cnfr20150930_10q.htm

 

 



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the Quarterly Period Ended September 30, 2015

 

OR

 

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

 

For the transition period from                 to

 

Commission file number 001-37536

 


 

Conifer Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Michigan

 

27-1298795

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

     

550 West Merrill Street, Suite 200

   

Birmingham, Michigan

 

48009

(Address of principal executive offices)

 

(Zip code)

 

(248) 559-0840

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ☐

Accelerated filer ☐

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

Smaller reporting company ☒

 

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

 

The number of outstanding shares of the registrant’s common stock, no par value, as of November 6, 2015, was 7,644,492.



 

 
 

 

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

 

Form 10-Q

 

INDEX

 

 

Page No.

Part I — Financial Information

 

Item 1 — Financial Statements

 

Consolidated Balance Sheets (Unaudited)

3

Consolidated Statements of Operations (Unaudited)

4

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

5

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

6

Consolidated Statements of Cash Flows (Unaudited)

7

Notes to Consolidated Financial Statements (Unaudited)

8

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

25

Item 3 — Quantitative and Qualitative Disclosures about Market Risk

37

Item 4 — Controls and Procedures

38

Part II — Other Information

39

Item 1 — Legal Proceedings

39

Item 1A — Risk Factors

39

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

39

Item 6 — Exhibits

40

Signatures

41

 

 
2

 

 

PART 1 - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share data) 

   

September 30,

   

December 31,

 
   

2015

   

2014

 

 

 

(Unaudited)

         
Assets              

Investment securities:

               

Fixed maturity securities, at fair value (amortized cost of $96,983 and $83,768, respectively)

  $ 97,566     $ 84,405  

Equity securities, at fair value (cost of $3,324 and $2,965, respectively)

    4,030       4,084  

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

    6,537       16,749  

Total investments

    108,133       105,238  
                 

Cash

    13,581       18,488  

Premiums and agents' balances receivable, net

    17,323       14,478  

Receivable from affiliate

    1,599       -  

Reinsurance recoverables on unpaid losses

    5,069       3,224  

Reinsurance recoverables on paid losses

    2,202       1,915  

Ceded unearned premiums

    8,293       9,510  

Deferred policy acquisition costs

    11,582       5,679  

Intangible assets, net

    947       1,171  

Goodwill

    485       1,104  

Other assets

    3,411       2,931  

Total assets

  $ 172,625     $ 163,738  
                 

Liabilities and Shareholders' Equity

               

Liabilities:

               

Unpaid losses and loss adjustment expenses

  $ 32,595     $ 31,531  

Unearned premiums

    45,683       43,381  

Reinsurance premiums payable

    998       7,069  

Senior debt

    9,750       27,562  

Accounts payable and accrued expenses

    2,762       2,521  

Other liabilities

    673       1,396  

Total liabilities

    92,461       113,460  
                 

Redeemable preferred stock (0 and 1,000,000 shares authorized; 0 and 60,600 shares issued and outstanding, respectively)

    -       6,119  
                 

Shareholders' equity:

               

Common stock, no par value (100,000,000 and 12,240,000 shares authorized; 7,644,492 and 3,995,013 issued and outstanding, respectively)

    80,199       46,119  

Accumulated deficit

    (727 )     (3,095 )

Accumulated other comprehensive income

    692       1,158  

Total shareholders' equity attributable to Conifer

    80,164       44,182  

Noncontrolling interest

    -       (23 )

Total shareholders' equity

    80,164       44,159  

Total liabilities and shareholders' equity

  $ 172,625     $ 163,738  

 

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

 

 
3

 

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)

(In thousands, except share and per share data)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
                                 

Revenue

                               

Premiums

                               

Gross earned premiums

  $ 23,042     $ 17,248     $ 66,203     $ 47,868  

Ceded earned premiums

    (5,159 )     (2,677 )     (18,712 )     (6,665 )

Net earned premiums

    17,883       14,571       47,491       41,203  

Net investment income

    505       321       1,460       823  

Net realized investment gains

    6       94       238       266  

Other gains

    104       -       104       -  

Other income

    523       387       1,492       1,424  

Total revenue

    19,021       15,373       50,785       43,716  
                                 

Expenses

                               

Losses and loss adjustment expenses, net

    9,813       10,215       27,359       30,477  

Policy acquisition costs

    4,605       3,738       9,839       10,488  

Operating expenses

    3,325       3,433       10,636       9,540  

Interest expense

    181       108       664       360  

Total expenses

    17,924       17,494       48,498       50,865  
                                 

Income (loss) before income taxes

    1,097       (2,121 )     2,287       (7,149 )

Income tax (benefit) expense

    (48 )     131       -       (178 )
                                 

Net income (loss)

    1,145       (2,252 )     2,287       (6,971 )

Less net (loss) income attributable to noncontrolling interest

    (181 )     (18 )     (81 )     28  

Net income (loss) attributable to Conifer

  $ 1,326     $ (2,234 )   $ 2,368     $ (6,999 )
                                 

Net income (loss) allocable to common shareholders

  $ 1,212     $ (2,250 )   $ 1,828     $ (7,042 )
                                 

Earnings (loss) per common share, basic and diluted

  $ 0.21     $ (0.89 )   $ 0.40     $ (3.02 )
                                 

Weighted average common shares outstanding, basic and diluted

    5,701,794       2,514,229       4,603,451       2,335,315  

 

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)

(In thousands)

  

   

Three Months Ended

   

Nine Months Ended

 
   

September 30

   

September 30

 
   

2015

   

2014

   

2015

   

2014

 
                                 

Net income (loss)

  $ 1,145     $ (2,252 )   $ 2,287     $ (6,971 )
                                 

Other comprehensive income (loss), net of tax:

                               

Unrealized investment gains (losses):

                               

Unrealized investment gains (losses) during the period

    379       (288 )     104       1,126  

Income tax expense (benefit)

    -       (98 )     -       383  

Unrealized investment gains (losses), net of tax

    379       (190 )     104       743  
                                 

Less: reclassification adjustments to:

                               

Net realized investment gains included in net income (loss)

    146       98       570       604  

Income tax expense

    -       33       -       205  

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

    146       65       570       399  
                                 

Other comprehensive income (loss)

    233       (255 )     (466 )     344  
                                 

Total comprehensive income (loss)

    1,378       (2,507 )     1,821       (6,627 )

Less comprehensive (loss) income attributable to noncontrolling interest

    (181 )     (18 )     (81 )     28  

Comprehensive income (loss) attributable to Conifer

  $ 1,559     $ (2,489 )   $ 1,902     $ (6,655 )

 

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

 

 
5

 

  

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

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

(In thousands, except share data)

 

 

   

Redeemable

Preferred Stock

   

Preferred Stock

   

No Par, Common Stock

   

Retained

Earnings

   

Accumulated

Other

   

Total Conifer

Holdings

                 
   

Shares

   

Amount

   

Shares

   

Amount

   

Shares

   

Amount

   

(Accumulated

deficit)

   

Comprehensive

Income (Loss)

   

Shareholders'

Equity

   

Noncontrolling

Interest

   

Total Equity

 

Balances at December 31, 2013

    -     $ -       -     $ -       1,749,626     $ 16,883     $ 3,851     $ 536     $ 21,270     $ (19 )   $ 21,251  

Net loss

    -       -       -       -       -       -       (6,999 )     -       (6,999 )     28       (6,971 )

Issuance of common stock

    -       -       -       -       1,256,873       16,045       -       -       16,045       -       16,045  

Conversion of note payable into shares of common stock

    -       -       -       -       82,252       1,000       -       -       1,000       -       1,000  

Issuance of Preferred Stock, $10

    -       -       66,000       660       -       -       -       -       660       -       660  

Issuance of Redeemable Preferred Stock, $100

    46,500       4,650                                                       -       -       -  

Cash dividends paid on Preferred Stock

    -       -       -       -       -       (32 )     (11 )     -       (43 )     -       (43 )

Other comprehensive income

    -       -       -       -       -       -       -       344       344       -       344  

Balances at September 30, 2014

    46,500     $ 4,650       66,000     $ 660       3,088,751     $ 33,896     $ (3,159 )   $ 880     $ 32,277     $ 9     $ 32,286  

Net loss

    -       -       -       -       -       -       64       -       64       (32 )     32  

Issuance of common stock

    -       -       -       -       906,262       12,430       -       -       12,430       -       12,430  

Issuance of Redeemable Preferred Stock, $100

    7,500       750       -       -       -       -       -       -       -       -       -  

Exchange of Preferred Stock for Redeemable Preferred Stock , $100

    6,600       660       (66,000 )     (660 )     -       -       -       -       (660 )     -       (660 )

Paid-in-kind dividends on redeemable Preferred Stock

    -       59       -       -       -       (59 )     -       -       (59 )     -       (59 )

Cash dividends paid on Preferred Stock

                                            (148 )     -               (148 )             (148 )

Other comprehensive income

    -       -       -       -       -       -       -       278       278       -       278  

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

    -       -       -       -       -       -       2,368               2,368       (81 )     2,287  

Issuance of common stock (Pre IPO)*

                                    55,029       750                       750               750  

Paid-in-kind dividends

    -       61       -       95       -       (156 )     -       -       (61 )     -       (61 )

Cash dividends paid on preferred stock

    -       -       -       -       -       (384 )     -       -       (384 )     -       (384 )

Reclassification of redeemable preferred stock to permanent equity

    (60,600 )     (6,180 )     60,600       6,180       -       -       -       -       6,180       -       6,180  

Issuance of common stock (IPO)*

    -       -       -       -       3,300,000       32,224       -       -       32,224       -       32,224  

IPO Expenses*

    -       -       -       -       -       (1,546 )     -       -       (1,546 )     -       (1,546 )

Repurchase of preferred stock

    -       -       (60,600 )     (6,275 )     -       -       -       -       (6,275 )     -       (6,275 )

Issuance of common stock to former preferred stockholders

    -       -       -       -       294,450       3,092       -       -       3,092       -       3,092  

Vesting of RSU**

    -       -       -       -       -       100       -       -       100               100  

Deconsolidation of affiliate

    -       -       -       -       -       -       -       -       -       104       104  

Other comprehensive loss

    -       -       -       -       -       -       -       (466 )     (466 )     -       (466 )

Balances at September 30, 2015

    -     $ -       -     $ -       7,644,492     $ 80,199     $ (727 )   $ 692     $ 80,164     $ -     $ 80,164  

 

* "IPO" - initial public offering

** "RSU" - restricted stock units

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

 

 
6

 

 

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

   

Nine Months Ended

 
   

September 30

 
   

2015

   

2014

 

Cash Flows from Operating Activities

               

Net income (loss)

  $ 2,287     $ (6,971 )

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

               

Depreciation and amortization of property and equipment, and intangibles

    307       283  

Amortization of bond premium and discount, net

    446       372  

Gains on investments

    (238 )     (273 )

Other gains

    (104 )     -  

Incentive awards expenses - vesting of RSU

    100       -  

Deferred income taxes

    -       (178 )

Changes in operating assets and liabilities:

               

(Increase) decrease in:

               

Premiums and agents' balances receivable

    (2,885 )     (955 )

Reinsurance recoverables

    (2,132 )     (1,712 )

Ceded unearned premiums

    1,217       702  

Deferred policy acquisition costs

    (5,903 )     (1,795 )

Other assets

    (679 )     (302 )

Increase (decrease) in:

               

Unpaid losses and loss adjustment expenses

    1,064       2,749  

Unearned premiums

    2,302       7,750  

Reinsurance premiums payable

    (6,071 )     16  

Accounts payable and accrued expenses

    1,019       601  

Other liabilities

    (556 )     (1,571 )

Net cash used in operating activities

    (9,826 )     (1,284 )

Cash Flows From Investing Activities

               

Purchase of investments:

               

Fixed maturity securities

    (20,762 )     (21,138 )

Equity securities

    (1,193 )     (970 )

Short-term investments

    (55,569 )     (49,476 )

Proceeds from maturities and redemptions of investments:

               

Fixed maturity securities

    1,400       252  

Proceeds from sales of investments:

               

Fixed maturity securities

    5,771       3,441  

Equity securities

    1,004       903  

Short-term investments

    65,781       37,353  

Purchases of property and equipment

    (126 )     (358 )

Deconsolidation of affilate

    (1,323 )     -  

Net cash used in investing activities

    (5,017 )     (29,993 )

Cash Flows From Financing Activities

               

Proceeds received from issuance of shares of common stock

    36,066       16,045  

Proceeds from issuance of shares of preferred stock

    -       5,310  

Repurchase of preferred stock

    (6,275 )     -  

Borrowings under debt arrangements

    1,650       15,700  

Repayment of borrowings under debt arrangements

    (19,462 )     (750 )

Dividends paid to preferred shareholders

    (384 )     (27 )

Payout of contingent consideration

    (113 )     (113 )

Payment of offering costs

    (1,546 )     -  

Net cash provided by financing activities

    9,936       36,165  

Net (decrease) increase in cash

    (4,907 )     4,888  

Cash at beginning of period

    18,488       11,296  

Cash at end of period

  $ 13,581     $ 16,184  
                 

Supplemental Disclosure of Cash Flow Information:

               

Interest paid

  $ 651     $ 383  

Net income taxes paid

  $ -     $ -  

 

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 and Management Representation

 

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, White Pine Insurance Company, Red Cedar Insurance Company , American Colonial Insurance Company , American Colonial Insurance Services and Sycamore Insurance Agency, Inc.

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and are unaudited. The Company has applied the applicable rules and regulations of the U. S. 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 U.S. 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 financial statements, have been included. The results of operations for the three and nine months ended September 30, 2015, are not necessarily indicative of the results expected for the year ended December 31, 2015.

 

These 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 consolidated balance sheet at December 31, 2014, was derived from the audited financial statements.

 

Business

 

The Company is 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 all 50 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. Refer to Note 9 ~ Shareholders’ Equity for further details.

 

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 consolidated financial statements and notes thereto, were adjusted retroactively to reflect the stock split.

 

Principles of Consolidation

  

Prior to September 30, 2015, the consolidated financial statements included the accounts of Conifer Holdings, Inc. and its wholly owned subsidiaries, and a 50%-owned affiliate (“Affiliate”) which the Company controlled due to its majority representation on the entity’s board of directors. Noncontrolling interest in a consolidated subsidiary in the consolidated balance sheets represents the noncontrolling shareholder’s proportionate share of the entity’s equity. Consolidated net income or loss is allocated to the Company and noncontrolling interest in proportion to their percentage ownership interests.

 

As of September 30, 2015, the Company longer controls the Affiliate but retains significant influence. As a result the entity was deconsolidated from the consolidated financial statements and recognized as an investment in an affiliate utilizing the equity method of accounting.

 

All intercompany transactions and accounts were eliminated.

 

 
8

 

  

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.

 

Offering Costs

  

Offering costs of $1.5 million were netted against the proceeds received from the offering and were recorded in common stock during the third quarter of 2015. The offering costs consisted of legal, accounting, printing and other incremental expenses, incurred in connection with the Company’s IPO.

 

Income Taxes

 

As of September 30, 2015 and December 31, 2014, the Company did not have any unrecognized tax benefits. As of September 30, 2015 and December 31, 2014, the Company had no accrued interest or penalties related to uncertain tax positions.

 

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.

 

 
9

 

 

2.     Investments

 

The cost or amortized cost, gross unrealized gain or loss, and estimated fair value of the investments in securities classified as available-for-sale at September 30, 2015 and December 31, 2014 were as follows (in thousands):

 

   

September 30, 2015

 
   

Cost or

Amortized

Cost

   

Gross Unrealized

   

Estimated

Fair Value 

 
       

 

Gains

   

Losses

     

Fixed Securities:

                               

U.S. Government obligations

  $ 5,485     $ 72     $ (1 )   $ 5,556  

State and local government

    14,492       270       (41 )     14,721  

Corporate debt

    34,006       206       (193 )     34,019  

Commercial mortgage and asset-backed

    43,000       371       (101 )     43,270  

Total fixed securities available for sale

    96,983       919       (336 )     97,566  

Equity Securities:

                               

Common stock

    3,324       849       (143 )     4,030  

Total equity securities available for sale

    3,324       849       (143 )     4,030  

Total securities available for sale

  $ 100,307     $ 1,768     $ (479 )   $ 101,596  

 

 

   

December 31, 2014

 
   

Cost or

Amortized

Cost

   

Gross Unrealized

   

Estimated

Fair Value 

 
       

Gains

   

Losses

     

Fixed 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 securities available for sale

    83,768       880       (243 )     84,405  

Equity Securities:

                               

Common stock

    2,965       1,158       (39 )     4,084  

Total equity securities available for sale

    2,965       1,158       (39 )     4,084  

Total securities available for sale

  $ 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 (in thousands, except number of issues):

 

 

   

September 30, 2015

 
   

Less than 12 months

   

Greater than 12 months

   

Total

 
   

Number

of

Issues

   

Fair Value of

Investments

with Unrealized

Losses

   

Gross

Unrealized

Losses

   

Number

of

Issues

   

Fair Value of

Investments

with Unrealized

Losses

   

Gross

Unrealized

Losses

   

Number

of

Issues

   

Fair Value of

Investments

with Unrealized

Losses

   

Gross

Unrealized

Losses

 

Fixed Securities:

                                                                       

U.S. Government obligations

    -     $ -     $ -       2     $ 684     $ (1 )     2     $ 684     $ (1 )

State and local government

    11       3,173       (41 )     -       -       -       11       3,173       (41 )

Corporate debt

    38       11,005       (178 )     9       1,536       (15 )     47       12,541       (193 )

Commercial mortgage and asset-backed

    33       12,826       (70 )     4       1,860       (31 )     37       14,686       (101 )

Total fixed securities available for sale

    82       27,004       (289 )     15       4,080       (47 )     97       31,084       (336 )

Equity Securities:

                                                                       

Common stock

    95       949       (121 )     3       43       (22 )     98       992       (143 )

Total equity securities available for sale

    95       949       (121 )     3       43       (22 )     98       992       (143 )

Total securities

    177     $ 27,953     $ (410 )     18     $ 4,123     $ (69 )     195     $ 32,076     $ (479 )

 

 
10

 

 

   

December 31, 2014

 
   

Less than 12 months

   

Greater than 12 months

   

Total

 
   

Number of Issues

   

Fair Value of Investments with Unrealized Losses

   

Gross Unrealized Losses

   

Number of Issues

   

Fair Value of Investments with Unrealized Losses

   

Gross Unrealized Losses

   

Number of Issues

   

Fair Value of Investments with Unrealized Losses

   

Gross Unrealized Losses

 

Fixed Securities:

                                                                       

U.S. Government obligations

    -     $ -     $ -       3     $ 1,319     $ (16 )     3     $ 1,319     $ (16 )

State and local government

    4       552       (1 )     3       825       (3 )     7       1,377       (4 )

Corporate debt

    61       18,835       (98 )     3       489       (8 )     64       19,324       (106 )

Commercial mortgage and asset-backed

    23       12,060       (34 )     10       4,999       (83 )     33       17,059       (117 )

Total fixed securities available for sale

    88       31,447       (133 )     19       7,632       (110 )     107       39,079       (243 )

Equity Securities:

                                                                       

Common stock

    20       347       (39 )     -       -       -       20       347       (39 )

Total equity securities available for sale

    20       347       (39 )     0       -       -       20       347       (39 )

Total securities

    108     $ 31,794     $ (172 )     19     $ 7,632     $ (110 )     127     $ 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 3.4 and 3.1 years as of September 30, 2015 and December 31, 2014, respectively.

 

The Company reviews its impaired securities for possible other-than-temporary impairment (“OTTI”) 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. The Company analyzed its investment portfolio in accordance with its OTTI review procedures and determined the Company did not need to record a credit related OTTI loss, nor recognize a non-credit related OTTI loss in other comprehensive income for the three and nine months ended September 30, 2015 and 2014. The Company’s conclusion is based on the following: (i) as of the specified date, all contractual interest and principal payments on the fixed maturity securities have 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’s sources of net investment income are as follows (in thousands):

 

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2015

   

2014

   

2015

   

2014

 

Fixed maturity securities

  $ 551     $ 348     $ 1,614     $ 898  

Equity securities

    24       21       69       56  

Cash and short-term investments

    -       3       4       7  

Total investment income

    575       372       1,687       961  

Investment expenses

    (70 )     (51 )     (227 )     (138 )

Net investment income

  $ 505     $ 321     $ 1,460     $ 823  

 

 
11

 

 

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 (in thousands):

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2015

   

2014

   

2015

   

2014

 

Fixed maturity securities:

                               

Gross realized gains

  $ 6     $ (4 )   $ 74     $ 18  

Gross realized losses

    (1 )     14       (5 )     (14 )

Total fixed securities

    5       10       69       4  
                                 

Equity securities:

                               

Gross realized gains

    30       106       233       299  

Gross realized losses

    (29 )     (22 )     (64 )     (37 )

Total equity securities

    1       84       169       262  
                                 

Total realized gains (losses)

  $ 6     $ 94     $ 238     $ 266  

 

 

Proceeds from the sales of debt and equity securities available for sale were $6.8 million and $4.3 million for the nine months ended September 30, 2015 and 2014, respectively.

 

The table below summarizes the amortized cost and fair value of available-for-sale fixed maturity securities by contractual maturity at September 30, 2015. 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 (in thousands):

 

   

Amortized

Cost

   

Estimated

Fair Value

 

Due in one year or less

  $ 4,595     $ 4,614  

Due after one year through five years

    32,405       32,593  

Due after five years through ten years

    7,714       7,794  

Due after ten years

    9,269       9,295  

Securities with contractual maturities

    53,983       54,296  

Commercial mortgage and asset backed

    43,000       43,270  

Total Fixed maturity securities

  $ 96,983     $ 97,566  

 

At September 30, 2015 and December 31, 2014, the insurance companies had an aggregate of $7.5 million and $7.0 million, respectively, on deposit in 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.

 

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 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 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.

 

 
12

 

 

The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis, classified by the valuation hierarchy as of September 30, 2015 and December 31, 2014 (in thousands):

 

   

September 30, 2015

 
   

Fair Value Measurements Using

 
           

Quoted Prices

in Active

Markets for

Identical Assets

   

Significant

Other

Observable

Inputs

   

Significant

Unobservable

Inputs

 
   

Total

   

(Level 1)

   

(Level 2)

   

(Level 3)

 

Assets:

                               

Fixed Maturity Securities:

                               

U.S. Government obligations

  $ 5,556     $ -     $ 5,556     $ -  

State and local government

    14,721       -       14,721       -  

Corporate debt

    34,019       -       34,019       -  

Commercial mortgage and asset-backed

    43,270       -       43,270       -  

Total fixed maturity securities

    97,566       -       97,566       -  

Equity Securities, common stock

    4,030       4,030       -       -  

Short-term investments*

    6,537       6,537       -       -  

Total assets measured at fair value

  $ 108,133     $ 10,567     $ 97,566     $ -  
                                 

Liabilities:

                               

Senior debt*

  $ 9,750     $ -     $ 9,750     $ -  

Total Liabilities measured at fair value

  $ 9,750     $ -     $ 9,750     $ -  

 

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

 

 

   

December 31, 2014

 
   

Fair Value Measurements Using

 
           

Quoted Prices in Active Markets for Identical Assets

   

Significant Other Observable Inputs

   

Significant Unobservable Inputs

 
   

Total

   

(Level 1)

   

(Level 2)

   

(Level 3)

 

Assets:

                               

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

  $ 105,238     $ 20,833     $ 84,405     $ -  
                                 

Liabilities:

                               

Senior debt*

  $ 27,562     $ -     $ 27,562     $ -  

Contingent consideration

    168       -       -       168  

Total Liabilities measured at fair value

  $ 27,730     $ -     $ 27,562     $ 168  

 

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

 

 

Level 1 investments consist of equity securities traded in an active exchange market. The Company uses unadjusted quoted prices for identical instruments to measure fair value. Level 1 also includes money market funds and other interest-bearing deposits at banks, which are reported as short-term investments. The fair value measurements that were based on Level 1 inputs comprise 9.8% of the fair value of the total investment portfolio as of September 30, 2015.

 

 
13

 

 

Level 2 investments include fixed maturity securities, which consist of U.S. government agency securities, state and local municipal bonds (including those held as restricted securities), corporate debt securities, mortgage-backed and asset-backed securities. The 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 90.2% of the fair value of the total investment portfolio as of September 30, 2015.

 

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 or (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. 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.

 

The Level 3 financial instruments include the fair value of the contingent consideration arrangements that the Company’s Affiliate entered into at the date of the respective acquisitions. The fair value of these liabilities was 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 (in thousands):

 

   

Fair Value Measurement Using Significant Unobservable Inputs - Level 3

 
   

Contingent Consideration Liabilities

 

Balance as of December 31, 2013

  $ 339  

Change in fair value

    11  

Payout of contingent consideration

    (182 )

Balance as of December 31, 2014

  $ 168  

Change in fair value

    4  

Payout of contingent consideration

    (113 )

Deconsolidation of affiliate

    (59 )

Balance as of September 30, 2015

    -  

 

 

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 nine months ended September 30, 2015 and 2014, respectively.

 

 
14

 

 

4. Deferred Policy Acquisition Costs

 

The Company defers costs incurred which are incremental and directly related to the successful acquisition of new or renewal insurance business, net of corresponding amounts of ceded reinsurance commissions. Net deferred policy acquisition costs are amortized and charged to expense in proportion to premium earned over the estimated policy term. The Company anticipates that its deferred policy acquisition costs will be fully recoverable and there were no premium deficiencies for the three and nine months ended September 30, 2015 and 2014. The activity in deferred policy acquisition costs, net of reinsurance transactions, is as follows (in thousands):

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2015

   

2014

   

2015

   

2014

 

Balance at beginning of period

  $ 7,659     $ 7,004     $ 5,679     $ 5,747  
                                 

Deferred policy acquisition costs

    8,528       4,276       15,742       12,283  

Amortization of policy acquisition costs

    (4,605 )     (3,738 )     (9,839 )     (10,488 )

Net change

    3,923       538       5,903       1,795  
                                 

Balance at end of period

  $ 11,582     $ 7,542     $ 11,582     $ 7,542  

 

 

5. Goodwill and Intangible Assets

 

The following table shows the goodwill and intangible asset balances at each reporting period (in thousands):

 

   

Goodwill

   

Net Intangible Assets

 
                 

Balance as of December 31, 2014

  $ 1,104     $ 1,171  

Deconsolidation of affiliate

    (619 )     (209 )

Amortization of intangibles

    -       (15 )
                 

Balance as of September 30, 2015

  $ 485     $ 947  

 

 

The following table reflects intangible assets and related accumulated amortization (in thousands):

 

 

   

As of September 30, 2015

 
   

Weighted Average Amortization Period

(in years)

   

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        100        53        47  
                               

Total

        $ 1,000     $ 53     $ 947  

 

   

As of December 31, 2014

 
   

Weighted

Average

Amortization

Period

(in years)

   

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       368       97       271  
                                 

Total

          $ 1,268     $ 97     $ 1,171  

 

 

Amortization of intangible assets was $18,400 and $55,200 for the three and nine months ended September 30, 2015 and 2014, respectively. Future amortization of definite-lived intangibles is as follows: remainder of 2015: $5,000, 2016: $20,000, 2017: $20,000 and 2018: $2,000.

 

 
15

 

 

6.     Unpaid Losses and Loss Adjustment Expenses

 

The Company establishes reserves for unpaid losses and loss adjustment expenses which represent the estimated ultimate cost of all losses incurred that were both reported and unreported (i.e., incurred but not yet reported losses; “IBNR”) and loss adjustment expenses 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, including reserves for catastrophes, is an inherently uncertain and complex process. The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimates. The highest degree of uncertainty is associated with reserves for losses incurred in the current reporting period as it contains the greatest proportion of losses that have not been reported or settled. The Company regularly updates its reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in prior year 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 loss adjustment expenses, 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 loss adjustment expenses, net of recoverables from reinsurers, for the periods indicated as follows (in thousands):

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2015

   

2014

   

2015

   

2014

 

Gross reserves - beginning of period

  $ 32,357     $ 31,833     $ 31,531     $ 28,908  

Less: reinsurance recoverables on unpaid losses

    5,022       4,207       3,224       3,953  
Net reserves - beginning of period     27,335       27,626       28,307       24,955  
                                 

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

                               
Current period     9,894       10,509       27,234       31,743  
Prior period     (81 )     (294 )     125       (1,266 )
Total net incurred losses and loss adjustment expenses     9,813       10,215       27,359       30,477  
                                 

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

                               
Current period     6,972       8,090       13,766       16,861  
Prior period     2,650       1,767       14,374       10,587  
Total net loss and loss adjustment expense payments     9,622       9,857       28,140       27,448  
                                 

Net reserves - end of period

    27,526       27,984       27,526       27,984  

Plus: reinsurance recoverables on unpaid losses

    5,069       3,673       5,069       3,673  
Gross reserves - end of period   $ 32,595     $ 31,657     $ 32,595     $ 31,657  

 

The Company’s incurred losses during the three and nine months ended September 30, 2015, reflect prior-year favorable reserve development of $81,000 and adverse development of $125,000, respectively. In the third quarter of 2015, there was $256,000 and $95,000 of favorable development in the commercial multi-peril and homeowners lines, respectively. This favorable development was partially offset by $163,000 and $161,000 of adverse reserve development in the run-off personal automobile and commercial automobile lines, respectively. For the nine months ended September 30, 2015, the adverse development was generated by the personal and commercial automobiles lines, totaling $494,000 and $696,000, respectively. This adverse development was partially offset by favorable development in other lines, including $530,000, $125,000 and $313,000 in the commercial multi-peril, other liability and workers’ compensation lines, respectively.

 

 
16

 

 

The Company’s incurred losses during the three and nine months ended September 30, 2014, reflect prior-year favorable reserve development of $294,000 and $1.3 million, respectively. In the third quarter of 2014, there was $91,000 and $91,000 of favorable reserve development in the commercial multi-peril and other liability lines, respectively. For the nine months ended September 30, 2014, there was a similar result, with the favorable development being generated primarily by the commercial multi-peril and other liability lines, totaling $877,000 and $481,000, respectively. This favorable development was partially offset by adverse development of $422,000 in the low-value dwelling line.

 

7.     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 $500,000 in 2015, and $300,000 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 ceded 25% of the subject premium, net of other reinsurance, and ceded 25% of the related losses within the Company’s retention which is between $0 and $500,000. The subject premium represents substantially all product lines other than the Florida homeowners and personal automobile policies. The Company recorded $9.5 million of ceded earned premiums during the nine months ended September 30, 2015, under the quota share reinsurance agreement. This agreement was terminated by the Company in August 2015. The purpose of the quota share arrangement was to reduce the capital requirements necessary to support the premium growth initiatives prior to the completion of the IPO. The IPO is expected to provide sufficient capital to support the current growth initiatives, and therefore management deemed the quota share was no longer necessary.

 

Beginning in December 2014, the Company assumed written premium of $5.5 million 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 $1.4 million. This assumption was offset during the nine months ended September 30, 2015 by a return of $1.3 million of assumed premiums from the 2014 assumption and $702,000 of assumed premiums from the 2015 assumption. The return premiums are related to the policyholders opting out of the related assumptions.

 

The Company assumed $1.2 million and $3.4 million of written premiums under insurance fronting arrangements for the three and nine months ended September 30, 2015, respectively. These 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 rating, the business is written in a state where the Company is not licensed or for other strategic reasons.

 

 
17

 

 

The following table presents the effects of such reinsurance and assumption transactions on premiums, losses and loss adjustment expenses, and policy acquisition costs (in thousands):

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2015

   

2014

   

2015

   

2014

 

Written premiums:

                               

Direct

  $ 22,438     $ 18,912     $ 65,067     $ 55,580  

Assumed

    1,804       -       3,438       -  

Ceded

    4,357       (2,695 )     (10,298 )     (5,962 )

Net written premiums

  $ 28,599     $ 16,217     $ 58,207     $ 49,618  
                                 

Earned premiums:

                               

Direct

  $ 21,136     $ 17,248     $ 60,487     $ 47,868  

Assumed

    1,906       -       5,716       -  

Ceded

    (5,159 )     (2,677 )     (18,712 )     (6,665 )

Net earned premiums

  $ 17,883     $ 14,571     $ 47,491     $ 41,203  
                                 

Loss and loss adjustment expenses:

                               

Direct

  $ 10,605     $ 10,420     $ 31,149     $ 33,850  

Assumed

    1,082       16       1,887       14  

Ceded

    (1,874 )     (221 )     (5,677 )     (3,387 )

Net Loss and loss adjustment expenses

  $ 9,813     $ 10,215     $ 27,359     $ 30,477  
                                 

Policy acquisition costs:

                               

Policy acquisition costs

  $ 5,184     $ 3,738     $ 13,359     $ 10,488  

Ceding commissions

    (579 )     -       (3,520 )     -  

Net Policy acquisition costs

  $ 4,605     $ 3,738     $ 9,839     $ 10,488  

 

 

8.     Senior Debt

 

A summary of the outstanding senior debt is as follows (in thousands):

 

   

September 30, 2015

   

December 31, 2014

 

Revolver

  $ -     $ 16,562  

Term Note

    3,000       3,500  

2014 Term Note

    6,750       7,500  
Total     9,750       27,562  

 

The following amendments were made to the terms and conditions of the Amended Credit Agreement during the nine months ended September 30, 2015: 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. On August 6, 2015, the Company entered into a third amendment to its Amended Credit Agreement (“Third Amendment”). The Third Amendment, among other things, further revised the provision that the Company’s Chairman’s ownership interest shall not be less than 33%, or after consummation of an IPO, not less than 15%. The Company was in compliance with its debt covenants at September 30, 2015.

 

All outstanding borrowings under our credit facility (the “Revolver”) were repaid from the proceeds received from the Company’s IPO, in August 2015. The undrawn portion of the Revolver, which was $17.5 million as of September 30, 2015, is available to finance working capital and for other general corporate purposes, including but not limited to, surplus contributions to its insurance company subsidiaries to support premium growth or strategic acquisitions.

 

9.     Shareholders’ Equity

 

Common Stock

  

On August 18, 2015, the Company completed its 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 $30.7 million after deducting underwriting discounts and commissions of $2.4 million and other offering expenses of $1.5 million. A portion of the net proceeds was used to repay indebtedness, including accrued interest, under the Revolver of $17.0 million, repurchase outstanding shares of preferred stock and pay accrued preferred dividends, totaling $6.3 million.

 

 
18

 

 

Concurrent with the closing of the IPO, the Company closed on a private placement transaction as further discussed in Note ~ 10 Redeemable Preferred Stock.

 

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.

 

As of September 30, 2015 and 2014, the Company had 7,644,492 and 3,995,013 issued and outstanding shares of common stock, respectively.

 

Preferred Stock

 

As of September 30, 2014, the Company had 66,000 issued and outstanding shares of preferred stock at $10.00 per share. On October 1, 2014, the then-outstanding shares of preferred stock were exchanged for shares of redeemable preferred stock. Refer to Note 10 ~ Redeemable Preferred Stock for further details.

 

10.     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 49%) 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 $6.3 million to holders of shares of preferred stock to repurchase such shares and for the payment of accrued dividends. Additionally, the Company issued 294,450 shares of common stock to former holders of the preferred stock for proceeds of $3.1 million. There are no shares of preferred stock outstanding after the closing of the IPO.

 

 

 
19

 

 

11. 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 (in thousands):

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2015

   

2014

   

2015

   

2014

 

Balance at beginning of period

  $ 459     $ 1,135     $ 1,158     $ 536  
Other comprehensive income (loss) before reclassifications     379       (190 )     104       743  

Amounts reclassified from accumulated other comprehensive income (loss)

    146       65       570       399  

Net current period other comprehensive income (loss)

    233       (255 )     (466 )     344  

Balance at end of period

  $ 692     $ 880     $ 692     $ 880  

 

 

The following table provides the impact of the reclassification adjustments to the respective line items in the statements of operations for the three and nine months ended September 30, 2015 and 2014 (in thousands).

 

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2015

   

2014

   

2015

   

2014

 

Net realized investment gains

  $ 146     $ 98     $ 570     $ 604  

Income tax expense

    -       33       -       205  

Total impact to net income (loss)

    146       65       570       399  

 

 

12. Earnings Per Share

 

Basic and diluted earnings (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 and other gains 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 earnings (loss) per common share, as follows (in thousands, except share and per share amounts):

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2015

   

2014

   

2015

   

2014

 
                                 

Net income (loss) attributable to Conifer

  $ 1,326     $ (2,234 )   $ 2,368     $ (6,999 )

Preferred stock dividends

    81       16       384       43  

Paid-in-kind dividends

    33       -       156       -  

Net income (loss) allocable to common shareholders

  $ 1,212     $ (2,250 )   $ 1,828     $ (7,042 )
                                 

Weighted average common shares, basic and diluted*

    5,701,794       2,514,229       4,603,451       2,335,315  
                                 

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

  $ 0.21     $ (0.89 )   $ 0.40     $ (3.02 )

 

*The nonvested shares of the restricted stock units were anti-dilutive as of September 30, 2015. Therefore, the basic and and diluted weighted average common shares are equal as of September 30, 2015.  

 

 

13.     Stock-based Compensation

 

In March 2015, the Company established the Conifer Holdings, Inc. 2015 Omnibus Incentive Plan (“2015 Plan”), which permits the granting of stock options, stock appreciation rights, restricted stock units and other stock-based awards. The 2015 Plan authorizes up to 1,377,000 shares of common stock for awards to be issued to employees, directors or consultants of the Company. The stock-based awards will be issued at no less than the market price on the date the awards are granted.

 

 
20

 

 

On August 18, 2015, the Company issued an aggregate of 380,952 restricted stock units (“RSU”) to executive officers and other employees to be settled in shares of common stock. The total RSUs were valued at $4.0 million on the date of grant. The grant-date fair value was determined using the fair value of the Company’s common stock as of the grant date. The awards vest in five annual installments, commencing on the first anniversary from the date of grant. The Company will expense the grant date fair value of the RSUs as compensation expense on a straight-line basis over the requisite service period. Upon vesting, each RSU will convert into one share of common stock. The unvested RSUs are subject to forfeiture in the event the employee is involuntarily or voluntarily terminated. If the employee is terminated by the Company for cause, the Company has the option to forfeit the terminated employees’ vested shares for no consideration and to cause the employee to have no further rights or interest in the vested RSUs.

 

The Company recorded $100,000 of compensation expense related to the RSUs for the three and nine months ended September 30, 2015. The total compensation cost related to the non-vested portion of the restricted stock units which has not been recognized as of September 30, 2015 was $3.9 million.

 

14.     Related Party Transactions

 

In December 2012, the Company entered into a short-term, unsecured note payable with an executive of the Company for $1.0 million. The note required quarterly interest-only payments at 12% per annum. The note was converted to equity of the Company in two separate transactions. On January 31, 2014, the Company issued 41,126 shares of common stock in satisfaction of $500,000 of the note balance. The remaining note balance was satisfied through the issuance of 41,126 shares of common stock on June 30, 2014. Interest expense recorded on the note was $34,500 for the nine months ended September 30, 2014.

 

15.     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 covered by the policy of insurance at issue. We account for such activity through the establishment of unpaid loss and loss expense reserves. In accordance with accounting guidance, if it is probable that an asset has been impaired or a liability has been incurred as of the date of the financial statements and the amount of loss is reasonably estimable; then an accrual for the costs to resolve these claims is recorded by the Company in the accompanying consolidated balance sheets. Period expenses related to the defense of such claims are included in the accompanying consolidated statements of operations. 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 to, either individually, or in the aggregate.

 

16.     Segment Information

 

The Company is 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. Within these two insurance businesses, the Company offers various insurance products. Such insurance businesses are engaged in underwriting and marketing insurance coverages, and administering claims processing for such policies.

 

The Company defines its operating segments as components of the business where separate financial information is available and used by the chief operating decision-making group in deciding how to allocate resources to its segments and in assessing its performance. In assessing performance of its operating segments, the Company’s chief operating decision-making group, comprised of key senior executives, reviews a number of financial measures including gross written premiums, net earned premiums, and loss and loss adjustment expenses, net of reinsurance recoveries. The primary measure used for making decisions about resources to be allocated to an operating segment and assessing its performance is segment underwriting gain or loss which is defined as segment revenues, consisting of net earned premiums and other income, less segment expenses, consisting of losses and loss adjustment expenses, policy acquisition costs and other underwriting and operating expenses of the operating segments. Other underwriting and operating expenses include primarily compensation and related benefits for underwriting personnel, licensing of policy issuance and claims systems, rent and utilities. The Company markets, distributes and sells its insurance products 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 and Pennsylvania. For the nine months ended September 30, 2015 and 2014, gross written premiums attributable to these three states were 58% and 59%, respectively, of the Company’s total gross written premiums.

 

 
21

 

 

The commercial lines and personal lines accounted for approximately 71% and 29%, respectively, of net earned premiums for the nine months ended September 30, 2015, and approximately 59% and 41%, respectively, of net earned premiums for the nine months ended September 30, 2014. Other income includes installment and policy fees charged to policyholders and commissions income from third party insurers on policies written through our agencies relating to our product lines.

 

The following provides a description of the Company’s two insurance businesses and product offerings within these businesses:

 

 

Commercial lines—offers coverage for property, liability, automobile and other miscellaneous coverage primarily to owner-operated small and mid-sized businesses, professional organizations and hospitality businesses such as restaurant, bars and taverns. Included within commercial insurance business are the following key products:

 

 

Commercial multi-peril (“CMP”)—provides property and liability coverages in a package to the policyholder.

 

 

Other liability—provides coverage for general liability and liquor liability on an individual policy.

 

 

Automobile—provides coverage for commercial automobiles for businesses that supply to their employees company-owned vehicles.

 

 

Other—includes primarily workers’ compensation coverage in narrowly selected areas.

 

 

Personal lines—offers coverage for low-value dwelling, wind-exposed homeowners and automobile. Included within personal insurance business are the following key products:

 

 

Low-value dwelling (previously known as Midwest homeowners)—provides coverage for nonstandard homeowners insurance and dwelling fire insurance products (property and basic perils coverage only) located primarily in Indiana and Illinois.

 

 

Wind-exposed homeowners (previously known as Specialty homeowners)—provides coverage in niche homeowners markets that have special risk characteristics, including coastal exposure to wind, located primarily in Florida, Hawaii and Texas.

 

 

Automobile—provides coverage for nonstandard private passenger automobile insurance policies primarily for individuals located in Florida and Illinois. Both the Florida and Illinois books of nonstandard auto business are currently in run-off.

 

The Company renamed Midwest homeowners to low-value dwelling as the Company began to enter into other geographic areas in the U.S. which target the niche, low-value dwelling market that is similar to the product offering within Midwest homeowners. The Company also renamed specialty homeowners to wind-exposed homeowners to better describe the underlying business.

 

In addition to the reportable segments, the Company maintains a Corporate and Other category to reconcile segment results to the consolidated totals. The Corporate and Other category includes: (i) corporate operating expenses such as salaries and related benefits of the Company’s executive management team and finance and information technology personnel, and other corporate headquarters expenses, (ii) interest expense on the Company’s senior debt obligations; (iii) depreciation and amortization on property and equipment, and (iv) all investment income activity. All investment income activity is reported within net investment income and net realized investment gains on the consolidated statements of operations. The Company’s assets on the consolidated balance sheet are not allocated to the reportable segments.

 

 
22

 

 

The following tables present information by reportable segment (in thousands):

 

   

Commercial Lines

   

Personal Lines

                 
                                           

Homeowners

                                 

Three Months Ended

September 30, 2015

 

CMP

   

Other

Liability

   

Auto

   

Other

   

Total

   

Low-value

Dwelling

   

Wind-

exposed

   

Auto

   

Total

   

Corporate

& Other

   

Total

 

Gross written premiums

  $ 9,413     $ 3,109     $ 3,226     $ 907     $ 16,655     $ 2,071     $ 5,537     $ (21 )   $ 7,587     $ -     $ 24,242  

Net written premiums

  $ 12,186     $ 3,541     $ 3,891     $ 1,168     $ 20,786     $ 2,201     $ 5,633     $ (21 )   $ 7,813     $ -     $ 28,599  

Net earned premiums

  $ 8,458     $ 2,107     $ 2,312     $ 744     $ 13,621     $ 1,530     $ 2,417     $ 315     $ 4,262     $ -     $ 17,883  

Other income

    (269 )     651       8       -       390       50       60       5       115       18       523  

Segment revenue

    8,189       2,758       2,320       744       14,011       1,580       2,477       320       4,377       18       18,406  

Loss and loss adjustment expenses, net

    4,581       716       1,535       211       7,043       1,179       1,139       452       2,770       -       9,813  

Policy acquisition costs

    2,069       684       549       146       3,448       444       616       97       1,157       -       4,605  

Operating expenses

    884       253       109       58       1,304       220       155       807       1,182       839       3,325  

Segment expenses

    7,534       1,653       2,193       415       11,795       1,843       1,910       1,356       5,109       839       17,743  

Segment underwriting gain (loss)

  $ 655     $ 1,105     $ 127     $ 329     $ 2,216     $ (263 )   $ 567     $ (1,036 )   $ (732 )   $ (821 )   $ 663  
                                                                                         

Investment income

                                                                            505       505  

Net realized investment gains

                                                                            6       6  

Other gains

                                                                            104       104  

Interest expense

                                                                            (181 )     (181 )

Income (loss) before income taxes

                                                                          $ (387 )   $ 1,097  
 

 

   

Commercial Lines

   

Personal Lines

                 
                                           

Homeowners

                                 

Three Months Ended

September 30, 2014

 

CMP

   

Other

Liability

   

Auto

   

Other

   

Total

   

Low-value

Dwelling

   

Wind-

exposed

   

Auto

   

Total

   

Corporate

& Other

   

Total

 

Gross written premiums

  $ 8,695     $ 1,771     $ 2,010     $ 789     $ 13,265     $ 2,198     $ 1,630     $ 1,819     $ 5,647     $ -     $ 18,912  

Net written premiums

  $ 7,192     $ 1,471     $ 1,811     $ 719     $ 11,193     $ 1,863     $ 1,342     $ 1,819     $ 5,024     $ -     $ 16,217  

Net earned premiums

  $ 6,540     $ 1,312     $ 1,360     $ 446     $ 9,658     $ 1,681     $ 888     $ 2,344     $ 4,913     $ -     $ 14,571  

Other income

    158       25       6       -       189       104       -       123       227       (29 )     387  

Segment revenue

    6,698       1,337       1,366       446       9,847       1,785       888       2,467       5,140       (29 )     14,958  

Loss and loss adjustment expenses, net

    3,169       404       880       300       4,753       2,590       455       2,417       5,462       -       10,215  

Policy acquisition costs

    1,670       371       350       87       2,478       528       302       430       1,260       -       3,738  

Operating expenses

    879       174       92       57       1,202       108       80       694       882       1,349       3,433  

Segment expenses

    5,718       949       1,322       444       8,433       3,226       837       3,541       7,604       1,349       17,386  

Segment underwriting gain (loss)

  $ 980     $ 388     $ 44     $ 2     $ 1,414     $ (1,441 )   $ 51     $ (1,074 )   $ (2,464 )   $ (1,378 )   $ (2,428 )
                                                                                         

Investment income

                                                                            321       321  

Net realized investment gains

                                                                            94       94  

Other gains

                                                                            -       -  

Interest expense

                                                                            (108 )     (108 )

Income (loss) before income taxes

                                                                          $ (1,071 )   $ (2,121 )
 

 
23

 

 

   

Commercial Lines

   

Personal Lines

                 
                                           

Homeowners

                                 

Nine Months Ended

September 30, 2015

 

CMP

   

Other

Liability

   

Auto

   

Other

   

Total

   

Low-value

Dwelling

   

Wind-

exposed

   

Auto

   

Total

   

Corporate

& Other

   

Total

 

Gross written premiums

  $ 29,840     $ 9,704     $ 8,510     $ 2,669     $ 50,723     $ 5,119     $ 11,595     $ 1,068     $ 17,782     $ -     $ 68,505  

Net written premiums

  $ 24,859     $ 8,441     $ 7,468     $ 2,396     $ 43,164     $ 4,196     $ 9,779     $ 1,068     $ 15,043     $ -     $ 58,207  

Net earned premiums

  $ 21,049     $ 5,269     $ 5,673     $ 1,788     $ 33,779     $ 4,409     $ 6,706     $ 2,597     $ 13,712     $ -     $ 47,491  

Other income

    308       737       19       -       1,064       165       101       85       351       77       1,492  

Segment revenue

    21,357       6,006       5,692       1,788       34,843       4,574       6,807       2,682       14,063       77       48,983  

Loss and loss adjustment expenses, net

    11,788       1,649       3,978       422       17,837       3,305       3,297       2,920       9,522       -       27,359  

Policy acquisition costs

    4,333       1,231       1,251       288       7,103       1,222       1,030       484       2,736       -       9,839  

Operating expenses

    2,785       696       325       181       3,987       405       390       1,010       1,805       4,844       10,636  

Segment expenses

    18,906       3,576       5,554       891       28,927       4,932       4,717       4,414       14,063       4,844       47,834  

Segment underwriting gain (loss)

  $ 2,451     $ 2,430     $ 138     $ 897     $ 5,916     $ (358 )   $ 2,090     $ (1,732 )   $ -     $ (4,767 )   $ 1,149  
                                                                                         

Investment income

                                                                            1,460       1,460  

Net realized investment gains

                                                                            238       238  

Other gains

                                                                            104       104  

Interest expense

                                                                            (664 )     (664 )

Income (loss) before income taxes

                                                                          $ (3,629 )   $ 2,287  

 

   

Commercial Lines

   

Personal Lines

                 
                                           

Homeowners

                                 

Nine Months Ended

September 30, 2014

 

CMP

   

Other

Liability

   

Auto

   

Other

   

Total

   

Low-value

Dwelling

   

Wind-

exposed

   

Auto

   

Total

   

Corporate

& Other

   

Total

 

Gross written premiums

  $ 23,806     $ 5,775     $ 6,257     $ 1,875     $ 37,713     $ 6,243     $ 4,691     $ 6,933     $ 17,867     $ -     $ 55,580  

Net written premiums

  $ 20,295     $ 5,142     $ 5,861     $ 1,708     $ 33,006     $ 5,573     $ 4,106     $ 6,933     $ 16,612     $ -     $ 49,618  

Net earned premiums

  $ 16,790     $ 3,767     $ 2,797     $ 1,056     $ 24,410     $ 4,636     $ 2,362     $ 9,795     $ 16,793     $ -     $ 41,203  

Other income

    573       103       18       -       694       314       -       436       750       (20 )     1,424  

Segment revenue

    17,363       3,870       2,815       1,056       25,104       4,950       2,362       10,231       17,543       (20 )     42,627  

Loss and loss adjustment expenses, net

    11,322       1,100       1,845       731       14,998       6,070       1,203       8,206       15,479       -       30,477  

Policy acquisition costs

    4,355       1,009       726       194       6,284       1,407       796       2,001       4,204       -       10,488  

Operating expenses

    2,609       582       284       161       3,636       317       238       1,427       1,982       3,922       9,540  

Segment expenses

    18,286       2,691       2,855       1,086       24,918       7,794       2,237       11,634       21,665       3,922       50,505  

Segment underwriting gain (loss)

  $ (923 )   $ 1,179     $ (40 )   $ (30 )   $ 186     $ (2,844 )   $ 125     $ (1,403 )   $ (4,122 )   $ (3,942 )   $ (7,878 )
                                                                                         

Investment income

                                                                            823       823  

Net realized investment gains

                                                                            266       266  

Other gains

                                                                            -       -  

Interest expense

                                                                            (360 )     (360 )

Income (loss) before income taxes

                                                                          $ (3,213 )   $ (7,149 )

 

In January 2015, the Company notified its insurance regulator in the State of Florida of its intent to stop writing nonstandard personal automobile policies. The Company discontinued offering and writing new policies on January 27, 2015, but will continue to service existing policies, pay claims and perform other administrative services as needed until the run-off of the claims on such policies is complete. In early 2014, the Company discontinued writing nonstandard personal automobile business in Illinois. The Company has no plans to provide or write this insurance coverage in the future. By the end of May 2015, this exited product line was solely in run-off. The Company received approval to discontinue its offering of personal automobile insurance policies from the insurance regulators in April 2015, and had ceased all writings by June 1, 2015. The personal automobile product line contributed $315,000 and $2.3 million to net earned premiums and $(1.0) million and $(1.1) million to income (loss) before income taxes for the three months ended September 30, 2015 and 2014, respectively, and $2.6 million and $9.8 million to net earned premiums, and $(1.7) million and $(1.4) million to income (loss) before income taxes for the nine months ended September 30, 2015 and 2014, respectively.

 

The decision to stop writing personal automobile policies is the result of the Company’s change in strategic positioning and its desire to increase its personal homeowners product line and pursue existing commercial line opportunities.

 

 
24

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

For the Periods ended September 30, 2015 and 2014

 

The following Management’s Discussion and Analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements (Unaudited), related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes included in our prospectus filed on August 13, 2015, with the U. S. Securities and Exchange Commission (“SEC”).

 

Forward-Looking Statements

 

Certain statements contained in this Quarterly Report on Form 10-Q, which are not statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, as Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements give current expectations or forecasts of future events or our future financial or operating performance. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek” and similar terms and phrases, or the negative thereof, may be used to identify forward-looking statements.

 

The forward-looking statements contained in this report are based on management’s good-faith belief and reasonable judgment based on current information. The forward-looking statements are qualified by important factors, risks and uncertainties, many of which are beyond our control, that could cause our actual results to differ materially from those in the forward-looking statements, including those described in our prospectus (“Risk Factors”) filed with the SEC on August 13, 2015 and subsequent reports filed with or furnished to the SEC. Any forward-looking statement made by us in this report speaks only as of the date hereof or as of the date specified herein. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by any applicable laws or regulations.

 

Business Overview

 

We are an insurance holding company that markets and services our product offerings through specialty commercial and specialty personal insurance business lines. Our growth has been significant since our founding in 2009. We are authorized to write insurance as an excess and surplus lines carrier in 44 states, and we are licensed to write insurance in 28 states as an admitted carrier. We currently offer our insurance products in all 50 states.

 

Our revenues are primarily derived from premiums earned from our insurance operations. We also generate other revenues through investment income and other income which consists of installment fees and policy issuance fees generally related to the policies we write. Our expenses consist primarily of losses and loss adjustment expenses, agents’ commissions, and other underwriting and administrative expenses. We organize our operations in two insurance businesses: commercial insurance lines and personal insurance lines.

 

Through our commercial insurance lines, we offer coverage for both commercial property and commercial liability. Within these two main lines we offer coverage for property, commercial multi-peril as part of commercial property and general liability and liquor liability as a part of our commercial liability. We also offer coverage for commercial automobiles and workers’ compensation. Our insurance policies are sold to targeted small and mid-sized businesses on a single or multiple-coverage basis.

 

Through our personal insurance lines, we offer nonstandard homeowners insurance and dwelling fire insurance products to individuals in four states. Our Midwest homeowners insurance line is comprised of dwelling insurance tailored for owners of lower valued homes, which we have historically offered in Illinois and Indiana. We are now expanding into other regions of the U.S. and have renamed our Midwest homeowners line to “low-value dwelling.” Our specialty homeowners products include wind-exposed homeowners coverage, including hurricane and wind coverage to underserved homeowners in Florida, Hawaii, and Texas. We have renamed our specialty homeowners line to “wind-exposed homeowners.” There has been no change in our approach to managing or evaluating these lines.

 

 

Recent Developments

  

On August 18, 2015, we closed on our initial public offering (“IPO”), raising net proceeds of $30.7 million, after deducting offering underwriting discounts and commissions of $2.4 million and other offering expenses of $1.5 million. We used $17.0 million of the proceeds to pay down all of our credit facility (the “Revolver”) and $6.3 million to buy back all of the outstanding preferred stock. The remaining $10.5 million ($7.4 million plus $3.1 million raised from preferred shareholders reinvesting their proceeds from the repurchase of the preferred shares into common shares at the IPO price), is available to contribute capital to the insurance subsidiaries in order to support our growth initiatives, and other general corporate purposes.

 

 

Critical Accounting Policies and Estimates

 

In certain circumstances, we are required to make estimates and assumptions that affect amounts reported in our consolidated financial statements and related footnotes. We evaluate these estimates and assumptions periodically on an on-going basis based on a variety of factors. There can be no assurance, however, that actual results will not be materially different than our estimates and assumptions, and that reported results of operation will not be affected by accounting adjustments needed to reflect changes in these estimates and assumptions. During the nine months ended September 30, 2015, there were no material changes to our critical accounting policies and estimates, which are disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s final prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the SEC on August 13, 2015.

 

 

 
25

 

 

Non-GAAP Financial Measures

 

Statutory Capital and Surplus

  

Statutory capital and surplus is a non-GAAP (accounting principles generally accepted in the United States -“GAAP”) measure. The Company’s insurance subsidiaries’ aggregate statutory capital and surplus was $70.0 million and $66.6 million at September 30, 2015 and December 31, 2014, respectively.

 

Operating Income and Operating Income Per Share

  

Operating income and operating income per share are non-GAAP measures that represent net income excluding net realized gains or loss, net of tax. The most directly comparable financial GAAP measures to operating income and operating income per share are net income and net income per share, respectively. Operating income and operating income per share are intended as supplemental information and are not meant to replace net income or net income per share. Operating income and operating income per share should be read in conjunction with the GAAP financial results. The following is a reconciliation of net income to operating income (in thousands), as well as net income per shato operating income per share:

 

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(in thousands, except share and per share amounts)

 

Net income (loss) allocable to common shareholders

  $ 1,212     $ (2,250 )   $ 1,828     $ (7,042 )

Net realized gains, net of tax

    110       62       342       176  

Net operating income (loss) allocable to common shareholders

  $ 1,102     $ (2,312 )   $ 1,486     $ (7,218 )
                                 

Weighted average common shares basic and diluted

    5,701,794       2,514,229       4,603,451       2,335,315  
                                 

Basic and diluted income (loss) per common share:

                               

Net income (loss) per share

  $ 0.21     $ (0.89 )   $ 0.40     $ (3.02 )

Net realized gains, net of tax, per share

    0.02       0.03       0.07       0.07  

Net operating income (loss) per share

  $ 0.19     $ (0.92 )   $ 0.32     $ (3.09 )

 

 

We use operating income and operating income per share to assess our performance and to evaluate the results of our business. We believe these measures provide investors with valuable information relating to our ongoing performance that may be obscured by the net effect of realized gains and losses as a result of our market risk sensitive instruments, which primarily relate to fixed income securities that are available for sale and not held for trading purposes. Realized gains and losses may vary significantly between periods and are generally driven by external economic developments, such as capital market conditions. Accordingly, operating income excludes the effect of items that tend to be highly variable from period to period and highlights the results from our ongoing business operations and the underlying loss or profitability of our business. We believe that it is useful for investors to evaluate operating income and operating income per share, along with net income and net income per share, when reviewing and evaluating our performance.

 

 

Executive Overview

 

The Company reported net income of $1.1 million and $2.3 million, for the three and nine months ended September 30, 2015, respectively, compared to a net loss of $2.3 million and $7.0 million for the same periods in 2014.

 

Net income allocable to common shareholders was $1.2 million or $0.21 per share and $1.8 million or $0.40 per share, for the three and nine months ended September 30, 2015, respectively, compared to a net loss of $2.3 million or $0.89 per share and $7.0 million or $3.02 per share for the same periods in 2014.

 

Operating income allocable to common shareholders was $1.1 million or $0.19 per share and $1.5 million or $0.32 per share, for the three and nine months ended September 30, 2015, respectively. This compares to an operating loss allocable to common shareholders of $2.3 million or $0.92 per share and $7.2 million or $3.09 per share for the same periods in 2014.

 

 
26

 

 

 

Our GAAP combined ratio improved 19.8 and 20.8 percentage points for the three and nine months ended September 30, 2015 to 96.4% and 97.7%, respectively, compared to 116.2% and 118.5% for the same periods in 2014.

  

The improved results were largely attributable to a significant reduction in weather-related losses in both the commercial multi-peril and the low-value dwelling lines written in the Midwest. These reductions drove a decrease in our loss ratio of 15.0 and 15.6 percentage points in the three and nine months ended September 30, 2015, respectively. In addition, our expense ratio decreased 4.8 and 5.2 percentage points in the three and nine months ended September 30, 2015, respectively. This decrease was a result of our ongoing efforts to leverage our fixed costs related to our infrastructure; our premium volume continues to grow while our operating costs remain relatively stable.

  

Our results for the three and nine months ended September 30, 2015, also reflect the continued expansion of our commercial lines and repositioning of our personal lines. Our commercial lines gross written premiums organically grew by 25.6% and 34.5% in the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014. Although gross written premiums in our personal lines remained relatively flat (0.5% decrease) for the nine months ended September 30, 2015, the gross written premiums grew 34.4% in the three months ended September 30, 2015, compared to the same period in 2014. The slight decrease in the year-to-date activity is the net result of the decreased premiums related to the run-off of the personal automobile line offset by growth in the wind-exposed homeowners line. The increase in the third quarter was generated from the wind-exposed homeowners as we continued to expand in Florida, Texas and Hawaii.

 

 

Results of Operations For The Three Months Ended September 30, 2015 and 2014

 

The following table summarizes our operating results for the periods indicated (in thousands):

 

 

Summary of Operating Results

 
   
   

Three Months Ended

September 30,

                 
   

2015

   

2014

   

$ Change

   

% Change

 
   

(in thousands)

 
                                 

Gross written premiums

  $ 24,242     $ 18,912     $ 5,330       28.2 %

Net written premiums

  $ 28,559     $ 16,217     $ 12,342       76.1 %

Net earned premiums

  $ 17,883     $ 14,571     $ 3,312       22.7 %

Other income

    523       387       136       35.1 %

Losses and loss adjustment expenses, net

    9,813       10,215       (402 )     -3.9 %

Policy acquisition costs

    4,605       3,738       867       23.2 %

Operating expenses

    3,325       3,433       (108 )     -3.1 %

Underwriting gain (loss)

    663       (2,428 )     3,092       *  

Net investment income

    505       321       184       57.3 %

Net realized investment gains

    6       94       (88 )     -93.6 %

Other gains

    104       -       104       *  

Interest expense

    181       108       73       67.6 %

Income (loss) before income taxes

    1,097       (2,121 )     3,218       *  

Income tax expense (benefit)

    (48 )     131       (179 )     *  

Net income (loss)

  $ 1,145     $ (2,252 )   $ 3,397       *  
                                 

GAAP Underwriting Ratios:

                               

Loss ratio (1)

    53.3 %     68.3 %                

Expense ratio (2)

    43.1 %     47.9 %                

Combined ratio (3)

    96.4 %     116.2 %                

 

                                 

 

(1)

The loss ratio is the ratio, expressed as a percentage, of net losses and loss adjustment expenses to net earned premiums and other income.

   
(2) The expense ratio is the ratio, expressed as a percentage, of policy acquisition costs and operating expenses to net earned premiums and other income.
   
(3) The combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100% indicates an underwriting profit. A combined ratio over 100% indicates an underwriting loss.
   
*  Percentage change is not meaningful

 

 
27

 

 

Premiums

 

Earned premiums are earned ratably over the term of the policy, whereas written premiums are reflected on the effective date of the policy. All commercial lines and homeowners products have annual policies, under which premiums are earned evenly over one year. Almost all personal automobile policies are six month term policies under which premiums are earned evenly over a six month period. The resulting net earned premiums are impacted by the gross and ceded written premiums, earned ratably over time.

 

Our premiums are presented below for the three months ended September 30, 2015 and 2014 (in thousands):

 

Summary of Premium Revenue

 
   
   

Three Months Ended September 30,

                 
   

2015

   

2014

   

$ Change

   

% Change

 
   

(in thousands)

 
                                 

Gross written premiums

                               

Commerical lines

  $ 16,655     $ 13,265     $ 3,390       25.6 %

Personal lines

    7,587       5,647       1,940       34.4 %

Total

  $ 24,242     $ 18,912     $ 5,330       28.2 %
                                 

Net written premiums

                               

Commerical lines

  $ 20,786     $ 11,193     $ 9,593       85.7 %

Personal lines

    7,813       5,024       2,789       55.5 %

Total

  $ 28,599     $ 16,217     $ 12,382       76.4 %
                                 

Net Earned premiums

                               

Commerical lines

  $ 13,621     $ 9,658     $ 3,963       41.0 %

Personal lines

    4,262       4,913       (651 )     -13.3 %

Total

  $ 17,883     $ 14,571     $ 3,312       22.7 %

 

 

Gross written premiums increased $5.3 million, or 28.2%, to $24.2 million for the three months ended September 30, 2015, as compared to $18.9 million for the same period in 2014. The increase was driven by continued growth in both our commercial and personal lines business which reflects our continued execution of our growth initiatives in the niche commercial insurance markets and our strategic change in the mix of business of our personal lines.

 

Commercial lines gross written premiums increased $3.4 million, or 25.6%, to $16.7 million in the third quarter of 2015, as compared to $13.3 million for the third quarter of 2014. This increase was primarily driven by the other liability and commercial auto business which grew 75.6% and 60.5%, respectively, compared to the same period in 2014.

 

Personal lines gross written premiums increased $1.9 million, or 34.4%, to $7.6 million in the third quarter of 2015, as compared to $5.6 million for the same period in 2014. The increase was driven by our wind-exposed homeowners business which continues to gain traction. The gross written premiums in this business line for the third quarter of 2015 were $5.5 million, or over triple of the related written premiums for third quarter of 2014. The increase was mostly attributable to growth in the Florida and Hawaii markets as we began writing business in these states in late 2014. The growth in the wind-exposed line was partially offset by a reduction in gross written premiums in the personal automobile business which is in run-off.

 

Net written premiums increased $12.4 million, or 76.4%, to $28.6 million for the three months ended September 30, 2015, as compared to $16.2 million for the same period in 2014. Of this increase, $9.4 million is due to the termination of a quota share reinsurance agreement which occurred on August 1, 2015. The quota share arrangement was terminated as management determined the Company no longer needed the leverage support of this reinsurance arrangement due to the added capital raised from the IPO. The termination of the agreement resulted in the reversal of the related unearned ceded premiums and had minimal impact on the net earned premiums for the three months ended September 30, 2015. Excluding the impact of the quota share reinsurance the net written premiums for the three months ended September 30, 2015 increased $4.5 million, or 27.9%, compared to the same period in 2014. This is consistent with the 28.2% increase in gross written premiums.

 

 
28

 

 

Ceded earned premiums as a percent of gross earned premiums were 22.4% for the third quarter of 2015, as compared to 15.5% for the same period in 2014. The increase in the ceded earned premium rate was attributable to the July 2015 activity of the quota share reinsurance arrangement; going forward, we expect this rate will continue to decrease as the arrangement was terminated on August 1, 2015 and we do not anticipate entering into a similar reinsurance arrangement in the near term. The rate in the second quarter of 2015 was 32.0%.

 

Other income

 

Other income is derived from policies we write and represents additional charges to policyholders for services outside of the premium charge, such as installment billing or policy issuance costs. It also includes commission income from the Affiliate. Other income for the three months ended September 30, 2015 increased $136,000, or 35.1%, to $523,000 as compared to $387,000 for the same period in 2014. Other income is expected to decrease in the future due to the deconsolidation of the Affiliate.

 

Losses and Loss Adjustment Expenses

 

The tables below detail our losses and loss adjustment expenses (“LAE”) and loss ratios for the three months ended September 30, 2015 and 2014 (in thousands).

 

Three Months Ended September 30, 2015

 

Commercial

Lines

   

Personal

Lines

   

Total

 
   

(dollars in thousands)

 
                         

Accident year net losses and LAE

  $ 7,192     $ 2,702     $ 9,894  

Net (favorable) adverse development

    (149 )     68       (81 )

Calendar year net loss and LAE

  $ 7,043     $ 2,770     $ 9,813  
                         

Accident year loss ratio

    51.3 %     61.7 %     53.8 %

Net (favorable) adverse development

    -1.0 %     1.6 %     -0.5 %

Calendar year loss ratio

    50.3 %     63.3 %     53.3 %

 

Three Months Ended September 30, 2014

 

Commercial

Lines

   

Personal

Lines

   

Total

 
   

(dollars in thousands)

 
                         

Accident year net losses and LAE

  $ 4,988     $ 5,521     $ 10,509  

Net (favorable) adverse development

    (235 )     (59 )     (294 )

Calendar year net loss and LAE

  $ 4,753     $ 5,462     $ 10,215  
                         

Accident year loss ratio

    50.7 %     107.4 %     70.3 %

Net (favorable) adverse development

    -2.4 %     -1.1 %     -2.0 %

Calendar year loss ratio

    48.3 %     106.3 %     68.3 %

 

 

Net losses and LAE decreased by $402,000, or 3.9%, for the three months ended September 30, 2015, as compared to the same period in 2014. The decrease in our net losses and LAE was attributable to a number of factors, including a significant reduction in weather-related property losses which were historically high in 2014, a decrease in losses in low-value dwelling resulting from our underwriting changes in late 2014, a reduction of nonstandard automobile-related losses as that line of business is in run-off and an increase in ceded losses under the quota share reinsurance agreement. Partially offsetting these items were increases to net losses and LAE due to increases in the overall growth of our business.

 

The calendar year loss ratios were 53.3% and 68.3% for the three months ended September 30, 2015 and 2014, respectively. The 15.0 percentage point decrease in the loss ratio was mainly the result of lower losses in the low-value dwelling and commercial multi-peril lines. Both lines experienced losses that were historically higher in 2014 due to weather-related property damage. In addition, the mix of business continues to evolve as our lines of business with historically lower overall loss ratios grows (such as wind-exposed homeowners, and commercial liability lines), and the historically higher loss ratio business declines (such as low-value dwelling in the Midwest and nonstandard automobile).

 

 
29

 

 

Overall reserve development on prior accident years in the third quarter of 2015 was favorable by $81,000, or 0.5 percentage points. In the third quarter of 2015, there was $256,000 and $95,000 of favorable reserve development in the commercial multi-peril and homeowners lines, respectively. This favorable development was partially offset by $163,000 and $161,000 of adverse reserve development in the run-off personal automobile and the continuing commercial automobile lines, respectively.

 

Total reserve development on prior accident years in the third quarter of 2014 was favorable by $294,000, or 2.0 percentage points. In the third quarter of 2014, there was $91,000 and $91,000 of favorable reserve development in the commercial multi-peril and other liability lines, respectively.

 

Expense Ratio

 

Our expense ratio is calculated by dividing the sum of policy acquisition costs and other underwriting and operating expenses by the sum of net earned premiums and other income. We use the expense ratio to evaluate the operating efficiency of our consolidated operations and each segment. Costs that cannot be readily identifiable as a direct cost of a segment or product line remain in Corporate and Other for segment reporting purposes.

 

The table below provides the expense ratio by major component.

 

 

   

Three Months Ended September 30,

 
   

2015

   

2014

 
   

(in thousands)

 

Commerical Lines

               

Policy acquisition costs

    24.6 %     25.2 %

Operating expenses

    9.3 %     12.2 %

Total

    33.9 %     37.4 %
                 

Personal Lines

               

Policy acquisition costs

    26.4 %     24.5 %

Operating expenses

    27.0 %     17.2 %

Total

    53.4 %     41.7 %
                 

Corporate and Other

               

Operating expenses

    4.6 %     9.0 %

Total

    4.6 %     9.0 %
                 

Consolidated

               

Policy acquisition costs

    25.0 %     25.0 %

Operating expenses

    18.1 %     22.9 %

Total

    43.1 %     47.9 %

 

 

Our expense ratio decreased 4.8 percentage points in the three months ended September 30, 2015, as compared to the same period in 2014. The reduction in the expense ratio is the result of leveraging our fixed costs related to our infrastructure as our premium volume continues to grow while our operating costs remain relatively stable.

 

Policy acquisition costs are costs we incur to issue policies, which include commissions, premium taxes, underwriting reports and underwriter compensation costs. The Company offsets direct commissions with ceded commissions from reinsurers. The percentage of policy acquisition costs to net earned premiums and other income remained consistent for three months ended September 30, 2015 and 2014 at approximately 25.0%.

 

Operating expenses consist primarily of employee compensation, information technology and occupancy costs, such as rent and utilities. Operating expenses as a percent of net earned premiums and other income was 18.1% and 22.9% for the three months ended September 30, 2015 and 2014, respectively. The reduction in the operating expenses is the result of leveraging our fixed costs.

 

 
30

 

 

Underwriting Results

 

We measure the performance of our consolidated results, in part, based on our underwriting gain or loss. The following table provides the underwriting gain or loss for the three months ended September 30, 2015 and 2014 (in thousands):

 

Underwriting Gain (Loss)

 
   
   

Three Months Ended September 30,

                 
   

2015

   

2014

   

$ Change

   

% Change

 
   

(in thousands)

 

Commerical Lines

                               

Commercial multi-peril

  $ 655     $ 980     $ (325 )     -33.2 %

Other liability

    1,105       388       717       184.8 %

Commercial automobile

    127       44       83       188.6 %

Other

    329       2       327       *  

Total

  $ 2,216     $ 1,414     $ 802       56.7 %
                                 

Personal Lines

                               

Low-value dwelling

  $ (263 )   $ (1,441 )   $ 1,178       -81.7 %

Wind-exposed homeowners

    567       51       516       *  

Personal automobile

    (1,036 )     (1,074 )     38       -3.5 %

Total

  $ (732 )   $ (2,464 )   $ 1,732       -70.3 %
                                 

Corporate and Other

    (821 )     (1,378 )     557       -40.4 %

Total

  $ 663     $ (2,428 )   $ 3,091       *  

 

   
* Percentage change is not meaningful

  

 

Results of Operations For The Nine Months Ended September 30, 2015 and 2014

 

The following table summarizes our operating results for the periods indicated (in thousands):

 

Summary of Operating Results

 
   
   

Nine Months Ended September 30,

                 
   

2015

   

2014

   

$ Change

   

% Change

 
   

(in thousands)

 

Gross written premiums

  $ 68,505     $ 55,580     $ 12,925       23.3 %

Net written premiums

  $ 58,207     $ 49,618     $ 8,589       17.3 %

Net earned premiums

  $ 47,491     $ 41,203     $ 6,288       15.3 %

Other income

    1,492       1,424       68       4.8 %

Losses and loss adjustment expenses, net

    27,359       30,477       (3,118 )     -10.2 %

Policy acquisition costs

    9,839       10,488       (649 )     -6.2 %

Operating expenses

    10,636       9,540       1,096       11.5 %

Underwriting gain (loss)

    1,149       (7,878 )     9,027       *  

Net investment income

    1,460       823       637       77.4 %

Net realized investment gains

    238       266       (28 )     -10.5 %

Other gains

    104       -       104       *  

Interest expense

    664       360       304       84.4 %

Income (loss) before income taxes

    2,287       (7,149 )     9,436       *  

Income tax expense (benefit)

    -       (178 )     178       *  

Net income (loss)

  $ 2,287     $ (6,971 )   $ 9,258       *  
                                 

GAAP Underwriting Ratios:

                               

Loss ratio (1)

    55.9 %     71.5 %                

Expense ratio (2)

    41.8 %     47.0 %                

Combined ratio (3)

    97.7 %     118.5 %                

 

                                 

(1)

The loss ratio is the ratio, expressed as a percentage, of net losses and loss adjustment expenses to net earned premiums and other income.

   
(2) The expense ratio is the ratio, expressed as a percentage, of policy acquisition costs and operating expenses to net earned premiums and other income.
   
(3) The combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100% indicates an underwriting profit. A combined ratio over 100% indicates an underwriting loss.
   
* Percentage change is not meaningful

 

 
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Premiums

 

Our premiums are presented below for the nine months ended September 30, 2015 and 2014 (in thousands):

  

Summary of Premium Revenue
 
   

Nine Months Ended

 September 30,

             
   

2015

   

2014

   

$ Change

   

% Change

 
   

(in thousands)

 
                                 

Gross written premiums

                               

Commerical lines

  $ 50,723     $ 37,713     $ 13,010       34.5 %

Personal lines

    17,782       17,867       (85 )     -0.5 %

Total

  $ 68,505     $ 55,580     $ 12,925       23.3 %
                                 

Net written premiums

                               

Commerical lines

  $ 43,164     $ 33,006     $ 10,158       30.8 %

Personal lines

    15,043       16,612       (1,569 )     -9.4 %

Total

  $ 58,207     $ 49,618     $ 8,589       17.3 %
                                 

Net Earned premiums

                               

Commerical lines

  $ 33,779     $ 24,410     $ 9,369       38.4 %

Personal lines

    13,712       16,793       (3,081 )     -18.3 %

Total

  $ 47,491     $ 41,203     $ 6,288       15.3 %

 

 

Gross written premiums increased $12.9 million, or 23.3%, to $68.5 million for the nine month period ended September 30, 2015, as compared to $55.6 million for the same period in 2014. The increase was driven by continued growth in our commercial lines business, which was partially offset by a slight decrease in our personal lines. The premium growth in our commercial lines in the nine months ended September 30, 2015, reflects our continued execution of our growth initiatives in the niche commercial insurance markets.

 

Commercial lines gross written premiums increased $13.0 million, or 34.5%, to $50.7 million for the nine months ended September 30, 2015, as compared to $37.7 million for the same period in 2014. This increase was primarily driven by the commercial multi-peril and other liability business which grew $6.0 million, or 25.3%, and $3.9 million, or 68.0%, respectively, compared to the same period in 2014.

 

The gross written premiums in our personal lines decreased slightly by $85,000 or, 0.5%, to $17.8 million for the nine months ended September 30, 2015, as compared to $17.9 million for the same period in 2014. The decrease was related to the change in the mix of business as we terminated our personal automobile line product in 2015 and implemented underwriting and marketing changes to our homeowners line in late 2014. As a result, the gross written premiums from our homeowners business increased $5.8 million, driven by our wind-exposure business, and our personal automobile business decreased $5.9 million for the nine months ended September 30, 2015.

 

Net written premiums increased $8.6 million, or 17.3%, to $58.2 million for the nine months ended September 30, 2015, compared to $49.6 million for the same period in 2014. This increase was driven by the impact of the termination of a quota share reinsurance agreement which occurred on August 1, 2015. The quota share arrangement was terminated as management determined the Company no longer needed the leverage support of this reinsurance arrangement due to the added capital raised from our IPO. The termination of the agreement resulted in the reversal of $9.4 million of related unearned ceded premiums and had minimal impact on the net earned premiums for the nine months ended September 30, 2015. Excluding the impact of the termination of the quota share reinsurance agreement the net written premiums for the nine months ended September 30, 2015 decreased $811,000, or 1.6%, compared to the same period in 2014.

 

 
32

 

 

Ceded earned premiums as a percent of gross earned premiums were 28.3% for the nine months ended September 30, 2015, as compared to 13.9% for the same period in 2014. The increase in the ceded earned premium rate was primarily attributable to the quota share reinsurance agreement which was in place from December 31, 2014 until August 1, 2015 and to a lesser extent, an increase in the rates on our catastrophe reinsurance program to correlate with our increased wind-exposed business. We expect this rate to continue to decrease in the future months due to the termination of the quota share agreement. The six month June 30, 2015 rate was 31.4%.

 

Other income

 

Other income for the nine months ended September 30, 2015 increased $69,000, or 4.8%, to $1.5 million as compared to $1.4 million for the same period in 2014. Other income is derived from policies we write and represents additional charges to policyholders for services outside of the premium charge, such as installment billing or policy issuance costs. It also includes commission income from the Affiliate. Other income is expected to decrease in the future due to the deconsolidation of the Affiliate.

 

Losses and Loss Adjustment Expenses

 

The tables below detail our losses and loss adjustment expenses (“LAE”) and loss ratios for the nine months ended September 30, 2015 and 2014 (in thousands).

 

Nine Months Ended September 30, 2015

 

Commercial Lines

   

Personal Lines

   

Total

 
   

(dollars in thousands)

 
                         

Accident year net losses and LAE

  $ 18,109     $ 9,125     $ 27,234  

Net (favorable) adverse development

    (272 )     397       125  

Calendar year net loss and LAE

  $ 17,837     $ 9,522     $ 27,359  
                         

Accident year loss ratio

    52.0 %     64.9 %     55.6 %

Net (favorable) adverse development

    -0.8 %     2.8 %     0.3 %

Calendar year loss ratio

    51.2 %     67.7 %     55.9 %

 

 

Nine Months Ended September 30, 2014

 

Commercial Lines

   

Personal Lines

   

Total

 
   

(dollars in thousands)

 
                         

Accident year net losses and LAE

  $ 16,455     $ 15,288     $ 31,743  

Net (favorable) adverse development

    (1,457 )     191       (1,266 )

Calendar year net loss and LAE

  $ 14,998     $ 15,479     $ 30,477  
                         

Accident year loss ratio

    65.5 %     87.1 %     74.5 %

Net (favorable) adverse development

    -5.8 %     1.1 %     -3.0 %

Calendar year loss ratio

    59.7 %     88.2 %     71.5 %

 

 

Net losses and LAE decreased by $3.1 million, or 10.2%, for the nine months ended September 30, 2015, as compared to the same period in 2014. Decreases in our net losses and LAE were attributable to a number of factors, including a significant reduction in weather-related property losses which were historically high in 2014, a $2.8 million decrease in losses in low-value dwelling (resulting from our underwriting changes in late 2014 and fewer weather-related losses) and a $5.3 million reduction of nonstandard automobile losses as that line of business is in run-off. Partially offsetting these items were increases to the net losses and LAE in the commercial line and wind-exposed homeowners business which corresponds with our expectations given the overall growth of our business.

 

The calendar year loss ratios were 55.9% and 71.5% for the nine months ended September 30, 2015 and 2014, respectively. The decrease in the loss ratio was mainly the result of lower losses in the low-value dwelling and commercial multi-peril lines. Both lines experienced losses that were historically higher in 2014 due to weather-related property damage. In addition, the mix of business continues to evolve as our lines of business with historically lower overall loss ratios grows (such as wind-exposed homeowners, and commercial liability lines), and the historically higher loss ratio business declines (such as low-value dwelling in the Midwest and nonstandard automobile).

 

 
33

 

 

Overall reserve development on prior accident years for the nine months ended September 30, 2015 was unfavorable by $125,000, or 0.3 percentage points. This unfavorable development consisted of adverse reserve development of $494,000 and $696,000 in the personal and commercial automobile lines, respectively partially offset by favorable development of $530,000, $125,000 and $313,000 in the commercial multi-peril, other liability and workers’ compensation lines, respectively.

 

Total prior-year reserve development for the nine months ended September 30, 2014 was favorable by $1.3 million, or 3.0 percentage points. This favorable development consisted of favorable reserve development of $877,000 and $481,000 in the commercial multi-peril and other liability lines, respectively, partially offset by $422,000 adverse reserve development in the low-value dwelling lines.

 

 

Expense Ratio

 

Our expense ratio is calculated by dividing the sum of policy acquisition costs and other underwriting and operating expenses by the sum of net earned premiums and other income. We use the expense ratio to evaluate the operating efficiency of our consolidated operations and each segment. Costs that cannot be readily identifiable as a direct cost of a segment or product line remain in Corporate and Other for segment reporting purposes.

 

The table below provides the expense ratio by major component.

 

   

Nine Months Ended September 30,

 
   

2015

   

2014

 
   

(in thousands)

 
                 

Commerical Lines

               

Policy acquisition costs

    20.4 %     25.0 %

Operating expenses

    11.4 %     14.5 %

Total

    31.8 %     39.5 %
                 

Personal Lines

               

Policy acquisition costs

    19.5 %     24.0 %

Operating expenses

    12.8 %     11.3 %

Total

    32.3 %     35.3 %
                 

Corporate and Other

               

Operating expenses

    9.9 %     9.2 %

Total

    9.9 %     9.2 %
                 

Consolidated

               

Policy acquisition costs

    20.1 %     24.6 %

Operating expenses

    21.7 %     22.4 %

Total

    41.8 %     47.0 %

 

 

Our expense ratio decreased 5.2 percentage points in the nine months ended September 30, 2015, as compared to the same period in 2014. The reduction in the expense ratio is the result of leveraging our fixed costs related to our infrastructure as our premium volume continues to grow while our operating costs remain relatively stable.

 

The percentage of policy acquisition costs to net earned premiums and other income was 20.1% and 24.6% for the nine months ended September 30, 2015 and 2014, respectively. The reduction in the ratio was primarily due to the impact of the quota share reinsurance agreement. The quota share reinsurance agreement includes a ceding commission equal to 37.0% of the ceded premiums. The ceding commission was recorded as a reduction to deferred policy acquisition costs and charged to expense as an offset to our direct costs in proportion to premium earned. The ceding commission recorded in the nine months ended September 30, 2015 was $3.5 million. This agreement was terminated by the Company in August 2015. To a lesser extent, policy acquisition costs were also reduced by the change in the mix of business. The nonstandard personal automobile business, which had a high acquisition cost ratio, went into run-off in early 2014. Now that it has substantially run-off, there are no more acquisition costs from this line.

 

 
34

 

 

Operating expenses consist primarily of employee compensation, information technology and occupancy costs, such as rent and utilities. Operating expenses as a percent of net earned premiums and other income was 21.7% and 22.4% for the nine months ended September 30, 2015 and 2014, respectively. The decreased ratio is the net result of an increase from the impact of the quota share reinsurance agreement and a decrease from the effect of an increase in earned premiums on a less variable expense infrastructure.

 

Underwriting Results

 

We measure the performance of our consolidated results, in part, based on our underwriting gain or loss. The following table provides the underwriting gain or loss for the nine months ended September 30, 2015 and 2014 (in thousands):

 

Underwriting Gain (Loss)

 
   
   

Nine Months Ended September 30,

                 
   

2015

   

2014

   

$ Change

   

% Change

 
   

(in thousands)

 
                                 

Commerical Lines

                               

Commercial multi-peril

  $ 2,451     $ (923 )   $ 3,374       *  

Other liability

    2,430       1,179       1,251       106.1 %

Commercial automobile

    138       (40 )     178       *  

Other

    897       (30 )     927       *  

Total

  $ 5,916     $ 186     $ 5,730       *  
                                 

Personal Lines

                               

Low-value dwelling

  $ (358 )   $ (2,844 )   $ 2,486       -87.4 %

Wind-exposed homeowners

    2,090       125       1,965       *  

Personal automobile

    (1,732 )     (1,403 )     (329 )     23.4 %

Total

  $ -     $ (4,122 )   $ 4,122       *  
                                 

Corporate and Other

    (4,767 )     (3,942 )     (825 )     20.9 %

Total

  $ 1,149     $ (7,878 )   $ 9,027       *  

 

 

   
* Percentage change is not meaningful

 

Investment Income

 

Net investment income increased by $637,000, or 77.4%, to $1.5 million for the nine months ended September 30, 2015, as compared to $823,000 for the same period in 2014. This increase was the result of growth of the investment portfolio and a change in the mix of investments. Average invested assets through the third quarter of 2015 were $106.7 million as compared to $72.2 million in 2014, an increase of $34.5 million, or 47.8%. As of September 30, 2015, the average invested asset balance was comprised of 85.3% of fixed maturities, 3.8% of equity securities and 10.9% of short term investments, compared to the September 30, 2014 mix of 73.5% of fixed maturities, 5.3% of equity securities and 21.2% of short term investments.

 

The portfolio’s average quality was AA at September 30, 2015 and December 31, 2014. The portfolio produced a tax equivalent book yield of 2.18% and 1.69% for the nine months ended September 30, 2015 and 2014, respectively. The average duration of the fixed maturity portfolio was 3.4 years at September 30, 2015 and 3.1 years at December 31, 2014.

 

Interest Expense

 

Interest expense was $664,000 and $360,000 for the nine months ended September 30, 2015 and 2014, respectively. Interest expense increased primarily due to the additional outstanding borrowings under the Revolver which existed until the completion of the Company’s IPO. The outstanding borrowings under the Revolver were repaid from the proceeds received from the Company’s IPO, in August 2015.

 

Income Tax Expense

 

For the nine months ended September 30, 2015, the Company had $0 of income tax expense due to a valuation allowance that offsets any use of prior period net operating loss carryforwards. The income tax benefit of $178,000 for the nine months ended September 30, 2014, relates to the impact of changes to net unrealized gains during the quarter which tax effect was included in the change in other comprehensive income and the corresponding change to the valuation allowance was reflected in the consolidated statement of operations as a deferred tax benefit.

 

 
35

 

 

Liquidity and Capital Resources

 

Sources and Uses of Funds

 

On August 18, 2015, the Company completed its IPO in which it issued and sold 3,300,000 shares of common stock at an IPO of $10.50 per share. The Company received net proceeds of $30.7 million after deducting underwriting discounts and commissions of $2.4 million and other offering expenses of $1.5 million.

 

At September 30, 2015, we had $20.1 million in cash and short-term investments. Our principal sources of funds, excluding capital raises, are insurance premiums, investment income, proceeds from maturity and sale of invested assets and installment fees. These funds are primarily used to pay claims, commissions, employee compensation, taxes and other operating expenses, and service debt.

 

We believe that our existing cash, short-term investments and investment securities balances and the $17.5 million available under our revolving credit line, will be adequate to meet our capital and liquidity needs and the needs of our subsidiaries on a short-term and long-term basis.

 

We conduct our business operations primarily through our insurance subsidiaries. Our ability to service debt, and pay administrative expenses is primarily reliant upon our intercompany service fees paid by the insurance subsidiaries to the holding company for management, administrative, and information technology services provided to the insurance subsidiaries by the holding company. Secondarily, the holding company may receive dividends from the insurance subsidiaries; however, this is not the primary means in which the holding company supports its funding as state insurance laws restrict the ability of our insurance subsidiaries to declare dividends to the holding company. Generally, the limitations are based on the greater of statutory net income for the preceding year or 10% of statutory surplus at the end of the preceding year. There were $2.7 million of dividends paid from our insurance subsidiaries during the nine months ended September 30, 2015.

 

We intend to contribute a portion of the net proceeds that we have received from our IPO to our insurance subsidiaries which will increase their statutory surplus levels. We expect that this will provide the necessary statutory capital to support our premium volume growth over the next two years.

 

Cash Flows

 

Operating Activities. Cash used in operating activities for the nine months ended September 30, 2015, was $9.8 million as compared to $1.3 million for the same period in 2014. The increase in cash used in operations was attributable to the quota share arrangement.

 

Investing Activities. Cash used in investing activities for the nine months ended September 30, 2015, was $5.0 million as compared to $30.0 million for the same period in 2014. The fluctuation in the funds used in routine investing activities correlates with the growth in the Company’s business. The Company continued to grow in 2015, however the current year growth has been at a slower pace than in 2014 and, therefore, the funds used in investing activities have decreased. In addition, we continue to invest in additional securities as premiums are collected faster than claims are paid out.

 

Financing Activities. Cash provided by financing activities for the nine months ended September 30, 2015, was $9.9 million as compared to $36.2 million for the same period in 2014. During the nine months ended September 30, 2015, we received net funds of $30.7 million from our IPO, received proceeds of $3.1 million for common stock issued to former holders of preferred stock, used $6.3 million to repurchase outstanding shares of preferred stock and pay accrued preferred dividends, used $17.0 million to pay off our revolving line of credit and used $1.3 million for our routine payments on our term loans.

 

During the nine months ended September 30, 2014, we initiated certain capital raising activities and received $21.4 million in proceeds from stock sold to third-party investors, members of the board of directors, executive management and employees, along with their relatives. In addition we had borrowings of $15.0 million under our revolving line of credit and term loan.

 

Outstanding Debt

 

We are party to a $30.0 million senior credit facility with Comerica Bank which currently consists of a $7.5 million five-year term note, a $5.0 million five-year term note and an available $17.5 million revolving line of credit expiring on August 1, 2016. Our total senior debt at September 30, 2015 was $9.8 million. Our minimum principal and interest payments on our senior debt for the last three months of 2015 is estimated at $581,000 with the following for 2016-2017, $5.0 million and 2018-2019, $4.9 million. Refer to Note 8 ~ Senior Debt of the Notes to the Consolidated Financial Statements, for additional information regarding our outstanding debt.

 

 
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Recently Issued Accounting Pronouncements

 

Refer to Note 1 ~ Summary of Significant Accounting Policies – Recently Issued Accounting Guidance of the Notes to the Consolidated Financial Statements for detailed information.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, as well as, other relevant market rates or price changes. The volatility and liquidity in the markets in which the underlying assets are traded directly influence market risk. The following is a discussion of our primary risk exposures and how those exposures are currently managed as of September 30, 2015. Our market risk sensitive instruments are primarily related to fixed income securities, which are available for sale and not held for trading purposes.

 

Interest Rate Risk

 

At September 30, 2015, the fair value of our investment portfolio, excluding cash and cash equivalents, was $101.6 million. Our investment portfolio consists principally of investment-grade, fixed-income securities, all of which are classified as available-for-sale. Accordingly, the primary market risk exposure to our debt securities is interest rate risk. In general, the fair market value of a portfolio of fixed-income securities increases or decreases inversely with changes in market interest rates, while net investment income realized from future investments in fixed-income securities increases or decreases along with interest rates. In addition, some of our fixed-income securities have call or prepayment options. This could subject us to reinvestment risk should interest rates fall and issuers call their securities, requiring us to reinvest at lower interest rates. We attempt to mitigate this interest rate risk by investing in securities with varied maturity dates and by managing the duration of our investment portfolio to a defined range of three to four years. The effective duration of our portfolio as of September 30, 2015, was approximately 3.4 years, compared to 3.1 years at December 31, 2014.

 

The table below summarizes our interest rate risk. The table also illustrates the sensitivity of the fair value of fixed-income investments, classified as fixed maturity securities and short-term investments, to selected hypothetical changes in interest rates as of September 30, 2015. The selected scenarios are not predictions of future events, but rather illustrate the effect that events may have on the fair value of the fixed-income portfolio and shareholders’ equity.

 

                   

Hypothetical Percentage

 
           

Estimated

   

Increase (Decrease) in

 

Hypothetical Change in Interest Rates

 

Estimated

   

Change in

           

Shareholders'

 

As of September 30, 2015

 

Fair Value

   

Fair Value

   

Fair Value

   

Equity

 
   

(dollars in thousands)

                 
                                 

200 basis point increase

  $ 97,337     $ (6,766 )     -6.5 %     -8.4 %

100 basis point increase

    100,668       (3,435 )     -3.3 %     -4.3 %

No change

    104,103       -       0.0 %     0.0 %

100 basis point decrease

    106,914       2,811       2.7 %     3.5 %

200 basis point decrease

    108,267       4,164       4.0 %     5.2 %

 

 

 

Credit Risk

 

An additional exposure to our fixed-income securities portfolio is credit risk. We manage our credit risk by investing only in investment-grade securities. In addition, we comply with applicable statutory requirements which limit the portion of our total investment portfolio that we can invest in any one security.

 

We are subject to credit risks with respect to our reinsurers. Although a reinsurer is liable for losses to the extent of the coverage which it assumes, our reinsurance contracts do not discharge our insurance companies from primary liability to each policyholder for the full amount of the applicable policy, and consequently our insurance companies remain obligated to pay claims in accordance with the terms of the policies regardless of whether a reinsurer fulfills or defaults on its obligations under the related reinsurance agreement. To mitigate our credit risk to reinsurance companies, we attempt to select financially strong reinsurers with an A.M. Best rating of “A−” or better and continue to evaluate their financial condition throughout the duration of our agreements.

 

 

 
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At September 30, 2015, the net amount due to the Company from reinsurers, including prepaid reinsurance, was $15.6 million. We believe all amounts recorded as due from reinsurers are recoverable.

 

Effects of Inflation

 

We do not believe that inflation has a material effect on our results of operations, except for the effect that inflation may have on interest rates and claims costs. We consider the effects of inflation in pricing and estimating reserves for unpaid losses and loss adjustment expenses. The actual effects of inflation on our results are not known until claims are ultimately settled. In addition to general price inflation, we are exposed to a long-term upward trend in the cost of judicial awards for damages.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

 

Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that required information is recorded, processed, summarized and reported within the required timeframe as specified in the SEC’s rules and forms of the SEC. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed is accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

Our management, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures at September 30, 2015. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of September 30, 2015.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 
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PART II - OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

The information required by this item is included under Note 15 ~ Commitments and Contingencies of the Notes to the Consolidated Financial Statements of the Company’s Form 10-Q for the nine months ended September 30, 2015, which is hereby incorporated by reference.

 

ITEM 1A.  RISK FACTORS

 

There were no material changes to the risk factors disclosed in the section entitled “Risk Factors” in the Registration Statement on Form S-1 (Amendment No. 3) filed on August 12, 2015 with the SEC.

 

ITEM 2UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Unregistered Sales of Equity Securities

 

In a private placement transaction, the previous holders of 29,550 shares of our preferred stock agreed to use the proceeds from the sale of these shares, including dividend payments, of $3.1 million, to purchase from us, on the closing of our IPO shares of our common stock. Immediately following the closing of our IPO on August 18, 2015, we issued a total of 294,481 shares of common stock at $10.50 per share to these former holders of preferred stock in return for proceeds to us of $3.2 million. The issuances of common stock to the previous holders of shares of preferred stock were exempt from the Securities Act in reliance on Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder exempting transactions by an issuer not involving any public offering.

 

Use of Proceeds from Initial Public Offering

 

The Registration Statement on Form S-1 (File No. 333-205448) for the IPO of our common stock was declared effective by the SEC on August 12, 2015. The Registration Statement on Form S-1 registered an aggregate of 3,565,000 shares of our common stock, including 465,000 shares of common stock registered to cover in full over-allotments by the underwriters. On August 18, 2015, we closed our IPO whereby 3,300,000 shares of our common stock were sold, which included 200,000 shares from the underwriters’ partial exercise of their overallotment option and the sale of 100,000 shares to James G. Petcoff, our Chief Executive Officer, at a public offering price of $10.50 per share. Upon completion of the sale of the shares of our common stock, referenced in the preceding sentence, the IPO terminated.

 

There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC on August 13, 2015 pursuant to Rule 424(b)(4).

 

 
39

 

 

ITEM 6.  EXHIBITS

 

       

Incorporated by Reference

Exhibit
Number

 

Exhibit Description

 

Form

 

Period
Ending

 

Exhibit /
Appendix
Number

 

Filing Date

3.1

 

Second Amended and Restated Articles of Incorporation of Conifer Holdings, Inc.

 

8-K

     

3.1

 

August 28, 2015

                     
                     

10.1

 

Third Amendment to Amended and Restated Credit Agreement and Consent dated as of August 6, 2015 between the Company and Comerica Bank, N.A.

 

10-Q

 

June 30, 2015

 

10.1.3

 

September 14, 2015

                     
                     

31.1

 

Section 302 Certification — CEO

               
                     

31.2

 

Section 302 Certification — CFO

               
                     

32.1*

 

Section 906 Certification — CEO

               
                     

32.2*

 

Section 906 Certification — CFO

               
                     

101.INS

 

XBRL Instance Document

               

101.SCH

 

SBRL Taxonomy Extension Schema Document

               

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase

               

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase

               

101.LAB

 

XBRL Taxonomy Extension Label Linkbase

               

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase

               

 

 

 


 

* This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

 

 
40

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

CONIFER HOLDINGS, INC.

     
     
 

By:

/s/ Harold J. Meloche

   

Harold J. Meloche

   

Chief Financial Officer,

   

Principal Financial Officer,

   

Principal Accounting Officer

 

Dated:   November 10, 2015

 

 

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