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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 March 31, 2019
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 þ 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 þ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☐
(Do not check if a smaller
reporting company)
Smaller reporting company þ
Emerging growth company þ
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
 
The number of outstanding shares of the registrant’s common stock, no par value, as of May 8, 2019, was 8,340,735.
 



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) 
 
March 31, 2019
 
December 31, 2018
 
(Unaudited)
 
 
Assets
 
 
 
Investment securities:
 
 
 
Debt securities, at fair value (amortized cost of $124,599 and $122,678, respectively)
$
124,057

 
$
120,440

Equity securities, at fair value (cost of $9,594 and $9,559, respectively)
12,038

 
10,737

Short-term investments, at fair value
8,069

 
8,925

Total investments
144,164

 
140,102

 
 
 
 
Cash and cash equivalents
10,411

 
10,792

Premiums and agents' balances receivable, net
18,684

 
21,247

Receivable from Affiliate
2,279

 
3,582

Reinsurance recoverables on unpaid losses
24,551

 
29,685

Reinsurance recoverables on paid losses
9,567

 
5,060

Prepaid reinsurance premiums
3,659

 
1,829

Deferred policy acquisition costs
12,153

 
12,011

Other assets
12,680

 
8,444

Total assets
$
238,148

 
$
232,752

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Liabilities:
 
 
 
Unpaid losses and loss adjustment expenses
$
93,966

 
$
92,807

Unearned premiums
51,519

 
52,852

Debt
34,583

 
33,502

Deferred gain on ADC
3,394

 
5,677

Accounts payable and other liabilities
11,771

 
5,751

Total liabilities
195,233

 
190,589

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Shareholders' equity:
 
 
 
Common stock, no par value (100,000,000 shares authorized; 8,353,051 and 8,478,202 issued and outstanding, respectively)
86,268

 
86,533

Accumulated deficit
(42,438
)
 
(41,758
)
Accumulated other comprehensive income (loss)
(915
)
 
(2,612
)
Total shareholders' equity
42,915

 
42,163

Total liabilities and shareholders' equity
$
238,148

 
$
232,752

 
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
March 31,
 
2019
 
2018
Revenue
 
 
 
Premiums
 
 
 
Gross earned premiums
$
25,550

 
$
27,724

Ceded earned premiums
(3,863
)
 
(3,924
)
Net earned premiums
21,687

 
23,800

Net investment income
910

 
802

Net realized investment gains
19

 
161

Change in fair value of equity securities
1,265

 
(297
)
Other income
422

 
357

Total revenue
24,303

 
24,823

 
 
 
 
Expenses
 
 
 
Losses and loss adjustment expenses, net
14,456

 
13,328

Policy acquisition costs
5,589

 
6,513

Operating expenses
4,323

 
4,187

Interest expense
710

 
619

Total expenses
25,078

 
24,647

 
 
 
 
Income (loss) before equity earnings of affiliates and income taxes
(775
)
 
176

Equity earnings of affiliates, net of tax
106

 
55

Income tax expense
11

 
18

 
 
 
 
Net income (loss)
$
(680
)
 
$
213

 
 
 
 
Earnings (loss) per common share, basic and diluted
$
(0.08
)
 
$
0.02

 
 
 
 
Weighted average common shares outstanding, basic and diluted
8,453,570

 
8,520,328

 
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
March 31,
 
 
2019
 
2018
 
Net income (loss)
$
(680
)
 
$
213

 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
Unrealized investment gains (losses):
 
 
 
 
Unrealized investment gains (losses) during the period
1,557

 
(1,846
)
 
Income tax (benefit) expense

 

 
Unrealized investment gains (losses), net of tax
1,557

 
(1,846
)
 
 
 
 
 
 
Less: reclassification adjustments to:
 
 
 
 
Net realized investment gains (losses) included in net income (loss)
(140
)
 

 
Income tax (benefit) expense

 

 
Total reclassifications included in net income (loss), net of tax
(140
)
 

 
 
 
 
 
 
Other comprehensive income (loss)
1,697

 
(1,846
)
 
 
 
 
 
 
Total comprehensive income (loss)
$
1,017

 
$
(1,633
)
 
 
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
 
Retained Earnings
(Accumulated
deficit)
 
Accumulated
Other
 
Total Shareholders' Equity
 
 
Shares
 
Amount
 
 
Comprehensive
Income (Loss)
 
Balances at December 31, 2017
 
8,520,328

 
$
86,199

 
$
(33,010
)
 
$
(363
)
 
$
52,826

Net income
 

 

 
213

 

 
213

Restricted stock unit expense, net
 

 
231

 

 

 
231

Other comprehensive loss
 

 

 

 
(1,846
)
 
(1,846
)
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 March 31, 2018
 
8,520,328

 
$
86,430

 
$
(32,318
)
 
$
(2,688
)
 
$
51,424

Net loss
 

 

 
(9,440
)
 

 
(9,440
)
Repurchase of common stock
 
(137,228
)
 
(636
)
 

 
 
 
(636
)
Restricted stock unit expense, net
 
95,102

 
739

 

 

 
739

Other comprehensive loss
 

 

 

 
76

 
76

Balances at December 31, 2018
 
8,478,202

 
$
86,533

 
$
(41,758
)
 
$
(2,612
)
 
$
42,163

Net loss
 

 

 
(680
)
 

 
(680
)
Repurchase of common stock
 
(125,151
)
 
(510
)
 

 

 
(510
)
Restricted stock unit expense
 

 
245

 

 

 
245

Other comprehensive income
 

 

 

 
1,697

 
1,697

Balances at March 31, 2019
 
8,353,051

 
$
86,268

 
$
(42,438
)
 
$
(915
)
 
$
42,915



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) 
 
Three Months Ended
March 31,
 
2019
 
2018
Cash Flows From Operating Activities
 
 
 
Net income (loss)
$
(680
)
 
$
213

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
39

 
88

Amortization of bond premium and discount, net
81

 
139

Net realized investment (gains) losses
101

 
(161
)
Other gains
(19
)
 

Change in fair value of equity securities
(1,265
)
 
297

Restricted stock unit expenses
245

 
231

Other
(106
)
 
(55
)
Changes in operating assets and liabilities:
 
 
 
(Increase) decrease in:
 
 
 
Premiums and agents' balances and other receivables
3,866

 
2,362

Reinsurance recoverables
627

 
(119
)
Prepaid reinsurance premiums
(1,830
)
 
31

Deferred policy acquisition costs
(142
)
 
731

Other assets
(4,145
)
 
(2,075
)
Increase (decrease) in:
 
 
 
Unpaid losses and loss adjustment expenses
1,159

 
(2,405
)
Unearned premiums
(1,333
)
 
(3,987
)
Accounts payable and other liabilities
1,202

 
802

Net cash provided by (used in) operating activities
(2,200
)
 
(3,908
)
Cash Flows From Investing Activities
 
 
 
Purchase of investments
(24,797
)
 
(25,175
)
Proceeds from maturities and redemptions of investments
2,929

 
5,079

Proceeds from sales of investments
23,220

 
26,563

Purchases of property and equipment
(23
)
 
(21
)
Net cash provided by (used in) investing activities
1,329

 
6,446

Cash Flows From Financing Activities
 
 
 
Repurchase of common stock
(510
)
 

Borrowings under debt arrangements
1,000

 

Net cash provided by (used in) financing activities
490

 

Net increase (decrease) in cash
(381
)
 
2,538

Cash and cash equivalents at beginning of period
10,792

 
11,868

Cash and cash equivalents at end of period
$
10,411

 
$
14,406

Supplemental Disclosure of Cash Flow Information:
 
 
 
Interest paid
$
626

 
$
619

Payable for securities - non cash item
3,026

 
3,094

 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 three months ended March 31, 2019, are not necessarily indicative of the results expected for the year ended December 31, 2019.
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, 2018, as filed with the SEC.
 Business
The Company is engaged in the sale of property and casualty insurance products and has organized its operations into three insurance businesses: commercial insurance lines, personal insurance lines, and agency business. 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.
Cash, Cash Equivalents, and Short-term Investments
Cash consists of cash deposits in banks, generally in operating accounts. Cash equivalents consist of money-market funds that are specifically used as overnight investments tied to cash deposit accounts. Short-term investments, consisting of money-market funds, are classified as investments in the consolidated balance sheets as they relate to the Company’s investment activities.
Lease Accounting
Effective January 1, 2019, the Company adopted FASB Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), which addresses the financial reporting of leasing transactions. This update required 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. We do not have any financing leases. The Company elected to use the transition option of practical expedients permitted within the new standard, which allows for the adoption of the new standard at the effective date without adjusting the comparative prior periods presented. Our operating leases consist primarily of real estate utilized in the operation of our businesses with lease terms ranging from 5 to 10 years. Management has determined the appropriate discount rate to use in calculating the right-to-use asset and lease liability is 6.75%. The Company recorded a right-of-use asset of $3.8 million and lease liabilities of $3.9 million included in Other Assets and Other Liabilities in the Consolidated Balance Sheets.

8

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




 Recently Issued Accounting Guidance
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which amends the current methodology and timing for recognizing credit losses. This amendment will replace the current GAAP "incurred loss" methodology for credit losses with a methodology based on expected credit losses. The new guidance will also require expanded consideration of a broader range of reasonable and increased supportable information for the credit loss estimates. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019.
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.
 


9

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




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 March 31, 2019 and December 31, 2018, were as follows (dollars in thousands):
 
March 31, 2019
 
Cost or
Amortized
Cost
Gross Unrealized
Estimated
Fair Value 
 
 
Gains
Losses
Debt Securities:
 
 
 
 
U.S. Government
$
15,236

$
9

$
(103
)
$
15,142

State and local government
17,135

334

(31
)
17,438

Corporate debt
32,550

353

(213
)
32,690

Asset-backed securities
23,551

26

(152
)
23,425

Mortgage-backed securities
28,826

39

(770
)
28,095

Commercial mortgage-backed securities
5,191

20

(40
)
5,171

Collateralized mortgage obligations
2,110

10

(24
)
2,096

Total debt securities available for sale
$
124,599

$
791

$
(1,333
)
$
124,057


 
December 31, 2018
 
Cost or
Amortized
Cost
Gross Unrealized
Estimated
Fair Value 
 
Gains
Losses
Debt Securities:
 
 
 
 
U.S. Government
$
15,360

$
3

$
(178
)
$
15,185

State and local government
15,847

115

(174
)
15,788

Corporate debt
30,423

74

(651
)
29,846

Asset-backed securities
24,468

24

(208
)
24,284

Mortgage-backed securities
30,377

18

(1,155
)
29,240

Commercial mortgage-backed securities
4,025

5

(77
)
3,953

Collateralized mortgage obligations
2,178

9

(43
)
2,144

Total debt securities available for sale
$
122,678

$
248

$
(2,486
)
$
120,440


10

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):  
 
March 31, 2019
 
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

$

$

 
17

$
14,147

$
(103
)
 
17

$
14,147

$
(103
)
State and local government
1

249


 
13

3,484

(31
)
 
14

3,733

(31
)
Corporate debt
1

1,049

(2
)
 
32

13,952

(211
)
 
33

15,001

(213
)
Asset-backed securities
18

12,388

(99
)
 
10

5,020

(53
)
 
28

17,408

(152
)
Mortgage-backed securities
8

292

(3
)
 
35

25,672

(767
)
 
43

25,964

(770
)
Commercial mortgage-backed securities
2

180


 
4

3,103

(40
)
 
6

3,283

(40
)
Collateralized mortgage obligations
5

156

(1
)
 
5

1,543

(23
)
 
10

1,699

(24
)
Total debt securities available for sale
35

$
14,314

$
(105
)
 
116

$
66,921

$
(1,228
)
 
151

$
81,235

$
(1,333
)
 
December 31, 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
1

$
2,470

$
(24
)
 
16

$
11,725

$
(154
)
 
17

$
14,195

$
(178
)
State and local government
21

4,935

(40
)
 
16

4,273

(134
)
 
37

9,208

(174
)
Corporate debt
36

12,096

(140
)
 
25

11,993

(511
)
 
61

24,089

(651
)
Asset-backed securities
25

17,743

(148
)
 
9

4,166

(60
)
 
34

21,909

(208
)
Mortgage-backed securities
20

5,474

(138
)
 
30

21,715

(1,017
)
 
50

27,189

(1,155
)
Commercial mortgage-backed securities
4

1,082

(12
)
 
3

2,632

(65
)
 
7

3,714

(77
)
Collateralized mortgage obligations
4

116

(1
)
 
6

1,587

(42
)
 
10

1,703

(43
)
Total debt securities available for sale
111

$
43,916

$
(503
)
 
105

$
58,091

$
(1,983
)
 
216

$
102,007

$
(2,486
)

11

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 three months ended March 31, 2019 and 2018.
 The Company’s sources of net investment income are as follows (dollars in thousands):
 
Three Months Ended March 31,
 
 
2019
 
2018
 
Debt securities
$
857

 
$
826

 
Equity securities
40

 
27

 
Cash and cash equivalents, and short-term investments
70

 
23

 
Total investment income
967

 
876

 
Investment expenses
(57
)
 
(74
)
 
Net investment income
$
910

 
$
802

 
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 March 31,
 
 
2019
 
2018
 
Debt securities:
 
 
 
 
Gross realized gains
$
20

 
$
2

 
Gross realized losses
(50
)
 
(5
)
 
Total debt securities
(30
)
 
(3
)
 
Equity securities:
 
 
 
 
Gross realized gains
49

 
170

 
Gross realized losses

 
(6
)
 
Total equity securities
49

 
164

 
Total net realized investment gains (losses)
$
19

 
$
161

 
Proceeds from the sales of available-for-sale securities were $4.1 million and $2.7 million for the three months ended March 31, 2019 and 2018, respectively.
The Company carries other equity investments that do not have a readily determinable fair value at cost, less impairment or observable changes in price. We review these investments for impairment during each reporting period. There was no impairment or observable changes in price recorded during 2019 related to the Company's equity securities without readily determinable fair value. These investments are a component of Other Assets in the Consolidated Balance Sheets.

12

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




The table below summarizes the amortized cost and fair value of available-for-sale debt securities by contractual maturity at March 31, 2019. 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
$
10,496

 
$
10,469

Due after one year through five years
29,491

 
29,580

Due after five years through ten years
14,256

 
14,392

Due after ten years
10,678

 
10,829

Securities with contractual maturities
64,921

 
65,270

Asset-backed securities
23,551

 
23,425

Mortgage-backed securities
28,826

 
28,095

Commercial mortgage-backed securities
5,191

 
5,171

Collateralized mortgage obligations
2,110

 
2,096

Total debt securities
$
124,599

 
$
124,057

 At March 31, 2019 and December 31, 2018, the Insurance Company Subsidiaries had an aggregate of $8.6 million and $8.5 million, respectively, on deposit in trust accounts to meet the deposit requirements of various state insurance departments. At March 31, 2019 and December 31, 2018, the Company had $46.7 million and $45.4 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. 


13

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.
Net Asset Value (NAV)—The fair values of investment company limited partnership investments are based on the capital account balances reported by the investment funds subject to their management review and adjustment. These capital account balances reflect the fair value of the investment funds.

14

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




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 March 31, 2019 and December 31, 2018 (dollars in thousands):
 
 
March 31, 2019
 
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
$
15,142

 
$

 
$
15,142

 
$

State and local government
17,438

 

 
17,438

 

Corporate debt
32,690

 

 
32,690

 

Asset-backed securities
23,425

 

 
23,425

 

Mortgage-backed securities
28,095

 

 
28,095

 

Commercial mortgage-backed securities
5,171

 

 
5,171

 

Collateralized mortgage obligations
2,096

 

 
2,096

 

Total debt securities
124,057

 

 
124,057

 

Equity Securities
7,784

 
7,520

 
264

 

Short-term investments
8,069

 
8,069

 

 

Total marketable investments measured at fair value
$
139,910

 
$
15,589

 
$
124,321

 
$

 
 
 
 
 
 
 
 
Investments measured at NAV:
 
 
 
 
 
 
 
Investment in limited partnership
$
4,254

 
 
 
 
 
 
Total investments measured at NAV
$
4,254

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets measured at fair value
$
144,164

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Senior Unsecured Notes *
$
22,730

 


 
$
22,730

 
$

Subordinated Notes *
10,861

 

 

 
10,861

Total Liabilities measured at fair value
$
33,591

 
$

 
$
22,730

 
$
10,861

* Carried at face value of debt net of unamortized debt issuance costs on the consolidated balance sheet



15

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




 
December 31, 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
$
15,185

 
$

 
$
15,185

 
$

State and local government
15,788

 

 
15,788

 

Corporate debt
29,846

 

 
29,846

 

Asset-backed securities
24,284

 

 
24,284

 

Mortgage-backed securities
29,240

 
 
 
29,240

 
 
Commercial mortgage-backed securities
3,953

 
 
 
3,953

 
 
Collateralized mortgage obligations
2,144

 
 
 
2,144

 
 
Total debt securities
120,440

 

 
120,440

 

Equity securities
6,587

 
6,323

 
264

 

Short-term investments
8,925

 
8,925

 


 

Total marketable investments measured at fair value
$
135,952

 
$
15,248

 
$
120,704

 
$

 
 
 
 
 
 
 
 
Investments measured at NAV:
 
 
 
 
 
 
 
Investment in limited partnership
$
4,150

 
 
 
 
 
 
Total investments measured at NAV
$
4,150

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets measured at fair value
$
140,102

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Senior Unsecured Notes *
$
21,252

 
$

 
$
21,252

 
$

Subordinated Notes *
10,640

 

 

 
10,640

Total Liabilities measured at fair value
$
31,892

 
$

 
$
21,252

 
$
10,640

* Carried at face value of debt net of unamortized debt issuance costs 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 March 31, 2019.
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 86.2% of the fair value of the total investment portfolio as of March 31, 2019.

16

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





 The Company obtains pricing for each security from independent pricing services, investment managers or consultants to assist in determining fair value for its Level 2 investments. To validate that these quoted prices are reasonable estimates of fair value, the Company performs various quantitative and qualitative procedures, such as (i) evaluation of the underlying methodologies, (ii) analysis of recent sales activity, (iii) analytical review of our fair values against current market prices and (iv) comparison of the pricing services’ fair value to other pricing services’ fair value for the same investment. No markets for the investments were determined to be inactive at period-ends. Based on these procedures, the Company did not adjust the prices or quotes provided from independent pricing services, investment managers or consultants.
As of March 31, 2019, Level 3 is entirely comprised of the Company's subordinated debt. In determining the fair value of the subordinated debt outstanding at March 31, 2019, the security attributes (issue date, maturity, coupon, calls, etc.) and market rates on September 24, 2018 (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 March 31, 2019, 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 three months ended March 31, 2019 and 2018, 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 three months ended March 31, 2019 and 2018. The activity in deferred policy acquisition costs, net of reinsurance transactions, is as follows (dollars in thousands):
 
Three Months Ended
March 31,
 
2019
 
2018
Balance at beginning of period
$
12,011

 
$
12,781

 
 
 
 
Deferred policy acquisition costs
5,731

 
5,782

Amortization of policy acquisition costs
(5,589
)
 
(6,513
)
Net change
142

 
(731
)
 
 
 
 
Balance at end of period
$
12,153

 
$
12,050


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

17

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




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):
 
Three Months Ended
March 31,
 
2019
 
2018
Gross reserves - beginning of period
$
92,807

 
$
87,896

Less: reinsurance recoverables on unpaid losses
(29,685
)
 
(20,066
)
Plus: deferred gain on ADC
5,677

 

Net reserves - beginning of period
68,799

 
67,830

 
 
 
 
Add: incurred losses and LAE, net of reinsurance:
 
 
 
Current period
12,472

 
13,344

Prior period
1,984

 
(16
)
Total net incurred losses and LAE
14,456

 
13,328

 
 
 
 
Deduct: loss and LAE payments, net of reinsurance:
 
 
 
Current period
1,050

 
1,588

Prior period
9,396

 
12,711

Total net loss and LAE payments
10,446

 
14,299

 
 
 
 
Net reserves - end of period
72,809

 
66,859

Plus: reinsurance recoverables on unpaid losses
24,551

 
20,063

Less: deferred gain on ADC
(3,394
)
 
(1,431
)
Gross reserves - end of period
$
93,966

 
$
85,491


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). As of March 31, 2019, the Company has ceded to the limit of the ADC.
The Company’s incurred losses during the three months ended March 31, 2019, include prior-year adverse reserve
development of $2.0 million. Of the $2.0 million of adverse development, $913,000 was related to commercial lines, and $1.1 million was related to personal lines. The reported reserve development is net of the amortization of the deferred gain on the ADC of $2.1 million and $137,000 for commercial and personal lines, respectively.

The Company’s incurred losses during the three months ended March 31, 2018, included favorable prior-year reserve development of $16,000. Excluding the effect of the ADC, the commercial lines of business reported $104,000 of favorable prior-year development offset by $366,000 of unfavorable development from the personal lines of business of which $266,000 was attributable to additional 2017 losses from Hurricane Harvey. The ADC had a favorable impact of $278,000 on prior year reserve development.



18

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




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 both 2019 and 2018 and primarily ceded all specific liability risks in excess of $400,000 in 2019, and $500,000 in 2018. 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 2019 ceded written and earned premium amounts include $250,000 of reinsurance reinstatement costs relating to Hurricane Irma.
 
Three Months Ended
March 31,
 
2019
 
2018
Written premiums:
 
 
 
Direct
$
18,464

 
$
18,855

Assumed
5,752

 
4,882

Ceded
(3,894
)
 
(3,892
)
Net written premiums
$
20,322

 
$
19,845

 
 
 
 
Earned premiums:
 
 
 
Direct
$
18,004

 
$
21,224

Assumed
7,546

 
6,500

Ceded
(3,863
)
 
(3,924
)
Net earned premiums
$
21,687

 
$
23,800

 
 
 
 
Losses and LAE:
 
 
 
Direct
$
16,799

 
$
12,958

Assumed
4,513

 
3,554

Ceded
(6,856
)
 
(3,184
)
Net Losses and LAE
$
14,456

 
$
13,328

 
 
 
 

19

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




7.     Debt
The Company's debt is comprised of three instruments: $25.3 million of publicly traded senior unsecured notes which were issued in September and October of 2018, a $10.0 million line of credit which commenced in June 2018, and $10.5 million of privately placed subordinated notes (the “Subordinated Notes”). A summary of the Company's outstanding debt is as follows (dollars in thousands):
 
March 31, 2019
 
December 31, 2018
Senior unsecured notes
$
24,086

 
$
24,018

Subordinated notes
9,497

 
9,484

Line of credit
1,000

 

Total
$
34,583

 
$
33,502

On September 24, 2018, the Company issued $22.0 million of public senior unsecured notes (the "Notes"). Maturing on September 30, 2023, the Notes bear interest at a rate of 6.75% per annum, payable quarterly at the end of March, June, September and December. The Company may redeem the Notes, in whole or in part, at face value at any time after September 30, 2021.
On October 12, 2018 the Company issued an additional $3.3 million of the Notes as the underwriters fully exercised their over-allotment option. The total aggregate principal amount of Notes sold by the Company in the public offering increased to $25.3 million. Proceeds from the Notes were primarily used to pay down $19.5 million of the Subordinated Notes.
Effective September 24, 2018, the Company amended the terms of the Subordinated Notes to reduce the principle value to $10.5 million, change the maturity to September 30, 2038 and modify the call provisions. The amended Subordinated Notes bear interest at a rate of 7.5% per annum until September 30, 2023, and 12.5% thereafter, and allow for four quarterly interest payment deferrals. Interest is payable quarterly at the end of March, June, September and December. Beginning September 30, 2021, the Company may redeem the Subordinated Notes, in whole or in part, for a call premium of $1.1 million. The call premium escalates each quarter to ultimately $1.75 million on September 30, 2023, then steps up to $3.05 million on December 31, 2023, and increases quarterly at a 12.5% per annum rate thereafter. The debt covenants are consistent with the original Subordinated Note terms. The Company paid a $105,000 loan origination fee on the effective date. The Company recorded the Subordinated Notes amendment as a debt modification and retained the unamortized debt issuance costs from the original loan which will be amortized over the 20-year life of the amended Subordinated Notes in conjunction with the $105,000 origination fee.
The carrying value of the Notes and Subordinated Notes are offset by $1.3 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.
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 March 31, 2019, the Company has drawn down $1.0 million on the line of credit.
On September 29, 2017, the Company executed $30.0 million of Subordinated Notes. These Subordinated Notes were amended as described above, and $19.5 million was paid down with proceeds from the Notes. These Subordinated Notes had a maturity date of September 29, 2032, bore interest, payable quarterly at a fixed annual rate of 8.0%, and allowed for up to four quarterly interest deferrals. On the fifth and tenth anniversary of the notes, the interest rate reset to 1,250 basis points and 1,500 basis points, respectively, above the 5-year mid-swap rate.
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. As of March 31, 2019, the Company was not in compliance with the tangible net worth financial covenants for the Subordinated Notes and line of credit (which are identical). In May of 2019, the holders of the Subordinated Notes and the line of credit (the “Lenders”) waived the March 31, 2019, tangible net worth requirement. Management is currently working with the Lenders to amend the existing agreements to ensure compliance in future periods. Management expects to be in compliance with all debt covenants in future periods.


20

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




8.     Shareholders’ Equity
On December 5, 2018, the Company's Board of Directors authorized a stock repurchase program, under which the Company may repurchase up to one million shares of the Company's common stock. Shares may be purchased in the open market or through negotiated transactions. The program may be terminated or suspended at any time, at the discretion of the Company. The Company may in the future enter into a Rule 10b5-1 trading plan to effect a portion of the authorized purchases, if criteria set forth in the plan are met. Such a plan would enable the Company to repurchase its shares during periods outside of its normal trading windows, when the Company typically would not be active in the market. The timing of purchases, and the exact number of any shares to be purchased, will depend on market conditions. The repurchase program does not include specific price targets or timetables. For the three months ended March 31, 2019, the Company had repurchased 125,151 shares of stock valued at approximately $510,000. For the year ended December 31, 2018 the Company had repurchased 129,175 shares of stock valued at approximately $584,000 related to the stock repurchase program. The Company also repurchased 8,053 shares of stock valued at approximately $52,000 related to the vesting of the Company’s restricted stock units. Upon the repurchase of the Company's shares, the shares remain authorized, but not issued or outstanding.

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.

As of March 31, 2019 and December 31, 2018 the Company had 8,353,051 and 8,478,202 issued and outstanding shares of common stock, respectively.

Holders of common stock are entitled to one vote per share and to receive dividends only when and if declared by the board of directors. The holders have no preemptive, conversion or subscription rights.

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
March 31,
 
2019
 
2018
Balance at beginning of period
$
(2,612
)
 
$
(363
)
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 after cumulative effects
(2,612
)
 
(842
)
Other comprehensive income (loss) before reclassifications
1,557

 
(1,846
)
Less: amounts reclassified from accumulated other comprehensive income (loss)
(140
)
 

Net current period other comprehensive income (loss)
1,697

 
(2,325
)
Balance at end of period
$
(915
)
 
$
(2,688
)


21

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
March 31,
 
2019
 
2018
Net income (loss)
$
(680
)
 
$
213

 
 
 
 
Weighted average common shares, basic and diluted*
8,453,570

 
8,520,328

 
 
 
 
Earnings (loss) per common share, basic and diluted
$
(0.08
)
 
$
0.02

* The nonvested shares of the restricted stock units were anti-dilutive as of March 31, 2019 and March 31, 2018. Therefore, the basic and diluted weighted average common shares are equal for the three and three months ended March 31, 2019 and March 31, 2018.


22

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




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.
 
The following summarizes our RSU activity (units in thousands):
 
Number of Units
 
Weighted Average Grant-Date Fair Value
 
 
 
 
Outstanding at December 31, 2017
307

 
$
9.84

Units forfeited
(3
)
 
9.91

Outstanding at March 31, 2018
304

 
9.84

Units granted
70

 
5.76

Units vested
(95
)
 
9.84

Units forfeited
(15
)
 
8.77

Outstanding at December 31, 2018
264

 
8.91

Units forfeited
(1
)
 
9.56

Outstanding at March 31, 2019
263

 
$
8.91

The Company recorded $245,000 and $231,000 of compensation expense related to the RSUs for the three months ended March 31, 2019 and 2018, respectively. The total compensation cost related to the non-vested portion of the restricted stock units which has not been recognized as of March 31, 2019, was $2.1 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 three classes of insurance businesses: commercial lines, personal lines, and wholesale agency business. Within these three businesses, the Company offers various insurance products and insurance agency services. Such insurance businesses are engaged in underwriting and marketing insurance coverages, and administering claims processing for such policies. The Company views the commercial and personal lines segments as underwriting business (business that takes on insurance underwriting risk). The wholesale agency business provides non-risk bearing revenue through commissions and policy fees. The wholesale agency business offers more insurance product options to the Company’s independent retail agents by both insurance products offered by the Company’s Insurance Subsidiaries as well as products offered by other insurers. This segment has expanded in 2019, resulting in its separate disclosure. Prior periods have been recast to reflect the separate disclosure of the wholesale agency segment.
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

23

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




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, and other revenue and expenses. The primary measure used for making decisions about resources to be allocated to an operating segment and assessing its performance is segment underwriting gain or loss which is defined as segment revenues, consisting of net earned premiums and other income, less segment expenses, consisting of losses and LAE, policy acquisition costs and operating expenses of the operating segments. Operating expenses primarily include compensation and related benefits for personnel, policy issuance and claims systems, rent and utilities. The Company markets, distributes and sells its insurance products through its own insurance agencies and a network of independent agents. All of the Company’s insurance activities are conducted in the United States with a concentration of activity in Florida, Michigan, Texas and Pennsylvania. For the three months ended March 31, 2019 and 2018, gross written premiums attributable to these four states were 57% and 60%, respectively, of the Company’s total gross written premiums.
The Agency business sells insurance products on behalf of the Company’s commercial and personal lines businesses as well as to third-party insurers. Certain acquisition costs incurred by the commercial and personal lines businesses are reflected as commission revenue for the Agency business and are eliminated in the Eliminations category. 
In addition to the reportable operating segments, the Company maintains a Corporate category to reconcile segment results to the consolidated totals. The Corporate category includes: (i) corporate operating expenses such as salaries and related benefits of the Company’s executive management team and finance and information technology personnel, and other corporate headquarters expenses, (ii) interest expense on the Company’s debt obligations; (iii) depreciation and amortization on property and equipment, and (iv) all investment income activity. All investment income activity is reported within net investment income, net realized investment gains, and change in fair value of equity securities on the consolidated statements of operations. The Company’s assets on the consolidated balance sheet are not allocated to the reportable segments.
The following tables present information by reportable operating segment (dollars in thousands):
Three Months Ended
March 31, 2019
 
Commercial Lines
 
Personal Lines
 
Total Underwriting
 
Wholesale Agency
 
Corporate
 
Eliminations
 
Total
Gross written premiums
 
$
22,584

 
$
1,632

 
$
24,216

 
$

 
$

 
$

 
$
24,216

Net written premiums
 
$
19,306

 
$
1,016

 
$
20,322

 
$

 
$

 
$

 
$
20,322

 
 
 
 
 
 
 
 
 
 
 
 
 
 


Net earned premiums
 
$
20,698

 
$
989

 
$
21,687

 
$

 
$

 
$

 
$
21,687

Other income
 
23

 
30

 
53

 
1,906

 
86

 
(1,623
)
 
422

Total revenue
 
20,721

 
1,019

 
21,740

 
1,906

 
86

 
(1,623
)
 
22,109

Losses and loss adjustment expenses, net
 
12,545

 
1,911

 
14,456

 

 

 

 
14,456

Policy acquisition costs
 
5,414

 
409

 
5,823

 
1,389

 

 
(1,623
)
 
5,589

Operating expenses
 
2,963

 
264

 
3,227

 
603

 
493

 

 
4,323

Total expenses
 
20,922

 
2,584

 
23,506

 
1,992

 
493

 
(1,623
)
 
24,368

Underwriting gain (loss)
 
$
(201
)
 
$
(1,565
)
 
$
(1,766
)
 
$
(86
)
 
$
(407
)
 
$

 
$
(2,259
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Net investment income
 
 

 
 

 
 
 
 
 
910

 

 
910

Net realized investment gains
 
 

 
 

 
 
 
 
 
19

 

 
19

Change in fair value of equity securities
 
 
 
 
 
 
 
 
 
1,265

 

 
1,265

Interest expense
 
 
 
 
 
 
 
 
 
(710
)
 

 
(710
)
Income (loss) before equity earnings of affiliates and income taxes
 
 

 
 

 
 
 
 
 
$
1,077

 
$

 
$
(775
)

24

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




Three Months Ended
March 31, 2018
 
Commercial Lines
 
Personal Lines
 
Total Underwriting
 
Wholesale Agency
 
Corporate
 
Eliminations
 
Total
Gross written premiums
 
$
21,788

 
$
1,949

 
$
23,737

 
$

 
$

 
$

 
$
23,737

Net written premiums
 
$
19,422

 
$
423

 
$
19,845

 
$

 
$

 
$

 
$
19,845

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earned premiums
 
$
20,127

 
$
3,673

 
$
23,800

 
$

 
$

 
$

 
$
23,800

Other income
 
34

 
74

 
108

 
1,764

 
29

 
(1,544
)
 
357

Total revenue
 
20,161

 
3,747

 
23,908

 
1,764

 
29

 
(1,544
)
 
24,157

Losses and loss adjustment expenses, net
 
10,200

 
3,128

 
13,328

 

 

 

 
13,328

Policy acquisition costs
 
5,833

 
1,033

 
6,866

 
1,191

 

 
(1,544
)
 
6,513

Operating expenses
 
3,384

 
275

 
3,659

 
408

 
120

 

 
4,187

Total expenses
 
19,417

 
4,436

 
23,853

 
1,599

 
120

 
(1,544
)
 
24,028

Underwriting gain (loss)
 
$
744

 
$
(689
)
 
55

 
165

 
(91
)
 

 
129

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 

 
 

 
 
 
 
 
802

 

 
802

Net realized investment gains
 
 

 
 

 
 
 
 
 
161

 

 
161

Change in fair value of equity securities
 
 
 
 
 
 
 
 
 
(297
)
 

 
(297
)
Interest expense
 
 

 
 

 
 
 
 
 
(619
)
 

 
(619
)
Income (loss) before equity earnings of affiliates and income taxes
 
 

 
 

 
 
 
 
 
$
(44
)
 
$

 
$
176






25


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
For the Periods Ended March 31, 2019 and 2018
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements (Unaudited), related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K, filed on March 13, 2019 with the U. S. Securities and Exchange Commission.
Forward-Looking Statements 
Certain statements contained in this Quarterly Report on Form 10-Q, which are not statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, as Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements give current expectations or forecasts of future events or our future financial or operating performance. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek” and similar terms and phrases, or the negative thereof, may be used to identify forward-looking statements. 
The forward-looking statements contained in this report are based on management’s good-faith belief and reasonable judgment based on current information. The forward-looking statements are qualified by important factors, risks and uncertainties, many of which are beyond our control, that could cause our actual results to differ materially from those in the forward-looking statements, including those described in our Form 10-K (“Item 1A Risk Factors”) filed with the SEC on March 13, 2019 and subsequent reports filed with or furnished to the SEC. Any forward-looking statement made by us in this report speaks only as of the date hereof or as of the date specified herein. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by any applicable laws or regulations.
Business Overview 
We are an insurance holding company that markets and services our product offerings through specialty commercial and specialty personal insurance business lines. Our growth has been significant since our founding in 2009. Currently, we are authorized to write insurance as an excess and surplus lines carrier in 45 states, including the District of Columbia. We are also licensed to write insurance as an admitted carrier in 42 states, including the District of Columbia, and we offer our insurance products in all 50 states.
Our revenues are primarily derived from premiums earned from our insurance operations. We also generate other revenues through investment income and other income which mainly consists of installment fees and policy issuance fees generally related to the policies we write.
Our expenses consist primarily of losses and loss adjustment expenses, agents’ commissions, and other underwriting and administrative expenses. We organize our operations into three insurance businesses: commercial insurance lines, personal insurance lines, and agency business. Together, the commercial and personal lines refer to "underwriting" operations that take insurance risk, and the agency business refers to non-risk insurance business.
Through our commercial insurance product lines, we offer coverage for both commercial property and commercial liability. We also offer coverage for commercial automobiles and workers’ compensation. Our insurance policies are sold to targeted small and mid-sized businesses on a single or multiple-coverage basis.
Through our personal insurance product lines, we offer homeowners insurance and dwelling fire insurance policies to
individuals in several states. Our specialty homeowners insurance product line is primarily comprised of either wind-exposed
homeowners insurance providing hurricane and wind coverage to underserved homeowners in Texas, Hawaii and Florida or
low-value dwelling insurance tailored for owners of lower valued homes, which we offer in Illinois, Indiana and
Texas. Due to recent Florida-based industry events, we have been de-emphasizing our Florida homeowners' business and
reducing our exposures in that state, as well as other wind-exposed states like Texas and Hawaii.
Through our wholesale agency business segment, we offer commercial and personal lines insurance products for our Insurance Subsidiaries as well as third-party insurers. We have expanded the wholesale agency business to develop more non-risk revenue streams, and provide our agents with more insurance product options.

26


Critical Accounting Policies and Estimates
 In certain circumstances, we are required to make estimates and assumptions that affect amounts reported in our consolidated financial statements and related footnotes. We evaluate these estimates and assumptions periodically on an on-going basis based on a variety of factors. There can be no assurance, however, that actual results will not be materially different than our estimates and assumptions, and that reported results of operation will not be affected by accounting adjustments needed to reflect changes in these estimates and assumptions. During the three months ended March 31, 2019, there were no material changes to our critical accounting policies and estimates, which are disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form 10-K filed with the SEC on March 13, 2019.

Executive Overview
The Company reported a net loss of $680,000, or $0.08 per share, for the three months ended March 31, 2019, compared to net income of $213,000, or $0.02 per share, for the same period in 2018.
Adjusted operating loss, a non-GAAP measure, was $4.2 million, or $0.50 per share for the three months ended March 31, 2019 compared to an adjusted operating income of $1.8 million, or $0.21 per share.
Our combined ratio was 108.1% for the three months ended March 31, 2019, compared to 99.7% for the same period in 2018.

27


Results of Operations For The Three Months Ended March 31, 2019 and 2018
 The following table summarizes our operating results for the periods indicated (dollars in thousands):
Summary of Operating Results
 
Three Months Ended March 31,
 
 
 
 
 
2019
 
2018
 
$ Change
 
% Change
Gross written premiums
$
24,216

 
$
23,737

 
$
479


2.0
 %
Net written premiums
$
20,322

 
$
19,845

 
$
477

 
2.4
 %
 
 
 
 
 
 
 
 
Net earned premiums
$
21,687

 
$
23,800

 
$
(2,113
)
 
(8.9
)%
Other income
422

 
357

 
65