Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2018
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the transition period from            to
 
Commission file number 001-37536
 
 
Conifer Holdings, Inc.
(Exact name of registrant as specified in its charter)
Michigan
 
27-1298795
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
550 West Merrill Street, Suite 200
 
 
Birmingham, Michigan
 
48009
(Address of principal executive offices)
 
(Zip code)
 
(248) 559-0840
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☐
(Do not check if a smaller
reporting company)
Smaller reporting company ☒
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
 
The number of outstanding shares of the registrant’s common stock, no par value, as of August 5, 2018, was 8,520,328.
 


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

2

PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands) 
 
June 30, 2018
 
December 31, 2017
 
(Unaudited)
 
 
Assets
 
 
 
Investment securities:
 
 
 
Debt securities, at fair value (amortized cost of $129,322 and $137,004, respectively)
$
126,677

 
$
136,536

Equity securities, at fair value (cost of $8,782 and $8,629, respectively)
9,530

 
9,687

Short-term investments, at fair value
4,364

 
11,427

Total investments
140,571

 
157,650

 
 
 
 
Cash
17,016

 
11,868

Premiums and agents' balances receivable, net
22,129

 
22,845

Receivable from affiliate
2,161

 
1,195

Reinsurance recoverables on unpaid losses
20,467

 
20,066

Reinsurance recoverables on paid losses
2,874

 
4,473

Prepaid reinsurance premiums
1,098

 
1,081

Deferred policy acquisition costs
12,021

 
12,781

Other assets
8,997

 
7,073

Total assets
$
227,334

 
$
239,032

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Liabilities:
 
 
 
Unpaid losses and loss adjustment expenses
$
83,662

 
$
87,896

Unearned premiums
52,390

 
57,672

Reinsurance premiums payable
2,719

 
3,299

Debt
29,060

 
29,027

Accounts payable and other liabilities
9,335

 
8,312

Total liabilities
177,166

 
186,206

 
 
 
 
Commitments and contingencies
—

 
—

 
 
 
 
Shareholders' equity:
 
 
 
Common stock, no par value (100,000,000 shares authorized; 8,520,328 and 8,520,328 issued and outstanding, respectively)
86,659

 
86,199

Accumulated deficit
(33,431
)
 
(33,010
)
Accumulated other comprehensive income (loss)
(3,060
)
 
(363
)
Total shareholders' equity
50,168

 
52,826

Total liabilities and shareholders' equity
$
227,334

 
$
239,032

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

3

CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(dollars in thousands, except per share data)

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Revenue
 
 
 
 
 
 
 
Premiums
 
 
 
 
 
 
 
Gross earned premiums
$
27,856

 
$
28,338

 
$
55,581

 
$
56,602

Ceded earned premiums
(3,918
)
 
(3,841
)
 
(7,842
)
 
(7,965
)
Net earned premiums
23,938

 
24,497

 
47,739

 
48,637

Net investment income
838

 
663

 
1,639

 
1,240

Net realized investment gains (losses)
12

 
—

 
173

 
(8
)
Change in fair value of equity securities
29

 
—

 
(268
)
 
—

Other gains
—

 
750

 
—

 
750

Other income
450

 
372

 
807

 
726

Total revenue
25,267

 
26,282

 
50,090

 
51,345

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Losses and loss adjustment expenses, net
15,067

 
16,674

 
28,396

 
32,407

Policy acquisition costs
6,472

 
6,428

 
12,985

 
12,900

Operating expenses
4,303

 
4,370

 
8,489

 
8,900

Interest expense
617

 
219

 
1,236

 
443

Total expenses
26,459

 
27,691

 
51,106

 
54,650

 
 
 
 
 
 
 
 
Income (loss) before equity earnings of affiliates and income taxes
(1,192
)
 
(1,409
)
 
(1,016
)
 
(3,305
)
Equity earnings of affiliates, net of tax
89

 
60

 
144

 
164

Income tax (benefit) expense
10

 
(282
)
 
28

 
(275
)
 
 
 
 
 
 
 
 
Net income (loss)
$
(1,113
)
 
$
(1,067
)
 
$
(900
)
 
$
(2,866
)
 
 
 
 
 
 
 
 
Earnings (loss) per common share, basic and diluted
$
(0.13
)
 
$
(0.14
)
 
$
(0.11
)
 
$
(0.38
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic and diluted
8,520,328

 
7,633,069

 
8,520,328

 
7,633,069

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

4

CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(dollars in thousands)
  
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
(1,113
)
 
$
(1,067
)
 
$
(900
)
 
$
(2,866
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized investment gains (losses):
 
 
 
 
 
 
 
Unrealized investment gains (losses) during the period
(376
)
 
519

 
(2,222
)
 
904

Income tax (benefit) expense
—

 
281

 
—

 
281

Unrealized investment gains (losses), net of tax
(376
)
 
238

 
(2,222
)
 
623

 
 
 
 
 
 
 
 
Less: reclassification adjustments to:
 
 
 
 
 
 
 
Net realized investment gains (losses) included in net income (loss)
(4
)
 
(1
)
 
(4
)
 
50

Income tax (benefit) expense
—

 
—

 
—

 
—

Total reclassifications included in net income (loss), net of tax
(4
)
 
(1
)
 
(4
)
 
50

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
(372
)
 
239

 
(2,218
)
 
573

 
 
 
 
 
 
 
 
Total comprehensive income (loss)
$
(1,485
)
 
$
(828
)
 
$
(3,118
)
 
$
(2,293
)
 
The accompanying notes are an integral part of the Consolidated Financial Statements.

5

CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
(dollars in thousands)
  
 
 
No Par, Common Stock
 
 
 
Accumulated
Other
 
Total Shareholders' Equity
 
 
Shares
 
Amount
 
Accumulated
deficit
 
Comprehensive
Income (Loss)
 
Balances at December 31, 2016
 
7,633,070

 
$
80,342

 
$
(11,468
)
 
$
(1,080
)
 
$
67,794

Net loss
 
—

 
—

 
(2,866
)
 
—

 
(2,866
)
Restricted stock unit expense, net
 
(1
)
 
466

 
—

 
—

 
466

Other comprehensive income
 
—

 
—

 
—

 
573

 
573

Balances at June 30, 2017
 
7,633,069

 
80,808

 
(14,334
)
 
(507
)
 
65,967

Net loss
 
—

 
—

 
(18,676
)
 
—

 
(18,676
)
Issuance of common stock in private placement
 
800,000

 
5,000

 
—

 
—

 
5,000

Common stock issuance costs
 
—

 
(38
)
 
—

 
—

 
(38
)
Restricted stock unit expense, net
 
87,259

 
429

 
—

 
—

 
429

Other comprehensive income
 
—

 
—

 
—

 
144

 
144

Balances at December 31, 2017
 
8,520,328

 
86,199

 
(33,010
)
 
(363
)
 
52,826

Net loss
 
—

 
—

 
(900
)
 
—

 
(900
)
Restricted stock unit expense, net
 
—

 
460

 
—

 
—

 
460

Other comprehensive loss
 
—

 
—

 
—

 
(2,218
)
 
(2,218
)
Cumulative effect of adoption of ASU No. 2016-01, net of taxes
 
—

 
—

 
556

 
(556
)
 
—

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

 
—

 
(77
)
 
77

 
—

Balances at June 30, 2018
 
8,520,328

 
$
86,659

 
$
(33,431
)
 
$
(3,060
)
 
$
50,168



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

6

CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(In thousands) 
 
Six Months Ended
June 30,
 
2018
 
2017
Cash Flows From Operating Activities
 
 
 
Net income (loss)
$
(900
)
 
$
(2,866
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
175

 
199

Amortization of bond premium and discount, net
272

 
288

Net realized investment (gains) losses
(173
)
 
8

Change in fair value of equity securities
268

 
—

Restricted stock unit expenses
460

 
466

Other
(144
)
 
(164
)
Changes in operating assets and liabilities:
 
 
 
(Increase) decrease in:
 
 
 
Premiums and agents' balances and other receivables
(250
)
 
2,547

Reinsurance recoverables
1,198

 
(4,977
)
Prepaid reinsurance premiums
(17
)
 
17

Deferred policy acquisition costs
760

 
641

Other assets
(1,894
)
 
67

Increase (decrease) in:
 
 
 
Unpaid losses and loss adjustment expenses
(4,234
)
 
12,266

Unearned premiums
(5,282
)
 
(3,147
)
Accounts payable and other liabilities
2,640

 
2,009

Net cash provided by (used in) operating activities
(7,121
)
 
7,354

Cash Flows From Investing Activities
 
 
 
Purchase of investments
(41,360
)
 
(96,012
)
Proceeds from maturities and redemptions of investments
15,531

 
13,062

Proceeds from sales of investments
38,126

 
75,343

Purchases of property and equipment
(28
)
 
(2
)
Net cash provided by (used in) investing activities
12,269

 
(7,609
)
Cash Flows From Financing Activities
 
 
 
Borrowings under debt arrangements
—

 
2,000

Repayment of borrowings under debt arrangements
—

 
(3,375
)
Net cash provided by (used in) financing activities
—

 
(1,375
)
Net increase (decrease) in cash
5,148

 
(1,630
)
Cash at beginning of period
11,868

 
12,493

Cash at end of period
$
17,016

 
$
10,863

Supplemental Disclosure of Cash Flow Information:
 
 
 
Interest paid
$
1,805

 
$
429

Payable for securities - non cash item
1,000

 
—

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

7
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




 
1.     Summary of Significant Accounting Policies
 Basis of Presentation
 The consolidated financial statements include accounts, after elimination of intercompany accounts and transactions, of Conifer Holdings, Inc. (the “Company” or “Conifer”), its wholly owned subsidiaries, Conifer Insurance Company ("CIC"), White Pine Insurance Company ("WPIC"), Red Cedar Insurance Company ("RCIC"), and Sycamore Insurance Agency, Inc. ("SIA"). CIC, WPIC, and RCIC are collectively referred to as the "Insurance Company Subsidiaries." On a stand-alone basis, Conifer Holdings, Inc. is referred to as the "Parent Company."
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Company has applied the rules and regulations of the United States Securities and Exchange Commission (“SEC”) regarding interim financial reporting and therefore the consolidated financial statements do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of management, all adjustments, consisting of items of a normal recurring nature, necessary for a fair presentation of the consolidated interim financial statements, have been included. The results of operations for the six months ended June 30, 2018, are not necessarily indicative of the results expected for the year ended December 31, 2018.
These consolidated financial statements and the notes thereto should be read in conjunction with the Company's audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on March 15, 2018.
 Business
The Company is engaged in the sale of property and casualty insurance products and has organized its business model around two classes of insurance businesses: commercial and personal lines. The Company underwrites a variety of specialty insurance products, including property, general liability, liquor liability, automobile, homeowners and dwelling policies. The Company markets and sells its insurance products through a network of independent agents and managing general agents. Policies are written in all 50 states. The Company’s corporate headquarters is located in Birmingham, Michigan with additional office facilities in Florida, Pennsylvania and Tennessee.
The Company also generates other revenues through investment income and other income which mainly consists of installment fees and policy issuance fees generally related to the policies we write. We also generate equity earnings from SIA's 50% owned agency (the "Affiliate"). The Affiliate places small commercial risks mainly for alarm and security guard markets.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes the amounts included in the consolidated financial statements reflect management's best estimates and assumptions, actual results may differ from these estimates.
 Recently Issued Accounting Guidance
Effective January 1, 2018, the Company adopted FASB Accounting Standards Update ("ASU") No. 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. As a result of adoption of this ASU, equity instruments that do not result in consolidation and are not accounted for under the equity method are measured at fair value and any changes in fair value are recognized in net income. Previously, the Company’s equity securities were classified as available-for-sale and changes in fair value were recorded in other comprehensive income. Upon adoption of this ASU, cumulative net unrealized gains on equity securities of $1.1 million, net of deferred income taxes of $0.5 million, were reclassified from accumulated other comprehensive income into accumulated deficit. Prior periods have not been recast to conform to the current presentation. See Note 2 ~ Investments for details regarding the change in net unrealized gains on equity securities included in net income for the current quarter ended June 30, 2018.
Effective January 1, 2018, the Company early adopted ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU provides an option to reclassify tax effects remaining in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act (TCJA) to retained earnings. Upon enactment of the TCJA, the U.S. corporate tax rate was reduced from 35% to 21% and the Company's U.S. deferred tax balances were remeasured to the lower enacted U.S. corporate tax rate. GAAP requires the effects of changes in tax rates and laws on deferred tax balances to be recorded as a component of income tax

8
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




expense in the period of enactment, even if the assets and liabilities relate to items of accumulated other comprehensive income. As a result of adopting the ASU, the Company reclassified $77,000 of previously recognized deferred taxes from accumulated other comprehensive income into accumulated deficit as of January 1, 2018.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which addresses the financial reporting of leasing transactions. This update will require the recognition of a right-of-use asset and a corresponding lease liability, discounted to the present value, for all leases that extend beyond 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the consolidated statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from the amortization of the right-of-use asset in the consolidated statement of operations and the repayment of the principal portion of the lease liability will be classified as a financing activity while the interest component will be included in the operating section of the consolidated statement of cash flows. This ASU is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. Management is currently evaluating the impact of the guidance.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which amends the current methodology and timing for recognizing credit losses. This amendment will replace the current GAAP "incurred loss" methodology for credit losses with a methodology based on expected credit losses. The new guidance will also require expanded consideration of a broader range of reasonable and increased supportable information for the credit loss estimates. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted for years beginning after December 15, 2018. Management is currently evaluating the impact of the guidance.

2.     Investments
The cost or amortized cost, gross unrealized gain or loss, and estimated fair value of the investments in securities classified as available for sale at June 30, 2018 and December 31, 2017, were as follows (dollars in thousands):
 
June 30, 2018
 
Cost or
Amortized
Cost
Gross Unrealized
Estimated
Fair Value 
 
 
Gains
Losses
Debt Securities:
 
 
 
 
U.S. Government
$
16,007

$
2

$
(266
)
$
15,743

State and local government
16,536

96

(221
)
16,411

Corporate debt
32,201

79

(739
)
31,541

Asset-backed securities
25,780

27

(153
)
25,654

Mortgage-backed securities
32,554

11

(1,331
)
31,234

Commercial mortgage-backed securities
3,916

—

(96
)
3,820

Collateralized mortgage obligations
2,328

9

(63
)
2,274

Total debt securities available for sale
129,322

224

(2,869
)
126,677

 
December 31, 2017
 
Cost or
Amortized
Cost
Gross Unrealized
Estimated
Fair Value 
 
Gains
Losses
Debt Securities:
 
 
 
 
U.S. Government
$
17,179

$
10

$
(99
)
$
17,090

State and local government
17,302

255

(54
)
17,503

Corporate debt
38,947

170

(209
)
38,908

Asset-backed securities
23,539

36

(35
)
23,540

Mortgage-backed securities
33,942

38

(522
)
33,458

Commercial mortgage-backed securities
3,532

3

(44
)
3,491

Collateralized mortgage obligations
2,563

19

(36
)
2,546

Total debt securities available for sale
137,004

531

(999
)
136,536

Equity Securities (1)
8,629

1,240

(182
)
9,687

Total securities available for sale
$
145,633

$
1,771

$
(1,181
)
$
146,223


9
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




(1) Effective January 1, 2018, the Company adopted ASU No. 2016-01. As a result, equity securities are no longer classified as available-for-sale. Prior periods have not been recast to conform to the current presentation. Refer to Note 1 ~ Summary of Significant Accounting Policies for further details.
The following table summarizes the aggregate fair value and gross unrealized losses, by security type, of the available-for-sale securities in unrealized loss positions. The table segregates the holdings based on the length of time that individual securities have been in a continuous unrealized loss position, as follows (dollars in thousands): 
 
June 30, 2018
 
Less than 12 months
 
Greater than 12 months
 
Total
 
No.
of
Issues
Fair Value of
Investments
with Unrealized
Losses
Gross
Unrealized
Losses
 
No.
of
Issues
Fair Value of
Investments
with Unrealized
Losses
Gross
Unrealized
Losses
 
No.
of
Issues
Fair Value of
Investments
with Unrealized
Losses
Gross
Unrealized
Losses
Debt Securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government
13

$
13,457

$
(218
)
 
6

$
1,958

$
(48
)
 
19

$
15,415

$
(266
)
State and local government
36

9,190

(163
)
 
7

1,371

(58
)
 
43

10,561

(221
)
Corporate debt
55

17,978

(327
)
 
8

5,481

(412
)
 
63

23,459

(739
)
Asset-backed securities
32

17,619

(145
)
 
3

558

(8
)
 
35

18,177

(153
)
Mortgage-backed securities
19

8,208

(223
)
 
27

22,162

(1,108
)
 
46

30,370

(1,331
)
Commercial mortgage-backed securities
4

2,718

(37
)
 
2

659

(59
)
 
6

3,377

(96
)
Collateralized mortgage obligations
10

1,881

(63
)
 
—

—

—

 
10

1,881

(63
)
Total debt securities available for sale
169

71,051

(1,176
)
 
53

32,189

(1,693
)
 
222

103,240

(2,869
)
 
December 31, 2017
 
Less than 12 months
 
Greater than 12 months
 
Total
 
No.
of
Issues
Fair Value of
Investments
with Unrealized
Losses
Gross
Unrealized
Losses
 
No.
of
Issues
Fair Value of
Investments
with Unrealized
Losses
Gross
Unrealized
Losses
 
No.
of
Issues
Fair Value of
Investments
with Unrealized
Losses
Gross
Unrealized
Losses
Debt Securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government
12

$
11,555

$
(64
)
 
7

$
2,207

$
(35
)
 
19

$
13,762

$
(99
)
State and local government
10

3,511

(20
)
 
7

1,424

(34
)
 
17

4,935

(54
)
Corporate debt
38

15,236

(46
)
 
10

6,555

(163
)
 
48

21,791

(209
)
Asset-backed securities
20

13,948

(29
)
 
3

915

(6
)
 
23

14,863

(35
)
Mortgage-backed securities
6

4,935

(19
)
 
26

24,939

(503
)
 
32

29,874

(522
)
Commercial mortgage-backed securities
3

2,026

(12
)
 
2

722

(32
)
 
5

2,748

(44
)
Collateralized mortgage obligations
8

1,870

(36
)
 
—

—

—

 
8

1,870

(36
)
Total debt securities available for sale
97

53,081

(226
)
 
55

36,762

(773
)
 
152

89,843

(999
)
Equity Securities (1)
13

436

(75
)
 
4

266

(107
)
 
17

702

(182
)
Total securities available for sale
110

$
53,517

$
(301
)
 
59

$
37,028

$
(880
)
 
169

$
90,545

$
(1,181
)

10
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




 (1) Effective January 1, 2018, the Company adopted ASU No. 2016-01. As a result, equity securities are no longer classified as available-for-sale. Prior periods have not been recast to conform to the current presentation. Refer to Note 1 ~ Summary of Significant Accounting Policies for further details.
The Company analyzed its investment portfolio in accordance with its other-than-temporary impairment ("OTTI") review procedures and determined the Company did not need to record a credit-related OTTI loss in net income, nor recognize a non-credit related OTTI loss in other comprehensive income for the six months ended June 30, 2018 and 2017.
 The Company’s sources of net investment income are as follows (dollars in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Debt securities
$
868

 
$
696

 
$
1,694

 
$
1,297

Equity securities
38

 
25

 
65

 
50

Cash and short-term investments
13

 
16

 
36

 
27

Total investment income
919

 
737

 
1,795

 
1,374

Investment expenses
(81
)
 
(74
)
 
(156
)
 
(134
)
Net investment income
$
838

 
$
663

 
$
1,639

 
$
1,240

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

 
$
—

 
$
2

 
$
—

Gross realized losses
(10
)
 
—

 
(15
)
 
(7
)
Total debt securities
(10
)
 
—

 
(13
)
 
(7
)
Equity securities:
 
 
 
 
 
 
 
Gross realized gains
36

 
—

 
206

 
29

Gross realized losses
(14
)
 
—

 
(20
)
 
(30
)
Total equity securities
22

 
—

 
186

 
(1
)
Total net realized investment gains (losses)
$
12

 
$
—

 
$
173

 
$
(8
)
 Proceeds from the sales of debt securities, maturities and other redemptions (primarily the return of capital) were $20.1 million and $13.6 million for the six months ended June 30, 2018 and 2017, respectively.
Effective January 1, 2018, the Company adopted ASU No. 2016-01. As a result, equity securities are no longer classified as available-for-sale with unrealized gains and losses recognized in other comprehensive income; rather, all changes in fair value of equity securities are now recognized in net income. The change in fair value of equity securities included in net income for three and six month ended June 30, 2018, was a $29,000 gain and a $268,000 loss. Prior periods have not been recast for the adoption of this guidance.
 The table below summarizes the amortized cost and fair value of available-for-sale debt securities by contractual maturity at June 30, 2018. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties (dollars in thousands):

11
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




 
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
$
7,205

 
$
7,190

Due after one year through five years
35,846

 
35,292

Due after five years through ten years
12,154

 
11,832

Due after ten years
9,539

 
9,381

Securities with contractual maturities
64,744

 
63,695

Asset-backed securities
25,780

 
25,654

Mortgage-backed securities
$
32,554

 
$
31,234

Commercial mortgage-backed securities
$
3,916

 
$
3,820

Collateralized mortgage obligations
$
2,328

 
$
2,274

Total debt securities
$
129,322

 
$
126,677

 At June 30, 2018 and December 31, 2017, the Insurance Company Subsidiaries had an aggregate of $8.2 million on deposit in trust accounts to meet the deposit requirements of various state insurance departments.  At June 30, 2018 and December 31, 2017, the Company had $32.1 million and $18.4 million, respectively, held in trust accounts to meet collateral requirements with other third-party insurers, relating to various fronting arrangements. There are withdrawal and other restrictions on these deposits, including the type of investments that may be held, however, the Company may generally invest in high-grade bonds and short-term investments and earn interest on the funds. 

3.     Fair Value Measurements
 The Company’s financial instruments include assets and liabilities carried at fair value, as well as assets and liabilities carried at cost or amortized cost but disclosed at fair value in these consolidated financial statements. Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principally most advantageous market for the asset or liability in an orderly transaction between market participants. In determining fair value, the Company applies the market approach, which uses prices and other relevant data based on market transactions involving identical or comparable assets and liabilities. The inputs to valuation techniques used to measure fair value are prioritized into a three-level hierarchy. The hierarchy gives the highest priority to quoted prices from sources independent of the reporting entity (“observable inputs”) and the lowest priority to prices determined by the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”). The fair value hierarchy is as follows:
 Level 1—Valuations that are based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
 Level 2—Valuations that are based on observable inputs (other than Level 1 prices) such as quoted prices for similar assets or liabilities at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
 Level 3—Unobservable inputs that are supported by little or no market activity. The unobservable inputs represent the Company’s best assumption of how market participants would price the assets or liabilities.
The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis, classified by the valuation hierarchy as of June 30, 2018 and December 31, 2017 (dollars in thousands):

12
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




 
 
June 30, 2018
 
Fair Value Measurements Using
 
Total
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Debt Securities:
 
 
 
 
 
 
 
U.S. Government
$
15,743

 
$
—

 
$
15,743

 
$
—

State and local government
16,411

 
—

 
16,411

 
—

Corporate debt
31,541

 
—

 
31,541

 
—

Asset-backed securities
25,654

 
—

 
25,654

 
—

Mortgage-backed securities
31,234

 
—

 
31,234

 
—

Commercial mortgage-backed securities
3,820

 
—

 
3,820

 
—

Collateralized mortgage obligations
2,274

 
—

 
2,274

 
—

Total debt securities
126,677

 
—

 
126,677

 
—

Equity Securities
5,377

 
5,113

 
264

 
—

Short-term investments
4,364

 
4,364

 
—

 
—

Total marketable investments measured at fair value
$
136,418

 
$
9,477

 
$
126,941

 
$
—

 
 
 
 
 
 
 
 
Investments measured at NAV:
 
 
 
 
 
 
 
Investment in limited partnership
$
4,153

 
 
 
 
 
 
Total investments measured at NAV
$
4,153

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets measured at fair value
$
140,571

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Debt *
$
29,800

 
$
—

 
$
—

 
$
29,800

Total Liabilities measured at fair value
$
29,800

 
$
—

 
$
—

 
$
29,800

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


13
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




 
December 31, 2017
 
Fair Value Measurements Using
 
Total
 
Quoted Prices in Active Markets for
Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Debt Securities:
 
 
 
 
 
 
 
U.S. Government
$
17,090

 
$
—

 
$
17,090

 
$
—

State and local government
17,503

 
—

 
17,503

 
—

Corporate debt
38,908

 
—

 
38,908

 
—

Asset-backed securities
23,540

 
—

 
23,540

 
—

Mortgage-backed securities
33,458

 
 
 
33,458

 
 
Commercial mortgage-backed securities
3,491

 
 
 
3,491

 
 
Collateralized mortgage obligations
2,546

 
 
 
2,546

 
 
Total debt securities
136,536

 
—

 
136,536

 
—

Equity securities
5,627

 
5,381

 
246

 
—

Short-term investments
11,427

 
8,429

 
2,998

 
—

Total marketable investments measured at fair value
$
153,590

 
$
13,810

 
$
139,780

 
$
—

 
 
 
 
 
 
 
 
Investments measured at NAV:
 
 
 
 
 
 
 
Investment in limited partnership
$
4,060

 
 
 
 
 
 
Total investments measured at NAV
$
4,060

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets measured at fair value
$
157,650

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Debt *
$
29,888

 
$
—

 
$
—

 
$
29,888

Total Liabilities measured at fair value
$
29,888

 
$
—

 
$
—

 
$
29,888

* Carried at cost or amortized cost on the consolidated balance sheet
Level 1 investments consist of equity securities traded in an active exchange market. The Company uses unadjusted quoted prices for identical instruments to measure fair value. Level 1 also includes money market funds and other interest-bearing deposits at banks, which are reported as short-term investments. The fair value measurements that were based on Level 1 inputs comprise 6.7% of the fair value of the total investment portfolio as of June 30, 2018.
Level 2 investments include debt securities, which consist of U.S. government agency securities, state and local municipal
bonds (including those held as restricted securities), corporate debt securities, mortgage-backed and asset-backed securities. The fair value of securities included in the Level 2 category were based on the market values obtained from a third party pricing service that were evaluated using pricing models that vary by asset class and incorporate available trade, bid and other observable market information. The third party pricing service monitors market indicators, as well as industry and economic events. The fair value measurements that were based on Level 2 inputs comprise 90.3% of the fair value of the total investment portfolio as of June 30, 2018.
 The Company obtains pricing for each security from independent pricing services, investment managers or consultants to assist in determining fair value for its Level 2 investments. To validate that these quoted prices are reasonable estimates of fair value, the Company performs various quantitative and qualitative procedures, such as (i) evaluation of the underlying methodologies, (ii) analysis of recent sales activity, (iii) analytical review of our fair values against current market prices and (iv) comparison of the pricing services’ fair value to other pricing services’ fair value for the same investment. No markets for

14
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




the investments were determined to be inactive at period-ends. Based on these procedures, the Company did not adjust the prices or quotes provided from independent pricing services, investment managers or consultants.
As of June 30, 2018, Level 3 is entirely comprised of the Company's subordinated debt. In determining the fair value of the subordinated debt outstanding at June 30, 2018, the security attributes (issue date, maturity, coupon, calls, etc.) and market rates on September 29, 2017 (the date of issuance) were fed into a valuation model. A lognormal trinomial interest rate lattice was created within the model to compute the option adjusted spread (“OAS”) which is the amount, in basis points, of interest rate required to be paid under the debt agreement over the risk-free U.S. Treasury rates. The OAS was then fed back into the model along with the June 30, 2018, U.S. Treasury rates. A new lattice was generated and the fair value was computed from the OAS. There were no changes in assumptions of credit risk from the issuance date.
 The Company’s policy on recognizing transfers between hierarchy levels is applied at the end of each reporting period. There were no transfers between Levels 1, 2 and 3 for the six months ended June 30, 2018 and 2017, respectively.

4. Deferred Policy Acquisition Costs
The Company defers costs incurred which are incremental and directly related to the successful acquisition of new or renewal insurance business, net of corresponding amounts of ceded reinsurance commissions. Net deferred policy acquisition costs are amortized and charged to expense in proportion to premium earned over the estimated policy term. The Company anticipates that its deferred policy acquisition costs will be fully recoverable and there were no premium deficiencies for the six months ended June 30, 2018 and 2017. The activity in deferred policy acquisition costs, net of reinsurance transactions, is as follows (dollars in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Balance at beginning of period
$
12,050

 
$
12,956

 
$
12,781

 
$
13,290

 
 
 
 
 
 
 
 
Deferred policy acquisition costs
6,443

 
6,121

 
12,225

 
12,259

Amortization of policy acquisition costs
(6,472
)
 
(6,428
)
 
(12,985
)
 
(12,900
)
Net change
(29
)
 
(307
)
 
(760
)
 
(641
)
 
 
 
 
 
 
 
 
Balance at end of period
$
12,021

 
$
12,649

 
$
12,021

 
$
12,649


5.     Unpaid Losses and Loss Adjustment Expenses
 The Company establishes reserves for unpaid losses and loss adjustment expenses ("LAE") which represent the estimated ultimate cost of all losses incurred that were both reported and unreported (i.e., incurred but not yet reported losses; or “IBNR”) and LAE incurred that remain unpaid at the balance sheet date. The Company’s reserving process takes into account known facts and interpretations of circumstances and factors including the Company’s experience with similar cases, actual claims paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management programs, product mix and contractual terms, changes in law and regulation, judicial decisions, and economic conditions. In the normal course of business, the Company may also supplement its claims processes by utilizing third party adjusters, appraisers, engineers, inspectors, and other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims. The effects of inflation are implicitly considered in the reserving process.
 Reserves are estimates of unpaid portions of losses that have occurred, including IBNR losses; therefore the establishment of appropriate reserves is an inherently uncertain and complex process. The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimates. The highest degree of uncertainty is associated with reserves for losses incurred in the current reporting period as it contains the greatest proportion of losses that have not been reported or settled. The Company regularly updates its reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in reserve estimates, which may be material, are reported in the results of operations in the period such changes are determined to be needed and recorded.
  Management believes that the reserve for losses and LAE, net of reinsurance recoverables, is appropriately established in the aggregate and adequate to cover the ultimate net cost of reported and unreported claims arising from losses which had

15
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




occurred by the date of the consolidated financial statements based on available facts and in accordance with applicable laws and regulations.
 The table below provides the changes in the reserves for losses and LAE, net of reinsurance recoverables, for the periods indicated as follows (dollars in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Gross reserves - beginning of period
$
85,491

 
$
62,135

 
$
87,896

 
$
54,651

Less: reinsurance recoverables on unpaid losses
20,063

 
9,125

 
20,066

 
6,658

Plus: deferred gain on ADC
(1,431
)
 
—

 
—

 
—

Net reserves - beginning of period
66,859

 
53,010

 
67,830

 
47,993

 
 
 
 
 
 
 
 
Add: incurred losses and LAE, net of reinsurance:
 
 
 
 
 
 
 
Current period
13,581

 
12,397

 
26,926

 
25,051

Prior period
1,486

 
4,277

 
1,470

 
7,356

Total net incurred losses and LAE
15,067

 
16,674

 
28,396

 
32,407

 
 
 
 
 
 
 
 
Deduct: loss and LAE payments, net of reinsurance:
 
 
 
 
 
 
 
Current period
4,437

 
5,313

 
6,026

 
7,216

Prior period
11,882

 
8,006

 
24,593

 
16,819

Total net loss and LAE payments
16,319

 
13,319

 
30,619

 
24,035

 
 
 
 
 
 
 
 
Net reserves - end of period
65,607

 
56,365

 
65,607

 
56,365

Plus: reinsurance recoverables on unpaid losses
20,467

 
10,552

 
20,467

 
10,552

Less: deferred gain on ADC
(2,412
)
 
—

 
(2,412
)
 
—

Gross reserves - end of period
$
83,662

 
$
66,917

 
$
83,662

 
$
66,917


On September 28, 2017, the Company entered into an adverse development cover reinsurance agreement (the "ADC") to cover loss development of up to $17.5 million in excess of stated reserves as of June 30, 2017. The agreement provides up to $17.5 million of reinsurance for adverse net loss reserve development for accident years 2005 through 2016. The agreement attaches when net losses exceed $1.4 million of the $36.6 million carried reserves at June 30, 2017, and extends to $19.5 million in coverage up to $57.5 million (inclusive of a 10% co-participation).
The Company accounts for the agreement as retroactive reinsurance. For the three and six months ended June 30, 2018, the Company recorded $1.5 million and $3.2 million of net adverse loss development covered under this agreement, which increased the retroactive reinsurance recoverable to $10.4 million, leaving $7.1 million of coverage remaining on the ADC. The Company recorded the retroactive reinsurance recoverable in excess of the consideration as a deferred gain that is amortized to earnings using the interest method over the estimated claims settlement period. As of June 30, 2018, the deferred gain of $2.4 million, net of amortization, is included in Other Liabilities on the consolidated balance sheets.
The Company’s incurred losses during the three and six months ended June 30, 2018, included adverse prior-year reserve
development of $1.5 million, respectively. Before the effect of the ADC deferred gain, the commercial lines of business reported $1.2 million of adverse prior-year development and $900,000 of adverse development from the personal lines of business for the three months ended June 30, 2018. Before the effect of the ADC deferred gain, the commercial lines of business reported $1.1 million of adverse prior-year development and $1.3 million of adverse development from the personal lines of business for the six months ended June 30, 2018. Included in the unfavorable development was $121,000 and $388,000 attributable to additional 2017 losses from Hurricane Harvey for the three and six months ended June 30, 2018, respectively. The ADC had a favorable impact of $583,000 and $862,000 on prior year reserve development for the three and six months ended June 30, 2018, respectively.
The Company’s incurred losses during the three and six months ended June 30, 2017, include prior-year adverse reserve development of $4.3 million and $7.4 million, respectively. In the second quarter of 2017, there was adverse development of $1.6 million from the commercial liability line of business, $1.3 million from the Florida homeowners line, $613,000 from the commercial property line and $245,000 from the commercial auto line of business. For the six months ended June 30, 2017,

16
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




there was adverse development of $2.9 million from the commercial liability line of business, $2.3 million from the commercial property line, $1.7 million from the Florida homeowners line, and $329,000 from the commercial auto line of business.

6.     Reinsurance
In the normal course of business, the Company seeks to minimize the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with reinsurers. The Company participates in reinsurance agreements in order to limit its loss exposure including protecting against catastrophe losses. The Company primarily ceded all specific commercial risks in excess of $500,000 in both 2018 and 2017. Reinsurance does not discharge the direct insurer from liability to its policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors the concentration of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. To date, the Company has not experienced any significant difficulties in collecting reinsurance recoverables.
The Company assumes written premiums under a few fronting arrangements, most of which are net of other reinsurance arrangements. The fronting arrangements are with unaffiliated insurers who write on behalf of the Company in markets that require a higher A.M. Best rating than the Company’s current rating, where the policies are written in a state where the Company is not licensed or for other strategic reasons.
The consideration for the ADC entered into in the third quarter of 2017 was a payment of $7.2 million, which resulted in a one-time charge to ceded premiums fully earned in the third quarter of 2017. There is a 35% contingent recovery depending on the performance of the reserves over time. No recovery is currently reflected in the financial statements.
The following table presents the effects of such reinsurance and assumption transactions on premiums and losses and LAE (dollars in thousands). The 2018 ceded written and earned premium amounts include $173,000 and $540,000 of reinsurance reinstatement costs relating to Hurricane Irma for the three and six months ended June 30, 2018, respectively.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Written premiums:
 
 
 
 
 
 
 
Direct
$
17,568

 
$
20,719

 
$
36,423

 
$
41,619

Assumed
8,994

 
6,262

 
13,876

 
11,836

Ceded
(3,967
)
 
(3,899
)
 
(7,860
)
 
(8,048
)
Net written premiums
$
22,595

 
$
23,082

 
$
42,439

 
$
45,407

 
 
 
 
 
 
 
 
Earned premiums:
 
 
 
 
 
 
 
Direct
$
20,561

 
$
21,960

 
$
41,785

 
$
44,020

Assumed
7,295

 
6,378

 
13,796

 
12,582

Ceded
(3,918
)
 
(3,841
)
 
(7,842
)
 
(7,965
)
Net earned premiums
$
23,938

 
$
24,497

 
$
47,739

 
$
48,637

 
 
 
 
 
 
 
 
Losses and LAE:
 
 
 
 
 
 
 
Direct
$
14,432

 
$
16,194

 
$
27,390

 
$
32,227

Assumed
3,414

 
4,830

 
6,969

 
8,704

Ceded
(2,779
)
 
(4,350
)
 
(5,963
)
 
(8,524
)
Net Losses and LAE
$
15,067

 
$
16,674

 
$
28,396

 
$
32,407

 
 
 
 
 
 
 
 

17
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




7.     Debt
The Company's debt is comprised of two instruments: a $10.0 million line of credit which commenced in June 2018 and $30.0 million of subordinated notes which commenced in September 2017. A summary of the Company's outstanding debt is as follows (dollars in thousands):
 
June 30, 2018
 
December 31, 2017
Subordinated notes
$
29,060

 
$
29,027

Line of credit
—

 
—

Total
$
29,060

 
$
29,027


On June 21, 2018, the Company entered into a $10.0 million line of credit. The agreement has a maturity date of June 21, 2019 and bears interest at the London Interbank rate ("LIBOR") plus 2.75% per annum, payable monthly. The agreement includes several covenants, including but not limited to a minimum tangible net worth, a minimum fixed charge coverage ratio, and minimum statutory risk-based capital levels. The new financing replaced the Company's previous senior debt facility ("Credit Facility"). As of June 30, 2018, the Company has not drawn down on the line of credit.
On September 29, 2017, the Company executed $30.0 million in private placement subordinated notes (the "Notes"). The Notes have a maturity date of September 29, 2032, bear interest, payable quarterly at a fixed annual rate of 8.0%, and allow for up to four quarterly interest deferrals. On the fifth and tenth anniversary of the notes, the interest rate resets to 1,250 basis points and 1,500 basis points, respectively, above the 5-year mid-swap rate. The Notes include an issuer call option at par from July 31, 2018, through October 31, 2018, and at 105% of par any time after September 29, 2020.  
The carrying value of the Notes is offset by $940,000 of debt issuance costs that will be amortized through interest expense over the life of the loan.
Proceeds from the Notes were used to pay off the Company's previous Credit Facility, which was terminated upon execution of the Notes and had total outstanding balances of $16.4 million. The Credit Facility was comprised of three notes: a $17.5 million revolving line of credit which commenced in October 2013; a $5.0 million five-year term note which commenced in October 2013; and a $7.5 million five-year term note which commenced in September 2014.
The Notes contain various restrictive covenants that relate to the Company’s tangible net worth, fixed-charge coverage ratios, dividend paying capacity, reinsurance retentions, and risk-based capital ratios.
On June 21, 2018, certain amendments were made to the Notes agreement to conform to the senior debt facility. The amendments include clarification of certain key terms, and debt covenant metrics. At June 30, 2018, the Company was in compliance with all of its subordinated debt financial covenants.

8.     Shareholders’ Equity
In September 2017, the Company issued $5.0 million of common equity through a private placement for 800,000 shares priced at $6.25 per share. The participants in the private placement consisted mainly of members of the Company’s management team and insiders, including Chairman and CEO James Petcoff. The Company used the proceeds to strengthen its balance sheet through contributions to the subsidiaries to support their future growth, as well as cover the cost of the ADC and reserve strengthening.
 On February 25, 2016, the Company's Board of Directors authorized a stock repurchase program, under which the Company may repurchase up to $2.1 million of its outstanding common stock. Under this program, management was authorized to repurchase shares at prevailing market prices through open market purchases, privately negotiated transactions, block purchases or otherwise in accordance with applicable federal securities laws, including Rule 10b5-1 and 10b-18 of the Securities Exchange Act of 1934, as amended. The actual timing, number and value of shares repurchased under the program was determined by management in its discretion and depends on a number of factors, including the market price of the Company’s stock, general market conditions, and other factors. For the six months ended June 30, 2018 and 2017, the Company had not repurchased any shares of stock. Repurchased shares remain authorized but not issued or outstanding, and are available to be reissued in the future.
As of June 30, 2018 and December 31, 2017, the Company had 8,520,328 issued and outstanding shares of common stock, respectively.
Holders of common stock are entitled to one vote per share and to receive dividends only when and if declared by the board of directors. The holders have no preemptive, conversion or subscription rights.

9. Accumulated Other Comprehensive Income (Loss)

18
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




 The following table presents changes in accumulated other comprehensive income (loss) for unrealized gains and losses on available-for-sale securities (dollars in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Balance at beginning of period
$
(2,688
)
 
$
(746
)
 
$
(363
)
 
$
(1,080
)
Other comprehensive income (loss) before reclassifications
(376
)
 
238

 
(2,222
)
 
623

Less: amounts reclassified from accumulated other comprehensive income (loss)
(4
)
 
(1
)
 
(4
)
 
50

Net current period other comprehensive income (loss)
(372
)
 
239

 
(2,218
)
 
573

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

 
—

 
(556
)
 
—

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

 
—

 
77

 
—

Balance at end of period
$
(3,060
)
 
$
(507
)
 
$
(3,060
)
 
$
(507
)

10. Earnings Per Share
 Basic and diluted earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. The following table presents the calculation of basic and diluted earnings (loss) per common share, as follows (dollars in thousands, except per share amounts):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
(1,113
)
 
$
(1,067
)
 
$
(900
)
 
$
(2,866
)
 
 
 
 
 
 
 
 
Weighted average common shares, basic and diluted*
8,520,328

 
7,633,069

 
8,520,328

 
7,633,069

 
 
 
 
 
 
 
 
Earnings (loss) per common share, basic and diluted
$
(0.13
)
 
$
(0.14
)
 
$
(0.11
)
 
$
(0.38
)
* The 362,000 and 404,000 nonvested shares of the restricted stock units were anti-dilutive as of June 30, 2018 and June 30, 2017, respectively. Therefore, the basic and diluted weighted average common shares are equal for the three and six months ended June 30, 2018 and June 30, 2017.

11.     Stock-based Compensation

In 2015, the Company issued 390,352 restricted stock units ("RSUs") to executive officers and other employees to be settled in shares of common stock. The total RSUs were valued at $4.1 million on the dates of grant. In 2016, the Company issued 111,281 RSUs to executive officers and other employees valued at $909,000 on the date of grant. In 2018, the Company issued 70,000 RSUs to executive officers and other employees valued at $404,000 on the dates of grant.
 
The following summarizes our RSU activity (units in thousands):

19
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




 
Number of Units
 
Weighted Average Grant-Date Fair Value
 
 
 
 
Outstanding at December 31, 2016
416

 
$
9.87

Units granted
—

 
—

Units vested
—

 
—

Units forfeited
(12
)
 
9.87

Outstanding at June 30, 2017
404

 
$
9.87

Units granted
—

 
—

Units vested
(95
)
 
9.97

Units forfeited
(2
)
 
10.36

Outstanding at December 31, 2017
307

 
$
9.84

Units granted
70

 
5.76

Units vested
—

 
—

Units forfeited
(15
)
 
8.76

Outstanding at June 30, 2018
362

 
$
9.09

The Company recorded $460,000 and $466,000 of compensation expense related to the RSUs for the six months ended June 30, 2018 and 2017, respectively. The total compensation cost related to the non-vested portion of the restricted stock units which has not been recognized as of June 30, 2018, was $3.3 million.

 
12.     Commitments and Contingencies
 Legal proceedings

20
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




 The Company and its subsidiaries are subject at times to various claims, lawsuits and proceedings relating principally to alleged errors or omissions in the placement of insurance, claims administration, and other business transactions arising in the ordinary course of business. Where appropriate, the Company vigorously defends such claims, lawsuits and proceedings. Some of these claims, lawsuits and proceedings seek damages, including consequential, exemplary or punitive damages, in amounts that could, if awarded, be significant. Most of the claims, lawsuits and proceedings arising in the ordinary course of business are related to the insurance policy issued. On the basis of current information, the Company does not believe that there is a reasonable possibility that any material loss exceeding amounts already accrued, if any, will result from any of the claims, lawsuits and proceedings to which the Company is subject, either individually, or in the aggregate.

13.     Segment Information
 The Company is engaged in the sale of property and casualty insurance products and has organized its business model around two classes of insurance businesses: commercial and personal lines. Within these two insurance businesses, the Company offers various insurance products. Such insurance businesses are engaged in underwriting and marketing insurance coverages, and administering claims processing for such policies.
 The Company defines its operating segments as components of the business where separate financial information is available and used by the chief operating decision-making group in deciding how to allocate resources to its segments and in assessing its performance. In assessing performance of its operating segments, the Company’s chief operating decision-making group, comprised of key senior executives, reviews a number of financial measures including gross written premiums, net earned premiums and losses and LAE, net of reinsurance recoveries. The primary measure used for making decisions about resources to be allocated to an operating segment and assessing its performance is segment underwriting gain or loss which is defined as segment revenues, consisting of net earned premiums and other income, less segment expenses, consisting of losses and LAE, policy acquisition costs and operating expenses of the operating segments. Operating expenses primarily include compensation and related benefits for underwriting personnel, policy issuance and claims systems, rent and utilities. The Company markets, distributes and sells its insurance products through its own insurance agencies and a network of independent agents. All of the Company’s insurance activities are conducted in the United States with a concentration of activity in Florida, Michigan, Texas and Pennsylvania. For the six months ended June 30, 2018 and 2017, gross written premiums attributable to these four states were 59% and 62%, respectively, of the Company’s total gross written premiums.
 In addition to the reportable operating segments, the Company maintains a Corporate and Other category to reconcile segment results to the consolidated totals. The Corporate and Other category includes: (i) corporate operating expenses such as salaries and related benefits of the Company’s executive management team and finance and information technology personnel, and other corporate headquarters expenses, (ii) interest expense on the Company’s debt obligations; (iii) depreciation and amortization on property and equipment, and (iv) all investment income activity. All investment income activity is reported within net investment income and net realized investment gains on the consolidated statements of operations. The Company’s assets on the consolidated balance sheet are not allocated to the reportable segments.

21
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




The following tables present information by reportable operating segment (dollars in thousands):
Three Months Ended June 30, 2018
 
Commercial Lines
 
Personal Lines
 
Corporate
& Other
 
Total
Gross written premiums
 
$
25,008

 
$
1,554

 
$
—

 
$
26,562

Net written premiums
 
$
22,284

 
$
311

 
$
—

 
$
22,595

 
 
 
 
 
 
 
 
 
Net earned premiums
 
$
20,872

 
$
3,066

 
$
—

 
$
23,938

Other income
 
162

 
213

 
75

 
450

Total revenue
 
21,034

 
3,279

 
75

 
24,388

Losses and loss adjustment expenses, net
 
12,334

 
2,733

 
—

 
15,067

Policy acquisition costs
 
5,144

 
1,328

 
—

 
6,472

Operating expenses
 
3,827

 
348

 
128

 
4,303

Total expenses
 
21,305

 
4,409

 
128

 
25,842

Underwriting gain (loss)
 
$
(271
)
 
$
(1,130
)
 
$
(53
)
 
$
(1,454
)
 
 
 
 
 
 
 
 
 
Net investment income
 
 

 
 

 
838

 
838

Net realized investment gains
 
 

 
 

 
12

 
12

Change in fair value of equity securities
 
 
 
 
 
29

 
29

Interest expense
 
 
 
 
 
$
(617
)
 
$
(617
)
Income (loss) before equity earnings of affiliates and income taxes
 
 

 
 

 
$
209

 
$
(1,192
)

22
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)