Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

 

For the Quarterly Period Ended June 30, 2015

 

OR

 

o

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 o  No x

 

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 o  No o

 

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

 

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller
reporting company)

Smaller reporting company x

 

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

 

The number of outstanding shares of the registrant’s common stock, no par value, as of September 11, 2015 was 7,644,492.

 

 

 



Table of Contents

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

 

Form 10-Q

 

INDEX

 

 

Page No.

Part I — Financial Information

 

Item 1 — Financial Statements

 

Condensed Consolidated Balance Sheets (Unaudited)

3

Condensed Consolidated Statements of Operations (Unaudited)

4

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

5

Condensed Consolidated Statement of Changes in Redeemable Preferred Stock and Equity (Unaudited)

6

Condensed Consolidated Statements of Cash Flows (Unaudited)

7

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3 — Quantitative and Qualitative Disclosures about Market Risk

39

Item 4 — Controls and Procedures

40

Part II — Other Information

42

Item 1 — Legal Proceedings

42

Item 1A — Risk Factors

42

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 6 — Exhibits

43

Signatures

44

 

2



Table of Contents

 

PART 1 - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

 

Condensed Consolidated Balance Sheets (Unaudited)

(dollars in thousands)

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

Assets

 

 

 

 

 

Investment securities:

 

 

 

 

 

Fixed maturity securities, at fair value (amortized cost $98,203 and $83,768 at June 30, 2015 and December 31, 2014, respectively)

 

$

98,271

 

$

84,405

 

Equity securities, at fair value (cost $3,176 and $2,965 at June 30, 2015 and December 31, 2014, respectively)

 

4,164

 

4,084

 

Short-term investments, at cost or amortized cost (approximates fair value)

 

6,237

 

16,749

 

 

 

 

 

 

 

Total investment securities

 

108,672

 

105,238

 

 

 

 

 

 

 

Cash

 

8,598

 

18,488

 

Premiums and agents’ balances receivable, net

 

15,434

 

14,478

 

Reinsurance recoverables on unpaid losses

 

5,022

 

3,224

 

Reinsurance recoverables on paid losses

 

1,249

 

1,915

 

Ceded unearned premiums

 

10,613

 

9,510

 

Deferred policy acquisition costs

 

7,659

 

5,679

 

Intangible assets, net

 

1,135

 

1,171

 

Goodwill

 

1,104

 

1,104

 

Other assets

 

4,192

 

2,931

 

Total assets

 

$

163,678

 

$

163,738

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Unpaid losses and loss adjustment expenses

 

$

32,357

 

$

31,531

 

Unearned premiums

 

44,484

 

43,381

 

Reinsurance premiums payable

 

2,699

 

7,069

 

Senior debt

 

27,462

 

27,562

 

Accounts payable and accrued expenses

 

4,383

 

2,521

 

Other liabilities

 

1,125

 

1,396

 

Total liabilities

 

112,510

 

113,460

 

 

 

 

 

 

 

Redeemable preferred stock, 1,000,000 shares authorized; 60,600 shares issued and outstanding at December 31, 2014

 

 

6,119

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred stock, 1,000,0000 shares authorized; 60,600 shares issued and outstanding at June 30, 2015

 

6,242

 

 

Common stock, no par value, 12,240,000 shares authorized, issued and outstanding 4,050,042 shares and 3,995,013 shares at June 30, 2015 and December 31, 2014, respectively

 

46,443

 

46,119

 

Accumulated deficit

 

(2,053

)

(3,095

)

Accumulated other comprehensive income

 

459

 

1,158

 

Total shareholders’ equity attributable to Conifer

 

51,091

 

44,182

 

Noncontrolling interest

 

77

 

(23

)

Total equity

 

51,168

 

44,159

 

Total liabilities and equity

 

$

163,678

 

$

163,738

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Operations (Unaudited)

(dollars in thousands, except per share amounts)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

Gross written premiums

 

$

23,059

 

$

19,001

 

$

44,263

 

$

36,668

 

Ceded written premiums

 

(7,117

)

(2,309

)

(14,655

)

(3,267

)

Change in net unearned premiums

 

(827

)

(2,735

)

 

(6,769

)

Net earned premiums

 

15,115

 

13,957

 

29,608

 

26,632

 

Net investment income

 

469

 

282

 

955

 

502

 

Net realized investment gains

 

87

 

81

 

232

 

172

 

Other income

 

480

 

505

 

969

 

1,037

 

Total revenue

 

16,151

 

14,825

 

31,764

 

28,343

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses, net

 

8,976

 

9,686

 

17,546

 

20,262

 

Policy acquisition costs

 

2,639

 

3,519

 

5,234

 

6,750

 

Operating expenses

 

3,619

 

3,213

 

7,311

 

6,107

 

Interest expense

 

239

 

123

 

483

 

252

 

Total expenses

 

15,473

 

16,541

 

30,574

 

33,371

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

678

 

(1,716

)

1,190

 

(5,028

)

Income tax expense (benefit)

 

48

 

(191

)

48

 

(309

)

Net income (loss)

 

630

 

(1,525

)

1,142

 

(4,719

)

Less net income attributable to noncontrolling interest

 

51

 

11

 

100

 

46

 

Net income (loss) attributable to Conifer

 

$

579

 

$

(1,536

)

$

1,042

 

$

(4,765

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) allocable to common shareholders

 

$

366

 

$

(1,552

)

$

616

 

$

(4,792

)

 

 

 

 

 

 

 

 

 

 

Income (loss) per share allocable to common shareholders, basic and diluted

 

$

0.09

 

$

(0.66

)

$

0.15

 

$

(2.13

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic and diluted

 

4,050,042

 

2,357,220

 

4,045,482

 

2,248,599

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(dollars in thousands)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

630

 

$

(1,525

)

$

1,142

 

$

(4,719

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Unrealized investment gains (losses):

 

 

 

 

 

 

 

 

 

Unrealized investment gains (losses) during the period

 

(977

)

879

 

(274

)

1,414

 

Income tax expense

 

 

299

 

 

481

 

Unrealized investment gains (losses), net of tax

 

(977

)

580

 

(274

)

933

 

 

 

 

 

 

 

 

 

 

 

Less: reclassification adjustments to:

 

 

 

 

 

 

 

 

 

Net realized investment gains included in net income (loss)

 

208

 

318

 

425

 

506

 

Income tax expense (benefit)

 

 

108

 

 

172

 

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

 

208

 

210

 

425

 

334

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

(1,185

)

370

 

(699

)

599

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

(555

)

(1,155

)

443

 

(4,120

)

Less comprehensive income attributable to noncontrolling interest

 

51

 

11

 

100

 

46

 

Comprehensive income (loss) attributable to Conifer

 

$

(606

)

$

(1,166

)

$

343

 

$

(4,166

)

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statement of Changes in Redeemable Preferred Stock and Equity (Unaudited)

(dollars in thousands)

 

 

 

Redeemable

 

 

 

 

 

No Par,

 

Retained
Earnings

 

Accumulated
Other
Comprehensive

 

Total
Conifer
Holdings

 

 

 

 

 

 

 

Preferred Stock

 

Preferred Stock

 

Common Stock

 

(Accumulated

 

Income

 

Shareholders’

 

Noncontrolling

 

Total

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

deficit)

 

(Loss)

 

Equity

 

Interest

 

Equity

 

Balances at December 31, 2014

 

60,600

 

$

6,119

 

 

$

 

3,995,013

 

$

46,119

 

$

(3,095

)

$

1,158

 

$

44,182

 

$

(23

)

$

44,159

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

1,042

 

 

1,042

 

100

 

1,142

 

Proceeds from issuance of common stock (Note 11)

 

 

 

 

 

55,029

 

750

 

 

 

750

 

 

750

 

Paid-in-kind dividends

 

 

61

 

 

62

 

 

(123

)

 

 

(61

)

 

(61

)

Cash dividends paid on preferred stock

 

 

 

 

 

 

(303

)

 

 

(303

)

 

(303

)

Reclassification of redeemable preferred stock to permanent equity (Note 12)

 

(60,600

)

(6,180

)

60,600

 

6,180

 

 

 

 

 

 

6,180

 

 

6,180

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

(699

)

(699

)

 

(699

)

Balances at June 30, 2015

 

 

$

 

60,600

 

$

6,242

 

4,050,042

 

$

46,443

 

$

(2,053

)

$

459

 

$

51,091

 

$

77

 

$

51,168

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2013

 

 

$

 

 

$

 

1,749,626

 

$

16,883

 

$

3,851

 

$

536

 

$

21,270

 

$

(19

)

$

21,251

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

(4,765

)

 

(4,765

)

46

 

(4,719

)

Issuance of common stock in capital raising activities (Note 11)

 

 

 

 

 

682,349

 

8,295

 

 

 

8,295

 

 

8,295

 

Conversion of note payable into shares of common stock (Note 16)

 

 

 

 

 

82,252

 

1,000

 

 

 

1,000

 

 

1,000

 

Issuance of shares of preferred stock (Note 11)

 

 

 

64,000

 

640

 

 

 

 

 

640

 

 

640

 

Cash dividends paid on preferred stock

 

 

 

 

 

 

(16

)

(11

)

 

(27

)

 

(27

)

Other comprehensive income

 

 

 

 

 

 

 

 

599

 

599

 

 

599

 

Balances at June 30, 2014

 

 

$

 

64,000

 

$

640

 

2,514,227

 

$

26,162

 

$

(925

)

$

1,135

 

$

27,012

 

$

27

 

$

27,039

 

 

See accompanying notes to condensed consolidated financial statements.

 

6



Table of Contents

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2015

 

2014

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income (loss)

 

$

1,142

 

$

(4,719

)

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

 

 

 

 

 

Depreciation and amortization of property and equipment, and intangibles

 

208

 

191

 

Amortization of bond premium and discount, net

 

279

 

258

 

Gains on investments

 

(232

)

(172

)

Deferred income taxes

 

 

(309

)

Changes in operating assets and liabilities:

 

 

 

 

 

Premiums and agents’ balances receivable

 

(956

)

(478

)

Reinsurance recoverables

 

(1,132

)

(2,148

)

Ceded unearned premiums

 

(1,103

)

144

 

Deferred policy acquisition costs

 

(1,980

)

(1,257

)

Other assets

 

(189

)

(317

)

Unpaid losses and loss adjustment expenses

 

825

 

2,925

 

Unearned premiums

 

1,103

 

6,084

 

Reinsurance premiums payable

 

(4,370

)

(989

)

Accounts payable and accrued expenses

 

1,862

 

777

 

Other liabilities

 

(312

)

(1,484

)

Net cash used in operating activities

 

(4,855

)

(1,494

)

 

 

 

 

 

 

Cash Flows From Investing Activities

 

 

 

 

 

Purchase of investments:

 

 

 

 

 

Fixed maturity securities

 

(19,059

)

(16,049

)

Equity securities

 

(759

)

(612

)

Short-term investments

 

(44,191

)

(24,036

)

Proceeds from maturities and redemptions of investments:

 

 

 

 

 

Fixed maturity securities

 

1,203

 

152

 

Proceeds from sales of investments:

 

 

 

 

 

Fixed maturity securities

 

3,206

 

2,035

 

Equity securities

 

717

 

556

 

Short-term investments

 

54,703

 

27,671

 

Purchases of property and equipment

 

(91

)

(288

)

Net cash used in investing activities

 

(4,271

)

(10,571

)

 

 

 

 

 

 

Cash Flows From Financing Activities

 

 

 

 

 

Proceeds received from issuance of shares of common stock

 

750

 

8,295

 

Proceeds from issuance of shares of preferred stock

 

 

640

 

Borrowings under Revolver

 

900

 

 

Repayment of borrowings under Revolver

 

(250

)

 

Principal payments under term notes

 

(750

)

(500

)

Dividends paid to preferred shareholders

 

(152

)

(11

)

Payout of contingent consideration

 

(113

)

(113

)

Payment of debt issuance costs

 

(35

)

 

Payment of deferred offering costs

 

(1,114

)

 

Net cash provided by (used in) financing activities

 

(764

)

8,311

 

Net decrease in cash

 

(9,890

)

(3,754

)

Cash at beginning of period

 

18,488

 

11,296

 

Cash at end of period

 

$

8,598

 

$

7,542

 

 

See accompanying notes to condensed consolidated financial statements.

 

7



Table of Contents

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except per share amounts)

 

1.              DESCRIPTION OF BUSINESS

 

Conifer Holdings, Inc. and its subsidiaries (collectively, the “Company”) are engaged in the sale of property and casualty insurance products and has organized its principal operations into two types of insurance businesses: commercial lines and personal lines.  The Company underwrites a variety of specialty insurance products, including property, general liability, commercial multi-peril, liquor liability, automobile, and homeowners and dwelling policies.  The Company markets and sells its insurance products through a network of independent agents, including managing general agents, whereby policies are written in 49 states in the United States (“U.S.”).  The Company’s corporate headquarters are located in Birmingham, Michigan with additional office facilities in Florida, Texas and Pennsylvania.

 

In January 2015, the Company discontinued offering and writing new nonstandard personal automobile policies and stopped writing renewal policies by June, 2015.  The Company will continue to service existing policies, pay claims and perform other administrative services until existing policies expire and all claims are paid (a process referred to as “run-off”).  The run-off is expected to be substantially complete by the end of 2016.

 

Initial Public Offering

 

In August 2015, the Company completed its initial public offering (“IPO”) whereby it issued and sold 3,300,000 shares of common stock, which included 100,000 shares issued and sold to the Company’s Chief Executive Officer, at a public offering price of $10.50 per share.  The Company received net proceeds of $30,625 after deducting underwriting discounts and commissions of $2,426 and other offering expenses of $1,599.  A portion of the net proceeds was used to repay indebtedness, including accrued interest, under the revolving credit facility “Revolver”) of $17,038, repurchase outstanding  shares of preferred stock and pay accrued preferred dividends, totaling $6,356.

 

Concurrent with the closing of the IPO, the Company closed on a private placement transaction as further discussed in Note 12.  In this separate transaction, the Company received proceeds of $3,092 from the sale of 294,481 shares of common stock to former holders of preferred stock.  The Company plans to use the proceeds from the sale of shares of common stock, along with the remaining IPO proceeds of $7,231, to fund future growth and for general corporate purposes.

 

Immediately prior to the IPO, the Company amended its articles of incorporation to change its authorized capital stock to consist of (i) 100,000,000 shares of common stock, no par value per share, and (ii) 10,000,000 shares of preferred stock, 60,600 designated as redeemable preferred stock.  Following the IPO and the repurchase of all outstanding shares of preferred stock, the Company further amended its articles of incorporation to remove the preferred stock designations.

 

2.              BASIS OF PRESENTATION

 

Unaudited Condensed Consolidated Financial Statements

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting.  Accordingly, these unaudited condensed consolidated financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments, consisting of items of a normal recurring nature, necessary for a fair presentation of the unaudited condensed consolidated financial statements, have been included.  The results of operations for the three and six months ended June 30, 2015, are not necessarily indicative of the results that may be expected for any other interim period or for the year ended December 31, 2015.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2014, included in the Company’s final prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the SEC on August 13, 2015.  The condensed consolidated balance sheet at December 31, 2014, was derived from the audited financial statements.

 

Stock Split

 

On July 22, 2015, the board of directors approved a stock split in the form of a stock dividend of 10.2 shares for each share of common stock which was effectuated immediately prior to the effectiveness of the IPO.  Accordingly, all common share and per share amounts for all periods presented in these unaudited condensed consolidated financial statements and notes thereto, were adjusted retroactively to reflect the stock split.

 

8



Table of Contents

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except per share amounts)

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of Conifer Holdings, Inc. and its wholly owned subsidiaries, and a 50%-owned entity that the Company controls due to its majority representation on the entity’s board of directors.  All intercompany transactions and accounts have been eliminated.

 

Noncontrolling interest in a consolidated subsidiary in the consolidated balance sheets represents the noncontrolling shareholder’s proportionate share of the 50%-owned entity’s equity.  Consolidated net income or loss is allocated to the Company and noncontrolling interest in proportion to their percentage ownership interests.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported therein.  Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from these estimates.

 

3.              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The Company has made no material changes to its significant accounting policies as reported in the Company’s final prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the SEC on August 13, 2015.  The following accounting policy has been added during the three months ended June 30, 2015:

 

Deferred Offering Costs

 

Offering costs, consisting of legal, accounting, printing and other incremental expenses, incurred in connection with the Company’s IPO are deferred and will be charged to common stock against the proceeds received from the offering in the third quarter of 2015. Such deferred costs, included in other assets in the condensed consolidated balance sheet, amounted to $1,114, at June 30, 2015.

 

Recently Issued Accounting Guidance

 

In May 2015, the Financial Accounting Standards Board issued Accounting Standards Update No. 2015-09, Disclosures about Short-Duration Contracts (Topic 944), which improves disclosure requirements for insurance entities with short-duration insurance contracts.  The standard does not change the existing recognition and measurement guidance for short-duration insurance contracts.  This standard will provide additional disclosures about our liability for unpaid losses and loss adjustment expenses, increase transparency of significant estimates made in measuring those liabilities, and provide financial statement users with additional information to facilitate analysis of the amount, timing and uncertainty of cash flows and development of loss reserves.  This standard is effective for annual periods beginning after December 15, 2015, and interim reporting periods thereafter and must be applied retrospectively by providing comparative disclosures for each period presented, except for those requirements that apply only to the current period.  Early adoption is permitted.  The enhanced disclosures under the new guidance will be provided by the Company for the year ended December 31, 2016, as required.

 

4.              Investments

 

The cost or amortized cost, gross unrealized gain or loss, and fair value of the fixed maturity and equity securities, by major security type, that are classified as available-for-sale securities, were as follows:

 

9



Table of Contents

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except per share amounts)

 

 

 

June 30, 2015

 

 

 

Cost or
Amortized

 

Gross Unrealized

 

Fair

 

 

 

Cost

 

Gain

 

Loss

 

Value

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

U.S. Government obligations

 

$

4,991

 

$

68

 

$

(5

)

$

5,054

 

State and local government

 

14,586

 

122

 

(173

)

14,535

 

Corporate debt

 

33,763

 

180

 

(105

)

33,838

 

Commercial mortgage and asset-backed

 

44,863

 

257

 

(276

)

44,844

 

Total fixed maturity securities

 

98,203

 

627

 

(559

)

98,271

 

Equity securities, common stock

 

3,176

 

1,045

 

(57

)

4,164

 

Total

 

$

101,379

 

$

1,672

 

$

(616

)

$

102,435

 

 

 

 

December 31, 2014

 

 

 

Cost or
Amortized

 

Gross Unrealized

 

Fair

 

 

 

Cost

 

Gain

 

Loss

 

Value

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

U.S. Government obligations

 

$

5,872

 

$

85

 

$

(16

)

$

5,941

 

State and local government

 

10,755

 

210

 

(4

)

10,961

 

Corporate debt

 

30,818

 

237

 

(106

)

30,949

 

Commercial mortgage and asset-backed

 

36,323

 

348

 

(117

)

36,554

 

Total fixed maturity securities

 

83,768

 

880

 

(243

)

84,405

 

Equity securities, common stock

 

2,965

 

1,158

 

(39

)

4,084

 

Total

 

$

86,733

 

$

2,038

 

$

(282

)

$

88,489

 

 

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:

 

 

 

June 30, 2015

 

 

 

Less than
12 Months

 

Greater than
12 Months

 

Total

 

 

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government obligations

 

$

126

 

$

(1

)

$

1,330

 

$

(4

)

$

1,456

 

$

(5

)

State and local government

 

8,435

 

(173

)

 

 

8,435

 

(173

)

Corporate debt

 

14,865

 

(94

)

862

 

(11

)

15,727

 

(105

)

Commercial mortgage and asset-backed

 

21,143

 

(231

)

1,074

 

(45

)

22,217

 

(276

)

Total fixed maturity securities

 

44,569

 

(499

)

3,266

 

(60

)

47,835

 

(559

)

Equity securities, common stock

 

659

 

(57

)

 

 

659

 

(57

)

Total

 

$

45,228

 

$

(556

)

$

3,266

 

$

(60

)

$

48,494

 

$

(616

)

 

10



Table of Contents

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except per share amounts)

 

 

 

December 31, 2014

 

 

 

Less than
12 Months

 

Greater than
12 Months

 

Total

 

 

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government obligations

 

$

 

$

 

$

1,319

 

$

(16

)

$

1,319

 

$

(16

)

State and local government

 

552

 

(1

)

825

 

(3

)

1,377

 

(4

)

Corporate debt

 

18,835

 

(98

)

489

 

(8

)

19,324

 

(106

)

Commercial mortgage and asset-backed

 

12,060

 

(34

)

4,999

 

(83

)

17,059

 

(117

)

Total fixed maturity securities

 

31,447

 

(133

)

7,632

 

(110

)

39,079

 

(243

)

Equity securities, common stock

 

347

 

(39

)

 

 

347

 

(39

)

Total

 

$

31,794

 

$

(172

)

$

7,632

 

$

(110

)

$

39,426

 

$

(282

)

 

Substantially all of the Company’s fixed maturity securities are of investment grade with an average credit quality of AA.  The fixed maturity securities are short in duration; approximately 3.5 years.

 

The Company reviews its impaired securities for possible other-than-temporary impairment at each quarter end.  A security has an impairment loss when its fair value is less than its cost or amortized cost at the balance sheet date.  After considering its review procedures, the Company does not consider the $616 of gross unrealized losses in the portfolio at June 30, 2015, to be other-than-temporary impairments because (i) as of that date, all contractual interest and principal payments on the fixed maturity securities has been received, (ii) there is no intent to sell the securities, (iii) it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost or cost bases and (iv) the unrealized loss relates to non-credit factors, such as interest rate changes and fluctuations due to market conditions.  The Company did not recognize any other-than-temporary impairment losses during the periods presented.

 

The Company’s sources of net investment income are as follows:

 

 

 

Three Months
Ended
June 30,

 

Six Months
Ended
June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Fixed maturity securities

 

$

532

 

$

306

 

$

1,063

 

$

550

 

Equity securities

 

22

 

20

 

45

 

35

 

Cash and short-term investments

 

2

 

1

 

4

 

4

 

Total investment income

 

556

 

327

 

1,112

 

589

 

Investment expenses

 

(87

)

(45

)

(157

)

(87

)

Net investment income

 

$

469

 

$

282

 

$

955

 

$

502

 

 

11



Table of Contents

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except per share amounts)

 

The following table summarizes the gross realized gains and losses from sales or maturities of available-for-sale fixed maturity and equity securities, as follows:

 

 

 

Three Months
Ended
June 30,

 

Six Months
Ended
June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

Gross realized gains

 

$

 

$

21

 

$

68

 

$

22

 

Gross realized losses

 

(1

)

(4

)

(4

)

(28

)

 

 

(1

)

17

 

64

 

(6

)

Equity securities:

 

 

 

 

 

 

 

 

 

Gross realized gains

 

104

 

78

 

203

 

193

 

Gross realized losses

 

(16

)

(14

)

(35

)

(15

)

 

 

88

 

64

 

168

 

178

 

Net realized investment gains

 

$

87

 

$

81

 

$

232

 

$

172

 

 

The following table summarizes the fair value and amortized cost of available-for-sale fixed maturity securities by contractual maturity at June 30, 2015, as follows:

 

 

 

Amortized
Cost

 

Fair
Value

 

Due in one year or less

 

$

3,922

 

$

3,935

 

Due after one year through five years

 

32,338

 

32,484

 

Due after five years through ten years

 

7,550

 

7,602

 

Due after ten years

 

9,530

 

9,406

 

Securities with contractual maturities

 

53,340

 

53,427

 

Commercial mortgage and asset-backed

 

44,863

 

44,844

 

Total fixed maturity securities

 

$

98,203

 

$

98,271

 

 

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.

 

At June 30, 2015 and December 31, 2014, the insurance companies had an aggregate of $7.0 million on deposit in a number of trust accounts to meet the deposit requirements of various state insurance departments.  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.

 

5.              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 condensed 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 principal most advantageous market for the asset or liability in an orderly transaction between market participants.  In determining fair value, the Company applies the market approach, which uses prices and other relevant data based on market transactions involving identical or comparable assets and liabilities.  The inputs to valuation techniques used to measure fair value are prioritized into a three-level hierarchy.  The hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs.  The fair value hierarchy is as follows:

 

Level 1—Inputs are based on quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2—Inputs are other than quoted prices that are observable for the asset or liabilities, either directly or indirectly, for substantially the full term of the asset or liability.

 

12



Table of Contents

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except per share amounts)

 

Level 3—Unobservable inputs that are supported by little or no market activity.  The unobservable inputs represent the Company’s best assumption of how market participants would price the assets or liabilities.

 

The following tables present the fair value of the Company’s financial instruments that were carried or disclosed at fair value.  Unless indicated, these items were carried at fair value on the consolidated balance sheets.

 

 

 

June 30, 2015

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

U.S. Government obligations

 

$

 

$

5,054

 

$

 

$

5,054

 

State and local government

 

 

14,535

 

 

14,535

 

Corporate debt

 

 

33,838

 

 

33,838

 

Commercial mortgage and asset-backed

 

 

44,844

 

 

44,844

 

Total fixed maturity securities

 

 

98,271

 

 

98,271

 

Equity securities, common stock

 

4,164

 

 

 

4,164

 

Short-term investments*

 

6,237

 

 

 

6,237

 

Total assets measured at fair value

 

$

10,401

 

$

98,271

 

$

 

$

108,672

 

Senior debt*

 

$

 

$

27,462

 

$

 

$

27,462

 

Contingent consideration

 

 

 

 

 

58

 

58

 

Interest rate swap

 

 

13

 

 

13

 

Total liabilities measured at fair value

 

$

 

$

27,475

 

$

58

 

$

27,533

 

 


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

 

 

 

December 31, 2014

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

U.S. Government obligations

 

$

 

$

5,941

 

$

 

$

5,941

 

State and local government

 

 

10,961

 

 

10,961

 

Corporate debt

 

 

30,949

 

 

30,949

 

Commercial mortgage and asset-backed

 

 

36,554

 

 

36,554

 

Total fixed maturity securities

 

 

84,405

 

 

84,405

 

Equity securities, common stock

 

4,084

 

 

 

4,084

 

Short-term investments*

 

16,749

 

 

 

16,749

 

Total assets measured at fair value

 

$

20,833

 

$

84,405

 

$

 

$

105,238

 

Senior debt*

 

$

 

$

27,562

 

$

 

$

27,562

 

Contingent consideration

 

 

 

168

 

168

 

Interest rate swap

 

 

9

 

 

9

 

Total liabilities measured at fair value

 

$

 

$

27,571

 

$

168

 

$

27,739

 

 


* Carried at cost or amortized cost on the condensed 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.

 

Level 2 investments include fixed maturity securities, which consist of U.S. government agency securities, state and local municipal bonds (including those held as restricted securities), corporate debt securities, mortgage-backed and asset-backed securities.  Fair value is measured for the majority of Level 2 investments using matrix pricing and observable market data, including benchmark securities or yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, bids, offers, default rates, loss severity and other economic measures.

 

13



Table of Contents

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except per share amounts)

 

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, including (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.

 

The Level 2 financial instruments also include our senior debt and an interest rate swap.  The fair value of borrowings under the senior debt, consisting of the revolving credit facility and term loans, approximates its carrying amount because interest is based on a short-term, variable, market-based rate.  At June 30, 2015 and December 31, 2014, the fair value of the interest rate swap was $13 and $9 (notional amounts of $3,250 and $3,750), respectively.

 

The Level 3 financial instruments include the fair value of the Company’s contingent consideration arrangements that were entered into at the date of the respective acquisitions, which are classified within other liabilities in the consolidated balance sheets.  The fair value of these liabilities were determined based on internally developed models that use assumptions or other data that are not readily observable from objective sources.

 

The following table sets forth a roll-forward of the Level 3 measurements:

 

 

 

Contingent
Consideration
Liabilities

 

Balance at December 31, 2013

 

$

339

 

Change in fair value

 

11

 

Payout of contingent consideration

 

(182

)

Balance at December 31, 2014

 

168

 

Change in fair value

 

3

 

Payout of contingent consideration

 

(113

)

Balance at June 30, 2015

 

$

58

 

 

6.   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.  The activity in deferred policy acquisition costs, net of reinsurance transactions, is as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Balance at beginning of period

 

$

6,120

 

$

6,322

 

$

5,679

 

$

5,747

 

Deferred policy acquisition costs

 

4,178

 

4,201

 

7,214

 

8,007

 

Amortization of policy acquisition costs

 

(2,639

)

(3,519

)

(5,234

)

(6,750

)

Net change

 

1,539

 

682

 

1,980

 

1,257

 

Balance at end of period

 

$

7,659

 

$

7,004

 

$

7,659

 

$

7,004

 

 

14



Table of Contents

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except per share amounts)

 

7.  Intangible Assets

 

The following table reflects intangible assets and related accumulated amortization:

 

 

 

As of June 30, 2015

 

 

 

Weighted
Average
Amortization
Period

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Nonamortizing indefinite-lived, intangible assets—state insurance licenses

 

 

 

$

900

 

$

 

$

900

 

Amortizing definite-lived, intangible assets—customer lists

 

5 years

 

368

 

133

 

235

 

Total

 

 

 

$

1,268

 

$

133

 

$

1,135

 

 

 

 

As of December 31, 2014

 

 

 

Weighted
Average
Amortization
Period

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Nonamortizing indefinite-lived intangible assets—state insurance licenses

 

 

 

$

900

 

$

 

$

900

 

Amortizing definite-lived, intangible assets—customer lists

 

5 years

 

368

 

97

 

271

 

Total

 

 

 

$

1,268

 

$

97

 

$

1,171

 

 

Amortization of intangible assets was $18 and $36 for the three and six months ended June 30, 2015 and 2014, respectively.  Future amortization of definite-lived intangibles is as follows: remainder of 2015: $38, 2016: $74, 2017: $74 and 2018: $49.

 

8.              Unpaid Losses and Loss Adjustment Expenses

 

The Company establishes a liability for unpaid losses and loss adjustment expenses which represents the estimated ultimate cost of all losses incurred that were both reported and unreported (i.e. incurred but not yet reported losses) and loss adjustment expenses incurred that remain unpaid at the balance sheet date.  The estimation of the ultimate liability for unpaid losses and loss adjustment expenses is a complex, imprecise and inherently uncertain process, and therefore involves a considerable degree of judgment and expertise.  The process for establishing the provision for loss and loss adjustment expense reserves reflects the uncertainties and significant judgmental factors inherent in predicting future results of both known and unknown loss events.  The Company’s evaluation of the adequacy of loss and loss adjustment expense reserves includes a re-estimation of such liabilities relating to each preceding financial year compared to the liability that was previously established.

 

15



Table of Contents

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except per share amounts)

 

The table below provides the changes in the liability for unpaid losses and loss adjustment expenses, net of recoverables from reinsurers (referred to as reserves), for the periods indicated as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Gross reserves—beginning of period

 

$

32,987

 

$

32,783

 

$

31,531

 

$

28,908

 

Less reinsurance recoverables on unpaid losses

 

4,590

 

6,255

 

3,224

 

3,953

 

Net reserves—beginning of period

 

28,397

 

26,528

 

28,307

 

24,955

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Current period

 

8,805

 

10,216

 

17,340

 

21,234

 

Prior periods

 

171

 

(530

)

206

 

(972

)

Total net incurred losses and loss adjustment expenses

 

8,976

 

9,686

 

17,546

 

20,262

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Current period

 

5,029

 

4,934

 

6,794

 

8,462

 

Prior periods

 

5,009

 

3,654

 

11,724

 

9,129

 

Total net loss and loss adjustment expense payments

 

10,038

 

8,588

 

18,518

 

17,591

 

 

 

 

 

 

 

 

 

 

 

Net reserves—end of period

 

27,335

 

27,626

 

27,335

 

27,626

 

Plus: reinsurance recoverables on unpaid losses

 

5,022

 

4,207

 

5,022

 

4,207

 

Gross reserves—end of period

 

$

32,357

 

$

31,833

 

$

32,357

 

$

31,833

 

 

The Company’s incurred losses during the three and six months ended June 30, 2015, reflect prior-year adverse reserve development of $171 and $206, respectively.  In the second quarter of 2015, there was $340 and $262 of adverse reserve development in the commercial automobile and personal automobile lines, respectively.  This adverse development was partially offset by favorable reserve development in other lines, including $270 and $95 of favorable reserve development in the commercial multi-peril and other liability lines, respectively.  For the six months ended June 30, 2015, there was a similar result, with the adverse development being generated by the personal and commercial automobiles lines, totaling $331 and $535, respectively.  This adverse development was partially offset by favorable development in other lines, including $274, $136 and $248 in the commercial multi-peril, other liability and workers’ compensation lines, respectively.

 

The Company’s incurred losses during the three and six months ended June 30, 2014 reflect prior-year favorable reserve development of $530 and $972, respectively.  In second quarter of 2014, there was $739 and $241 of favorable reserve development in the commercial multi-peril and other liability lines, respectively.  This was partially offset by $307 of adverse development in our low-value dwelling line.  For the six months ended June 30, 2014, there was a similar result, with the favorable development being generated primarily by the commercial multi-peril and other liability lines, totaling $786 and $390, respectively.  This favorable development was partially offset by adverse development of $432 in the low-value dwelling line.

 

9.              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.  Although reinsurance does not discharge the direct insurer from liability to its policyholder, the insurance companies participate in such treaty and facultative reinsurance agreements in order to limit their loss exposure, protect them against catastrophic losses and diversify their business.  The Company primarily ceded all specific risks in excess of $500 in 2015, and $300 in 2014.  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.

 

Effective December 31, 2014, the Company entered into a quota share reinsurance agreement in which it cedes 25% of the subject premium, net of other reinsurance, and cedes 25% of the related losses within the Company’s retention which is between $0 and $500.  The subject premium represents substantially all product lines other than the Florida homeowners and personal automobile policies.  The Company recorded $4,123 and $8,957 of ceded written premiums during the three and six months ended June 30, 2015, respectively, under the quota share reinsurance agreement.  This agreement was terminated by the Company in August 2015.  The

 

16



Table of Contents

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except per share amounts)

 

purpose of the quota share arrangement was to reduce the capital requirements necessary to support the premium growth initiatives.  With the anticipation of the IPO, which was expected to provide sufficient capital to support the current growth initiatives, the quota share was no longer necessary.

 

Beginning in December 2014, the Company assumed written premium of $5,483 under a policy assumption agreement with Citizens Property and Casualty Corporation (“Citizens”).  Citizens is a Florida government-sponsored insurer that provides homeowners insurance to Florida residences that cannot find coverage in the voluntary market.  Upon assuming this premium, the Company becomes the primary insurer to the policyholders.  The Company is responsible for claims occurring on or after the effective date of the assumption.

 

In the first quarter of 2015, another assumption from Citizens took place for $1,419, which was mostly offset by a return of $1,334 of assumed premiums from the 2014 assumption, as policyholders opted out.  In the second quarter of 2015, the Company recorded a return of written premium of $662 to Citizens relating to the policyholders opting out of the first quarter assumption.

 

In the second quarter of 2015, the Company assumed $2,211 of written premiums under insurance fronting arrangements with other insurers to write on behalf of the Company in markets that require a higher A.M. Best rating than the Company’s rating, the business is 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, losses and loss adjustment expenses, and policy acquisition costs:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Written premiums:

 

 

 

 

 

 

 

 

 

Direct

 

$

21,510

 

$

19,001

 

$

42,629

 

$

36,668

 

Assumed

 

1,549

 

 

1,634

 

 

Ceded

 

(7,117

)

(2,309

)

(14,655

)

(3,267

)

Net written premiums

 

$

15,942

 

$

16,692

 

$

29,608

 

$

33,401

 

 

 

 

 

 

 

 

 

 

 

Earned premiums:

 

 

 

 

 

 

 

 

 

Direct

 

$

20,050

 

$

16,139

 

$

39,351

 

$

30,620

 

Assumed

 

2,137

 

 

3,810

 

 

Ceded

 

(7,072

)

(2,182

)

(13,553

)

(3,988

)

Net earned premiums

 

$

15,115

 

$

13,957

 

$

29,608

 

$

26,632

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses:

 

 

 

 

 

 

 

 

 

Direct

 

$

10,622

 

$

10,296

 

$

20,544

 

$

23,430

 

Assumed

 

281

 

(50

)

805

 

(2

)

Ceded

 

(1,927

)

(560

)

(3,803

)

(3,166

)

Net loss and loss adjustment expenses

 

$

8,976

 

$

9,686

 

$

17,546

 

$

20,262

 

 

 

 

 

 

 

 

 

 

 

Policy acquisition costs:

 

 

 

 

 

 

 

 

 

Policy acquisition costs

 

$

4,129

 

$

3,519

 

$

8,175

 

$

6,750

 

Ceding commissions

 

(1,490

)

 

(2,941

)

 

Net policy acquisition costs

 

$

2,639

 

$

3,519

 

$

5,234

 

$

6,750

 

 

10.       Senior Debt

 

A summary of the outstanding senior debt is as follows:

 

 

 

June 30,
2015

 

December 31,
2014

 

Revolver

 

$

17,212

 

$

16,562

 

Term Note

 

3,250

 

3,500

 

2014 Term Note

 

7,000

 

7,500

 

Total

 

$

27,462

 

$

27,562

 

 

17



Table of Contents

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except per share amounts)

 

There have been no changes to the terms and conditions of the Amended Credit Agreement during the six months ended June 30, 2015, except as follows: On May 4, 2015, the Company entered into a first amendment to its Amended Credit Agreement which, among other things, revised the provision that the Company’s Chairman’s ownership interest be not less than 50% to not less than 33%.  On June 29, 2015, the Company entered into a second amendment to its Amended Credit Agreement which, among other things, further revised the provision that the Company’s Chairman’s ownership interest be not less than 20% after the consummation of an IPO.  The Company was in compliance with its debt covenants at June 30, 2015.

 

During the six months ended June 30, 2015, the Company borrowed $900 on the Revolver to fund short-term working capital needs and repaid $250.  The weighted-average interest rate on borrowings under the Revolver for the six months ended June 30, 2015, and for the year ended December 31, 2014, was 3.4% and 3.2%, respectively.

 

As disclosed in Note 1, all outstanding borrowings under the Revolver were repaid from the proceeds received from the Company’s IPO, in August 2015.

 

11.       Shareholders’ Equity

 

Common Stock

 

In January 2015, the Company issued 55,029 shares of common stock to a Vice-President of the Company for cash of $750 ($13.63 per share).

 

During the six months ended June 30, 2014, the Company initiated certain capital-raising activities whereby shares of common stock were issued to third-party investors, members of the board of directors, executive management and employees, along with their relatives.  The Company raised proceeds of $8,295 from the issuance of 682,349 shares of common stock at $12.16 per share.

 

Preferred Stock

 

During the six months ended June 30, 2014, the Company issued 64,000 shares of preferred stock at $10.00 per share to certain investors.  On October 1, 2014, the then-outstanding shares of preferred stock were exchanged for shares of redeemable preferred stock.

 

12.       Redeemable Preferred Stock

 

At December 31, 2014, the Company had 60,600 shares of redeemable preferred stock outstanding.  The shares of redeemable preferred stock were initially recorded at fair value and thereafter increased by accrued paid-in-kind dividends.  The Company classified the shares of redeemable preferred within temporary equity on its consolidated balance sheet at December 31, 2014, due to its liquidation rights.  The redeemable preferred stock was redeemable in cash upon a deemed liquation event (i.e., the sale of 50% or more of the outstanding shares of voting capital stock) that is not solely within the control of the Company.

 

On March 25, 2015, the Company further amended its articles of incorporation with the consent of more than 80% of the holders of the preferred stock and a majority of the holders of the common stock to restrict the definition of a Liquidation Event to the liquidation, dissolution or winding up of the Company and to eliminate from that definition a change of control or a public offering of the Company.  All or part of the preferred stock may be redeemed after one year from the date of issuance, at the option of the Company, by a cash payment of the original purchase price plus any accumulated and as yet unpaid preferred dividends and paid-in-kind dividends.  On the effective date of the modification, the Company reclassified the carrying amount of its redeemable preferred stock from temporary equity to permanent equity as the redemption of the redeemable preferred stock was within the Company’s control.

 

Pursuant to agreements effective on or before July 1, 2015, the holders of preferred stock agreed to allow the Company to repurchase their outstanding preferred shares at the original purchase price (i.e. $100 per share) plus all accrued and unpaid preferred dividends.  In addition, the holders of 29,550 shares (or 48.8%) of preferred stock agreed to use such cash received from the Company’s repurchase of their preferred stock to purchase shares of common stock at the same per share price as the common stock offered in the Company’s IPO.  The closing of these transactions were conditioned on the completion of the Company’s IPO.

 

Following the closing of the Company’s IPO on August 18, 2015, the Company paid $6,356 to holders of shares of preferred stock to repurchase such shares and for the payment of accrued dividends.  Additionally, the Company issued 294,481 shares of

 

18



Table of Contents

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except per share amounts)

 

common stock to former holders of the preferred stock for proceeds of $3,092.  There are no shares of preferred stock outstanding after the closing of the IPO.

 

13. 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:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Balance at beginning of period

 

$

1,644

 

$

765

 

$

1,158

 

$

536

 

Other comprehensive income (loss) before reclassifications

 

(977

)

580

 

(274

)

933

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

208

 

210

 

425

 

334

 

Net current period other comprehensive income (loss)

 

(769

)

370

 

(699

)

599

 

Balance at end of period

 

$

459

 

$

1,135

 

$

459

 

$

1,135

 

 

The following table provides the impact of the reclassification adjustments to the respective line items in the statements of operations for the three and six months ended June 30, 2015 and 2014.

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Net realized investment gains

 

$

208

 

$

318

 

$

425

 

$

506

 

Income tax expense (benefit)

 

 

108

 

 

172

 

Total impact to net income (loss)

 

$

208

 

$

210

 

$

425

 

$

334

 

 

14.       Income (Loss) Per Share

 

Basic and diluted income (loss) per share are computed by dividing net income allocable to common shareholders by the weighted average number of common shares outstanding during the period.  The dividends on preferred stock are deducted from the net income to arrive at net income allocable to common shareholders.  In the period of a net loss, the dividends on preferred stock are added to the net loss to arrive at net loss allocable to common shareholders.

 

The following table presents the calculation of basic and diluted income (loss) per common share, as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Conifer

 

$

579

 

$

(1,536

)

$

1,042

 

$

(4,765

)

Preferred stock dividends

 

151

 

16

 

303

 

27

 

Paid-in-kind dividends

 

62

 

 

123

 

 

Net income (loss) allocable to common shareholders

 

$

366

 

$

(1,552

)

$

616

 

$

(4,792

)

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common shares, basic and diluted

 

4,050,042

 

2,357,220