255

)

 

$

(45,375

)

 

$

(17,810

)

 

$

103,805

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative amount of net liability paid as of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One year later

 

 

13,245

 

 

$

16,091

 

 

$

20,200

 

 

$

29,533

 

 

$

44,521

 

 

$

29,520

 

 

$

40,244

 

 

$

39,187

 

 

$

51,129

 

 

$

57,963

 

 

 

 

Two years later

 

 

19,711

 

 

 

24,060

 

 

 

35,972

 

 

 

56,962

 

 

 

62,369

 

 

 

57,864

 

 

 

70,478

 

 

 

79,965

 

 

 

95,765

 

 

 

 

 

 

 

Three years later

 

 

23,241

 

 

 

32,699

 

 

 

50,676

 

 

 

61,168

 

 

 

77,409

 

 

 

78,861

 

 

 

103,770

 

 

 

114,622

 

 

 

 

 

 

 

 

 

 

Four years later

 

 

26,056

 

 

 

37,474

 

 

 

58,317

 

 

 

66,556

 

 

 

87,587

 

 

 

100,377

 

 

 

128,772

 

 

 

 

 

 

 

 

 

 

 

 

 

Five years later

 

 

27,217

 

 

 

40,438

 

 

 

61,349

 

 

 

70,945

 

 

 

99,544

 

 

 

114,346

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six years later

 

 

27,780

 

 

 

41,979

 

 

 

63,814

 

 

 

76,563

 

 

 

106,535

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seven years later

 

 

28,384

 

 

 

42,428

 

 

 

65,654

 

 

 

78,821

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Eight years later

 

 

28,555

 

 

 

43,025

 

 

 

66,238

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine years later

 

 

29,199

 

 

 

43,148

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ten years later

 

 

29,237

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross liability-end of year

 

 

28,909

 

 

 

31,532

 

 

 

35,423

 

 

 

54,651

 

 

 

87,896

 

 

 

92,807

 

 

 

107,246

 

 

 

111,270

 

 

 

139,085

 

 

 

165,539

 

 

 

174,612

 

Reinsurance recoverable on unpaid losses

 

 

3,952

 

 

 

3,225

 

 

 

5,405

 

 

 

6,658

 

 

 

20,066

 

 

 

29,685

 

 

 

22,579

 

 

 

24,218

 

 

 

40,344

 

 

 

82,651

 

 

 

70,807

 

Net liability-end of year

 

 

24,957

 

 

 

28,307

 

 

 

30,018

 

 

 

47,993

 

 

 

67,830

 

 

 

63,122

 

 

 

84,667

 

 

 

87,052

 

 

 

98,741

 

 

 

82,888

 

 

 

103,805

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross liability re-estimated - latest

 

 

35,911

 

 

 

53,611

 

 

 

85,551

 

 

 

115,849

 

 

 

176,969

 

 

 

182,121

 

 

 

186,956

 

 

 

186,015

 

 

 

204,735

 

 

 

200,159

 

 

 

 

Reinsurance recoverable on unpaid losses re-estimated - latest

 

 

6,515

 

 

 

9,899

 

 

 

18,530

 

 

 

35,613

 

 

 

67,104

 

 

 

59,524

 

 

 

40,929

 

 

 

42,708

 

 

 

60,619

 

 

 

99,460

 

 

 

 

Net liability re-estimated - latest

 

 

29,396

 

 

 

43,712

 

 

 

67,021

 

 

 

80,236

 

 

 

109,865

 

 

 

122,597

 

 

 

146,027

 

 

 

143,307

 

 

 

144,116

 

 

 

100,699

 

 

 

 

Gross cumulative
  redundancy (deficiency)

 

$

(7,002

)

 

$

(22,079

)

 

$

(50,128

)

 

$

(61,198

)

 

$

(89,073

)

 

$

(89,314

)

 

$

(79,710

)

 

$

(74,745

)

 

$

(65,650

)

 

$

(34,620

)

 

 

 

(1)
 Year Ended December 31, 
 200920102011201220132014201520162017
     
Net liability for losses and loss expenses$911
$18,795
$17,164
$17,547
$24,956
$28,307
$30,017
$47,993
$67,830
Liability re‑estimated as of:         
One year later764
16,565
12,807
13,508
23,763
29,321
40,239
57,452
 
Two years later593
13,071
9,870
13,601
25,521
33,274
52,321
  
Three years later495
10,300
10,038
13,821
26,560
38,569
   
Four years later452
10,698
10,064
13,860
27,784
    
Five years later434
10,926
10,227
13,980
     
Six years later434
11,215
10,414
      
Seven years later434
11,402
       
Eight years later$434
        
          
Net cumulative redundancy (deficiency)$477
$7,393
$6,750
$3,567
$(2,828)$(10,262)$(22,304)$(9,459) 
          
Cumulative amount of net liability paid as of:         
One year later$253
$4,112
$3,383
$5,186
$13,245
$16,091
$20,020
$29,533
 
Two years later315
6,277
6,092
9,106
19,711
24,060
35,972
  
Three years later426
8,302
7,917
11,444
23,241
32,699
   
Four years later434
9,372
8,788
13,015
26,056
    
Five years later434
9,971
9,730
13,522
     
Six years later434
10,799
10,167
      
Seven years later434
11,219
       
Eight years later         
          
Gross liability‑end of year911
32,047
29,574
24,843
28,908
31,532
35,422
54,651
87,896
Reinsurance recoverable on unpaid losses
13,252
12,410
7,296
3,952
3,225
5,405
6,658
20,066
Net liability‑end of year911
18,795
17,164
17,547
24,956
28,307
30,017
47,993
67,830
          
Gross liability re‑estimated‑latest434
21,879
18,407
20,094
34,012
43,856
62,707
73,313
 
Reinsurance recoverable on unpaid losses re‑estimated‑latest
10,477
7,993
6,113
6,229
5,287
10,387
15,860
 
Net liability re‑estimated‑latest434
11,402
10,414
13,981
27,783
38,569
52,320
57,453
 
          
Gross cumulative redundancy (deficiency)$477
$10,168
$11,167
$4,749
$(5,104)$(12,324)$(27,285)$(18,662) 
Data from 2009 relates only to American Equable, Inc., which is now known as CICThe 2023 and the 2010 through 2017 data2022 column includes CIC$10.9 million and WPIC.$25.9 million of reinsurance recoverables from the loss portfolio transfer (“LPT”), respectively. All previous years do not reflect any recoverables from the LPT.

The first line of the table presents the unpaid loss and LAE reserves at December 31 for each year, net of reinsurance recoverables, including the incurred but not reported ("IBNR") reserve. The next section of the table sets forth the re‑estimates of incurred losses from later years, including payments, for the years indicated. The increase/decrease from the original estimate would generally be a combination of factors, including, but not limited to:

Claims being settled for amounts different from the original estimates;

Reserves being increased or decreased for individual claims that remain open as more information becomes known about those individual claims; and
More or fewer claims being reported after the related year end, than had been expected to be reported before that date.

As our historical data for a particular line of business increases, both in terms of the number of years of loss experience and the size of our data pool, we will increasingly rely upon our own loss experience rather than industry loss experience in establishing our loss and LAE reserves. We plan to continue to applyapplied reserving practices consistent with historical methodologies.methodologies and incorporated specific analyses where appropriate.

9


Additional information relating to our reserves is included within the Losses and Loss Adjustment Expenses section of Note 1 ~ Summary of Significant Accounting Policies and Note 5 ~ Unpaid Losses and Loss Adjustment Expensessection of Note 1 ~ Summary of Significant Accounting Policies and Note 8 ~ Unpaid Losses and Loss Adjustment Expenses of the Notes to the Consolidated Financial Statements, as well as in the Critical Accounting Policies ~ Policies:Unpaid LossesLoss and Loss Adjustment ExpensesExpense Reserves section of Item 7, Management’s Discussion and Analysis.

Regulation

Insurance Company Regulation

Our Insurance Company Subsidiaries are subject to regulation in the states where they conduct business. State insurance regulations generally are designed to protect the interests of policyholders, consumers or claimants rather than shareholders or other investors. The nature and extent of such state regulation varies by jurisdiction, but generally involves:

Prior approval of the acquisition of control of an insurance company or of any company controlling an insurance company;
Regulation of certain transactions entered into by such insurance company subsidiary with any of its affiliates;
Approval of premium rates, forms and policies used for many lines of admitted insurance;
Standards of solvency and minimum amounts of capital and surplus that must be maintained;
Limitations on types and concentration of investments;
Licensing of insurers and agents;
Deposits of securities for the benefit of policyholders; and
The filing of periodic reports with state insurance regulators with respect to financial condition and other matters.

In addition, state regulatory examiners perform periodic examinations of our Insurance Company Subsidiaries. The results of these examinations can give rise to regulatory orders requiring remedial, injunctive or other corrective action.

Insurance Holding Company Regulation

We operate as an insurance holding company and are subject to regulation in the jurisdictions in which we conduct business. These regulations require that each of our Insurance Company Subsidiaries register with the insurance department of its state of domicile and furnish information concerning the operations of companies within the holding company system that may materially affect the operations, management or financial condition of the insurers within the system. The insurance laws similarly provide that all transactions among members of a holding company system must be fair and reasonable. Certain types of transactions between our Insurance Company Subsidiaries and the Company and our other affiliates generally must be disclosed to the state regulators, and prior approval of the state insurance regulator generally is required for any material or extraordinary transaction. In addition, a change of control of a domestic insurer or of any controlling person requires the prior approval of the state of domicile insurance regulator.

Various State and Federal Regulation

Regulations

Insurance companies are also affected by a variety of state and federal legislative and regulatory measures and judicial decisions that define and extend the risks and benefits for which insurance is sought and provided. In addition, for some classes of insureds individual state insurance departments may prevent premium rates for some classes of insureds from reflecting the level of risk assumed by the insurer for those classes. Such developments may adversely affect the profitability of various lines of insurance. In some cases, if permitted by applicable regulations, these adverse effects on profitability can be minimized through repricing of coverages or limitations or cessation of the affected business.


Reinsurance Intermediary

Our reinsurance intermediaries are also subject to regulation. Under applicable regulations, an intermediary is responsible, as a fiduciary, for funds received on account of the parties to the reinsurance transaction. The intermediaries are required to hold such funds in appropriate bank accounts subject to restrictions on withdrawals and prohibitions on commingling.

10


Licensing and Agency Contracts

We, or certain of our designated employees, must be licensed to act as agents by regulatory authorities in the states in which we conduct business. Regulations and licensing laws vary in each state and are often complex.

Insurance licenses are issued by state insurance regulators upon application and may be of perpetual duration or may require periodic renewal. There are often requirements to obtain appropriate new licenses before we can begin writing or offer new coverages in a new state. The requirements are more stringent when writing on an admitted basis, as opposed to on an E&S basis where there is greater form and rate flexibility.

Insurers operating on an admitted basis must file premium rate schedules and policy or coverage forms for review and approval by the insurance regulators. In many states, rates and policy forms must be approved prior to use, and insurance regulators have broad discretion in judging whether or not an insurer’s rates are adequate, excessive and unfairly discriminatory.

The applicable licensing laws and regulations in all states are subject to amendment or reinterpretation by state regulatory authorities, and such authorities are vested in most cases with relatively broad discretion as to the granting, revocation, suspension and renewal of licenses. We, or our employees, could be excluded, or temporarily suspended, from continuing with some or all of our activities in, or otherwise subjected to penalties by, a particular state.

Membership in Insolvency Funds and Associations, Mandatory Pools and Insurance Facilities

Most states require admitted property and casualty insurers to become members of insolvency funds or associations, which generally protect policyholders against the insolvency of insurers. Members of the fund or association must contribute to the payment of certain claims made against insolvent insurers. The Company's assessments from insolvency funds were minimal for the years ended December 31, 2017, 2016,2023 and 2015.

2022.

Our Insurance Company Subsidiaries are also required to participate in various mandatory insurance facilities or in funding mandatory pools, which are generally designed to provide insurance coverage for consumers who are unable to obtain insurance in the voluntary insurance market. Among the pools participated in are those established in certain states to provide windstorm and other similar types of property coverage. These pools typically require all companies writing applicable lines of insurance in the state for which the pool has been established to fund deficiencies experienced by the pool based upon each company’s relative premium writings in that state, with any excess funding typically distributed to the participating companies on the same basis. To the extent that reinsurance treaties do not cover these assessments, they may have an adverse effect on the Company. For the years ended December 31, 2017, 2016,2023 and 2015,2022, total assessments paid to all such facilities were minimal.

Restrictions on Dividends and Risk-Based Capital

For information on Restrictions on Dividends and Risk-based Capital that affect us please refer to Note 912 ~ Statutory Financial Data, Risk-Based Capital and Dividend Restrictions of the Notes to the Consolidated Financial Statements and the Regulatory and Rating Issues section within Item 7, Management’s Discussion and Analysis.

NAIC-IRIS Ratios

The National Association of Insurance Commissioners’ (“NAIC”) Insurance Regulatory Information System (“IRIS”) was developed by a committee of state insurance regulators and is primarily intended to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies thirteen industry ratios and specifies “usual values” for each ratio. Departure from the usual values on four or more ratios generally leads to inquiries or possible further review from individual state insurance commissioners. However, the generation of ratios outside of the usual values does not necessarily indicate a financial problem. For example, premium growth, alone, can trigger one or more unusual values. Refer to the Regulatory and Rating Issues section within Item 7, Management’s Discussion and Analysis.

11



Effect of Federal Legislation

The Terrorism Risk Insurance Act (“TRIA”), was enacted in November 2002. After several extensions, Congress enacted the Terrorism Risk Insurance Program Reauthorization of 2015 (“Act”). The Act extends the Federal Terrorism Insurance Program untilwas extended through December 31, 2020.2027 in December of 2019. The Act continues to require insurance companies to offer terrorism coverage. There is minimal exposure to this coverage as most of our policyholders decline this coverage option.

Employees

At December 31, 2017,2023, we had 14394 employees. Substantially allAll of our employees are full-time.were full-time as of December 31, 2023. Our employees are not subject to any collective bargaining agreement, and we are not aware of any current efforts to implement such an agreement. We believe we have good working relations with our employees.

Effective March 13, 2017, the Company entered into employment agreements (the “Employment Agreements”) with each of Mr. James G. Petcoff, the Company’s Chairman and CEO, Mr. Brian J. Roney, the Company’s President, Mr. Nicholas J. Petcoff, the Company’s Executive Vice President, and Mr. Andrew D. Petcoff, the Company’s Senior Vice President. The Employment Agreements are the same except for the individuals’ titles and annual base salaries, which are $550,000 for Mr. James G. Petcoff; $425,000 for Mr. Brian J. Roney; $425,000 for Mr. Nicholas J. Petcoff; and $375,000 for Mr. Andrew D. Petcoff. The initial term for each of the Employment Agreements ends on March 13, 2018, with unlimited one-year automatic extensions unless the Employee gives written notice of non-extension, not less than 30 days prior to the expiration of the term, or the Company gives written notice of non-extension prior to the expiration of the term. The Employment Agreements provide for an annual base salary, participation in the annual bonus plan, participation in any long-term incentive plan made generally available to senior executive officers of the Company and other fringe benefits and perquisites as are generally made available to the Company’s executives.
If any of the executives’ employment is terminated for cause, the executive will receive the accrued and unpaid portion of base salary. If any of the executives’ employment is terminated due to death or permanent disability, the executive (or his legal representative or beneficiary) will receive the accrued and unpaid portion of base salary and any earned but not yet paid incentive awards for already completed years or award cycles. If any of the executives’ employment is terminated without cause or if he terminates his employment for good reason (assuming the change of control provisions below do not apply), the executive will receive the accrued and unpaid portion of base salary, any earned but not yet paid incentive awards for already completed years or award cycles, plus one times his annual base salary. In addition, any unvested equity awards will immediate vest. If any of the executives’ employment is terminated without cause (other than due to death or permanent disability) or he terminates such employment for good reason, in each case within 24 months after a change of control, the executive will receive the accrued and unpaid portion of base salary, any earned but not yet paid incentive awards for already completed years or award cycles and 2.99 times the sum of (i) his annual base salary and (ii) the greater of his annual target bonus or his average bonus for the prior three years. In addition, any unvested equity awards will immediate vest.
The employment agreements also provide for confidentiality and non-solicitation provisions, the latter for one year after termination of employment.


Available Information

We maintain an internet website at http://www.cnfrh.com, where we make available, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Statements of Beneficial Ownership (Forms 3, 4, and 5), and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish to, the SEC. In addition, the SEC maintains an Internet site that contains reports, proxy statements, and other information that we file at www.sec.gov. The public may read and copy any materials we file with the Commission at the SEC's Public Reference Room at 100 F Street, NE., Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. Information found on our website or any other website is not part of this annual report on Form 10-K or any other report we file with, or furnish to the SEC.

Glossary

Accident year


The annual calendar accounting period in which loss events occurred, regardless of when the losses are actually reported, booked or paid.

Accident year combined ratio

The accident year combined ratio is an insurance industry measure that excludes changes in net ultimate loss estimates from prior accident year loss reserves. The accident year combined ratio provides management with an assessment of the specific policy year’s profitability (which matches policy pricing with related losses) and assists management in their evaluation of product pricing levels and quality of business written. Management uses accident year combined ratio as one component to assess the Company's current year performance and as a measure to evaluate, and if necessary, adjust current year pricing and underwriting.

Adjusted operating income (loss)

Net

Adjusted operating income (loss) is a non-GAAP measure. Adjusted operating income (loss) represents net income (loss) excluding the after-tax impact of net realized investment gains (losses), change in fair value of equity securities, the gain from sale of renewal rights, the gain from VSRM Transaction, the loss portfolio transfer risk fee and other gains (losses), the tax effect of changes in unrealized gains (to the extent included in net income), and cumulative effect of changes in accounting principles when applicable..

Adjusted operating income (loss), per share

Adjusted operating income (loss) per share is a non-GAAP measure. Adjusted operating income (loss) on a per share basis.represents the net income (loss) allocable to common shareholders excluding net realized investment gains (losses) per share, change in fair value of equity securities per share, the gain from sale of renewal rights per share, the gain from VSRM Transaction per share, the loss portfolio transfer risk fee per share and other gains (losses) per share.

Amended Credit Agreement / Amended and Restated Credit AgreementThe Amended and Restated Credit Agreement, dated September 29, 2014, is between the Company and Comerica Bank, N.A. (refer to the exhibits hereto, as amended from time to time). The Agreement defines our previous credit facility and its terms; it was terminated in September 2017 (refer to the exhibit listing for details of the term changes, maturity dates, etc.).

Assignment of Benefits

A legal tool that allows a third party to assert a claim and be paid for services performed for an insured who would normally be reimbursed directly by the insurance company after making a claim themselves.

Book value per share

Total common shareholders' equity divided by the number of common shares outstanding.

Case reserves

Estimates of anticipated future payments to be made on each specific individual known, or reported claim.claim, which are exclusive of any IBNR estimated reserves.

12


Combined Ratio based on accounting principles generally accepted in the United States of America (“GAAP”)

The Combined Ratiocombined ratio is the sum of the Loss and LAE Ratioloss ratio and the Expense Ratio as defined below.expense ratio. These ratios differ from statutory ratios to reflect GAAP accounting, as management evaluates the performance of our underwriting operations using the GAAP combined ratio.

Combined Ratio based on statutory accounting practices (“SAP”)

The combined loss and expense ratio (or combined ratio),based on SAP, expressed as a percentage, is the key measure of underwriting profitability traditionally used in the property and casualty insurance business. The combined ratio is a statutory accounting measurement, which represents the sum of (i) the ratio of losses and loss expenses to net earned premiums (loss ratio), plus (ii) the ratio of underwriting expenses to net written premiums (expense ratio).

Combined Ratio (Overall)

When the combined ratio is under 100%, underwriting results are generally considered profitable; when the combined ratio is over 100%, underwriting results are generally considered unprofitable.

Deferred policy acquisition costs


Primarily commissions and premium-related taxes that vary with, and are primarily related to, the production of new contracts and are deferred and amortized to achieve a matching of revenues and expenses when reported in financial statements prepared in accordance with GAAP.


Deficiency

Deficiency

With regard to reserves for a given liability, a deficiency exists when it is estimated or determined that the reserves are insufficient to pay the ultimate settlement value of the related liabilities. Where the deficiency is the result of an estimate, the estimated amount of deficiency (or even the finding of whether or not a deficiency exists) may change as new information becomes available.

Expense Ratio

For GAAP, it is the ratio of GAAP underwriting expenses incurred to net earned premiums plus other income. For SAP, it is the ratio of Statutory underwriting expenses incurred to net written premiums.

Incurred but not reported (IBNR) reserves


Reserves for estimated losses and LAE that have been incurred but not yet reported to the insurer. This includes amounts for unreported claims, development on known cases, and re-opened claims.

Loss


An occurrence that is the basis for submission and/or payment of a claim. Losses may be covered, limited or excluded from coverage, depending on the terms of the policy.

Loss adjustment expenses (LAE)


The expenses of settling claims, including legal and other fees and the portion of general expenses allocated to claim settlement costs.

Loss and LAE ratio

The ratio of incurred losses and loss adjustment expenses to net earned premiums plus other income.

Loss reserves


Liabilities established by insurers and reinsurers to reflect the estimated cost of claims incurred that the insurer or reinsurer will ultimately be required to pay in respect of insurance or reinsurance it has written. Reserves are established for losses and for LAE, and consist of case reserves and IBNR reserves. As the term is used in this document, “loss reserves” is meant to include reserves for both losses and LAE, unless stated otherwise.

Loss reserve development


The increase or decrease in LossLosses or LAE as a result of the re-estimation of claims and claim adjustment expense reserves at successive valuation dates for a given group of claims. Loss reserve development may be related to prior year or current year development.

Losses incurred

The total losses sustained by an insurance company under a policy or policies, whether paid or unpaid. Incurred losses include a provision for IBNR.

NAIC-IRIS ratios

Financial ratios calculated by the NAIC to assist state insurance departments in monitoring the financial condition of insurance companies.

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Policyholders' surplus


As determined under SAP, the amount remaining after all liabilities including loss reserves, are subtracted from all admitted assets. Admitted assets are assets of an insurer prescribed or permitted by a state to be recognized on the statutory balance sheet. Policyholders' surplus is also referred to as “surplus” or “statutory surplus” for statutory accounting purposes.

Premium leverage ratio

The ratio of written premium (gross or net) to consolidated statutory surplus.

Redundancy


With regard to reserves for a given liability, a redundancy exists when it is estimated or determined that the reserves are greater than what will be needed to pay the ultimate settlement value of the related liabilities. Where the redundancy is the result of an estimate, the estimated amount of redundancy (or even the finding of whether or not a redundancy exists) may change as new information becomes available.

Risk-Based Capital (RBC)

A measure adopted by the NAIC and enacted by states for determining the minimum statutory policyholders' surplus requirements of insurers. Insurers having total adjusted capital less than that required by the RBC calculation will be subject to varying degrees of regulatory action.

Statutory accounting practices (SAP)

The practices and procedures prescribed or permitted by domiciliary state insurance regulatory authorities in the United States for recording transactions and preparing financial statements.

Underwriting gain or loss

Net earned premiums plus other income, less losses, LAE, commissions, and operating expenses.



ITEM 1A. RISK FACTORS

Summary

Risk Factors

You should read the following risk factors carefully in connection with evaluating our business and the forward-looking information contained in this Annual Report on Form 10-K. Any of the following risks could materially and adversely affect our business, operating results, financial condition and the actual outcome of matters as to which forward-looking statements are made in this Annual Report on Form 10-K. While we believe we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our business, operating results or financial condition in the future.

Summary Risk Factors

Our business is subject to numerous risks and uncertainties. We have listed below the material risk factors applicable to us. These material risks include, but are not limited to, the following:

Operational Risks
Investment Risks
Liquidity Risks
Legal and Regulatory Risks
Rating Agency Risks
General Risk Factors

Operational Risks

We may not be able to extend or repay our indebtedness owed to our secured lenders, which would have a material adverse effect on our financial condition and ability to continue as a going concern.

If we are unable to service or repay these obligations at maturity and we are otherwise unable to extend the maturity dates or refinance these obligations, we would be in default. We cannot provide any assurances that we will be able to raise

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the necessary amount of capital to service these obligations. Upon a default, our secured lenders would have the right to exercise their rights and remedies to collect, which would include foreclosing on our assets. Accordingly, a default would have a material adverse effect on our business, and we would likely be forced to seek bankruptcy protection.

Our various loan agreements contain financial and non-financial covenants and provisions providing for cross-default. The evaluation of compliance with these provisions is subject to interpretation and the exercise of judgment.

Our actual incurred losses may be greater than our loss and loss adjustment expense reserves, which could have a material adverse effect on our financial condition and results of operations.

Insurance companies’ financial condition and results of operations depend upon their ability to accurately assess the potential losses and loss adjustment expenses under the terms of the insurance policies they underwrite. Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what the expected ultimate settlement and administration of claims will cost, and the ultimate liability may be greater or less than the current estimate. In the insurance industry, there is always the risk that reserves may prove inadequate as it is possible for insurance companies to underestimate the cost of claims.

There has been considerable adverse development reported by the Company in recent years.

We base our estimates on our assessment of known facts and circumstances, as well as estimates of future trends in claim severity, claim frequency, judicial theories of liability and other factors. These variables are affected by both internal and external events that could increase our exposure to losses, including changes in actuarial projections, claims handling procedures, inflation, severe weather, climate change, economic and judicial trends, and legislative changes. We continually monitor reserves using new information on reported claims and a variety of statistical techniques to update our current estimate. Our estimates could prove to be inadequate, and this underestimation could have a material adverse effect on our financial strength.

Among the

The uncertainties we encounter in establishing our loss reserves for losses and related expenses in connection withinclude:

For the majority of our insurance businesses are as follows:
When we write “occurrence” policies, we are obligated to pay covered claims, up to the contractually agreed amount, for any covered loss that occurs while the policy is in force. Accordingly, claims may be reported and develop many years after a policy has lapsed;
Even when a claim is received, (irrespective of whether the policy is a "claims-made”, which requires claims to be reported during the policy period, or an “occurrence” based form), it may take considerable time to fully appreciate the extent of the covered loss suffered by the insured and, consequently, estimates of loss associated with specific claims can increase over time;
New theories of liability are enforced retroactively from time to time by courts;
Volatility in the financial markets, economic events, weather events and other external factors may result in an increase in the number of claims and the severity of the claims reported. In addition, elevated inflationary conditions would, among other things, drive loss costs to increase;
If claims became more frequent, even if we had no liability for those claims, the cost of evaluating these potential claims could escalate beyond the amount of the reserves we have established. If
When we enter new lines of business, or encounter new theories of claims liability, we may encounter an increase in claims frequency and greater claims handling costs than we had anticipated; and
Estimation of “IBNR”IBNR losses is a complex and inherently uncertain process which involves a considerable degree of judgment and expertise, which adds to the overall difficulty of estimating loss reserves.

If any of our insurance reserves should prove to be inadequate for the reasons discussed above, or for any other reason, we will be required to increase reserves, resulting in a reduction in our net income and shareholders’ equity in the period in which the deficiency is identified. FutureSuch adverse development can result in the unplanned need for additional capital, which may need to be obtained through the sale of assets or additional issuance of common stock or preferred stock which could dilute current shareholder value.

If we are unable to underwrite risks accurately and charge competitive yet profitable rates to our policyholders, our business, financial condition and results of operations will be adversely affected.

In general, the premiums for our insurance policies are established at the time a policy is issued and, therefore, before all of our underlying costs are known. Like other insurance companies, we rely on estimates and assumptions in setting our

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premium rates. Establishing adequate premium rates is necessary, together with investment income, to generate sufficient revenue to offset losses, LAE and other underwriting costs and to earn a profit. If we do not accurately assess the risks that we underwrite, we may not charge adequate premiums to cover our losses and expenses, which would adversely affect our results of operations and our profitability. Alternatively, we could set our premiums too high, which could reduce our competitiveness and lead to lower revenues.

Pricing involves the acquisition and analysis of historical loss data and the projection of future trends, loss costs and expenses, and inflation trends, among other factors, for each of our products in multiple risk tiers and many different markets. In order to accurately price our policies, we must:

Collect and properly analyze a substantial volume of data from our insureds;
Develop, test and apply appropriate actuarial projections and rating formulas;
Closely monitor and timely recognize changes in trends; and
Project both frequency and severity of our insureds’ losses with reasonable accuracy.

We seek to implement our pricing accurately in accordance with our assumptions. Our ability to undertake these efforts successfully and, as a result, accurately price our policies, is subject to a number of risks and uncertainties, including:

Insufficient or unreliable data;
Incorrect or incomplete analysis of available data;
Uncertainties generally inherent in estimates and assumptions;
Our failure to implement appropriate actuarial projections and rating formulas or other pricing methodologies;
Regulatory constraints on rate increases; and
Our failure to accurately estimate investment yields and the duration of our liability for loss and loss adjustment expenses, as well as unanticipated court decisions, legislation or regulatory action.

In addition, as a result of current industry non-weather factors, such as the increase in litigation surrounding the Assignment of Benefits claims and lawsuits in Florida, in particular, we may experience additional losses that could adversely affect our financial position and results of operations.

There may be limited capacity from third party insurers to support the business produce by our MGA.

As discussed in Item 1 ~ Business, the Company is making a strategic shift wherein our Insurance Company Subsidiaries will underwrite significantly less business. The Company’s earned premium and investment income revenues will be substantially in excess of established reservesreplaced with commission revenue generated by CIS, our MGA, producing premiums for third-party insurers. We cannot assure that we will be able to locate third party insurers to underwrite the business our MGA can produce. The failure to obtain sufficient third party underwriting capacity could also have a material adverse effect on future earningsour business, financial condition and liquidityresults of operations.

We operate in a highly competitive environment and we may not continue to be able to compete effectively against larger or more wellestablished business rivals.

We compete with a large number of other companies in our selected lines of business. Many of our competitors are substantially larger and may enjoy better name recognition, substantially greater financial resources, higher financial strength ratings by rating agencies, broader and more diversified product lines and more widespread agency relationships than we do. Insurers in our markets generally compete on the basis of price, consumer recognition, coverages offered, claims handling, financial stability, customer service and geographic coverage. Although pricing is influenced to some degree by that of our competitors, it is not in our best interests to compete solely on price, and we may from time-to-time experience a loss of market share during periods of intense price competition. A number of new, proposed or potential legislative or industry developments could further increase competition in our industry including, but not limited to:

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An increase in capital‑raising by companies in our lines of business, which wouldcould result in new entrants to our markets and an excess of capital in the industry;
The deregulation of commercial insurance lines in certain states and the possibility of federal regulatory reform of the insurance industry, which could increase competition from standard carriers for our E&S lines of insurance business; and
Changing practices caused by the Internet may lead to greater competition in the insurance business. Among the possible changes are shifts in the way insurance is purchased. If our distribution model were to be significantly altered by changes in the way products are marketed, including, without limitation, through use of the Internet, it could have a material adverse effect on our premiums, underwriting results and profits.

There is no assurance that we will be able to continue to compete successfully in the insurance markets in which we participate. Increased competition in our market could result in a change in the supply and/or demand for insurance, affect our ability to attractprice our products at risk‑adequate rates and retain existing business, and could affector underwrite new business on favorable terms. If this increased competition so limits our ability to retaintransact business, our operating results could be adversely affected.

Increased information technology security threats and more sophisticated computer crimes pose a risk to our systems, networks, products and services.

Our business is dependent upon the uninterrupted functioning of our information technology and telecommunication systems. We rely upon our systems, as well as the systems of our vendors, to underwrite and process our business; make claim payments; provide customer service; provide policy administration services, such as endorsements, cancellations and premium collections; comply with insurance regulatory requirements; and perform actuarial and other analytical functions necessary for pricing and product development.

Our systems may be damaged, disrupted, or hire qualified personnel.


shut down due to unauthorized access, malicious software, undetected intrusion, hardware failures, or other events, and in these circumstances our disaster recovery planning may be ineffective or inadequate. Information technology security threats from user error to cybersecurity attacks are increasing in frequency and sophistication. These threats pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. The potential consequences of a material cybersecurity attack include reputational damage, litigation with third parties, and increased cybersecurity protection and remediation costs. A sustained business interruption or system failure could adversely impact our ability to process our business, provide customer service, pay claims in a timely manner or perform other necessary business functions. We could also be subject to fines and penalties related to a security breach. The cost to remedy a severe breach could be substantial.

Severe weather conditions and other catastrophes are inherently unpredictable and may have a material adverse effect on our financial results and financial condition.

Our property insurance business is exposed to the risk of severe weather conditions and other catastrophes. Catastrophes can be caused by various events, including natural events such as hurricanes, winter weather, tornadoes, windstorms, earthquakes, hailstorms, severe thunderstorms, fires and other non-natural events such as explosions or riots.

The incidence and severity of catastrophes and severe weather conditions are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Severe weather conditions and catastrophes can cause greater losses in our property lines and cause our liquidity and financial condition to deteriorate. In addition, our inability to obtain reinsurance coverage at reasonable rates and in amounts adequate to mitigate the risks associated with severe weather conditions and other catastrophes could have a material adverse effect on our business and results of operation.operations.

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Our investment portfolio is subject

We may be unable to significant market and credit risks, which could resultobtain reinsurance coverage at reasonable prices or on terms that provide us adequate protection.

We purchase reinsurance in an adverse impact on our financial conditions or results of operations.

Our results of operations depend, in part, on the performancemany of our investment portfolio. We seeklines of business to hold a diversified portfoliohelp manage our exposure to insurance risks that we underwrite and to reduce volatility in our results.

The availability and cost of investments that is managed by professional investment advisory management firms in accordance with our investment policy and routinely reviewed by our Investment Committee. However, our investmentsreinsurance are subject to general economicprevailing market conditions, both in terms of price and market risks as well as risks inherent to particular securities.

available capacity, each of which can affect our business volume and profitability. The valueavailability of reasonably affordable reinsurance is a critical element of our investment portfoliobusiness plan. One important way we utilize reinsurance is subject to the risk that certain investments may default or become impaired duereduce volatility in claims payments by limiting our exposure to deterioration in the financial condition of one or more issuers of the securities held, or duelosses from large risks. Another way we use reinsurance is to deterioration in the financial condition of an insurer that guarantees an issuer’s payments of such investments. Such defaults and impairments could reducepurchase substantial protection against concentrated losses when we enter new markets. As a result, our net investment income and result in realized investment losses.
Risks for all types of securities are managed through application of our investment policy, which establishes investment parameters that include but are not limited to maximum percentages of investment in certain types of securities and minimum levels of credit quality, which we believe are within guidelines established by the NAIC and various state insurance departments, as applicable.
A severe economic downturn could cause us to incur substantial realized and unrealized investment losses in future periods, which would have an adverse impact on our financial condition, results of operations, debt and financial strength ratings, Insurance Company Subsidiaries’ capital liquidity and ability to access capital markets.
Although we seekmanage volatility and avoid significant losses, expand into new markets or grow by offering insurance to preserve our capital, we cannot be certain that our investment objectives will be achieved, and results may vary substantially over time. In addition, although we seek to employ investment strategies that are not correlated with our insurance exposures, losses in our investment portfolio may occur at the same time as underwriting losses and, therefore, exacerbate the adverse effectnew kinds of the losses on us.
Our ability to meet ongoing cash requirements, service debt and pay dividendsenterprises may be limited by our holding company structure and regulatory constraints restricting dividends or other distributions by our Insurance Company Subsidiaries.
We are a holding company that transacts the majorityunavailability of our business through our Insurance Company Subsidiaries. Our ability to meet our obligations on our outstanding debt, and to pay our expenses and shareholder dividends, depends upon the dividend paying capacity of our Insurance Company Subsidiaries.reasonably priced reinsurance. We will be limited by the earnings of our Insurance Company Subsidiaries, and the distribution or other payment of such earnings to it in the form of dividends, loans, advances or the reimbursement of expenses. Payments of dividends to us by our Insurance Company Subsidiaries are subject to various business considerations and restricted by state insurance laws, including laws establishing minimum solvency and liquidity thresholds, and could be subject to revised restrictions in the future. The ability to pay ordinary and extraordinary dividends must be reviewed in relation to the impact on key financial measurement ratios, including RBC ratios. The Insurance Company Subsidiaries’ ability to pay future dividends without advance regulatory approval is dependent upon maintaining a positive level of unassigned surplus. As a result, at times, we may not be able to receive dividendsobtain reinsurance on acceptable terms or from our Insurance Company Subsidiaries in amounts necessaryentities with satisfactory creditworthiness. Under such circumstances, we may have to meet our debt obligations, to pay shareholder dividends on our capital stock or to pay corporate expenses. Therefore,reduce the inabilitylevel of our Insurance Company Subsidiariesunderwriting commitments, which would reduce our revenues.

Many reinsurance companies have begun to pay dividendsexclude certain coverages from, or make other distributions could have a material adverse effect on our business and financial condition.


The price of our common stock may be volatile and limited public float and low trading volume for our shares may have an adverse impact on the share price or make it difficult to liquidate.
The trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could be significant and could cause a lossalter terms in, the amount invested in our shares of common stock. Factorsreinsurance contracts we enter into with them. Some exclusions relate to risks that could cause fluctuation are listed inwe cannot exclude from the Industry Risks” and “Risks Relatedpolicies we write due to our Business” listed above.
business or regulatory constraints. In addition, reinsurers are imposing terms, such as lower per occurrence and aggregate limits, on direct insurers that do not wholly cover the stock market in general, and the market for insurance companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. This litigation, if instituted against us, could result in substantial costs, divert our management’s attention and resources, and harm our business, operating results, and financial condition.
risks written. As a result, of these factors, investors in our common stock maywe, like other direct insurance companies, write insurance policies which, to some extent, do not be able to resell their shares at or above their purchase price or may not be able to resell them at all. These market and industry factors may materially reducehave the market price of our common stock, regardless of our operating performance. In addition, price volatility may be greater if the public float and the trading volume of our common stock remain low.
We may be adversely affected by interest rate changes.
Our investment portfolio is predominantly comprised of fixed income securities. These securities are sensitive to changes in interest rates. An increase in interest rates typically reduces the fair market value of fixed income securities. In addition, if interest rates decline, investment income earned from future investments in fixed income securities will be lower. We generally hold our fixed income securities to maturity, so our interest rate exposure does not usually result in realized losses. However, as noted above, rising interest rates could result in a significant reduction of our book value. A low investment yield environment could adversely impact our net earnings, as a result of fixed income securities maturing and being replaced with lower yielding securities which impact investing results.
Interest rates are highly sensitive to many factors beyond our control including general economic conditions, governmental monetary policy, and political conditions. As discussed above, fluctuations in interest rates may adversely impact our business. See “Item 7A. Qualitative and Quantitative Disclosures About Market Risk” for further discussion on interest rate risk.
A decline in our financial strength rating may result in a reduction of new or renewal business.
Participants in the insurance industry use ratings from independent ratings agencies, such as A.M. Best Company, Inc. (“A.M. Best”), Demotech, Inc. (“Demotech”), and Kroll Bond Rating Agency ("Kroll") as an important means of assessing the financial strength and quality of insurers. In setting their ratings, A.M. Best, Demotech and Kroll utilize a quantitative and qualitative analysis of a company’s balance sheet strength, operating performance and business profile. These analyses include comparisons to peers and industry standards as well as assessments of operating plans, philosophy and management. For A.M. Best, the ratings range from A++, or superior, to F for in liquidation. Demotech’s ratings range from “A” (unsurpassed) to M (moderate). Kroll's ratings range from AAA (extremely strong) to R (under regulatory supervision). As of the date of this Form 10-K, A.M. Best has assigned financial strength ratings of B++ with a negative outlook to CIC (the fifth highest rating level out of sixteen rating levels) and B+ with a stable outlook for WPIC (the sixth highest out of sixteen). A rating of B++ for CIC and a rating of B+ for WPIC means A.M. Best considers both companies to have a “good” ability to meet ongoing financial obligations. Both CIC, WPIC are rated “A” by Demotech (the third highest rating level out of six rating levels) as of the date of this Form 10-K. A financial stability rating of “A” from Demotech indicates “exceptional” financial stability related to maintaining surplus at an acceptable level. Kroll has given CIC and WPIC an insurance financial strength rating of BBB+ with a stable outlook (fourth highest rating level out of eleven) as of the date of this Form 10-K. A BBB+ rating indicates that the insurer's financial condition is adequate.
A.M. Best, Demotech and Kroll assign ratings that are intended to provide an independent opinion of an insurance company’s ability to meet its financial obligations to policyholders and such ratings are not evaluations directed to investors. A.M. Best, Demotech and Kroll periodically review our ratings and may revise ratings downward or revoke them at their sole discretion based primarily on their analyses of our balance sheet strength (including capital adequacy and loss and loss adjustment expense reserve adequacy), operating performance and business profile. Factors that could affect such analyses include but are not limited to:

If we change our business practices from our organizational business plan in a manner that no longer supports A.M. Best’s, Demotech’s or Kroll's rating;
If unfavorable financial, regulatory or market trends affect us, including excess market capacity;
If we incur operating losses;
If we have unresolved issues with government regulators;
If we are unable to retain our senior management or other key personnel;
If our investment portfolio incurs significant losses; or
If A.M. Best, Demotech or Kroll alters its capital adequacy assessment methodology in a manner that would adversely affect our rating.
These and other factors could result in a downgrade of our rating. A downgrade of our rating could cause our current and future agents, retail brokers and insureds to choose other, more highly‑rated competitors. A downgrade of this rating could also increase the cost or reduce the availabilitybenefit of reinsurance protection. These gaps in reinsurance protection expose us to us.
In addition, in view of the earningsgreater risk and capital pressures recently experienced by many financial institutions, including insurance companies, it is possible that rating organizations will heighten the level of scrutiny that they apply togreater potential losses. For example, certain reinsurers have excluded coverage for terrorist acts or priced such institutions and may increase the capital and other requirements employed in the rating organizations’ models for maintenance of certain ratings levels. It is possible that such reviews of us may result in adverse ratings consequences, which could have a material adverse effect on our financial condition and results of operations. A downgrade or withdrawal of any rating could severely limit or prevent us from writing new and renewal insurance contracts.
coverage at unreasonably high rates.

We distribute our insurance products through a select group of agents, several of which account for a significant portion of our business, and there can be no assurance that such relationships will continue, or if they do continue, that the relationship will be on favorable terms to us. In addition, reliance on agents subjects us to their credit risk.

Our distribution model depends almost entirely on the agencies that distribute our products. In 2017, our top2023, six independent agencies accounted for approximately 33%40% of our gross written premiums in our commercial lines, and our top four independent agencies, accounted for approximately 41%62% of our gross written premiums in our personal lines. We cannot assure you that these relationships, or our relationships with any of our agencies will continue. Even if the relationships do continue, they may not be on terms that are profitable for us. The termination of a relationship with one or more significant agents could result in lower direct written premiumspremium revenue and could have a material adverse effect on our results of operations or business prospects.

Certain premiums from policyholders, where the business is produced by agents, are collected directly by the agents and forwarded to our Insurance Company Subsidiaries. In certain jurisdictions, when the insured pays its policy premium to these agents for payment on behalf of our Insurance Company Subsidiaries, the premiums might be considered to have been paid under applicable insurance laws and regulations. Accordingly, the insured would no longer be liable to us for those amounts, whether or not we have actually received the premiums from that agent. Consequently, we assume a degree of credit risk associated with agents. There may be instances where agents collect premiums but do not remit them to us and we may be required under applicable law to provide the coverage set forth in the policy despite the absence of premiums. If we are unable to collect premiums from agents, in the future, underwriting profits may decline and our financial condition and results of operations could be materially and adversely affected.

The property and casualty insurance business is historically cyclical in nature, and we may experience periods with excess underwriting capacity and unfavorable premium rates, which could adversely affect our business.

Historically, insurers have experienced significant fluctuations in operating results due to competition, frequency and severity of catastrophic events, levels of capacity, adverse litigation trends, regulatory constraints, general economic conditions and other factors. The supply of insurance is related to prevailing prices, the level of insured losses and the level of capital available to the industry that, in turn, may fluctuate in response to changes in rates of return on investments being earned in the insurance industry. As a result, the insurance business historically has been a cyclical industry characterized by

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periods of intense price competition due to excessive underwriting capacity as well as periods when shortages of capacity increased premium levels. Demand for insurance depends on numerous factors, including the frequency and severity of catastrophic events, levels of capacity, the introduction of new capital providers, and general economic conditions. All of these factors fluctuate and may contribute to price declines generally in the insurance industry.

We cannot predict with certainty whether market conditions will improve, remain constant or deteriorate. Negative market conditions may impair our ability to underwrite insurance at rates we consider appropriate and commensurate relative to the risk assumed. If we cannot underwrite insurance at appropriate rates, our ability to transact business will be materially and adversely affected. Any of these factors could lead to an adverse effect on our business, financial condition and results of operations.


If we are unable to underwrite risks accurately and charge competitive yet profitable rates to our policyholders, our business, financial condition and results of operations will be adversely affected.
In general, the premiums for our insurance policies are established at the time a policy is issued and, therefore, before all of our underlying costs are known. Like other insurance companies, we rely on estimates and assumptions in setting our premium rates. Establishing adequate premium rates is necessary, together with investment income, to generate sufficient revenue to offset losses, LAE and other underwriting costs and to earn a profit. If we do not accurately assess the risks that we underwrite, we may not charge adequate premiums to cover our losses and expenses, which would adversely affect our results of operations and our profitability. Alternatively, we could set our premiums too high, which could reduce our competitiveness and lead to lower revenues.
Pricing involves the acquisition and analysis of historical loss data and the projection of future trends, loss costs and expenses, and inflation trends, among other factors, for each of our products in multiple risk tiers and many different markets. In order to accurately price our policies, we:
Collect and properly analyze a substantial volume of data from our insureds;
Develop, test and apply appropriate actuarial projections and rating formulas;
Closely monitor and timely recognize changes in trends; and
Project both frequency and severity of our insureds’ losses with reasonable accuracy.
We seek to implement our pricing accurately in accordance with our assumptions. Our ability to undertake these efforts successfully and, as a result, accurately price our policies, is subject to a number of risks and uncertainties, including:
Insufficient or unreliable data;
Incorrect or incomplete analysis of available data;
Uncertainties generally inherent in estimates and assumptions;
Our failure to implement appropriate actuarial projections and rating formulas or other pricing methodologies;
Regulatory constraints on rate increases; and
Our failure to accurately estimate investment yields and the duration of our liability for loss and loss adjustment expenses, as well as unanticipated court decisions, legislation or regulatory action.
In addition, as a result of current industry non-weather factors, such as the increase in litigation surrounding the Assignment of Benefits claims and lawsuits in Florida, in particular, we may experience additional losses that could adversely affect our financial position or results of operations.
We operate in a highly competitive environment and we may not continue to be able to compete effectively against larger or more well‑established business rivals.
We compete with a large number of other companies in our selected lines of business. Many of our competitors are substantially larger and may enjoy better name recognition, substantially greater financial resources, higher financial strength ratings by rating agencies, broader and more diversified product lines and more widespread agency relationships than us. Insurers in our markets generally compete on the basis of price, consumer recognition, coverages offered, claims handling, financial stability, customer service and geographic coverage. Although pricing is influenced to some degree by that of our competitors, it is not in our best interests to compete solely on price, and we may from time-to-time experience a loss of market share during periods of intense price competition. A number of new, proposed or potential legislative or industry developments could further increase competition in our industry including, but not limited to:
An increase in capital‑raising by companies in our lines of business, which could result in new entrants to our markets and an excess of capital in the industry;
The deregulation of commercial insurance lines in certain states and the possibility of federal regulatory reform of the insurance industry, which could increase competition from standard carriers for our E&S lines of insurance business; and
Changing practices caused by the Internet may lead to greater competition in the insurance business. Among the possible changes are shifts in the way insurance is purchased. If our distribution model was to be significantly altered by changes in the way products were marketed, including, without limitation, through use of the Internet, it could have a material adverse effect on our premiums, underwriting results and profits.

There is no assurance that we will be able to continue to compete successfully in the insurance market. Increased competition in our market could result in a change in the supply and/or demand for insurance, affect our ability to price our products at risk‑adequate rates and retain existing business, or underwrite new business on favorable terms. If this increased competition so limits our ability to transact business, our operating results could be adversely affected.

Adverse economic factors, including recession, inflation, periods of high unemployment or lower economic activity could result in the sale of fewer policies than expected or an increase in the infrequency or severity of claims and premium defaults or both, which, in turn, could affect our growth and profitability.

Factors, such as business revenue, economic conditions, the volatility and strength of the capital markets and inflation can all affect the business and economic environment in which we operate. These same factors affect our ability to generate revenue and profits. In an economic downturn that is characterized by higher unemployment, declining spending and reduced corporate revenues, the demand for insurance products is adversely affected, which directly affects our premium levels and profitability. Negative economic factors may also affect our ability to receive the appropriate rate for the risk we insure with our policyholders and may adversely affect the number of policies we can write, including with respect to our opportunities to underwrite profitable business. In an economic downturn, our customers may have less need for insurance coverage, cancel existing insurance policies, modify their coverage or not renew with us. Existing policyholders may exaggerate or even falsify claims to obtain higher claims payments. These outcomes would reduce our underwriting profit to the extent these factors are not reflected in the rates we charge.

The failure of any of the loss limitations or exclusions we employ, or changes in other claims or coverage issues, could have a material adverse effect on our financial condition or results of operations.

Our policies include provisions to limit our exposure to known risks. In addition, we design our policy terms to manage our exposure to expanding theories of legal liability like those which have given rise to claims for lead paint, asbestos, mold, construction defects and environmental matters. Many of the policies we issue also include conditions requiring the prompt reporting of claims to us and entitle us to decline coverage in the event of a violation of that condition. Also, many of our policies limit the period during which a policyholder may bring a claim under the policy, which in many cases is shorter than the statutory period under which such claims can be brought against our policyholders.

As industry practices and legal, judicial, social and other conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond the underwriting intent or by increasing the size or number of claims.

It is possible that a court or regulatory authority could nullify or void any number of the provisions we put in place to limit our exposure. Regulatory authorities or courts may not interpret the limitations or exclusions that we included in the policies in the manner we intended. Or legislation could be enacted modifying or barring the use of such endorsements and limitations. These types of governmental actions could result in higher than anticipated losses and loss adjustment expenses, which could have a material adverse effect on our financial condition or results of operations. In some instances, these changes may not become apparent until sometime after we have issued insurance policies that are affected by the changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after a contract is issued.

If we are unable to retain key management and employees or recruit other qualified personnel, we may be adversely affected.

We believe that our future success depends, in large part, on our ability to retain our experienced management team and key employees, particularly our chief executive officer, Nicholas J. Petcoff. There can be no assurance that we can attract and retain the necessary employees to conduct our business activities on a timely basis or at all. Our competitors may offer more favorable compensation arrangements to our key management or employees to incentivize them to leave our Company.

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Furthermore, our competitors may make it more difficult for us to hire their personnel by offering excessive compensation arrangements to certain employees to induce them not to leave their current employment and bringing litigation against employees who do leave (and possibly us as well) to join us. The loss of any of our executive officers or other key personnel, or our inability to recruit and retain additional qualified personnel as we grow, could materially and adversely affect our business and results of operations, and could prevent us from fully implementing our growth strategies.

We rely on our systems and employees, and those of certain thirdparty vendors and service providers in conducting our operations, and certain failures, including internal or external fraud, operational errors, or systems malfunctions, could materially adversely affect our operations.

We are exposed to many types of operational risk, including the risk of fraud by employees and outsiders, clerical and recordkeeping errors and computer or telecommunications systems malfunctions. Our business depends on our ability to process a large number of increasingly complex transactions. If any of our operational, accounting, or other data processing systems fail or have other significant shortcomings, we could be materially adversely affected. Similarly, we depend on our employees. We could be materially adversely affected if one or more of our employees cause a significant operational breakdown or failure, either as a result of human error or intentional sabotage or fraudulent manipulation of our operations or systems.

Third parties with whom we do business, including vendors that provide services or security solutions for our operations, could also be sources of operational and information security risk to us, including from breakdowns, failures, or capacity constraints of their own systems or employees. Any of these occurrences could diminish our ability to operate our business, or cause financial loss, potential liability to insureds, inability to secure insurance, reputational damage or regulatory intervention, which could materially adversely affect us.

Litigation and legal proceedings against our subsidiaries could have a material adverse effect on our business, financial condition and/or results of operations.

As an insurance holding company, our Subsidiaries are named as defendants in various legal actions in the ordinary course of business. We believe that the outcome of presently pending matters, individually and in the aggregate, will not have a material adverse effect on our consolidated financial position, operating results or liquidity. However, the outcomes of lawsuits cannot be predicted and, if determined adversely, could require us to pay significant damage amounts or to change aspects of our operations, which could have a material adverse effect on our financial results.

Our geographic concentration ties our performance to the business, economic, natural perils, man-made perils, and regulatory conditions within our most concentrated region.

Our revenues and profitability are subject to the prevailing regulatory, legal, economic, political, demographic, competitive, weather and other conditions in the principal states in which we do business. Changes in any of these conditions could make it less attractive for us to do business in such states and would have a more pronounced effect on us compared to companies that are more geographically diversified. In addition, our exposure to severe losses from localized perils, such as earthquakes, hurricanes, tropical storms, tornadoes, wind, ice storms, hail, fires, terrorism, riots and explosions, is increased in those areas where we have written significant numbers of insurance policies.

We are subject to credit risk with regard to our reinsurance counterparties.

Although reinsurance makes the assuming reinsurer liable to us to the extent of the risk ceded, we are not relieved of our primary liability to our insureds as the direct insurer. We cannot be sure that our reinsurers will pay all reinsurance claims on a timely basis or at all. For example, reinsurers may default in their financial obligations to us as the result of insolvency, lack of liquidity, operational failure, fraud, asserted defenses based on agreement wordings or the principle of utmost good faith, asserted deficiencies in the documentation of agreements or other reasons. The failure of a reinsurer to pay us does not lessen our contractual obligations to insureds. If a reinsurer fails to pay the expected portion of a claim or claims, our net losses might increase substantially and adversely affect our financial condition. Any disputes with reinsurers regarding coverage under reinsurance contracts could be time‑consuming, costly and uncertain of success.

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Downgrades to the credit ratings of our reinsurance counterparties may result in the reduction of rating agency capital credit provided by those reinsurance contracts and could, therefore, result in a downgrade of our own credit ratings. We evaluate each reinsurance claim based on the facts of the case, historical experience with the reinsurer on similar claims and existing case law and include any amounts deemed uncollectible from the reinsurer in our reserve for uncollectible reinsurance.

Damage to our reputation could have a material adverse effect on our business.

Our reputation is one of our key assets. Our ability to attract and retain policyholders is highly dependent upon the external perceptions of our level of service, trustworthiness, business practices, financial condition and other subjective qualities. Negative perceptions or publicity regarding these or other matters, including from actual or alleged conduct by us or our employees, could damage our reputation. Any resulting erosion of trust and confidence among existing and potential policyholders, regulators and other parties important to the success of our business could make it difficult for us to attract new policyholders and maintain existing ones, which could have a material adverse effect on our business, financial condition and results of operations.

Investment Risks

Our investment portfolio is subject to significant market and credit risks, which could result in an adverse impact on our financial conditions or results of operations.

Our results of operations depend, in part, on the performance of our investment portfolio. We seek to hold a diversified portfolio of investments that is managed by professional investment advisory management firms in accordance with our investment policy and routinely reviewed by our Investment Committee. However, our investments are subject to general economic conditions and market risks as well as risks inherent to particular securities.

The value of our investment portfolio is subject to the risk that certain investments may default or become impaired due to deterioration in the financial condition of one or more issuers of the securities held, or due to deterioration in the financial condition of an entity that guarantees an issuer’s payments of such investments. Such defaults and impairments could reduce our net investment income and result in realized investment losses.

A severe economic downturn could cause us to incur substantial realized and unrealized investment losses in future periods, which would have an adverse impact on our financial condition, results of operations, debt and financial strength ratings, Insurance Company Subsidiaries’ capital liquidity and ability to access capital markets. In addition, losses in our investment portfolio may occur at the same time as underwriting losses and, therefore, exacerbate the adverse effect of the losses on us.

We may be adversely affected by interest rate changes.

Our investment portfolio is predominantly comprised of fixed income securities. These securities are sensitive to changes in interest rates. An increase in interest rates typically reduces the fair market value of fixed income securities. In addition, if interest rates decline, investment income earned from future investments in fixed income securities will be lower. Rising interest rates could result in a significant reduction of our book value. A low investment yield environment could adversely impact our net earnings, as a result of fixed income securities maturing and being replaced with lower yielding securities which impact investing results.

Interest rates are highly sensitive to many factors beyond our control including general economic conditions, governmental monetary policy, and political conditions. See Item 7A ~ Qualitative and Quantitative Disclosures About Market Risk for further discussion on interest rate risk.

Liquidity Risks

Any debt service obligations will reduce the funds available for other business purposes, and the terms and covenants relating to our current and future indebtedness could adversely impact our financial performance and liquidity.

As of December 31, 2023, the Company had $17.9 million of 9.75% public senior unsecured notes outstanding and $9.8 million of senior secured notes outstanding. The Company's line of credit matured on December 1, 2022, and was not

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renewed. See Note 10 ~ Debt for additional details. We are subject to risks typically associated with debt financing, such as insufficient cash flow to meet required debt service payment obligations and the inability to refinance existing indebtedness.

Our ability to make payments on our indebtedness is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If we are unable to generate sufficient cash flow to service our debt and meet our other commitments, we may need to restructure or refinance all or a portion of our debt, sell material assets or operations or raise additional debt or equity capital. We may not be able to effect any of these actions on a timely basis, on commercially reasonable terms or at all, and these actions may not be sufficient to meet our capital requirements. In addition, the terms of our existing or future debt arrangements may restrict us from effecting any of these alternatives. For example, the senior secured notes contain various restrictive covenants that relate to the Company’s tangible net worth, fixed-charge coverage ratios, dividend paying capacity, reinsurance retentions, and risk-based capital ratios. If we are unable to meet debt covenant requirements or to obtain future waivers regarding such failures, we could be in breach of our credit agreement. Any such breach could cause significant disruption to our operations, including a requirement to immediately repay our indebtedness, and would have severe adverse effects on our liquidity and financial flexibility.

As of December 31, 2023, the Company was not in compliance with the tangible net worth, dividend paying capacity, risk-based capital and consolidated debt to capital covenants on its senior secured notes. On March 27, 2024, the holders of the senior secured notes waived the December 31, 2023 covenants and modified the minimum requirements of the financial debt covenants beginning with the first quarter ending March 31, 2024. Management expects to be in compliance with all debt covenants in future periods.

Our ability to meet ongoing cash requirements, service debt and pay dividends may be limited by our holding company structure and regulatory constraints restricting dividends or other distributions by our Insurance Company Subsidiaries.

We are a holding company that transacts the majority of our business through our Insurance Company Subsidiaries and, as a result, our principal sources of funds are payments from our Insurance Company Subsidiaries, including intercompany service fees and dividends. Our ability to meet our obligations on our outstanding debt and pay our expenses, depends on continuing to receive sufficient funds from our Insurance Company Subsidiaries. We have met our outstanding cash flow obligations at the holding company level primarily through intercompany service fees we receive as well as direct expense reimbursements. We may also use dividends from our Insurance Company Subsidiaries, however, insurance regulations limit such dividend payments. At this time any dividend payment from our Insurance Company Subsidiaries would need prior regulatory approval. Any significant reduction in the intercompany service fees we receive, and any regulatory or other limitations on the payment of dividends to us from our Insurance Company Subsidiaries, may adversely affect our ability to meet our debt obligations and pay our expenses.

Legal and Regulatory Risks

We are subject to extensive regulation, which may adversely affect our ability to achieve our business objectives. In addition, if we fail to comply with these regulations, we may be subject to penalties, including fines and suspensions, which may adversely affect our financial condition and results of operations.

As a holding company which owns insurance companies domiciled in the United States, we and our admitted Insurance Company Subsidiaries are subject to extensive regulation, primarily by Michigan (the domiciliary state for CIC and WPIC) and to a lesser degree, the other jurisdictions in which we operate. Most insurance regulations are designed to protect the interests of insurance policyholders, as opposed to the interests of shareholders. These regulations generally are administered by a department of insurance in each state and relate to, among other things, authorizations to write certain lines of business, capital and surplus requirements, reserve requirements, rate and form approvals, investment and underwriting limitations, affiliate transactions, dividend limitations, cancellation and non‑renewal of policies, changes in control, solvency and a variety of other financial and non‑financial aspects of our business. These laws and regulations are regularly re‑examined and any changes in these laws and regulations or new laws may be more restrictive, could make it more expensive to conduct business or otherwise adversely affect our operations. State insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to financial condition, holding

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company issues and other matters. These regulatory requirements may impose timing and expense or other constraints that could adversely affect our ability to achieve some or all of our business objectives.

In addition, regulatory authorities have broad discretion to deny or revoke licenses for various reasons, including the violation of regulations. In some instances, where there is uncertainty as to applicability, we follow practices based on our interpretations of regulations or practices that we believe are generally followed by the industry. These practices may turn out to be different from the interpretations of regulatory authorities. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or otherwise penalize us. This could adversely affect our ability to operate our business.

The admitted market is subject to more state regulation than the E&S market, particularly with regard to rate and form filing requirements, restrictions on the ability to exit lines of business, premium tax payments and membership in various state associations, such as guaranty associations. Some states have deregulated their commercial insurance markets. We cannot predict the effect that further deregulation would have on our business, financial condition or results of operations.

The NAICState of Michigan has developed a systemadopted the NAIC’s calculation to testmeasure the adequacy of statutory capital of U.S.‑based insurers, known as Risk-Based Capital ("RBC"), that many states have adopted. This systemRBC. The RBC calculation establishes the minimum amount of RBCcapital necessary for a company to support its overall business operations. It identifies property‑casualty insurers that may be inadequately capitalized by looking at certain inherent risks of each insurer’s assets and liabilities and its mix of premiums. Insurers falling below a calculated threshold may be subject to varying degrees of regulatory action, including supervision, rehabilitation or liquidation. Failure to maintain adequate risk‑based capitalRBC at the required levels could adversely affect the ability of our Insurance Company Subsidiaries to maintain regulatory authority to conduct their business.

In addition,

The State of Michigan has adopted the various state insurance regulators have increased their focus on risks within an insurer’s holding company system that may pose enterprise risk to the insurer. In 2012, the NAIC adopted significant changes to the insurance


NAIC’s holding company act and regulations (the “NAIC Amendments”). The NAIC Amendments, when adopted by the various states, are designed to respond to perceived gaps in the regulation of insurance holding company systems in the United States. One of the major changes is a requirement that anregulations. This act requires, among other things, that:

An insurance holding company system’s ultimate controlling person submit annuallyan annual enterprise risk report to its leaddomiciliary state insurance regulator an “enterprise risk report” thatwhich identifies activities, circumstances or events involving one or more affiliates of an insurer that if not remedied properly, are likely tomay have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole. Other changes include requiring awhole,
A controlling person to submit prior notice to its domiciliary insurance regulator of a divestiture of control, having detailedand
Insurers comply with certain minimum requirements for cost sharing and management agreements between anthe insurer and its affiliates and expandingaffiliates.

The State of the agreements between an insurer and its affiliates to be filed with its domiciliary insurance regulator. The NAIC Amendments must be adopted by the individual state legislatures and insurance regulators in order to be effective. Michigan (i.e., our main domiciliary state for both our CIC and WPIC subsidiaries), requires a form of the enterprise risk report.

In 2012, the NAIC also adopted the NAIC’s Risk Management and Own Risk and Solvency Assessment Model Act (the “ORSA Model Act”). The ORSA Model Act when adopted by the various states, will requirerequires that an insurance holding company system’s Chief Risk Officer to submit annually to its lead state insurancedomiciliary regulator an Own Risk and Solvency Assessment Summary Report (“ORSA”). The ORSA is a confidential internal assessment appropriate to the nature, scale and complexity of an insurer, conducted by that insurer of the material and relevant risks identified by the insurer associated with anthe insurer’s current business plan and the sufficiency of capital resources to support those risks. The ORSA Model Act must be adopted by the individual state legislature and insurance regulators in order to be effective. Michigan has adopted the ORSA Model Act.  ORSA filings will be required in Michigan starting in 2018. The Company is currently exempt from providing an ORSA summary report as it does not meet the minimum premium requirements.
We may be required to comply with this requirement in the future if our gross written premium exceeds $500 million annually.

We cannot predict the impact if any, that the NAIC Amendments, compliance with the ORSA Model Actthese requirements or any other regulatory requirements may have on our business, financial condition or results of operations.

Our Insurance Company Subsidiaries are subject to minimum capital and surplus requirements. Failure to meet these requirements could subject us to regulatory action.

Our Insurance Company Subsidiaries are subject to minimum capital and surplus requirements imposed under the laws of their respective states of domicile and each state in which they issue policies. Any failure by one of our Insurance Company Subsidiaries to meet minimum capital and surplus requirements will subject it to corrective action. This may include requiring the adoption of a comprehensive financial plan, revocation of its license to sell insurance products or placing the subsidiary under state regulatory control. It may also result in our Insurance Company Subsidiaries being limited in their ability to make a dividend to us and could be a factor in causing rating agencies to downgrade our ratings. Any new

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minimum capital and surplus requirements adopted in the future may require us to increase the capital and surplus of our Insurance Company Subsidiaries, which we may not be able to do.

As of December 31, 2023, CIC fell within the Company Action Level and WPIC fell within the Regulatory Action Level of the RBC formula. WPIC also fell below two other regulatory thresholds which are necessary to stay in compliance. Management is required to provide a plan to its domiciliary regulator that shows how the Companies will get above the minimum level requirements. Management believes that the planned reduction in premium anticipated by a strategic shift to use third-party insurers for substantially all of its commercial lines business will be sufficient to bring the Companies back into compliance by December 31, 2024. Management expects to substantially cease all writings in WPIC by the end of the second quarter of 2024. For more information about Management's strategic shift to non-risk bearing revenue, see Item 1 ~ Business and Item 7 ~ Management's Discussion and Analysis of Financial Condition and Results of Operations.

We may become subject to additional government or market regulation which may have a material adverse impact on our business.

Market disruptions like those experienced during the credit‑driven financial market collapse in 2008, as well as the dramatic increase in the capital allocated to alternative asset management during recent years, have led to increased governmental as well as self‑regulatory scrutiny of the insurance industry in general. In addition, certain legislation proposing greater regulation of the industry is periodically considered by governing bodies of some jurisdictions, and the credit‑driven equity market collapse may increase the likelihood that some increased regulation of the industry is mandated.

jurisdictions.

Our business could be adversely affected by changes in state laws, including those relating to asset and reserve valuation requirements, surplus requirements, limitations on investments and dividends, enterprise risk and risk‑based capitalRBC requirements and, at the federal level, by laws and regulations that may affect certain aspects of the insurance industry, including proposals for preemptive federal regulation. The U.S. federal government generally has not directly regulated the insurance industry except for certain areas of the market, such as insurance for flood, nuclear and terrorism risks. However, the federal government has undertaken initiatives or considered legislation in several areas that may affect the insurance industry, including tort reform and corporate governance. The Dodd‑Frank Wall Street Reform and Consumer Protection Act (the “Dodd‑Frank Act”) also established the Federal Insurance Office, which is authorized to study, monitor and report to Congress on the insurance industry and to recommend that the Financial Stability Oversight Council (the “FSOC”) designate an insurer as an entity posing risks to U.S. financial stability in the event of the insurer’s material financial distress or failure. In December 2013, the Federal Insurance Office issued a report on alternatives to modernize and improve the system of insurance regulation in the United States, including increasing national uniformity through either a federal charter or effective action by the states. Any additional regulations established as a result of the Dodd‑Frank Act or actions in response to the Federal Insurance Office Report could increase our costs of compliance or lead to disciplinary action. In addition, legislation has been introduced from time to time that, if enacted, could result in the federal government assuming a more direct role in the regulation of the insurance industry, including federal licensing in addition to or in lieu of state licensing and reinsurance for natural catastrophes. We are unable to predict whether any legislation will be enacted or any regulations will be adopted, or the effect any such developments could have on our business, financial condition or results of operations.

It is impossible to predict what, if any, changes in the regulations applicable to us, the markets in which we operate, trade and invest or the counterparties with which we do business may be instituted in the future. Any such regulation could have a material adverse impact on our business.


The effect of emerging claim and coverage issues on our business is uncertain.

As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either broadening coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until sometime after we have issued insurance contracts that are affected by the changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after a contract is issued.

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We

Rating Agency Risks

A decline in our financial strength rating may not be able to manage our growth effectively.

We intend to continue to growresult in an adverse effect on our business, financial condition and operating results.

Participants in the insurance industry use ratings from independent ratings agencies, such as A.M. Best Company, Inc. (“A.M. Best”) and Kroll Bond Rating Agency ("Kroll") as an important means of assessing the financial strength and quality of insurers. In setting their ratings, A.M. Best and Kroll utilize a quantitative and qualitative analysis of a company’s balance sheet strength, operating performance and business profile. These analyses include comparisons to peers and industry standards as well as assessments of operating plans, philosophy and management. For A.M. Best, the ratings range from A++, or superior, to F for in liquidation. Kroll's ratings range from AAA (extremely strong) to R (under regulatory supervision).

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.

A.M. Best and Kroll assign ratings that are intended to provide an independent opinion of an insurance company’s ability to meet its financial obligations to policyholders and such ratings are not evaluations directed to investors. A.M. Best and Kroll periodically review our ratings and may revise ratings downward or revoke them at their sole discretion based primarily on their analyses of our balance sheet strength (including capital adequacy and loss and loss adjustment expense reserve adequacy), operating performance and business profile. Factors that could affect such analyses include but are not limited to:

If unfavorable financial, regulatory or market trends affect us, including excess market capacity;
If we incur operating losses or significant investment portfolio losses;
If we have unresolved issues with government regulators;
If we are unable to retain our senior management or other key personnel;
If A.M. Best or Kroll alters its capital adequacy assessment methodology in a manner that would adversely affect our rating.

In addition, with a heightened level of scrutiny placed on many financial institutions (including insurance companies) in recent years, rating agencies may increase the capital and other requirements to maintain certain ratings levels. These and other factors could result in a downgrade of our rating. The recent downgrade and withdrawal of our rating could cause our current and future agents, retail brokers and insureds to choose other, more highly‑rated competitors and could also increase the cost or reduce the availability of reinsurance to us. Furthermore, these recent developments could severely limit or prevent us from writing new and renewal insurance contracts and may have a material adverse effect on our financial condition and results of operations.

We are subject to assessments and other surcharges from state guaranty funds, and mandatory state insurance facilities, which could require additional capital, systems developmentmay reduce our profitability.

Our Insurance Company Subsidiaries are subject to assessments in most states where we are licensed for the provision of funds necessary for the settlement of covered claims under certain policies provided by impaired, insolvent or failed insurance companies. These assessments are levied by guaranty associations within the state in proportion to the premiums written by member insures in the lines of business in which the impaired, insolvent or failed insurer was engaged. Maximum contributions required by law in any one year vary by state, and skilled personnel.have historically been less than one percent of annual premiums written. We cannot assure you that we will be able to locate profitable business opportunities, meet predict with certainty the amount of future assessments because they depend on factors outside

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our capital needs, expand our systems and our internal controls effectively, allocate our human resources optimally, identify qualified employees or agents or incorporate effectively the componentscontrol, such as insolvencies of any businesses we may acquire in our effort to achieve growth. The failure to manage our growth effectively and maintain underwriting disciplineother insurance companies. Significant assessments could have a material adverse effect on our business, financial condition and results of operations.

We

General Risk Factors

The price of our common stock may be unablevolatile and limited public float and low trading volume for our shares may have an adverse impact on the share price or make it difficult to obtain reinsurance coverage at reasonable prices or on terms that provide us adequate protection.

We purchase reinsurance in manyliquidate.

The trading price of our linescommon stock may be highly volatile and could be subject to wide fluctuations in response to various factors, some of businesswhich are beyond our control and may not be related to help manage our exposureoperating performance. These fluctuations could be significant and could cause a loss in the amount invested in our shares of common stock.

In addition, the stock market in general, and the market for insurance companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to insurance risks that we underwrite and to reducethe operating performance of those companies. At times, securities class action litigation has been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. This litigation, if instituted against us, could result in substantial costs, divert our results.

The availabilitymanagement’s attention and cost of reinsurance are subject to prevailing market conditions, both in terms of priceresources, and available capacity, each of which can affectharm our business, volumeoperating results, and profitability. The availability of reasonably affordable reinsurance is a critical element of our business plan. One important way we utilize reinsurance is to reduce volatility in claims payments by limiting our exposure to losses from large risks. Another way we use reinsurance is to purchase substantial protection against concentrated losses when we enter new markets. financial condition.

As a result of these factors, investors in our ability to manage volatility and avoid significant losses, expand into new markets or grow by offering insurance to new kinds of enterprises may be limited by the unavailability of reasonably priced reinsurance. Wecommon stock may not be able to obtain reinsurance on acceptable termsresell their shares at or above their purchase price or may not be able to resell them at all. These market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance. In addition, price volatility may be greater if the public float and the trading volume of our common stock remain low.

Our common stock may be delisted from entities with satisfactory creditworthiness. In such event,The Nasdaq Stock Market if we are unwillingcannot maintain compliance with Nasdaq’s continued listing requirements.

On October 23, 2023, the Company received a letter from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) indicating that, based upon the closing bid price of the Company’s common stock for the last 30 consecutive business days and its number of publicly held shares, the Company no longer met Nasdaq Listing Rule 5450(b)(1)(C), which requires listed companies to acceptmaintain a minimum market value of publicly held shares (“MVPHS”) of at least $5.0 million.

Nasdaq Listing Rule 5810(c)(3)(D) provides a compliance period of 180 calendar days, or until April 22, 2024 (the “First Compliance Date”), in which to regain compliance with this requirement. In March 2024, we applied to transfer the terms or credit risk of potential reinsurers, we would have to reduce the levellisting of our underwriting commitments, which would reduce our revenues.

Many reinsurance companies have begun to exclude certain coverages from, or alter terms in, the reinsurance contracts we enter into with them. Some exclusions relate to risks that we cannot in turn excludecommon stock from the policies we write dueNasdaq Global Market to the Nasdaq Capital Market. Nasdaq approved our application effective on March 19, 2024, and the listing of our common stock transferred to the Nasdaq Capital Market effective as of the opening of business or regulatory constraints. In addition, reinsurers are imposing terms, such as lower per occurrence and aggregate limits, on direct insurers that do not wholly cover the risks written by these direct insurers. As a result, we, like other direct insurance companies, write insurance policies which to some extent do not have the benefit of reinsurance protection. These gaps in reinsurance protection expose us to greater risk and greater potential losses. For example, certain reinsurers have excluded coverage for terrorist acts or priced such coverage at unreasonably high rates.
March 21, 2024. Our common stock is currently listed on The Nasdaq Capital Market.

If we are unablefail to retain key management and employees or recruit other qualified personnel, wesatisfy the continued listing requirements of The Nasdaq Capital Market, The Nasdaq Capital Market may be adversely affected.

We believe thattake steps to delist our future success depends, in large part,common stock, which could have a materially adverse effect on our ability to retainraise additional funds as well as the price and liquidity of our experienced management teamcommon stock. Such a delisting would likely have a negative effect on the price of our common stock and key employees, particularlywould impair our chairman and chief executive officer, James G. Petcoff. Therestockholders’ ability to sell or purchase our common stock when they wish to do so. In the event of a delisting, we can beprovide no assurance that we can attract and retain the necessary employees to conduct our business activities on a timely basis or at all. Our competitors may offer more favorable compensation arrangements to our key management or employees to incentivize them to leave our Company. Furthermore, our competitors may make it more difficult forany action taken by us to hire their personnel by offering excessive compensation arrangementsrestore compliance with listing requirements would allow our common stock to certain employees to induce them not to leave their current employment and bringing litigation against employees who do leave (and possibly us as well) to join us. The loss of anybecome listed again, stabilize the market price or improve the liquidity of our executive officerscommon stock, prevent our common stock from dropping below the Nasdaq minimum bid price requirement, or other key personnel, or our inability to recruit and retain additional qualified personnel as we grow, could materially and adversely affect our business and results of operations, and could prevent us from fully implementing our growth strategies.future non-compliance with The Nasdaq Capital Market’s listing requirements.

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We may require additional capital in the future, which may not be available or available only on unfavorable terms.

Our future capital requirements depend on many factors, including our ability to write newgrow premium volume and renewalunderwrite the business successfully and to establish premium rates and reserves at levels sufficient to cover losses. Our ability to underwrite depends largely upon the expected quality of our claims paying process and our perceived financial strength as estimated by potential insureds, agents, brokers, other intermediaries and independent rating agencies.profitably. To the extent that our existing capital is insufficient, to fund our future operating requirements, cover claim losses, or satisfy ratings agencies in order to maintain a


satisfactory rating, we may need to raise additional capital in the future through offerings of debt or equity securities or otherwise to:

Fund liquidity needs caused by underwriting or investment losses;
Replace capital lost in the event of significant reinsurance losses or adverse reserve developments;development;
Satisfy letters of credit or guarantee bond requirements that may be imposed by our clients or by regulators;
Meet rating agency or regulatory capital requirements; or
Respond to competitive pressures.

Additionally, since the Company is no longer rated by Kroll or A.M. Best, following the Company’s withdrawal from the rating process, the absence of credit ratings on our outstanding securities could impact our ability to obtain additional debt or hybrid capital at reasonable terms or at all. Credit ratings are an opinion by third parties of our financial strength and ability to meet ongoing obligations to our future policyholders. The lack of a credit rating may make it difficult for investors to evaluate an investment in our securities and for us to raise additional capital in the future on acceptable terms or at all.

Any equity or debt financing, if available at all, may be on terms that are unfavorable to us. Further,Furthermore, any additional capital raised through the sale of equity could dilute your ownership interest in the Company and may cause the value of our shares to decline. Additional capital raised through the issuance of debt may result in creditors having rights, preferences and privileges senior or otherwise superior to those of the holders of our shares and may limit our flexibility in operating our business and make it more difficult to obtain capital in the future. Disruptions, uncertainty, or volatility in the capital and credit markets may also limit our access to capital required to operate our business. If we are not able to obtain adequate capital, our business, financial condition and results of operations could be materially adversely affected.

We are subject to credit risk with regard to our reinsurance counterparties.
Although reinsurance makes the assuming reinsurer liable to us to the extent of the risk ceded, we are not relieved of our primary liability to our insureds as the direct insurer.

We cannot be sureassure you that we will declare or pay dividends on our reinsurers will pay all reinsurance claims on a timely basis or at all. For example, reinsurers may default in their financial obligations to us as the result of insolvency, lack of liquidity, operational failure, fraud, asserted defenses based on agreement wordings or the principle of utmost good faith, asserted deficiencies in the documentation of agreements or other reasons. The failure of a reinsurer to pay us does not lessen our contractual obligations to insureds. If a reinsurer fails to pay the expected portion of a claim or claims, our net losses might increase substantially and adversely affect our financial condition. Any disputes with reinsurers regarding coverage under reinsurance contracts could be time‑consuming, costly and uncertain of success.

Downgrades to the credit ratings of our reinsurance counterparties may result in the reduction of rating agency capital credit provided by those reinsurance contracts and could, therefore, result in a downgrade of our own credit ratings. We evaluate each reinsurance claim based on the facts of the case, historical experience with the reinsurer on similar claims and existing case law and include any amounts deemed uncollectible from the reinsurer in our reserve for uncollectible reinsurance.
Our Insurance Company Subsidiaries are subject to minimum capital and surplus requirements. Failure to meet these requirements could subject us to regulatory action.
Our Insurance Company Subsidiaries are subject to minimum capital and surplus requirements imposed under the laws of their respective states of domicile and each state in which they issue policies. As of December 31, 2017, our Insurance Company Subsidiaries were in compliance with all such reserves. Any failure by one of our Insurance Company Subsidiaries to meet minimum capital and surplus requirements imposed by applicable state law will subject it to corrective action. This may include requiring adoption of a comprehensive financial plan, revocation of its license to sell insurance products or placing the subsidiary under state regulatory control. A decline in the risk based capital ratios of our Insurance Company Subsidiaries could limit their ability to make a dividend to us and could be a factor in causing rating agencies to downgrade our ratings. Any new minimum capital and surplus requirements adoptedcommon shares in the future so any returns may require usbe limited to increase the capital and surplusvalue of our Insurance Company Subsidiaries, whichstock.

We currently anticipate that we maywill retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to shareholders will therefore be ablelimited to do.

Any debt service obligations will reduce the funds available for other business purposes, and the terms and covenants relatingappreciation in value of their stock, if any.

In addition, any determination to declare or pay future dividends to our current and future indebtedness could adversely impact our financial performance and liquidity.

As of December 31, 2017, we had $30 million of interest-only Subordinated Notes ("Notes") outstanding. We are subject to risks typically associated with debt financing, such as insufficient cash flow to meet required debt service payment obligations andshareholders will be at the inability to refinance existing indebtedness.
The Notes contain various restrictive covenants that relate to the Company’s tangible net worth, fixed-charge coverage
ratios, dividend paying capacity, reinsurance retentions, and risk-based capital ratios. If we are unable to meet debt covenant requirements or to obtain future waivers regarding such failures, we could be in breachdiscretion of our credit agreement. Any such breach could cause significant disruption to our operations,board of directors ("Board") and will depend on a variety of factors, including a requirement to immediately repay our indebtedness, and would have severe adverse effects on our liquidity and financial flexibility.

The failure of any of the loss limitations or exclusions we employ, or changes in other claims or coverage issues, could have a material adverse effect on(1) our financial condition, or results of operations.
Although we seek to mitigate our loss exposure through a variety of methods, the future is inherently unpredictable. It is difficult to predict the timing, frequency and severity of losses with statistical certainty. It is not possible to completely eliminate our exposure to un‑forecasted or unpredictable events and, to the extent that losses from such risks occur, our financial condition andliquidity, results of operations could be materially adversely affected.
For instance, various provisions of our policies, such as limitations or exclusions from coverage or choice of forum, which have been negotiated to limit our risks, may not be enforceable in the manner we intend. At the present time, we employ a variety of endorsements to our policies that limit exposure to known risks. As industry practices and legal, judicial, social and other conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond the underwriting intent or by increasing the size or number of claims.
In addition, we design our policy terms to manage our exposure to expanding theories of legal liability like those which have given rise to claims for lead paint, asbestos, mold, construction defects and environmental matters. Many of the policies we issue also include conditions requiring the prompt reporting of claims to us and entitle us to decline coverage in the event of a violation of that condition. Also, many of our policies limit the period during which a policyholder may bring a claim under the policy, which in many cases is shorter than the statutory period under which such claims can be brought against our policyholders. While these exclusions and limitations help us assess and reduce our loss exposure and help eliminate known exposures to certain risks, it is possible that a court or regulatory authority could nullify or void an exclusion or legislation could be enacted modifying or barring the use of such endorsements and limitations. These types of governmental actions could result in higher than anticipated losses and loss adjustment expenses, which could have a material adverse effect on our financial condition or results of operations. In some instances, these changes may not become apparent until sometime after we have issued insurance policies that are affected by the changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after a contract is issued.
Increased information technology security threats and more sophisticated computer crimes pose a risk to our systems, networks, products and services.
Our business is dependent upon the uninterrupted functioning of our information technology and telecommunication systems. We rely upon our systems, as well as the systems of our vendors, to underwrite and process our business; make claim payments; provide customer service; provide policy administration services, such as endorsements, cancellations and premium collections; comply with insurance regulatory requirements; and perform actuarial and other analytical functions necessary for pricing and product development. We have established security policies, processes and layers of defense designed to help identify and protect against intentional and unintentional misappropriation or corruption of our systems and information and disruption of our operations. Our security measures are focused on the prevention, detection and remediation of damage from computer viruses, natural disasters, unauthorized access, cyber attack and other similar disruptions.
Despite these efforts, our systems may be damaged, disrupted, or shut down due to attacks by unauthorized access, malicious software, undetected intrusion, hardware failures, or other events, and in these circumstances our disaster recovery planning may be ineffective or inadequate. Information technology security threats from user error to cybersecurity attacks are increasing in frequency and sophistication. Cybersecurity attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer crime and advanced threats. These threats pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. The potential consequences of a material cybersecurity attack include reputational damage, litigation with third parties, and increased cybersecurity protection and remediation costs. A sustained business interruption or system failure could adversely impact(including our ability to processgenerate cash flow in excess of expenses and our expected or actual net income), retained earnings and collateral and capital requirements, (2) general business provide customer service, pay claims in a timely manner or perform other necessary business functions. We could also be subject to fines and penalties from a security breach. The cost to remedy a severe breach could be substantial.
We rely on our systems and employees, and those of certain third‑party vendors and service providers in conducting our operations, and certain failures, including internal or external fraud, operational errors, or systems malfunctions, could materially adversely affect our operations.
We are exposed to many types of operational risk, including the risk of fraud by employees and outsiders, clerical and recordkeeping errors and computer or telecommunications systems malfunctions. Our business depends on our ability to process a large number of increasingly complex transactions. If any of our operational, accounting, or other data processing systems fail or have other significant shortcomings, we could be materially adversely affected. Similarly, we depend on our employees. We could be materially adversely affected if one or more of our employees cause a significant operational

breakdown or failure, either as a result of human error or intentional sabotage or fraudulent manipulation of our operations or systems.
Third parties with whom we do business, including vendors that provide services or security solutions for our operations, could also be sources of operational and information security risk to us, including from breakdowns, failures, or capacity constraints of their own systems or employees. Any of these occurrences could diminish our ability to operate our business, or cause financial loss, potential liability to insureds, inability to secure insurance, reputational damage or regulatory intervention, which could materially adversely affect us.
Our geographic concentration ties our performance to the business, economic, natural perils, man-made perils,conditions, (3) legal, tax and regulatory conditions within our most concentrated region.
Our revenues and profitability are subject to the prevailing regulatory, legal, economic, political, demographic, competitive, weatherlimitations, (4) contractual prohibitions and other conditions inrestrictions, (5) the principal states in which we do business. Changes in anyeffect of these conditions could make it less attractive for us to do business in such states and would have a more pronounced effect on us compared to companies that are more geographically diversified. In addition, our exposure to severe losses from localized perils, such as earthquakes, hurricanes, tropical storms, tornadoes, wind, ice storms, hail, fires, terrorism, riots and explosions, is increased in those areas where we have written significant numbers of insurance policies.
Litigation and legal proceedings against our subsidiaries could have a material adverse effect on our business, financial condition and/dividend or results of operations.
As an insurance holding company, our subsidiaries are named as defendants in various legal actions in the ordinary course of business. We believe that the outcome of presently pending matters, individually and in the aggregate, will not have a material adverse effect on our consolidated financial position, operating results or liquidity. However, the outcomes of lawsuits cannot be predicted and, if determined adversely, could require us to pay significant damage amounts or to change aspects of our operations, which could have a material adverse effect ondividends upon our financial results.
We are subject to assessmentsstrength ratings and (6) any other surcharges from state guaranty funds, and mandatory state insurance facilities, which may reducefactors that our profitability.
Our Insurance Company Subsidiaries are subject to assessments in most states where we are licensed for the provision of funds necessary for the settlement of covered claims under certain policies provided by impaired, insolvent or failed insurance companies. These assessments, which are levied by guaranty associations within the state in proportion to premiums written by member insures in the lines of business in which the impaired, insolvent or failed insurer was engaged. Maximum contributions required by law in any one year vary by state, and have historically been less than one percent of annual premiums written. We cannot predict with certainty the amount of future assessments because they depend on factors outside our control, such as insolvencies of other insurance companies. Significant assessments could have a material adverse effect on our financial condition and results of operations.
Risks Related to Ownership of Our Common Stock
Board deems relevant.

Our principal shareholders and management own a significant percentage of our stock and will beare able to exert significant control over matters subject to shareholder approval.

As of December 31, 2017,2023, our executive officers, directors, 5% shareholders and their affiliates owned approximately 45.8%71.7% of our voting stock. Therefore, these shareholders will have the ability to influence us through their ownership position. These shareholders may be able to significantly influence all matters requiring shareholder approval. For example, these shareholders may be able to significantly influence elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our shareholders.

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We cannot assure you that we will declare or pay dividends on our common shares in the future so any returns may be limited to the value of our stock.

We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to shareholders will therefore be limited to appreciation in value of their stock, if any.
In addition, any determination to declare or pay future dividends to our shareholders will be at the discretion of our board of directors and will depend on a variety of factors, including (1) our financial condition, liquidity, results of operations (including our ability to generate cash flow in excess of expenses and our expected or actual net income), retained earnings and collateral and capital requirements, (2) general business conditions, (3) legal, tax and regulatory limitations,

(4) contractual prohibitions and other restrictions, (5) the effect of a dividend or dividends upon our financial strength ratings and (6) any other factors that our board of directors deems relevant. See “Dividend Policy.”

We incur significant increased costs as a result of operating as a public company, and our management will beis required to devote substantial time to newrelated compliance initiatives.

As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, we are subject to the reporting requirements of the Exchange Act, which require, among other things, that we file with the SEC, annual, quarterly and current reports with respect to our business and financial condition. We are also subject to other reporting and corporate governance requirements, including certain requirements of Nasdaq and certain provisions of the Sarbanes‑Oxley Act and the regulations promulgated thereunder, which will imposeimposes significant compliance obligations upon us.

The Sarbanes‑Oxley Act and the Dodd‑Frank Act, as well as new rules subsequently implemented by the SEC and Nasdaq, have increased regulation of, and imposed enhanced disclosure and corporate governance requirements on, public companies. Our efforts to comply with these evolving laws, regulations and standards have increased our operating costs and may divert management’s time and attention from revenue‑generating activities.

Other expenses associated with being a public company include increases in auditing, accounting and legal fees and expenses, investor relations expenses, increased directors’ fees and director and officer liability insurance costs, registrar and transfer agent fees and listing fees, as well as other expenses.

Certain provisions of our corporate governance documents and Michigan law could discourage, delay or prevent a merger or acquisition at a premium price.

Our amended and restated articles of incorporation and bylaws will contain provisions that may make the acquisition of our Company more difficult without the approval of our board of directors (our “Board”).Board. These include provisions that, among other things:

Permit the Board to issue up to 10 million shares of preferred stock, with any rights, preferences and privileges as they may determine (including the right to approve an acquisition or other change in control);
Provide that the authorized number of directors may be fixed only by the Board in accordance with our amended and restated bylaws;
Do not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares entitled to vote in any election of directors to elect all of the directors standing for election);
Provide that all vacancies and newly created directorships may be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;
Prohibit removal of directors without cause;
Prohibit shareholders from calling special meetings of shareholders;
Requires unanimous consent for shareholders to take action by written consent without approval of the action by our Board;
Provide that shareholders seeking to present proposals before a meeting of shareholders or to nominate candidates for election as directors at a meeting of shareholders must provide advance notice in writing and also comply with specified requirements related to the form and content of a shareholder’s notice;
Require at least 80% supermajority shareholder approval to alter, amend or repeal certain provisions of our amended and restated articles of incorporation; and
Require at least 80% supermajority shareholder approval in order for shareholders to adopt, amend or repeal our amended and restated bylaws.

These provisions may frustrate or prevent any attempts by our shareholders to replace or remove our current management by making it more difficult for shareholders to replace members of the Board, of Directors, which is responsible for appointing members of our management.

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In addition, theour 2015 Omnibus Incentive Plan permits the Board or a committee thereof to accelerate, vest or cause the restrictions to lapse with respect to outstanding equity awards, in the event of, or immediately prior to, a change in control. Such vesting or acceleration could discourage the acquisition of our Company.


We could also become subject to certain anti‑takeover provisions under Michigan law which may discourage, delay or prevent someone from acquiring us or merging with us, whether or not an acquisition or merger is desired by or beneficial to our shareholders. If a corporation’s board of directors chooses to “opt in” to certain provisions of Michigan Law, such corporation may not, in general, engage in a business combination with any beneficial owner, directly or indirectly, of 10% of the corporation’s outstanding voting shares unless the holder has held the shares for five years or more or, among other things, the board of directors has approved the business combination. Our Board of Directors has not elected to be subject to this provision, but could do so in the future. Any provision of our amended and restated articles of incorporation or bylaws or Michigan law that has the effect of delaying or deterring a change in control could limit the opportunity for our shareholders to receive a premium for their shares, and could also affect the price that some investors are willing to pay for our common stock otherwise.

Our ability to meet our obligations on our outstanding debt, including making principal and interest payments on the New Public Notes and the Senior Secured Notes, may be limited by our holding company structure and regulatory constraints restricting dividends or other distributions by our Insurance Company Subsidiaries.

We are a holding company that transacts the majority of our business through our Insurance Company Subsidiaries and, as a result, our principal sources of funds are payments from our Insurance Company Subsidiaries, including intercompany service fees and dividends. Our ability to meet our obligations on our outstanding debt obligations, including making principal and interest payments on the Notes, depends on continuing to receive sufficient funds from our Insurance Company Subsidiaries. We have met our outstanding debt obligations primarily through intercompany service fees we receive. We may also use dividends from our Insurance Company Subsidiaries, however, insurance regulations limit such dividend payments. Dividend payments may be further constrained by rating agency capital requirements or other business considerations. As a result, our ability to use dividends as a source of funds to meet our debt obligations may be significantly limited. Any significant reduction in the intercompany service fees we receive, and any regulatory and other limitations on the payment of dividends to us by our Insurance Company Subsidiaries, may adversely affect our ability to pay interest on the Notes as it comes due and the principal of the Notes at their maturity.

Although the New Public Notes are currently listed on Nasdaq, the trading market for the New Public Notes may be limited, which could affect the market price of the New Public Notes or your ability to sell them.

Although the Notes are currently listed on Nasdaq, we cannot provide any assurances that it will remain on Nasdaq or that an active trading market will exist for the Notes or that you will be able to sell your Notes. The Notes may trade at a discount to their face value depending on access to markets, prevailing interest rates, the market for similar securities, our credit ratings, general economic conditions, our financial condition, performance and prospects and other factors. We cannot assure you that a liquid trading market will be available for the Notes, that you will be able to sell the Notes at a particular time or that the price you receive when you sell will be favorable. To the extent an active trading market does not exist, the liquidity and trading price for the Notes may be harmed.

If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the New Public Notes.

Any default under the agreements governing our indebtedness, including other indebtedness to which we may be a party that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal and interest on the Notes and substantially decrease the market value of the Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under any other debt

29


we may incur in the future could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation.

There are limited covenants in the Indenture relating to our Notes.

In addition to our currently outstanding indebtedness and other liabilities, the Indenture does not restrict us or our subsidiaries from incurring additional debt or other liabilities, including additional senior debt or secured debt under our secured credit facilities. If we incur additional debt or liabilities, our ability to pay the obligations on the Notes could be adversely affected.

Our indebtedness, including the indebtedness we or our subsidiaries may incur in the future, could have important consequences for the holders of the Notes, including:

limiting our ability to satisfy our obligations with respect to the Notes;

increasing our vulnerability to general adverse economic and industry conditions;

limiting our ability to obtain additional financing to fund future working capital, capital expenditures, and other general corporate requirements;
requiring a substantial portion of our cash flow from operations for the payment of principal of, and interest on, our indebtedness and thereby reducing our ability to use our cash flow to fund working capital, capital expenditures and general corporate requirements; and
limiting our flexibility in planning for, or reacting to, changes in our business and the industry; and putting us at a disadvantage compared to competitors with less indebtedness.

In addition, we have limited restrictions under the Indenture from granting security interests in our assets, paying dividends or issuing or repurchasing securities.

Moreover, the Indenture does not require us to maintain any financial ratios or specific levels of net worth, revenues, income, cash flow or liquidity and, accordingly, does not protect holders of the Notes in the event that we experience material adverse changes in our financial condition or results of operations. Holders of the Notes have limited protection under the Indenture in the event of a highly leveraged transaction, reorganization, default under our existing indebtedness, restructuring, merger or similar transaction.

For these reasons, you should not consider the covenants in the Indenture a significant factor in evaluating whether to invest in the Notes.

The Notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries.

The Notes are obligations exclusively of Conifer Holdings, Inc. and not of any of our subsidiaries. None of our subsidiaries is a guarantor of the Notes and the Notes are not guaranteed by any subsidiary we may acquire or create in the future. Any assets of our subsidiaries will not be directly available to satisfy the claims of our creditors, including holders of the Notes. Even if we are recognized as a creditor of one or more of our subsidiaries, our claims would still be effectively subordinated to any security interests in the assets of any such subsidiary and to any indebtedness or other liabilities of any such subsidiary senior to our claims. Consequently, the Notes are structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries and any subsidiaries that we may in the future acquire or establish. Our subsidiaries may incur substantial indebtedness in the future, all of which would be structurally senior to the Notes.

Volatility in the market price and trading volume of our common stock could adversely impact the trading price of the Notes.

The market price of our common stock could fluctuate significantly for many reasons, including in response to the risks described in this section or any number of our financial filings or disclosures or for reasons unrelated to our operations, such as reports by industry analysts, investor perceptions or negative announcements by our customers, competitors or suppliers

30


regarding their own performance, as well as industry conditions and general financial, economic and political instability. A decrease in the market price of our common stock could adversely impact the trading price of the Notes.

We may redeem the Notes before maturity, and holders of the redeemed Notes may be unable to reinvest the proceeds at the same or a higher rate of return.

We may redeem all or a portion of the Notes. If redemption does occur, holders of the redeemed Notes may be unable to reinvest the money received in the redemption at a rate that is equal to or higher than the rate of return on the Notes.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.


ITEM 1C. CYBERSECURITY

Identifying, assessing and managing cybersecurity risks is an important component of Conifer’s overall enterprise risk management program. As with the management of risks generally, given our holding company structure, the management of cybersecurity risks involves coordination between the Company and its consolidated subsidiaries.

The Company and each of its consolidated subsidiaries are responsible for developing a cybersecurity program appropriate for their respective businesses. The design of these cybersecurity programs is informed by the Center for Internet Security Critical Security Controls framework (“CISCSC”). This does not imply that these programs meet all specifications of CISCSC, but rather that we use them as a guide to help us identify, assess and manage cybersecurity risks relevant to our business. The cybersecurity programs developed by the Company and its consolidated subsidiaries include, among other things, (i) advanced threat protection and detection systems; (ii) vulnerability scanning and testing of network defenses; (iii) user authentication, role-based access, and privileged access management; (iv) data encryption, loss prevention, backup and recovery mechanisms; (v) employee training; (vi) disaster recovery testing and (vii) security assessments of third-party service providers.

Our cybersecurity risk management program is part of our overall enterprise risk management program, and shares common methodologies, reporting channels and governance processes that apply across the enterprise risk management program to other legal, compliance, strategic, operational, and financial risk areas.

We have not identified risks from known cybersecurity threats, including as a result of any prior cybersecurity incidents in the past three fiscal years, that have materially affected or are reasonably likely to materially affect us, including our operations, business strategy, results of operations, or financial condition.

Cybersecurity Governance

Our Board considers cybersecurity risk as part of its risk oversight function and has delegated to the Audit Committee oversight of cybersecurity and other information technology risks. The Audit Committee oversees management’s implementation of our cybersecurity risk management program.

Our management team, including our Chief Information Officer, is responsible for assessing and managing our material risks from cybersecurity threats.

ITEM 2. PROPERTIES

We lease office space in Birmingham,Troy, Michigan, where our principal executive office is located. We also lease offices in Southfield, Michigan; Jacksonville, Orlando and Miami, Florida; Somerset, Pennsylvania; and Brentwood, Tennessee.Florida. We believe that our facilities are adequate for our current needs and that suitable additional or substitute space will be available as needed.


We are party to legal proceedings which arise in the ordinary course of business. We believe that the outcome of such matters, individually and in the aggregate, will not have a material adverse effect on our consolidated financial position, operating results or liquidity.


ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

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PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Shareholder Information

Corporate Headquarters

Transfer Agent & Registrar

550

3001 W. Merrill StreetBig Beaver Rd., Suite 200

American Stock Transfer &

Equiniti Trust Co,Company, LLC

Birmingham,

Troy, MI 4800948084

6201 15th Avenue

48 Wall Street

Phone: (248) 559-0840

Brooklyn,

New York, NY 1121910005

Independent Registered
Public Accounting Firm

Corporate Counsel

Deloitte & Touche,

Honigman, LLP

Stock Listing

200 Renaissance Center

660 Woodward Avenue

Nasdaq

Suite 3900Symbol: CNFR
Detroit, MI 48243
Corporate Counsel
Honigman Miller Schwartz and Cohn, LLP
600 Woodward Avenue

2290 First National Building

Detroit, MI 48226-3506

Shareholder Relations and Form 10-K

A copy of our 20172023 Annual Report and Form 10-K, as filed with the Securities and Exchange Commission, may be obtained upon written request to our Financial Reporting Department at our corporate headquarters at ir@cnfrh.com.

Share Price and

Dividend Information

Our common stock is traded on the Nasdaq under the symbol “CNFR.” The following table sets forth the high and low sale prices of our common shares as reported by the Nasdaq for each period shown:
 High Low
2017   
First Quarter7.75 6.55
Second Quarter8.05 6.75
Third Quarter7.30 6.05
Fourth Quarter7.15 5.55
    
2016   
First Quarter9.22 6.04
Second Quarter7.00 6.27
Third Quarter8.59 7.15
Fourth Quarter8.55 6.65
Policy

Neither Michigan law nor our amended and restated articles of incorporation requires our board of directorsBoard to declare dividends on our common stock. Conifer Holdings, Inc. is a holding company that has no substantial revenues of its own, and relies primarily on intercompany service fees, cash dividends or distributions from its subsidiaries to pay operating expenses, service debts, and pay dividends to shareholders. The payment of dividends by the Insurance Company Subsidiaries is limited


under the laws and regulations of their respective state of domicile. These regulations stipulate the maximum amount of annual dividends or other distributions available to shareholders without prior approval of the relevant regulatory authorities. Any future determination to declare cash dividends on our common stock will be made at the discretion of the board of directors and will depend on the financial condition, results of operations, capital requirements, general business conditions and other factors that the board of directorsBoard may deem relevant. The Parent Company has not historically paid dividends and does not anticipate paying cash dividends on its common stock for the foreseeable future.
For additional information regarding dividend restrictions, refer to the Liquidity and Capital Resources section of Management’s Discussion and Analysis.

Shareholders of Record

Our common stock is traded on The Nasdaq Capital Market under the symbol "CNFR." As of March 15, 2018,April 1, 2024, there were 3526 shareholders of record of our common stock. A substantially greater number of holders are beneficial owners whose shares are held of record by banks, brokers and other nominees.

Recent Sales

Repurchases of Unregistered Securities

In the past three years, we have sold and issued the following unregistered securities:
Company's Stock

On September 27, 2017, the Company’s Board of Directors authorized a private placement stock purchase offering wherein the Company was authorized to sell a maximum of $7.0 million of the Company’s common stock, no par value per share, pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506(b) of Regulation D as promulgated under the Securities Act and in accordance with applicable federal securities laws, including Rule 10b5-1 and 10b-18 of the Securities Exchange Act of 1934 as amended. The participants in the private placement consisted mainly of members of the Company’s management team and Board of Directors, including the Company’s Chairman and CEO, James Petcoff.

Under this private placement offering, the Company issued $5.0 million of common equity consisting of 800,000 shares at the price of $6.25 per share on September 28, 2017. The Company’s common stock closing market price on the Nasdaq Stock Market on September 28, 2017, was $6.05 per share. The offering was made to accredited investors only. No commissions or other remuneration were paid in connection with the issuance. The actual timing, number and value of shares to be issued under the private placement offering was determined by management in its discretion and depended on a number of factors, including the market price of the Company’s stock, general marketing conditions, and other factors. The Company used the proceeds from the issuance to strengthen its balance sheet through contributions to the Insurance Company Subsidiaries to support future growth, as well as to cover the cost of the ADC and reserve strengthening.
On February 25, 2016,December 5, 2018, the Company's Board of Directors authorized a stock repurchase program, under which the Company may repurchase up to $2.1one million shares of the Company's common stock. Shares may be purchased in the open market or through negotiated transactions. The program may be terminated or suspended at any time, at the discretion of the Company. The Company may in the future enter into a Rule 10b5-1 trading plan to effect a portion of the authorized purchases, if criteria set forth in the plan are met. Such a plan would enable the Company to repurchase its shares during periods outside of its outstanding common stock. Under this program, management was authorized to repurchase shares at prevailing market prices through open marketnormal trading windows, when the Company typically would not be active in the market. The timing of purchases, privately negotiated transactions, block purchases or otherwise in accordance with applicable federal securities laws, including Rule 10b5-1 and 10b-18 of the Securities Exchange Act of 1934, as amended. The actual timing, number and value of shares repurchased under the program was determined by management in its discretion and depended on aexact number of factors, including theany shares to be purchased, will depend on market conditions. The repurchase program does not include specific price of the Company’s stock, general market conditions, and other factors.targets or timetables. The Companycompany did not repurchase any shares of stock for the year ended December 31,

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2023 related to the stock repurchase program. For the year ended December 31, 2023, the Company repurchased 1,968 shares of stock valued at approximately $3,000 related to the vesting of the Company’s restricted stock units. Upon the repurchase of the Company's shares, the shares remain authorized, but not issued or outstanding.

Recent Sales of Unregistered Securities

On December 20, 2023 (the “Initial Issue Date”), the Company issued $6.0 million of its outstandingnewly designated Series A Preferred Stock (the "Series A Preferred Stock"), no par value, through a private placement of 1,000 shares of Series A Preferred Stock priced at $6,000 per share that matures on June 30, 2026 (the “Maturity Date”). The Series A Preferred Stock was sold to Clarkston 91 West LLC (the "Purchaser"), an entity affiliated with Gerald and Jeffrey Hakala, members of the Board of the Company. The sale of the Series A Preferred Stock was not registered under the Securities Act of 1933, as amended (the “Securities Act”), in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act and certain rules and regulations promulgated thereunder. The Series A Preferred Stock shall only be convertible for shares of the Company’s common stock, during 2017.

Inno par value, at the fourth quarterMaturity Date.

On the Maturity Date, each outstanding share of 2014, in a series of transactions ranging from September 30, 2014 through January 16, 2015, we sold an aggregate of 1,535,814the Series A Preferred Stock, that has not otherwise been redeemed, shall automatically convert into 4,000 shares of ourthe Company’s common stock, at a per share price of $13.63, resulting in aggregate gross proceeds of $20.9 million. These shares were soldsubject to certain of our officersadjustment for reverse and directorsforward stock splits, stock dividends, stock combinations and other third party accredited investors.

similar transactions of the common stock that occur after the Initial Issue Date (the “Automatic Conversion”). Upon the Automatic Conversion, the holder shall be deemed to be the holder of record of the Company’s common stock issuable upon such conversion.

In August 2022, the Company issued $5.0 million of common equity through a private placement of 2,500,000 shares priced at $2.00 per share. The participants in the private placement consisted of members of the Company's Board.

No underwriters were involved in the foregoing salessale of securities. The issuances of the securities described above were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering.


ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA[Reserved]

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The following tables set forth selected consolidated historical financial information of Conifer Holdings, Inc. and Subsidiaries as of the dates and for the periods indicated. The selected financial data for the years ended December 31, 2017, 2016, 2015, 2014 and 2013 were derived from our audited consolidated financial statements and related notes thereto.

These historical results are not necessarily indicative of results to be expected for any future period. The following financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto included elsewhere in this report (dollars in thousands, except for per share data).
 Year Ended December 31,
 2017 2016 2015 2014 2013
Operating Results:         
Gross written premiums$114,284
 $114,923
 $93,750
 $83,847
 $44,087
Ceded written premiums(23,044) (14,994)
 (14,076)
 (17,548)
 (6,439)
Net written premiums$91,240
 $99,929
 $79,674
 $66,299
 $37,648
          
Net earned premiums$91,729
 $89,627
 $66,765
 $57,528
 $27,629
Net investment income2,728
 2,173
 1,902
 1,175
 1,000
Net realized investment gains70
 1,365
 285
 417
 299
Other gains (losses) (1)750
 (400)
 104
 
 3,714
Other income1,560
 1,118
 1,667
 1,809
 834
Total revenue96,837
 93,883
 70,723
 60,929
 33,476
Losses and loss adjustment expenses, net73,917
 59,003
 38,882
 40,730
 15,824
Policy acquisition costs26,245
 25,280
 16,183
 14,696
 7,667
Operating expenses17,367
 17,596
 14,806
 12,139
 9,161
Interest expense1,362
 647
 769
 584
 541
Total expenses118,891
 102,526
 70,640
 68,149
 33,193
Income (loss) before income taxes(22,054)
 (8,643)
 83
 (7,220)
 283
Income tax expense (benefit)(447) (77)
 48
 (281)
 3
Equity earnings (losses) in affiliates, net of tax65
 129
 (52)
 
 
Net income (loss)(21,542)
 (8,437)
 (17)
 (6,939)
 280
Less net income (loss) attributable to non-controlling interest
 
 (81)
 (4)
 (69)
Net income (loss) attributable to Conifer$(21,542) $(8,437) $64
 $(6,935) $349
Net income (loss) allocable to common shareholders   
$(21,542) $(8,437) $(476) $(7,200) $349
Net income (loss) per share allocable to common shareholders, basic and diluted$(2.74) $(1.11) $(0.09) $(2.69) $0.20
Weighted average common shares outstanding, basic and diluted7,867,344
 7,618,588
 5,369,960
 2,672,440
 1,749,626

 Year Ended December 31,
 2017 2016 2015 2014 2013
Balance Sheet Data:         
Cash and invested assets$169,518
 $141,023
 $130,427
 $123,726
 $68,445
Reinsurance recoverables24,539
 7,498
 7,044
 5,139
 4,394
Total assets239,032
 203,701
 177,927
 163,738
 96,856
Unpaid losses and loss adjustment expenses87,896
 54,651
 35,422
 31,531
 28,908
Unearned premiums57,672
 58,126
 47,916
 43,381
 26,505
Debt29,027
 17,750
 12,750
 27,562
 13,087
Total liabilities186,206
 135,907
 100,665
 113,460
 75,605
Preferred stock (2)
 
 
 6,119
 
Total shareholders’ equity attributable to Conifer52,826
 67,794
 77,262
 44,182
 21,270
Other Data:         
Shareholders’ equity per common share outstanding$6.20
 $8.88
 $10.11
 $11.06
 $12.16
Regulatory capital and surplus (3)62,451
 62,189
 71,153
 65,974
 34,817
 Year Ended December 31,
 2017 2016 2015 2014 2013
Underwriting Ratios:         
Loss ratio79.2% 65.0% 56.8% 68.6% 55.6%
Expense ratio46.8% 47.2% 45.3% 45.2% 59.1%
Combined ratio126.0% 112.2% 102.1% 113.8% 114.7%

(1)In 2017, the Company recognized a $750,000 gain on the sale of the renewal rights of a portion of the low value dwelling book of business to another insurer. In 2016, as a result of the merger of ACIC into WPIC, the value of intangible assets recorded for insurance licenses on ACIC were written off resulting in a loss. In 2015, the Company recognized a gain as a result of the deconsolidation of an affiliate. In 2013, the Company recognized a gain on the acquisitions of EGI Insurance Services, Inc. and MLBA Mutual Insurance Company. The acquisitions were accounted for as bargain purchases.
(2)In March 2015, the Company reclassified the then carrying amount of its preferred stock of $6,180 from temporary equity to permanent equity as the redemption of the preferred stock became within the Company’s control as a result of the amendments to the preferred stock designations.
(3)For our Insurance Company Subsidiaries, the excess of assets over liabilities are determined in accordance with statutory accounting principles as determined by the domiciliary state for each Insurance Company Subsidiary.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements, related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K, filed with the U. S. Securities and Exchange Commission (“SEC”).

Forward-Looking Statements
Certain statements contained

Recent Developments and Significant Transactions

Strategic Shift to Non Risk-Bearing Revenue

Historically, our wholesale agency segment produced only a small portion of our gross written premiums. Beginning in this Annual Report on Form 10-K, which are not statements of historical fact, are forward-looking statements within the meaning of Section 27A2024, our wholesale agency segment is being converted into a full managing general agency ("MGA") and is expected to produce almost 100% of the Securities Act of 1933, as amended, as Section 21ECompany’s gross written premiums. As a result of the Securities Exchange ActInsurance Company Subsidiaries lacking sufficient capital to continue to underwrite the volume of 1934,business they have historically written, we plan to utilize third-party insurers and rely mostly on commission revenues in our MGA, CIS. Substantially all of the Company's commercial lines business will be directly written by third-party insurers with A.M. Best ratings of A- or better by the end of the second quarter of 2024. We expect to continue to underwrite the low-value homeowners business written in Texas and Midwest, however, we will be non-renewing all homeowners business written in Oklahoma by the end of the second half of 2024.

Utilizing third-party insurers as amended. Forward-looking statements give current expectations or forecastsunderwriters of future events or our future financial or operating performance. Words such as “anticipate,” “believe,” “estimate,” “expect,” "will," “intend,” “may,” “plan,” “seek”MGA-produced business will provide a much broader reach for our existing profitable programs and similar terms and phrases, or the negative thereof, may be usedwe expect this 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, which could cause our actual results to differ materially from thoseresult in the forward-looking statements, including those described aboveproduction of substantially more premium volume for the agency segment generating more commission revenue. This shift will significantly reduce revenues from earned premiums in Item 1A Risk Factorsthe near term and subsequent reports filed with or furnishedinvestment income, over time, for the Insurance Company Subsidiaries. Cash from operating activities will shift from premiums and investment income to revenues from commissions. Over time, cash from operating activities will be reduced as losses are paid on existing loss reserves which will be offset by cash flows increasing from investing activities as we sell investments to fund the loss payments. We believe this strategic shift is the best path forward to profitability for the Company.

Sale of Renewal Rights

In September 2023, the Company sold the renewal rights of one of its insurance programs to another insurer for $2.5 million in cash in addition to also agreeing to participate in the Company's issuance of new public debt in September 2023, by purchasing $5.0 million of the new debt. The program renewal rights which were sold and transferred provided mostly liability insurance to the SEC. Any forward-looking statement made by ussecurity guard and alarm installation industries ("Security Program"). The program produced gross earned premiums of $55.9 million and $41.0 million in 2023 and 2022, respectively. The buyer began writing new and renewal policies for this report speaks onlyprogram as of September 15, 2023. On September 30, 2023, the Company ceded 100% of its gross unearned premium of $30.9 million in the program to the buyer in return for an $8.4 million ceding commission. As of December 31, 2023, the Company retained $24.1 million of net cash owed to the buyer under a funds withheld provision which is recorded as a liability on the Consolidated Balance Sheets. The funds withheld balance is expected to be paid out as premiums are earned and related claims are paid. The Company incurred $135,000 in expense related to this transaction. As part of this transaction, five claims staff transferred employment to the buyer. The buyer will handle all of the Company’s run-off claims for this program under a related claims administration agreement.

The Company recognized a net gain of $2.3 million, which is reflected in Gain from sale of renewal rights on the Consolidated Statements of Operations. As a result of the sale of renewal rights, the Company is no longer providing liability insurance to the security guard and alarm installation industries.

Debt Restructuring

The Company repaid all of the $24.4 million of public senior secured notes, issued in 2018, that matured on September 30, 2023. The Company funded the repayment of the senior unsecured notes through a combination of newly issued public notes which totaled $6.7 million, as well as exchanging a portion of the maturing notes for new notes totaling $11.2 million. The Company also restructured its $10.5 million subordinated debt into senior secured notes, paying down $500,000 of the outstanding debt. The maturity of the new senior secured notes was shortened to five years from September 30, 2038,

35


to September 30, 2028, and there are now required quarterly principal payments of $250,000 with the balance due upon maturity, in addition to a requirement that net proceeds from any asset sales be applied against the principal balance of the senior secured notes. See Note 10 ~ Debt for further details.

VSRM Transaction

Prior to October 13, 2022, CIS, formally known as Sycamore, owned 50% of Venture Agency Holdings, Inc. ("Venture") and has accounted for its ownership under the equity method of accounting. On October 13, 2022, CIS purchased the other 50% of Venture from an individual for $9.7 million. Following this purchase, CIS owned 100% of Venture, which was then renamed to VSRM, Inc. ("VSRM"). VRSM and its two wholly owned subsidiaries, The Roots Insurance Agency, Inc. ("Roots") and Mitzel Insurance Agency, Inc. ("Mitzel") were incorporated into the Company's consolidated financial statements as of the date hereof orof the acquisition.

The Company recognized CIS' purchase of the individual's shares of VSRM as a step acquisition and revalued all assets and liabilities upon the acquisition date. This resulted in the recognition of an $8.8 million non-operating gain reported in the Consolidated Statements of Operations as Gain from VSRM Transaction in the fourth quarter of 2022. The Company also utilized $12.5 million of federal tax net operating losses carried forward and $14.8 million state tax net operating losses carried forward, for a net-of-tax benefit of $9.4 million. VSRM retained $8.9 million of debt, and $9.4 million of tax liabilities, as well as other smaller assets and liabilities that did not go with the transaction.

The fair value of the equity interest of VSRM immediately prior to the acquisition by CIS was $10.1 million. The fair value techniques used to measure the fair value of VSRM included using the carrying value of all current assets and liabilities as their carrying values approximated their fair values. Intangible assets were reviewed based on recent valuations performed by third party valuation experts and the net realized proceeds received upon the sale of the Security & Alarm Business sold the following day.

On October 14, 2022, VSRM sold all of its security guard and alarm installation insurance brokerage business (the "Security & Alarm Business") to a third party insurance brokerage firm for $38.2 million. As part of the transaction, the individual who previously owned 50% of VSRM transitioned employment to the buyer, along with a team of approximately eight other employees of VSRM. The Company recognized this transaction as the sale of a business. Because all assets and liabilities were just adjusted to fair value from the step acquisition described above, the basis of the net assets sold equaled the net proceeds from the sale, thus there was no gain recognized upon the sale of the Security & Alarm Business.

On December 30, 2022, VSRM contributed its remaining business, including its two wholly owned subsidiaries (Mitzel and Roots) to a new wholly owned subsidiary, Sycamore Specialty Underwriters, LLC ("SSU"). The business contributed to SSU consisted of customer accounts of substantially all of the personal lines business and a small subset of the commercial lines business underwritten by the Insurance Company Subsidiaries, and all of the customer accounts VSRM produced for third-party insurers, other than the security guard and alarm installation brokerage business previously sold.

On December 31, 2022, Andrew D. Petcoff purchased 50% of SSU from VSRM, Inc. for $1,000. As a result, SSU and its two wholly owned subsidiaries, Roots and Mitzel, are no longer consolidated in the Company's consolidated financial statements as of December 31, 2022, and VSRM's investment in SSU is accounted for using the date specified herein. We undertakeequity method. The net assets transferred to SSU had a fair value of $0 at the time of the contribution. There was no gain or loss recognized upon the sale of half of SSU to Mr. Petcoff. Included in the net assets transferred to SSU was a $1.0 million promissory note payable, a liability that was assumed by SSU. The note payable was an obligation that originated as part of the Venture Transaction. See Note 4 ~ Sale of Certain Agency Business for further details.

In order to publicly update any forward-looking statement, whetherdetermine the value of the portion of the business contributed to SSU, the Company obtained a third party valuation based on a weighting of discounted cash flows and earnings before interest, taxes, depreciation and amortization (EBITDA) multiple valuation methods. The valuation included significant estimates and assumptions related to (i) forecasted revenue and EBITDA and (ii) the selection of the EBITDA multiple and discount rate.

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Loss Portfolio Transfer

On November 1, 2022, the Company entered into a loss portfolio transfer (“LPT”) reinsurance agreement with Fleming Reinsurance Ltd (“Fleming Re”). Under the agreement, Fleming Re will cover an aggregate limit of $66.3 million of paid losses on $40.8 million of stated net reserves as of June 30, 2022, relating to accident years 2019 and prior. This covers substantially all of the commercial liability lines underwritten by the Company. Within the aggregate limit, there is a result$5.5 million loss corridor in which the Company retains losses in excess of new information, future developments or otherwise, except$40.8 million. Fleming Re is then responsible to cover paid losses in excess of $46.3 million up to $66.3 million. Accordingly, there is $20.0 million of adverse development cover for accident years 2019 and prior. Under the agreement, Fleming Re was paid $40.8 million for stated net reserves as mayof June 30, 2022, plus a one-time risk fee of $5.4 million. Recoverables due to the Company under this agreement are recorded as reinsurance recoverables. The agreement is between CIC and WPIC and Fleming Re. As of December 31, 2023, the Company has recorded losses through the $5.5 million corridor and $9.1 million into the $20.0 million layer.

The Company paid $25.0 million in cash on October 14, 2022, which was netted down for claims paid through September 30, 2022, totaling $7.6 million, and $13.6 million of funds withheld. Cash used to fund the transaction was generated from the existing investment portfolios held by CIC and WPIC.

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 requirednon-rated by any applicable laws or regulations.

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. Our growth has been significant since our founding in 2009. Currently, we are authorized to write insurance as an excess and surplus lines carrier in 4445 states, including the District of Columbia. We are licensed to write insurance as an admitted carrier in 42 states, including the District of Columbia, as an admitted carrier and we offer our insurance products in all 50 states.

Our revenues are primarily derived from premiums earned from our insurance operations. We also generate other revenues through investment income and other income which mainly consists of: installment fees and policy issuance fees generally related to the policies we write and commission income from SIA's 50% owned agency (the "Affiliate"). The Affiliate places small commercial risks mainly for alarm and security guard markets.

write.

Our expenses consist primarily of losses and loss adjustment expenses, agents’ commissions, and other underwriting and administrative expenses. We organize our operations in twothree insurance businesses: commercial insurance lines, personal lines, and agency business. Together, the commercial and personal lines refer to “underwriting” operations that take insurance lines.

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 either wind-exposed homeowners insurance providing hurricane and wind coverage to underserved homeowners in Texas, Hawaii and Florida or low-value dwelling insurance tailored for owners of lower valued homes, which we offer in Illinois, Indiana Louisiana and Texas. Due

Through our wholesale agency business segment, we offer commercial and personal lines insurance products for our Insurance Company Subsidiaries as well as third-party insurers. The wholesale agency business segment provides our agents

37


with more insurance product options. As a result of the sale of certain agency business on June 30, 2021, more recently our agency segment was not producing significant amounts of business for third party insurers and produced approximately 50% less business for the Insurance Company Subsidiaries. However, as discussed above, we expect the wholesale agency segment to become more prominent going forward as substantially all of our commercial lines business will be produced by the wholesale agency segment 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 greatly improving our competitive edge in the marketplace.

As we transition to more of a MGA operation, 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 Florida-based industry events, we have been de-emphasizing our Florida homeowners' businessinsurance 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 reducing our exposures in that state. Otherwise, there has been little change in our approach to managing or evaluating these lines.


debt service costs going forward.

Critical Accounting Policies and Estimates

General

We identified the accounting estimates below as critical to the understanding of our financial position and results of operations. Critical accounting estimates are defined as those estimates that are both important to the portrayal of our financial condition and results of operations and which require us to exercise significant judgment. We use significant judgment concerning future results and developments in applying these critical accounting estimates and in preparing our consolidated financial statements. These judgments and estimates affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of material contingent assets and liabilities. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements. We evaluate our estimates regularly using information that we believe to be relevant. See the Consolidated Financial Statements Note 1 ~ Summary of Significant Accounting Policies, for further details.

Unpaid Loss and Loss Adjustment Expense Reserves

Our recorded loss and loss adjustment expenses ("LAE") reserves represent management’s best estimate of unpaid loss and LAE at each balance sheet date, based on information, facts and circumstances known at such time. Our loss and LAE reserves reflect our estimates at the balance sheet date of:

Case reserves, which are unpaid loss and LAE amounts that have been reported; and
Incurred but not reported ("IBNR") reserves, which are (1) unpaid loss and LAE amounts that have been incurred but not yet reported; and (2) the expected development on case reserves.

We do not discount the loss and LAE reserves for the time value of money.

Case reserves are initially set by our claims personnel. When a claim is reported to us, our claims department completes a case‑basis valuation and establishes a case reserve for the estimated amount of the probable ultimate losses and LAE

38


associated with that claim. Our claims department updates their case‑basis valuations upon receipt of additional information and reduces case reserves as claims are paid. The case reserve is based primarily upon an evaluation of the following factors:

The type of loss;
The severity of injury or damage;
Our knowledge of the circumstances surrounding the claim;
The jurisdiction of the occurrence;
Policy provisions related to the claim;
Expenses intended to cover the ultimate cost of settling claims, including investigation and defense of lawsuits resulting from such claims, costs of outside adjusters and experts, and all other expenses which are identified to the case; and
Any other information considered pertinent to estimating the indemnity and expense exposure presented by the claim.

IBNR reserves are determined by subtracting case reserves and paid loss and LAE from the estimated ultimate loss and LAE. Our actuarial department develops estimated ultimate loss and LAE on a quarterly basis. Our Reserve Review Committee (which includes our Chief Executive Officer, President, Chief Financial Officer, other members of executive management, and key actuarial, underwriting and claims personnel) meets each quarter to review our actuaries’ estimated ultimate expected loss and LAE.

We use several generally accepted actuarial methods to develop estimated ultimate loss and LAE estimates by line of business and accident year. This process relies on the basic assumption that past experience, adjusted for the effects of current developments and likely trends, is a reasonable basis for predicting future outcomes. These methods utilize various inputs, including:

Written and earned premiums;
Paid and reported losses and LAE;
Expected initial loss and LAE ratio, which is the ratio of incurred losses and LAE to earned premiums; and

Expected claim reporting and payout patterns based on our own loss experience and supplemented with insurance industry data where applicable.

The principal standard actuarial methods used by our actuaries for their comprehensive reviews include:

Loss ratio method—This method uses loss and LAE ratios for prior accident years, adjusted for current trends, to determine an appropriate expected loss and LAE ratio for a given accident year;
Loss development methods—Loss development methods assume that the losses and LAE yet to emerge for an accident year are proportional to the paid or reported loss and LAE amounts observed to‑date. The paid loss development method uses losses and LAE paid to date, while the reported loss development method uses losses and LAE reported to date;
Bornheutter‑Ferguson method—This method is a combination of the loss ratio and loss development methods, where the loss development factor is given more weight as an accident year matures; and
Frequency/severity method—This method projects claim counts and average cost per claim on a paid or reported basis for high frequency, low severity products.

Our actuaries give different weights to each of these methods based upon the amount of historical experience data by line of business and by accident year, and based on judgment as to what method is believed to result in the most accurate

39


estimate. The application of each method by line of business and by accident year may change in the future if it is determined that a different emphasis for each method would result in more accurate estimates.

Our actuaries also analyze several diagnostic measures by line of business and accident year, including but not limited to: reported and closed frequency and severity, claim reporting and claim closing patterns, paid and incurred loss ratio development, and ratios of paid loss and LAE to incurred loss and LAE. After the actuarial methods and diagnostic measures have been performed and analyzed, our actuaries use their judgment and expertise to select an estimated ultimate loss and LAE by line of business and by accident year.

Our actuaries estimate an IBNR reserve for our unallocated LAE not specifically identified to a particular claim, namely our internal claims department salaries and associated general overhead and administrative expenses associated with the adjustment and processing of claims. These estimates, which are referred to as unallocated loss adjustment expense ("ULAE") reserves, are based on internal cost studies and analyses reflecting the relationship of ULAE paid to actual paid and incurred losses. We select factors that are applied to case reserves and IBNR reserve estimates in order to estimate the amount of ULAE reserves applicable to estimated loss reserves at the balance sheet date.

We allocate the applicable portion of our estimated loss and LAE reserves to amounts recoverable from reinsurers under reinsurance contracts and report those amounts separately from our loss and LAE reserves as an asset on our balance sheet.

The estimation of ultimate liability for losses and LAE is a complex, imprecise and inherently uncertain process, and therefore involves a considerable degree of judgment and expertise. Our loss and LAE reserves do not represent an exact measurement of liability, but are estimates based upon various factors, including but not limited to:

Actuarial projections of what we, at a given time, expect to be the cost of the ultimate settlement and administration of claims reflecting facts and circumstances then known;
Estimates of future trends in claims severity and frequency;
Assessment of asserted theories of liability; and
Analysis of other factors, such as variables in claims handling procedures, economic factors, and judicial and legislative trends and actions.

Most or all of these factors are not directly or precisely quantifiable, particularly on a prospective basis, and are subject to a significant degree of variability over time. In addition, the establishment of loss and LAE reserves makes no provision for the broadening of coverage by legislative action or judicial interpretation or for the extraordinary future emergence of new types of losses not sufficiently represented in our historical experience or which cannot yet be quantified. As a result, an integral component of our loss and LAE reserving process is the use of informed subjective estimates and judgments about our ultimate exposure to losses and LAE. Accordingly, the ultimate liability may vary significantly from the current estimate. The effects of change in the estimated loss and LAE reserves are included in the results of operations in the period in which the estimate is revised.

Our reserves consist entirely of reserves for property and liability losses, consistent with the coverages provided for in the insurance policies directly written or assumed by us under reinsurance contracts. Occasionally, severalSeveral years may elapse


between the occurrence of an insured loss, the reporting of the loss to us and our payment of the loss. The level of IBNR reserves in relation to total reserves depends upon the characteristics of the specific line of business, particularly related to the speed with which claims are reported and outstanding claims are paid. Lines of business for which claims are reported slowly will have a higher percentage of IBNR reserves than lines of business that report and settle claims more quickly.

40


The following table shows the ratio of IBNR reserves to total reserves net of reinsurance recoverables as of December 31, 20172023 (dollars in thousands):

Line of Business
Case
Reserves
 
IBNR
Reserves
 
Total
Reserves
 
Ratio of
IBNR to
Total
Reserves
  
Commercial Lines$32,280
 $27,041
 $59,321
 45.6%
Personal Lines5,569
 2,940
 8,509
 34.6%
Total Lines$37,849
 $29,981
 $67,830
 44.2%

Reserves

Commercial Lines

 

 

Personal Lines

 

 

Total Lines

 

Gross case reserves

$

69,380

 

 

$

4,318

 

 

$

73,698

 

Ceded case reserves

 

(19,001

)

 

 

(1,826

)

 

 

(20,827

)

Net case reserves

 

50,379

 

 

 

2,492

 

 

 

52,871

 

 

 

 

 

 

 

 

 

 

Gross IBNR

 

99,658

 

 

 

1,256

 

 

 

100,914

 

Ceded IBNR

 

(49,980

)

 

 

 

 

 

(49,980

)

Net IBNR

 

49,678

 

 

 

1,256

 

 

 

50,934

 

 

 

 

 

 

 

 

 

 

Unpaid losses and loss adjustment expenses

 

169,038

 

 

 

5,574

 

 

 

174,612

 

Reinsurance recoverables on unpaid losses

 

(68,981

)

 

 

(1,826

)

 

 

(70,807

)

Net unpaid losses and loss adjustment expenses

$

100,057

 

 

$

3,748

 

 

$

103,805

 

 

 

 

 

 

 

 

 

 

Ratio of Gross IBNR to Unpaid losses and loss adjustment expenses

 

59.0

%

 

 

22.5

%

 

 

57.8

%

Included in the reinsurance recoverables were reinsurance recoverables from the LPT which were $10.9 million of reinsurance recoverables on case reserves. All of the reinsurance recoverables from the LPT are included in commercial lines.

Although we believe that our reserve estimates are reasonable, it is possible that our actual loss and LAE experience may not conform to our assumptions and may, in fact, vary significantly from our assumptions. Accordingly, the ultimate settlement of losses and the related LAE may vary significantly from the estimates included in our financial statements. We continually review our estimates and adjust them as we believe appropriate as our experience develops or new information becomes known to us. Such adjustments are included in current operations.

Our loss and LAE reserves do not represent an exact measurement of liability, but are estimates. The most significant assumptions affecting our IBNR reserve estimates are the loss development factors applied to paid losses and case reserves to develop IBNR by line of business and accident year. Although historical loss development provides us with an indication of future loss development, it typically varies from year to year. Thus, for each accident year within each line of business we select one loss development factor out of a range of historical factors.

We generated a sensitivity analysis of our net reserves which represents reasonably likely levels of variability in our selected loss development factors. We believe the most meaningful approach to the sensitivity analysis is to vary the loss development factors that drive the ultimate loss and LAE estimates. We applied this approach on an accident year basis, reflecting the reasonably likely differences in variability by level of maturity of the underlying loss experience for each accident year. Generally, the most recent accident years are characterized by more unreported losses and less information available for settling claims, and have more inherent uncertainty than the reserve estimates for more mature accident years. Therefore, we used variability factors of plus or minus 10% for the most recent accident year, 5% for the preceding accident year, and 2.5% for the second preceding accident year. There is minimal expected variability for accident years at four or more years’ maturity.


The following table displays ultimate net loss and LAE and net loss and LAE reserves by accident year for the year ended December 31, 2017.2023. We applied the sensitivity factors to each accident year amount and have calculated the amount of potential net loss and LAE reserve change and the impact on 20172023 reported pre-tax income and on net income and shareholders’ equity at December 31, 2017.2023. We believe it is not appropriate to sum the illustrated amounts as it is not reasonably likely that each accident year’s reserve estimate assumptions will vary simultaneously in the same direction to the full extent of the sensitivity factor. We also believe that such changes to our reserve balance would not have a material impact on our operating results, financial position, or liquidity. The net income and shareholders' equity amounts include an income tax rate assumption of 21%., however due to the net operating losses (“NOL”) available to use against taxable income and the offsetting valuation

41


allowance, there is no difference between pre-tax income and shareholders’ equity in this schedule. The dollar amounts in the table are in thousands.

 
Ultimate
Loss and LAE
Sensitivity
Factor
 
December 31, 2017
Ultimate
Loss and LAE
 
December 31, 2017
Loss and LAE
Reserves
 
Potential
Impact on
2017 Pre-
Tax Income
 
Potential
Impact on 2017
Net Income and
December 31, 2017
Shareholders'
Equity
  
Increased Ultimate Losses & LAE         
Accident Year 201710.0 % $63,785
 $39,910
 $6,379
 $5,039
Accident Year 20165.0 % 45,599
 11,571
 2,280
 1,801
Accident Year 20152.5 % 49,709
 10,479
 1,243
 982
Prior to 2015 Accident Years % 
 5,870
 
 
          
Decreased Ultimate Losses & LAE         
Accident Year 2017(10.0)% 63,785
 39,910
 (6,379) (5,039)
Accident Year 2016(5.0)% 45,599
 11,571
 (2,280) (1,801)
Accident Year 2015(2.5)% 49,709
 10,479
 (1,243) (982)
Prior to 2015 Accident Years % 
 5,870
 
 

 

 

As of December 31,
2023

 

 

 

 

 

Impact

 

 

 

Net Ultimate
Loss and
LAE (1)

 

 

Net Loss and
LAE
Reserves (1)

 

 

Ultimate
Loss and
LAE
Sensitivity
Factor

 

 

Pre-
Tax Income (2)

 

 

Shareholders'
Equity (2)

 

Increased Ultimate Losses & LAE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accident Year 2023

 

$

64,579

 

 

$

37,578

 

 

 

10.0

%

 

$

(6,458

)

 

$

(5,102

)

Accident Year 2022

 

 

62,985

 

 

 

28,804

 

 

 

5.0

%

 

 

(3,149

)

 

 

(2,488

)

Accident Year 2021

 

 

58,958

 

 

 

19,666

 

 

 

2.5

%

 

 

(1,474

)

 

 

(1,164

)

Prior to 2021 Accident Years

 

 

 

 

 

17,757

 

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Decreased Ultimate Losses & LAE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accident Year 2023

 

 

64,579

 

 

 

37,578

 

 

 

(10.0

)%

 

 

6,458

 

 

 

5,102

 

Accident Year 2022

 

 

62,985

 

 

 

28,804

 

 

 

(5.0

)%

 

 

3,149

 

 

 

2,488

 

Accident Year 2021

 

 

58,958

 

 

 

19,666

 

 

 

(2.5

)%

 

 

1,474

 

 

 

1,164

 

Prior to 2021 Accident Years

 

 

 

 

 

17,757

 

 

 

%

 

 

 

 

 

 

(1) Represents amounts as of December 31, 2023.

(2) Represents how pre-tax income and shareholders' equity would change if the Net Ultimate Loss and LAE were to change by the percentage in the Ultimate Loss and LAE Sensitivity Factor column.

Investment Valuation and Impairment

Credit Losses

We carry debt and equity securities classified as available‑for‑saleavailable-for-sale at fair value, and unrealized gains and losses on such securities, totaled $13.3 million as of December 31, 2023, net of any deferred taxes, are reported as a separate component of accumulated other comprehensive income. Our equity securities that do not result in consolidation and are not accounted for under the equity method are measured at fair value and any changes in fair value are recognized in net income. We carry other equity investments that do not have a readily determinable fair value at cost, less impairment and adjusted for observable price changes under the measurement alternative provided under GAAP. We review the equity securities and other equity investments for impairment during each reporting period.

We review available-for-sale debt securities for credit losses based on current expected credit loss methodology at the end of each reporting period. We do not have any securities classified as trading or held‑to‑maturity.

We evaluate our available‑for‑sale investments regularlyheld to determinematurity.

At each quarter-end, for available-for-sale debt securities in an unrealized loss position, the Company first assesses whether there haveit intends to sell or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through earnings.

For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been declinesrecorded through an allowance for credit losses is recognized in value thatother comprehensive income. Changes in the allowance for credit losses are other‑than‑temporary.recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of an available-for-sale

42


security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Our outside investment managers assist us in this evaluation. When we determine that a security has experienced an other‑than‑temporary impairment, the impairment loss is recognized as a realized investment loss.

We consider a number of factors in assessing whether an impairment is other‑than‑temporary, including (1) the amount and percentage that current fair value is below cost or amortized cost, (2) the length of time that the fair value has been below cost or amortized cost and (3) recent corporate developments or other factors that may impact an issuer’s near term prospects. In addition, for debt securities, we consider the credit quality ratings for the securities, with a special emphasis on securities downgraded to below investment grade. We also consider our intent to sell available‑for‑sale debt securities in an unrealized loss position, and if it is more likely than not that we will be required to sell these securities before a recovery in fair value to their cost or amortized cost basis. For equity securities, we evaluate the near‑term prospect of these investments in relation to the severity and duration of the impairment, and we consider our ability and intent to hold these investments until they recover their fair value.

Fair values are measured in accordance with ASC 820, Fair Value Measurements. The guidance establishes a framework for measuring fair value and a three‑level hierarchy based upon the quality of inputs used to measure fair value. The three levels of the fair value hierarchy are: (1) Level 1: inputs are based on quoted prices (unadjusted) in active markets for identical assets or liabilities, (2) Level 2: inputs are other than quoted prices that are observable for the asset or liabilities, either directly or indirectly, for substantially the full term of the asset or liability and (3) 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.
The Company also has investment company limited partnership investments, which are measured at net asset value (NAV). The fair value of these investments is based on the capital account balances reported by the investment funds subject to their management review and adjustment. The capital account balances reflect the fair value of the investment funds.

The fair values of debt and equity securities have been determined using fair value prices provided by our investment managers, who utilize internationally recognized independent pricing services. The prices provided by the independent pricing services are generally based on observable market data in active markets (e.g., broker quotes and prices observed for comparable securities).

The values for publicly‑traded equity securities are generally based on Level 1 inputs which use the market approach valuation technique. The values for debt securities generally incorporate significant Level 2 inputs. The carrying value of cash and short‑term investments approximate their fair values due to their short‑term maturity.

We review fair value prices provided by our outside investment managers for reasonableness by comparing the fair values provided by the managers to those provided by our investment custodian. We also review and monitor changes in unrealized gains and losses. We obtain an understanding of the methods, models and inputs used by our investment managers and independent pricing services, and controls are in place to validate that prices provided represent fair values. Our control process includes initial and ongoing evaluation of the methodologies used, a review of specific securities and an assessment for proper classification within the fair value hierarchy.

Income Taxes

Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. We are subject to income taxes in the United States and numerous state jurisdictions. Significant judgment is required in determining the consolidated income tax expense.
On December 22, 2017, the U.S. federal government enacted H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Act”). The Act provides for significant changes to corporate taxation including the decrease of the corporate tax rate from 34% to 21%. We have completed an analysis of the impact of the Act and has followed the additional guidance provided by the Security and Exchange Commission's Staff Accounting Bulletin No. 118. We believe there are no material provisional balances as of December 31, 2017.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax‑planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results and incorporate assumptions about the amount of future state and federal pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income or loss.

As of December 31, 2017,2023, we have federal and state income tax net operating loss (“NOL”("NOL") carryforwards of $43.6$80.8 million and $11$120.3 million, respectively, whichrespectively. Of the NOL carryforwards, $78.2 million will expire at various dates from 2029in tax years 2030 through 2037.2043 and $10.3 million will never expire. Of the federal NOL amount, $15.1$19.5 million are subject to limitations under Section 382 of the Internal Revenue Code. These net NOL carryforwards are limited in the amount that can be utilized in any one year and may expire before they are realized. At this time we do not expect that any of the remaining NOL carryforwards will expire before utilized.

The carrying value of our gross deferred tax asset for the NOL carryforwards is equal to the total NOL carryforward amount times the applicable federal and state tax rates, and was $9.5 million and $8.0 million as of December 31, 2017 and 2016, respectively. Total gross deferred tax assets were $13.3 million and $13.0 million as of December 31, 2017 and 2016.

A valuation allowance of $9.9$28.0 million and $8.4$21.7 million has been recorded against the gross deferred tax assets as of December 31, 20172023 and 2016,2022, respectively, as the Company has recognized a three yearthree-year cumulative loss as of December 31, 20172023 which is significant negative evidence to support the lack of recoverability of those deferred tax assets in accordance with ASC 740, Income Taxes. If the $28.0 million valuation allowance as of December 31, 2023 were reversed in the future, it would increase book value by $2.29 per share. The net deferred tax liability was $115,000 and $179,000assets were zero as of December 31, 20172023 and 2016, respectively.

2022.

If, in the future, we determine we can support the recoverability of a portion or all of the deferred tax assets under the guidance, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets will be accounted for as a reduction of income tax expense and result in an increase in equity. Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and our effective tax rate in the future.

43



Non-GAAP Financial Measures

Adjusted Operating Income (Loss) and Adjusted Operating Income (Loss) Per Share

Adjusted operating income (loss) and adjusted operating income (loss) per share are non-GAAP measures that represent net income allocable to common shareholders excluding net realized investment gains (losses), change in fair value of equity securities, the gain from sale of renewal rights, the gain from VSRM Transaction, the loss portfolio transfer risk fee and other gains (losses), net of tax, the effects of tax reform, and the tax effect of changes in unrealized gains to the extent included in net income.. 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 to adjusted operating income (dollars in thousands), as well as net income per share to adjusted operating income per share:

 For the Years Ended December 31,
 2017 2016 2015
  
Net income (loss) allocable to common shareholders$(21,542) $(8,437) $(476)
Less:     
Net realized investment gains and other gains (losses)820
 965
 389
Effect of tax law change63
 
 
Tax effect of unrealized gains and losses on investments356
 147
 
Adjusted operating income (loss)$(22,781) $(9,549) $(865)
      
Weighted average common shares, diluted7,867,344
 7,618,588
 5,369,960
      
Diluted (loss) per common share:     
Net income (loss) allocable to common shareholders$(2.74) $(1.11) $(0.09)
Net realized investment gains and other gains (losses) per share0.10
 0.13
 0.07
Effect of tax law change0.01
 
 
Tax effect of unrealized gains and losses on investments0.05
 0.02
 
Adjusted operating (loss) per share$(2.90) $(1.26) $(0.16)

 

 

For the Years Ended December 31,

 

 

 

2023

 

 

2022

 

Net income (loss)

 

$

(25,904

)

 

$

(10,681

)

Less:

 

 

 

 

 

 

Net realized investment gains (losses)

 

 

(20

)

 

 

(1,505

)

Change in fair value of equity securities

 

 

608

 

 

 

403

 

Gain from VSRM Transaction

 

 

 

 

 

8,810

 

Loss portfolio transfer risk fee

 

 

 

 

 

(5,400

)

Gain from sale of renewal rights

 

 

2,335

 

 

 

 

Other gains (losses)

 

 

 

 

 

59

 

Impact of income tax expense (benefit) from adjustments *

 

 

 

 

 

 

Adjusted operating income (loss)

 

$

(28,827

)

 

$

(13,048

)

 

 

 

 

 

 

Weighted average common shares, diluted

 

 

12,220,511

 

 

 

10,692,090

 

 

 

 

 

 

 

Diluted income (loss) per common share:

 

 

 

 

 

 

Net income (loss)

 

$

(2.12

)

 

$

(1.00

)

Less:

 

 

 

 

 

 

Net realized investment gains (losses)

 

 

 

 

 

(0.14

)

Change in fair value of equity securities

 

 

0.05

 

 

 

0.04

 

Gain from VSRM Transaction

 

 

 

 

 

0.82

 

Loss portfolio transfer risk fee

 

 

 

 

 

(0.51

)

Gain from sale of renewal rights

 

 

0.19

 

 

 

 

Other gains (losses)

 

 

 

 

 

0.01

 

Impact of income tax expense (benefit) from adjustments *

 

 

 

 

 

 

Adjusted operating income (loss) per share

 

$

(2.36

)

 

$

(1.22

)

* The Company has recorded a full valuation allowance against its deferred tax assets as of December 31, 2023 and 2022. 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, in conjunction with other financial measures, to assess our performance and to evaluate the results of our business. We believe these measures provide investors with valuable information relating to our ongoing performance that may be obscured by the effect of investment gains and losses as a result of our market risk sensitive instruments, which primarily relate to fixed income securities that are available for saleavailable-for-sale and not held for trading purposes. Realized investment 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 loss or profitability 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.

44


Executive Overview

In 2017, we continued

The Company's gross written premiums increased $5.8 million, or 4.2%, to expand our commercial lines and reposition$143.9 million in 2023, compared to $138.0 million in 2022. This was primarily due to increased gross written premiums in our personal lines of business.business from increases in exposure units and, to a lesser degree, increased rates. Our commercialpersonal lines gross written premiums grew by 4.4%premium increased $15.6 million, or 73.8%, to $36.8 million in 2017, and personal line gross written premiums decreased by 16.9% in 2017, as2023, compared to 2016.

In September 2017, we entered into an adverse development cover reinsurance agreement (the "ADC") to protect against loss development of up to $17.5$21.2 million in excess of stated reserves as of June 30, 2017. The agreement provides up to $17.5 million of reinsurance for adverse net loss reserve development for accident years 2005 through 2016. The agreement attaches when net losses exceed $1.4 million of the $36.6 million carried reserves at June 30, 2017, and extends to $19.5 million in coverage up to $57.5 million (inclusive of a 10% co-participation).

The 2017 results were mainly driven by adverse development on prior-year reserves which were incurred through September 30, 2017, the cost of the ADC, and losses from hurricanes Irma and Harvey.
Our expense ratio continues to improve as we have executed on rationalizing costs with growing earned premiums. In the fourth quarter of 2017, the expense ratio was 41.4%, down 4.2 percentage points from the fourth quarter of 2016.
2022.

The Company reported a net loss of $21.5$25.9 million, or $2.74$2.12 per share, for the year ended December 31, 2017,in 2023, compared to a net loss of $8.4$10.7 million, or $1.11$1.00 per share, for the year ended December 31, 2016.

in 2022.

Adjusted operating loss, a non-GAAP measure, was $22.8$28.8 million, or $2.90$2.36 per share, for the year ended December 31, 2017,in 2023, compared to an adjusted operating loss of $9.5$13.0 million, or $1.26$1.22 per share, in 2022.

The 2023 results included a non-operating net gain of $2.3 million from the sale of its Security Program. See Note 2 ~ Sale of Renewal Rightsfor the year ended December 31, 2016.

Potential impact of ADC on future periods
We purchased the ADC to greatly reduce our exposure to prior-year adverse development. further detail.

The benefits of the ADC can be seen2022 results included an $8.8 million non-operating gain in the fourth quarter wherein we experienced $2.1of 2022 from the step acquisition of VSRM and subsequent sale of its security guard and alarm installation insurance brokerage business to a third party insurance brokerage firm. The Company also recorded a tax benefit of $9.4 million from the utilization of NOL carryforwards applied against the taxable gain on the transaction. The deferred tax assets associated with the NOLs had a valuation allowance against it, and thus there was the recognition of the benefit in the period it was used.

The Company entered into a loss portfolio transfer reinsurance agreement on November 1, 2022 with Fleming Re in order to reduce its exposure to future unfavorable development on its reserves. The Company was charged a one-time risk fee of $5.4 million. Fleming Re will cover an aggregate limit of $66.3 million of adverse development, but retained only $33,000 of that development. In 2017, we paid $7.20 million in ceded premiums under the ADC, and ceded $7.19 million in losses. There remains available $10.3losses on $40.8 million of stated net reserves as of June 30, 2022, relating to accident years 2019 and prior. Within the aggregate limit, there is a $5.5 million loss corridor in which the Company retains losses in excess of $40.8 million. Fleming Re is then responsible to cover paid losses in excess of $46.3 million up to $66.3 million. As of December 31, 2023, the event of additional adverse development.

Company has recorded losses through the $5.5 million corridor and $9.1 million into the $20.0 million layer.

In the event there is additional adverse development that exceedsfourth quarter of 2022, the costCompany incurred $2.0 million of the ADC, that excess amount will be deemed a gain under retroactivelosses and $1.6 million reinsurance accounting rules and is requiredreinstatement costs related to be deferred and only recognized in earnings in proportion to the actual paid recoveries under the ADC. Over the life of the contract, the accounting benefit will align with economic benefit of the ADC, however we may be required to recognize losses in near-term future periods, only to recognize offsetting gains in periods further out.Hurricane Ian.

45



Results of Operations - 20172023 Compared to 2016

2022

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

Summary Operating Results

 

 

Years Ended December 31,

 

 

 

 

 

 

 

 

 

2023

 

 

2022

 

 

$ Change

 

 

% Change

 

Gross written premiums

 

$

143,834

 

 

$

138,019

 

 

$

5,815

 

 

 

4.2

%

 

 

 

 

 

 

 

 

 

 

 

 

Net written premiums

 

$

68,688

 

 

$

91,232

 

 

$

(22,544

)

 

 

(24.7

%)

 

 

 

 

 

 

 

 

 

 

 

 

Net earned premiums

 

$

83,935

 

 

$

96,711

 

 

$

(12,776

)

 

 

(13.2

%)

Agency commission income

 

 

5,680

 

 

 

1,414

 

 

 

4,266

 

 

*

 

Other income

 

 

694

 

 

 

1,354

 

 

 

(660

)

 

 

(48.7

%)

Losses and loss adjustment expenses, net

 

 

82,413

 

 

 

81,440

 

 

 

973

 

 

 

1.2

%

Policy acquisition costs

 

 

20,892

 

 

 

22,179

 

 

 

(1,287

)

 

 

(5.8

%)

Operating expenses

 

 

17,891

 

 

 

18,789

 

 

 

(898

)

 

 

(4.8

%)

Loss portfolio transfer risk fee

 

 

 

 

 

5,400

 

 

 

(5,400

)

 

*

 

Underwriting gain (loss)

 

 

(30,887

)

 

 

(28,329

)

 

 

(2,558

)

 

 

(9.0

%)

Net investment income

 

 

5,526

 

 

 

3,043

 

 

 

2,483

 

 

 

81.6

%

Net realized investment gains (losses)

 

 

(20

)

 

 

(1,505

)

 

 

1,485

 

 

*

 

Change in fair value of equity securities

 

 

608

 

 

 

403

 

 

 

205

 

 

*

 

Gain from sale of renewal rights

 

 

2,335

 

 

 

 

 

 

2,335

 

 

*

 

Gain from VSRM Transaction

 

 

 

 

 

8,810

 

 

 

(8,810

)

 

*

 

Other gains (losses)

 

 

 

 

 

59

 

 

 

(59

)

 

*

 

Interest expense

 

 

3,206

 

 

 

2,971

 

 

 

235

 

 

 

7.9

%

Income (loss) before income taxes

 

 

(25,644

)

 

 

(20,490

)

 

 

(5,154

)

 

*

 

Equity earnings in Affiliate, net of tax

 

 

(251

)

 

 

368

 

 

 

(619

)

 

 

(168.2

%)

Income tax expense

 

 

9

 

 

 

(9,441

)

 

 

9,450

 

 

*

 

Net income (loss)

 

$

(25,904

)

 

$

(10,681

)

 

$

(15,223

)

 

*

 

Underwriting Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio (1)

 

 

97.8

%

 

 

83.9

%

 

 

 

 

 

 

Expense ratio (2)

 

 

37.1

%

 

 

38.4

%

 

 

 

 

 

 

Combined ratio (3)

 

 

134.9

%

 

 

122.3

%

 

 

 

 

 

 

(1)
The loss ratio is the ratio, expressed as a percentage, of net losses and loss adjustment expenses to net earned premiums and other income from underwriting operations.
 Years Ended December 31,    
 2017 2016 $ Change % Change
  
Gross written premiums$114,284
 $114,923
 $(639) (0.6%)
Net written premiums$91,240
 $99,929
 $(8,689) (8.7%)
Net earned premiums$91,729
 $89,627
 $2,102
 2.3%
Other income1,560
 1,118
 442
 39.5%
Losses and loss adjustment expenses, net73,917
 59,003
 14,914
 25.3%
Policy acquisition costs26,245
 25,280
 965
 3.8%
Operating expenses17,367
 17,596
 (229) (1.3%)
Underwriting gain (loss)(24,240) (11,134) (13,106) *
Net investment income2,728
 2,173
 555
 25.5%
Net realized investment gains70
 1,365
 (1,295) (94.9%)
Other gains (losses)750
 (400) 1,150
 *
Interest expense1,362
 647
 715
 110.5%
Income (loss) before income taxes(22,054) (8,643) (13,411) *
Income tax expense (benefit)(447) (77) (370) *
Equity earnings (losses) in affiliates, net of tax65
 129
 (64) *
Net income (loss)$(21,542) $(8,437) $(13,105) *
        
Underwriting Ratios:       
Loss ratio79.2% 65.0%    
Expense ratio46.8% 47.2%    
Combined ratio126.0% 112.2%    
(2)
The expense ratio is the ratio, expressed as a percentage, of policy acquisition costs and operating expenses to net earned premiums and other income from underwriting operations.
(3)
The combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100% indicates an underwriting profit. A combined ratio over 100% indicates an underwriting loss.

* Percentage change is not meaningful

Premiums

Earned premiums

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

46



Our premiums are presented below for the years ended December 31, 20172023 and 20162022 (dollars in thousands):

Summary of Premium Revenue

 Years Ended December 31,    
 2017 2016 $ Change % Change
  
Gross written premiums       
Commercial lines$92,112
 $88,242
 $3,870
 4.4%
Personal lines22,172
 26,681
 (4,509) (16.9%)
Total$114,284
 $114,923
 $(639) (0.6%)
        
Net written premiums       
Commercial lines$78,217
 $78,439
 $(222) (0.3%)
Personal lines13,023
 21,490
 (8,467) (39.4%)
Total$91,240
 $99,929
 $(8,689) (8.7%)
        
Net Earned premiums       
Commercial lines$76,786
 $68,921
 $7,865
 11.4%
Personal lines14,943
 20,706
 (5,763) (27.8%)
Total$91,729
 $89,627
 $2,102
 2.3%

 

 

Years Ended December 31,

 

 

 

 

 

 

 

 

 

2023

 

 

2022

 

 

$ Change

 

 

% Change

 

Gross written premiums

 

 

 

 

 

 

 

 

 

 

 

 

Commercial lines

 

$

107,078

 

 

$

116,868

 

 

$

(9,790

)

 

 

(8.4

%)

Personal lines

 

 

36,756

 

 

 

21,151

 

 

 

15,605

 

 

 

73.8

%

Total

 

$

143,834

 

 

$

138,019

 

 

$

5,815

 

 

 

4.2

%

 

 

 

 

 

 

 

 

 

 

 

 

Net written premiums

 

 

 

 

 

 

 

 

 

 

 

 

Commercial lines

 

$

36,580

 

 

$

72,318

 

 

$

(35,738

)

 

 

(49.4

%)

Personal lines

 

 

32,108

 

 

 

18,914

 

 

 

13,194

 

 

 

69.8

%

Total

 

$

68,688

 

 

$

91,232

 

 

$

(22,544

)

 

 

(24.7

%)

 

 

 

 

 

 

 

 

 

 

 

 

Net Earned premiums

 

 

 

 

 

 

 

 

 

 

 

 

Commercial lines

 

$

59,221

 

 

$

80,823

 

 

$

(21,602

)

 

 

(26.7

%)

Personal lines

 

 

24,714

 

 

 

15,888

 

 

 

8,826

 

 

 

55.6

%

Total

 

$

83,935

 

 

$

96,711

 

 

$

(12,776

)

 

 

(13.2

%)

Gross written premiums remained flat for the year ended December 31, 2017, as compared to 2016. These results reflect our continued execution of our growth initiatives in the niche commercial insurance markets and our strategic change in the mix of business of our personal lines.

Commercial lines gross written premiums increased $3.9by $5.8 million, or 4.4%4.2%, to $92.1$143.8 million for the year ended December 31, 2017, as2023, compared to $88.2$138.0 million for the year ended December 31, 2016. This increase was seen across almost every commercial product line as a result of our continued strategic expansion efforts.
Personal2022.

Commercial lines gross written premiums decreased $4.5$9.8 million,, or 16.9%8.4%, to $22.2 $107.1 million, for the year ended December 31, 2017, as2023, compared to $26.7$116.9 million for the same periodyear ended December 31, 2022. Gross written premiums for our hospitality programs decreased by $5.5 million, or 20.5%, to $21.5 million for the year ended December 31, 2023, compared to $27.0 million for the year ended December 31, 2022. Gross written premiums for our small business programs decreased by $4.3 million, or 4.7%, to $85.6 million, for the year ended December 31, 2023, compared to $89.9 million for the year ended December 31, 2022. In both the hospitality and small business programs, the reductions in 2016. Thispremiums were due to the Company’s concerted efforts to reduce writings in individual lines of business and jurisdictions that were the least profitable.

Personal lines gross written premiums increased $15.6 million, or 73.8%, to $36.8 million for the year ended December 31, 2023, compared to $21.2 million for the year ended December 31, 2022. The increase was largely driven by a reductionincreased policy counts in wind-exposedTexas and Oklahoma. The Company is expected to discontinue writing in Oklahoma in the second quarter of 2024. Oklahoma homeowners businessrepresented $17.1 million of the Company’s gross written premium in both Florida and Texas.

2023. Texas homeowners is expected to continue to grow.

Net written premiums decreased $8.7$22.5 million, or 8.7%24.7%, to $68.7 million, for the year ended December 31, 2023, compared to $91.2 million for the year ended December 31, 2017,2022.

As part of the Security Program transaction, the Company ceded 100% of its gross unearned premium related to the program as comparedof September 30, 2023. This increased the Company's net ceded written premium by $18.8 million in its commercial lines of business for the year ended December 31, 2023. Commercial lines net written premiums further decreased due to $99.9more ceded premiums as a result of a higher reinsurance cost and the Company entered into a new quota share reinsurance agreement, effective January 1, 2023. The new 50% quota share treaty applies to a subset of our commercial business that represents approximately 12.0% of our gross written premiums for the year ended December 31, 2023. The Company ceded $10.3 million of written premium related to this quota share reinsurance agreement for the twelve months ended December 31, 2023.

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 $4.3 million to $5.7 million for the year ended December 31, 2016.2023, compared to $1.4 million for the year ended December 31, 2022. The decreaseincrease was primarily due to $7.2the Company's Security Program

47


transaction in September of 2023. As part of the arrangement with the buyer, our managing general agency, CIS, is appointed as the producer for this business, for approximately a two-year transition period. During this time our wholesale agency segment will receive a commission from the buyer, and pay a sub-producer substantially the same commission. This will result in higher consolidated other income for the Company. Policy acquisition costs will remain substantially the same amount for the period of this agreement. In 2023, the Company recorded $5.2 million of ceded written premium recorded in the third quartercommission revenue and $5.2 million of 2017 relating to the ADC.

commission expense as a result of this arrangement.

Other Income

Other income consists primarily of fees charged to policyholders by the Company for services outside of the premium charge, such as installment billings orand policy issuance costs. CommissionOther income is also receiveddecreased by the Company’s insurance agencies for writing policies for third party insurance companies. Other income$660,000, or 48.7%, to $694,000 for the year ended December 31, 2017 increased $442,000, or 39.5%, to $1.5 million as2023, compared to $1.1$1.4 million for the year ended December 31, 2016.2022. The increasedecrease in other income was due to continued expansion into lines of business in which various fees are chargedmostly related to the policyholders.


homeowners business that was originally produced within the consolidated Company during 2022. This homeowners business was contributed to SSU in December of 2022, resulting in a significant decline in other income during 2023.

Losses and Loss Adjustment Expenses

The tables below detail our losses and LAE and loss ratios for the years ended December 31, 20172023 and 20162022 (dollars in thousands).

Year Ended December 31, 2017
Commercial
Lines
 
Personal
Lines
 Total
  
Accident year net losses and LAE$48,520
 $15,937
 $64,457
Net (favorable) adverse development7,181
 2,279
 9,460
Calendar year net loss and LAE$55,701
 $18,216
 $73,917
      
Accident year loss ratio62.7% 101.4% 69.1%
Net (favorable) adverse development9.3% 14.5% 10.1%
Calendar year loss ratio72.0% 115.9% 79.2%
Year Ended December 31, 2016
Commercial
Lines
 
Personal
Lines
 Total
  
Accident year net losses and LAE$35,652
 $13,130
 $48,782
Net (favorable) adverse development6,789
 3,432
 10,221
Calendar year net loss and LAE$42,441
 $16,562
 $59,003
      
Accident year loss ratio51.4% 61.8% 53.7%
Net (favorable) adverse development9.8% 16.1% 11.3%
Calendar year loss ratio61.2% 77.9% 65.0%

Year Ended December 31, 2023

 

Commercial
Lines

 

 

Personal
Lines

 

 

Total

 

Accident year net losses and LAE

 

$

43,622

 

 

$

20,958

 

 

$

64,580

 

Net (favorable) adverse development

 

 

19,206

 

 

 

(1,373

)

 

 

17,833

 

Calendar year net loss and LAE

 

$

62,828

 

 

$

19,585

 

 

$

82,413

 

 

 

 

 

 

 

 

 

 

Accident year loss ratio

 

 

73.4

%

 

 

84.5

%

 

 

76.6

%

Net (favorable) adverse development

 

 

32.3

%

 

 

(5.6

)%

 

 

21.2

%

Calendar year loss ratio

 

 

105.7

%

 

 

78.9

%

 

 

97.8

%

Year Ended December 31, 2022

 

Commercial
Lines

 

 

Personal
Lines

 

 

Total

 

Accident year net losses and LAE

 

$

46,884

 

 

$

10,272

 

 

$

57,156

 

Net (favorable) adverse development

 

 

23,878

 

 

 

406

 

 

 

24,284

 

Calendar year net loss and LAE

 

$

70,762

 

 

$

10,678

 

 

$

81,440

 

 

 

 

 

 

 

 

 

 

Accident year loss ratio

 

 

57.9

%

 

 

64.3

%

 

 

58.9

%

Net (favorable) adverse development

 

 

29.4

%

 

 

2.6

%

 

 

25.0

%

Calendar year loss ratio

 

 

87.3

%

 

 

66.9

%

 

 

83.9

%

Net losses and LAE increased by $14.9$973,000, or 1.2%, to $82.4 million or 25.3%, for the year ended December 31, 2017, as2023, compared to $81.4 million for the same period in 2016. The increase was due to a combination of $9.5 million of adverse reserve development from prior years and $5.4 million of net losses from Hurricanes Harvey and Irma.year ended December 31, 2022. The calendar year loss ratios were 79.2%97.8% and 65.0%83.9% for the years ended December 31, 20172023 and 2016,2022, respectively. The hurricanes contributed 6.4 percentage points to the 2017 loss ratio. The ADC resulted in approximately a 1.5 percentage point increase in losses was attributable to both higher current accident year losses as well as reserve strengthening on prior year accident years.

Current accident year losses were higher mostly as a result of significant storm activity in the loss ratioOklahoma homeowners line in the spring and early summer of 2023. Commercial lines current accident year losses were lower mostly due to an improved mix of business in 2023 as slightlycompared to prior years. The Company's quick service restaurant program, which generated large losses in prior years and $2.7 million of accident year losses in 2022, only generated $270,000 of accident year losses in 2023. We would expect no more accident year losses from the quick service restaurant program going forward as the premiums were ceded underfully earned out as of December 31, 2023. The sale of the ADC thanSecurity Program included ceding 100% of the unearned premiums on this program as of September 30, 2023, resulting in a significantly reduced amount of accident

48


year losses for this program in 2017. the fourth quarter of 2023. This program represented 35.3% of the Company’s net earned premiums for the year-to-date period ending as of September 30, 2023, and zero percent in the fourth quarter of 2023.

The 14.2 percentage point increase in our loss ratio was primarily attributable to the reserve strengthening in our Florida homeowners, commercial automobile and commercial liability lines of business.

The $9.5Company experienced $19.2 million of adverse development in 2017 consisted of $7.18 million from commercial lines and $2.3 million from personal lines and mostly related to the 2016 and 2015 accident years. Substantially all of this development occurred in the first three quarters of 2017 and primarily consisted of $5.1 million from commercial liability business, $1.6 million from the commercial property, $1.7 million from Florida homeowners and $0.5 million from commercial auto business.
Overall reserve development on prior accident years for the year ended December 31, 2016, was unfavorable by $10.22023, related to the Company's commercial lines of business, while the Company experienced $1.4 million or 11.3 percentage points of favorable development in its personal lines of business.

Of the loss ratio. The development included $2.7$19.2 million of adverse development for the Company's commercial lines for year ended December 31, 2023, $7.2 million was related to accident year 2022, $6.9 million was related to accident year 2021, and $4.9 million was related to accident year 2020 and $173,000 was 2019 and prior years. The development came primarily from commercial liability lines of business particularly in both the wind-exposed homeowners and commercial autolonger tail lines of business, as a result of additional loss emergence primarily from the Security Program which represented 58% of the adverse development while the remainder was substantially in hospitality, most notably the quick service restaurant program. Both the Security Program and the quick service restaurant program are no longer written by the Company. As a result of this loss emergence, the Company increased its expected loss ratio selections on both prior accident years as well as $2.6the current accident year, resulting in increases to our carried loss reserves.

The Company experienced $24.3 million and $760,000 of adverse development infor the hospitality lineyear ended December 31, 2022. Of the $24.3 million of business and personal autoadverse development, $23.9 million was related to the Company's commercial lines of business, respectively.

while $406,000 was related to the Company's personal lines of business. Of the $24.3 million of adverse development, $1.8 million was related to the 2021 accident year, $4.0 million was related to the 2020 accident year, $9.6 million was related to the 2019 accident year, $5.2 million was related to the 2018 accident year, and $3.7 million was related to 2017 and prior accident years. The adverse development was mostly related to the Company's commercial liability lines and was driven by multiple factors including significant social inflation generating higher severity than historical experience, and longer tail exposure than anticipated, particularly in certain jurisdictions.

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 operatingother underwriting expenses by the sum of net earned premiums and other income. We useincome of the expense ratio to evaluate the operating efficiency of our consolidated operations and each segment.underwriting business. Costs that are notcannot be readily identifiable as a direct cost of a segment or product line remain in Corporate and Other for segment reporting purposes.





The expense ratio excludes wholesale agency and Corporate expenses.

The table below provides the expense ratio by major component:

 Years Ended December 31,
 2017 2016
 Before ADC or Reinstatement Costs Impact of ADC & Reinstatement CostsTotal  
Commercial Lines      
Policy acquisition costs24.7% 1.7%26.4% 26.8%
Operating expenses13.7% 1.0%14.7% 9.7%
Total38.4% 2.7%41.1% 36.5%
       
Personal Lines      
Policy acquisition costs31.5% 5.2%36.7% 31.6%
Operating expenses14.0% 2.3%16.3% 13.7%
Total45.5% 7.5%53.0% 45.3%
       
Corporate and Other      
Operating expenses3.7% %3.7% 8.7%
Total3.7% %3.7% 8.7%
       
Consolidated      
Policy acquisition costs25.9% 2.2%28.1% 27.8%
Operating expenses17.2% 1.4%18.6% 19.4%
Total43.1% 3.6%46.7% 47.2%

 

 

Years Ended December 31,

 

 

 

2023

 

2022

 

 

 

 

 

 

 

 

Commercial Lines

 

 

 

 

 

 

Policy acquisition costs

 

 

15.3

%

 

 

21.8

%

Operating expenses

 

 

20.2

%

 

 

16.1

%

Total

 

 

35.5

%

 

 

37.9

%

 

 

 

 

 

 

Personal Lines

 

 

 

 

 

 

Policy acquisition costs

 

 

26.8

%

 

 

28.8

%

Operating expenses

 

 

13.9

%

 

 

12.2

%

Total

 

 

40.7

%

 

 

41.0

%

 

 

 

 

 

 

Total Underwriting

 

 

 

 

 

 

Policy acquisition costs

 

 

18.8

%

 

 

23.0

%

Operating expenses

 

 

18.3

%

 

 

15.4

%

Total

 

 

37.1

%

 

 

38.4

%

Our expense ratio decreased by half of a percentage point,1.3% to 46.7%37.1% for the year ended December 31, 2017,2023, as compared to the same period in 2016. The decrease in the ratio was primarily due to continued improvement in our operating efficiencies as our earned premium grew faster than our more fixed expense structure.2022. The decrease was dampeneddriven by the impact of both the hurricanes and ADC which occurreda reduction in the third quarter of 2017. During 2017, $7.2 millionpolicy acquisition costs ratio and was ceded to the ADC (a one-time charge) and $806,000 was ceded as reinstatement costs of catastrophe reinsurance relating to Hurricane Irma. Before these two costs, the expense ratio would have declined even further, to 43.1% for the year, and 41.1%partially offset by an increase in the fourth quarter of 2017.operating expense ratio.

49


Policy acquisition costs are costs we incur to issue policies, which include commissions, premium taxes, underwriting reports and underwriter compensation costs. The Company offsets direct commissions with ceded commissions from reinsurers. The percentage of policy acquisition costs to net earned premiums and other income increaseddecreased by 4.2%, from 23.0% in 2022, to 28.1% for the year ended December 31, 2017, compared to 27.8%18.8% in 2016.2023. The increasedecrease was primarily due to the decrease in net earned premiums related to the ADC and reinstatement ceded premiums. Before the $7.2 million and $806,000 of ceded earned premiums, the policy acquisition cost ratio in 2017, was 25.9%, a 1.9 percentage point reduction. Our directadditional ceding commissions, which reduces commission expense, rate was consistent between 2016 and 2017.

as a result of the new quota share reinsurance treaty mentioned above.

Operating expenses consist primarily of employee compensation, information technology and occupancy costs, such as rent and utilities. Operating expenses as a percent of net earned premiums and other income was 18.6% and 19.4% for the years ended December 31, 2017 and 2016, respectively. Earned premium growth on a more fixedincreased by 2.9%, from 15.4% in 2022, to 18.3% in 2023. The operating expense structure has helpedratios were higher primarily due to reduceincreased reinsurance costs due to the operating expense ratio,new quota share reinsurance treaty mentioned above, which is expected to continue to decline as ourlowered net earned premium grows. In addition, there have been Company-wide efforts to reduce operating expenses even with growing earned premiums. Dampening the effects of the growth in earned premium and expense reductions was the impact of the ADC and reinstatement premiums. Before the impact of the ADC and reinstatement premiums, the operating expense ratio was 17.2% for the year and only 15.4% in the fourth quarter of 2017.


Underwriting 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 years ended December 31, 20172023 and 20162022 (dollars in thousands):

Underwriting Gain (Loss)

 Years Ended December 31,    
 2017 2016 $ Change % Change
  
Commercial Lines$(10,096) $1,531
 $(11,627) (759.4)%
Personal Lines(10,838) (4,929) (5,909) 119.9 %
Corporate and Other(3,306) (7,736) 4,430
 (57.3)%
Total$(24,240) $(11,134) $(13,106) *
* Percentage change is not meaningful

 

 

Years Ended December 31,

 

 

 

 

 

 

2023

 

 

2022

 

 

Change

 

Commercial Lines

 

$

(24,512

)

 

$

(25,845

)

 

$

1,333

 

Personal Lines

 

 

(4,882

)

 

 

(1,248

)

 

$

(3,634

)

Total Underwriting

 

 

(29,394

)

 

 

(27,093

)

 

 

(2,301

)

Wholesale Agency

 

 

(495

)

 

 

(553

)

 

 

58

 

Corporate

 

 

(1,067

)

 

 

(921

)

 

 

(146

)

Eliminations

 

 

69

 

 

 

238

 

 

 

(169

)

Total underwriting income (loss)

 

$

(30,887

)

 

$

(28,329

)

 

$

(2,558

)

Investment Income

Net investment income increased by $555,000,$2.5 million, or 25.5%81.6%, to $2.7$5.5 million for the year ended December 31, 2017, as2023, compared to $2.1$3.0 million for the year ended December 31, 2016.2022. This increase was mainly due to the growth of the investment portfolio.an increase in interest income in our debt securities due to higher interest rates in 2023. Average invested assets during 2023 were $141.7 million compared to $160.1 million for the same period in 2022. The investment portfolio was comprised of 84.1% debt securities, 1.6% equity securities, and 14.3`% short-term investments as of December 31, 2017, were $143.1 million2023. The investment portfolio was comprised of 81.2% debt securities, 3.5% equity securities, and 15.3% short-term investments as compared to $123.1 millionof December 31, 2022.

The debt securities portfolio had an average credit quality was AA+ at December 31, 2016, an increase of $20.0 million, or 16.2%. As of December 31, 2017, the average invested asset balance was comprised of 87.3% debt securities, 5.0% equity securities2023 and 7.9% short-term investments, compared to the December 31, 2016 mix of 89.4% debt securities, 3.6% equity securities and 7.0% short term investments.

The portfolio’s average quality was AA at December 31, 2017 and 2016.2022, respectively. The portfolio produced a tax equivalenttax-equivalent book yield of2.5% 3.3% and 2.2%2.3% for the years ended December 31, 20172023 and 2016,2022, respectively. The duration-to-worst averageoption adjusted duration of the debt securities portfolio was 3.22.9 years and 3.5 years at December 31, 20172023 and 2016.
Other2022, respectively.

Realized Investment Gains (Losses)

In 2017, we recognized a $750,000 gain on the sale

Net realized investment losses were $20,000 during 2023, compared to $1.5 million of the renewal rightslosses during 2022. The Company repositioned most of a portion of the low value dwelling book of businessits equity portfolio in 2022, and had minimal activity related to another insurer. In 2016, as a result of the merger of ACIC into WPIC, the value of intangible assets recorded for insurance licenses on ACIC were written off resultingselling equity securities in a $400,000 loss.

2023.

Interest Expense

and Preferred Dividend

Interest expense was $1.4$3.2 million and $647,000$2.9 million for the years ended December 31, 20172023 and 2016,2022, respectively. Interest expense increased due to the increase in outstanding debt throughout the year. We issued $30.0The Company repaid $24.4 million of subordinatedits 6.75% public senior unsecured notes in(the "old notes") and issued $17.9 million of 9.75% public senior unsecured notes (the "new notes") during the third quarter of 2017, with a current interest rate2023, which mature on September 30, 2028. The Company also restructured its existing $10.5 million of 8.0% per annum. We paid off all7.5% subordinated notes to $10.0 million of thenew 12.5% senior debt facility from the proceeds of the subordinated notes. secured notes on September 30, 2023. The senior secured notes mature on September 30, 2028.

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Interest expense includes the amortization of debt issuance costs relating to the new subordinated notes whichand the senior secured notes. The interest expense relating to the amortization of debt issuance costs on the new notes is $66,000$353,000 per annum over the 15-year5-year life of the new notes.

Income Tax Expense (Benefit)
On December 22, 2017, The interest expense relating to the U.S. federal government enacted H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and Vamortization of debt issuance costs on the senior secured notes is $189,000 per annum over the 5-year life of the Concurrent Resolution onsenior secured notes.

The increase in interest rates and debt issuance costs from the Budget for Fiscal Year 2018” (the “Act”). The Act provides for significant changesCompany's new and restructured debt during the third quarter of 2023 contributed to corporate taxation including the decrease$235,000 increase in interest expense during 2023, compared to 2022.

We issued $25.3 million of the corporate tax rate from 34% to 21%. We have completed an analysisold notes in 2018, of the impact of the Act and have followed the additional guidance provided by the Security and Exchange Commission's Staff Accounting Bulletin No. 118. We believe there are no material provisional balanceswhich, $24.4 million was outstanding as of December 31, 2017.

We accounted for the impacts2022, due to Company repurchases of the Act by remeasuring our deferred tax assets and liabilities at the 21% enacted tax rate.old notes during 2020. The approximate impactCompany did not repurchase any of the changeold notes in tax rate was a decrease in net deferred tax assets (before valuation allowance)2022. Interest expense includes the amortization of $5.6 million with a corresponding deferred income tax expense of $5.6 million. The valuation allowance also decreased by $5.7 million with a corresponding deferred income tax benefit of $5.7 million. Accordingly, the net deferred income tax impact on the results of operationsdebt issuance costs relating to the Act was a $63,000 deferred tax benefit in 2017.old notes which is $260,000 per annum over the 5-year life of the Notes. The Company’s net deferred tax assetsinterest expense relating to the amortization of debt issuance costs for the year endedexisting $10.5 million of the subordinated notes is $51,000 per annum over the 20-year life of the subordinated notes.

The Company had a $10.0 million line of credit during 2022, which it drew upon and paid down at various times. This contributed to the interest expense in 2022. The Company had no outstanding balance on its line of credit on December 31, 2016, remain2022, as the line of credit agreement matured on December 1, 2022, and was not renewed.

The Company also pays a dividend on its $6.0 million preferred stock. Refer to Note 13 ~ Shareholders’ Equity for further details. The preferred stock dividend is not an expense and does not impact net income. However, it does reduce net income allocable to common shareholders, earnings per share and cash flows. The Company declared $19,000 of dividends in 2023, and would expect to pay $630,000 for a full year at the previously enacted tax rate.

current dividend rate, which is variable.

Income Tax Expense

For the year ended December 31, 2017,2023, the Company reported $16,000$26,000 of current federal income tax benefit and $12,000$0 of current state income tax benefit. The Company also reported a deferred tax benefit of $419,000 which was largely$17,000 and $9.4 million for the


result of changes in the net deferred tax asset valuation allowance related to changes in unrealized gains. For the year years ended December 31, 2016, the Company reported $0 of current federal income tax expense2023 and $70,000 of current state income tax expense. The Company also reported a deferred tax benefit of $147,000 related to a $400,000 write-off of intangible assets resulting from the merger of ACIC into WPIC in 2016.
2022, respectively.

There is a $9.9$28.0 million valuation allowance against 100% of the net deferred tax assets at December 31, 2017, which would increase book value by $1.16 per share if reversed in the future.2023. The valuation allowance was $8.4$21.7 million for 2016.as of December 31, 2022. As of December 31, 2017,2023, the Company has net operating loss carryforwards for federal income tax purposes of $43.6$80.8 million, of which $78.2 million expire in tax years 20292030 through 2037.2043 and $10.3 million will never expire. Of this amount, $15.1$19.5 million are limited in the amount that can be utilized in any one year and may expire before they are realized under Section 382 of the Internal Revenue Code. The Company has state net operating loss carryforwards of $11.0$120.3 million, which expire in tax years 20292024 through 2037.


Results of Operations - 2016 Compared to 2015
The following table summarizes our operating results for the years indicated (dollars in thousands):
Summary Operating Results
 Years Ended December 31,    
 2016 2015 $ Change % Change
  
Gross written premiums$114,923
 $93,750
 $21,173
 22.6%
Net written premiums$99,929
 $79,674
 $20,255
 25.4%
Net earned premiums$89,627
 $66,765
 $22,862
 34.2%
Other income1,118
 1,667
 (549) (32.9%)
Losses and loss adjustment expenses, net59,003
 38,882
 20,121
 51.7%
Policy acquisition costs25,280
 16,183
 9,097
 56.2%
Operating expenses17,596
 14,806
 2,790
 18.8%
Underwriting gain (loss)(11,134) (1,439) (9,695) *
Net investment income2,173
 1,902
 271
 14.2%
Net realized investment gains1,365
 285
 1,080
 378.9%
Other gains(400) 104
 (504) *
Interest expense647
 769
 (122) (15.9%)
Income (loss) before income taxes(8,643) 83
 (8,726) *
Income tax expense (benefit)(77) 48
 (125) *
Equity earnings (losses) in affiliates, net of tax129
 (52) 181
 *
Net income (loss)$(8,437) $(17) $(8,420) *
        
Underwriting Ratios:       
Loss ratio65.0% 56.8%    
Expense ratio47.2% 45.3%    
Combined ratio112.2% 102.1%    
* Percentage change is not meaningful
Premiums
Earned premiums are earned ratably over the term of the policy, whereas written premiums are reflected on the effective date of the policy. All commercial lines and homeowners products have annual policies, under which premiums are earned evenly over one year. Almost all personal automobile policies are six month term policies under which premiums are earned evenly over a six-month period. The resulting net earned premiums are impacted by the gross and ceded written premiums, earned ratably over time.

Our premiums are presented below for the years ended December 31, 2016 and 2015 (dollars in thousands):
Summary of Premium Revenue
 Years Ended December 31,    
 2016 2015 $ Change % Change
  
Gross written premiums       
Commercial lines$88,242
 $68,197
 $20,045
 29.4%
Personal lines26,681
 25,553
 1,128
 4.4%
Total$114,923
 $93,750
 $21,173
 22.6%
     
 
Net written premiums    
 
Commercial lines$78,439
 $58,157
 $20,282
 34.9%
Personal lines21,490
 21,517
 (27) (0.1%)
Total$99,929
 $79,674
 $20,255
 25.4%
     
 
Net Earned premiums    
 
Commercial lines$68,921
 $48,586
 $20,335
 41.9%
Personal lines20,706
 18,179
 2,527
 13.9%
Total$89,627
 $66,765
 $22,862
 34.2%
Gross written premiums increased $21.2 million, or 22.6%, to $114.9 million for the year ended December 31, 2016, as compared to $93.8 million for the same period in 2015. The increase was driven by continued growth in our commercial lines. These results reflect our continued execution of our growth initiatives in the niche commercial insurance markets and our strategic change in the mix of business of our personal lines.
Commercial lines gross written premiums increased $20.0 million, or 29.4%, to $88.2 million for the year ended December 31, 2016, as compared to $68.2 million for the year ended December 31, 2015. This increase was primarily driven by expansion in the hospitality and security services product lines.
Personal lines gross written premiums increased $1.1 million, or 4.4%, to $26.7 million for the year ended December 31, 2016, as compared to $25.6 million for the same period in 2015. This was largely driven by favorable growth of 38% in the Company’s low-value dwelling product line, partially offset by reduction in gross written premiums in the Florida homeowners business as well as the personal automobile business which is in runoff.
Net written premiums increased $20.3 million, or 25.4%, to $99.9 million for the year ended December 31, 2016, as compared to $79.7 million for the year ended December 31, 2015. This result is consistent with the 22.6% increase in gross written premiums.
Other Income
Other income consists primarily of fees charged to policyholders by the Company for services outside of the premium charge, such as installment billings or policy issuance costs. Commission income is also received by the Company’s insurance agencies for writing policies for third party insurance companies. Other income for the year December 31, 2016 decreased $549,000, or 32.9%, to $1.1 million as compared to $1.7 million for the year ended December 31, 2015. The decrease was primarily due to the deconsolidation of the Affiliate at September 30, 2015. Prior to the deconsolidation their income was recorded as other income, since then their net profit or loss has been recorded as equity earnings.


Losses and Loss Adjustment Expenses
The tables below detail our losses and LAE and loss ratios for the years ended December 31, 2016 and 2015 (dollars in thousands).
Year Ended December 31, 2016
Commercial
Lines
 
Personal
Lines
 Total
  
Accident year net losses and LAE$35,652
 $13,130
 $48,782
Net (favorable) adverse development6,789
 3,432
 10,221
Calendar year net loss and LAE$42,441
 $16,562
 $59,003
      
Accident year loss ratio51.4% 61.8% 53.7%
Net (favorable) adverse development9.8% 16.1% 11.3%
Calendar year loss ratio61.2% 77.9% 65.0%
Year Ended December 31, 2015
Commercial
Lines
 
Personal
Lines
 Total
  
Accident year net losses and LAE$25,365
 $12,057
 $37,422
Net (favorable) adverse development365
 1,095
 1,460
Calendar year net loss and LAE$25,730
 $13,152
 $38,882
      
Accident year loss ratio51.1% 64.6% 54.7%
Net (favorable) adverse development0.7% 5.9% 2.1%
Calendar year loss ratio51.8% 70.5% 56.8%
Net losses and LAE increased by $20.1 million, or 51.7%, for the year ended December 31, 2016, as compared to the same period in 2015. The increase was primarily due to a 34.2% increase in net earned premiums and $10.2 million of unfavorable reserve development from prior years. The calendar year loss ratios were 65.0% and 56.8% for the years ended December 31, 2016 and 2015, respectively. The 8.2 percentage point increase in our loss ratio was primarily attributable to the reserve strengthening in our Florida homeowners, commercial automobile and commercial liability lines of business.
Overall reserve development on prior accident years for the year ended December 31, 2016 was unfavorable by $10.2 million, or 11.3 percentage points of the loss ratio. For the year ended December 31, 2016, this was made up of $2.7 million of adverse development in both the wind-exposed homeowners and commercial auto lines of business as well as $2.6 million and $760,000 of adverse development in the hospitality line of business and personal auto lines of business, respectively.
Total reserve development on prior accident years for the year ended December 31, 2015 was unfavorable by $1.5 million, or 2.1 percentage points of the loss ratio. For the year ended December 31, 2015, there was $1.2 million and $835,000 of unfavorable reserve development in the personal automobile and commercial automobile lines, respectively. This unfavorable development was partially offset by $320,000, $189,000, and $101,000 of favorable reserve development in the workers' compensation line, the low-value dwelling lines and the other liability line, respectively.
Expense Ratio
Our expense ratio is calculated by dividing the sum of policy acquisition costs and operating expenses by the sum of net earned premiums and other income. We use the expense ratio to evaluate the operating efficiency of our consolidated operations and each segment. Costs that are not readily identifiable as a direct cost of a segment or product line remain in Corporate and Other for segment reporting purposes.





The table below provides the expense ratio by major component:
 Years Ended December 31,
 2016 2015
  
Commercial Lines   
Policy acquisition costs26.8% 24.0%
Operating expenses9.7% 10.0%
Total36.5% 34.0%
    
Personal Lines   
Policy acquisition costs31.6% 22.7%
Operating expenses13.7% 17.7%
Total45.3% 40.4%
    
Corporate and Other   
Operating expenses8.7% 9.5%
Total8.7% 9.5%
    
Consolidated   
Policy acquisition costs27.8% 23.7%
Operating expenses19.4% 21.6%
Total47.2% 45.3%
Our expense ratio increased by 1.9 percentage points for the year ended December 31, 2016, as compared to the same period in 2015. The increase in the ratio was primarily due to increased policy acquisition costs as ceding commissions from a quota share agreement reduced commission expense in the first seven months of 2015. This increase was partially offset by improved operating expense ratios as we gained efficiencies from an improved earned premium base.
Policy acquisition costs are costs we incur to issue policies, which include commissions, premium taxes, underwriting reports and underwriter compensation costs. The Company offsets direct commissions with ceded commissions from reinsurers. The percentage of policy acquisition costs to net earned premiums and other income increased to 27.8% for the year ended December 31, 2016, compared to 23.7% in 2015, primarily due to the termination of a quota share reinsurance agreement in August 2015, which had previously reduced commission expense from ceding commission received from the reinsurer. The Company's direct commission expense rate was consistent between 2015 and 2016.
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 income was 19.4% and 21.6% for the years ended December 31, 2016 and 2015, respectively. Earned premium growth on a more fixed operating expense structure has helped to reduce the operating expense ratio, which is expected to continue to decline as our earned premium grows.


Underwriting 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 years ended December 31, 2016 and 2015 (dollars in thousands):
Underwriting Gain (Loss)
 Years Ended December 31,    
 2016 2015 $ Change % Change
  
Commercial Lines$1,531
 $7,035
 $(5,504) (78.2)%
Personal Lines(4,929) (2,035) (2,894) 142.2 %
Corporate and Other(7,736) (6,439) (1,297) 20.1 %
Total$(11,134) $(1,439) $(9,695) *
* Percentage change is not meaningful
Investment Income
Net investment income increased by $271,000, or 14.2%, to $2.2 million for the year ended December 31, 2016, as compared to $1.9 million for the year ended December 31, 2015. This increase was the result of growth of the investment portfolio and a change in the mix of investments. Average invested assets as of December 31, 2016 were $123.1 million as compared to $111.5 million at December 31, 2015, an increase of $11.6 million, or 10.4%. As of December 31, 2016, the average invested asset balance was comprised of 89.4% fixed maturities, 3.6% equity securities and 7.0% short-term investments, compared to the December 31, 2015 mix of 85.8% fixed maturities, 3.8% equity securities and 10.4% short term investments.
The portfolio’s average quality was AA at December 31, 2016 and 2015. The portfolio produced a tax equivalent book yield of 2.2% and 2.1% for the years ended December 31, 2016 and 2015, respectively. The duration-to-worst average of the debt securities portfolio was 3.2 years and 3.1 years at December 31, 2016 and 2015.
Interest Expense
Interest expense was $647,000 and $769,000 for the years ended December 31, 2016 and 2015, respectively. Interest expense decreased primarily due to the decrease in outstanding borrowings in 2016 until the fourth quarter when the company drew $4.0 million on the Revolver. Prior to fourth quarter the borrowings were lower because the previously outstanding borrowings under the Revolver were repaid from the proceeds received from the Company’s IPO, in August 2015.
Income Tax Expense
For the year ended December 31, 2016, the Company had $0 of current federal income tax expense due to current year losses, which can provide no benefit, and $70,000 of state income tax expense. The Company also had a deferred tax benefit of $147,000 related to a $400,000 write-off of intangible assets resulting from the merger of ACIC into WPIC in 2016. For the year ended December 31, 2015, the Company had $0 of federal income tax expense and $48,000 of state income tax expense.
The Company has established an $8.4 million valuation allowance against 100% of the net deferred tax assets for 2016, which would increase book value per share by $1.10 if reversed in the future, based on current income tax rates. The valuation allowance was $5.2 million for 2015. As of December 31, 2016, the Company has net operating loss carryforwards for federal income tax purposes of $22.8 million, which expire in tax years 2029 through 2036. Of this amount, $15.1 million are limited in the amount that can be utilized in any one year and may expire before they are realized under Section 382 of the Internal Revenue Code. The Company has state net operating loss carryforwards of $8.7 million, which expire in tax years 2030 through 2036.

2043.

Liquidity and Capital Resources

Sources and Uses of Funds

At December 31, 2017, we2023, the Company had $23.3$32.0 million in cash, cash equivalents, and short-term investments.investments, of which, $16.8 million was unrestricted. Our principal sources of funds excluding capital raises, arehave historically been insurance premiums, investment income, proceeds from maturity and sale of invested assets and


installment fees. other income. These funds are primarily used to pay claims, commissions, employee compensation, taxes and other operating expenses, and service debt.
We believe that our existing cash, short-term investments

In December 2023, the Company issued $6.0 million of Series A Preferred Stock. The Company intends to use the proceeds for working capital and investment securities balancesgeneral corporate purposes.

During 2024, based on the capital structure as of December 31, 2023, the Company will be adequaterequired to meet our capitalmake $1.0 million of principal payments on the senior secured notes, $630,000 of preferred dividend payments and liquidity needs andapproximately $3.3 million of interest on all of the needsCompany's debt instruments, all of our subsidiaries on a short-term and long-term basis.

which are paid quarterly.

We conduct our business operations primarily through our Insurance Company Subsidiaries.Subsidiaries and our wholesale agency. Our ability to service debt, and pay administrative expenses is primarily reliant upon our intercompany service fees paid by the Insurance Company Subsidiaries and wholesale agency to the holding company for management, administrative, and information technology services provided to the Insurance Company Subsidiaries and the wholesale agency by the holding company.Parent

51


Company. Secondarily, the holding companyParent Company may receive dividends from the Insurance Company Subsidiaries;Subsidiaries and wholesale agency; 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 holding company under certain circumstances.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. ThereWe received $1.4 million in dividends paid from RCIC in 2023. No dividends were no dividends paid from our Insurance Company Subsidiaries in 2022, and do not anticipate any dividends being paid to us from our insurance subsidiaries during the year ended December 31, 2017. There were $5.52024 and 2025.

We contributed $400,000, $6.8 million and $3.1 million of dividends paid from our Insurance Company Subsidiaries to the holding company during the years ended December 31, 2016 and 2015, respectively.

We contributed $20.9$11.4 million to our Insurance Company Subsidiaries in 20172023 and 2022, respectively.

Largely due to increase theirreserve strengthening during 2023 in our Insurance Company Subsidiaries, we incurred a consolidated net loss of $25.9 million. We used cash from operation activities of $13.6 million and our overall equity at December 31, 2023 totaled $2.9 million. As a result of these factors, we were out of compliance with several of our debt covenants and obtained a waiver from our lender. The aforementioned factors have presented additional liquidity and capital challenges on the Company’s financial condition.

Both Insurance Company Subsidiaries lack sufficient capital to continue to underwrite the volume of business they have historically written. As part of our strategic shift, going forward we plan to utilize third-party insurers and rely mostly on commission revenues in our managed general agency, CIS. Substantially all of our commercial lines business will be 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.

As of the filing of this Form 10-K, the Insurance Company Subsidiaries are still the primary underwriters for the business produced by CIS and still the primary source of revenues and cash flows. The Insurance Company Subsidiaries are currently both required to provide an action plan with the state of domicile insurance regulator to remediate certain statutory capital and surplus levels.regulatory deficiencies. If we do not remediate the regulatory deficiencies the insurance regulator could suspend or terminate the insurers’ authority to write business. Also, A.M. Best and Kroll downgraded the financial strength ratings of both companies and we terminated the rating relationship. Therefore, neither company is currently rated by a nationally recognized statistical rating organization which can have an impact on the ability to market to policyholders. We believe that the current statutory surplus levelsInsurance Company Subsidiaries will both regain compliance with the state insurance regulators, however, as part of the strategic shift, we no longer expect significant revenues to be generated through them after the second quarter of 2024. These circumstances could jeopardize the ability of the Company to generate insurance underwriting revenues which could raise substantial doubt on our ability to meet our obligations as they become due.

To alleviate these concerns the Company is in the process of implementing the strategic shift mentioned above which will not require the use of either Insurance Company Subsidiary to generate the majority of the Company’s revenues going forward. Rather, the Company will expect to generate the vast majority of its revenue from commissions from third-party insurers. In order to successfully implement the strategic shift the Company must have in place producer agreements with third-party insurers. Currently the Company has executed one producer agreement for approximately 25% of the existing commercial lines book of business and is expected to execute another producer agreement with a different third-party insurer for the funds available atremaining commercial lines business within a a short period of time of filing this Form 10-K. We expect to continue to underwrite the holding company level will provideexisting personal lines business within our Insurance Company Subsidiaries.

With these producer agreements in place the necessary statutory capitalCompany expects to supportbe able to generate the needed revenues to meeting our premium volume growthobligations as they become due over the next two years.

On August 18, 2015,twelve months. In the event there are delays in implementing the strategic shift or other uncertainties arise with respect to completion of our strategic shift during 2024, these events could have a negative effect on our liquidity and ability to satisfy our obligations as they become due. If the Company completedwere to experience any such uncertainties, the Company believes it has alternative sources of liquidity available which are sufficient to cover any short-term needs as a result of any such uncertainties encountered. Management believes the current actions being executed to

52


implement the planned strategic shift coupled with additional availablesources of available liquidity, will be sufficient to enable the Company to meet its IPOobligations 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 which it issued and sold 3,300,000 shares ofexchange for common stock, ator for a pricecombination of $10.50 per share.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 Company received net proceeds of $30.4 million after deducting underwriting discounts and commissions of $2.4 million and other offering expenses of $1.8 million.

amounts involved in such transactions, individually or in the aggregate, may be material.

Cash Flows

Operating Activities.Activities. Cash provided byused in operating activities for the year ended December 31, 2017,2023 was $9.1$13.6 million as compared to $40.5 million for the same period in 2022. The $26.9 million decrease in cash used in operating activities of $6.2was primarily due to a $35.1 million fordecrease in net losses paid, a $8.9 million decrease in acquisition costs paid on our underwriting business and a $1.0 million decrease in operating expenses paid. These decreases were offset by a $23.4 million decrease in net premiums collected during the year endedyear. Funds held under reinsurance agreements were $24.6 million and $11.0 million at December 31, 2016.2023 and 2022, respectively. The increaseimpact of changes in funds held contributed $2.4 million to the decrease in cash provided by operations was attributable to the overall growth of the business.

used in operating activities during 2023.

Cash provided byused in operating activities for the year ended December 31, 2016,2022 was $6.2$40.5 million as compared to cash used inprovided by operating activities of $3.1$5.4 million for December 31, 2015.the same period in 2021. The $45.9 million decrease was primarily due to a $45.2 million increase in cash providedpaid losses and $8.0 million decrease in premiums collected, net of reinsurance premiums and a $5.4 million risk fee paid. This decrease was offset by operations was attributablea $6.9 million decrease in the amount of acquisition costs paid during 2022 compared to the overall growth of the business.

2021.

Investing Activities. Cash used in investing activities for the year ended December 31, 2017,2023 was $26.0 million as$272,000 compared to $10.8$56.5 million for the same period in 2016. The increase in funds used inof cash provided by investing activities in 2022. The $56.8 million decrease in cash provided by investing activities over the prior year was due todriven by a $102.0 million decrease in proceeds from sales of investments, a $9.9 million decrease in proceeds from maturities and redemptions of investments and a $32.8 million decrease in proceeds from the sale of the agency business that occurred in 2022. These decreases were offset by an increase$83.4 million decrease in funds available to be invested in our investment portfolios in the insurance subsidiaries.

Net cash used for purchases of investments in 2023 compared to 2022.

Cash provided by investing activities for the year ended December 31, 2015,2022 was $15.3$56.5 million andcompared to $1.4 million in 2021. The $55.1 million increase in cash provided by investing activities over the prior year was primarily attributabledriven by $34.3 million increase in net proceeds from sale of investments in 2022, compared to net investments intothe same period in 2021. The Company also experienced an increase of $32.8 million from its sale of agency business in 2022, compared to the same period in 2021.

Financing Activities. Cash used in financing activities for the years ended December 31, 2023, was $3.2 million compared to $2.1 million of cash provided by financing activities for years ended December 31, 2022. The $5.3 million decrease was largely attributed to the Company paying down $13.9 million of its existing public debt securities of $23.9 million,that was due on September 30, 2023. This was offset by the saleCompany borrowing an additional $6.7 million in debt and raising $6.0 million of short-term investmentspreferred stock in December 2023, compared to $5.0 million of $10.3 million.

Financing Activities.proceeds from common stock in 2022.

Cash provided by financing activities for the yearyears ended December 31, 2017,2022, was $16.2$2.1 million as compared to $4.4$5.0 million for the same period in 2016. The higherof cash providedused by financing activities in 2017for years ended December 31, 2021. The $7.1 million increase was fromlargely attributed to the Company raising $5.0 million of proceeds fromthrough the issuance of additional common stock and the issuancein August 2022.

Outstanding Debt

The Company issued $17.9 million of a $30.0 million subordinated debt offering, offset by issuance costs and the payment in full of thepublic senior debt facility.

In 2015, we received net funds of $30.4 million from our IPO and received proceeds of $3.1 million for common stock issued to former holders of preferred stock. We also received proceeds from our revolving line of creditunsecured notes ("New Public Notes") during the yearthird quarter of $4.4 million. In addition, we used $6.3 million2023. The New Public Notes bear an interest rate of the proceeds to repurchase outstanding shares of preferred stock, and pay preferred dividends. We also used $17.0 million to pay off our revolving line of credit, and used $1.8 million for our routine payments on our term loans.
Outstanding Debt
We are a party to $30.0 million in subordinated notes, effective September 29, 2017. The notes have a maturity date of September 29, 2032, bear interest,9.75% per annum, payable quarterly at a fixed annual ratethe end of 8.0%,March, June, September and allows for up to four quarterly interest deferrals. OnDecember and mature on September 30, 2028. The Company may redeem the fifth and tenth anniversary of the notes, the interest rate resets to 1,250 basis points and 1,500 basis points, respectively, above the 5-year mid-swap rate. TheNew Public Notes, include an issuer call optionin whole or in part, at par from July 31, 2018, through October 31, 2018, andface value at 105% of par any time after September 30, 2025.

53


The Company paid down $500,000 of principal on its $10.5 million of subordinated notes on September 29, 2020.2023. The Company then restructured its existing $10.0 million of subordinated notes to senior secured notes ("Senior Secured Notes") with its lender on September 30, 2023. The Senior Secured Notes mature on September 30, 2028, and bear an interest rate of 12.5% per annum. Interest is payable quarterly at the end of March, June, September, and December. Quarterly principal payments of $250,000 are required starting on December 31, 2023 through September 30, 2028. The Company may redeem the Senior Secured Notes, in whole or in part, for a call premium of $1.8 million less 22% of the interest payment amounts that were paid prior to the date of redemption. As of December 31, 2023, the Company was not in compliance with the tangible net worth, dividend paying capacity, risk-based capital and consolidated debt to capital covenants on its Senior Secured Notes. On March 27, 2024, the holders of the senior secured notes waived the December 31, 2023 covenants, and waived any future instances of non-compliance with the same covenants going forward through May 31, 2025. Management expects to be in compliance with all debt covenants in future periods.

As of December 31, 2023, the carrying value of the New Public Notes isand Senior Secured Notes were offset


by $973,000$1.7 million and $897,000 of capitalized debt issuance costs, that will berespectively. The debt issuance costs are amortized through interest expense over the life of the loan.loans. Refer to Note 710 ~ Debt of the Notes to the consolidated financial statements, for additional information regarding our outstanding debt.

The Company maintained a $10.0 million line of credit with a national bank that matured on December 1, 2022. The line of credit was not renewed after it matured. The line of credit contained interest at the London Interbank rate ("LIBOR") plus 2.75% per annum, payable monthly.

On April 24, 2020, the Company received a $2.7 million PPP loan from the line of credit lender pursuant to the Paycheck Protection Program of the CARES Act administered by the SBA. The Company received notice from the SBA that the loan was 100% forgiven, including accrued interest, on July 8, 2021. This resulted in a $2.8 million gain that is included in Other Gains on the Consolidated Statement of Operations.

Contractual Obligations and Commitments

The following table is a summary of our contractual obligations and commitments as of December 31, 20172023 (dollars in thousands):

 

 

Payments due by period

 

 

 

Total

 

 

Less than
one year

 

 

One to
three years

 

 

Three to
five years

 

 

More than
five years

 

Senior unsecured notes

 

$

17,887

 

 

$

 

 

$

 

 

$

17,887

 

 

$

 

Interest on senior unsecured notes

 

 

8,284

 

 

 

1,744

 

 

 

3,488

 

 

 

3,052

 

 

 

 

Senior secured notes

 

 

9,750

 

 

 

1,000

 

 

 

2,000

 

 

 

6,750

 

 

 

 

Interest on senior secured notes

 

 

4,453

 

 

 

1,172

 

 

 

1,969

 

 

 

1,312

 

 

 

 

Lease obligations

 

 

1,302

 

 

 

274

 

 

 

460

 

 

 

390

 

 

 

178

 

Unpaid loss and loss adjustment expense (1)

 

 

174,612

 

 

 

50,948

 

 

 

68,901

 

 

 

37,081

 

 

 

17,682

 

Purchase Obligations (2)

 

 

1,020

 

 

 

360

 

 

 

660

 

 

 

 

 

 

 

Total

 

$

217,308

 

 

$

55,498

 

 

$

77,478

 

 

$

66,472

 

 

$

17,860

 

(1)
 Payments due by period
 Total Less than one year One to three years Three to five years More than five years
          
Subordinated debt$30,000
 $
 $
 $
 $30,000
Interest on subordinated debt59,371
 2,400
 4,800
 5,306
 46,865
Operating Lease Obligations5,083
 940
 1,702
 1,362
 1,079
Loss and loss adjustment expense (1)87,896
 33,323
 33,845
 15,238
 5,490
Purchase Obligations (2)1,710
 360
 720
 630
 
Total$184,060
 $37,023
 $41,067
 $22,536
 $83,434

(1) The estimated unpaid loss and loss adjustment expense payments were made using estimates based on historical payment patterns. However, future payments may be different than historical payment patterns.
(2)
Includes estimated future payments under the software license agreement relating to our policy issuance system. This agreement requires minimum monthly payments of $30,000, and is variable with premium volume. The future payment assumptions are based on the minimum monthly payments. The software license agreement expires on September 30, 2022.November 1, 2026.

Regulatory and Rating Issues

The NAIC has a RBC formula to be applied to all property and casualty insurance companies. The formula measures required capital and surplus based on an insurance company’s products and investment portfolio and is used as a tool to

54


evaluate the capital adequacy of regulated companies. The RBC formula is used by state insurance regulators to monitor trends in statutory capital and surplus for the purpose of initiating regulatory action. In general, an insurance company must submit a calculation of its RBC formula to the insurance department of its state of domicile as of the end of the previous calendar year. These laws require increasing degrees of regulatory oversight and intervention as an insurance company’s RBC declines.

At December 31, 2017, both2023, CIC fell within the Company Action Level of our Insurance Company Subsidiaries were in excessthe RBC formula and WPIC fell within the Regulatory Action Level of any minimum threshold at which corrective action would be required.

Insurance operations are subject to various leverage tests (e.g., premium-to-statutory surplus ratios),the RBC formula. WPIC also fell below two other regulatory thresholds which are evaluatednecessary to stay in compliance. Management is required to provide a plan to its domiciliary regulator that shows how the Companies will get above the minimum level requirements. In the event the Companies do not regain compliance, the director may suspend, revoke, or limit the certificate of authority of the Companies. Management believes that the reduction in premium anticipated by regulators and rating agencies. Asthe strategic shift to use third-party insurers for substantially all of its commercial lines business will be sufficient to bring the Companies back into compliance by December 31, 2017, on a trailing twelve-month statutory combined basis,2024. Management expects to substantially cease all writings in WPIC by the gross written and net written premium leverage ratios were 1.8 to 1.0 and 1.5 to 1.0, respectively.
end of the second quarter of 2024.

The NAIC’s Insurance Regulatory Information System (“IRIS”)IRIS was developed to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies thirteen industry ratios and specifies “usual values” for each ratio. State insurance regulators review the IRIS ratio results to determine if an insurer is in need of further regulatory scrutiny or action. While the ratios, individually and collectively, are useful tools for identifying companies that may be experiencing financial difficulty, they are only a guide for regulators and should not be considered an absolute indicator of a Company's financial condition. While inquiries from regulators are not uncommon, our Insurance Company Subsidiaries have not experienced any regulatory actions due to their IRIS ratio results or otherwise.    

results.

Recently Issued Accounting Pronouncements

Refer to Note 1 ~ Summary of Significant Accounting Policies –Policies: Recently Issued Accounting Guidance of the Notes to the Consolidated Financial Statements for detailed information.


ITEM 7A. 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, as well as, 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 risk exposures and how those exposures are currently managed as of December 31, 2017.2023. Our market risk sensitive instruments are primarily related to fixed income securities, which are available for saleavailable-for-sale and not held for trading purposes.

Interest Rate Risk

At December 31, 20172023 and 2016,2022, the fair value of our investment portfolio, excluding cash and cash equivalents, was $157.7$146.0 million and $128.5$137.4 million, respectively. Our investment portfolio consists principally of investment-grade, fixed-income securities, all of which are classified as debt securities. Accordingly, the primary market risk exposure to our debt securitiesportfolio is interest rate risk. In general, the fair market value of a portfolio of fixed-income securities increases or decreases inversely with changes in market interest rates, while net investment income realized from future investments in fixed-income 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 duration-to-worst averageoption adjusted duration of the debt securities portfolio was 2.9 and 3.5 years as of December 31, 20172023 and 2016, was 3.2 years.2022, respectively.

55


The table below summarizes our interest rate risk. The table also illustrates the sensitivity of the fair value of our investments, classified as debt securities and short-term investments, to selected hypothetical changes in interest rates as of December 31, 2017.2023. The selected scenarios are not predictions of future events, but rather illustrate the effect that events may have on the fair value of the fixed-income portfolio and shareholders’ equity (dollars in thousands).

      
Hypothetical Percentage
Increase (Decrease) in
Hypothetical Change in Interest Rates
As of December 31, 2017
 
Estimated
Fair Value
 
Estimated
Change in
Fair Value
 Fair Value 
Shareholders'
Equity
         
200 basis point increase $138,789
 $(9,174) (6.2)% (17.4)%
100 basis point increase 143,376
 (4,587) (3.1)% (8.7)%
No change 147,963
 
  %  %
100 basis point decrease 152,106
 4,143
 2.8 % 7.8 %
200 basis point decrease 155,805
 7,842
 5.3 % 14.8 %

 

 

 

 

 

 

 

 

Hypothetical Percentage
Increase (Decrease) in

 

Hypothetical Change in Interest Rates As of December 31, 2023

 

Estimated
Fair Value

 

 

Estimated
Change in
Fair Value

 

 

Fair
Value

 

 

Shareholders'
Equity

 

200 basis point increase

 

 

135,941

 

 

$

(7,714

)

 

 

(5.4

)%

 

 

(267.0

)%

100 basis point increase

 

 

139,647

 

 

 

(4,008

)

 

 

(2.8

)%

 

 

(138.7

)%

No change

 

 

143,655

 

 

 

 

 

 

 

 

 

 

100 basis point decrease

 

 

147,979

 

 

 

4,324

 

 

 

3.0

%

 

 

149.7

%

200 basis point decrease

 

 

152,590

 

 

 

8,935

 

 

 

6.2

%

 

 

309.3

%

Credit Risk

An additional exposure to our debt securities portfolio is credit risk. We manage our credit risk by investing onlyprimarily 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.

security or issuer.

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 December 31, 20172023 and 2016,2022, the net amount due to the Company from reinsurers, including prepaid reinsurance, was $25.6$112.3 million and $11.6$99.6 million, respectively. We believe all amounts recorded as due from reinsurers are recoverable.

Effects of Inflation

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


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Refer to list of Financial Statement Schedules (including the Report of Independent Registered Public Accounting Firm referenced therein) set forth in Item 15 of this Annual Report on Form 10-K and Note 19 ~ Quarterly Financial Data (Unaudited) of the Notes to the Consolidated Financial Statements.


10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.


ITEM 9A. 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 December 31, 2017.2023. Based on such evaluations, the Chief Executive Officer and Chief Financial Officer have concluded the Company’s disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by the

56


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.

Management’s Annual Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Company’s management has concluded that, as of December 31, 2017,2023, the Company’s internal control over financial reporting was effective.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

There was no change in internal controls over financial reporting during the quarter ended December 31, 20172023 that has materially affected, or is reasonably likely to materially effect, our internal controls over financial reporting.

Attestation Report of the Registered Public Accounting Firm

This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting as required by Section 404(c) of the Sarbanes Oxley Act of 2002. Because we qualify as an emerging growth2002 due to the Company’s small reporting company under the JOBS Act, management's report was not subject to attestation by our independent registered public accounting firm.


status elected on Form 10-K.

ITEM 9B. OTHER INFORMATION

During the three months ended December 31, 2023, none of the Company’s directors or Section 16 officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act or any “non-Rule 10b5-1 trading arrangement.”

ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Not applicable.

57


None.



PART III

Certain information required by Part III is omitted from this Report in that the Registrant will file a definitive Proxy Statement pursuant to Regulation 14A (the “Proxy Statement”) not later than 120 days after the end of the fiscal year covered by this report and certain information included therein is incorporated herein by reference. Only those sections of the Proxy Statement that specifically address the items set forth herein are incorporated by reference.


ITEMS 10 to 14

Items 10 through 14 (inclusive) of this Part III are not included herein because the Company will file a definitive Proxy Statement with the SEC that will include the information required by such Items, and such information is incorporated herein by reference. The Company’s Proxy Statement will be filed with the SEC and delivered to stockholders in connection with the Annual Meeting of Shareholders to be held on May 16, 201722, 2024 and the information under the following captions is included in such incorporation by reference: “Information about the Nominees, the Incumbent Directors and Other Executive Officers,” “Corporate Governance,” “Code of Conduct,” “Report of the Audit Committee,” “Section 16(a) Beneficial Ownership Reporting Compliance,”“Compensation “Compensation of Executive Officers,” “Director Compensation,” “Report of the Compensation Committee of the Board on Executive Compensation,”“Compensation Committee Interlocks and Insider Participation”,“SecurityParticipation,” “Security Ownership of Certain Beneficial Owners and Management”, Management,” Certain Relationships and Related Party Transactions,”“Independence Determination,” and “The“The Second Proposal on Which You are Voting on Ratification of Appointment of Independent Registered Public Accounting Firm."Our Code of Business Conduct and Ethics can be found on our website www.cnfrh.com.

58



CONIFER HOLDINGS, INC. AND SUBSIDIARIES


PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES


The following documents are filed as part of this Report:

 

 

Page No.

1.

List of Financial Statements

 

 

Report of Independent Registered Public Accounting Firm (PCAOB ID No. 166)

60

 

Consolidated Balance Sheets – December 31, 2023 and 2022

63

 

Consolidated Statements of Operations – For Years Ended December 31, 2023 and 2022

64

 

Consolidated Statements of Comprehensive Income (Loss) – For Years Ended December 31, 2023 and 2022

65

 

Consolidated Statement of Changes in Shareholders’ Equity – For Years Ended December 31, 2023 and 2022

66

 

Consolidated Statements of Cash Flows – For Years Ended December 31, 2023 and 2022

67

 

Notes to Consolidated Financial Statements

69

2.

Financial Statement Schedules

 

 

Schedule I – Summary of Investments Other Than Investments in Related Parties – Omitted as information is included in the consolidated financial statements or notes thereto - See Note 5 ~ Investments

 

 

Schedule II – Condensed Financial Information of Registrant

102

 

Schedule III – Supplementary Insurance Information – Omitted as information is included in the consolidated financial statements or notes thereto - See Note 20 ~ Segment Information

 

 

Schedule IV – Reinsurance – Omitted as information is included in the consolidated financial statements or notes thereto See Note 9 ~ Reinsurance

 

 

Schedule V – Valuation and Qualifying Accounts

106

 

Schedule VI – Supplemental Information Concerning Property and Casualty Insurance Operations – Omitted as information is included in the consolidated financial statements and notes thereto

 

3.

Exhibits – The Exhibits listed on the accompanying Exhibit Index immediately following the Financial Statement Schedules are filed as part of, or incorporated by reference into, this Form 10-K

107

59


  Page No.
1.List of Financial Statements 
 Report of Independent Registered Public Accounting Firm on Financial Statements54
 Consolidated Balance Sheets – December 31, 2017 and 201655
 Consolidated Statements of Operations – For Years Ended December 31, 2017, 2016 and 201556
 Consolidated Statements of Comprehensive Income (Loss) – For Years Ended December 31, 2017, 2016 and 201557
 Consolidated Statement of Changes in Redeemable Preferred Stock and Shareholders’ Equity – For Years Ended December 31, 2017, 2016 and 201558
 Consolidated Statements of Cash Flows – For Years Ended December 31, 2017, 2016 and 201559
 Notes to Consolidated Financial Statements60
2.Financial Statement Schedules 
 Schedule I – Summary of Investments Other Than Investments in Related Parties – Omitted as information is included in the consolidated financial statements or notes thereto 
 Schedule II – Condensed Financial Information of Registrant96
 Schedule III – Supplementary Insurance Information – Omitted as information is included in the consolidated financial statements or notes thereto 
 Schedule IV – Reinsurance – Omitted as information is included in the consolidated financial statements or notes thereto 
 Schedule V – Valuation and Qualifying Accounts100
 Schedule VI – Supplemental Information Concerning Property and Casualty Insurance Operations – Omitted as information is included in the consolidated financial statements or notes thereto 
3.Exhibits – The Exhibits listed on the accompanying Exhibit Index immediately following the financial statement schedule are filed as part of, or incorporated by reference into, this Form 10-K101

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

Conifer Holdings, Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Conifer Holdings, Inc. and subsidiaries (the "Company"“Company”) as of December 31, 20172023 and 2016,2022; the related consolidated statements of operations,income, comprehensive income, (loss), changes in redeemable preferred stock and shareholders'shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017,2023 and 2022; and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the "financial statements"“financial statements”).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172023 and 2016,2022 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2023 and 2022 in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These

The Company's management is responsible for these financial statements are the responsibility of the Company's management.statements. Our responsibility is to express an opinion on the Company'sCompany’s financial statements based on our audits.audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our auditsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits,audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’sCompany's internal control over financial reporting. Accordingly, we express no such opinion.

Our auditsaudit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our auditsaudit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current year audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

Liability for Unpaid Losses and Loss Adjustment Expenses - Refer to Notes 1 and 8 to the Financial Statements

Critical Audit Matter Description

The Company’s estimated liability for unpaid losses and loss adjustment expense (LAE) totaled $175 million at December 31, 2023. The Company’s reserve for unpaid losses and LAE represents the estimated ultimate cost of settling all claims incurred related to insured events that have occurred as of the reporting date. The Company determines the reserve for unpaid losses and LAE on an individual-case basis for those claims reported as of December 31, 2023, with bulk reserves for additional development, if any, on the reported claims and an estimate for unpaid losses and LAE for all claims incurred related to insured events that have occurred as of December 31, 2023 but have not yet been reported by the policyholders to the Company (collectively referred to as incurred but not reported, or IBNR). The Company estimates IBNR reserves by projecting ultimate losses using industry-accepted actuarial methods. Management engages an independent actuarial firm to

60


prepare an actuarial analysis of unpaid losses and LAE and provides a statement of actuarial opinion on management’s estimate of unpaid losses and LAE.

Estimating the liability for unpaid losses and LAE requires significant judgment, relating to factors such as claim development patterns, severity, type and jurisdiction of loss, economic conditions, legislative development, and a variety of actuarial assumptions. Estimating the liability for unpaid losses and LAE is inherently uncertain, dependent on management’s judgment, and significantly impacted by claim and actuarial factors and conditions that may change over time. The ultimate settlement of unpaid losses and LAE may vary materially from the recorded liability, and such variance may adversely affect the Company’s financial results. For these reasons, we identified the estimate of unpaid losses and LAE as a critical audit matter, as it involved especially subjective auditor judgment.

How the Critical Audit Matter was Addressed in the Audit

Our audit procedures related to the unpaid losses and LAE reserve included the following, among others:

We obtained an understanding and evaluated the design of key controls over the process and data used by management to estimate the liability for unpaid losses and LAE, including those controls related to the estimation of and management’s review of the estimated liability of unpaid losses and LAE.
We tested the completeness, integrity, and accuracy of the underlying data used by the Company’s actuaries, such as paid loss data, case reserve data, loss adjustment expense data, and loss development tables.
With assistance from our engaged actuarial specialist, we reviewed the reasonableness of the methods and assumptions used by the Company and their engaged actuary to develop their unpaid losses and LAE reserve estimate.
We performed additional analysis over certain lines of business where historical development of losses could have a significant impact on the current estimate of unpaid losses.
We evaluated management’s prior year estimate for unpaid losses and LAE and the factors leading to changes in the estimate recognized in the current year.

Going Concern Analysis Refer to Note 1 of the Financial Statements

Critical Audit Matter Description

As described in Note 1 to the Company’s consolidated financial statements, the Company has experienced continued net losses, negative operating cash flows, significant adverse claim development, and has breached multiple debt covenants (that have subsequently been waived through May 31, 2025). Management has developed cash flow projections based on management’s plans which they believe will allow the Company to meet its obligations for twelve months from the date of issuance of the consolidated financial statements.

Auditing management’s going concern analysis and the evaluation and disclosure of liquidity was challenging because of the subjectivity used by management when evaluating whether the Company will meet its obligations as they come due, which are based on significant future actions by management.

How the Critical Audit Matter was Addressed in the Audit

The primary procedures we performed to audit this critical audit matter included the following:

We obtained an understanding and evaluated the design of management’s internal controls over developing the Company's going concern analysis. We evaluated the design of controls over management's process to forecast financial results and liquidity for one year after the date the consolidated financial statements are issued, including management's review of significant assumptions and the completeness and accuracy of underlying data use in the forecast.

To assess the Company’s ability to forecast revenue, we compared historical revenue to actual results. We assessed the reasonableness of the Company’s assumptions related to forecasted revenue, including expected premium volume in comparison to historical experience and other sources of future revenue and considered whether the assumptions were consistent with evidence obtained in other areas of the audit.

61


We evaluated the sensitivity and impact of reasonably possible changes in the key assumptions and estimates, including management’s ability to execute a planned change in business strategy, potential uncertainty in timing of execution of such a transition in strategy, and management's projections of future claims expense, based on historical adverse development as well as other sources of liquidity available to the Company.

We addressed whether management plans were considered probable of being implemented, and when considered with other potential sources of liquidity available to the Company, were considered sufficient to overcome the current liquidity challenges present.

We also evaluated management's liquidity disclosures in the consolidated financial statements for accuracy and completeness.

/s/ DeloittePlante & Touche LLP

Detroit, Michigan
March 15, 2018
Moran, PLLC

We have served as the Company'sCompany’s auditor since 2010.2022.

East Lansing, Michigan

April 1, 2024

62





CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(dollars in thousands)


 December 31,
 2017 2016
Assets   
Investment securities:   
Debt securities, at fair value (amortized cost of $137,004 and $113,915, respectively)$136,536
 $113,163
Equity securities, at fair value (cost of $8,629 and $4,283, respectively)9,687
 4,579
Short-term investments, at fair value11,427
 10,788
Total investments157,650
 128,530
    
Cash11,868
 12,493
Premiums and agents' balances receivable, net22,845
 24,538
Receivable from Affiliate1,195
 1,751
Reinsurance recoverables on unpaid losses20,066
 6,658
Reinsurance recoverables on paid losses4,473
 840
Prepaid reinsurance premiums1,081
 4,120
Deferred policy acquisition costs12,781
 13,290
Other assets7,073
 11,481
Total assets$239,032
 $203,701
    
Liabilities and Shareholders' Equity   
Liabilities:   
Unpaid losses and loss adjustment expenses$87,896
 $54,651
Unearned premiums57,672
 58,126
Reinsurance premiums payable3,299
 
Debt29,027
 17,750
Accounts payable and accrued expenses8,312
 5,380
Total liabilities186,206
 135,907
    
Commitments and contingencies (Note 17)
 
    
Shareholders' equity:   
Common stock, no par value (100,000,000 shares authorized; 8,520,328 and 7,633,070 issued and outstanding, respectively)86,199
 80,342
Accumulated deficit(33,010) (11,468)
Accumulated other comprehensive income (loss)(363) (1,080)
Total shareholders' equity52,826
 67,794
Total liabilities and shareholders' equity$239,032
 $203,701

 

 

December 31,

 

 

 

2023

 

 

2022

 

Assets

 

 

 

 

 

 

Investment securities:

 

 

 

 

 

 

Debt securities, at fair value (amortized cost of $135,370 and $127,119,
   respectively)

 

$

122,113

 

 

$

110,201

 

Equity securities, at fair value (cost of $2,385 and $1,905, respectively)

 

 

2,354

 

 

 

1,267

 

Short-term investments, at fair value

 

 

20,838

 

 

 

25,929

 

Total investments

 

 

145,305

 

 

 

137,397

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

11,125

 

 

 

28,035

 

Premiums and agents' balances receivable, net

 

 

29,369

 

 

 

21,802

 

Receivable from Affiliate

 

 

1,047

 

 

 

1,261

 

Reinsurance recoverables on unpaid losses

 

 

70,807

 

 

 

82,651

 

Reinsurance recoverables on paid losses

 

 

12,619

 

 

 

6,653

 

Prepaid reinsurance premiums

 

 

28,908

 

 

 

16,399

 

Deferred policy acquisition costs

 

 

6,285

 

 

 

10,290

 

Other assets

 

 

6,339

 

 

 

7,862

 

Total assets

 

$

311,804

 

 

$

312,350

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Unpaid losses and loss adjustment expenses

 

$

174,612

 

 

$

165,539

 

Unearned premiums

 

 

65,150

 

 

 

67,887

 

Reinsurance premiums payable

 

 

246

 

 

 

6,144

 

Debt

 

 

25,061

 

 

 

33,876

 

Funds held under reinsurance agreements

 

 

24,550

 

 

 

11,084

 

Premiums payable to other insureds

 

 

13,986

 

 

 

 

Accounts payable and accrued expenses

 

 

5,310

 

 

 

8,870

 

Total liabilities

 

 

308,915

 

 

 

293,400

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

Preferred stock, no par value (10,000,000 shares authorized; 1,000 and 0 issued and outstanding, respectively)

 

 

6,000

 

 

 

 

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

 

 

98,100

 

 

 

97,913

 

Accumulated deficit

 

 

(86,683

)

 

 

(60,760

)

Accumulated other comprehensive income (loss)

 

 

(14,528

)

 

 

(18,203

)

Total shareholders' equity

 

 

2,889

 

 

 

18,950

 

Total liabilities and shareholders' equity

 

$

311,804

 

 

$

312,350

 

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

63



CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(dollars in thousands, except per share data)

 Year Ended December 31,
 2017 2016 2015
Revenue     
Gross earned premiums$114,737
 $104,713
 $89,216
Ceded earned premiums(23,008) (15,086) (22,451)
Net earned premiums91,729
 89,627
 66,765
Net investment income2,728
 2,173
 1,902
Net realized investment gains70
 1,365
 285
Other gains (losses)750
 (400) 104
Other income1,560
 1,118
 1,667
Total revenue96,837
 93,883
 70,723
      
Expenses     
Losses and loss adjustment expenses, net73,917
 59,003
 38,882
Policy acquisition costs26,245
 25,280
 16,183
Operating expenses17,367
 17,596
 14,806
Interest expense1,362
 647
 769
Total expenses118,891
 102,526
 70,640
      
Income (loss) before income taxes(22,054) (8,643) 83
Income tax expense (benefit)(447) (77) 48
Equity earnings (losses) in affiliates, net of tax65
 129
 (52)
      
Net income (loss)(21,542) (8,437) (17)
Less net loss attributable to noncontrolling interest
 
 (81)
Net income (loss) attributable to Conifer$(21,542) $(8,437) $64
      
Net income (loss) allocable to common shareholders$(21,542) $(8,437) $(476)
      
Net income (loss) allocable to common shareholders per share, basic and diluted
$(2.74) $(1.11) $(0.09)
      
Weighted average common shares outstanding, basic and diluted
7,867,344
 7,618,588
 5,369,960

 

 

Year Ended December 31,

 

 

 

2023

 

 

2022

 

Revenue and Other Income

 

 

 

 

 

 

Gross earned premiums

 

$

146,572

 

 

$

135,401

 

Ceded earned premiums

 

 

(62,637

)

 

 

(38,690

)

Net earned premiums

 

 

83,935

 

 

 

96,711

 

Net investment income

 

 

5,526

 

 

 

3,043

 

Net realized investment gains (losses)

 

 

(20

)

 

 

(1,505

)

Change in fair value of equity securities

 

 

608

 

 

 

403

 

Gain from VSRM Transaction

 

 

 

 

 

8,810

 

Loss portfolio transfer risk fee

 

 

 

 

 

(5,400

)

Gain from sale of renewal rights

 

 

2,335

 

 

 

 

Other gains (losses)

 

 

 

 

 

59

 

Agency commission income

 

 

5,680

 

 

 

1,414

 

Other income

 

 

694

 

 

 

1,354

 

Total revenue and other income

 

 

98,758

 

 

 

104,889

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

Losses and loss adjustment expenses, net

 

 

82,413

 

 

 

81,440

 

Policy acquisition costs

 

 

20,892

 

 

 

22,179

 

Operating expenses

 

 

17,891

 

 

 

18,789

 

Interest expense

 

 

3,206

 

 

 

2,971

 

Total expenses

 

 

124,402

 

 

 

125,379

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

(25,644

)

 

 

(20,490

)

Equity earnings (losses) in Affiliate, net of tax

 

 

(251

)

 

 

368

 

Income tax expense (benefit)

 

 

9

 

 

 

(9,441

)

 

 

 

 

 

 

 

Net income (loss)

 

$

(25,904

)

 

$

(10,681

)

Preferred stock dividends

 

 

19

 

 

 

 

Net income (loss) allocable to common shareholders

 

 

(25,885

)

 

 

(10,681

)

 

 

 

 

 

 

Earnings (loss) per common share, basic and diluted

 

$

(2.12

)

 

$

(1.00

)

 

 

 

 

 

 

Weighted average common shares outstanding, basic and diluted

 

 

12,220,511

 

 

 

10,692,090

 

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

64



CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

(dollars in thousands)

 Year Ended December 31,
 2017 2016 2015
Net income (loss)$(21,542) $(8,437) $(17)
      
Other comprehensive income (loss), net of tax:     
Unrealized investment gains (losses):     
Unrealized investment gains (losses) during the period1,151
 (2,139) (274)
Income tax expense (benefit)356
 
 
Unrealized investment gains (losses), net of tax795
 (2,139) (274)
      
Less: reclassification adjustments to:     
Net realized investment gains included in net income (loss)78
 (877) 702
Income tax expense
 
 
Total reclassifications included in net income (loss), net of tax78
 (877) 702
      
Other comprehensive income (loss)717
 (1,262) (976)
      
Total comprehensive income (loss)(20,825) (9,699) (993)
Less comprehensive income (loss) attributable to noncontrolling interest
 
 (81)
Comprehensive income (loss) attributable to Conifer$(20,825) $(9,699) $(912)

 

 

Year Ended December 31,

 

 

 

2023

 

 

2022

 

Net income (loss)

 

$

(25,904

)

 

$

(10,681

)

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

Unrealized investment gains (losses):

 

 

 

 

 

 

Unrealized investment gains (losses) during the period

 

 

3,624

 

 

 

(16,024

)

Income tax expense (benefit)

 

 

 

 

 

 

Unrealized investment gains (losses), net of tax

 

 

3,624

 

 

 

(16,024

)

Less: reclassification adjustments to:

 

 

 

 

 

 

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

 

 

(51

)

 

 

69

 

Income tax expense (benefit)

 

 

 

 

 

 

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

 

 

(51

)

 

 

69

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

3,675

 

 

 

(16,093

)

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$

(22,229

)

 

$

(26,774

)

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

65




Notes to Consolidated Financial Statements

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Redeemable Preferred Stock and Shareholders' Equity

(dollars in thousands)

For the Years ended December 31, 2017, 2016 and 2015
 
Redeemable
Preferred Stock
Preferred Stock No Par, Common Stock 
Retained
Earnings
(Accumulated
deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total Conifer
Holdings
Shareholders'
Equity
    
 Shares AmountShares Amount Shares Amount    
Noncontrolling
Interest
 Total Equity
Balances at December 31, 201460,600
 $6,119

 $
 3,995,013
 $46,119
 $(3,095) $1,158
 $44,182
 $(23) $44,159
Net income (loss)
 

 
 
 
 64
 
 64
 (81) (17)
Issuance of common stock (Pre IPO)*
 

 
 55,029
 750
 
 
 750
 
 750
Paid-in-kind dividends
 61

 95
 
 (156) 
 
 (61) 
 (61)
Cash dividends paid on preferred stock
 

 
 
 (384) 
 
 (384) 
 (384)
Reclassification of redeemable preferred stock to permanent equity
(60,600) (6,180)60,600
 6,180
 
 
 
 
 6,180
 
 6,180
Issuance of common stock (IPO)*
 

 
 3,300,000
 32,224
 
 
 32,224
 
 32,224
IPO Expenses*
 

 
 
 (1,837) 
 
 (1,837) 
 (1,837)
Repurchase of preferred stock
 
(60,600) (6,275) 
 
 
 
 (6,275) 
 (6,275)
Issuance of common stock to former preferred stockholders

 

 
 294,450
 3,092
 
 
 3,092
 
 3,092
RSU expense **
 

 
 
 303
 
 
 303
 
 303
Deconsolidation of affiliate
 

 
 
 
 
 
 
 104
 104
Other comprehensive loss
 

 
 
 
 
 (976) (976) 
 (976)
Balances at December 31, 2015
 $

 $
 7,644,492
 $80,111
 $(3,031) $182
 $77,262
 $
 $77,262
Net loss
 

 
 
 
 (8,437) 
 (8,437) 
 (8,437)
Repurchase of common stock
 

 
 (88,650) (625) 
 
 (625) 
 (625)
RSU expense **
 

 
 77,228
 856
 
 
 856
 
 856
Other comprehensive loss
 

 
 
 
 
 (1,262) (1,262) 
 (1,262)
Balances at December 31, 2016
 $

 $
 7,633,070
 $80,342
 $(11,468) $(1,080) $67,794
 $
 $67,794
Net loss
 

 
 
 
 (21,542) 
 (21,542) 
 (21,542)
Issuance of common stock in private placement
 

 
 800,000
 5,000
 
 
 5,000
 
 5,000
Common stock issuance costs
 

 
   (38) 
 
 (38) 
 (38)
RSU expense, net **
 

 
 87,258
 895
 
 
 895
 
 895
Other comprehensive income
 

 
 
 
 
 717
 717
 
 717
Balances at December 31, 2017
 

 
 8,520,328
 $86,199
 $(33,010) $(363) $52,826
 $
 $52,826
* "IPO" - initial public offering
** "RSU" - restricted stock units

 

 

No Par, Preferred Stock

 

 

No Par, Common
Stock

 

 

Retained
Earnings

 

 

Accumulated
Other

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

(Accumulated
deficit)

 

 

Comprehensive
Income (Loss)

 

 

Shareholders'
Equity

 

Balances at January 1, 2022

 

 

 

 

 

 

 

 

9,707,817

 

 

 

92,692

 

 

 

(50,079

)

 

 

(2,110

)

 

 

40,503

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,681

)

 

 

 

 

 

(10,681

)

Repurchase of common stock

 

 

 

 

 

 

 

 

(1,968

)

 

 

10

 

 

 

 

 

 

 

 

 

10

 

Issuance of common stock private placement

 

 

 

 

 

 

 

 

2,500,000

 

 

 

5,000

 

 

 

 

 

 

 

 

 

5,000

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

10,000

 

 

 

211

 

 

 

 

 

 

 

 

 

211

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16,093

)

 

 

(16,093

)

Balances at December 31, 2022

 

 

 

 

$

 

 

 

12,215,849

 

 

$

97,913

 

 

$

(60,760

)

 

$

(18,203

)

 

$

18,950

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25,904

)

 

 

 

 

 

(25,904

)

Issuance of preferred stock

 

 

1,000

 

 

 

6,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,000

 

Repurchase of common stock

 

 

 

 

 

 

 

 

(1,968

)

 

 

(3

)

 

 

 

 

 

 

 

 

(3

)

Cash dividends paid on preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(19

)

 

 

 

 

 

(19

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

9,000

 

 

 

190

 

 

 

 

 

 

 

 

 

190

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,675

 

 

 

3,675

 

Balances at December 31, 2023

 

 

1,000

 

 

$

6,000

 

 

 

12,222,881

 

 

$

98,100

 

 

$

(86,683

)

 

$

(14,528

)

 

$

2,889

 

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

66




Notes to Consolidated Financial Statements

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(dollars in thousands)

 Year Ended December 31,
 2017 2016 2015
Cash Flows from Operating Activities     
Net income (loss)$(21,542) $(8,437) $(17)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
     
Depreciation and amortization372
 401
 398
Amortization of bond premium and discount, net532
 589
 629
Net realized investment gains(70) (1,365) (285)
Other (gains) losses
 400
 (104)
Restricted stock unit expenses895
 856
 303
Other(484) (277) (53)
Changes in operating assets and liabilities:     
(Increase) decrease in:     
Premiums, agents' balances and other receivables2,249
 (6,487) (3,765)
Reinsurance recoverables(17,041) (454) (1,905)
Prepaid reinsurance premiums3,039
 (637) 6,027
Deferred policy acquisition costs509
 (1,188) (6,423)
Other assets4,239
 (7,139) (904)
Increase (decrease) in:     
Unpaid losses and loss adjustment expenses33,245
 19,229
 3,891
Unearned premiums(454) 10,210
 4,535
Reinsurance premiums payable3,299
 (1,069) (6,000)
Accounts payable and other liabilities302
 1,534
 537
Net cash provided by (used in) operating activities9,090
 6,166
 (3,136)
Cash Flows From Investing Activities     
Purchases of investments(218,492) (166,965) (118,620)
Proceeds from maturities and redemptions of investments25,213
 13,730
 1,400
Proceeds from sales of investments167,338
 142,679
 103,416
Purchases of property and equipment(13) (195) (167)
Deconsolidation of affiliate
 
 (1,323)
Net cash used in investing activities(25,954) (10,751) (15,294)
Cash Flows From Financing Activities     
Proceeds received from issuance of shares of common stock5,000
 
 36,066
Repurchase of common stock
 (625) 
Repurchase of preferred stock
 
 (6,275)
Borrowings under debt arrangements32,000
 7,000
 4,400
Repayment of borrowings under debt arrangements(19,750) (2,000) (19,212)
Dividends paid to preferred shareholders
 
 (384)
Payout of contingent consideration
 
 (113)
Stock and debt issuance costs(1,011) 
 (1,837)
Net cash provided by financing activities16,239
 4,375
 12,645
Net increase (decrease) in cash(625) (210) (5,785)
Cash at beginning of period12,493
 12,703
 18,488
Cash at end of period$11,868
 $12,493
 $12,703
Supplemental Disclosure of Cash Flow Information:     
Interest paid$876
 $641
 $844
Net income taxes paid
 
 
Paid-in-kind dividends
 
 61
Payable for securities - non cash item2,691
 486
 20

 

 

Year Ended December 31,

 

 

 

2023

 

 

2022

 

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income (loss)

 

$

(25,904

)

 

$

(10,681

)

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

 

 

 

 

 

 

Gain from sale of renewal rights

 

 

(2,335

)

 

 

 

Gain upon consolidation of VSRM (1) and sale of agency business

 

 

 

 

 

(10,052

)

Depreciation and amortization

 

 

545

 

 

 

417

 

Amortization of bond premium and discount, net

 

 

(871

)

 

 

320

 

Net realized investment (gains) losses

 

 

20

 

 

 

1,505

 

Change in fair value of equity securities

 

 

(608

)

 

 

(403

)

Loss on sale of fixed assets

 

 

 

 

 

33

 

Deferred Income tax expense

 

 

(17

)

 

 

(9,396

)

Stock-based compensation expenses

 

 

190

 

 

 

211

 

Equity (earnings) loss in Affiliate, net of tax

 

 

251

 

 

 

(368

)

Other

 

 

 

 

 

60

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

(Increase) decrease in:

 

 

 

 

 

 

Premiums, agents' balances and other receivables

 

 

(7,549

)

 

 

(594

)

Reinsurance recoverables

 

 

5,878

 

 

 

(47,613

)

Prepaid reinsurance premiums

 

 

(12,509

)

 

 

(8,098

)

Deferred policy acquisition costs

 

 

4,005

 

 

 

1,977

 

Other assets

 

 

250

 

 

 

(138

)

Increase (decrease) in:

 

 

 

 

 

 

Unpaid losses and loss adjustment expenses

 

 

9,073

 

 

 

26,454

 

Unearned premiums

 

 

(2,737

)

 

 

2,618

 

Funds held under reinsurance agreements

 

 

13,450

 

 

 

11,100

 

Reinsurance premiums payable

 

 

(5,898

)

 

 

826

 

Premiums payable to other insureds

 

 

13,986

 

 

 

 

Accounts payable and other liabilities

 

 

(2,612

)

 

 

1,348

 

Net cash provided by operating activities

 

 

(13,392

)

 

 

(40,474

)

Cash Flows From Investing Activities

 

 

 

 

 

 

Purchases of investments

 

 

(234,869

)

 

 

(318,227

)

Proceeds from maturities and redemptions of investments

 

 

10,424

 

 

 

20,324

 

Proceeds from sales of investments

 

 

222,772

 

 

 

324,091

 

Proceeds from sale of renewal rights

 

 

2,335

 

 

 

 

Proceeds from sale of agency business, net of $271 of cash disposed of (1)

 

 

 

 

 

32,759

 

Purchase of VSRM, net of $3,920 cash acquired (1)

 

 

 

 

 

(1,947

)

Deconsolidation of SSU (1)

 

 

 

 

 

(497

)

Contribution to SSU (1)

 

 

(934

)

 

 

 

Net cash provided by (used in) investing activities

 

 

(272

)

 

 

56,503

 

Cash Flows From Financing Activities

 

 

 

 

 

 

Proceeds received from issuance of shares of preferred stock

 

 

6,000

 

 

 

 

Proceeds received from issuance of shares of common stock

 

 

 

 

 

5,000

 

Proceeds from issuance of long-term debt

 

 

6,727

 

 

 

 

Repurchase of common stock

 

 

(3

)

 

 

10

 

Borrowings under lines of credit

 

 

 

 

 

19,500

 

Repayment of lines of credit

 

 

 

 

 

(19,500

)

Paydown of long-term debt

 

 

(13,971

)

 

 

(2,917

)

Debt issuance costs

 

 

(1,999

)

 

 

 

Net cash provided by (used in) financing activities

 

 

(3,246

)

 

 

2,093

 

Net increase (decrease) in cash

 

 

(16,910

)

 

 

18,122

 

Cash at beginning of period

 

 

28,035

 

 

 

9,913

 

Cash at end of period

 

$

11,125

 

 

$

28,035

 

(1) See Note 3 ~ VSRM Transaction

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

67



CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Supplemental Disclosure of Cash Flow Information

(dollars in thousands)

 

 

Year Ended December 31,

 

 

 

2023

 

 

2022

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

Interest paid

 

$

3,077

 

 

$

2,979

 

Income taxes paid (refunded), net

 

 

1

 

 

 

(11

)

Exchanging of public senior unsecured notes

 

 

11,160

 

 

 

 

Preferred stock dividends declared but not paid at end of period

 

 

19

 

 

 

 

68


CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

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"), Red Cedar Insurance Company ("RCIC"), White Pine Insurance Company ("WPIC"), andConifer Insurance Services ("CIS") formerly known as Sycamore Insurance Agency, Inc. ("SIA"Sycamore"), and VSRM, Inc. ("VSRM"). VSRM has substantially no operations following the contribution to SSU as described in Note 3 ~ VSRM Transaction. CIC, WPIC, and RCIC are collectively referred to as the "Insurance Company Subsidiaries." On a stand-alone basis Conifer Holdings, IncInc. is referred to as the "Parent Company." On December 30, 2016, the Company's wholly owned subsidiary, American Colonial Insurance CompanyVSRM owns a 50% non-controlling interest in Sycamore Specialty Underwriters, LLC ("ACIC"SSU" or "Affiliate") was merged into WPIC.

.

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.

Business

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

The Company discontinued offering nonstandard personal automobile policies in the first half of 2015. The Company will continue to pay claims and perform other administrative services until existing policies expire and all claims are paid (a process referred to as “run-off”). The run-off was substantially complete at the end of 2016.

Initial Public Offering
In August 2015, the Company completed its initial public offering (“IPO”) whereby it issued and sold 3,300,000 shares of common stock, which included 100,000 shares issued and sold to the Company’s Chief Executive Officer, at a public offering price of $10.50 per share. Refer to Note 10 ~ Shareholders’ Equity for further details.

Summary of Significant Accounting Policies

Affiliate
Prior to September 30, 2015, the consolidated financial statements included a 50%-owned affiliate, Venture Holdings, Inc. (the “Affiliate”) which the Company controlled due to its majority representation on the entity’s board of directors. Consolidated net income or loss was allocated to the Company and noncontrolling interest in proportion to their percentage ownership interests. As of September 30, 2015, the Company no longer controlled the Affiliate but retained significant influence. As a result the entity was deconsolidated from the consolidated financial statements and recognized as an investment in an affiliate utilizing the equity method of accounting.

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. In applying these estimates, management makes subjective and complex judgments that frequently require assumptions about matters that are inherently uncertain, including uncertainties associated with the Pandemic. 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 short-term investments in the consolidated balance sheets as they relate principally to the Company’s investment activities.

LeaseAccounting

The Company maintains itsaccounts for leases under FASB Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), which required the recognition of a right-of-use asset and a corresponding lease liability, discounted to the present value upon initial recognition, for all leases that extend beyond 12 months. For operating leases, the asset and liability are amortized over the lease term with expense recognized on a straight-line basis and all cash depositsflows included in major banksthe operating section of the consolidated statement of cash flows. We do not have any financing leases. Our operating leases consist primarily of real

69


estate utilized in the operation of our businesses with lease terms ranging from 5 to 10 years. Management has determined the appropriate discount rate to use in calculating the right-to-use asset and invests short-term fundslease liability is 9.5%. The Company records a right-of-use asset and lease liabilities included in institutional money-market fundsOther Assets and short-term financial instruments. These securities typically mature within three months or less.Other Liabilities in the Consolidated Balance Sheets. As of December 31, 2023, the Company had a right-of-use asset of $960,000, and lease liabilities of $1.0 million. As of December 31, 2022, the Company had a right-of-use asset of $1.3 million, and lease liabilities of $1.3 million.



Notes to Consolidated Financial Statements

Investment Securities

Investment securities, consisting of debt and equity

Debt securities are classified as available for saleavailable-for-sale and reported at fair value. The Company determines the fair value using the market approach, which uses quoted prices or other relevant data based on market transactions involving identical or comparable assets. The Company purchases the available-for-sale debt securities with the expectation that they will be held to maturity, buthowever the Company may sell them if market conditions or credit‑related risk warrant earlier sales. The Company does not have any securities classified as held-to-maturity or trading.

We review available-for-sale debt securities for credit losses based on current expected credit loss methodology at the end of each reporting period. We do not have any securities classified as trading or held to maturity.

At each quarter-end, for available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through earnings.

For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Our outside investment managers assist us in this evaluation.

The change in unrealized gain and loss on the investmentdebt securities is recorded as a component of accumulated other comprehensive income (loss), net of the related deferred tax effect, until realized.

The debt securities portfolio includes mortgage-backed and asset-backedstructured securities. The Company recognizes income from these securities using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from anticipated prepayments, the estimated economic life is recalculated and the remaining unamortized premium or discount is amortized prospectively over the remaining economic life. Premiums and discounts on mortgage-backed and asset-backedstructured securities are amortized or accreted over the life of the related available‑for‑sale security as an adjustment to yield using the effective interest method. Such amortization and accretion is included in interest income in the consolidated statements of operations. Dividend and interest income are recognized when earned.

Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis and included in earnings on the trade date.

Equity securities that do not result in consolidation and are not accounted for under the equity method are measured at fair value and any changes in fair value are recognized in net income in the Consolidated Statements of Operations.

Investment company limited partnerships are measured at their net asset value, which approximates fair value. Any changes in the net asset value are recognized in net income in the Consolidated Statements of Operations.

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Other-than-Temporary Impairments

The Company reviews its impaired securities for possible other-than-temporary impairment ("OTTI") at each quarter-end. A security has an impairment loss when itscarries other equity investments that do not have a readily determinable fair value isat cost, less than its costimpairment and adjusted for observable price changes under the measurement alternative provided under GAAP. We review these investments for impairment during each reporting period. These investments are a component of Other Assets in the Consolidated Balance Sheets. There were no observable prices changes to the Company's other equity investments during 2023 or amortized cost at the balance sheet date. The Company considers the following factors in performing its review: (i) the amount by which the security’s fair value is less than its cost, (ii) length of time the security has been impaired, (iii) whether management has the intent to sell the security, (iv) if it is more likely than not that management will be required to sell the security before recovery of its amortized cost basis, (v) whether the impairment is due to an issuer‑specific event, credit issues or change in market interest rates, (vi) the security’s credit rating and any recent downgrades or (vii) stress testing of expected cash flows under different scenarios. If2022.

Credit Losses

Effective January 1, 2023, the Company determinesadopted ASU 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which introduces a new process for recognizing credit losses on financial instruments based on expected credit losses. This new standard replaces the incurred loss methodology and the concept of Other-than-Temporary Impairment (or “OTTI”) with an expected credit loss methodology that a security has experienced an OTTI, the impairment is recognized as a realized investment loss in the consolidated statements of operations.

For each impaired security, the Company determines if: (i) it does not intend to sell the security and (ii) it will more likely than not be required to sell the security before recovery of its amortized cost basis. If the Company cannot assert these conditions, an OTTI loss is recorded through the consolidated statements of operations in the current period. For all other impaired securities, except equity securities, the Company will assess whether the net present value of the cash flows expected to be collected from the security is less than its amortized cost basis. Such a shortfall in cash flows issometimes referred to as the Current Expected Credit Loss (CECL) methodology. The guidance applies to Conifer's reinsurance recoverables, premium receivable, and debt securities. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. The adoption of ASC 326 did not have a “credit loss.” For any such security, the Company separates the impairment loss into: (i) the credit loss and (ii) the non-credit loss, which is the amount related to all other factors such as interest rate changes, fluctuations in exchange rates and market conditions. The credit loss charge is recorded to the current period statements of operations and the non-credit loss is recorded to accumulated other comprehensive income (loss), within shareholders’ equity, on an after-tax basis. A security’s cost basis is permanently reduced by the amount of a credit loss. Income is accreted over the remaining life of a debt security basedmaterial impact on the interest rate necessary to discount the expected future cash flows to the new basis. If the security is non-income producing, any cash proceeds is applied as a reduction of principal when received. For equity securities, if the impairment is deemed an OTTI, the loss is recognized in the statements of operations.Company's financial statements.

Recognition of Premium Revenues

All of the property and casualty policies written by our insurance companies are considered short-duration contracts. These policiespolicy premiums are earned on a daily pro-rata basis, net of reinsurance, over the term of the policy, which are six orprimarily twelve months in duration. The portion of premiums written that relate to the unexpired terms of policies in force are deferred and reported as unearned premium at the balance sheet date. Premiums on reinsured business are accounted for on a basis consistent with that used in accounting for the original policies issued and terms of the reinsurance contracts.

Reinsurance

Reinsurance premiums, commissions, losses and loss adjustment expenses ("LAE") on reinsured business are accounted for on a basis consistent with that used in accounting for the original policies issued and the terms of the reinsurance contracts. The amounts reported as reinsurance recoverables include amounts billed to reinsurers on losses and LAE paid as



Notes to Consolidated Financial Statements

well as estimates of amounts expected to be recovered from reinsurers on insurance liabilities that have not yet been paid. Reinsurance recoverables on unpaid losses and LAE are estimated based upon assumptions consistent with those used in establishing thosethe gross liabilities as they are applied to the underlying reinsured contracts. The Company records an allowance for uncollectible reinsurance recoverables based on an assessment of the reinsurer’s creditworthiness and collectability of the recorded amounts. Management believes an allowance for uncollectible recoverablerecoverables from its reinsurers was not necessary for the periods presented.

The Company receives ceding commissions in connection with certain ceded reinsurance. The ceding commissions are recorded as a reduction of operating expenses.

policy acquisition costs.

In 2017,2022, the Company entered into an adverse development covera loss portfolio transfer ("LPT") reinsurance agreement (the "ADC").agreement. The ADCLPT is a retroactive reinsurance contract. IfSee Note 9 ~ Reinsurance for further details regarding the cumulative claim and allocated claim adjustment expenses ceded under the ADC exceed the consideration paid, the resulting gain from such excess is deferred and amortized into earnings in future periods in proportion to actual recoveries under the ADC. In any period in which there is a gain position and a revised estimate of claim and allocated claim adjustment expenses, a portion of the deferred gain is cumulatively recognized in earnings as if the revised estimate was available at the inception date of the ADC.LPT.

Deferred Policy Acquisition Costs

Costs incurred which are incremental and directly related to the successful acquisition of new or renewal insurance business isare deferred. These deferred costs consist of commissions paid to agents (net of ceding commissions), premium taxes, and underwriting costs, including compensation and payroll related benefits. Proceeds from reinsurance transactions that represent recovery of acquisition costs reduce applicable unamortized acquisition costs in such a manner that net acquisition costs are capitalized and charged to expense. Amortization of such policy acquisition costs is charged to expense in proportion to premium earned over the estimated policy term.

To the extent that unearned premiums on existing policies are not adequate to cover the sum of expected losses and LAE, unamortized acquisition costs and policy maintenance costs, unamortized deferred policy acquisition costs are charged to expense to the extent required to eliminate the premium deficiency. If the premium deficiency is greater than the unamortized policy acquisition costs, a liability is recorded for any such deficiency. As of December 31, 2023, there was no

71


premium deficiency reserve. The Company considers anticipated investment income in determining whether a premium deficiency exists. Management performs this evaluation at each insurance product line level.

Unpaid Losses and Loss Adjustment Expenses

The liability for unpaid losses and LAE in the consolidated balance sheetsConsolidated Balance Sheets represents the Company’s estimate of the amount it expects to pay for the ultimate cost of all losses and LAE incurred that remain unpaid at the balance sheet date. The liability is recorded on an undiscounted basis, except for the liability for unpaid losses and LAE assumed related to acquired companies which are initially recorded at fair value.basis. The process of estimating the liability for unpaid losses and LAE is a complex process that requires a high degree of judgment.

The liability for unpaid losses and LAE representrepresents the accumulation of individual case estimates for reported losses and LAE, and actuarially determined estimates for incurred but not reported losses and LAE.LAE and includes a provision for estimated costs to settle all outstanding claims at the balance sheet date. The liability for unpaid losses and LAE is intended to include the ultimate net cost of all losses and LAE incurred but unpaid as of the balance sheet date. The liability is stated net of anticipated deductibles, salvage and subrogation, and gross of reinsurance ceded. The estimate of the unpaid losses and LAE liability is continually reviewed and updated. Although management believes the liability for losses and LAE is reasonable, the ultimate liability may be more or less than the current estimate.

The estimation of ultimate liability for unpaid losses and LAE is a complex, imprecise and inherently uncertain process, and therefore involves a considerable degree of judgment and expertise. The Company utilizes various actuarially‑accepted reserving methodologies in deriving the continuum of expected outcomes and ultimately determining its estimated liability amount. These methodologies utilize various inputs, including but not limited to written and earned premiums, paid and reported losses and LAE, expected initial loss and LAE ratio, which is the ratio of incurred losses and LAE to earned premiums, and expected claim reporting and payout patterns (including company-specific and industry data). The liability for unpaid loss and LAE does not represent an exact measurement of liability, but is an estimate that is not directly or precisely quantifiable, particularly on a prospective basis, and is subject to a significant degree of variability over time. In addition, the establishment of the liability for unpaid losses and LAE makes no provision for the broadening of coverage by legislative action or judicial interpretation or for the extraordinary future emergence of new types of losses not sufficiently represented in the Company’s historical experience or which cannot yet be quantified. As a result, an integral component of estimating the liability for unpaid losses and LAE is the use of informed subjective estimates and judgments about the



Notes to Consolidated Financial Statements

ultimate exposure to unpaid losses and LAE. The effects of changes in the estimated liability are included in the results of operations in the period in which the estimates are revised.

The Company allocates the applicable portion of the unpaid losses and LAE to amounts recoverable from reinsurers under reinsurance contracts and reports those amounts separately as assets on the consolidated balance sheets.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credittax-credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Deferred tax assets are recognized to the extent that there is sufficient positive evidence, as allowed under the Accounting Standard Codification ("ASC") 740, Income Taxes, to support the recoverability of those deferred tax assets. The Company establishes a valuation allowance to the extent that there is insufficient evidence to support the recoverability of the deferred tax asset under ASC 740. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax‑planning strategies, and results of recent operations. If it is determined that the deferred tax assets would be realizable in the future in excess of their net recorded amount, an adjustment would be made to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

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As of December 31, 20172023 and 2016,2022, the Company did notnot have any unrecognized tax benefits and had no accrued interest or penalties related to uncertain tax positions.

Other Income

Other income consists primarily of fees charged to policyholders by the Company for services outside of the premium charge, such as installment billings or policy issuance costs. Commission income is also received by the Company’s insurance agencies for writing policies for third party insurance companies. The Company recognizes commission income on the later of the effective date of the policy, the date when the premium can be reasonably established, or the date when substantially all services related to the insurance placement have been rendered.

Agency Commission Income

Agency commission income is comprised of commissions earned on policies where the Company has no exposure to underlying risk on the policies written. Agency commission income is earned at the time the policy is written.

Operating Expenses

Operating expenses consist primarily of other underwriting, compensation and benefits, information technology, facility and other administrative expenses.

Recently Issued

Accounting Guidance

Not Yet Adopted

In January 2016,2021, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition2022-06, Reference Rate Reform (Topic 848). This guidance provides optional expedients and Measurementexceptions that are intended to ease the burden of Financial Assets and Financial Liabilities. The amendments in this update modify the requirements relatedupdating contracts to contain a new reference rate due to the measurement of certain financial instruments in the statement of financial condition and results of operation. For equity investments (other than investments accounted for using the equity method), entities must measure such instruments at fair value with changes in fair value recognized in net income. Reporting entities may continue to elect to measure equity investments which do not have a readily determinable fair value at cost with adjustments for impairment and observable changes in price. In addition, for a liability (other than a derivative liability) that an entity measures at fair value, any change in fair value related to the instrument-specific credit risk, that is the entity’s own-credit, should be presented separately in other comprehensive income and not as a component of net income. The amendments are effective for the Company on January 1, 2018, with early adoption permitted solely for the instrument-specific credit risk for liabilities measured at fair value. The amendments must be applied on a modified retrospective basis with a cumulative effect adjustment asdiscontinuation of the beginning of the fiscal year of initial adoption. For the year ended December 31, 2017, other comprehensive income includes $1.1 million of net unrealized gains on equity securities.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which addresses the financial reporting of leasing transactions. This update will require the recognition of a right-of-use asset and a corresponding lease liability, discounted to the present value, for all leases that extend beyond 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the consolidated statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from the amortization of the right-of-use asset in the consolidated statement of operations and the repayment of the principal portion of the lease liability will be classified as a financing activity while the interest component will be included in the operating


Notes to Consolidated Financial Statements

section of the consolidated statement of cash flows. This ASU is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. Management is currently evaluating the impact of the guidance.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which amends the current methodology and timing for recognizing credit losses. This amendment will replace the current GAAP "incurred loss" methodology for credit losses with a methodology based on expected credit losses. The new guidance will also require expanded consideration of a broader range of reasonable and increased supportable information for the credit loss estimates. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted for years beginning after December 15, 2018. Management is currently evaluating the impact of the guidance.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), which clarifies how certain cash receipts and cash payments should be presented and classified in the statement of cash flows under Topic 230, Statement of Cash FlowsLondon Inter-Bank Offered Rate (LIBOR). This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption is permitted. This guidance is available immediately and may be implemented in any period prior to the guidance expiration on December 31, 2024. Management does not expectedexpect the new guidance to have a material impact on ourthe Company’s consolidated statement of cash flows.
financial statements.

In February 2018, November 2023, the FASB issued ASU No. 2018-02, Income Statement -2023-07, Segment Reporting Comprehensive Income (Topic 220)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"), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“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 2018-02”), which provides guidance on adjusting2023-07 is effective for fiscal years beginning after December 31, 2024. Early adoption is permitted. the Company is currently evaluating the impact the adoption of “stranded tax effects” in accumulated other comprehensive income (“AOCI”) duethis 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 U.S. federal government enacting H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and Vreconciliation of the Concurrent Resolutioneffective 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.

Risks and Uncertainties

The Company is exposed to interest rate risks as it maintains a significant amount of its investment portfolio in debt securities. As of December 31, 2023, total net unrealized losses in the debt securities was $13.3 million. Management believes it will not need to sell debt securities at significant losses as it has the ability and intention to hold them until maturity or their values improve.

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Company Liquidity

We conduct our business operations primarily through our Insurance Company Subsidiaries. Our ability to service debt, and pay administrative expenses is primarily reliant upon our intercompany service fees paid by the Insurance Company Subsidiaries to the holding company for management, administrative, and information technology services provided to the Insurance Company Subsidiaries by the Parent Company. The Parent Company may receive dividends from the Insurance Company Subsidiaries; however, this is not the primary means in which the holding company supports its funding as state insurance laws restrict the ability of our Insurance Company Subsidiaries to declare dividends to the Parent Company, and we do not anticipate any dividends being paid to us from our insurance subsidiaries during 2024 and 2025.

Due to significant losses in 2023, much of which is 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. We incurred a consolidated net loss of $25.9 million. We used cash from the operation activities of $13.6 million, and our overall equity at December 31, 2023 totaled $2.9 million. As a result of these factors, we were out of compliance with several of our debt covenants and obtained a waiver from our lender. The aforementioned factors have resented additional liquidity and capital challenges on the Budget for Fiscal Year 2018”Company's financial condition. Accordingly, management is in the process of implementing a strategic shift in which the Company will utilize third-party insurers and rely mostly on commission revenues generated by our managed general agency. Management may also consider the sale of other assets to generate additional cash resources available to the Company.

In September 2023, the Company repaid its $24.4 million of 6.75% public senior unsecured notes (the “Act”"Old Public Notes") and funded it, in part, with issuing 9.75% public senior unsecured notes (the "New Public Notes") in the amount of $17.9 million.

The Company also paid down $500,000 of principal on its subordinated notes on September 29, 2023. The Company then restructured its existing $10.0 million of subordinated notes to Senior Secure Notes with its lender on September 30, 2023. The Senior Secured Notes mature on September 30, 2028, and bear an interest rate of 12.5% per annum. Quarterly principal payments of $250,000 are required on the Senior Secured Notes starting on December 22, 2017 (see Note 8)31, 2023 through September 30, 2028. The requirements on the new Senior Secured Notes will result in $1.0 million per year of principal to be paid on the senior secured debt that previously was not required.

On December 20, 2023, the Company issued $6.0 million of its newly designated Series A Preferred Stock (the "Preferred Stock"). The Company intends to use the proceeds for working capital and general corporate purposes.

As of the filing of this Form 10-K, the Insurance Company Subsidiaries are still the primary underwriters for the business produced by CIS and still the primary source of revenues and cash flows. The Insurance Company Subsidiaries are currently both required to provide an action plan with the state of domicile insurance regulator to remediate certain statutory capital and surplus regulatory deficiencies. If we do not remediate the regulatory deficiencies the insurance regulator could suspend or terminate the insurers’ authority to write business. Also, A.M. Best and Kroll downgraded the financial strength ratings of both companies and we terminated the rating relationship. Therefore, neither company is currently rated by a nationally recognized statistical rating organization which can have an impact on the ability to market to policyholders. We believe that the Insurance Company Subsidiaries will both regain compliance with the state insurance regulators, however, as part of the strategic shift, we no longer expect significant revenues to be generated through them after the second quarter of 2024. These circumstances could jeopardize the ability of the Company to generate insurance underwriting revenues which could put into doubt our ability to meet our obligations as they become due.

To alleviate these concerns the Company is in the process of implementing the strategic shift mentioned above which will not require the use of either Insurance Company Subsidiary to generate the majority of the Company’s revenues going forward. Rather, the Company will expect to generate the vast majority of its revenue from commissions from third-party insurers. In order to successfully implement the strategic shift the Company must have in place producer agreements with third-party insurers. Currently the Company has executed one producer agreement for approximately 25% of the existing commercial lines book of business and is expected to execute another producer agreement with a different third-party insurer

74


for the remaining commercial lines business within a week of filing this Form 10-K. We expect to continue to underwrite the existing personal lines business within our Insurance Company Subsidiaries.

With these producer agreements in place the Company expects to be able to generate the needed revenues to meeting our obligations as they become due over the next twelve months. In the event there are delays in implementing the strategic shift or other uncertainties arise with respect to completion of our strategic shift during 2024, these events could have a negative effect on our liquidity and ability to satisfy our obligations as they become due. If the Company were to experience any such uncertainties the Company believes it has alternative sources of liquidity available which are sufficient to cover any short-term needs as a result of any such uncertainties encountered. Management believes the current actions being 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.

2. Sale of Renewal Rights

In September 2023, the Company sold the renewal rights of one of its insurance programs to another insurer for $2.5 million in cash in addition to agreeing to participate in the Company's issuance of new public debt in September 2023, by purchasing $5.0 million of new debt. The program provided mostly liability insurance to the security guard and alarm installation industries. The program produced gross earned premiums of $55.9 million and $41.0 million in 2023 and 2022, respectively. The buyer began writing new and renewal policies for this program as of September 15, 2023. On September 30, 2023, the Company ceded 100% of its gross unearned premium of $30.9 million in the program to the buyer in return for an $8.4 million ceding commission. As of December 31, 2023, the Company retained $24.1 million of net cash owed to the buyer under a funds withheld provision. This can be seen in the funds held under reinsurance agreements in the liability section of the Company's Consolidated Balance Sheets. The funds withheld balance is expected to be paid out as premiums are earned and related claims are paid. The Company incurred $135,000 in expense related to this transaction. As part of this transaction, five claims staff transferred employment to the buyer. The buyer will handle all of the Company’s run-off claims for this program under a related claims administration agreement.

3. VSRM Transaction

Prior to ASU 2018-02,October 13, 2022, CIS, formerly known as Sycamore, owned 50% of Venture Agency Holdings, Inc. ("Venture") and has accounted for its ownership under the equity method of accounting. On October 13, 2022, CIS purchased the other 50% of Venture from an individual for $9.7 million. Following this purchase, CIS obtained control and owned 100% of Venture, which was then renamed to VSRM, Inc. ("VSRM"). VRSM and its two wholly owned subsidiaries, The Roots Insurance Agency, Inc. ("Roots") and Mitzel Insurance Agency, Inc. ("Mitzel") were incorporated into the Company's consolidated financial statements as of the date of the acquisition. CIS initially purchased the Venture shares with a promissory note for $9.7 million and ultimately settled the note with $5.9 million of cash received from the Security & Alarm Business sale, described below, and $3.8 million in the form of stock from the buyer of the Security & Alarm Business. The Company acquired the remaining outstanding shares of VSRM, in order to take advantage of net operating tax effectlosses as part of unrealized gainsa tax planning strategy to apply to the Security and Alarm Business sale described below, in addition to the strategic focus of getting out of the Security and Alarm line of business.

The Company recognized CIS's purchase of the individual's shares of VSRM as a step acquisition and revalued all assets and liabilities upon the acquisition date. This resulted in the recognition of an $8.8 million non-operating gain reported in the Consolidated Statement of Operations as Gain from VSRM Transaction in the fourth quarter of 2022. The Company also utilized $12.5 million of federal income tax net operating losses were valued at 34%carried forward and included$14.8 million state income tax net operating losses carried forward, for a total net-of-tax benefit of $9.4 million. VSRM retained $8.9 million of debt, and $9.4 million of tax liabilities, as well as other smaller assets and liabilities that did not go with the transaction.

A condensed schedule of assets and liabilities incorporated into the consolidated balance sheet from the VSRM acquisition is provided below:

75


Cash

$

3,921

 

Trade receivables

 

4,604

 

Customer relationship intangible assets

 

37,122

 

Other assets

 

574

 

Total assets

$

46,221

 

 

 

 

Trade and other payables

 

7,624

 

Deferred tax liability

 

9,407

 

Note payable to Affiliate

 

6,000

 

Senior debt

 

2,917

 

Total Liabilities

$

25,948

 

 

 

 

Fair value of net assets acquired

$

20,273

 

The following table presents the calculation of the $8.8 million revaluation gain related to the Company's equity method investment in AOCI. WhenVSRM as a result of the ActVSRM Transaction:

Carrying value of equity method investment in VSRM

$

1,773

 

Fair value of investment in VSRM

 

10,583

 

Gain on step acquisition

$

8,810

 

The fair value of the equity interest of VSRM immediately prior to the acquisition was signed into law on December 22, 2017, it required companies$10.6 million. The fair value techniques used to re-valuemeasure the tax effectfair value of all unrealized gains and lossesVSRM included using the new federal statutory raterecent valuations performed by third party valuation experts and the net realized proceeds received upon the sale of 21% with the resulting change recordedSecurity & Alarm Business sold the following day.

There were no material transaction costs incurred in the current income tax provision thus creating a “stranded tax effect.” ASU 2018-02 allows companies to early adopt the standard for year ends prior to December 15, 2018, but is not required. The standard would allow companies to make a one-time reclassification from AOCI to retained earningsacquisition of VSRM. Additionally, no results of operations for the stranded tax effectsSecurity and Alarm business have been included the consolidated financial statements as that business was immediately disposed of. Results of operations for the retained business have been included from the date of acquisition.

On October 14, 2022, VSRM sold all of its security guard and alarm installation insurance brokerage business (the "Security & Alarm Business") to a third party insurance brokerage firm for $38.2 million, of which $32.8 million was paid in cash and $3.8 million was in the form of the buyer's stock. The $3.8 million of buyer's stock was immediately used to settle a portion of the $9.7 million promissory note that was issued to buy the 50% of Venture and the remainder of the promissory note was settled with cash from the sale of business.

As part of the transaction, the individual who previously notedowned 50% of VSRM transitioned employment to the buyer, along with a team of approximately eight other employees of VSRM. Also, the Company transferred to the buyer, $4.3 million of accounts receivable, $5.8 million of current liabilities, $271,000 in cash as well as all books and requires certain other disclosures.records of the business being purchased. The buyer held back $75,000 of cash for a future true up of the trade balances which the Company reflected as a current receivable. The Company has not electedrecognized this transaction as the sale of a business. Because all assets and liabilities were just adjusted to early adoptfair value from the step acquisition described above, the basis of the net assets sold equaled the net proceeds from the sale, thus there was no gain recognized upon the sale of the Security & Alarm Business.

The following table reconciles the net assets disposed of from this standardtransaction:

76


Cash at closing

$

32,759

 

Net liabilities transferred

 

1,499

 

Hold back

 

75

 

Stock of acquirer

 

3,822

 

Total purchase price

$

38,155

 

 

 

 

Cash

$

271

 

Premiums transferred to buyer

 

4,326

 

Intangible assets

 

38,154

 

Trade payables and accrued liabilities assumed by buyer

 

(5,838

)

Net assets disposed of

 

36,913

 

Gross gain

 

1,242

 

Broker fee transaction costs

 

(1,242

)

Net gain

$

 

The net gain on revaluation of the investment in VSRM and the disposal of the Security and Alarm Business line are summarized below:

Gross gains

$

10,052

 

Broker fee

 

(1,242

)

Net gain

$

8,810

 

On December 30, 2022, VSRM contributed its remaining business, including its two wholly owned subsidiaries (Mitzel and Roots) to a new wholly owned subsidiary, Sycamore Specialty Underwriters, LLC ("SSU"). The business contributed to SSU consisted of customer accounts of substantially all of the personal lines business and a small subset of the commercial lines business underwritten by the Insurance Company Subsidiaries, and all of the customer accounts VSRM produced for third-party insurers, other than the security guard and alarm installation brokerage business previously sold.

On December 31, 2022, Sycamore Financial Group, LLC ("SFG"), wholly owned by Andrew D. Petcoff purchased 50% of SSU from VSRM, Inc. for $1,000. As a result, SSU and its two wholly owned subsidiaries, Roots and Mitzel, are no longer consolidated in the Company's consolidated financial statements as of December 31, 2017. This guidance2022, and VSRM's investment in SSU is accounted for using the equity method. The net assets transferred to SSU had a fair value of $0 at the time of the contribution. There was no gain or loss recognized upon the sale of half of SSU to SFG. Included in the net assets transferred to SSU was a $1.0 million promissory note obligation of VSRM that originated as part of the Venture Transaction described below, and is payable to CIC. The $1.0 million promissory note was still outstanding and payable to CIC as of December 31, 2023. The $934,000 receivable from VSRM in the table below transferred as part of the deconsolidation resulted in the Company retaining an existing related payable for $934,000 which was repaid in 2023.

The following table provides the assets and liabilities deconsolidated as a result of this transaction:

Cash

$

497

 

Receivable from VSRM

 

934

 

Trade receivables

 

239

 

Intangible asset

 

196

 

Other assets

 

514

 

Total assets

$

2,380

 

 

 

 

Payable to Affiliates

 

286

 

Trade payables

 

193

 

Note payable

 

1,000

 

Other liabilities

 

901

 

Total Liabilities

$

2,380

 

In order to determine the value of the business contributed to SSU, the Company obtained a third party valuation based on a weighting of discounted cash flows and earnings before interest, taxes, depreciation and amortization (EBITDA) multiple valuation methods. The valuation included significant estimates and assumptions related to (i) forecasted revenue and EBITDA and (ii) the selection of the EBITDA multiple and discount rate.

77


4. Sale of Certain Agency Business

In June of 2021, CIS, formerly known as Sycamore, sold the customer accounts and other related assets of some of its personal and commercial lines of business to Venture. Two promissory notes were created as a result of the sale (one for $3.0 million and one for $6.0 million). In December 2021, Venture paid off the $3.0 million note. On October 20, 2022, Venture paid down $5.0 million of the $6.0 million note. The remaining $1.0 million promissory note was assumed by SSU as part of the contribution of business to SSU described in Note 3 ~ Acquisition of Joint Venture and Subsequent Sale of Business, and was still outstanding as a payable to CIC as of December 31, 2023.

5. Investments

Results for reporting periods occurring before January 1, 2023 continue to be reported in accordance with previously applicable U.S. GAAP and are presented under ASC 326, which was adopted by the Company on January 1, 2023. The Company analyzed its investment portfolio in accordance with its credit loss review policy and determined it did not expectedneed to haverecord a material impact on our consolidated balance sheets.




Notescredit loss for the twelve months ended December 31, 2023. The Company holds only investment grade securities from high credit quality issuers. The gross unrealized losses of $13.3 million as of December 31, 2023, from the Company's available-for-sale securities are due to Consolidated Financial Statements
market conditions and interest rate changes. Management believes it will not need to sell its available-for-sale securities at significant losses as it has the ability and intention to hold them until maturity or until their values improve.


2.Investments

The cost or amortized cost, gross unrealized gain or loss, and estimated fair value of the investments in securities classified as available for saleavailable-for-sale at December 31, 20172023 and 20162022 were as follows (dollars in thousands):

 

 

December 31, 2023

 

 

 

Cost or

 

 

Gross Unrealized

 

 

 

 

 

 

Amortized
Cost

 

 

Gains

 

 

Losses

 

 

Estimated
Fair Value

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

$

5,405

 

 

$

3

 

 

$

(161

)

 

$

5,247

 

State and local government

 

 

24,274

 

 

 

 

 

 

(3,810

)

 

 

20,464

 

Corporate debt

 

 

34,002

 

 

 

 

 

 

(3,507

)

 

 

30,495

 

Asset-backed securities

 

 

38,289

 

 

 

47

 

 

 

(584

)

 

 

37,752

 

Mortgage-backed securities

 

 

26,768

 

 

 

 

 

 

(4,641

)

 

 

22,127

 

Commercial mortgage-backed securities

 

 

3,404

 

 

 

 

 

 

(160

)

 

 

3,244

 

Collateralized mortgage obligations

 

 

3,228

 

 

 

 

 

 

(444

)

 

 

2,784

 

Total debt securities available for sale

 

$

135,370

 

 

$

50

 

 

$

(13,307

)

 

$

122,113

 

 

 

December 31, 2022

 

 

 

Cost or

 

 

Gross Unrealized

 

 

 

 

 

 

Amortized
Cost

 

 

Gains

 

 

Losses

 

 

Estimated
Fair Value

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

$

7,833

 

 

$

 

 

$

(335

)

 

$

7,498

 

State and local government

 

 

25,487

 

 

 

1

 

 

 

(4,672

)

 

 

20,816

 

Corporate debt

 

 

35,347

 

 

 

 

 

 

(4,788

)

 

 

30,559

 

Asset-backed securities

 

 

21,742

 

 

 

 

 

 

(1,246

)

 

 

20,496

 

Mortgage-backed securities

 

 

29,194

 

 

 

 

 

 

(5,157

)

 

 

24,037

 

Commercial mortgage-backed securities

 

 

3,414

 

 

 

 

 

 

(186

)

 

 

3,228

 

Collateralized mortgage obligations

 

 

4,102

 

 

 

 

 

 

(535

)

 

 

3,567

 

Total debt securities available for sale

 

$

127,119

 

 

$

1

 

 

$

(16,919

)

 

$

110,201

 

78


 December 31, 2017
 
Cost or
Amortized
Cost
Gross Unrealized
Estimated
Fair Value 
 
 
Gains
Losses
Debt securities:    
U.S. Government$17,179
$10
$(99)$17,090
State and local government17,302
255
(54)17,503
Corporate debt38,947
170
(209)38,908
Asset-backed securities23,539
36
(35)23,540
Mortgage-backed securities33,942
38
(522)33,458
Commercial mortgage-backed securities3,532
3
(44)3,491
Collateralized mortgage obligations2,563
19
(36)2,546
Total debt securities available for sale137,004
531
(999)136,536
Equity securities:8,629
1,240
(182)9,687
Total securities available for sale$145,633
$1,771
$(1,181)$146,223
 December 31, 2016
 
Cost or
Amortized
Cost
Gross Unrealized
Estimated
Fair Value 
 GainsLosses
Debt securities:    
U.S. Government$5,908
$31
$(36)$5,903
State and local government13,618
106
(205)13,519
Corporate debt34,105
205
(254)34,056
Asset-backed securities19,094
20
(13)19,101
Mortgage-backed securities33,423
64
(630)32,857
Commercial mortgage-backed securities4,760
14
(63)4,711
Collateralized mortgage obligations3,007
34
(25)3,016
Total debt securities available for sale113,915
474
(1,226)113,163
Equity securities:4,283
366
(70)4,579
Total securities available for sale$118,198
$840
$(1,296)$117,742


Notes to Consolidated Financial Statements

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 as follows (dollars in thousands):

 

 

December 31, 2023

 

 

 

Less than 12 months

 

 

12 months or More

 

 

Total

 

 

 

No.
of
Issues

 

 

Fair Value of
Investments
with
Unrealized
Losses

 

 

Gross
Unrealized
Losses

 

 

No.
of
Issues

 

 

Fair Value of
Investments
with
Unrealized
Losses

 

 

Gross
Unrealized
Losses

 

 

No.
of
Issues

 

 

Fair Value of
Investments
with
Unrealized
Losses

 

 

Gross
Unrealized
Losses

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

 

1

 

 

$

649

 

 

$

(7

)

 

 

9

 

 

$

3,400

 

 

$

(154

)

 

 

10

 

 

$

4,049

 

 

$

(161

)

State and local government

 

 

3

 

 

 

1,193

 

 

 

(7

)

 

 

113

 

 

 

19,096

 

 

 

(3,803

)

 

 

116

 

 

 

20,289

 

 

 

(3,810

)

Corporate debt

 

 

-

 

 

 

-

 

 

 

-

 

 

 

66

 

 

 

30,495

 

 

 

(3,507

)

 

 

66

 

 

 

30,495

 

 

 

(3,507

)

Asset-backed securities

 

 

1

 

 

 

1,090

 

 

 

(1

)

 

 

21

 

 

 

16,270

 

 

 

(583

)

 

 

22

 

 

 

17,360

 

 

 

(584

)

Mortgage-backed securities

 

 

4

 

 

 

11

 

 

 

(1

)

 

 

64

 

 

 

22,116

 

 

 

(4,640

)

 

 

68

 

 

 

22,127

 

 

 

(4,641

)

Commercial mortgage
  -backed securities

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4

 

 

 

3,225

 

 

 

(160

)

 

 

4

 

 

 

3,225

 

 

 

(160

)

Collateralized mortgage
  obligations

 

 

-

 

 

 

-

 

 

 

-

 

 

 

32

 

 

 

2,803

 

 

 

(444

)

 

 

32

 

 

 

2,803

 

 

 

(444

)

Total debt securities
  available for sale

 

 

9

 

 

 

2,943

 

 

 

(16

)

 

 

309

 

 

 

97,405

 

 

 

(13,291

)

 

 

318

 

 

 

100,348

 

 

 

(13,307

)

 

 

December 31, 2022

 

 

 

Less than 12 months

 

 

12 months or More

 

 

Total

 

 

 

No.
of
Issues

 

 

Fair Value of
Investments
with
Unrealized
Losses

 

 

Gross
Unrealized
Losses

 

 

No.
of
Issues

 

 

Fair Value of
Investments
with
Unrealized
Losses

 

 

Gross
Unrealized
Losses

 

 

No.
of
Issues

 

 

Fair Value of
Investments
with
Unrealized
Losses

 

 

Gross
Unrealized
Losses

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

 

8

 

 

$

3,534

 

 

$

(135

)

 

 

5

 

 

$

3,964

 

 

$

(200

)

 

 

13

 

 

$

7,498

 

 

$

(335

)

State and local government

 

 

77

 

 

 

12,966

 

 

 

(2,318

)

 

 

45

 

 

 

7,147

 

 

 

(2,354

)

 

 

122

 

 

 

20,113

 

 

 

(4,672

)

Corporate debt

 

 

27

 

 

 

10,069

 

 

 

(1,373

)

 

 

42

 

 

 

20,890

 

 

 

(3,415

)

 

 

69

 

 

 

30,959

 

 

 

(4,788

)

Asset-backed securities

 

 

6

 

 

 

3,188

 

 

 

(76

)

 

 

20

 

 

 

17,308

 

 

 

(1,170

)

 

 

26

 

 

 

20,496

 

 

 

(1,246

)

Mortgage-backed securities

 

 

57

 

 

 

4,006

 

 

 

(573

)

 

 

12

 

 

 

20,031

 

 

 

(4,584

)

 

 

69

 

 

 

24,037

 

 

 

(5,157

)

Commercial mortgage
  -backed securities

 

 

4

 

 

 

3,205

 

 

 

(186

)

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

3,205

 

 

 

(186

)

Collateralized mortgage
  obligations

 

 

26

 

 

 

1,789

 

 

 

(196

)

 

 

9

 

 

 

1,802

 

 

 

(339

)

 

 

35

 

 

 

3,591

 

 

 

(535

)

Total debt securities
  available for sale

 

 

205

 

 

$

38,757

 

 

$

(4,857

)

 

 

133

 

 

$

71,142

 

 

$

(12,062

)

 

 

338

 

 

$

109,899

 

 

$

(16,919

)

 December 31, 2017
 Less than 12 months Greater than 12 months Total
 
No.
of
Issues
Fair Value of
Investments
with
Unrealized
Losses
Gross
Unrealized
Losses
 
No.
of
Issues
Fair Value of
Investments
with
Unrealized
Losses
Gross
Unrealized
Losses
 
No.
of
Issues
Fair Value of
Investments
with
Unrealized
Losses
Gross
Unrealized
Losses
Debt securities:           
U.S. Government12
$11,555
$(64) 7
$2,207
$(35) 19
$13,762
$(99)
State and local government10
3,511
(20) 7
1,424
(34) 17
4,935
(54)
Corporate debt38
15,236
(46) 10
6,555
(163) 48
21,791
(209)
Asset-backed securities20
13,948
(29) 3
915
(6) 23
14,863
(35)
Mortgage-backed securities6
4,935
(19) 26
24,939
(503) 32
29,874
(522)
Commercial mortgage-backed securities3
2,026
(12) 2
722
(32) 5
2,748
(44)
Collateralized mortgage obligations8
1,870
(36) 


 8
1,870
(36)
Total debt securities available for sale97
53,081
(226) 55
36,762
(773) 152
89,843
(999)
Equity securities:           
Common stock13
436
(75) 4
266
(107) 17
702
(182)
Total equity securities available for sale13
436
(75) 4
266
(107) 17
702
(182)
Total securities110
$53,517
$(301) 59
$37,028
$(880) 169
$90,545
$(1,181)


Notes to Consolidated Financial Statements

 December 31, 2016
 Less than 12 months Greater than 12 months Total
 
No.
of
Issues
Fair Value of
Investments with
Unrealized Losses
Gross
Unrealized
Losses
 
No.
of
Issues
Fair Value of
Investments with
Unrealized Losses
Gross
Unrealized
Losses
 
No.
of
Issues
Fair Value of
Investments with
Unrealized Losses
Gross
Unrealized
Losses
Debt securities:           
U.S. Government15
$4,539
$(36) 
$
$
 15
$4,539
$(36)
State and local government29
8,217
(202) 1
104
(3) 30
8,321
(205)
Corporate debt22
9,031
(239) 7
3,369
(15) 29
12,400
(254)
Asset-backed securities10
4,612
(13) 2
118

 12
4,730
(13)
Mortgage-backed securities41
30,330
(630) 


 41
30,330
(630)
Commercial mortgage-backed securities5
1,432
(54) 3
684
(9) 8
2,116
(63)
Collateralized mortgage obligations3
1,674
(25) 


 3
1,674
(25)
Total debt securities available for sale125
59,835
(1,199) 13
4,275
(27) 138
64,110
(1,226)
Equity securities:           
Common stock76
2,472
(61) 2
66
(9) 78
2,538
(70)
Total equity securities available for sale76
2,472
(61) 2
66
(9) 78
2,538
(70)
Total securities201
$62,307
$(1,260) 15
$4,341
$(36) 216
$66,648
$(1,296)
The Company analyzed its investment portfolio in accordance with its OTTI review procedures and determined the Company did not need to record a credit-related OTTI loss, nor recognize a non credit-related OTTI loss in other comprehensive income for the years ended December 31, 2017 and 2016.

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

 

 

December 31,

 

 

 

2023

 

 

2022

 

Debt securities

 

$

4,121

 

 

$

2,517

 

Equity securities

 

 

36

 

 

 

52

 

Cash, cash equivalents, and short-term investments

 

 

1,603

 

 

 

776

 

Total investment income

 

 

5,760

 

 

 

3,345

 

Investment expenses

 

 

(234

)

 

 

(302

)

Net investment income

 

$

5,526

 

 

$

3,043

 

79


  December 31,
 2017 2016 2015
Debt securities$2,757
 $2,370
 $2,110
Equity securities124
 98
 92
Cash and short-term investments122
 21
 5
Total investment income3,003
 2,489
 2,207
Investment expenses(275) (316) (305)
Net investment income$2,728
 $2,173
 $1,902


Notes to Consolidated Financial Statements

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

 

 

December 31,

 

 

 

2023

 

 

2022

 

Debt securities:

 

 

 

 

 

 

Gross realized gains

 

$

 

 

$

6

 

Gross realized losses

 

 

(20

)

 

 

(155

)

Total debt securities

 

 

(20

)

 

 

(149

)

Equity securities:

 

 

 

 

 

 

Gross realized gains

 

 

 

 

 

375

 

Gross realized losses

 

 

 

 

 

(1,731

)

Total equity securities

 

 

 

 

 

(1,356

)

Total net realized investment gains

 

$

(20

)

 

$

(1,505

)

  December 31,
 2017 2016 2015
Debt securities:     
Gross realized gains$32
 $587
 $92
Gross realized losses(8) (24) (6)
Total debt securities24
 563
 86
Equity securities:     
Gross realized gains76
 1,198
 290
Gross realized losses(30) (396) (91)
Total equity securities46
 802
 199
Total net investment realized gains$70
 $1,365
 $285

Proceeds from the sales of debt and equityavailable-for-sale securities available for sale, maturities and other redemptions (primarily the return of capital) were $10.9 million, $44.3$11.9 million and $10.6$32.0 million for the years ended December 31, 2017, 20162023 and 2015,2022, respectively.

The gross realized gains from sales of available-for-sale securities for the years ended December 31, 2023 and 2022 were $0 and $5,000, respectively. The gross realized losses from sales of available-for-sale securities for the years ended December 31, 2023 and 2022 were $18,000 and $155,000, respectively.

As of December 31, 2023 and 2022, there were $0 of payables from securities purchased, respectively. As of December 31, 2023 and 2022, there were $0 and $650,000 of receivables from securities sold, respectively.

The Company's gross unrealized losses related to its equity investments were $535,000 and $638,000 as of December 31, 2023 and 2022, respectively. The Company's gross unrealized gains related to its equity investments were $505,000 as of December 31, 2023. The Company had no gross unrealized gains related to its equity investments as of December 31, 2022.

The Company also carries other equity investments that do not have a readily determinable fair value and are recorded at cost, less impairment or observable changes in price. We review these investments for impairment during each reporting period. There was no impairment or observable changes in price recorded during 2023 related to the Company's equity securities without readily determinable fair value. These investments are a component of Other Assets in the Consolidated Balance Sheets. The value of these investments as of December 31, 2023 and December 31, 2022 were $1.4 million and $1.8 million, respectively.

The table below summarizes the amortized cost and fair value of available-for-sale debt securities by contractual maturity at December 31, 2017.2023. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties (dollars in thousands):

 

 

Amortized
Cost

 

 

Estimated
Fair Value

 

Due in one year or less

 

$

3,212

 

 

$

3,175

 

Due after one year through five years

 

 

30,996

 

 

 

28,983

 

Due after five years through ten years

 

 

18,768

 

 

 

15,904

 

Due after ten years

 

 

10,705

 

 

 

8,144

 

Securities with contractual maturities

 

 

63,681

 

 

 

56,206

 

Asset-backed securities

 

 

38,289

 

 

 

37,752

 

Mortgage-backed securities

 

 

26,768

 

 

 

22,127

 

Commercial mortgage-backed securities

 

 

3,404

 

 

 

3,244

 

Collateralized mortgage obligations

 

 

3,228

 

 

 

2,784

 

Total debt securities

 

$

135,370

 

 

$

122,113

 

 
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less$10,015
 $10,016
Due after one year through five years41,111
 41,027
Due after five years through ten years12,293
 12,396
Due after ten years10,009
 10,062
Securities with contractual maturities73,428
 73,501
Commercial mortgage and asset backed63,576
 63,035
Total debt securities$137,004
 $136,536

At December 31, 20172023 and 2016,2022, the Insurance Companies Subsidiaries had an aggregate of $8.2$8.2 million and $9.6$8.0 million, respectively, on deposit in trust accounts to meet the deposit requirements of various state insurance departments. At December 31, 20172023 and 2016,2022, the Company had $18.4$123.5 million and $10.3$95.7 million held in trust accounts to meet collateral

80


requirements with other third-party insurers, relating to various fronting arrangements. Approximately $111.3 million of the trust account balances are for collateral of gross unearned premiums and gross loss reserves of the fronted business on the Security Program and the quick service restaurant program. There are withdrawal and other restrictions on these deposits, including the type of investments that may be held, however, the Company may generally invest in high-grade bonds and short-term investments and earn interest on the funds. As the unearned premiums run off to zero and loss reserves are paid on these programs, the trust balances will be released and available for general use.



Notes to Consolidated Financial Statements

Investment in Affiliate
The Company recognizes its 50%-ownership interest in the Affiliate under the equity method of accounting. The investment balance is included in Other assets in the consolidated balance sheets and activity is included in consolidated statement of operations as Equity earnings (losses) in affiliates, net of tax. A summary of key balances of the Affiliate are presented below (dollars in thousands):
 December 31,
 2017 2016 2015
Total assets$1,344
 $3,516
 $4,633
Total liabilities1,310
 3,612
 4,944
Total shareholder's equity$34
 $(96) $(311)
      
For the year ended December 31,     
Total Revenue$(275) $(316) $(305)
Net Income2,728
 2,173
 1,902


Notes to Consolidated Financial Statements

3.

6. Fair Value Measurements

The Company’s financial instruments include assets and liabilities carried at fair value, as well as assets and liabilitiesdebt carried at cost or amortized cost butface value, net of unamortized debt issuance costs, which are also disclosed at fair value in these consolidated financial statements.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.

81


The following tables present the Company’s assets and liabilities measured at fair value, classified by the valuation hierarchy as of December 31, 20172023 and 20162022 (dollars in thousands):



Notes to Consolidated Financial Statements

 December 31, 2017
 Fair Value Measurements Using
 Total 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:       
Debt Securities:       
U.S. Government$17,090
 $
 $17,090
 $
State and local government17,503
 
 17,503
 
Corporate debt38,908
 
 38,908
 
Asset-backed securities23,540
 
 23,540
 
Mortgage-backed securities33,458
 
 33,458
 
Commercial mortgage-backed securities3,491
 
 3,491
 
Collateralized mortgage obligations2,546
 
 2,546
 
Total debt securities136,536
 
 136,536
 
Equity Securities5,627
 5,381
 246
 
Short-term investments11,427
 8,429
 2,998
 
Total investments measured at fair value$153,590
 $13,810
 $139,780
 $
        
Investments measured at NAV:       
Investment in limited partnership$4,060
      
Total investments measured at NAV$4,060
      
        
Total assets measured at fair value$157,650
      
        
Liabilities:       
Debt*$29,888
 $
 $
 $29,888
Total Liabilities measured at fair value$29,888
 $
 $
 $29,888

 

 

December 31, 2023

 

 

 

Fair Value Measurements Using

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

$

5,247

 

 

$

 

 

$

5,247

 

 

$

 

State and local government

 

 

20,464

 

 

 

 

 

 

20,464

 

 

 

 

Corporate debt

 

 

30,495

 

 

 

 

 

 

30,495

 

 

 

 

Asset-backed securities

 

 

37,752

 

 

 

 

 

 

37,752

 

 

 

 

Mortgage-backed securities

 

 

22,127

 

 

 

 

 

 

22,127

 

 

 

 

Commercial mortgage-backed securities

 

 

3,244

 

 

 

 

 

 

3,244

 

 

 

 

Collateralized mortgage obligations

 

 

2,784

 

 

 

 

 

 

2,784

 

 

 

 

Total debt securities

 

 

122,113

 

 

 

 

 

 

122,113

 

 

 

 

Equity Securities

 

 

896

 

 

 

139

 

 

 

757

 

 

 

 

Short-term investments

 

 

20,838

 

 

 

20,838

 

 

 

 

 

 

 

Total marketable investments measured at fair value

 

$

143,847

 

 

$

20,977

 

 

$

122,870

 

 

$

 

Investments measured at NAV:

 

 

 

 

 

 

 

 

 

 

 

 

Investment in limited partnership

 

 

1,458

 

 

 

 

 

 

 

 

 

 

Total assets measured at fair value

 

$

145,305

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Senior Unsecured Notes *

 

$

11,791

 

 

$

 

 

$

11,791

 

 

$

 

Senior Secured Notes *

 

 

9,965

 

 

 

 

 

 

 

 

 

9,965

 

Total Liabilities (non-recurring fair value measure)

 

$

21,756

 

 

$

 

 

$

11,791

 

 

$

9,965

 

* Carried at cost or amortized costface value of debt net of unamortized debt issuance costs on the consolidated balance sheet




Notes to Consolidated Financial Statements

 December 31, 2016
 Fair Value Measurements Using
 Total 
Quoted Prices in Active Markets for
Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets:       
Debt Securities:       
U.S. Government$5,903
 $
 $5,903
 $
State and local government13,519
 
 13,519
 
Corporate debt34,056
 
 34,056
 
Asset-backed securities19,101
 
 19,101
 
Mortgage-backed securities32,857
 
 32,857
 
Commercial mortgage-backed securities4,711
 
 4,711
 
Collateralized mortgage-backed securities3,016
 
 3,016
 
Total debt securities113,163
 
 113,163
 
Equity Securities4,579
 4,469
 110
 
Short-term investments10,788
 10,788
 
 
Total assets measured at fair value$128,530
 $15,257
 $113,273
 $
        
Liabilities:       
Senior debt*$17,750
 $
 $17,750
 $
Total Liabilities measured at fair value$17,750
 $
 $17,750
 $

 

 

December 31, 2022

 

 

 

Fair Value Measurements Using

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

$

7,498

 

 

$

 

 

$

7,498

 

 

$

 

State and local government

 

 

20,816

 

 

 

 

 

 

20,816

 

 

 

 

Corporate debt

 

 

30,559

 

 

 

 

 

 

30,559

 

 

 

 

Asset-backed securities

 

 

20,496

 

 

 

 

 

 

20,496

 

 

 

 

Mortgage-backed securities

 

 

24,037

 

 

 

 

 

 

24,037

 

 

 

 

Commercial mortgage-backed securities

 

 

3,228

 

 

 

 

 

 

3,228

 

 

 

 

Collateralized mortgage obligations

 

 

3,567

 

 

 

 

 

 

3,567

 

 

 

 

Total debt securities

 

 

110,201

 

 

 

 

 

 

110,201

 

 

 

 

Equity Securities

 

 

917

 

 

 

160

 

 

 

757

 

 

 

 

Short-term investments

 

 

25,929

 

 

 

25,929

 

 

 

 

 

 

 

Total marketable investments measured at fair value

 

$

137,047

 

 

$

26,089

 

 

$

110,958

 

 

$

 

Investments measured at NAV:

 

 

 

 

 

 

 

 

 

 

 

 

Investment in limited partnership

 

 

350

 

 

 

 

 

 

 

 

 

 

Total assets measured at fair value

 

$

137,397

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Senior Unsecured Notes *

 

$

22,430

 

 

$

 

 

$

22,430

 

 

$

 

Subordinated Notes *

 

 

11,300

 

 

 

 

 

 

 

 

 

11,300

 

Total Liabilities (non-recurring fair value measure)

 

$

33,730

 

 

$

 

 

$

22,430

 

 

$

11,300

 

* Carried at cost or amortized costface value of debt net of unamortized debt issuance costs on the consolidated balance sheet

82


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 8.8%15% and 18% of the fair value of the total investment portfoliomarketable investments measured at fair value as of December 31, 2017.

2023 and December 31, 2022, respectively.

Level 2 investments include debt securities and equity securities, which consist of U.S. government agency securities, state and local municipal bonds, (including those held as restricted securities), corporate debt securities, mortgage-backed and asset-backed securities. The fair value of securities included in the Level 2 category were based on the market values obtained from a third party pricing service that were evaluated using pricing models that vary by asset class and incorporate available trade, bid and other observable market information. The third party pricing service monitors market indicators, as well as industry and economic events. The fair value measurements that were based on Level 2 inputs comprise 88.7%85% and 82% of the fair value of the total investment portfoliomarketable investments measured at fair value as of December 31, 2017.

2023 and December 31, 2022, respectively.

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

As of December 31, 2017,2023, 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 subordinated debt.Senior Secured Notes. In determining the fair value of the subordinated debtSenior Secured Notes outstanding at December 31, 2017,2023, the security attributes (issue date, maturity, coupon, calls, etc.) and market rates on September 29, 2017 (the date of issuance) were fedentered 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



Notes to Consolidated Financial Statements

was then fedentered back into the model along with the December 31, 2017,2023 U.S. Treasury rates. A new lattice was generated and the fair value was computed from the OAS. There were no changes in assumptions of credit risk from the issuance date.

As of December 31, 2022, the fair value of the subordinated debt reported at amortized cost was considered a Level 3 liability in the fair value hierarchy and is entirely comprised of the Company's subordinated notes. In determining the fair value of the subordinated notes outstanding at December 31, 2022, the security attributes (issue date, maturity, coupon, calls, etc.) and market rates on September 24, 2018 (the date of the restated and amended agreement which was repriced at that time) were entered into a valuation model. A lognormal trinomial interest rate lattice was created within the model to compute the option adjusted spread (“OAS”) which is the amount, in basis points, of interest rate required to be paid under the debt agreement over the risk-free U.S. Treasury rates. The Company’sOAS was then entered back into the model along with the December 31, 2022 U.S. Treasury rates. A new lattice was generated and the fair value was computed from the OAS. There were no changes in assumptions of credit risk from the issuance date.

The Company's policy on recognizing transfers between hierarchy levelshierarchies is applied at the end of each reporting period. There were no transfers between Levels 1, 2 andin or out of Level 3 for the yearstwelve months ended December 31, 20172023 and 2016, respectively.2022.

4.

7. 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

83


deficiencies for the years December 31, 2017, 20162023 and 2015. 2022. The activity in deferred policy acquisition costs, net of reinsurance transactions, is as follows (dollars in thousands):

 

 

December 31,

 

 

 

2023

 

 

2022

 

Balance at beginning of period

 

$

10,290

 

 

$

12,267

 

Deferred policy acquisition costs

 

 

16,887

 

 

 

20,202

 

Amortization of policy acquisition costs

 

 

(16,589

)

 

 

(22,179

)

Impact from renewal rights sale

 

 

(4,303

)

 

 

 

Net change

 

 

(4,005

)

 

 

(1,977

)

Balance at end of period

 

$

6,285

 

 

$

10,290

 

 December 31,
 2017 2016 2015
Balance at beginning of period$13,290
 $12,102
 $5,679
 

    
Deferred policy acquisition costs25,736
 26,468
 22,606
Amortization of policy acquisition costs(26,245) (25,280) (16,183)
Net change(509) 1,188
 6,423
      
Balance at end of period$12,781
 $13,290
 $12,102

5.

8. Unpaid Losses and Loss Adjustment Expenses

The Company establishes reserves for unpaid losses and 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 as well as a provision for estimated future costs related to claim settlement for all claims 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 prior year 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, netany related estimates of reinsurance recoverables, is appropriately established in the aggregate and adequate to cover the ultimate net cost of reported and unreported claims arising from losses which had occurred by the date of the consolidated financial statements based on available facts and in accordance with applicable laws and regulations.

84




Notes to Consolidated Financial Statements

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

 

 

December 31,

 

 

 

2023

 

 

2022

 

Gross reserves - beginning of period

 

$

165,539

 

 

$

139,085

 

Less: reinsurance recoverables on unpaid losses

 

 

82,651

 

 

 

40,344

 

Net reserves - beginning of period

 

 

82,888

 

 

 

98,741

 

Add: incurred losses and loss adjustment expenses, net
  of reinsurance

 

 

 

 

 

 

Current period

 

 

64,580

 

 

 

57,156

 

Prior period

 

 

17,833

 

 

 

24,284

 

Total net incurred losses and loss adjustment
  expenses

 

 

82,413

 

 

 

81,440

 

Deduct: loss and loss adjustment expense payments,
  net of reinsurance

 

 

 

 

 

 

Current period

 

 

27,001

 

 

 

20,894

 

Prior period

 

 

34,495

 

 

 

76,399

 

Total net loss and loss adjustment expense
  payments

 

 

61,496

 

 

 

97,293

 

Net reserves - end of period

 

 

103,805

 

 

 

82,888

 

Plus: reinsurance recoverables on unpaid losses

 

 

70,807

 

 

 

82,651

 

Gross reserves - end of period

 

$

174,612

 

 

$

165,539

 

 
December 31,
 2017 2016 2015
Gross reserves - beginning of period$54,651
 $35,422
 $31,531
Less: reinsurance recoverables on unpaid losses6,658
 5,405
 3,224
Net reserves - beginning of period47,993
 30,017
 28,307
      
Add: incurred losses and loss adjustment expenses, net of reinsurance     
Current period64,458
 48,782
 37,422
Prior period9,459
 10,221
 1,460
Total net incurred losses and loss adjustment expenses73,917
 59,003
 38,882
      
Deduct: loss and loss adjustment expense payments, net of reinsurance     
Current period24,547
 20,828
 20,635
Prior period29,533
 20,199
 16,537
Total net loss and loss adjustment expense payments54,080
 41,027
 37,172
      
Net reserves - end of period67,830
 47,993
 30,017
Plus: reinsurance recoverables on unpaid losses20,066
 6,658
 5,405
Gross reserves - end of period$87,896
 $54,651
 $35,422

There was $9.5 million, $10.2$17.8 million and $1.5$24.3 million of adverse development on prior accident year reserves in 2017, 20162023 and 2015,2022, respectively. There were no significant changes in the key methods utilized in the analysis and calculations of the Company’s reserves during 2017, 2016 or 2015.

On September 28, 2017,2023 and 2022.

Of the Company entered into an adverse development cover reinsurance agreement to cover loss development of up to $17.5 million in excess of stated reserves as of June 30, 2017, for accident years 2005 through 2016. The agreement attaches when net losses exceed $1.4 million of the $36.6 million carried reserves at June 30, 2017, and extends to $19.5 million in coverage up to $57.5 million. The company retains a 10% co-participation for any development in excess of the retention.

In 2017, $7.19 million of adverse development was ceded to the ADC, which leaves $10.3 million of coverage in the event of additional adverse development. Due to the benefits of the ADC, the Company reported only $33,000 of adverse development in the fourth quarter of 2017, as it ceded $2.1 million of adverse development under the ADC. Discussion of adverse development, below, is net of amounts ceded to the ADC.
The $9.5$17.8 million of adverse development in 2017 consisted of $7.182023, $5.9 million was related to the 2022 accident year, $6.8 million was related to the 2021 accident year, $4.9 million was related to the 2020 accident year, and $218,000 was related to the 2019 and prior accident years. The development came primarily from commercial liability lines of business particularly in the longer tail lines of business, as a result of additional loss emergence primarily from the Security Program which represented 58% of the adverse development while the remainder was substantially in hospitality, most notably the quick service restaurant program. Both the Security Program and $2.3the quick service restaurant program are no longer written by the Company. As a result of this loss emergence, the Company increased its expected loss ratio selections on both prior accident years as well as the current accident year, resulting in increases to our carried loss reserves.

Of the $24.3 million from personal linesof adverse development in 2022, $1.8 million was related to the 2021 accident year, $4.0 million was related to the 2020 accident year, $9.6 million was related to the 2019 accident year, $5.2 million was related to the 2018 accident year, and $3.7 million was related to 2017 and prior accident years. The adverse development was mostly related to the 2016 and 2015 accident years. Substantially all of this development occurred in the first three quarters of 2017 and primarily consisted of $5.1 million from theCompany's commercial liability business, $1.6 million from commercial property, $1.7 million from Florida homeownerslines and $0.5 million from commercial auto business.

Incurred losses during 2017 also included $5.4 millionwas driven by multiple factors including significant social inflation generating higher severity than historical experience, and longer tail exposure than anticipated, particularly in net catastrophe losses in the current accident year related to Hurricane Harvey in Texas and Hurricane Irma in Florida. Approximately 34% of the losses were generated in Commercial Lines and 66% in Personal lines. Losses from Hurricane Irma were in excess of the Company’s $4.0 million retention on its catastrophe reinsurance treaty which resulted in $5.2 million of losses being ceded to the treaty as of December 31, 2017. This also resulted in a $806,000 charge for catastrophe reinstatement premiums which was recorded as ceded premiums in 2017.
In 2016, prior year net ultimate loss and LAE estimates increased $10.2 million. The $10.2 million increase reflects adverse development of $4.1 million in the commercial lines liability products, $2.7 million in the commercial automobile line, $2.7 million in the wind-exposed homeowners' line and $0.8 million in the run-off personal automobile line.


Notes to Consolidated Financial Statements

In 2015, prior year net ultimate loss and LAE estimates increased $1.5 million. The $1.5 million increase reflects adverse development of $1.2 million in the run-off personal automobile line, $835,000 in the commercial automobile line and $121,000 in the wind-exposed homeowners' line. These were partially offset by favorable development in all of the other lines totaling $660,000.

certain jurisdictions.

Loss Development Tables

The following tables represent cumulative incurred loss and allocated loss adjustment expenses ("ALAE"), net of reinsurance, by accident year and cumulative paid loss and allocated loss adjustment expenses,ALAE, net of reinsurance, by accident year, for the years ended December 31, 20092014 to 2017,2023, as well as total IBNR and the cumulative number of reported claims for the year ended December 31, 2017,2023, by reportable segment and accident year (dollars in thousands). The tables do not include reinsurance recoverables from the LPT. The 2023 and 2022 columns in the commercial lines incurred and paid loss tables below do not

85


Commercial Lines
 Incurred loss and allocated loss adjustment expenses, net of reinsurance  Total IBNR Cumulative number of reported claims
Accident YearFor the years ended December 31,
2009*2010*2011*2012*2013*2014*2015*20162017 2017 2017
2009$11,400$12,066$10,312$8,943$8,232$8,403$8,359$8,414$8,442 $0 877
2010 7,346
8,568
7,255
6,357
6,170
6,074
6,207
6,292
 
 771
2011  6,753
5,758
5,326
5,049
4,932
4,903
4,935
 
 590
2012   7,745
6,421
6,288
6,384
6,253
6,190
 40
 560
2013    10,018
9,435
9,893
10,237
11,252
 181
 600
2014     19,709
19,907
22,711
26,367
 754
 1,740
2015      22,442
26,633
31,861
 2,083
 2,327
2016       32,396
34,935
 6,078
 3,462
2017       
44,251
 20,897
 5,276
       Total $174,525    
              
Cumulative paid loss and allocated loss adjustment expenses, net of reinsurance    
Accident YearFor the years ended December 31,     
2009*2010*2011*2012*2013*2014*2015*20162017    
2009$4,436$5,942$6,410$7,233$7,800$7,867$7,933$8,321$8,441    
2010 3,066
4,488
5,219
5,910
6,040
6,065
6,166
6,258
    
2011  2,645
3,534
3,964
4,449
4,641
4,744
4,872
    
2012   2,325
3,703
4,696
5,558
5,994
6,065
    
2013    3,979
6,211
7,643
8,622
10,147
    
2014     8,715
13,977
17,458
22,446
    
2015      10,470
17,817
22,549
    
2016       10,255
19,135
    
2017       
12,448
    
       Total 112,361
    
  Unpaid losses and ALAE - years 2009 through 2017 
62,164
    
Unpaid losses and ALAE - prior to 2009 (1)* 
148
    
Unpaid ADC  (6,065)    
Unpaid losses and ALAE, net of reinsurance 
$56,247    

include reinsurance recoverables on reserves of $10.9 million and $25.9 million and reinsurance recoverables on paid losses of $3.8 million and $3.9 million, respectively, related to the LPT.

Commercial Lines

 

 

 

 

 

Incurred loss and allocated loss adjustment expenses, net of reinsurance

 

 

Total
IBNR

 

 

Cumulative
number of
reported
claims

 

Accident

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year

2014*

 

 

2015*

 

 

2016*

 

 

2017*

 

 

2018*

 

 

2019*

 

 

2020*

 

 

2021*

 

 

2022*

 

 

2023

 

 

2023

 

 

2023

 

2014

 

19,709

 

 

 

19,907

 

 

 

22,711

 

 

 

26,367

 

 

 

28,145

 

 

 

28,766

 

 

 

29,045

 

 

 

29,175

 

 

 

29,011

 

 

 

29,093

 

 

 

 

 

 

1,755

 

2015

 

 

 

 

22,442

 

 

 

26,633

 

 

 

31,861

 

 

 

34,478

 

 

 

36,372

 

 

 

37,795

 

 

 

38,824

 

 

 

39,093

 

 

 

39,311

 

 

 

 

 

 

2,363

 

2016

 

 

 

 

 

 

 

32,396

 

 

 

34,935

 

 

 

40,440

 

 

 

44,355

 

 

 

46,089

 

 

 

46,993

 

 

 

48,677

 

 

 

49,162

 

 

 

19

 

 

 

3,559

 

2017

 

 

 

 

 

 

 

 

 

 

44,251

 

 

 

44,495

 

 

 

49,749

 

 

 

51,883

 

 

 

55,589

 

 

 

56,649

 

 

 

59,149

 

 

 

234

 

 

 

5,835

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

42,624

 

 

 

42,432

 

 

 

49,741

 

 

 

55,261

 

 

 

60,102

 

 

 

61,881

 

 

 

568

 

 

 

6,128

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

41,286

 

 

 

42,129

 

 

 

46,329

 

 

 

55,263

 

 

 

59,028

 

 

 

1,611

 

 

 

6,337

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,867

 

 

 

35,328

 

 

 

39,193

 

 

 

43,918

 

 

 

3,012

 

 

 

3,866

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40,388

 

 

 

42,266

 

 

 

48,650

 

 

 

5,557

 

 

 

2,947

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

41,708

 

 

 

49,751

 

 

 

10,142

 

 

 

2,323

 

2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39,456

 

 

 

20,752

 

 

 

1,644

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

479,399

 

 

$

41,895

 

 

 

 

Commercial lines

 

Cumulative paid loss and allocated loss adjustment expenses, net of reinsurance

 

Accident

 

 

 

 

 

 

 

 

 

 

 

 

Year

2014*

 

2015*

 

2016*

 

2017*

 

2018*

 

2019*

 

2020*

 

2021*

 

2022*

 

2023

 

2014

 

8,715

 

 

13,977

 

 

17,458

 

 

22,446

 

 

25,609

 

 

27,544

 

 

28,389

 

 

28,648

 

 

28,608

 

 

28,688

 

2015

 

 

 

10,470

 

 

17,817

 

 

22,549

 

 

30,475

 

 

34,497

 

 

35,833

 

 

37,563

 

 

38,685

 

 

39,116

 

2016

 

 

 

 

 

10,255

 

 

19,135

 

 

27,785

 

 

37,967

 

 

41,945

 

 

43,644

 

 

46,957

 

 

48,557

 

2017

 

 

 

 

 

 

 

12,448

 

 

23,020

 

 

34,205

 

 

42,308

 

 

47,148

 

 

52,800

 

 

57,304

 

2018

 

 

 

 

 

 

 

 

 

10,375

 

 

19,799

 

 

31,633

 

 

41,577

 

 

50,508

 

 

57,114

 

2019

 

 

 

 

 

 

 

 

 

 

 

10,078

 

 

20,462

 

 

28,958

 

 

39,893

 

 

50,369

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

10,217

 

 

17,332

 

 

24,225

 

 

33,354

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,870

 

 

21,313

 

 

30,478

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,839

 

 

22,892

 

2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

376,358

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Unpaid losses and ALAE, years 2014 through 2023

 

$

103,041

 

Unpaid losses and ALAE, prior to 2014*

 

 

160

 

 

Unpaid Losses, LPT

 

 

(10,928

)

Unpaid losses and ALAE, net of reinsurance

 

$

92,273

 

* Presented as unaudited required supplementary information.

Personal Lines

 

 

 

 

 

Incurred loss and allocated loss adjustment expenses, net of reinsurance

 

 

Total
IBNR

 

 

Cumulative
number of
reported
claims

 

Accident

 

 

 

 

 

 

For the years ended December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

Year

2014*

 

 

2015*

 

 

2016*

 

 

2017*

 

 

2018*

 

 

2019*

 

 

2020*

 

 

2021*

 

 

2022*

 

 

2023

 

 

2023

 

 

2023

 

2014

 

17,951

 

 

 

17,471

 

 

 

17,735

 

 

 

17,880

 

 

 

17,929

 

 

 

18,082

 

 

 

18,095

 

 

 

18,097

 

 

 

18,052

 

 

 

18,028

 

 

 

 

 

 

3,737

 

2015

 

 

 

 

10,877

 

 

 

13,445

 

 

 

14,721

 

 

 

15,285

 

 

 

15,364

 

 

 

15,427

 

 

 

15,427

 

 

 

15,448

 

 

 

15,456

 

 

 

 

 

 

2,154

 

2016

 

 

 

 

 

 

 

11,619

 

 

 

13,418

 

 

 

14,949

 

 

 

15,550

 

 

 

15,655

 

 

 

15,634

 

 

 

15,679

 

 

 

15,681

 

 

 

 

 

 

1,815

 

2017

 

 

 

 

 

 

 

 

 

 

14,058

 

 

 

13,550

 

 

 

14,493

 

 

 

14,793

 

 

 

14,911

 

 

 

14,957

 

 

 

14,955

 

 

 

 

 

 

2,914

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

5,893

 

 

 

6,378

 

 

 

6,283

 

 

 

6,382

 

 

 

6,298

 

 

 

6,336

 

 

 

 

 

 

803

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,099

 

 

 

2,712

 

 

 

2,898

 

 

 

2,862

 

 

 

2,867

 

 

 

 

 

 

341

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,339

 

 

 

2,590

 

 

 

2,636

 

 

 

2,619

 

 

 

 

 

 

324

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,409

 

 

 

4,332

 

 

 

4,240

 

 

 

 

 

 

48

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,404

 

 

 

8,122

 

 

 

 

 

 

714

 

2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19,444

 

 

 

1,156

 

 

 

1,584

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

107,748

 

 

$

1,156

 

 

 

 

86




Notes to Consolidated Financial Statements

(1) The Company's formation was in 2009, however, as a result of the acquisition of WPIC in 2010, incurred losses prior to the 2009 accident year remain outstanding.

Personal Lines
 Incurred loss and allocated loss adjustment expenses, net of reinsurance Total IBNR Cumulative number of reported claims
Accident YearFor the years ended December 31,
2009*2010*2011*2012*2013*2014*2015*20162017 2017 2017
2009$667$639$634$634$634$634$634$634$634 $0 65
2010 320
188
184
184
184
184
184
184
 
 77
2011  1,678
1,758
1,981
2,031
2,030
2,045
2,027
 1
 717
2012   9,960
11,690
11,740
12,159
12,390
12,365
 17
 3,328
2013    18,034
17,996
18,925
19,138
19,167
 43
 5,138
2014     17,951
17,471
17,735
17,880
 49
 3,660
2015      10,877
13,445
14,721
 71
 2,120
2016       11,619
13,418
 202
 1,806
2017        14,058
 3,190
 2,450
       Total $94,454    
 
Cumulative paid loss and allocated loss adjustment expenses, net of reinsurance    
Accident YearFor the years ended December 31,    
2009*2010*2011*2012*2013*2014*2015*20162017    
2009$537$634$634$634$634$634$634$634$634    
2010 151
174
184
184
184
184
184
184
    
2011  787
1,292
1,633
1,859
1,983
2,021
2,024
    
2012   5,665
9,251
10,844
11,777
12,202
12,306
    
2013    9,955
15,883
18,052
18,600
19,014
    
2014     12,819
16,515
17,260
17,746
    
2015      7,771
11,873
13,844
    
2016       7,119
11,238
    
2017        8,320
    
       Total 85,310
    
Unpaid losses and ALAE - years 2009 through 2017  9,144
    
Unpaid losses and ALAE - prior to 2009 (1)*  
    
Unpaid ADC  (1,132)    
Unpaid losses and ALAE, net of reinsurance  $8,012    

Personal lines

 

Cumulative paid loss and allocated loss adjustment expenses, net of reinsurance

 

Accident

 

 

 

 

 

 

For the years ended December 31,

 

 

 

 

 

 

 

 

 

 

Year

2014*

 

 

2015*

 

 

2016*

 

 

2017*

 

 

2018*

 

 

2019*

 

 

2020*

 

 

2021*

 

 

2022*

 

 

2023

 

2014

 

12,819

 

 

 

16,515

 

 

 

17,260

 

 

 

17,746

 

 

 

17,855

 

 

 

18,047

 

 

 

18,068

 

 

 

18,070

 

 

 

18,025

 

 

 

18,027

 

2015

 

 

 

 

7,771

 

 

 

11,873

 

 

 

13,844

 

 

 

15,159

 

 

 

15,250

 

 

 

15,290

 

 

 

15,416

 

 

 

15,444

 

 

 

15,452

 

2016

 

 

 

 

 

 

 

7,119

 

 

 

11,238

 

 

 

14,442

 

 

 

15,110

 

 

 

15,351

 

 

 

15,452

 

 

 

15,679

 

 

 

15,681

 

2017

 

 

 

 

 

 

 

 

 

 

8,320

 

 

 

12,944

 

 

 

14,004

 

 

 

14,526

 

 

 

14,866

 

 

 

14,957

 

 

 

14,955

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

4,296

 

 

 

5,618

 

 

 

6,100

 

 

 

6,242

 

 

 

6,244

 

 

 

6,333

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,119

 

 

 

2,604

 

 

 

2,692

 

 

 

2,850

 

 

 

2,859

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,307

 

 

 

2,455

 

 

 

2,605

 

 

 

2,619

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,022

 

 

 

3,980

 

 

 

4,081

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,397

 

 

 

7,923

 

2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,170

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

104,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Unpaid losses and ALAE, years 2014 through 2023

 

 

$

3,648

 

Unpaid losses and ALAE, prior to 2014*

 

 

 

 

Unpaid losses and ALAE, net of reinsurance

 

 

$

3,648

 

* Presented as unaudited required supplementary information.

Total Lines

 

Incurred loss and allocated loss adjustment expenses, net of reinsurance

 

 

Total
IBNR

 

Cumulative number of reported claims

 

Accident

For the years ended December 31,

 

 

 

 

 

 

Year

2014*

 

2015*

 

2016*

 

2017*

 

2018*

 

2019*

 

2020*

 

2021*

 

2022*

 

2023

 

 

2023

 

2023

 

2014

 

37,660

 

 

37,378

 

 

40,446

 

 

44,247

 

 

46,074

 

 

46,848

 

 

47,140

 

 

47,272

 

 

47,063

 

 

47,121

 

 

 

 

 

5,492

 

2015

 

 

 

33,319

 

 

40,078

 

 

46,581

 

 

49,763

 

 

51,736

 

 

53,222

 

 

54,251

 

 

54,541

 

 

54,767

 

 

 

 

 

4,517

 

2016

 

 

 

 

 

44,015

 

 

48,353

 

 

55,389

 

 

59,905

 

 

61,744

 

 

62,627

 

 

64,356

 

 

64,843

 

 

 

19

 

 

5,374

 

2017

 

 

 

 

 

 

 

58,309

 

 

58,045

 

 

64,242

 

 

66,676

 

 

70,500

 

 

71,606

 

 

74,104

 

 

 

234

 

 

8,749

 

2018

 

 

 

 

 

 

 

 

 

48,517

 

 

48,810

 

 

56,024

 

 

61,643

 

 

66,400

 

 

68,217

 

 

 

568

 

 

6,931

 

2019

 

 

 

 

 

 

 

 

 

 

 

44,385

 

 

44,841

 

 

49,227

 

 

58,125

 

 

61,895

 

 

 

1,611

 

 

6,678

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

36,206

 

 

37,918

 

 

41,829

 

 

46,537

 

 

 

3,012

 

 

4,190

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

44,797

 

 

46,598

 

 

52,890

 

 

 

5,557

 

 

2,995

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

51,112

 

 

57,873

 

 

 

10,142

 

 

3,037

 

2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

58,900

 

 

 

21,908

 

 

3,228

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

587,147

 

 

 

43,051

 

 

 

87






Notes to Consolidated Financial Statements

Total Lines
 Incurred loss and allocated loss adjustment expenses, net of reinsurance Total IBNR Cumulative number of reported claims
Accident YearFor the years ended December 31,
2009*2010*2011*2012*2013*2014*2015*20162017 2017 2017
2009$12,066$12,705$10,946$9,577$8,866$9,037$8,993$9,048$9,076 $0 942
2010 7,666
8,756
7,439
6,541
6,354
6,258
6,391
6,476
 
 848
2011  8,431
7,517
7,307
7,081
6,963
6,949
6,964
 1
 1,307
2012   17,705
18,111
18,028
18,544
18,642
18,554
 57
 3,888
2013    28,052
27,431
28,817
29,375
30,419
 224
 5,738
2014     37,660
37,378
40,446
44,247
 803
 5,400
2015      33,319
40,078
46,581
 2,154
 4,447
2016       44,015
48,353
 6,280
 5,268
2017        58,309
 24,087
 7,726
       Total $268,979    
 
Cumulative paid loss and allocated loss adjustment expenses, net of reinsurance    
Accident YearFor the years ended December 31,    
2009*2010*2011*2012*2013*2014*2015*20162017    
2009$4,973$6,576$7,043$7,867$8,434$8,501$8,567$8,955$9,075    
2010 3,217
4,662
5,403
6,094
6,223
6,248
6,350
6,442
    
2011  3,432
4,826
5,597
6,308
6,624
6,766
6,897
    
2012   7,990
12,954
15,540
17,335
18,195
18,369
    
2013    13,934
22,094
25,695
27,223
29,162
    
2014     21,534
30,492
34,718
40,192
    
2015      18,241
29,690
36,393
    
2016       17,374
30,373
    
2017        20,768
    
       Total 197,671
    
  Unpaid losses and ALAE - years 2009 through 2017  71,308
    
Unpaid losses and ALAE - prior to 2009 (1)*  148
    
Unpaid ADC  (7,197)    
Unpaid losses and ALAE, net of reinsurance  $64,259    

Total lines

 

Cumulative paid loss and allocated loss adjustment expenses, net of reinsurance

 

Accident

 

 

 

For the years ended December 31,

 

Year

2014*

 

 

2015*

 

 

2016*

 

 

2017*

 

 

2018*

 

 

2019*

 

 

2020*

 

 

2021*

 

 

2022*

 

 

2023

 

2014

 

21,534

 

 

 

30,492

 

 

 

34,718

 

 

 

40,192

 

 

 

43,464

 

 

 

45,591

 

 

 

46,457

 

 

 

46,718

 

 

 

46,633

 

 

 

46,715

 

2015

 

 

 

 

18,241

 

 

 

29,690

 

 

 

36,393

 

 

 

45,634

 

 

 

49,747

 

 

 

51,123

 

 

 

52,979

 

 

 

54,129

 

 

 

54,568

 

2016

 

 

 

 

 

 

 

17,374

 

 

 

30,373

 

 

 

42,227

 

 

 

53,077

 

 

 

57,296

 

 

 

59,096

 

 

 

62,636

 

 

 

64,238

 

2017

 

 

 

 

 

 

 

 

 

 

20,768

 

 

 

35,964

 

 

 

48,209

 

 

 

56,834

 

 

 

62,014

 

 

 

67,757

 

 

 

72,259

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

14,671

 

 

 

25,417

 

 

 

37,733

 

 

 

47,819

 

 

 

56,752

 

 

 

63,447

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,197

 

 

 

23,066

 

 

 

31,650

 

 

 

42,743

 

 

 

53,228

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,524

 

 

 

19,787

 

 

 

26,830

 

 

 

35,973

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,892

 

 

 

25,293

 

 

 

34,559

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18,236

 

 

 

30,815

 

2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24,656

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

480,458

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Unpaid losses and ALAE, years 2014 through 2023

 

 

$

106,689

 

Unpaid losses and ALAE, prior to 2014*

 

 

160

 

 

Unpaid losses, LPT

 

 

 

(10,928

)

Unpaid losses and ALAE, net of reinsurance

 

 

$

95,921

 

* Presented as unaudited required supplementary information.




Notes to Consolidated Financial Statements

The following table reconciles the claimloss development information to the consolidated balance sheet for the year ended December 31, 2017,2023, by reportable segment (dollars in thousands).

 

 

December 31,
2023

 

Net unpaid losses claims and ALAE

 

 

 

Commercial Lines

 

$

92,273

 

Personal Lines

 

 

3,648

 

Total unpaid losses and LAE, net of reinsurance

 

 

95,921

 

Reinsurance recoverable on losses and LAE

 

 

 

Commercial Lines

 

 

68,981

 

Personal Lines

 

 

1,826

 

Total reinsurance recoverable on unpaid losses and LAE

 

 

70,807

 

ULAE expense

 

 

7,884

 

Total gross unpaid losses and LAE

 

$

174,612

 

 December 31, 2017
Net outstanding liabilities for unpaid claims and ALAE 
Commercial Lines$56,247
Personal Lines8,012
Liabilities for unpaid claims and ALAE, net of reinsurance64,259
  
Reinsurance recoverable on unpaid claims 
Commercial Lines17,265
Personal Lines2,801
Total reinsurance recoverable on unpaid claims20,066
  
ULAE Expense3,571
  
Total gross liability for unpaid claims and LAE$87,896

Loss Duration Disclosure (unaudited)

The following table represents the average annual percentage payout of incurred losses by age, net of reinsurance, for each reportable segment.

 

 

Average annual percentage payout of incurred losses by age, net of reinsurance

 

 

Year 1

 

Year 2

 

Year 3

 

Year 4

 

Year 5

 

Year 6

 

Year 7

 

Year 8

 

Year 9

 

Year
10+

Commercial Lines

 

27.3%

 

21.6%

 

18.6%

 

12.8%

 

9.2%

 

4.9%

 

2.9%

 

1.5%

 

0.7%

 

0.5%

Personal Lines

 

83.1%

 

11.3%

 

5.3%

 

0.3%

 

0.0%

 

0.0%

 

0.0%

 

0.0%

 

0.0%

 

0.0%

Total Lines

 

29.2%

 

21.3%

 

18.2%

 

12.4%

 

8.9%

 

4.7%

 

2.8%

 

1.4%

 

0.7%

 

0.4%

88


 Average annual percentage payout of incurred losses by age, net of reinsurance
 Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10+
Commercial Lines34.6%21.7%18.0%12.3%6.4%3.4%1.9%1.0%0.6%0.1%
Personal Lines60.8%19.3%10.8%4.9%2.6%1.5%0.1%%%%
Total Lines37.9%21.4%17.1%11.4%6.0%3.1%1.7%0.8%0.5%0.1%



Notes to Consolidated Financial Statements

6.

9. Reinsurance

In the normal course of business, the Company participates in reinsurance agreements in order to limit losses that may arise from catastrophes or other individually severe events. The Company primarily ceded all specific loss commercial liability risks in excess of $500,000$400,000 in 2017, 2016,2023 and 2015. $340,000 in 2022. The Company ceded specific loss commercial property risks in excess of $400,000 in 2023 and $300,000 in 2022. The Company ceded homeowners specific risks in excess of $300,000 in 2023 and 2022.

A "treaty" is a reinsurance agreement in which coverage is provided for a class of risks and does not require policy by policy underwriting of the reinsurer. "Facultative" reinsurance is where a reinsurer negotiates an individual reinsurance agreement for every policy it will reinsure on a policypolicy-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.

The Company entered into new specific loss reinsurance treaties on December 31, 2021 and January 1, 2022 which included a 40% ceding commission. The reinsurance premiums related to these treaties increased by policy basis.

the same amount as the ceding commission. The ceding commissions were carried forward under the 2023 treaties with substantially similar terms.

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

Casualty Clash

The Company is party to a workers' compensation and casualty clash reinsurance treaty with limits up to $18.0 million in excess of a $2.0 million retention.
Clash coverage is a type of reinsurance that provides additional coverage in the event that one casualty loss event results in two or more claims and recovery under the reinsurance treaties may otherwise be limited due to the amount, type or number of claims. Clash reinsurance further protects the balance sheet as it reduces the potential maximum loss on either a single risk or a large number of risks.
Effective January 1, 2022 through December 31, 2023, the Company was party to a workers’ compensation and casualty clash reinsurance treaty with a limit of $29.0 million in excess of $1.0 million.

Facultative

The Company was party to a facultative reinsurance agreement with a large reinsurer for commercial auto physical damage risks primarily in excess of $400,000.
The Company haswas party to a facultative reinsurance agreement with a large reinsurer for property risks with total insured values above the other reinsurance treaty limits.

Liability

Property
Effective NovemberJanuary 1, 2014,2019 through December 31, 2023, the Company entered intowas party to an excess of loss reinsurance treaty for commercial liability coverage with a limit of $600,000 in excess of $400,000.

Property

Effective January 1, 2020 through December 31, 2023, the Company was party to an excess of loss reinsurance treaty for personal property coverage with limits up to $2.7a limit of $1.7 million in excess of $300,000,$300,000, for homeowners' and dwelling fire business. This treaty remained in effect
Effective January 1, 2023 through 2017.
Effective July 1, 2015,December 31, 2023, the Company entered intowas party to an excess of loss reinsurance treaty for commercial property values from $2.0coverage with a limit of $7.6 million in excess of $400,000.
Effective January 1, 2022 through December 31, 2022, the Company was party to $4.0an excess of loss reinsurance treaty for commercial property coverage with a limit of $7.7 million to replace muchin excess of the facultative reinsurance cover. This treaty remained in effect throughout 2017.$300,000.

89


At December 31, 2017,2023, the Company iswas covered for property catastrophe losses up to $106.0$27.0 million in excess of a $4.0$3.0 million retention for the first event. TheThis treaty renews terminates on June 1, 2018.2024.
Multiple Line
Effective January 1, 2015,At December 31, 2022, the Company entered into an excess of loss multi-line treaty that covers commercialwas covered for property and casualtycatastrophe losses up to $1.5$28.0 million in excess of a $500,000 retention.$2.0 million retention for the first event. This treaty remained in effect through 2017.terminates on June 1, 2023.

Quota Share

The Company has commercial umbrella treaties for commercial lines business in the form of
Under a 90% quota share. A quota share agreement, is an agreement between an insurer and a reinsurer whereby the reinsurer pays an agreed-upona percentage of all losses the insurer sustains. In turn, the insurer compensates the reinsurersustains in return for this agreement in the form of a percentagesimilar percent of the premiums forwritten on that risk. A ceding commission is paid by the applicable lines coveredreinsurer to the insurer to cover acquisition and reinsurance period.operating expenses.
Effective December 31, 2014, the
The Company entered intoceded 90% to 100% of its commercial umbrella coverages under a 25% quota share arrangement with a reinsurer for coverage net of the other reinsurance arrangements and within the Company's retention of $500,000 for commercial lines and $300,000 for personal homeowners lines. treaty.
The Company terminated the agreement on August 1, 2015. The purposeceded 50% of theits cannabis program net written premiums under a quota share arrangement was to reduce the capital requirements necessary to support premium growth initiatives. The IPO provided sufficient capital to support growth initiatives, and the quota share was no longer deemed necessary.
Adverse Development Cover
Effective September 28, 2017, the Company entered into an ADC to cover loss development of up to $17.5 million in excess of stated reserves as of June 30, 2017. The consideration for the ADC entered into in the third


Notes to Consolidated Financial Statementstreaty.

quarter was $7.2 million, which resulted in a one-time charge to ceded premiums fully earned in the third quarter. The agreement provides up to $17.5 million of reinsurance for adverse net loss reserve development for accident years 2005 through 2016. The agreement attaches when net losses exceed $1.4 million of the $36.6 million carried reserves at June 30, 2017, and extends to $19.5 million in coverage up to $57.5 million (inclusive of a 10% co-participation). As of December 31, 2017, the Company has ceded $7.19 million of losses into the $17.5 million layer. There is a 35% contingent recovery depending on the performance of the reserves over time. No contingent recovery is currently reflected in the financial statements.
Equipment Breakdown, Employment Practice Liability, and Data Compromise and Identity Recovery
The Company has a 100% quota share arrangement with another reinsurer forceded 100% of a small number of equipment breakdown, employment practices liability, and data compromise, and cannabis cyber liability coverages that are occasionally bundled with other products.products under separate quota share agreements.

Sale of Renewal Rights

On September 30, 2023, the Company entered into a 100% quota share reinsurance agreement with the buyer of the renewal rights described in Note 2 ~ Sale of Renewal Rights. The Company ceded $30.9 million of its gross unearned premiums relating to the security guard and alarm installation program in exchange for 22% - 27% ceding commission.

Loss Portfolio Transfer

On November 1, 2022, the Company entered into a loss portfolio transfer (“LPT”) reinsurance agreement with Fleming Reinsurance Ltd (“Fleming Re”). Under the agreement, Fleming Re will cover an aggregate limit of $66.3 million of paid losses on $40.8 million of stated net reserves as of June 30, 2022, relating to accident years 2019 and prior. This covers substantially all of the commercial liability lines underwritten by the Company. Within the aggregate limit, there is a $5.5 million loss corridor in which the Company retains losses in excess of $40.8 million. Fleming Re is then responsible to cover paid losses in excess of $46.3 million up to $66.3 million. Accordingly, there is $20.0 million of adverse development cover for accident years 2019 and prior. Under the agreement, Fleming Re was compensated with $40.8 million for stated net reserves as of June 30, 2022, plus a one-time risk fee of $5.4 million. Recoverables due to the Company under this agreement are recorded as reinsurance recoverables. The agreement is between CIC and WPIC and Fleming Re. As of December 31, 2022, the Company has recorded losses through the $5.5 million corridor and $644,000 into the $20.0 million layer. As of December 31, 2022, the Consolidated Balance Sheet included $3.9 million of reinsurance recoverables on paid losses related to the LPT, and $25.9 million of reinsurance recoverables on unpaid losses related to the LPT. As of December, 31, 2023, the Company has recorded losses through the $5.5 million corridor and $9.1 million into the $20.0 million layer. As of December 31, 2023, the Consolidated Balance Sheet included $3.8 million of reinsurance recoverables on paid losses related to the LPT, and $10.9 million of reinsurance recoverables on unpaid losses related to the LPT.

The Company assumes written premiums under a few fronting arrangements. The fronting arrangements are with unaffiliated insurers who write on behalf of the Company in markets that require a higher A.M. Best rating than the Company’s rating, or where the policies are written in a state where the Company is not licensed or for other strategic reasons. Assumed premiums are comprised entirely of these arrangements other than where there are premiums assumed from Citizens Property and Casualty Corporation (“Citizens”).

Beginning in December 2014, the Company assumed written premium of $5.5 million under a policy assumption agreement with Citizens. Citizens is a Florida government-sponsored insurer that provides homeowners insurance to Florida residences that cannot find coverage in the voluntary market. Upon assuming this premium, the Company becomes the primary insurer to the policyholders. The Company is responsible for claims occurring on or after the effective date of the assumption.
In the first quarter of 2015, the Company assumed additional written premium from Citizens in the amount of $1.4 million. This assumption was offset during the year ended December 31, 2015 by a return of $1.3 million of assumed premiums from the 2014 assumption and $738,000 of assumed premiums from the 2015 assumption. The return premiums are related to the policyholders opting out of the related assumptions. The Company did not assume any Citizens business in 2016 or 2017.

The Company assumed $28.0 million, $25.0$43.6 million and $2.5$42.2 million of written premiums under the insurance fronting arrangements for the years ended ended December 31, 2017, 2016,2023 and 2015,2022, respectively.

90




Notes to Consolidated Financial Statements

The following table presents the effects of such reinsurance and assumptionassumed reinsurance transactions on written premiums, earned premiums and losses and LAE (dollars in thousands). The 2017In 2023, ceded written and earned premium amounts include $806,000included $91,000 of reinsurance reinstatement costs related to catastrophe losses. In 2022, ceded written and earned premium amounts included $1.6 million of reinsurance reinstatement costs relating to Hurricane Irma:

Ian.

 

 

Year Ended December 31,

 

 

 

2023

 

 

2022

 

Written premiums:

 

 

 

 

 

 

Direct

 

$

100,214

 

 

$

95,832

 

Assumed

 

 

43,620

 

 

 

42,187

 

Ceded

 

 

(75,146

)

 

 

(46,787

)

Net written premiums

 

$

68,688

 

 

$

91,232

 

 

 

 

 

 

 

Earned premiums:

 

 

 

 

 

 

Direct

 

$

96,595

 

 

$

97,843

 

Assumed

 

 

49,977

 

 

 

37,558

 

Ceded

 

 

(62,637

)

 

 

(38,690

)

Net earned premiums

 

$

83,935

 

 

$

96,711

 

 

 

 

 

 

 

Loss and loss adjustment expenses:

 

 

 

 

 

 

Direct

 

$

75,175

 

 

$

73,000

 

Assumed

 

 

45,662

 

 

 

43,487

 

Ceded

 

 

(38,424

)

 

 

(35,047

)

Net loss and LAE

 

$

82,413

 

 

$

81,440

 

 Year Ended December 31,
 2017 2016 2015
Written premiums:     
Direct$86,251
 $89,915
 $90,503
Assumed28,033
 25,008
 3,247
Ceded(23,044) (14,994) (14,076)
Net written premiums$91,240
 $99,929
 $79,674
      
Earned premiums:     
Direct$87,656
 $90,660
 $82,614
Assumed27,081
 14,053
 6,602
Ceded(23,008) (15,086) (22,451)
Net earned premiums$91,729
 $89,627
 $66,765
      
Loss and loss adjustment expenses:     
Direct$79,035
 $59,940
 $43,989
Assumed19,524
 11,955
 2,756
Ceded(24,642) (12,892) (7,863)
Net Loss and loss adjustment expenses$73,917
 $59,003
 $38,882



10. Debt

As of December 31, 2023, the Company’s debt was comprised of two instruments: $17.9 million of 9.75% public senior unsecured notes (the "New Public Notes") which were issued during the third quarter of 2023, and $9.8 million of privately placed 12.5% senior secured notes ("Senior Secured Notes"), which were issued on September 30, 2023. The New Public Notes to Consolidated Financial Statements


7.Debt
On have substantially the same terms as the 6.75% public senior unsecured notes (the "Old Public Notes") which matured on September 29, 2017,30, 2023, except for the coupon. A summary of the Company's outstanding debt is as follows (dollars in thousands):

 

 

As of December 31, 2023

 

 

As of December 31, 2022

 

 

 

Gross Debt

 

 

Unamortized
Debt Issuance
Costs

 

 

Net Debt

 

 

Gross Debt

 

 

Unamortized
Debt Issuance
Costs

 

 

Net Debt

 

Public Notes

 

$

17,887

 

 

$

1,679

 

 

$

16,208

 

 

$

24,381

 

 

$

195

 

 

$

24,186

 

Senior Secured Notes

 

 

9,750

 

 

 

897

 

 

 

8,853

 

 

 

 

 

 

 

 

 

 

Subordinated notes

 

 

 

 

 

 

 

 

 

 

 

10,500

 

 

 

810

 

 

 

9,690

 

Total

 

$

27,637

 

 

$

2,576

 

 

$

25,061

 

 

$

34,881

 

 

$

1,005

 

 

$

33,876

 

Public Note repayment and new issuance

The Company repaid all the $24.4 million of its Old Public Notes which matured on September 30, 2023, by paying off $13.2 million in cash and exchanging $11.2 million for the New Public Notes. The New Public Notes have substantially the same terms as the Old Public Notes, except for the coupon.

The Company funded the repayment of the Old Public Notes with several different fundraising initiatives. In August and September of 2023, the Company issued $30.0raised $6.7 million in private placementcash under and S-1 registration statement for the New Public Notes.

The Company also raised $6.2 million under an S-4 registration statement exchange offering for the New Public Notes and the Company's lender of its subordinated notes (the "Notes").also exchanged its $5.0 million holding of the Company's Old Public

91


Notes for $5.0 million of the New Public Notes under the S-1 registration statement. As such, there was a non-cash exchange of $11.2 million of Old Public Notes for New Public Notes. The remaining $6.5 million of cash needed to pay down the Old Public Notes have a maturity datewas provided with cash on hand.

New Public Notes

The Company issued $17.9 million of September 29, 2032,New Public Notes during the third quarter of 2023. The new notes bear aninterest rate of 9.75% per annum, payable quarterly at a fixed annual ratethe end of 8.0%,March, June, September and allow for up to four quarterly interest deferrals. OnDecember and mature on September 30, 2028. The Company may redeem the fifth and tenth anniversary of thenew notes, the interest rate resets to 1,250 basis points and 1,500 basis points, respectively, above the 5-year mid-swap rate. The Notes include an issuer call optionin whole or in part, at par from July 31, 2018, through October 31, 2018, andface value at 105% of par any time after September 30, 2025.

Senior Secured Notes

The Company paid down $500,000 of principal on its subordinated notes on September 29, 2020.

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

Debt issuance costs

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

As of December 31, 2023, the carrying value of the New Public Notes isand Senior Secured Notes were offset by $973,000$1.7 million and $897,000 of capitalized costs, respectively. The debt issuance costs that will beare amortized through interest expense over the life of the loan.

loans.

Debt covenants

The Notes replaced the Company's senior debt facility ("Credit Facility"), which was terminated upon execution of the Notes. The Credit Facility was comprised of three notes: a $17.5 million revolving line of credit ("Revolver") which commenced in October 2013; a $5.0 million five-year term note ("Term Note") which commenced in October 2013; and a $7.5 million five-year term note which commenced in September 2014 ("2014 Term Note"). A summary of the outstanding debt is as follows (dollars in thousands):

 December 31,
 2017 2016
Subordinated Debt$29,027
 $
Revolver
 10,500
Term Note
 1,750
2014 Term Note
 5,500
Total$29,027
 $17,750
The proceeds from the Notes were utilized to repay all of the outstanding balances on the Credit Facility and to contribute additional capital into the Insurance Company Subsidiaries.
TheSenior Secured Notes contain various restrictive financial debt covenants that relate to the Company’s minimum tangible net worth, minimum fixed-charge coverage ratios, dividend-payingdividend paying capacity, reinsurance retentions, and risk-based capital ratios. AtThe Senior Secured Notes also require that any proceeds the Company receives from asset sales be used to pay down the principal. As of December 31, 2017,2023, the Company was not in compliance with the tangible net worth, dividend paying capacity, risk-based capital and consolidated debt to capital covenants. On March 27, 2024, the holders of the Senior Secured Notes waived the December 31, 2023 covenants and modified the minimum requirements of the financial debt covenants. Management expects to be in compliance with all debt covenants in future periods.

The following table shows the scheduled principal payments of itsthe Company's debt financial covenants.as of December 31, 2023 (dollars in thousands):

Year

 

Senior unsecured notes

 

 

Senior secured notes

 

2024

 

 

1,000

 

 

 

 

2025

 

 

1,000

 

 

 

 

2026

 

 

1,000

 

 

 

 

2027

 

 

1,000

 

 

 

 

2028

 

 

5,750

 

 

 

17,887

 

Total

 

$

9,750

 

 

$

17,887

 

Line of credit

The Company maintained a $10.0 million line of credit with a national bank during 2022. The line of credit carried an interest rate at LIBOR plus 2.75% per annum, payable monthly. The line of credit agreement matured on December 1, 2022, and was not renewed.

92


8.

11. Income Taxes

At December 31, 2017 and 2016,2023, the Company had current income taxestax receivable of $214,000 and $110,000, respectively,$65,000 included in other assets in the consolidated balance sheets.

At December 31, 2022, the Company had current income tax receivable of $58,000 included in other assets in the consolidated balance sheets.

The income tax expense (benefit) is comprised of the following (dollars in thousands):

 

 

Year Ended December 31,

 

 

 

2023

 

 

2022

 

Current tax expense (benefit)

 

$

26

 

 

$

(45

)

Deferred tax expense (benefit)

 

 

(17

)

 

 

(9,396

)

Total income tax expense (benefit)

 

$

9

 

 

$

(9,441

)

 Year Ended December 31,
 2017 2016 2015
Current tax expense (benefit)$(28) $70
 $48
Deferred tax expense (benefit)(419) (147) 
Total income tax expense (benefit)$(447) $(77) $48

The income tax expense (benefit) differed from the amounts computed by applying the statutory U.S. federal income tax rate of 34%21% in 2023 and 2022 to pretax income as a result of the following (dollars in thousands):

 

 

Year Ended December 31,

 

 

 

2023

 

 

2022

 

Income (loss) before income taxes

 

$

(25,644

)

 

$

(20,490

)

Statutory U.S. federal income tax rate

 

 

(5,385

)

 

 

(4,303

)

State income taxes, net of federal benefit

 

 

(1,503

)

 

 

(5,984

)

Tax‑exempt investment income and dividend received deduction

 

 

(13

)

 

 

(22

)

Nondeductible meals and entertainment

 

 

73

 

 

 

79

 

Valuation allowance on deferred tax assets

 

 

7,254

 

 

 

3,715

 

Equity-earnings from Affiliate

 

 

 

 

 

195

 

Net gain from sale of agency assets

 

 

 

 

 

(2,848

)

Utilization of state NOLs

 

 

 

 

 

(386

)

Deferred corrections

 

 

(476

)

 

 

 

PPP Loan forgiveness

 

 

 

 

 

 

Other

 

 

59

 

 

 

113

 

Income tax expense (benefit)

 

$

9

 

 

$

(9,441

)

Effective tax rate

 

 

 

 

 

46.1

%

93




Notes to Consolidated Financial Statements


 Year Ended December 31,
 2017 2016 2015
Income (loss) before income taxes$(22,054) $(8,643) $83
Statutory U.S. federal income tax rate(7,498) (2,939) 28
State income taxes, net of federal benefit(106) (3) (72)
Tax‑exempt investment income and dividend received deduction(123) (106) (116)
Nondeductible meals and entertainment54
 61
 45
Valuation allowance on deferred tax assets1,515
 2,808
 (2,050)
Net operating loss write-off
 
 2,150
Change in federal tax rate5,612
 
 
Other99
 102
 63
Income tax expense (benefit)$(447) $(77) $48
Effective tax rate2.0% 0.9% 57.8%

On December 22, 2017, the U.S. federal government enacted H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Act”). The Act provides for significant changes to corporate taxation including the decrease of the corporate tax rate from 34% to 21%. The Company has completed its analysis of the impact of the Act and has followed the additional guidance provided by the Security and Exchange Commission's Staff Accounting Bulletin No. 118. Management believes there are no material provisional balances as of December 31, 2017.
The Company has accounted for the impacts of the Act by remeasuring its deferred tax assets and liabilities at the 21% enacted tax rate. The approximate impact of the change in tax rate was a decrease in net deferred tax assets (before valuation allowance) of $5.6 million with a corresponding deferred income tax expense of $5.6 million. The valuation allowance also decreased by $5.7 million with a corresponding deferred income tax benefit of $5.7 million. Accordingly, the net deferred income tax impact on the results of operations relating to the Act was a $63,000 deferred tax benefit in 2017. The Company’s net deferred tax assets for the year ended December 31, 2016, remain at the previously enacted tax rate.
The Company has recorded a reasonable estimate for the impact of the Act on the discounted loss reserves included in the table, below. The Company will true-up the deferred tax asset for this item when the United States Treasury releases the 2018 discount factors. The corresponding deferred tax liability related to the transitional adjustment will be recognized over the next eight years beginning with the year ending December 31, 2018.
For the year ended December 31, 2015, the Company reconsidered how it presents deferred tax assets and the associated valuation allowance which are subject to permanent limitation and which will expire unused. As such, the 2015 valuation allowance and gross net operating loss deferred tax asset were reduced by $2.2 million to remove the deferred tax assets that would expire unused.



Notes to Consolidated Financial Statements

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (dollars in thousands):

 

 

December 31,

 

 

 

2023

 

 

2022

 

Deferred tax assets:

 

 

 

 

 

 

Discounted unpaid losses and loss adjustment expenses

 

$

1,749

 

 

$

1,217

 

Unearned premiums

 

 

1,648

 

 

 

2,324

 

Net operating loss carryforwards

 

 

16,960

 

 

 

12,152

 

Net unrealized losses on investments

 

 

2,780

 

 

 

3,687

 

State net operating loss carryforwards

 

 

6,523

 

 

 

5,097

 

Other

 

 

112

 

 

 

403

 

Gross deferred tax assets

 

 

29,772

 

 

 

24,880

 

Less valuation allowance

 

 

(28,013

)

 

 

(21,663

)

Total deferred tax assets, net of allowance

 

 

1,759

 

 

 

3,217

 

Deferred tax liabilities:

 

 

 

 

 

 

Investment basis difference

 

 

208

 

 

 

23

 

Tax rate change transition discounting

 

 

92

 

 

 

137

 

Equity investment in Affiliate

 

 

 

 

 

691

 

Deferred policy acquisition costs

 

 

1,320

 

 

 

2,161

 

Intangible assets

 

 

115

 

 

 

115

 

Property and equipment

 

 

24

 

 

 

41

 

Other

 

 

 

 

 

49

 

Total deferred tax liabilities

 

 

1,759

 

 

 

3,217

 

Net deferred tax liability

 

$

 

 

$

 

 December 31,
 2017 2016
Deferred tax assets:   
Discounted unpaid losses and loss adjustment expenses$1,026
 $715
Unearned premiums2,576
 4,085
Net operating loss carryforwards9,147
 7,757
State net operating loss carryforwards385
 223
Other135
 203
Gross deferred tax assets13,269
 12,983
Less valuation allowance(9,904) (8,389)
Total deferred tax assets, net of allowance3,365
 4,594
Deferred tax liabilities:   
Investment basis difference19
 45
Unrealized gains on investments124
 (156)
Deferred policy acquisition costs2,684
 4,519
Intangible assets107
 163
Property and equipment85
 202
Other461
 
Total deferred tax liabilities3,480
 4,773
Net deferred tax liability$(115) $(179)

The net deferred tax liability is recorded in Accountsaccounts payable and accrued expenses in the consolidated balance sheets.

As of December 31, 2017,2023, the Company has net operating lossNOL carryforwards for federal income tax purposes of $43.6$80.8 million, of which $78.2 million expire in tax years 20292030 through 2037.2043 and $10.3 million never expire. Of this amount, $15.1$19.5 million are limited in the amount that can be utilized in any one year and may expire before they are realized under Section 382 of the Internal Revenue Code. The Company has state net operating loss carryforwards of $11.0$120.3 million, which expire in tax years 20292024 through 2037.

2043.

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of the existing deferred tax assets under the guidance of ASC 740. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three‑year period ended December 31, 2017.2023. Such objective evidence limits the Company's ability to consider other subjective evidence, such as management's projections for future growth.

Based on its evaluation, the Company has recorded a valuation allowance of $9.9$28.0 million and $8.4$21.7 million at December 31, 20172023 and 2016,2022, respectively, to reduce the deferred tax assets to an amount that is more likely than not to be realized based on the provisions in ASC 740. The amount of the deferred tax assets considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or if objective negative evidence in the form of cumulative losses is no longer present, and additional weight may be given to subjective evidence, such as the Company’s projections for growth.

The Company files consolidated federal income tax returns. For the years before 2014,2020, the Company is no longer subject to U.S. federal examinations; however, the Internal Revenue Service has the ability to review years prior to 20142020 to the extent the Company utilized tax attributes carried forward from those prior years. The statute of limitations on state filings is generally three to four years.


years.


94


Notes to Consolidated Financial Statements

9.

12. Statutory Financial Data, Risk-Based Capital and Dividend Restrictions

U.S. state insurance laws and regulations prescribe accounting practices for determining statutory net income and capital and surplus for insurance companies. In addition, state regulators may permit statutory accounting practices that differ from prescribed practices. Statutory accounting practices prescribed or permitted by regulatory authorities for the Company’s Insurance Company Subsidiaries differ from GAAP. The principal differences between statutory accounting practices ("SAP") and GAAP as they relate to the financial statements of the Company’s Insurance Company Subsidiaries are (i) policy acquisition costs are expensed as incurred under SAP, whereas they are deferred and amortized under GAAP, (ii) deferred tax assets are subject to more limitations regarding what amounts can be recorded under SAP and (iii) bonds are recorded at amortized cost under SAP and fair value under GAAP.

Risk-Based Capital ("RBC") requirements as promulgated by the National Association of Insurance Commissioners (‘‘NAIC’’) require property and casualty insurers to maintain minimum capitalization levels determined based on formulas incorporating various business risks (e.g., investment risk, underwriting profitability, etc.) of the Insurance Company Subsidiaries. As of December 31, 2017, 20162023, CIC fell within the Company Action Level and 2015,WPIC fell within the Regulatory Action Level of the RBC formula. WPIC also fell below two other regulatory thresholds which are necessary to stay in compliance. Management is required to provide a plan to its domiciliary regulator that shows how the Companies will get above the minimum level requirements. Management believes that the planned reduction in premium anticipated by a strategic shift to use third-party insurers for substantially all of its commercial lines business will be sufficient to bring the Companies back into compliance by December 31, 2024. Management expects to substantially cease all writings in WPIC by the end of the second quarter of 2024. In the event the Companies do not regain compliance, the director may suspend, revoke, or limit the certificate of authority of the Companies.

As of December 31, 2022, the Insurance Company Subsidiaries’ adjusted capital and surplus exceeded their authorized control level as determined by the NAIC’s risk-based capital models.

Summarized 2017, 20162023 and 20152022 statutory basis information for the non-captive Insurance Company Subsidiaries, which differs from generally accepted accounting principles, is as follows (dollars in thousands). On December 30, 2016, the Company's wholly owned subsidiary, ACIC was merged into WPIC. As a result, 2017 and 2016 statutory data is shown for the remaining two Insurance Company Subsidiaries, while 2015 data is shown for the prior three Insurance Company Subsidiaries, (dollars in thousands).

 

 

CIC

 

 

WPIC

 

2023

 

 

 

 

 

 

Statutory capital and surplus

 

$

32,117

 

 

$

7,494

 

RBC authorized control level

 

 

19,050

 

 

 

5,268

 

Statutory net income (loss)

 

 

(14,014

)

 

 

(9,841

)

RBC %

 

 

169

%

 

 

142

%

 

 

CIC

 

 

WPIC

 

2022

 

 

 

 

 

 

Statutory capital and surplus

 

$

47,827

 

 

$

20,651

 

RBC authorized control level

 

 

15,541

 

 

 

5,098

 

Statutory net income (loss)

 

 

(6,846

)

 

 

(4,171

)

RBC %

 

 

308

%

 

 

405

%

 Conifer 
White
Pine
2017:   
Statutory capital and surplus$35,848
 $26,075
RBC authorized control level8,873
 6,224
Statutory net income (loss)(6,993) (13,737)
RBC %404% 419%

Conifer 
White
Pine
2016:   
Statutory capital and surplus$29,539
 $32,391
RBC authorized control level6,676
 6,583
Statutory net income (loss)(2,782) (1,209)
RBC %442% 492%
 Conifer 
American
Colonial
 
White
Pine
2015:     
Statutory capital and surplus$30,637
 $22,523
 $17,452
RBC authorized control level5,390
 2,809
 2,978
Statutory net income (loss)387
 (2,278) 784
RBC %569% 802% 585%

Dividend Restrictions

The state insurance statutes in which the Insurance Company Subsidiaries are domiciled limit the amount of dividends that they may pay annually without first obtaining regulatory approval. Generally, the limitations are based on the greater of statutory net income for the preceding year or 10%10% of statutory surplus at the end of the preceding year. The Insurance Company Subsidiaries must receive regulatory approval in order to pay dividends to the Parent Company from its Insurance Company Subsidiaries in 2017.


Subsidiaries.


95


Notes to Consolidated Financial Statements

10.

13. Shareholders’ Equity

Common

Preferred Stock

In September 2017,

On December 20, 2023, the Company issued $5.0$6.0 million of its newly designated Series A Preferred Stock (the "Preferred Stock"), no par value, through a private placement of 1,000 shares priced at $6,000 per share that matures on June 30, 2026. The Preferred Stock was sold to Clarkston 91 West LLC (the "Purchaser"), an entity affiliated with Gerald and Jeffrey Hakala, members of the Board of Directors of the Company. The Company intends to use the proceeds for working capital and general corporate purposes. Preferred Stock shareholders have no voting rights and optional redemption is only in the control of the Company.

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 8.0%, whichever is higher, plus 200 basis points. As of December 31, 2023, this equated to an annualized rate of 10.5%.

The Company has the option to redeem the Preferred Stock at the end of any fiscal quarter, in whole or in part, at a price equal to issue price, plus the amount that would result in a 20.0%, compounded annually, annualized return to the holder (inclusive of the dividends paid), on the portion being redeemed.

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 4,000 shares of the Company's common stock, subject to adjustment for reverse and forward stock splits, stock dividends, stock combinations and other similar transactions of the common stock that occur after the initial issue date.

As of December 31, 2023 and 2022, the Company had 1,000 and 0 issued and outstanding shares of Preferred Stock, respectively.

Common Stock

On August 10, 2022, the Company issued $5.0 million of common equity through a private placement for 800,000of 2,500,000 shares

priced at $6.25.$2.00 per share. The participants in the private placement consisted mainly of members of the Company’s management team
and insiders, including Chairman and CEO James Petcoff.Company's Board of Directors. The Company used the proceeds to strengthen its balance sheet
through contributions to the Insurance Company Subsidiaries to support their futurefor growth and to cover the cost of the ADC and reserve strengthening.
On February 25, 2016,capital in the Company's Board of Directors authorized a stock repurchase program, under which the Company may repurchase up to $2.1 million of its outstanding common stock. Under this program, management is authorized to repurchase shares at prevailing market prices through open market purchases, privately negotiated transactions, block purchases or otherwise in accordance with applicable federal securities laws, including Rule 10b5-1 and 10b-18 of the Securities Exchange Act of 1934, as amended. The actual timing, number and value of shares repurchased under the program was determined by management in its discretion and depended on a number of factors, including the market price of the Company’s stock, general market conditions, and other factors. specialty core business segments.

For the year ended December 31, 2017,2023, the Company had not repurchased any shares of stock. For the year ended December 31, 2016, the Company had repurchased and retired 88,6501,968 shares of stock valued at approximately $625,000. Repurchased$3,000 related to the vesting of the Company’s restricted stock units. Upon the repurchase of the Company’s shares, the shares remain authorized, but not issued or outstanding, and are availableoutstanding.

For the year ended December 31, 2022, the Company repurchased 1,968 shares of stock valued at approximately $4,000 related to be reissued in the future.

vesting of the Company’s restricted stock units. The Company's additional paid-in capital relating to the Company's stock repurchases was $10,000 for the year ended December 31, 2022. The capital increase was due to a $14,000 adjustment for cash returned related to the Company's stock repurchase program.

As of December 31, 20172023 and 2016,2022, the Company had 8,520,32812,222,881 and 7,633,07012,215,849 issued and outstanding shares of common stock, respectively.

Holders of common stock are entitled to one vote per share and to receive dividends only when and if declared by the board of directors. The holders have no preemptive, conversion or subscription rights.


96


11.Redeemable Preferred Stock
At December 31, 2014, the Company had 60,600 shares of redeemable preferred stock outstanding. The shares of redeemable preferred stock were initially recorded at fair value and thereafter increased by accrued paid-in-kind dividends. The Company classified the shares of redeemable preferred stock within temporary equity on its consolidated balance sheet at December 31, 2014, due to its liquidation rights.
On March 25, 2015, the Company amended its articles of incorporation with the consent of more than 80% of the holders of the preferred stock and a majority of the holders of the common stock to restrict the liquidation rights to the liquidation, dissolution or winding up of the Company. It was previously more broadly defined. On the effective date of the modification, the Company reclassified the carrying amount of its redeemable preferred stock from temporary equity to permanent equity.
Pursuant to agreements effective on or before July 1, 2015, the holders of preferred stock agreed to allow the Company to repurchase their outstanding preferred shares at the original purchase price (i.e., $100 per share) plus all accrued and unpaid preferred dividends. In addition, the holders of 29,550 shares (or 49%) of preferred stock agreed to use such cash received from the Company’s repurchase of their preferred stock to purchase shares of common stock at the same per share price as the common stock offered in the Company’s IPO. The closing of these transactions were conditioned on the completion of the Company’s IPO.
Following the closing of the Company’s IPO on August 18, 2015, the Company paid $6.3 million to holders of shares of preferred stock to repurchase such shares and for the payment of accrued dividends. Additionally, the Company issued 294,450 shares of common stock to former holders of the preferred stock for proceeds of $3.1 million. There are no shares of redeemable preferred stock outstanding after the closing of the IPO.




Notes to Consolidated Financial Statements

12.

14. Accumulated Other Comprehensive Income (Loss)

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

 

 

Year Ended
December 31,

 

 

 

2023

 

 

2022

 

Balance at beginning of period

 

$

(18,203

)

 

$

(2,110

)

Other comprehensive income (loss) before reclassifications

 

 

3,624

 

 

 

(16,024

)

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

 

 

(51

)

 

 

69

 

Net current period other comprehensive income (loss)

 

 

3,675

 

 

 

(16,093

)

Balance at end of period

 

$

(14,528

)

 

$

(18,203

)

 Year Ended
December 31,
 2017 2016
Balance at beginning of period$(1,080) $182
Other comprehensive income (loss) before reclassifications795
 (2,139)
Less: amounts reclassified from accumulated other comprehensive income (loss)78
 (877)
Net current period other comprehensive income (loss)717
 (1,262)
Balance at end of period$(363) $(1,080)

13.

15. EarningsPer 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. In the period of a net loss, the dividends on preferred stock are added to the net loss to arrive at net loss allocable to common shareholders. The following table presents the calculation of basic and diluted earnings (loss) per common share, as follows (in(dollars in thousands, except share and per share amounts):

 Year Ended
December 31,
 2017 2016 2015
Net income (loss) attributable to Conifer$(21,542) $(8,437) $64
Preferred stock dividends
 
 384
Paid-in-kind dividends
 
 156
Net income (loss) allocable to common shareholders$(21,542) $(8,437) $(476)
      
Weighted average common shares, basic and diluted*7,867,344
 7,618,588
 5,369,960
      
Earnings (loss) per share allocable to common, basic and diluted$(2.74) $(1.11) $(0.09)

 

 

Year Ended
December 31,

 

 

 

2023

 

 

2022

 

Net income (loss)

 

$

(25,904

)

 

$

(10,681

)

Preferred stock dividends

 

 

19

 

 

 

-

 

Net income (loss) allocable to common shareholders

 

$

(25,923

)

 

$

(10,681

)

Weighted average common shares, basic and diluted*

 

 

12,220,511

 

 

 

10,692,090

 

Earnings (loss) per share, basic and diluted

 

$

(2.12

)

 

$

(1.00

)

* The preferred shares that may be convertible into a total of 4,000,000 common shares were anti-dilutive and thus did not impact the diluted earnings per share calculation. There were no unvested restricted stock units as of December 31, 2023. The non-vested shares of the restricted stock units and stock options were anti-dilutive as of December 31, 2017, 2016, and 2015.2022. Therefore, the basic and diluted weighted average commonnon-vested shares are equal as ofexcluded from earnings (loss) per share for the years ended December 31, 2017, 2016, and 2015.  2022.


14.

16. Stock-based Compensation

In 2015,

On March 8, 2022 the Company established the Conifer Holdings, Inc. 2015 Omnibus Incentive Plan (“2015 Plan”), which permits the granting of stockissued options stock appreciation rights, restricted stock units ("RSU") and other stock-based awards. The 2015 Plan authorizes up to 1,377,000purchase 630,000 shares of the Company's common stock for awards to be issuedtwo named executive officers. The right to employees, directors or consultantsexercise the options will vest over a five-year period on a straight-line basis. The options have a strike price of the Company.$4.53 per share and will expire on March 8, 2032. The RSUs are issued at no less than the market price on the date the awards are granted. The awards vest in five annual installments, commencing on the first anniversary from the date of grant. The Company will expense theestimated grant date fair value of these options is $612,000, which is being expensed ratably over the RSUs as compensation expensevesting period. A Black Scholes model was used to determine the fair value of the options at the time the options were issued, using the Company’s historical 5-year market price of its stock to determine volatility (equating to 65.04%), an estimated 5-year term to exercise the options, a 5-year risk-free rate of return of 1.8%, and the market price for the Company’s stock of $2.40 per share.

On June 30, 2020, the Company issued options to purchase 280,000 shares of the Company’s common stock to certain executive officers and other employees. The right to exercise the options will vest over a five-year period on a straight-line basisbasis. The options have a strike price of $3.81 per share and expire on June 30, 2030. The estimated grant date fair value of these options is $290,000, which will be expensed ratably over the requisite servicevesting period. Upon vesting, each RSU will convert into one share of common stock. The unvested RSUs are subject to forfeiture in the event the employee is involuntarily or voluntarily terminated. If the employee is terminated by

97


In 2016 and 2018, the Company for cause, the Company has the option to forfeit the terminated employees’ vested shares for no considerationissued 111,281 and to cause the employee to have no further rights or interest in the vested RSUs.

The following summarizes our RSU activity (units in thousands):


Notes to Consolidated Financial Statements

 Number of Units Weighted Average Grant-Date Fair Value
Outstanding at August 12, 2015 (IPO)
 $
Units granted390
 10.48
Outstanding at December 31, 2015390
 $10.48
Units granted111
 8.17
Units vested(77) 10.48
Units forfeited(8) 9.95
Outstanding at December 31, 2016416
 $9.87
Units granted
 
Units vested(95) 9.97
Units forfeited(14) 9.94
Outstanding at December 31, 2017307
 $9.84
The scheduled vesting for the70,000, respectively, of restricted stock units at December 31, 2017 was as follows (in thousands):
    
 2018 2019 2020 2021 Total
          
Scheduled vesting - RSUs95
 95
 95
 22
 307
          
In 2015, the Company issued 390,352 RSUs(“RSUs”) to executive officers and othervarious employees to be settled in shares of common stock. The total RSUsstock, which were valued at $4.1 million$909,000, and $404,000, respectively, on the datedates of grant. In 2016, the Company issued 111,281 RSUs to executive officers and other employees valued at $909,000 on the date of grant.

The Company recorded $948,000, $856,000$17,000 and $303,000$56,000 of compensation expense related to the RSUs for the years ended December 31, 2017, 20162023, and 2015,2022, respectively. The total compensation cost related to the non-vested portion of the restricted stock units which has not been recognizedThere are no unvested RSUs as of December 31, 2017 was $3.0 million.2023.

The Company recorded $51,000 and $53,000 of compensation expense for the years ended December 31, 2023 and 2022, respectively, related to the stock options granted on June 30, 2020. There were 100,000 options outstanding and unvested as of December 31, 2023, which will generate an estimated future expense of $78,000.

The Company recorded $122,000 and $102,000 of compensation expense for the years ended December 31, 2023, and 2022, respectively, related to the stock options granted on March 8, 2022. There were 504,000 options outstanding and unvested as of December 31, 2023, which will generate an estimated future expense of $387,000.


15.

17. Related Party Transactions

In October 2015,

J. Grant Smith joined the Company’s Board on January 12, 2024. J. Grant Smith is the President and Chief Operating Officer of Waterford Bank. As of December 31, 2023, the Company hired the brotherowned $528,000 of the Chairman and Chief Executive Officer, James G. Petcoff, as the president of a newly created managing general agency, Blue Spruce Underwriters. In this capacity, B. Matthew Petcoff leads a team of agents in writing business in the hospitality industry, focusing on quick-service restaurants.

Waterford Bank's common stock.

The Company employs Nicholas J. Petcoff as its Chief Executive Vice PresidentOfficer and a director andDirector of the Company's Board of Directors. Nicholas J. Petcoff became the Company's sole Chief Executive Officer on December 31, 2023. The Company employed Andrew D. Petcoff as its Senior Vice President of Personal Lines; eachLines and as President of those individuals haveCIS, until June 30, 2021. The Company’s employment of Andrew D. Petcoff ended as the result of the Venture Transaction. See Note 4 ~ Sale of Certain Agency Business for additional details. Andrew D. Petcoff resigned from the Company's Board of Directors on December 31, 2022. Andrew D. Petcoff is now the President of Sycamore Specialty Underwriters, LLC ("SSU"), a related Affiliate to the Company as of December 31, 2022. See Note 3 ~ VSRM Transaction for additional details.

Nicholas J. Petcoff has been employed with the Company since 2009. Andrew D. Petcoff had formerly been employed with the Company since 2009. They are the sons of the Company's former Executive Chairman and ChiefCo-Chief Executive Officer, James G. Petcoff. James G. Petcoff stepped down as the Company's Executive Chairman and Co-Chief Executive Officer on December 31, 2023.

The Company employed B. Matthew Petcoff as Vice President of CIS until June 30, 2021. B. Matthew Petcoff is the brother of the Executive Chairman and Co-Chief Executive Officer, James G. Petcoff. The Company also employed Hilary Petcoff as its Vice President of Enterprise Risk Management until June 30, 2021. Ms. Petcoff is the daughter of the Company’s Executive Chairman and Co-Chief Executive Officer, James G. Petcoff. As a result of the transaction in Note 3 ~ VSRM Transaction, B. Matthew Petcoff and Hilary Petcoff are no longer employees of Venture Agency Holdings, Inc., and are no longer affiliated with the Company as of December 31, 2022.

In October 2022, the Company acquired control over Venture (a previous equity method investee) for total consideration of $9.7 million as further described in Note 3 ~ VRSM Transaction.

See Note 13 ~ Shareholders' Equity for the preferred and common stock issuances to members of the Company's Board.


16.

18. Employee Benefit Plans

In 2014, the

The Company establishedmaintains a retirement savings plan under section 401(k) of the Internal Revenue Code (the “Plan”) for certain eligible employees. Eligible employees electing to participate in the 401(k) plan may defer and contribute from 1%1% to 100%100% of their compensation on a pre‑tax or post-tax basis, subject to statutory limits. The Company will match the



Notes to Consolidated Financial Statements

employees’ contributions up to the first 4%4% of their compensation. The Company’s Plan expense amounted to $432,000, $405,000$411,000 and $346,000$457,000 for the years ended December 31, 2017, 20162023 and 20152022, respectively.


98




Notes to Consolidated Financial Statements

17.

19. Commitments and Contingencies

Legal proceedings

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

Commitments

In 2010, the

The Company entered intois party to an agreement with an unaffiliated partycompany to design, develop, and implementprovide a new policy administration, billing, and claims system for the Company. The scope of work and fee structure has changed over time. Currently, the agreement requires a minimum monthly payment of $30,000$30,000 with a fee schedule that is scalable with the premium volume, and expires on September 30, 2022.

Operating leases
November 1, 2026. The Company leases administrative office facilities, includingincurred $1.9 million of expenses from its corporate headquarters, and office equipment under operating leases that expire at various dates through 2024. The Company has the option to extend its corporate headquarters lease for two additional five‑year periods. The Company recognizes rent expense on a straight‑line basis over the termuse of the lease. Rent expense under the operating leases totaled $961,000system in 2017, $915,000 in 2016,2023 and $795,000 in 2015.2022, respectively.

The future minimum rental payments under non-cancelable operating leases as of December 31, 2017, are as follows (in thousands):
Years Ending December 31,Amount
2018$940
2019865
2020837
2021726
2022636
2023 and thereafter1,079
Total future minimum rental payments$5,083
18.

20. Segment Information

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

99


The Company defines its operating segments as components of the business where separate financial information is available and used by the chief operating decision-making groupdecision 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-making group, comprised of key senior executives, reviewsdecision makers, the Chief Executive Officer, review a number of financial measures including gross written premiums, net earned premiums, and losses and LAE, net of reinsurance recoveries.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 underwriting personnel, policy issuance and claims systems, rent and



Notes to Consolidated Financial Statements

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 Florida, Michigan, Texas, Oklahoma and Pennsylvania.California. For the years ended December 31, 2017, 20162023 and 2015,2022, gross written premiums attributable to these four states were 60.8%, 56.7%,59.9% and 66.6%52.8%, respectively, of the Company’s total gross written premiums.

The following table summarizes our net earned premiums:

 Net Earned Premium
 2017 2016 2015
Commercial84% 77% 73%
Personal16% 23% 27%
Total100% 100% 100%

 

 

Net Earned Premium

 

 

 

2023

 

 

2022

 

Commercial

 

 

71

%

 

 

84

%

Personal

 

 

29

%

 

 

16

%

Total

 

 

100

%

 

 

100

%

The following provides a descriptionwholesale agency business sells insurance products on behalf of the Company’s two insurancecommercial and personal lines businesses as well as to third-party insurers. Certain acquisition costs incurred by the commercial and product offerings within these businesses:

Commercial lines—offers coveragepersonal lines businesses are reflected as commission revenue for property, liability, automobilethe wholesale agency business and other miscellaneous coverage primarily to owner-operated small and mid-sized businesses, professional organizations and hospitality businesses such as restaurants, bars and taverns.
Personal lines—offers coverage for low-value dwelling, and wind-exposed homeowners.
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, andsome finance and information technology personnel, and other corporate headquarters expenses, (ii) interest expense on the Company’s senior 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, and net realized investment gains, and change in fair value of equity securities on the consolidated statements of operations.



Notes The Company’s assets on the consolidated balance sheet are not allocated to Consolidated Financial Statementsthe reportable segments.

100



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

Year Ended December 31, 2023

Commercial
Lines

 

 

Personal
Lines

 

 

Under-writing

 

 

Wholesale Agency

 

 

Corp-orate

 

 

Elim-inations

 

 

Total

 

Gross written premiums

$

107,078

 

 

$

36,756

 

 

$

143,834

 

 

$

 

 

$

 

 

$

 

 

$

143,834

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net written premiums

$

36,580

 

 

$

32,108

 

 

$

68,688

 

 

$

 

 

$

 

 

$

 

 

$

68,688

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earned premiums

$

59,221

 

 

$

24,714

 

 

$

83,935

 

 

$

 

 

$

 

 

$

 

 

$

83,935

 

Agency commission income

 

 

 

 

 

 

 

 

 

 

5,680

 

 

 

 

 

 

 

 

 

5,680

 

Other income

 

217

 

 

 

96

 

 

 

313

 

 

 

1,379

 

 

 

239

 

 

 

(1,237

)

 

 

694

 

Segment revenue

 

59,438

 

 

 

24,810

 

 

 

84,248

 

 

 

7,059

 

 

 

239

 

 

 

(1,237

)

 

 

90,309

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses, net

 

62,828

 

 

 

19,585

 

 

 

82,413

 

 

 

 

 

 

 

 

 

 

 

 

82,413

 

Policy acquisition costs

 

9,134

 

 

 

6,663

 

 

 

15,797

 

 

 

6,401

 

 

 

 

 

 

(1,306

)

 

 

20,892

 

Operating expenses

 

11,988

 

 

 

3,444

 

 

 

15,432

 

 

 

1,153

 

 

 

1,306

 

 

 

 

 

 

17,891

 

Segment expenses

 

83,950

 

 

 

29,692

 

 

 

113,642

 

 

 

7,554

 

 

 

1,306

 

 

 

(1,306

)

 

 

121,196

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment underwriting gain (loss)

 

(24,512

)

 

 

(4,882

)

 

 

(29,394

)

 

 

(495

)

 

 

(1,067

)

 

 

69

 

 

 

(30,887

)

Net investment income

 

 

 

 

 

 

 

 

 

 

 

 

 

5,526

 

 

 

 

 

 

5,526

 

Net realized investment gains (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

(20

)

 

 

 

 

 

(20

)

Change in fair value of equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

608

 

 

 

 

 

 

608

 

Gain on sale of renewal rights

 

 

 

 

 

 

 

 

 

 

 

 

 

2,335

 

 

 

 

 

 

2,335

 

Other gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,206

)

 

 

 

 

 

(3,206

)

Income (loss) before income taxes

$

(24,512

)

 

$

(4,882

)

 

$

(29,394

)

 

$

(495

)

 

$

4,176

 

 

$

69

 

 

$

(25,644

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred policy acquisition costs

$

2,047

 

 

$

4,357

 

 

 

 

 

 

 

 

 

 

 

$

(119

)

 

$

6,285

 

Unearned premiums

 

45,494

 

 

 

19,656

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

65,150

 

Unpaid losses and loss adjustment expenses

 

169,039

 

 

 

5,573

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

174,612

 

Year Ended December 31, 2022

 

Commercial
Lines

 

 

Personal
Lines

 

 

Under-writing

 

 

Wholesale Agency

 

 

Corp-orate

 

 

Elim-inations

 

 

Total

 

Gross written premiums

 

$

116,868

 

 

$

21,151

 

 

$

138,019

 

 

$

 

 

$

 

 

$

 

 

$

138,019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net written premiums

 

$

72,318

 

 

$

18,914

 

 

$

91,232

 

 

$

 

 

$

 

 

$

 

 

$

91,232

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earned premiums

 

$

80,823

 

 

$

15,888

 

 

$

96,711

 

 

$

 

 

$

 

 

$

 

 

$

96,711

 

Agency commission income

 

 

 

 

 

 

 

 

 

 

 

1,414

 

 

 

 

 

 

 

 

 

1,414

 

Other income

 

 

245

 

 

 

82

 

 

 

327

 

 

 

4,298

 

 

 

271

 

 

 

(3,542

)

 

 

1,354

 

Segment revenue

 

 

81,068

 

 

 

15,970

 

 

 

97,038

 

 

 

5,712

 

 

 

271

 

 

 

(3,542

)

 

 

99,479

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses, net

 

 

70,762

 

 

 

10,678

 

 

 

81,440

 

 

 

 

 

 

 

 

 

 

 

 

81,440

 

Policy acquisition costs

 

 

17,682

 

 

 

4,604

 

 

 

22,286

 

 

 

3,653

 

 

 

 

 

 

(3,760

)

 

 

22,179

 

Operating expenses

 

 

13,069

 

 

 

1,936

 

 

 

15,005

 

 

 

2,612

 

 

 

1,192

 

 

 

(20

)

 

 

18,789

 

Loss portfolio transfer risk fee

 

 

5,400

 

 

 

 

 

 

5,400

 

 

 

 

 

 

 

 

 

 

 

 

5,400

 

Segment expenses

 

 

106,913

 

 

 

17,218

 

 

 

124,131

 

 

 

6,265

 

 

 

1,192

 

 

 

(3,780

)

 

 

127,808

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment underwriting gain (loss)

 

 

(25,845

)

 

 

(1,248

)

 

 

(27,093

)

 

 

(553

)

 

 

(921

)

 

$

238

 

 

 

(28,329

)

Net investment income

 

 

 

 

 

 

 

 

 

 

 

32

 

 

 

3,011

 

 

 

 

 

 

3,043

 

Net realized investment gains (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,505

)

 

 

 

 

 

(1,505

)

Change in fair value of equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

403

 

 

 

 

 

 

403

 

Gain from VSRM Transaction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,810

 

 

 

 

 

 

8,810

 

Other gains

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

60

 

 

 

 

 

 

59

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

(42

)

 

 

(2,929

)

 

 

 

 

 

(2,971

)

Income (loss) before income taxes

 

$

(25,845

)

 

$

(1,248

)

 

$

(27,093

)

 

$

(564

)

 

$

6,929

 

 

$

238

 

 

$

(20,490

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred policy acquisition costs

 

$

7,683

 

 

$

2,796

 

 

 

 

 

 

 

 

 

 

 

$

(189

)

 

$

10,290

 

Unearned premiums

 

 

56,565

 

 

 

11,322

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

67,887

 

Unpaid losses and loss adjustment expenses

 

 

159,558

 

 

 

5,981

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

165,539

 

         
Year Ended December 31, 2017 Commercial Lines Personal Lines 
Corporate
& Other
 Total
Gross written premiums $92,112
 $22,172
 $
 $114,284
Net written premiums $78,217
 $13,023
 $
 $91,240
Net earned premiums $76,786
 $14,943
 $
 $91,729
Other income 628
 780
 152
 1,560
Segment revenue 77,414
 15,723
 152
 93,289
Loss and loss adjustment expenses, net 55,701
 18,216
 
 73,917
Policy acquisition costs 20,470
 5,775
 
 26,245
Operating expenses 11,339
 2,570
 3,458
 17,367
Segment expenses 87,510
 26,561
 3,458
 117,529
Segment underwriting gain (loss)
 $(10,096) $(10,838) $(3,306) $(24,240)
         
Investment income  
  
 2,728
 2,728
Net realized investment gains  
  
 70
 70
Other gains (losses)  
  
 750
 750
Interest expense  
  
 (1,362) (1,362)
Income (loss) before income taxes  
  
 $(1,120) $(22,054)
         
Selected Balance Sheet Data:        
Deferred policy acquisition costs $10,116
 $2,665
 $
 $12,781
Unearned premiums 45,951
 11,721
 
 57,672
Loss and loss adjustment expense reserves 76,586
 11,310
 
 87,896

21. Subsequent Events

101




Notes to Consolidated Financial Statements

         
Year Ended December 31, 2016 Commercial Lines Personal Lines 
Corporate
& Other
 Total
Gross written premiums $88,242
 $26,681
 $
 $114,923
Net written premiums $78,439
 $21,490
 $
 $99,929
Net earned premiums $68,921
 $20,706
 $
 $89,627
Other income 378
 558
 182
 1,118
Segment revenue 69,299
 21,264
 182
 90,745
Loss and loss adjustment expenses, net 42,441
 16,562
 
 59,003
Policy acquisition costs 18,560
 6,720
 
 25,280
Operating expenses 6,767
 2,911
 7,918
 17,596
Segment expenses 67,768
 26,193
 7,918
 101,879
Segment underwriting gain (loss)
 $1,531
 $(4,929) $(7,736) $(11,134)
         
Investment income  
  
 2,173
 2,173
Net realized investment gains  
  
 1,365
 1,365
Other gains (losses)  
  
 (400) (400)
Interest expense  
  
 (647) (647)
Income (loss) before income taxes
  
  
 $(5,245) $(8,643)
         
Selected Balance Sheet Data:        
Deferred policy acquisition costs $10,156
 $3,134
 $
 $13,290
Unearned premiums 44,484
 13,642
 
 58,126
Loss and loss adjustment expense reserves 46,917
 7,734
 
 54,651


Notes to Consolidated Financial Statements

         
Year Ended December 31, 2015 Commercial Lines Personal Lines 
Corporate
& Other
 Total
Gross written premiums $68,197
 $25,553
 $
 $93,750
Net written premiums $58,157
 $21,517
 $
 $79,674
Net earned premiums $48,586
 $18,179
 $
 $66,765
Other income 1,099
 489
 79
 1,667
Segment revenue 49,685
 18,668
 79
 68,432
Loss and loss adjustment expenses, net 25,730
 13,152
 
 38,882
Policy acquisition costs 11,937
 4,246
 
 16,183
Operating expenses 4,983
 3,305
 6,518
 14,806
Segment expenses 42,650
 20,703
 6,518
 69,871
Segment underwriting gain (loss)
 $7,035
 $(2,035) $(6,439) $(1,439)
         
Investment income  
  
 1,902
 1,902
Net realized investment gains  
  
 285
 285
Other gains (losses)  
  
 104
 104
Interest expense  
  
 (769) (769)
Income (loss) before income taxes
  
  
 $(4,917) $83
         
Selected Balance Sheet Data:        
Deferred policy acquisition costs $8,401
 $3,701
 $
 $12,102
Unearned premiums 33,337
 14,579
 
 47,916
Loss and loss adjustment expense reserves 29,739
 5,683
 
 35,422


Notes to Consolidated Financial Statements

19. Quarterly Financial Data (Unaudited)

The following is a summaryCompany performed an evaluation of quarterly results of operations for 2017subsequent events through the date the financial statements were issued and 2016 (in thousands, except per share and ratio data). The fluctuations between periods and changes in reserves, as disclosed in Note 5, are due to the normal fluctuations in operations from quarter to quarter.

 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
2017:       
Gross written premiums$26,474
 $26,981
 $29,581
 $31,247
Net written premiums$22,324
 $23,082
 $18,395
 $27,439
Net earned premiums$24,140
 $24,497
 $17,659
 $25,433
Net investment income577
 663
 768
 720
Net realized gains(8) 
 39
 39
Other gains (losses)
 750
 
 
Other income354
 372
 477
 357
Losses and loss adjustment expenses, net15,733
 16,674
 26,468
 15,042
Policy acquisition costs6,472
 6,428
 6,655
 6,690
Operating expenses4,530
 4,370
 4,474
 3,993
Interest expense224
 219
 303
 616
Income tax (benefit) expense6
 (282) (135) (36)
Equity earnings (losses) in affiliates, net of tax104
 60
 (76) (23)
Net income (loss)$(1,798) $(1,067) $(18,898) $221
Diluted earnings (loss) per common share (1)$(0.24) $(0.14) $(2.46) $0.03
Combined ratio (2)109.1% 110.4% 207.3% 99.7%
        
2016:       
Gross written premiums$25,393
 $29,725
 $28,497
 $31,308
Net written premiums$22,050
 $26,176
 $24,634
 $27,069
Net earned premiums$20,109
 $21,675
 $23,380
 $24,463
Net investment income537
 528
 560
 548
Net realized gains(8) 541
 71
 761
Other gains (losses)
 
 
 (400)
Other income245
 283
 303
 287
Losses and loss adjustment expenses, net12,699
 13,541
 14,582
 18,181
Policy acquisition costs6,003
 6,014
 6,266
 6,997
Operating expenses4,139
 4,536
 4,710
 4,211
Interest expense157
 143
 168
 179
Income tax (benefit) expense
 (623) 16
 530
Equity losses in affiliates, net of tax87
 71
 (47) 18
Net income (loss)$(2,028) $(513) $(1,475) $(4,421)
Diluted earnings (loss) per common share (1)$(0.27) $(0.07) $(0.19) $(0.58)
Combined ratio (2)112.2% 109.7% 107.9% 118.7%

(1) Due to the changesdetermined there were no recognized or unrecognized subsequent events that would require an adjustment or additional disclosure in the equity structurecondensed consolidated financial statements as of the Company (Note ~ 10 Shareholders' Equity) the weighted average common shares outstanding has fluctuated over the past two years and therefore the quarterly diluted earnings (loss) perDecember 31, 2023.



Notes to Consolidated Financial Statements

common share does not total the full-year earnings (loss) per common share stated on the face of the Consolidated Statements of Operations.
(2) The combined ratio is the sum of the loss ratio and the expense ratio. The loss ratio is the ratio, expressed as a percentage, of net losses and LAE to net premiums earned and other income. The expense ratio is the ratio, expressed as a percentage, of policy acquisition costs and operating expenses to net earned premiums and other income.


Schedule II

Conifer Holdings, Inc.

Condensed Financial Information of Registrant

Balance Sheets – Parent Company Only

(dollars in thousands)

 

 

December 31,

 

 

 

2023

 

 

2022

 

Assets

 

 

 

 

 

 

Investment in subsidiaries

 

$

31,157

 

 

$

56,670

 

Cash

 

 

3,174

 

 

 

9,022

 

Due from Affiliate

 

 

33

 

 

 

113

 

Other assets

 

 

1,457

 

 

 

2,434

 

Total assets

 

$

35,821

 

 

$

68,239

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Debt

 

$

29,061

 

 

$

33,876

 

Due to subsidiaries

 

 

3,436

 

 

 

9,754

 

Other liabilities

 

 

1,798

 

 

 

5,659

 

Total liabilities

 

 

34,295

 

 

 

49,289

 

Shareholders' equity:

 

 

 

 

 

 

Preferred stock, no par value (10,000,000 shares authorized; 1,000 and 0 issued and outstanding, respectively)

 

 

6,000

 

 

 

 

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

 

 

98,100

 

 

 

97,913

 

Accumulated deficit

 

 

(86,683

)

 

 

(60,760

)

Accumulated other comprehensive income (loss)

 

 

(15,891

)

 

 

(18,203

)

Total shareholders' equity

 

 

1,526

 

 

 

18,950

 

Total liabilities and shareholders' equity

 

$

35,821

 

 

$

68,239

 

The accompanying notes are an integral part of the Condensed Financial Information of Registrant.

102



 December 31,
 2017 2016
    
Assets   
Investment in subsidiaries$77,657
 $78,637
Equity securities400
 
Cash2,583
 4,639
Due from subsidiaries513
 
Due from affiliate348
 946
Other assets1,271
 2,009
Total assets$82,772
 $86,231
    
Liabilities and Shareholders' Equity   
Liabilities:   
Debt$29,027
 $17,750
Other liabilities919
 687
Total liabilities29,946
 18,437
    
Shareholders' equity:   
Common stock, no par value (100,000,000 shares authorized; 8,520,328 and 7,633,070 issued and outstanding, respectively)86,199
 80,342
Accumulated deficit(33,010) (11,468)
Accumulated other comprehensive income (loss)(363) (1,080)
Total shareholders' equity52,826
 67,794
Total liabilities and shareholders' equity$82,772
 $86,231


Schedule II

Conifer Holdings, Inc.

Condensed Financial Information of Registrant

Statements of Comprehensive Income (Loss) – Parent Company Only

(dollars in thousands)

 

 

Year Ended December 31,

 

 

 

2023

 

 

2022

 

Revenue

 

 

 

 

 

 

Management fees from subsidiaries

 

$

17,367

 

 

$

4,980

 

Other income

 

 

819

 

 

 

190

 

Total revenue

 

 

18,186

 

 

 

5,170

 

Expenses

 

 

 

 

 

 

Operating expenses

 

 

14,133

 

 

 

14,365

 

Interest expense

 

 

3,079

 

 

 

2,816

 

Total expenses

 

 

17,212

 

 

 

17,181

 

Income (loss) before equity in earnings (losses) of subsidiaries and income tax expense (benefit)

 

 

974

 

 

 

(12,011

)

Income tax expense (benefit)

 

 

73

 

 

 

(4,078

)

Income (loss) before equity earnings (losses) of subsidiaries

 

 

901

 

 

 

(7,933

)

Equity earnings (losses) in subsidiaries

 

 

(26,805

)

 

 

(2,748

)

Net income (loss)

 

 

(25,904

)

 

 

(10,681

)

Other Comprehensive Income

 

 

 

 

 

 

Equity in other comprehensive income (loss) of subsidiaries

 

 

2,312

 

 

 

(16,093

)

Total Comprehensive income (loss)

 

$

(23,592

)

 

$

(26,774

)

The accompanying notes are an integral part of the Condensed Financial Information of Registrant.

103


 Year Ended December 31,
 2017 2016 2015
Revenue     
Management fees from subsidiaries$15,905
 $9,911
 $8,007
Other income826
 51
 64
Total revenue16,731
 9,962
 8,071
      
Expenses     
Operating expenses13,496
 16,995
 13,710
Interest expense1,362
 647
 766
Total expenses14,858
 17,642
 14,476
      
Income (loss) before equity in earnings (losses)
of subsidiaries and income tax benefit
1,873
 (7,680) (6,405)
Income tax benefit859
 (864) (1,025)
Income (loss) before equity earnings (losses) of subsidiaries1,014
 (6,816) (5,380)
Equity earnings (losses) in subsidiaries(22,556) (1,621) 5,363
      
Net income (loss)(21,542) (8,437) (17)
Less net loss attributable to noncontrolling interest
 
 (81)
Net income (loss) attributable to Conifer$(21,542) $(8,437) $64
      
Other Comprehensive Income     
Equity in other comprehensive income (loss) of subsidiaries717
 (1,262) (976)
Total Comprehensive income (loss)$(20,825) $(9,699) $(912)



Schedule II

Conifer Holdings, Inc.

Condensed Financial Information of Registrant

Statement of Cash Flows – Parent Company Only

(dollars in thousands)

 

 

Year Ended December 31,

 

 

 

2023

 

 

2022

 

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income (loss)

 

$

(25,904

)

 

$

(10,681

)

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

 

 

 

 

 

 

Depreciation and amortization

 

 

545

 

 

 

436

 

Equity in undistributed (income) loss of subsidiaries

 

 

26,805

 

 

 

2,748

 

Stock-based compensation expense

 

 

190

 

 

 

211

 

Deferred income tax expense

 

 

(3,806

)

 

 

3,884

 

Other (gain) loss

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Due from subsidiaries

 

 

(6,318

)

 

 

2,699

 

Due from Affiliate

 

 

80

 

 

 

107

 

Current income tax recoverable

 

 

 

 

 

 

Other assets

 

 

860

 

 

 

62

 

Other liabilities

 

 

(73

)

 

 

(203

)

Net cash provided by (used in) operating activities

 

 

(7,621

)

 

 

(737

)

Cash Flows From Investing Activities

 

 

 

 

 

 

Contributions to subsidiaries

 

 

1,019

 

 

 

4,000

 

Dividends received from subsidiaries

 

 

 

 

 

 

Purchases of investments

 

 

 

 

 

 

Purchases of property and equipment

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

 

1,019

 

 

 

4,000

 

Cash Flows From Financing Activities

 

 

 

 

 

 

Proceeds received from issuance of shares of preferred stock

 

 

6,000

 

 

 

 

Proceeds received from issuance of shares of common stock

 

 

 

 

 

5,000

 

Proceeds from issuance of long-term debt

 

 

10,727

 

 

 

 

Repurchase of common stock

 

 

(3

)

 

 

10

 

Borrowings under debt arrangements

 

 

 

 

 

5,000

 

Repayment of borrowings under debt arrangements

 

 

 

 

 

(5,000

)

Paydown of long-term debt

 

 

(13,971

)

 

 

 

Debt issuance costs

 

 

(1,999

)

 

 

 

Net cash provided by financing activities

 

 

754

 

 

 

5,010

 

Net increase (decrease) in cash

 

 

(5,848

)

 

 

8,273

 

Cash at beginning of period

 

 

9,022

 

 

 

749

 

Cash at end of period

 

$

3,174

 

 

$

9,022

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

Interest paid

 

 

2,949

 

 

 

2,979

 

Preferred stock dividends declared but not paid at end of period

 

 

19

 

 

 

 

The accompanying notes are an integral part of the Condensed Financial Information of Registrant.

104


 Year Ended December 31,
 2017 2016 2015
Cash Flows from Operating Activities     
Net income (loss)$(21,542) $(8,437) $(17)
Adjustments to reconcile net income (loss) to net cash used in operating activities:     
Depreciation and amortization347
 364
 321
Deferred income taxes(485) 288
 140
Equity in undistributed (income) loss of subsidiaries22,556
 1,621
 (5,363)
Incentive awards expenses - vesting of RSUs895
 856
 303
Changes in operating assets and liabilities:     
Due from subsidiaries(513) 150
 (921)
Due from affiliates598
 
 
Other assets532
 (270) (396)
Other liabilities590
 5
 (500)
Net cash provided by (used in) operating activities2,978
 (5,423) (6,433)
Cash Flows From Investing Activities     
Contributions to subsidiaries(20,860) (2,100) (7,500)
Dividends received from subsidiaries
 5,450
 2,700
Purchases of investments(400) 
 
Purchases of property and equipment(13) (192) (146)
Net cash provided by (used in) investing activities(21,273) 3,158
 (4,946)
Cash Flows From Financing Activities     
Proceeds received from issuance of shares of common stock5,000
 
 36,066
Repurchase of common stock
 (625) 
Repurchase of preferred stock
 
 (6,275)
Borrowings under debt arrangements32,000
 7,000
 4,400
Repayment of borrowings under debt arrangements(19,750) (2,000) (19,212)
Dividends paid to preferred shareholders
 
 (384)
Stock and debt issuance costs(1,011) 
 (1,837)
Net cash provided by financing activities16,239
 4,375
 12,758
Net increase (decrease) in cash(2,056) 2,110
 1,379
Cash at beginning of period4,639
 2,529
 1,150
Cash at end of period$2,583
 $4,639
 $2,529
      
Supplemental Disclosure of Cash Flow Information:     
Interest paid$876
 $641
 $844
Non-cash dividend received from subsidiaries
 
 400
Paid-in-kind dividends
 
 61



Conifer Holding, Inc.

Condensed Financial Information of Registrant

Parent Company Only

Notes to Condensed Financial Statements


1. Accounting Policies

Organization

Conifer Holdings, Inc. (the “Parent”) is a Michigan‑domiciled holding company organized for the purpose of managing its insurance entities. The Parent conducts its principal operations through these entities.

Basis of Presentation

The accompanying condensed financial information should be read in conjunction with the Consolidated Financial Statements and related Notes of Conifer Holdings, Inc. and Subsidiaries. Investments in subsidiaries are accounted for using the equity method. Under the equity method, the investment in subsidiaries is stated at cost plus contributions and equity in undistributed income (loss) of consolidated subsidiaries less dividends received since the date of acquisition.

The Parent’s operations consist of income earned from management and administrative services performed for the insurance entities pursuant to intercompany services agreements. These management and administrative services include providing management, marketing, offices and equipment, and premium collection, for which the insurance companies pay fees based on a percentage of gross premiums written. Also, the Parent receives commission income for performing agency services. The primary operating costs of the Parent are salaries and related costs of personnel, information technology, administrative expenses, and professional fees. The income received from the management and administrative services is used to cover operating costs, meet debt service requirements and cover other holding company obligations.

Estimates and Assumptions

Preparation of the condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed financial statements and accompanying disclosures. Those estimates are inherently subject to change, and actual results may ultimately differ from those estimates.

Dividends

The Parent received $1.4 million in cash dividends from its subsidiariesRCIC in 2023. The Parent received a $10.8 million dividend from CIS during the fourth quarter of $0.0, $5.52022.

2. Guarantees

The Parent has guaranteed the principal and interest obligations of a $10.0 million surplus note issued by Conifer Insurance Company to White Pine Insurance Company (both wholly owned subsidiaries). The note pays interest annually at a per annum rate of 4% and $2.7 million for the years endedhas no maturity.

As of December 31, 2017, 2016 and 2015, respectively.2023, the surplus note was adjusted to a fair value of $6.8 million as a result of KBRA downgrading CIC's surplus note rating from BBB- to BB+. This change in CIC's rating required a change in the statutory statement presentation from a cost basis to a fair value basis of accounting.

105



Schedule V

Conifer Holdings, Inc.

and Subsidiaries

Valuation and Qualifying Accounts

For the Years Ended December 31, 2017, 20162023 and 2015

2022

(dollars in thousands)

 

Balance at
Beginning of Period

 

 

Charged to
Expense

 

 

Decrease to
Other
Comprehensive
Income

 

 

Deductions from
Allowance Account

 

 

Balance at
End of Period

 

Valuation for Deferred Tax Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2023

 

21,663

 

 

 

7,254

 

 

 

(904

)

 

 

 

 

 

28,013

 

2022

 

14,594

 

 

 

3,715

 

 

 

3,354

 

 

 

 

 

 

21,663

 


106



 Balance at Beginning of Period Charged to Expense Decrease to Other Comprehensive Income Deductions from Allowance Account Balance at End of Period
Valuation for Deferred Tax Assets         
2017$8,389
 $1,515
 $
 $
 $9,904
20165,160
 2,808
 421
 
 8,389
20156,917
 
 
 (1,757) 5,160



CONIFER HOLDINGS, INC.

Exhibit Index

 

 

 

 

Incorporated by Reference

 

Exhibit

Number

 

Exhibit Description

 

Form

 

Period

Ending

 

Exhibit /

Appendix
Number

 

Filing Date

Filed /

Furnished Herewith

3.1

 

Second Amended and Restated Articles of Incorporation of Conifer Holdings, Inc.

 

8-K

 

September 30, 2015

 

3.1

 

August 28, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

3.2

 

Amended and Restated Bylaws of Conifer Holdings, Inc.

 

S-1A

 

September 30, 2015

 

3.4

 

July 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

3.3

 

Certificate of Designation of Series A Preferred Stock

 

8-K

 

 

 

3.1

 

December 22, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

4.1

 

Description of Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.2

 

Indenture dated September 24, 2018, by and between the Company and Wilmington Trust, National Association, as trustee

 

8-K

 

 

 

4.1

 

September 24, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

4.3

 

Form of Note (included in Exhibit A to the Second Supplemental Indenture)

 

8-K

 

 

 

4.3

 

August 8, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

4.4

 

Second Supplemental Indenture dated August 8, 2023, by and between the Company and Wilmington Trust, National Association, as trustee

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.6

 

2015 Omnibus Incentive Plan

 

S-1

 

 

 

10.2

 

July 2, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

10.7

 

Lease Agreement, dated June 14, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.8

 

Limited Waiver Regarding Second Amended and Restated Note Purchase Agreement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.12

 

Employment agreement - Nicholas J. Petcoff

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.13

 

Employment agreements including Brian J. Roney

 

10-K

 

December 31, 2016

 

10.13

 

March 15, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

10.14

 

Note Purchase Agreement dated September 29, 2017 between the Company and Elanus Capital Investments Master SP Series 3

 

10-Q

 

September 30, 2017

 

10.14

 

November 11, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

10.15

 

Credit Agreement Dated as of June 21, 2018 with The Huntington National Bank

 

10-K

 

December 31, 2018

 

10.15

 

March 13, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

10.16

 

First Amendment to Note Purchase Agreement dated as of June 21, 2018 between the Company and Elanus Capital Investments Master SP Series 3

 

10-K

 

December 31, 2018

 

10.16

 

March 13, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

107



10.17

 

Amended and Restated Note Purchase Agreement dated September 25, 2018 between the Company and Elanus Capital Investments Master SP Series 3

 

10-K

 

December 31, 2018

 

10.17

 

March 13, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

10.18

 

Waiver and Consent from The Huntington National Bank dated as of October 31, 2018, regarding the Amended and Restated Note Purchase Agreement between the Company and Elanus Capital Investments Master SP Series 3

 

10-K

 

December 31, 2018

 

10.18

 

March 13, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

10.19

 

First Amendment to Amended and Restated Note Purchase Agreement dated as of December 13, 2018 between the Company and Elanus Capital Investments Master SP Series 3

 

10-K

 

December 31, 2018

 

10.19

 

March 13, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

10.20

 

 

First Amendment to Credit Agreement dated as of December 27, 2018 between the Company and The Huntington National Bank

 

10-K

 

December 31, 2018

 

10.20

 

March 13, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

10.21

 

 

Second Amendment to Amended and Restated Note Purchase Agreement dated as of June 21, 2019 between the Company and Elanus Capital Investments Master SP Series 3

 

10-K

 

December 31, 2019

 

10.21

 

March 12, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

10.22

 

Second Amendment to Credit Agreement dated as of June 21, 2019 between the Company and The Huntington National Bank

 

10-K

 

December 31, 2019

 

10.22

 

March 12, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

10.24

 

Third Amendment to Credit Agreement dated as of April 24, 2020 between the Company and The Huntington National Bank

 

10-Q

 

March 31, 2020

 

10.24

 

May 13, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

10.25

 

Amendment to Promissory Note dated as of June 19, 2020 between the Company and The Huntington National Bank

 

10-Q

 

June 30, 2020

 

10.25

 

August 12, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

10.26

 

Fourth Amendment to Credit Agreement dated as of June 19, 2020 between the Company and The Huntington National Bank

 

10-Q

 

June 30, 2020

 

10.26

 

August 12, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

10.27

 

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

 

10-Q

 

June 30, 2021

 

10.27

 

August 11, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

10.28

 

Fifth Amendment to Credit Agreement dated as of June 18, 2021

 

10-Q

 

June 30, 2021

 

10.28

 

August 11, 2021

 

108


    Incorporated by Reference 
Exhibit
Number
 Exhibit Description Form Period
Ending
 Exhibit /
Appendix
Number
 Filing DateFiled / Furnished Herewith
3.1  8-K September 30, 2015 3.1 August 28, 2015 
            
3.2  S-1A September 30, 2015 3.4 July 30, 2015 
            
10.6  S-1   10.2 July 2, 2015 
            
10.7  S-1   10.3 July 2, 2015 
            
10.13  10-K December 31, 2016 10.13 March 15, 2017*
            
10.14  10-Q September 30, 2017 10.14 November 11, 2017*
            
21.1         *
            
23.1         *
            
31.1         *
            
31.2         *
            
32.1*         *
            
32.2*         *
            
101.INS XBRL Instance Document        *
101.SCH XBRL Taxonomy Extension Schema Document        *
101.CAL XBRL Taxonomy Extension Calculation Linkbase        *
101.DEF XBRL Taxonomy Extension Definition Linkbase        *
101.LAB XBRL Taxonomy Extension Label Linkbase        *
101.PRE XBRL Taxonomy Extension Presentation Linkbase        *

 

 

between the company and the Huntington National Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.29

 

Six Amendment to Credit Agreement dated as of August 8, 2022 between the Company and the Huntington National Bank

 

10-Q

 

June 30, 2022

 

10.29

 

August 11, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

10.30

 

Purchase Agreement, dated December 20, 2023, by and between Conifer Holdings, Inc. and Clarkston Capital, LLC

 

8-K

 

 

 

10.1

 

December 22, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

10.31

 

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

 

10-Q

 

September 30, 2023

 

10.1

 

November 11, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

21.1

 

List of Subsidiaries of the Company

 

 

 

 

 

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

23.1

 

Consent of Plante Moran PLLC, Independent Registered Public Accounting Firm

 

 

 

 

 

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

31.1

 

Section 302 Certification — CEO

 

 

 

 

 

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

31.2

 

Section 302 Certification — CFO

 

 

 

 

 

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

32.1*

 

Section 906 Certification — CEO

 

 

 

 

 

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

32.2*

 

Section 906 Certification — CFO

 

 

 

 

 

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

97

 

Conifer Clawback Policy

 

 

 

 

 

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

99.1

 

Report of Independent Registered Public Accounting Firm on Supplemental Information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.INS

 

inline XBRL Instance Document

 

 

 

 

 

 

 

 

*

101.SCH

 

inline XBRL Taxonomy Extension Schema With Embedded Linkbases Document

 

 

 

 

 

 

 

 

*

104

 

Cover Page Interactive Data file (embedded within the inline XBRL document)

 

 

 

 

 

 

 

 

 

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

ITEM 16. Form 10-K Summary

None.

109




SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities and 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/ James G.Nicholas J. Petcoff

James G.

Nicholas J. Petcoff

Chairman and

Chief Executive Officer

(Principal Executive Officer)

By:

/s/ Harold J. Meloche

Harold J. Meloche

Chief Financial Officer and Treasurer

(Principal Accounting and Financial Officer)

Dated: March 15, 2018


April 1, 2024

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

Title

Date

SignatureTitleDate

/s/ James G.Nicholas J. Petcoff

Chairman and

Chief Executive Officer

March 15, 2018

April 1, 2024

James G.

Nicholas J. Petcoff

(Principal Executive Officer)

/s/ Harold J. Meloche

Chief Financial Officer and Treasurer

March 15, 2018

April 1, 2024

Harold J. Meloche

(Principal Accounting and Financial Officer)

/s/ Mark McCammonIsolde O'Hanlon

Director, Board Chair

March 15, 2018

April 1, 2024

Mark McCammon

Isolde O'Hanlon

/s/ Nicholas J. PetcoffJeffrey Hakala

Director

March 15, 2018

April 1, 2024

Nicholas J. Petcoff

Jeffrey Hakala

/s/ Jorge MoralesGerald W. Hakala

Director

March 15, 2018

April 1, 2024

Jorge Morales

Gerald W. Hakala

/s/ Timothy Lamothe

Director

April 1, 2024

Timothy Lamothe

/s/ Richard J. Williams, Jr.

Director

March 15, 2018

April 1, 2024

Richard J. Williams, Jr.

/s/ Joseph D. Sarafa

Director

March 15, 2018

April 1, 2024

Joseph D. Sarafa

/s/ Isolde O'HanlonJ. Grant Smith

Director

March 15, 2018

April 1, 2024

Isolde O'Hanlon

J. Grant Smith

/s/ John Melstrom

Director

April 1, 2024

John Melstrom

/s/ James G. Petcoff

Director

April 1, 2024

James G. Petcoff

110



104