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Section 1: 10-Q (10-Q)

Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
þ

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

For the Quarterly Period Ended June 30, 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 August 6, 2019, was 9,508,257.
 



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) 
 
June 30, 2019
 
December 31, 2018
 
(Unaudited)
 
 
Assets
 
 
 
Investment securities:
 
 
 
Debt securities, at fair value (amortized cost of $123,324 and $122,678, respectively)
$
124,118

 
$
120,440

Equity securities, at fair value (cost of $10,333 and $9,559, respectively)
11,862

 
10,737

Short-term investments, at fair value
4,614

 
8,925

Total investments
140,594

 
140,102

 
 
 
 
Cash and cash equivalents
20,415

 
10,792

Premiums and agents' balances receivable, net
23,125

 
21,247

Receivable from Affiliate
1,783

 
3,582

Reinsurance recoverables on unpaid losses
21,396

 
29,685

Reinsurance recoverables on paid losses
9,835

 
5,060

Prepaid reinsurance premiums
2,281

 
1,829

Deferred policy acquisition costs
12,302

 
12,011

Other assets
11,665

 
8,444

Total assets
$
243,396

 
$
232,752

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Liabilities:
 
 
 
Unpaid losses and loss adjustment expenses
$
97,981

 
$
92,807

Unearned premiums
51,606

 
52,852

Debt
34,658

 
33,502

Deferred gain on ADC
481

 
5,677

Accounts payable and accrued expenses
12,161

 
5,751

Total liabilities
196,887

 
190,589

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Shareholders' equity:
 
 
 
Common stock, no par value (100,000,000 shares authorized; 9,519,550 and 8,478,202 issued and outstanding, respectively)
91,410

 
86,533

Accumulated deficit
(45,322
)
 
(41,758
)
Accumulated other comprehensive income (loss)
421

 
(2,612
)
Total shareholders' equity
46,509

 
42,163

Total liabilities and shareholders' equity
$
243,396

 
$
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
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Revenue
 
 
 
 
 
 
 
Premiums
 
 
 
 
 
 
 
Gross earned premiums
$
25,082

 
$
27,856

 
$
50,632

 
$
55,581

Ceded earned premiums
(3,733
)
 
(3,918
)
 
(7,596
)
 
(7,842
)
Net earned premiums
21,349

 
23,938

 
43,036

 
47,739

Net investment income
1,051

 
838

 
1,961

 
1,639

Net realized investment gains
715

 
12

 
734

 
173

Change in fair value of equity securities
(915
)
 
29

 
350

 
(268
)
Other income
581

 
450

 
1,003

 
807

Total revenue
22,781

 
25,267

 
47,084

 
50,090

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Losses and loss adjustment expenses, net
14,382

 
15,067

 
28,838

 
28,396

Policy acquisition costs
6,210

 
6,472

 
11,799

 
12,985

Operating expenses
4,340

 
4,303

 
8,663

 
8,489

Interest expense
725

 
617

 
1,435

 
1,236

Total expenses
25,657

 
26,459

 
50,735

 
51,106

 
 
 
 
 
 
 
 
Income (loss) before equity earnings of affiliates and income taxes
(2,876
)
 
(1,192
)
 
(3,651
)
 
(1,016
)
Equity earnings of affiliates, net of tax
(8
)
 
89

 
98

 
144

Income tax expense

 
10

 
11

 
28

 
 
 
 
 
 
 
 
Net income (loss)
$
(2,884
)
 
$
(1,113
)
 
$
(3,564
)
 
$
(900
)
 
 
 
 
 
 
 
 
Earnings (loss) per common share, basic and diluted
$
(0.34
)
 
$
(0.13
)
 
$
(0.42
)
 
$
(0.11
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic and diluted
8,370,782

 
8,520,328

 
8,411,835

 
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
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
(2,884
)
 
$
(1,113
)
 
$
(3,564
)
 
$
(900
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized investment gains (losses):
 
 
 
 
 
 
 
Unrealized investment gains (losses) during the period
1,366

 
(376
)
 
2,923

 
(2,222
)
Income tax (benefit) expense

 

 

 

Unrealized investment gains (losses), net of tax
1,366

 
(376
)
 
2,923

 
(2,222
)
 
 
 
 
 
 
 
 
Less: reclassification adjustments to:
 
 
 
 
 
 
 
Net realized investment gains (losses) included in net income (loss)
30

 
(4
)
 
(110
)
 
(4
)
Income tax (benefit) expense

 

 

 

Total reclassifications included in net income (loss), net of tax
30

 
(4
)
 
(110
)
 
(4
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
1,336

 
(372
)
 
3,033

 
(2,218
)
 
 
 
 
 
 
 
 
Total comprehensive income (loss)
$
(1,548
)
 
$
(1,485
)
 
$
(531
)
 
$
(3,118
)
 
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 (loss)
 

 

 
(900
)
 

 
(900
)
Restricted stock unit expense, net
 

 
460

 

 

 
460

Other comprehensive loss
 

 

 

 
(2,218
)
 
(2,218
)
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 June 30, 2018
 
8,520,328

 
$
86,659

 
$
(33,431
)
 
$
(3,060
)
 
$
50,168

Net income (loss)
 

 

 
(8,327
)
 

 
(8,327
)
Repurchase of common stock
 
(137,228
)
 
(636
)
 

 

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

 
510

 

 

 
510

Other comprehensive loss
 

 

 

 
448

 
448

Balances at December 31, 2018
 
8,478,202

 
$
86,533

 
$
(41,758
)
 
$
(2,612
)
 
$
42,163

Net income (loss)
 

 

 
(3,564
)
 

 
(3,564
)
Repurchase of common stock
 
(142,815
)
 
(608
)
 

 

 
(608
)
Issuance of common stock private placement
 
1,176,471

 
5,000

 

 

 
5,000

Restricted stock unit expense
 
7,692

 
485

 

 

 
485

Other comprehensive income
 

 

 

 
3,033

 
3,033

Balances at June 30, 2019
 
9,519,550

 
$
91,410

 
$
(45,322
)
 
$
421

 
$
46,509



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) 
 
Six Months Ended
June 30,
 
2019
 
2018
Cash Flows From Operating Activities
 
 
 
Net income (loss)
$
(3,564
)
 
$
(900
)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
233

 
175

Amortization of bond premium and discount, net
220

 
272

Net realized investment (gains) losses
(734
)
 
(173
)
Change in fair value of equity securities
(350
)
 
268

Restricted stock unit expenses
485

 
460

Other
(98
)
 
(144
)
Changes in operating assets and liabilities:
 
 
 
(Increase) decrease in:
 
 
 
Premiums and agents' balances and other receivables
(79
)
 
(250
)
Reinsurance recoverables
3,514

 
1,198

Prepaid reinsurance premiums
(452
)
 
(17
)
Deferred policy acquisition costs
(291
)
 
760

Other assets
(3,743
)
 
(1,894
)
Increase (decrease) in:
 
 
 
Unpaid losses and loss adjustment expenses
5,174

 
(4,234
)
Unearned premiums
(1,246
)
 
(5,282
)
Accounts payable and other liabilities
708

 
2,640

Net cash provided by (used in) operating activities
(223
)
 
(7,121
)
Cash Flows From Investing Activities
 
 
 
Purchase of investments
(55,037
)
 
(41,360
)
Proceeds from maturities and redemptions of investments
8,417

 
15,531

Proceeds from sales of investments
51,102

 
38,126

Purchases of property and equipment
(23
)
 
(28
)
Net cash provided by (used in) investing activities
4,459

 
12,269

Cash Flows From Financing Activities
 
 
 
Proceeds received from issuance of shares of common stock
5,000

 

Repurchase of common stock
(608
)
 

Borrowings under debt arrangements
995

 

Net cash provided by (used in) financing activities
5,387

 

Net increase (decrease) in cash
9,623

 
5,148

Cash and cash equivalents at beginning of period
10,792

 
11,868

Cash and cash equivalents at end of period
$
20,415

 
$
17,016

Supplemental Disclosure of Cash Flow Information:
 
 
 
Interest paid
$
1,269

 
$
1,805

Payable for securities - non cash item
979

 
1,000

 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 six months ended June 30, 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 $3.9 million and lease liabilities of $3.9 million included in Other Assets and Other Liabilities in the Consolidated Balance Sheet on January 1, 2019.

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. Management is currently evaluating the impact of the guidance. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.
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. Management is currently evaluating the impact of the guidance. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.
 
 


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 June 30, 2019 and December 31, 2018, were as follows (dollars in thousands):
 
June 30, 2019
 
Cost or
Amortized
Cost
Gross Unrealized
Estimated
Fair Value 
 
 
Gains
Losses
Debt Securities:
 
 
 
 
U.S. Government
$
14,787

$
51

$
(18
)
$
14,820

State and local government
14,467

461

(4
)
14,924

Corporate debt
32,281

600

(23
)
32,858

Asset-backed securities
21,718

73

(75
)
21,716

Mortgage-backed securities
32,409

85

(481
)
32,013

Commercial mortgage-backed securities
4,673

113

(9
)
4,777

Collateralized mortgage obligations
2,989

21


3,010

Total debt securities available for sale
$
123,324

$
1,404

$
(610
)
$
124,118


 
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):  
 
June 30, 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

$

$

 
11

$
7,534

$
(18
)
 
11

$
7,534

$
(18
)
State and local government
1

238

(1
)
 
4

412

(3
)
 
5

650

(4
)
Corporate debt



 
10

4,901

(23
)
 
10

4,901

(23
)
Asset-backed securities
8

7,205

(22
)
 
17

7,707

(53
)
 
25

14,912

(75
)
Mortgage-backed securities
4

485

(1
)
 
35

23,702

(480
)
 
39

24,187

(481
)
Commercial mortgage-backed securities
1

118


 
3

1,441

(9
)
 
4

1,559

(9
)
Collateralized mortgage obligations
1

19


 
1

30


 
2

49


Total debt securities available for sale
15

$
8,065

$
(24
)
 
81

$
45,727

$
(586
)
 
96

$
53,792

$
(610
)
 
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 and six months ended June 30, 2019 and 2018.
 The Company’s sources of net investment income are as follows (dollars in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Debt securities
$
998

 
$
868

 
$
1,855

 
$
1,694

Equity securities
35

 
38

 
75

 
65

Cash, cash equivalents and short-term investments
116

 
13

 
186

 
36

Total investment income
1,149

 
919

 
2,116

 
1,795

Investment expenses
(98
)
 
(81
)
 
(155
)
 
(156
)
Net investment income
$
1,051

 
$
838

 
$
1,961

 
$
1,639

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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Debt securities:
 
 
 
 
 
 
 
Gross realized gains
$
204

 
$

 
$
223

 
$
2

Gross realized losses
(3
)
 
(10
)
 
(52
)
 
(15
)
Total debt securities
201

 
(10
)
 
171

 
(13
)
Equity securities:
 
 
 
 
 
 
 
Gross realized gains
539

 
36

 
588

 
206

Gross realized losses
(25
)
 
(14
)
 
(25
)
 
(20
)
Total equity securities
514

 
22

 
563

 
186

Total net realized investment gains (losses)
$
715

 
$
12

 
$
734

 
$
173

Proceeds from the sales of available-for-sale debt securities were $10.3 million and $5.0 million for the six months ended June 30, 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 June 30, 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
$
9,812

 
$
9,809

Due after one year through five years
30,418

 
30,848

Due after five years through ten years
12,301

 
12,659

Due after ten years
9,004

 
9,286

Securities with contractual maturities
61,535

 
62,602

Asset-backed securities
21,718

 
21,716

Mortgage-backed securities
32,409

 
32,013

Commercial mortgage-backed securities
4,673

 
4,777

Collateralized mortgage obligations
2,989

 
3,010

Total debt securities
$
123,324

 
$
124,118

 At June 30, 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 June 30, 2019 and December 31, 2018, the Company had $47.7 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 June 30, 2019 and December 31, 2018 (dollars in thousands):
 
 
June 30, 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
$
14,820

 
$

 
$
14,820

 
$

State and local government
14,924

 

 
14,924

 

Corporate debt
32,858

 

 
32,858

 

Asset-backed securities
21,716

 

 
21,716

 

Mortgage-backed securities
32,013

 

 
32,013

 

Commercial mortgage-backed securities
4,777

 

 
4,777

 

Collateralized mortgage obligations
3,010

 

 
3,010

 

Total debt securities
124,118

 

 
124,118

 

Equity Securities
6,906

 
6,642

 
264

 

Short-term investments
4,614

 
4,614

 

 

Total marketable investments measured at fair value
$
135,638

 
$
11,256

 
$
124,382

 
$

 
 
 
 
 
 
 
 
Investments measured at NAV:
 
 
 
 
 
 
 
Investment in limited partnership
$
4,956

 
 
 
 
 
 
Total investments measured at NAV
$
4,956

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets measured at fair value
$
140,594

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Senior Unsecured Notes *
$
21,758

 
$

 
$
21,758

 
$

Subordinated Notes *
11,089

 

 

 
11,089

Line of credit **
$
995

 

 
995

 

Total Liabilities measured at fair value
$
33,842

 
$

 
$
21,758

 
$
11,089

* Carried at face value of debt net of unamortized debt issuance costs on the consolidated balance sheet
** Carried at cost 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 8.0% of the fair value of the total investment portfolio as of June 30, 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 88.5% of the fair value of the total investment portfolio as of June 30, 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 June 30, 2019, Level 3 is entirely comprised of the Company's subordinated debt. In determining the fair value of the subordinated debt outstanding at June 30, 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 June 30, 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 Level 2 financial instruments also include the Company's senior debt. The fair value of the borrowings under the senior revolving credit facility approximates its carrying amount because interest is based on a short-term, variable, market-based rate.
 The Company’s policy on recognizing transfers between hierarchy levels is applied at the end of each reporting period. There were no transfers between Levels 1, 2 and 3 for the three and six months ended June 30, 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 six months ended June 30, 2019 and 2018. The activity in deferred policy acquisition costs, net of reinsurance transactions, is as follows (dollars in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Balance at beginning of period
$
12,153

 
$
12,050

 
$
12,011

 
$
12,781

 
 
 
 
 
 
 
 
Deferred policy acquisition costs
6,359

 
6,443

 
12,090

 
12,225

Amortization of policy acquisition costs
(6,210
)
 
(6,472
)
 
(11,799
)
 
(12,985
)
Net change
149

 
(29
)
 
291

 
(760
)
 
 
 
 
 
 
 
 
Balance at end of period
$
12,302

 
$
12,021

 
$
12,302

 
$
12,021


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

17

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




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
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Gross reserves - beginning of period
$
93,966

 
$
85,491

 
$
92,807

 
$
87,896

Less: reinsurance recoverables on unpaid losses
24,551

 
20,063

 
29,685

 
20,066

Plus: deferred gain on ADC
(3,394
)
 
(1,431
)
 
(5,677
)
 

Net reserves - beginning of period
72,809

 
66,859

 
68,799

 
67,830

 
 
 
 
 
 
 
 
Add: incurred losses and LAE, net of reinsurance:
 
 
 
 
 
 
 
Current period
11,994

 
13,581

 
24,465

 
26,926

Prior period
2,388

 
1,486

 
4,373

 
1,470

Total net incurred losses and LAE
14,382

 
15,067

 
28,838

 
28,396

 
 
 
 
 
 
 
 
Deduct: loss and LAE payments, net of reinsurance:
 
 
 
 
 
 
 
Current period
2,692

 
4,437

 
3,742

 
6,026

Prior period
7,433

 
11,882

 
16,829

 
24,593

Total net loss and LAE payments
10,125

 
16,319

 
20,571

 
30,619

 
 
 
 
 
 
 
 
Net reserves - end of period
77,066

 
65,607

 
77,066

 
65,607

Plus: reinsurance recoverables on unpaid losses
21,396

 
20,467

 
21,396

 
20,467

Less: deferred gain on ADC
(481
)
 
(2,412
)
 
(481
)
 
(2,412
)
Gross reserves - end of period
$
97,981

 
$
83,662

 
$
97,981

 
$
83,662


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 June 30, 2019, the Company has ceded to the limit of the ADC. The Company accounts for the agreement as retroactive reinsurance.
The Company’s incurred losses during the three and six months ended June 30, 2019, include prior-year adverse reserve development of $2.4 million and $4.4 million, respectively. The reported reserve development is net of the amortization of the deferred gain on the ADC of $3.0 million and $5.2 million for the three and six months ended June 30, 2019, respectively. As of June 30, 2019, there remained $481,000 of deferred gain on the ADC that will be recognized in future periods. The adverse development mainly stemmed from commercial liability and Florida homeowners lines business.
The Company’s incurred losses during the three and six months ended June 30, 2018, included prior-year adverse reserve development of $1.5 million and $1.5 million, respectively. Before the effect of the ADC deferred gain, the commercial lines of business reported $1.2 million of adverse prior-year development and $900,000 of adverse development from the personal lines of business for the three months ended June 30, 2018. Before the effect of the ADC deferred gain, the commercial lines of business reported $1.1 million of adverse prior-year development and $1.3 million of adverse development from the personal lines of business for the six months ended June 30, 2018. Included in the unfavorable development was $121,000 and $388,000 attributable to additional 2017 losses from Hurricane Harvey for the three and six months ended June 30, 2018, respectively.

18

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




The ADC had a favorable impact of $583,000 and $862,000 on prior year reserve development for the three and six months ended June 30, 2018, respectively.

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 following table presents the effects of such reinsurance and assumption transactions on premiums and losses and LAE (dollars in thousands). The three and six months ended June 30, 2019 written and earned premiums amounts includes $93,000 and $343,000 of reinsurance reinstatement costs relating to Hurricane Irma, respectively.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Written premiums:
 
 
 
 
 
 
 
Direct
$
14,954

 
$
17,568

 
$
33,417

 
$
36,423

Assumed
10,215

 
8,994

 
15,968

 
13,876

Ceded
(3,735
)
 
(3,967
)
 
(7,629
)
 
(7,860
)
Net written premiums
$
21,434

 
$
22,595

 
$
41,756

 
$
42,439

 
 
 
 
 
 
 
 
Earned premiums:
 
 
 
 
 
 
 
Direct
$
17,254

 
$
20,561

 
$
35,258

 
$
41,785

Assumed
7,828

 
7,295

 
15,374

 
13,796

Ceded
(3,733
)
 
(3,918
)
 
(7,596
)
 
(7,842
)
Net earned premiums
$
21,349

 
$
23,938

 
$
43,036

 
$
47,739

 
 
 
 
 
 
 
 
Losses and LAE:
 
 
 
 
 
 
 
Direct
$
17,434

 
$
14,432

 
$
34,232

 
$
27,390

Assumed
5,741

 
3,414

 
10,255

 
6,969

Ceded
(8,793
)
 
(2,779
)
 
(15,649
)
 
(5,963
)
Net Losses and LAE
$
14,382

 
$
15,067

 
$
28,838

 
$
28,396

 
 
 
 
 
 
 
 

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):
 
June 30, 2019
 
December 31, 2018
Senior unsecured notes
$
24,153

 
$
24,018

Subordinated notes
9,510

 
9,484

Line of credit
995

 

Total
$
34,658

 
$
33,502

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 2019, the holders of the Subordinated Notes and the line of credit (the “Lenders”) waived the March 31, 2019, tangible net worth requirement.
On June 21, 2019, the Company renewed the $10.0 million line of credit with substantially the same terms and conditions other than adjustments to the tangible net worth covenant and the debt-to-total capital ratio covenant which were modified. The renewed line of credit matures on June 19, 2020. On June 21, 2019, the Company also entered into an amendment of the Subordinated Notes agreement to conform the tangible network and debt-to-total capital ratio covenants to the modified terms in the line of credit agreement. Under the modified debt covenant terms management expects to remain compliant going forward.
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 were 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 $1.1 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 June 30, 2019, the Company was in compliance with all of its debt financial covenants.
On June 21, 2018, the Company entered into a $10.0 million line of credit. The line of credit 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 June 30, 2019, the Company has $995,000 outstanding on the line of credit, and was in compliance with all of its financial covenants.
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

20

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




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.

8.     Shareholders’ Equity
In June 2019, the Company issued $5.0 million of common equity through a private placement for 1,176,471 shares priced at $4.25 per share. The participants in the private placement consisted of members of the Company's Board of Directors. The Company used the proceeds for growth capital in the Company's specialty core business segments.
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 six months ended June 30, 2019, the Company had repurchased 142,815 shares of stock valued at approximately $608,000. 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.
For six months ended June 30, 2019, the Company had repurchased 2,308 shares of stock valued at approximately $11,000 related to the vesting of the Company's restricted stock units. For the year ended December 31, 2018, the Company 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.
As of June 30, 2019 and December 31, 2018 the Company had 9,519,550 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.



21

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




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
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Balance at beginning of period
$
(915
)
 
$
(2,688
)
 
$
(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
(915
)
 
(2,688
)
 
(2,612
)
 
(842
)
Other comprehensive income (loss) before reclassifications
1,366

 
(376
)
 
2,923

 
(2,222
)
Less: amounts reclassified from accumulated other comprehensive income (loss)
30

 
(4
)
 
(110
)
 
(4
)
Net other comprehensive income (loss)
1,336

 
(372
)
 
3,033

 
(2,218
)
Balance at end of period
$
421

 
$
(3,060
)
 
$
421

 
$
(3,060
)
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
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
(2,884
)
 
$
(1,113
)
 
$
(3,564
)
 
$
(900
)
 
 
 
 
 
 
 
 
Weighted average common shares, basic and diluted*
8,370,782

 
8,520,328

 
8,411,835

 
8,520,328

 
 
 
 
 
 
 
 
Earnings (loss) per common share, basic and diluted
$
(0.34
)
 
$
(0.13
)
 
$
(0.42
)
 
$
(0.11
)
* The nonvested shares of the restricted stock units were anti-dilutive as of June 30, 2019 and June 30, 2018. Therefore, the basic and diluted weighted average common shares are equal for the three and six months ended June 30, 2019 and June 30, 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 granted
70

 
5.76

Units forfeited
(15
)
 
8.76

Outstanding at June 30, 2018
362

 
9.09

Units vested
(95
)
 
9.84

Units forfeited
(3
)
 
9.96

Outstanding at December 31, 2018
264

 
8.91

Units vested
(8
)
 
5.65

Units forfeited
(6
)
 
6.13

Outstanding at June 30, 2019
250

 
$
9.08

The Company recorded $485,000 and $460,000 of compensation expense related to the RSUs for the six months ended June 30, 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 June 30, 2019, was $1.8 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.



23

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




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 increases the product options to the Company’s independent retail agents by offering both insurance products from the Insurance Company Subsidiaries as well as products offered by other insurers. 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 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 six months ended June 30, 2019 and 2018, gross written premiums attributable to these four states were 54% and 59%, 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.

24

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




The following tables present information by reportable operating segment (dollars in thousands):
Three Months Ended
June 30, 2019
 
Commercial Lines
 
Personal Lines
 
Total Underwriting
 
Wholesale Agency
 
Corporate
 
Eliminations
 
Total
Gross written premiums
 
$
23,459

 
$
1,710

 
$
25,169

 
$

 
$

 
$

 
$
25,169

Net written premiums
 
$
20,178

 
$
1,256

 
$
21,434

 
$

 
$

 
$

 
$
21,434

 
 
 
 
 
 
 
 
 
 
 
 
 
 


Net earned premiums
 
$
20,154

 
$
1,195

 
$
21,349

 
$

 
$

 
$

 
$
21,349

Other income
 
50

 
45

 
95

 
2,575

 
46

 
(2,135
)
 
581

Total revenue
 
20,204

 
1,240

 
21,444

 
2,575

 
46

 
(2,135
)
 
21,930

Losses and loss adjustment expenses, net
 
12,549

 
1,833

 
14,382

 

 

 

 
14,382

Policy acquisition costs
 
5,807

 
345

 
6,152

 
1,574

 

 
(1,516
)
 
6,210

Operating expenses