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Section 1: 10-Q (10-Q)

Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the transition period from            to
 
Commission file number 001-37536
 
 
Conifer Holdings, Inc.
(Exact name of registrant as specified in its charter)
Michigan
 
27-1298795
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
550 West Merrill Street, Suite 200
 
 
Birmingham, Michigan
 
48009
(Address of principal executive offices)
 
(Zip code)
 
(248) 559-0840
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☐
(Do not check if a smaller
reporting company)
Smaller reporting company ☒
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
 
The number of outstanding shares of the registrant’s common stock, no par value, as of November 6, 2017, was 8,518,488.
 



CONIFER HOLDINGS, INC. AND SUBSIDIARIES
 
Form 10-Q
 
INDEX
 
 
Page No.
 
 


5




23

38

39

 
40

40

40

41

42


2


PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands) 
 
September 30, 2017
 
December 31, 2016
 
(Unaudited)
 
 
Assets
 
 
 
Investment securities:
 
 
 
Fixed maturity securities, at fair value (amortized cost of $121,914
and $113,915, respectively)
$
121,883

 
$
113,163

Equity securities, at fair value (cost of $9,386 and $4,283, respectively)
10,157

 
4,579

Short-term investments, at fair value
13,815

 
10,788

Total investments
145,855

 
128,530

 
 
 
 
Cash
30,846

 
12,493

Premiums and agents' balances receivable, net
22,233

 
24,538

Receivable from affiliate
589

 
1,751

Reinsurance recoverables on unpaid losses
13,528

 
6,658

Reinsurance recoverables on paid losses
2,244

 
840

Ceded unearned premiums
1,082

 
4,120

Deferred policy acquisition costs
12,753

 
13,290

Other assets
7,179

 
11,481

Total assets
$
236,309

 
$
203,701

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Liabilities:
 
 
 
Unpaid losses and loss adjustment expenses
$
82,756

 
$
54,651

Unearned premiums
55,669

 
58,126

Reinsurance premiums payable
7,349

 

Debt
29,010

 
17,750

Accounts payable and other liabilities
9,031

 
5,380

Total liabilities
183,815

 
135,907

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Shareholders' equity:
 
 
 
Common stock, no par value (100,000,000 shares authorized; 8,518,488 and 7,633,070 issued and outstanding, respectively)
85,979

 
80,342

Accumulated deficit
(33,231
)
 
(11,468
)
Accumulated other comprehensive income (loss)
(254
)
 
(1,080
)
Total shareholders' equity
52,494

 
67,794

Total liabilities and shareholders' equity
$
236,309

 
$
203,701

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

3


CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(dollars in thousands, except per share data)

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Revenue
 
 
 
 
 
 
 
Premiums
 
 
 
 
 
 
 
Gross earned premiums
$
28,891

 
$
27,253

 
$
85,493

 
$
76,057

Ceded earned premiums
(11,232
)
 
(3,873
)
 
(19,198
)
 
(10,893
)
Net earned premiums
17,659

 
23,380

 
66,295

 
65,164

Net investment income
768

 
560

 
2,008

 
1,625

Net realized investment gains
39

 
71

 
31

 
604

Other gains

 

 
750

 

Other income
477

 
303

 
1,203

 
829

Total revenue
18,943

 
24,314

 
70,287

 
68,222

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Losses and loss adjustment expenses, net
26,468

 
14,582

 
58,875

 
40,822

Policy acquisition costs
6,655

 
6,266

 
19,555

 
18,282

Operating expenses
4,474

 
4,710

 
13,374

 
13,384

Interest expense
303

 
168

 
745

 
468

Total expenses
37,900

 
25,726

 
92,549

 
72,956

 
 
 
 
 
 
 
 
Income (loss) before equity earnings of affiliates and income taxes
(18,957
)
 
(1,412
)
 
(22,262
)
 
(4,734
)
Equity earnings of affiliates, net of tax
(76
)
 
(47
)
 
89

 
111

Income tax (benefit) expense
(135
)
 
16

 
(410
)
 
(607
)
 
 
 
 
 
 
 
 
Net income (loss)
$
(18,898
)
 
$
(1,475
)
 
$
(21,763
)
 
$
(4,016
)
 
 
 
 
 
 
 
 
Earnings (loss) per common share, basic and diluted
$
(2.46
)
 
$
(0.19
)
 
$
(2.85
)
 
$
(0.53
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic and diluted
7,675,952

 
7,608,284

 
7,647,520

 
7,613,954

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

4


CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(dollars in thousands)
  
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Net income (loss)
$
(18,898
)
 
$
(1,475
)
 
$
(21,763
)
 
$
(4,016
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized investment gains (losses):
 
 
 
 
 
 
 
Unrealized investment gains (losses) during the period
377

 
(109
)
 
1,281

 
1,629

Income tax (benefit) expense
117

 
(23
)
 
398

 
564

Unrealized investment gains (losses), net of tax
260

 
(86
)
 
883

 
1,065

 
 
 
 
 
 
 
 
Less: reclassification adjustments to:
 
 
 
 
 
 
 
Net realized investment gains (losses) included in net income (loss)
7

 
(43
)
 
57

 
(301
)
Income tax benefit

 
(17
)
 

 
(104
)
Total reclassifications included in net income (loss), net of tax
7

 
(26
)
 
57

 
(197
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
253

 
(60
)
 
826

 
1,262

 
 
 
 
 
 
 
 
Total comprehensive income (loss)
$
(18,645
)
 
$
(1,535
)
 
$
(20,937
)
 
$
(2,754
)
 
The accompanying notes are an integral part of the Consolidated Financial Statements.

5


CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
(dollars in thousands)
  
 
 
No Par, Common Stock
 
 
 
Accumulated
Other
 
Total Shareholders' Equity
 
 
Shares
 
Amount
 
Accumulated
deficit
 
Comprehensive
Income (Loss)
 
Balances at December 31, 2015
 
7,644,492

 
$
80,111

 
$
(3,031
)
 
$
182

 
$
77,262

Net loss
 

 

 
(4,016
)
 

 
(4,016
)
Repurchase of common stock
 
(88,650
)
 
(625
)
 

 

 
(625
)
Restricted stock unit expense
 
75,388

 
621

 

 

 
621

Other comprehensive income
 

 

 

 
1,262

 
1,262

Balances at September 30, 2016
 
7,631,230

 
80,107

 
(7,047
)
 
1,444

 
74,504

Net loss
 

 

 
(4,421
)
 

 
(4,421
)
Restricted stock unit expense
 
1,840

 
235

 

 

 
235

Other comprehensive loss
 

 

 

 
(2,524
)
 
(2,524
)
Balances at December 31, 2016
 
7,633,070

 
80,342

 
(11,468
)
 
(1,080
)
 
67,794

Net loss
 

 

 
(21,763
)
 

 
(21,763
)
Issuance of common stock private placement
 
800,000

 
5,000

 

 

 
5,000

Private placement expenses
 

 
(13
)
 

 

 
(13
)
Restricted stock unit expense
 
85,418

 
650

 

 

 
650

Other comprehensive income
 

 

 

 
826

 
826

Balances at September 30, 2017
 
8,518,488

 
$
85,979

 
$
(33,231
)
 
$
(254
)
 
$
52,494



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

6


CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(In thousands) 
 
Nine Months Ended
September 30,
 
2017
 
2016
Cash Flows From Operating Activities
 
 
 
Net income (loss)
$
(21,763
)
 
$
(4,016
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization of property and equipment, and intangibles
296

 
298

Amortization of bond premium and discount, net
395

 
432

Net realized gains on investments
(31
)
 
(604
)
Incentive awards expenses - vesting of restricted stock units
650

 
621

Equity earnings of affiliate
(89
)
 
(111
)
Changes in operating assets and liabilities:
 
 
 
(Increase) decrease in:
 
 
 
Premiums and agents' balances receivable
3,467

 
(1,323
)
Reinsurance recoverables
(8,274
)
 
(2,909
)
Ceded unearned premiums
3,038

 
(1,368
)
Deferred policy acquisition costs
537

 
(1,101
)
Other assets
4,025

 
(1,490
)
Increase (decrease) in:
 
 
 
Unpaid losses and loss adjustment expenses
28,105

 
10,572

Unearned premiums
(2,457
)
 
7,559

Accounts payable and other liabilities
9,607

 
(346
)
Net cash provided by operating activities
17,506

 
6,214

Cash Flows From Investing Activities
 
 
 
Purchase of investments:
 
 
 
Fixed maturity securities
(26,448
)
 
(43,284
)
Equity securities
(4,847
)
 
(1,099
)
Short-term investments
(127,947
)
 
(85,806
)
Proceeds from maturities and redemptions of investments:
 
 
 
Fixed maturity securities
6,350

 
12,315

Other redemptions
11,778

 

Proceeds from sales of investments:
 
 
 
Fixed maturity securities
966

 
27,426

Equity securities
453

 
1,200

Short-term investments
124,926

 
78,144

Purchases of property and equipment
(6
)
 
(148
)
Net cash used in investing activities
(14,775
)
 
(11,252
)
Cash Flows From Financing Activities
 
 
 
Proceeds received from issuance of shares of common stock
4,375

 

Repurchase of common stock

 
(625
)
Borrowings under debt arrangements
32,000

 
3,000

Repayment of borrowings under debt arrangements
(19,750
)
 
(1,500
)
Payment of equity issuance costs
(13
)
 

Payment of debt issuance costs
(990
)
 

Net cash provided by financing activities
15,622

 
875

Net increase (decrease) in cash
18,353

 
(4,163
)
Cash at beginning of period
12,493

 
12,703

Cash at end of period
$
30,846

 
$
8,540

Supplemental Disclosure of Cash Flow Information:
 
 
 
Interest paid
$
860

 
$
343

Net income taxes paid

 
47

Payable for securities - non cash item
1,500

 
1,464

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

7

CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




 
1.     Summary of Significant Accounting Policies
 Basis of Presentation
 The consolidated financial statements include accounts, after elimination of intercompany accounts and transactions, of Conifer Holdings, Inc. (the “Company” or “Conifer”), its wholly owned subsidiaries, Conifer Insurance Company ("CIC"), White Pine Insurance Company ("WPIC"), Red Cedar Insurance Company ("RCIC"), and Sycamore Insurance Agency, Inc ("SIA"). CIC, WPIC, and RCIC are collectively referred to as the "Insurance Company Subsidiaries." On a stand-alone basis, Conifer Holdings, Inc. is referred to as the "Parent Company." On December 30, 2016, the Company's wholly owned subsidiary, American Colonial Insurance Company ("ACIC") was merged into WPIC, with WPIC as the surviving entity.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Company has applied the rules and regulations of the United States Securities and Exchange Commission (“SEC”) regarding interim financial reporting and therefore the consolidated financial statements do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of management, all adjustments, consisting of items of a normal recurring nature, necessary for a fair presentation of the consolidated interim financial statements, have been included. The results of operations for the nine months ended September 30, 2017, are not necessarily indicative of the results expected for the year ended December 31, 2017.
These consolidated financial statements and the notes thereto should be read in conjunction with the Company's audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC on March 15, 2017.
 Business
The Company is engaged in the sale of property and casualty insurance products and has organized its business model around two classes of insurance businesses: commercial and personal lines. The Company underwrites a variety of specialty insurance products, including property, general liability, liquor liability, automobile, homeowners and dwelling policies. The Company markets and sells its insurance products through a network of independent agents and managing general agents. Policies are written in all 50 states. The Company’s corporate headquarters is located in Birmingham, Michigan with additional office facilities in Florida, Pennsylvania and Tennessee.
The Company also generates 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. We also generate equity earnings from SIA's 50% owned agency (the "Affiliate"). The Affiliate places small commercial risks mainly for alarm and security guard markets.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes the amounts included in the consolidated financial statements reflect management's best estimates and assumptions, actual results may differ from these estimates.
 Recently Issued Accounting Guidance
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU significantly changes the income statement impact of equity investments and the recognition of changes in fair value of financial liabilities attributable to an entity's own credit risk when the fair value option is elected. The ASU requires equity instruments that are not accounted for under the equity method to be measured at fair value and to recognize any changes in fair value in net income rather than other comprehensive income. ASU No. 2016-01 becomes effective for the Company in 2018 and will be applied using a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The provisions related to equity investments without a readily determinable fair value will be applied prospectively to equity investments as of the adoption date. Adoption of this ASU is not expected to have a material impact on the Company's financial position, cash flows, or total comprehensive income, but may have a material impact on the Company's results of operations as changes in fair value of equity instruments will be presented in net income rather than other comprehensive income. For the nine months ended September 30, 2017, other comprehensive income includes $476,000 of net unrealized gains on equity securities, net of taxes.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires lessees to record most leases on their balance sheets as a lease liability with a corresponding right-of-use asset, but continue to recognize the related leasing

8

CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




expense within net income. ASU No. 2016-02 becomes effective for the Company in 2019 and will be applied using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company's future minimum lease payments, which represent minimum annual rental commitments excluding taxes, insurance and other operating costs for noncancelable operating leases, and will be subject to this new guidance, totaled $5.2 million at December 31, 2016. The calculation of the lease liability and right-of-use asset requires further analysis of the underlying leases to determine which portions of the underlying lease payments are required to be included in the calculation, however, the Company does not believe that this standard will have a material impact on the financial statements.
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, except for debt securities measured at fair value. 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, 2018. The Company does not believe this standard will have a material impact on the financial statements.
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 flow under Topic 230, Statement of Cash Flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This ASU becomes effective for the Company beginning in 2018. Early adoption is permitted. The Company does not believe that this standard will have a material impact to the statement of cash flows.

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 sale at September 30, 2017 and December 31, 2016, were as follows (dollars in thousands):
 
September 30, 2017
 
Cost or
Amortized
Cost
Gross Unrealized
Estimated
Fair Value 
 
 
Gains
Losses
Fixed Maturity Securities:
 
 
 
 
U.S. Government obligations
$
9,252

$
26

$
(43
)
$
9,235

State and local government
16,009

246

(53
)
16,202

Corporate debt
40,219

279

(162
)
40,336

Commercial mortgage-backed and other asset-backed
56,434

156

(480
)
56,110

Total fixed maturity securities available for sale
121,914

707

(738
)
121,883

Equity Securities
9,386

923

(152
)
10,157

Total securities available for sale
$
131,300

$
1,630

$
(890
)
$
132,040

 
December 31, 2016
 
Cost or
Amortized
Cost
Gross Unrealized
Estimated
Fair Value 
 
Gains
Losses
Fixed Maturity Securities:
 
 
 
 
U.S. Government obligations
$
5,908

$
31

$
(36
)
$
5,903

State and local government
13,618

106

(205
)
13,519

Corporate debt
34,105

205

(254
)
34,056

Commercial mortgage-backed and other asset-backed
60,284

132

(731
)
59,685

Total fixed maturity securities available for sale
113,915

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


9

CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




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): 
 
September 30, 2017
 
Less than 12 months
 
Greater than 12 months
 
Total
 
No.
of
Issues
Fair Value of
Investments
with Unrealized
Losses
Gross
Un realized
Losses
 
No.
of
Issues
Fair Value of
Investments
with Unrealized
Losses
Gross
Un realized
Losses
 
No.
of
Issues
Fair Value of
Investments
with Unrealized
Losses
Gross
Un realized
Losses
Fixed Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government obligations
10

$
6,177

$
(37
)
 
4

$
914

$
(6
)
 
14

$
7,091

$
(43
)
State and local government
23

6,108

(35
)
 
3

506

(18
)
 
26

6,614

(53
)
Corporate debt
13

7,568

(143
)
 
5

2,037

(19
)
 
18

9,605

(162
)
Commercial mortgage and asset-backed
42

31,653

(424
)
 
6

1,656

(56
)
 
48

33,309

(480
)
Total fixed maturity securities available for sale
88

51,506

(639
)
 
18

5,113

(99
)
 
106

56,619

(738
)
Equity Securities:
 
 
 
 
 
 
 
 
 
 
 
Common stocks
19

1,087

(141
)
 
1

33

(11
)
 
20

1,120

(152
)
Total equity securities available for sale
19

1,087

(141
)
 
1

33

(11
)
 
20

1,120

(152
)
Total securities
107

$
52,593

$
(780
)
 
19

$
5,146

$
(110
)
 
126

$
57,739

$
(890
)
 
December 31, 2016
 
Less than 12 months
 
Greater than 12 months
 
Total
 
No.
of
Issues
Fair Value of
Investments
with Unrealized
Losses
Gross
Un realized
Losses
 
No.
of
Issues
Fair Value of
Investments
with Unrealized
Losses
Gross
Un realized
Losses
 
No.
of
Issues
Fair Value of
Investments
with Unrealized
Losses
Gross
Un realized
Losses
Fixed Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government obligations
15

$
4,539

$
(36
)
 

$

$

 
15

$
4,539

$
(36
)
State and local government
29

8,217

(202
)
 
1

104

(3
)
 
30

8,321

(205
)
Corporate debt
22

9,031

(239
)
 
7

3,369

(15
)
 
29

12,400

(254
)
Commercial mortgage and asset-backed
59

38,048

(722
)
 
5

802

(9
)
 
64

38,850

(731
)
Total fixed maturity securities available for sale
125

59,835

(1,199
)
 
13

4,275

(27
)
 
138

64,110

(1,226
)
Equity Securities:
 
 
 
 
 
 
 
 
 
 
 
Common stock
76

2,472

(61
)
 
2

66

(9
)
 
78

2,538

(70
)
Total equity securities available for sale
76

2,472

(61
)
 
2

66

(9
)
 
78

2,538

(70
)
Total securities
201

$
62,307

$
(1,260
)
 
15

$
4,341

$
(36
)
 
216

$
66,648

$
(1,296
)

10

CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




 The Company analyzed its investment portfolio in accordance with its other-than-temporary impairment ("OTTI") review procedures and determined the Company did not need to record a credit-related OTTI loss in net income, nor recognize a non-credit related OTTI loss in other comprehensive income for the nine months ended September 30, 2017 and 2016.
 The Company’s sources of net investment income are as follows (dollars in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Fixed maturity securities
$
733

 
$
616

 
$
2,030

 
$
1,772

Equity securities
44

 
23

 
94

 
75

Cash and short-term investments
64

 
7

 
91

 
13

Total investment income
841

 
646

 
2,215

 
1,860

Investment expenses
(73
)
 
(86
)
 
(207
)
 
(235
)
Net investment income
$
768

 
$
560

 
$
2,008

 
$
1,625


The following table summarizes the gross realized gains and losses from sales or maturities of available-for-sale fixed maturity and equity securities (dollars in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Fixed maturity securities:
 
 
 
 
 
 
 
Gross realized gains
$
29

 
$
7

 
$
29

 
$
524

Gross realized losses
(1
)
 

 
(8
)
 
(22
)
Total fixed maturity securities
28

 
7

 
21

 
502

Equity securities:
 
 
 
 
 
 
 
Gross realized gains
11

 
79

 
40

 
230

Gross realized losses

 
(15
)
 
(30
)
 
(128
)
Total equity securities
11

 
64

 
10

 
102

Total realized gains (losses)
$
39

 
$
71

 
$
31

 
$
604

 Proceeds from the sales of debt and equity securities available for sale, maturities and other redemptions (primarily the return of capital) were $19.5 million and $40.9 million for the nine months ended September 30, 2017 and 2016, respectively.
 The table below summarizes the amortized cost and fair value of available-for-sale fixed maturity securities by contractual maturity at September 30, 2017. 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
$
11,122

 
$
11,136

Due after one year through five years
34,171

 
34,327

Due after five years through ten years
11,255

 
11,392

Due after ten years
8,932

 
8,918

Securities with contractual maturities
65,480

 
65,773

Commercial mortgage and asset backed
56,434

 
56,110

Total Fixed maturity securities
$
121,914

 
$
121,883

 At September 30, 2017 and December 31, 2016, the Insurance Company Subsidiaries had an aggregate of $8.2 million and $9.6 million respectively, on deposit in trust accounts to meet the deposit requirements of various state insurance departments.  At September 30, 2017 and December 31, 2016, the Company had $12.8 million and $10.3 million held in trust accounts to

11

CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




meet collateral requirements with other third-party insurers, relating to various fronting arrangements. There are withdrawal and other restrictions on these deposits, including the type of investments that may be held, however, the Company may generally invest in high-grade bonds and short-term investments and earn interest on the funds. 

3.     Fair Value Measurements
 The Company’s financial instruments include assets and liabilities carried at fair value, as well as assets and liabilities carried at cost or amortized cost but disclosed at fair value in these consolidated financial statements. Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principally most advantageous market for the asset or liability in an orderly transaction between market participants. In determining fair value, the Company applies the market approach, which uses prices and other relevant data based on market transactions involving identical or comparable assets and liabilities. The inputs to valuation techniques used to measure fair value are prioritized into a three-level hierarchy. The hierarchy gives the highest priority to quoted prices from sources independent of the reporting entity (“observable inputs”) and the lowest priority to prices determined by the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”). The fair value hierarchy is as follows:
 Level 1—Valuations that are based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
 Level 2—Valuations that are based on observable inputs (other than Level 1 prices) such as quoted prices for similar assets or liabilities at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
 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 following tables present the Company’s assets and liabilities measured at fair value on a recurring basis, classified by the valuation hierarchy as of September 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
September 30, 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:
 
 
 
 
 
 
 
Fixed Maturity Securities:
 
 
 
 
 
 
 
U.S. Government obligations
$
9,235

 
$

 
$
9,235

 
$

State and local government
16,202

 

 
16,202

 

Corporate debt
40,336

 

 
40,336

 

Commercial mortgage-backed and other asset-backed
56,110

 

 
56,110

 

Total fixed maturity securities
121,883

 

 
121,883

 

Equity Securities
10,157

 
5,055

 
5,102

 

Short-term investments
13,815

 
13,815

 

 

Total assets measured at fair value
$
145,855

 
$
18,870

 
$
126,985

 
$

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Debt
$
29,010

 
$

 
$
29,010

 
$

Total Liabilities measured at fair value
$
29,010

 
$

 
$
29,010

 
$




12

CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




 
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:
 
 
 
 
 
 
 
Fixed Maturity Securities:
 
 
 
 
 
 
 
U.S. Government obligations
$
5,903

 
$

 
$
5,903

 
$

State and local government
13,519

 

 
13,519

 

Corporate debt
34,056

 

 
34,056

 

Commercial mortgage-backed and other asset-backed
59,685

 

 
59,685

 

Total fixed maturity securities
113,163

 

 
113,163

 

Equity Securities
4,579

 
4,469

 
110

 

Short-term investments
10,788

 
10,788

 

 

Total assets measured at fair value
$
128,530

 
$
15,257

 
$
113,273

 
$

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Debt
$
17,750

 
$

 
$
17,750

 
$

Total Liabilities measured at fair value
$
17,750

 
$

 
$
17,750

 
$


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 12.9% of the fair value of the total investment portfolio as of September 30, 2017.
Level 2 investments include fixed maturity 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 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. The fair value of securities included in the Level 2 category based on the market values obtained from a third party pricing service 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 87.1% of the fair value of the total investment portfolio as of September 30, 2017.
 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 for the periods presented. Based on these procedures, the Company did not adjust the prices or quotes provided from independent pricing services, investment managers or consultants.
The Level 2 financial instruments also include our debt. At September 30, 2017 the fair value of borrowings, consisting of fifteen year subordinated notes, approximate its carrying amount. At December 31, 2016, the fair value of borrowings under the debt, consisting of the revolving credit facility and term loans, approximates its carrying amount because interest is based on a short-term, variable, market-based rate.
 The Company’s policy on recognizing transfers between hierarchy levels is applied at the end of each reporting period. There were no transfers between Levels 1, 2 and 3 for the nine months ended September 30, 2017 and 2016, respectively.



13

CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)





4. Deferred Policy Acquisition Costs
The Company defers costs incurred which are incremental and directly related to the successful acquisition of new or renewal insurance business, net of corresponding amounts of ceded reinsurance commissions. Net deferred policy acquisition costs are amortized and charged to expense in proportion to premium earned over the estimated policy term. The Company anticipates that its deferred policy acquisition costs will be fully recoverable and there were no premium deficiencies for the nine months ended September 30, 2017 and 2016. The activity in deferred policy acquisition costs, net of reinsurance transactions, is as follows (dollars in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Balance at beginning of period
$
12,649

 
$
13,182

 
$
13,290

 
$
12,102

 
 
 
 
 
 
 
 
Deferred policy acquisition costs
6,759

 
6,287

 
19,018

 
19,383

Amortization of policy acquisition costs
(6,655
)
 
(6,266
)
 
(19,555
)
 
(18,282
)
Net change
104

 
21

 
(537
)
 
1,101

 
 
 
 
 
 
 
 
Balance at end of period
$
12,753

 
$
13,203

 
$
12,753

 
$
13,203


5.     Unpaid Losses and Loss Adjustment Expenses
 The Company establishes reserves for unpaid losses and loss adjustment expenses ("LAE") which represent the estimated ultimate cost of all losses incurred that were both reported and unreported (i.e., incurred but not yet reported losses; or “IBNR”) and LAE incurred that remain unpaid at the balance sheet date. The Company’s reserving process takes into account known facts and interpretations of circumstances and factors including the Company’s experience with similar cases, actual claims paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management programs, product mix and contractual terms, changes in law and regulation, judicial decisions, and economic conditions. In the normal course of business, the Company may also supplement its claims processes by utilizing third party adjusters, appraisers, engineers, inspectors, and other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims. The effects of inflation are implicitly considered in the reserving process.
 Reserves are estimates of unpaid portions of losses that have occurred, including IBNR losses; therefore the establishment of appropriate reserves is an inherently uncertain and complex process. The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimates. The highest degree of uncertainty is associated with reserves for losses incurred in the current reporting period as it contains the greatest proportion of losses that have not been reported or settled. The Company regularly updates its reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in reserve estimates, which may be material, are reported in the results of operations in the period such changes are determined to be needed and recorded.
  Management believes that the reserve for losses and LAE, net of reinsurance recoverables, is appropriately established in the aggregate and adequate to cover the ultimate net cost of reported and unreported claims arising from losses which had occurred by the date of the consolidated financial statements based on available facts and in accordance with applicable laws and regulations.
 The table below provides the changes in the reserves for losses and LAE, net of reinsurance recoverables, for the periods indicated as follows (dollars in thousands):

14

CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Gross reserves - beginning of period
$
66,917

 
$
41,832

 
$
54,651

 
$
35,422

Less: reinsurance recoverables on unpaid losses
10,552

 
5,890

 
6,658

 
5,405

Net reserves - beginning of period
56,365

 
35,942

 
47,993

 
30,017

 
 
 
 
 
 
 
 
Add: incurred losses and LAE, net of reinsurance:
 
 
 
 
 
 
 
Current period
24,398

 
11,989

 
49,449

 
35,135

Prior period
2,070

 
2,593

 
9,426

 
5,687

Total net incurred losses and LAE
26,468

 
14,582

 
58,875

 
40,822

 
 
 
 
 
 
 
 
Deduct: loss and LAE payments, net of reinsurance:
 
 
 
 
 
 
 
Current period
7,194

 
6,938

 
14,410

 
14,730

Prior period
6,411

 
3,926

 
23,230

 
16,449

Total net loss and LAE payments
13,605

 
10,864

 
37,640

 
31,179

 
 
 
 
 
 
 
 
Net reserves - end of period
69,228

 
39,660

 
69,228

 
39,660

Plus: reinsurance recoverables on unpaid losses
13,528

 
6,334

 
13,528

 
6,334

Gross reserves - end of period
$
82,756

 
$
45,994

 
$
82,756

 
$
45,994


On September 28, 2017, the Company entered into an adverse development cover reinsurance agreement (the "ADC") to cover loss development of up to $17.5 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 Company’s incurred losses during the three and nine months ended September 30, 2017, included prior-year adverse reserve development of $2.1 million and $9.4 million, respectively. The $2.1 million of net adverse development was comprised of $865,000 from the commercial liability line of business, $697,000 from the Florida homeowners line, $604,000 from the commercial auto line of business, $350,000 from the commercial property line, offset by $446,000 of favorable development from other lines. For the nine months ended September 30, 2017, there was adverse development of $4.2 million from the commercial liability line of business, $2.4 million from the Florida homeowners line, $2.2 million from the commercial property line, $932,000 from the commercial auto line of business, offset by $277,000 of favorable development in other lines.
Incurred losses during the three months ended September 30, 2017 also included $5.0 million in net catastrophe losses in the current accident year related to Hurricane Harvey and Hurricane Irma in Texas and Florida.
The Company’s incurred losses during the three and nine months ended September 30, 2016 included prior-year adverse reserve development of $2.6 million and $5.7 million, respectively. In the third quarter of 2016, there was $759,000 and $584,000 of adverse development in the Florida homeowners and commercial automobile lines, respectively. For the nine months ended September 30, 2016, there was adverse development of $2.2 million from the Florida homeowners line and $2.1 million from the commercial automobile line. The balance of the adverse development stemmed from the general liability products, mostly related to the hospitality lines. On a year-to-date basis, however, the reserve development on general liability products was slightly favorable.

6.     Reinsurance
In the normal course of business, the Company seeks to minimize the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with reinsurers. The Company participates in reinsurance agreements in order to limit its loss exposure including protecting against catastrophe losses. The Company primarily ceded all specific commercial risks in excess of $500 thousand in both 2017 and 2016. Reinsurance does not discharge the direct insurer from liability to its policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors

15

CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




the concentration of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. To date, the Company has not experienced any significant difficulties in collecting reinsurance recoverables.
The Company assumes written premiums under a few fronting arrangements, most of which are net of other reinsurance arrangements. The fronting arrangements are with unaffiliated insurers who write on behalf of the Company in markets that require a higher A.M. Best rating than the Company’s current rating, where the policies are written in a state where the Company is not licensed or for other strategic reasons.
The consideration for the ADC entered into in the third quarter was a payment of $7.2 million, which resulted in a one-time charge to ceded premiums fully earned in the third quarter. There is a 35% contingent recovery depending on the performance of the reserves over time. No recovery is currently reflected in the financial statements.
The following table presents the effects of such reinsurance and assumption transactions on premiums and losses and LAE (dollars in thousands). The 2017 ceded written and earned premium amounts include $600,000 of reinsurance reinstatement costs relating to Hurricane Irma.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Written premiums:
 
 
 
 
 
 
 
Direct
$
20,112

 
$
22,340

 
$
61,731

 
$
66,473

Assumed
9,469

 
6,157

 
21,305

 
17,143

Ceded
(11,186
)
 
(3,863
)
 
(19,235
)
 
(10,755
)
Net written premiums
$
18,395

 
$
24,634

 
$
63,801

 
$
72,861

 
 
 
 
 
 
 
 
Earned premiums:
 
 
 
 
 
 
 
Direct
$
21,797

 
$
23,057

 
$
65,817

 
$
67,871

Assumed
7,094

 
4,196

 
19,676

 
8,186

Ceded
(11,232
)
 
(3,873
)
 
(19,198
)
 
(10,893
)
Net earned premiums
$
17,659

 
$
23,380

 
$
66,295

 
$
65,164

 
 
 
 
 
 
 
 
Losses and LAE:
 
 
 
 
 
 
 
Direct
$
27,268

 
$
13,616

 
$
59,496

 
$
41,460

Assumed
5,313

 
1,750

 
14,017

 
4,106

Ceded
(6,113
)
 
(784
)
 
(14,638
)
 
(4,744
)
Net Losses and LAE
$
26,468

 
$
14,582

 
$
58,875

 
$
40,822

 
 
 
 
 
 
 
 
7.     Debt
On September 29, 2017, the Company executed $30.0 million in private placement subordinated notes (the "Notes"). The Notes have a maturity date of September 29, 2032, bear interest, payable quarterly at a fixed annual rate of 8.0%, and allow for up to four quarterly interest deferrals. On 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. The Notes include an issuer call option at par from July 31, 2018, through October 31, 2018, and at 105% of par any time after September 29, 2020.  
The carrying value of the Notes is offset by $990,000 of debt issuance costs that will be amortized through interest expense over the life of the loan.
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):

16

CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




 
September 30, 2017
 
December 31, 2016
Subordinated Debt
$
29,010

 
$

Revolver

 
10,500

Term Note

 
1,750

2014 Term Note

 
5,500

Total
$
29,010

 
$
17,750

The proceeds from the Notes were utilized to repay the outstanding balances on the Credit Facility, consisting of the $11.0 million Revolver and $5.4 million term notes.
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. At September 30, 2017, the Company was in compliance with all of its subordinated debt financial covenants.

8.     Shareholders’ Equity
In September 2017, the Company issued $5.0 million of common equity through a private placement for 800,000 shares priced at $6.25. The participants in the private placement consisted mainly of members of the Company’s management team and insiders, including Chairman and CEO James Petcoff. The Company will use the proceeds to strengthen its balance sheet through contributions to the subsidiaries to support their future growth, as well as cover the cost of the ADC and reserve strengthening. At September 30, 2017, $625,000 of the total issuance was receivable; those funds were fully collected within ten days of period end.
 On February 25, 2016, 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 over a one-year period. Under this program, management was 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. The plan expired on February 25, 2017. For the nine months ended September 30, 2017, the Company had not repurchased or retired any shares of stock. In 2016, the Company repurchased and retired 88,650 shares of stock valued at approximately $625 thousand.

9. Other Comprehensive Income (Loss)
 The following table presents changes in accumulated other comprehensive income (loss) for unrealized gains and losses on available-for-sale securities (dollars in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Balance at beginning of period
$
(507
)
 
$
1,504

 
$
(1,080
)
 
$
182

Other comprehensive income (loss) before reclassifications
260

 
(86
)
 
883

 
1,065

Less: amounts reclassified from accumulated other comprehensive income (loss)
7

 
(26
)
 
57

 
(197
)
Net current period other comprehensive income (loss)
253

 
(60
)
 
826

 
1,262

Balance at end of period
$
(254
)
 
$
1,444

 
$
(254
)
 
$
1,444




17

CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




10. Earnings Per Share
 Basic and diluted earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. The following table presents the calculation of basic and diluted earnings (loss) per common share, as follows (dollars in thousands, except per share amounts):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Net income (loss)
$
(18,898
)
 
$
(1,475
)
 
$
(21,763
)
 
$
(4,016
)
 
 
 
 
 
 
 
 
Weighted average common shares, basic and diluted*
7,675,952

 
7,608,284

 
7,647,520

 
7,613,954

 
 
 
 
 
 
 
 
Earnings (loss) per common share, basic and diluted
$
(2.46
)
 
$
(0.19
)
 
$
(2.85
)
 
$
(0.53
)
* The 309,000 nonvested shares of the restricted stock units were anti-dilutive as of September 30, 2017. Therefore, the basic and diluted weighted average common shares are equal for the three and nine months ended September 30, 2017.

11.     Stock-based Compensation

In 2015, the Company issued 390,352 RSUs to executive officers and other employees to be settled in shares of common stock. The total RSUs were valued at $4.1 million on the date 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 following summarizes our restricted stock unit "RSU" activity (units in thousands):
 
Number of Units
 
Weighted Average Grant-Date Fair Value
 
 
 
 
Outstanding at December 31, 2015
390

 
$
10.48

Units granted
111

 
8.17

Units vested
(75
)
 
10.5

Units forfeited

 

Outstanding at September 30, 2016
426

 
$
9.88

Units granted

 

Units vested
(2
)
 
9.56

Units forfeited
(8
)
 
9.95

Outstanding at December 31, 2016
416

 
$
9.87

Units granted

 

Units vested
(93
)
 
9.97

Units forfeited
(14
)
 
9.95

Outstanding at September 30, 2017
309

 
$
9.84

The Company recorded $650,000 and $621,000 of compensation expense related to the RSUs for the nine months ended September 30, 2017 and 2016, respectively. The total compensation cost related to the non-vested portion of the restricted stock units which has not been recognized as of September 30, 2017, was $3.0 million.

 


18

CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




12.     Commitments and Contingencies
 Legal proceedings
 The Company and its subsidiaries are subject at times to various claims, lawsuits and proceedings relating principally to alleged errors or omissions in the placement of insurance, claims administration, and other business transactions arising in the ordinary course of business. Where appropriate, the Company vigorously defends such claims, lawsuits and proceedings. Some of these claims, lawsuits and proceedings seek damages, including consequential, exemplary or punitive damages, in amounts that could, if awarded, be significant. Most of the claims, lawsuits and proceedings arising in the ordinary course of business are related to the insurance policy issued. 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, either individually, or in the aggregate.

13.     Segment Information
 The Company is engaged in the sale of property and casualty insurance products and has organized its business model around two classes of insurance businesses: commercial and personal lines. Within these two insurance businesses, the Company offers various insurance products. Such insurance businesses are engaged in underwriting and marketing insurance coverages, and administering claims processing for such policies.
 The Company defines its operating segments as components of the business where separate financial information is available and used by the chief operating decision maker in deciding how to allocate resources to its segments and in assessing its performance. In assessing performance of its operating segments, the Company’s chief operating decision maker, the Chief Executive Officer, reviews a number of financial measures including gross written premiums, net earned premiums, losses and LAE, net of reinsurance recoveries. However, the primary measure used for making decisions about resources to be allocated to an operating segment and assessing 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 other underwriting and operating expenses of the operating segments. Other underwriting and operating expenses primarily include compensation and related benefits for underwriting personnel, licensing of policy issuance and claims systems, rent and utilities. The Company markets, distributes and sells its insurance products primarily through 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 and Pennsylvania. For the nine months ended September 30, 2017 and 2016, gross written premiums attributable to these four states were 60% and 58% of the Company’s total gross written premiums.
 In addition to the reportable operating 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 and finance and information technology personnel, and other corporate headquarters expenses, (ii) interest expense on the Company’s debt obligations; (iii) depreciation and amortization on property and equipment, and (iv) all investment income activity. All investment income activity is reported within net investment income and net realized investment gains on the consolidated statements of operations. The Company’s assets on the consolidated balance sheet are not allocated to the reportable segments.

19

CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




The following tables present information by reportable operating segment (dollars in thousands):
Three Months Ended September 30, 2017
 
Commercial Lines
 
Personal Lines
 
Corporate
& Other
 
Total
Gross written premiums
 
$
23,509

 
$
6,072

 
$

 
$
29,581

Net written premiums
 
$
16,221

 
$
2,174

 
$

 
$
18,395

 
 
 
 
 
 
 
 
 
Net earned premiums
 
$
15,658

 
$
2,001

 
$

 
$
17,659

Other income
 
162

 
281

 
34

 
477

Segment revenue
 
15,820

 
2,282

 
34

 
18,136

Losses and loss adjustment expenses, net
 
19,589

 
6,879

 

 
26,468

Policy acquisition costs
 
5,161

 
1,494

 

 
6,655

Operating expenses
 
3,322

 
808

 
344

 
4,474

Segment expenses
 
28,072

 
9,181

 
344

 
37,597

Segment underwriting gain (loss)
 
$
(12,252
)
 
$
(6,899
)
 
$
(310
)
 
$
(19,461
)
 
 
 
 
 
 
 
 
 
Net investment income
 
 

 
 

 
768

 
768

Net realized investment gains
 
 

 
 

 
39

 
39

Interest expense
 
 
 
 
 
$
(303
)
 
$
(303
)
Income (loss) before equity earnings of affiliates and income taxes
 
 

 
 

 
$
194

 
$
(18,957
)

20

CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




Three Months Ended September 30, 2016
 
Commercial Lines
 
Personal Lines
 
Corporate
& Other
 
Total
Gross written premiums
 
$
20,759

 
$
7,738

 
$

 
$
28,497

Net written premiums
 
$
18,230

 
$
6,404

 
$

 
$
24,634

 
 
 
 
 
 
 
 
 
Net earned premiums
 
$
17,878

 
$
5,502

 
$

 
$
23,380

Other income
 
81

 
101

 
121

 
303

Segment revenue
 
17,959

 
5,603

 
121

 
23,683

Losses and loss adjustment expenses, net
 
9,564

 
5,018

 

 
14,582

Policy acquisition costs
 
4,868

 
1,398

 

 
6,266

Operating expenses
 
1,803

 
779

 
2,128

 
4,710

Segment expenses
 
16,235

 
7,195

 
2,128

 
25,558

Segment underwriting gain (loss)
 
$
1,724

 
$
(1,592
)
 
$
(2,007
)
 
$
(1,875
)
 
 
 
 
 
 
 
 
 
Net investment income
 
 

 
 

 
560

 
560

Net realized investment gains
 
 

 
 

 
71

 
71

Interest expense
 
 

 
 

 
(168
)
 
(168
)
Income (loss) before equity earnings of affiliates and income taxes
 
 

 
 

 
$
(1,544
)
 
$
(1,412
)

Nine Months Ended September 30, 2017
 
Commercial Lines
 
Personal Lines
 
Corporate
& Other