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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, 2018
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 5, 2018, was 8,602,703.
 



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

2


PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands) 
 
September 30, 2018
 
December 31, 2017
 
(Unaudited)
 
 
Assets
 
 
 
Investment securities:
 
 
 
Debt securities, at fair value (amortized cost of $125,018 and $137,004, respectively)
$
121,996

 
$
136,536

Equity securities, at fair value (cost of $8,890 and $8,629, respectively)
9,832

 
9,687

Short-term investments, at fair value
9,905

 
11,427

Total investments
141,733

 
157,650

 
 
 
 
Cash
16,455

 
11,868

Premiums and agents' balances receivable, net
22,415

 
22,845

Receivable from affiliate
1,321

 
1,195

Reinsurance recoverables on unpaid losses
27,118

 
20,066

Reinsurance recoverables on paid losses
2,540

 
4,473

Prepaid reinsurance premiums
1,498

 
1,081

Deferred policy acquisition costs
11,843

 
12,781

Other assets
8,074

 
7,073

Total assets
$
232,997

 
$
239,032

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Liabilities:
 
 
 
Unpaid losses and loss adjustment expenses
$
91,046

 
$
87,896

Unearned premiums
51,701

 
57,672

Reinsurance premiums payable

 
3,299

Debt
29,750

 
29,027

Accounts payable and other liabilities
13,961

 
8,312

Total liabilities
186,458

 
186,206

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Shareholders' equity:
 
 
 
Common stock, no par value (100,000,000 shares authorized; 8,602,703 and 8,520,328 issued and outstanding, respectively)
86,915

 
86,199

Accumulated deficit
(36,982
)
 
(33,010
)
Accumulated other comprehensive income (loss)
(3,394
)
 
(363
)
Total shareholders' equity
46,539

 
52,826

Total liabilities and shareholders' equity
$
232,997

 
$
239,032

 
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,
 
2018
 
2017
 
2018
 
2017
Revenue
 
 
 
 
 
 
 
Premiums
 
 
 
 
 
 
 
Gross earned premiums
$
27,318

 
$
28,891

 
$
82,899

 
$
85,493

Ceded earned premiums
(3,868
)
 
(11,232
)
 
(11,711
)
 
(19,198
)
Net earned premiums
23,450

 
17,659

 
71,188

 
66,295

Net investment income
786

 
768

 
2,425

 
2,008

Net realized investment gains (losses)
(21
)
 
39

 
152

 
31

Change in fair value of equity securities
151

 

 
(116
)
 

Other gains

 

 

 
750

Other income
405

 
477

 
1,212

 
1,203

Total revenue
24,771

 
18,943

 
74,861

 
70,287

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Losses and loss adjustment expenses, net
16,554

 
26,468

 
44,950

 
58,875

Policy acquisition costs
6,452

 
6,655

 
19,437

 
19,555

Operating expenses
4,786

 
4,474

 
13,276

 
13,374

Interest expense
598

 
303

 
1,834

 
745

Total expenses
28,390

 
37,900

 
79,497

 
92,549

 
 
 
 
 
 
 
 
Income (loss) before equity earnings of affiliates and income taxes
(3,619
)
 
(18,957
)
 
(4,636
)
 
(22,262
)
Equity earnings of affiliates, net of tax
93

 
(76
)
 
237

 
89

Income tax (benefit) expense
25

 
(135
)
 
52

 
(410
)
 
 
 
 
 
 
 
 
Net income (loss)
$
(3,551
)
 
$
(18,898
)
 
$
(4,451
)
 
$
(21,763
)
 
 
 
 
 
 
 
 
Earnings (loss) per common share, basic and diluted
$
(0.42
)
 
$
(2.46
)
 
$
(0.52
)
 
$
(2.85
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic and diluted
8,553,613

 
7,675,952

 
8,531,545

 
7,647,520

 
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,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
(3,551
)
 
$
(18,898
)
 
$
(4,451
)
 
$
(21,763
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized investment gains (losses):
 
 
 
 
 
 
 
Unrealized investment gains (losses) during the period
(352
)
 
377

 
(2,574
)
 
1,281

Income tax (benefit) expense

 
117

 

 
398

Unrealized investment gains (losses), net of tax
(352
)
 
260

 
(2,574
)
 
883

 
 
 
 
 
 
 
 
Less: reclassification adjustments to:
 
 
 
 
 
 
 
Net realized investment gains (losses) included in net income (loss)
(18
)
 
7

 
(22
)
 
57

Income tax (benefit) expense

 

 

 

Total reclassifications included in net income (loss), net of tax
(18
)
 
7

 
(22
)
 
57

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
(334
)
 
253

 
(2,552
)
 
826

 
 
 
 
 
 
 
 
Total comprehensive income (loss)
$
(3,885
)
 
$
(18,645
)
 
$
(7,003
)
 
$
(20,937
)
 
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, 2016
 
7,633,070

 
$
80,342

 
$
(11,468
)
 
$
(1,080
)
 
$
67,794

Net loss
 

 

 
(21,763
)
 

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

 
5,000

 
 
 
 
 
5,000

Common stock issuance costs
 
 
 
(13
)
 
 
 
 
 
(13
)
Restricted stock unit expense, net
 
85,418

 
650

 

 

 
650

Other comprehensive income
 

 

 

 
826

 
826

Balances at September 30, 2017
 
8,518,488

 
85,979

 
(33,231
)
 
(254
)
 
52,494

Net loss
 

 

 
221

 

 
221

Common stock issuance costs
 

 
(25
)
 

 

 
(25
)
Restricted stock unit expense, net
 
1,840

 
245

 

 

 
245

Other comprehensive income
 

 

 

 
(109
)
 
(109
)
Balances at December 31, 2017
 
8,520,328

 
86,199

 
(33,010
)
 
(363
)
 
52,826

Net loss
 

 

 
(4,451
)
 

 
(4,451
)
Restricted stock unit expense, net
 
82,375

 
716

 

 

 
716

Other comprehensive loss
 

 

 

 
(2,552
)
 
(2,552
)
Cumulative effect of adoption of ASU No. 2016-01, net of taxes
 

 

 
556

 
(556
)
 

Cumulative effect of adoption of ASU No. 2018-02, net of taxes
 

 

 
(77
)
 
77

 

Balances at September 30, 2018
 
8,602,703

 
$
86,915

 
$
(36,982
)
 
$
(3,394
)
 
$
46,539



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,
 
2018
 
2017
Cash Flows From Operating Activities
 
 
 
Net income (loss)
$
(4,451
)
 
$
(21,763
)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
254

 
296

Amortization of bond premium and discount, net
392

 
395

Net realized investment (gains) losses
(152
)
 
(31
)
Change in fair value of equity securities
116

 

Restricted stock unit expenses
716

 
650

Other
(237
)
 
(89
)
Changes in operating assets and liabilities:
 
 
 
(Increase) decrease in:
 
 
 
Premiums and agents' balances and other receivables
304

 
3,467

Reinsurance recoverables
(5,119
)
 
(8,274
)
Prepaid reinsurance premiums
(417
)
 
3,038

Deferred policy acquisition costs
938

 
537

Other assets
(900
)
 
4,025

Increase (decrease) in:
 
 
 
Unpaid losses and loss adjustment expenses
3,150

 
28,105

Unearned premiums
(5,971
)
 
(2,457
)
Accounts payable and other liabilities
3,866

 
9,607

Net cash provided by (used in) operating activities
(7,511
)
 
17,506

Cash Flows From Investing Activities
 
 
 
Purchase of investments
(63,599
)
 
(159,242
)
Proceeds from maturities and redemptions of investments
18,460

 
18,128

Proceeds from sales of investments
56,632

 
126,345

Purchases of property and equipment
(69
)
 
(6
)
Net cash provided by (used in) investing activities
11,424

 
(14,775
)
Cash Flows From Financing Activities
 
 
 
Proceeds received from issuance of shares of common stock

 
4,375

Borrowings under debt arrangements
22,000

 
32,000

Repayment of borrowings under debt arrangements
(20,000
)
 
(19,750
)
Payment of equity issuance costs

 
(13
)
Payment of debt issuance costs
(1,326
)
 
(990
)
Net cash provided by (used in) financing activities
674

 
15,622

Net increase (decrease) in cash
4,587

 
18,353

Cash at beginning of period
11,868

 
12,493

Cash at end of period
$
16,455

 
$
30,846

Supplemental Disclosure of Cash Flow Information:
 
 
 
Interest paid
$
2,386

 
$
860

Payable for securities - non cash item
1,681

 
1,500

 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."
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, 2018, are not necessarily indicative of the results expected for the year ended December 31, 2018.
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/A for the year ended December 31, 2017, as filed with the SEC.
 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
Effective January 1, 2018, the Company adopted FASB Accounting Standards Update ("ASU") No. 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. As a result of adoption of this ASU, equity instruments 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. Previously, the Company’s equity securities were classified as available-for-sale and changes in fair value were recorded in other comprehensive income. Upon adoption of this ASU, cumulative net unrealized gains on equity securities of $1.1 million, net of deferred income taxes of $0.5 million, were reclassified from accumulated other comprehensive income into accumulated deficit. Prior periods have not been recast to conform to the current presentation. See Note 2 ~ Investments for details regarding the change in net unrealized gains on equity securities included in net income for the current quarter ended September 30, 2018.
Effective January 1, 2018, the Company early adopted ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU provides an option to reclassify tax effects remaining in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act (TCJA) to retained earnings. Upon enactment of the TCJA, the U.S. corporate tax rate was reduced from 35% to 21% and the Company's U.S. deferred tax balances were remeasured to the lower enacted U.S. corporate tax rate. GAAP requires the effects of changes in tax rates and laws on deferred tax balances to be recorded as a component of income tax

8

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




expense in the period of enactment, even if the assets and liabilities relate to items of accumulated other comprehensive income. As a result of adopting the ASU, the Company reclassified $77,000 of previously recognized deferred taxes from accumulated other comprehensive income into accumulated deficit as of January 1, 2018.
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 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. We do not have any financing leases. If the standard were adopted as of September 30, 2018, approximately $4.4 million of future lease liabilities would be added to our balance sheet with a corresponding right-of-use asset. We have approximately $860,000 of operating lease expenses for the nine months ended September 30, 2018, and do not expect that there would be a materially different expense upon adoption.
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 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 840), which modifies the disclosure requirements for assets and liabilities measured at fair value. The requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements have all been removed. However, the changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period must be disclosed along with the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements (or other quantitative information if it is more reasonable). Finally, for investments measured at net asset value, the requirements have been modified so that the timing of liquidation and the date when restrictions from redemption might lapse are only disclosed if the investee has communicated the timing to the entity or announced the timing publicly. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted upon the issuance of this update. Management is currently evaluating the impact of the guidance.
 

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, 2018 and December 31, 2017, were as follows (dollars in thousands):
 
September 30, 2018
 
Cost or
Amortized
Cost
Gross Unrealized
Estimated
Fair Value 
 
 
Gains
Losses
Debt Securities:
 
 
 
 
U.S. Government
$
15,809

$
1

$
(307
)
$
15,503

State and local government
16,004

57

(305
)
15,756

Corporate debt
31,742

86

(706
)
31,122

Asset-backed securities
24,006

22

(187
)
23,841

Mortgage-backed securities
31,320

9

(1,524
)
29,805

Commercial mortgage-backed securities
3,890


(100
)
3,790

Collateralized mortgage obligations
2,247

7

(75
)
2,179

Total debt securities available for sale
$
125,018

$
182

$
(3,204
)
$
121,996


9

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




 
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 government
17,302

255

(54
)
17,503

Corporate debt
38,947

170

(209
)
38,908

Asset-backed securities
23,539

36

(35
)
23,540

Mortgage-backed securities
33,942

38

(522
)
33,458

Commercial mortgage-backed securities
3,532

3

(44
)
3,491

Collateralized mortgage obligations
2,563

19

(36
)
2,546

Total debt securities available for sale
137,004

531

(999
)
136,536

Equity Securities (1)
8,629

1,240

(182
)
9,687

Total securities available for sale
$
145,633

$
1,771

$
(1,181
)
$
146,223

(1) Effective January 1, 2018, the Company adopted ASU No. 2016-01. As a result, equity securities are no longer classified as available-for-sale. Prior periods have not been recast to conform to the current presentation. Refer to Note 1 ~ Summary of Significant Accounting Policies for further details.
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, 2018
 
Less than 12 months
 
Greater than 12 months
 
Total
 
No.
of
Issues
Fair Value of
Investments
with Unrealized
Losses
Gross
Unrealized
Losses
 
No.
of
Issues
Fair Value of
Investments
with Unrealized
Losses
Gross
Unrealized
Losses
 
No.
of
Issues
Fair Value of
Investments
with Unrealized
Losses
Gross
Unrealized
Losses
Debt Securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government
9

$
9,877

$
(165
)
 
10

$
5,300

$
(142
)
 
19

$
15,177

$
(307
)
State and local government
40

9,239

(185
)
 
9

2,827

(120
)
 
49

12,066

(305
)
Corporate debt
47

14,716

(247
)
 
11

7,118

(459
)
 
58

21,834

(706
)
Asset-backed securities
29

18,228

(173
)
 
5

972

(14
)
 
34

19,200

(187
)
Mortgage-backed securities
19

6,664

(242
)
 
28

20,999

(1,282
)
 
47

27,663

(1,524
)
Commercial mortgage-backed securities
4

2,310

(26
)
 
2

1,400

(74
)
 
6

3,710

(100
)
Collateralized mortgage obligations
9

275

(4
)
 
3

1,553

(71
)
 
12

1,828

(75
)
Total debt securities available for sale
157

$
61,309

$
(1,042
)
 
68

$
40,169

$
(2,162
)
 
225

$
101,478

$
(3,204
)

10

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




 
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. Government
12

$
11,555

$
(64
)
 
7

$
2,207

$
(35
)
 
19

$
13,762

$
(99
)
State and local government
10

3,511

(20
)
 
7

1,424

(34
)
 
17

4,935

(54
)
Corporate debt
38

15,236

(46
)
 
10

6,555

(163
)
 
48

21,791

(209
)
Asset-backed securities
20

13,948

(29
)
 
3

915

(6
)
 
23

14,863

(35
)
Mortgage-backed securities
6

4,935

(19
)
 
26

24,939

(503
)
 
32

29,874

(522
)
Commercial mortgage-backed securities
3

2,026

(12
)
 
2

722

(32
)
 
5

2,748

(44
)
Collateralized mortgage obligations
8

1,870

(36
)
 



 
8

1,870

(36
)
Total debt securities available for sale
97

53,081

(226
)
 
55

36,762

(773
)
 
152

89,843

(999
)
Equity Securities (1)
13

436

(75
)
 
4

266

(107
)
 
17

702

(182
)
Total securities available for sale
110

$
53,517

$
(301
)
 
59

$
37,028

$
(880
)
 
169

$
90,545

$
(1,181
)
 (1) Effective January 1, 2018, the Company adopted ASU No. 2016-01. As a result, equity securities are no longer classified as available-for-sale. Prior periods have not been recast to conform to the current presentation. Refer to Note 1 ~ Summary of Significant Accounting Policies for further details.
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, 2018 and 2017.
 The Company’s sources of net investment income are as follows (dollars in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Debt securities
$
801

 
$
733

 
$
2,495

 
$
2,030

Equity securities
33

 
44

 
98

 
94

Cash and short-term investments
19

 
64

 
55

 
91

Total investment income
853

 
841

 
2,648

 
2,215

Investment expenses
(67
)
 
(73
)
 
(223
)
 
(207
)
Net investment income
$
786

 
$
768

 
$
2,425

 
$
2,008


11

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




The following table summarizes the gross realized gains and losses from sales or maturities of available-for-sale debt and equity securities (dollars in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Debt securities:
 
 
 
 
 
 
 
Gross realized gains
$
52

 
$
29

 
$
54

 
$
29

Gross realized losses
(131
)
 
(1
)
 
(146
)
 
(8
)
Total debt securities
(79
)
 
28

 
(92
)
 
21

Equity securities:
 
 
 
 
 
 
 
Gross realized gains
84

 
11

 
290

 
40

Gross realized losses
(26
)
 

 
(46
)
 
(30
)
Total equity securities
58

 
11

 
244

 
10

Total net realized investment gains (losses)
$
(21
)
 
$
39

 
$
152

 
$
31

 Proceeds from the sales of debt securities, maturities and other redemptions (primarily the return of capital) were $23.5 million and $19.5 million for the nine months ended September 30, 2018 and 2017, respectively.
Effective January 1, 2018, the Company adopted ASU No. 2016-01. As a result, equity securities are no longer classified as available for sale with unrealized gains and losses recognized in other comprehensive income; rather, all changes in fair value of equity securities are now recognized in net income. The change in fair value of equity securities included in net income for the three and nine months ended September 30, 2018, was a $151,000 gain and a $116,000 loss, respectively. Prior periods have not been recast for the adoption of this guidance.
 The table below summarizes the amortized cost and fair value of available-for-sale debt securities by contractual maturity at September 30, 2018. 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
$
7,009

 
$
6,986

Due after one year through five years
35,377

 
34,818

Due after five years through ten years
12,972

 
12,578

Due after ten years
8,197

 
7,999

Securities with contractual maturities
63,555

 
62,381

Asset-backed securities
24,006

 
23,841

Mortgage-backed securities
31,320

 
29,805

Commercial mortgage-backed securities
3,890

 
3,790

Collateralized mortgage obligations
2,247

 
2,179

Total debt securities
$
125,018

 
$
121,996

 At September 30, 2018 and December 31, 2017, the Insurance Company Subsidiaries had an aggregate of $8.2 million on deposit in trust accounts to meet the deposit requirements of various state insurance departments.  At September 30, 2018 and December 31, 2017, the Company had $41.0 million and $18.4 million, respectively, held in trust accounts to meet collateral requirements with other third-party insurers, relating to various fronting arrangements. There are withdrawal and other restrictions on these deposits, including the type of investments that may be held, however, the Company may generally invest in high-grade bonds and short-term investments and earn interest on the funds. 


12

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




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, 2018 and December 31, 2017 (dollars in thousands):

13

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




 
 
September 30, 2018
 
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
$
15,503

 
$

 
$
15,503

 
$

State and local government
15,756

 

 
15,756

 

Corporate debt
31,122

 

 
31,122

 

Asset-backed securities
23,841

 

 
23,841

 

Mortgage-backed securities
29,805

 

 
29,805

 

Commercial mortgage-backed securities
3,790

 

 
3,790

 

Collateralized mortgage obligations
2,179

 

 
2,179

 

Total debt securities
121,996

 

 
121,996

 

Equity Securities
5,645

 
5,381

 
264

 

Short-term investments
9,905

 
9,905

 

 

Total marketable investments measured at fair value
$
137,546

 
$
15,286

 
$
122,260

 
$

 
 
 
 
 
 
 
 
Investments measured at NAV:
 
 
 
 
 
 
 
Investment in limited partnership
$
4,187

 
 
 
 
 
 
Total investments measured at NAV
$
4,187

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets measured at fair value
$
141,733

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Senior Unsecured Notes *
$
22,000

 
$
22,000

 
$

 
$

Subordinated Notes *
9,907

 

 

 
9,907

Total Liabilities measured at fair value
$
31,907

 
$
22,000

 
$

 
$
9,907

* Carried at cost or amortized cost on the consolidated balance sheet


14

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




 
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 government
17,503

 

 
17,503

 

Corporate debt
38,908

 

 
38,908

 

Asset-backed securities
23,540

 

 
23,540

 

Mortgage-backed securities
33,458

 
 
 
33,458

 
 
Commercial mortgage-backed securities
3,491

 
 
 
3,491

 
 
Collateralized mortgage obligations
2,546

 
 
 
2,546

 
 
Total debt securities
136,536

 

 
136,536

 

Equity securities
5,627

 
5,381

 
246

 

Short-term investments
11,427

 
8,429

 
2,998

 

Total marketable 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

* Carried at cost or amortized cost on the consolidated balance sheet
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 10.8% of the fair value of the total investment portfolio as of September 30, 2018.
Level 2 investments include debt 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 86.3% of the fair value of the total investment portfolio as of September 30, 2018.
 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

15

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




the investments were determined to be inactive at period-ends. Based on these procedures, the Company did not adjust the prices or quotes provided from independent pricing services, investment managers or consultants.
As of September 30, 2018, Level 3 is entirely comprised of the Company's subordinated debt. In determining the fair value of the subordinated debt outstanding at September 30, 2018, the security attributes (issue date, maturity, coupon, calls, etc.) and market rates on September 29, 2017 (the date of issuance) were fed into a valuation model. A lognormal trinomial interest rate lattice was created within the model to compute the option adjusted spread (“OAS”) which is the amount, in basis points, of interest rate required to be paid under the debt agreement over the risk-free U.S. Treasury rates. The OAS was then fed back into the model along with the September 30, 2018, 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 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, 2018 and 2017, respectively.

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, 2018 and 2017. 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,
 
2018
 
2017
 
2018
 
2017
Balance at beginning of period
$
12,021

 
$
12,649

 
$
12,781

 
$
13,290

 
 
 
 
 
 
 
 
Deferred policy acquisition costs
6,274

 
6,759

 
18,499

 
19,018

Amortization of policy acquisition costs
(6,452
)
 
(6,655
)
 
(19,437
)
 
(19,555
)
Net change
(178
)
 
104

 
(938
)
 
(537
)
 
 
 
 
 
 
 
 
Balance at end of period
$
11,843

 
$
12,753

 
$
11,843

 
$
12,753


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.

16

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




  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):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Gross reserves - beginning of period
$
83,662

 
$
66,917

 
$
87,896

 
$
54,651

Less: reinsurance recoverables on unpaid losses
20,467

 
10,552

 
20,066

 
6,658

Plus: deferred gain on ADC
(2,412
)
 

 

 

Net reserves - beginning of period
65,607

 
56,365

 
67,830

 
47,993

 
 
 
 
 
 
 
 
Add: incurred losses and LAE, net of reinsurance:
 
 
 
 
 
 
 
Current period
13,153

 
24,398

 
40,079

 
49,449

Prior period
3,401

 
2,070

 
4,871

 
9,426

Total net incurred losses and LAE
16,554

 
26,468

 
44,950

 
58,875

 
 
 
 
 
 
 
 
Deduct: loss and LAE payments, net of reinsurance:
 
 
 
 
 
 
 
Current period
5,423

 
7,194

 
11,448

 
14,410

Prior period
7,877

 
6,411

 
32,471

 
23,230

Total net loss and LAE payments
13,300

 
13,605

 
43,919

 
37,640

 
 
 
 
 
 
 
 
Net reserves - end of period
68,861

 
69,228

 
68,861

 
69,228

Plus: reinsurance recoverables on unpaid losses
27,118

 
13,528

 
27,118

 
13,528

Less: deferred gain on ADC
(4,933
)
 

 
(4,933
)
 

Gross reserves - end of period
$
91,046

 
$
82,756

 
$
91,046

 
$
82,756


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 accounts for the agreement as retroactive reinsurance. For the three and nine months ended September 30, 2018, the Company recorded $4.1 million and $7.3 million of net adverse loss development covered under this agreement, which increased the retroactive reinsurance recoverable to $14.5 million, leaving $3.0 million of coverage remaining on the ADC. The Company recorded the retroactive reinsurance recoverable in excess of the consideration as a deferred gain that is amortized to earnings using the interest method over the estimated claims settlement period. As of September 30, 2018, the deferred gain of $4.9 million, net of amortization, is included in Other Liabilities on the consolidated balance sheets.
The Company’s incurred losses during the three and nine months ended September 30, 2018, included adverse prior-year reserve development of $3.4 million and $4.9 million, respectively. Before the effect of the ADC deferred gain, the commercial lines of business reported $4.2 million of adverse prior-year development and personal lines reported $612,000 of adverse development for the three months ended September 30, 2018. Before the effect of the ADC deferred gain, the commercial lines of business reported $5.3 million of adverse prior-year development and personal lines reported $1.9 million of adverse development for the nine months ended September 30, 2018. Included in the unfavorable development was $83,000 and $471,000 attributable to additional 2017 losses from Hurricane Harvey for the three and nine months ended September 30, 2018, respectively. The ADC had a favorable impact of $1.5 million and $2.4 million on prior year reserve development for the three and nine months ended September 30, 2018, respectively.
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

17

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




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.

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 property risks in excess of $300,000 in 2018 and $500,000 in 2017 and primarily ceded all specific liability risks in excess of $500,000 in both 2018 and 2017. Reinsurance does not discharge the direct insurer from liability to its policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors the concentration of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. To date, the Company has not experienced any significant difficulties in collecting reinsurance recoverables.
The Company assumes written premiums under a few fronting arrangements, 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 of 2017 was a payment of $7.2 million, which resulted in a one-time charge to ceded premiums fully earned in the third quarter of 2017. 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 2018 ceded written and earned premium amounts include $257,000 and $797,000 of reinsurance reinstatement costs relating to Hurricane Irma for the three and nine months ended September 30, 2018, respectively.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Written premiums:
 
 
 
 
 
 
 
Direct
$
16,814

 
$
20,112

 
$
53,237

 
$
61,731

Assumed
9,815

 
9,469

 
23,691

 
21,305

Ceded
(3,783
)
 
(11,186
)
 
(11,642
)
 
(19,235
)
Net written premiums
$
22,846

 
$
18,395

 
$
65,286

 
$
63,801

 
 
 
 
 
 
 
 
Earned premiums:
 
 
 
 
 
 
 
Direct
$
19,955

 
$
21,797

 
$
61,739

 
$
65,817

Assumed
7,363

 
7,094

 
21,160

 
19,676

Ceded
(3,868
)
 
(11,232
)
 
(11,711
)
 
(19,198
)
Net earned premiums
$
23,450

 
$
17,659

 
$
71,188

 
$
66,295

 
 
 
 
 
 
 
 
Losses and LAE:
 
 
 
 
 
 
 
Direct
$
19,324

 
$
27,268

 
$
46,714

 
$
59,496

Assumed
5,027

 
5,313

 
11,996

 
14,017

Ceded
(7,797
)
 
(6,113
)
 
(13,760
)
 
(14,638
)
Net Losses and LAE
$
16,554

 
$
26,468

 
$
44,950

 
$
58,875

 
 
 
 
 
 
 
 
7.     Debt
The Company's debt is comprised of three instruments: $22.0 million of senior unsecured notes which were issued in September 2018, a $10.0 million line of credit which commenced in June 2018, and $30.0 million of subordinated notes which commenced in September 2017. A summary of the Company's outstanding debt is as follows (dollars in thousands):
 
September 30, 2018
 
December 31, 2017
Senior unsecured notes
$
20,779

 
$

Subordinated notes
8,971

 
29,027

Line of credit

 

Total
$
29,750

 
$
29,027

On September 24, 2018, the Company issued $22.0 million of senior unsecured notes (the "Notes"). The Notes bear interest at the rate of 6.75% per year, and interest on the Notes is payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year, beginning on December 31, 2018. The Notes will mature on September 30, 2023. The Company may redeem the Notes, in whole or in part at any time or from time to time on or after September 30, 2021, at the redemption price of 100% aggregate principal amount, plus any accrued and unpaid interest. $20.0 million of the proceeds from the Notes were used to pay off the Company's private placement subordinated notes (the "Subordinated Notes").
On June 21, 2018, the Company entered into a $10.0 million line of credit. The agreement has a maturity date of June 21, 2019 and bears interest at the London Interbank rate ("LIBOR") plus 2.75% per annum, payable monthly. The agreement includes several covenants, including but not limited to a minimum tangible net worth, a minimum fixed-charge coverage ratio, and minimum statutory risk-based capital levels. As of September 30, 2018, the Company has not drawn down on the line of credit.
On September 29, 2017, the Company executed $30.0 million of Subordinated Notes. The Subordinated 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 Subordinated Notes, the interest rate resets to 1,250 basis points and 1,500 basis points, respectively, above the 5-year mid-swap rate. The Company paid down $20.0 million of the Subordinated Notes in September 2018.  
The carrying value of the Notes and Subordinated Notes are offset by $1.2 million and $1.0 million of debt issuance costs, respectively. The debt issuance costs will be amortized through interest expense over the life of the loans.
The Subordinated 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, 2018, the Company was in compliance with all of its 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 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. The Company used 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.
 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. 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 depends on a number of factors, including the market price of the Company’s stock, general market conditions, and other factors. For the nine months ended September 30, 2018 and 2017, the Company had not repurchased any shares of stock. Repurchased shares remain authorized but not issued or outstanding, and are available to be reissued in the future.
As of September 30, 2018 and December 31, 2017, the Company had 8,602,703 and 8,520,328 issued and outstanding shares of common stock, respectively.

18

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




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.

9. 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 (dollars in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Balance at beginning of period
$
(3,060
)
 
$
(507
)
 
$
(363
)
 
$
(1,080
)
Other comprehensive income (loss) before reclassifications
(352
)
 
260

 
(2,574
)
 
883

Less: amounts reclassified from accumulated other comprehensive income (loss)
(18
)
 
7

 
(22
)
 
57

Net current period other comprehensive income (loss)
(334
)
 
253

 
(2,552
)
 
826

Plus: cumulative effect of adoption of ASU No. 2016-01, net of taxes

 

 
(556
)
 

Plus: cumulative effect of adoption of ASU No. 2018-02, net of taxes

 

 
77

 

Balance at end of period
$
(3,394
)
 
$
(254
)
 
$
(3,394
)
 
$
(254
)

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,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
(3,551
)
 
$
(18,898
)
 
$
(4,451
)
 
$
(21,763
)
 
 
 
 
 
 
 
 
Weighted average common shares, basic and diluted*
8,553,613

 
7,675,952

 
8,531,545

 
7,647,520

 
 
 
 
 
 
 
 
Earnings (loss) per common share, basic and diluted
$
(0.42
)
 
$
(2.46
)
 
$
(0.52
)
 
$
(2.85
)
* The 273,000 and 309,000 nonvested shares of the restricted stock units were anti-dilutive as of September 30, 2018 and September 30, 2017, respectively. Therefore, the basic and diluted weighted average common shares are equal for the three and nine months ended September 30, 2018 and September 30, 2017.

11.     Stock-based Compensation

In 2015, the Company issued 390,352 restricted stock units ("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 dates 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. In 2018, the Company issued 70,000 RSUs to executive officers and other employees valued at $404,000 on the dates of grant.
 

19

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




The following summarizes our RSU activity (units in thousands):
 
Number of Units
 
Weighted Average Grant-Date Fair Value
 
 
 
 
Outstanding at December 31, 2016
416

 
$
9.87

Units vested
(93
)
 
9.97

Units forfeited
(14
)
 
9.95

Outstanding at September 30, 2017
309

 
$
9.84

Units vested
(2
)
 
9.56

Outstanding at December 31, 2017
307

 
$
9.84

Units granted
70

 
5.76

Units vested
(89
)
 
10.02

Units forfeited
(15
)
 
8.81

Outstanding at September 30, 2018
273

 
$
8.79

The Company recorded $716,000 and $650,000 of compensation expense related to the RSUs for the nine months ended September 30, 2018 and 2017, 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, 2018, was $2.2 million.

 
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-making group 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, reviews a number of financial measures including gross written premiums, net earned premiums and losses and LAE, net of reinsurance recoveries. 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 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,

20

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




Michigan, Texas and Pennsylvania. For the nine months ended September 30, 2018 and 2017, gross written premiums attributable to these four states were 54% and 60%, respectively, 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.
The following tables present information by reportable operating segment (dollars in thousands):
Three Months Ended September 30, 2018
 
Commercial Lines
 
Personal Lines
 
Corporate
& Other
 
Total
Gross written premiums
 
$
24,806

 
$
1,823

 
$

 
$
26,629

Net written premiums
 
$
22,160

 
$
686

 
$

 
$
22,846

 
 
 
 
 
 
 
 
 
Net earned premiums
 
$
21,270

 
$
2,180

 
$

 
$
23,450

Other income
 
167

 
199

 
39

 
405

Total revenue
 
21,437

 
2,379

 
39

 
23,855

Losses and loss adjustment expenses, net
 
14,445

 
2,109

 

 
16,554

Policy acquisition costs
 
5,441

 
1,011

 

 
6,452

Operating expenses
 
3,969

 
416

 
401

 
4,786

Total expenses
 
23,855

 
3,536

 
401

 
27,792

Underwriting gain (loss)
 
$
(2,418
)
 
$
(1,157
)
 
$
(362
)
 
$
(3,937
)