ifer (CNFR) - 2019 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements, management's analysis of operations, market risk disclosures, and internal controls ITEM 1 — FINANCIAL STATEMENTS This section presents the unaudited consolidated financial statements, including balance sheets, income statements, cash flows, and detailed notes Consolidated Balance Sheets (Unaudited) This section provides a snapshot of the Company's assets, liabilities, and shareholders' equity at specific dates | Metric | June 30, 2019 (Unaudited) ($ thousands) | December 31, 2018 ($ thousands) | |:---|:---|:---| | Assets ||| | Total investments | $140,594 | $140,102 | | Cash and cash equivalents | $20,415 | $10,792 | | Premiums and agents' balances receivable, net | $23,125 | $21,247 | | Reinsurance recoverables on unpaid losses | $21,396 | $29,685 | | Total assets | $243,396 | $232,752 | | Liabilities ||| | Unpaid losses and loss adjustment expenses | $97,981 | $92,807 | | Unearned premiums | $51,606 | $52,852 | | Debt | $34,658 | $33,502 | | Total liabilities | $196,887 | $190,589 | | Shareholders' Equity ||| | Total shareholders' equity | $46,509 | $42,163 | | Total liabilities and shareholders' equity | $243,396 | $232,752 | Consolidated Statements of Operations (Unaudited) This section details the Company's revenues, expenses, and net income or loss over specific reporting periods | Metric | Three Months Ended June 30, 2019 ($ thousands) | Three Months Ended June 30, 2018 ($ thousands) | Six Months Ended June 30, 2019 ($ thousands) | Six Months Ended June 30, 2018 ($ thousands) | |:---|:---|:---|:---|:---|\n| Net earned premiums | $21,349 | $23,938 | $43,036 | $47,739 | | Total revenue | $22,781 | $25,267 | $47,084 | $50,090 | | Losses and loss adjustment expenses, net | $14,382 | $15,067 | $28,838 | $28,396 | | Policy acquisition costs | $6,210 | $6,472 | $11,799 | $12,985 | | Operating expenses | $4,340 | $4,303 | $8,663 | $8,489 | | Total expenses | $25,657 | $26,459 | $50,735 | $51,106 | | Net income (loss) | $(2,884) | $(1,113) | $(3,564) | $(900) | | Earnings (loss) per common share, basic and diluted | $(0.34) | $(0.13) | $(0.42) | $(0.11) | Consolidated Statements of Comprehensive Income (Loss) (Unaudited) This section presents the Company's net income or loss and other comprehensive income or loss components | Metric | Three Months Ended June 30, 2019 ($ thousands) | Three Months Ended June 30, 2018 ($ thousands) | Six Months Ended June 30, 2019 ($ thousands) | Six Months Ended June 30, 2018 ($ thousands) | |:---|:---|:---|:---|:---|\n| Net income (loss) | $(2,884) | $(1,113) | $(3,564) | $(900) | | Other comprehensive income (loss) | $1,336 | $(372) | $3,033 | $(2,218) | | Total comprehensive income (loss) | $(1,548) | $(1,485) | $(531) | $(3,118) | Consolidated Statements of Changes in Shareholders' Equity (Unaudited) This section outlines the changes in the Company's shareholders' equity over the reporting period | Metric | December 31, 2018 ($ thousands) | June 30, 2019 ($ thousands) | |:---|:---|:---|\n| Common Stock Amount | $86,533 | $91,410 | | Accumulated Deficit | $(41,758) | $(45,322) | | Accumulated Other Comprehensive Income (Loss) | $(2,612) | $421 | | Total Shareholders' Equity | $42,163 | $46,509 | | Shares Outstanding | 8,478,202 | 9,519,550 | - The Company issued 1,176,471 shares of common stock through a private placement, increasing common stock by $5,000,000[17] - The Company repurchased 142,815 shares of common stock for $608,000 during the six months ended June 30, 2019[17] Consolidated Statements of Cash Flows (Unaudited) This section details the cash inflows and outflows from operating, investing, and financing activities | Cash Flow Activity | Six Months Ended June 30, 2019 ($ thousands) | Six Months Ended June 30, 2018 ($ thousands) | |:---|:---|:---|\n| Net cash provided by (used in) operating activities | $(223) | $(7,121) | | Net cash provided by (used in) investing activities | $4,459 | $12,269 | | Net cash provided by (used in) financing activities | $5,387 | $0 | | Net increase (decrease) in cash | $9,623 | $5,148 | | Cash and cash equivalents at end of period | $20,415 | $17,016 | Notes to Consolidated Financial Statements (Unaudited) This section provides detailed explanations and disclosures supporting the consolidated financial statements 1. Summary of Significant Accounting Policies This section details the basis of financial statement presentation, key accounting policies, use of estimates, and recently adopted or issued accounting guidance - The Company adopted FASB ASU No. 2016-02, Leases (Topic 842), effective January 1, 2019, recognizing a right-of-use asset and corresponding lease liability of $3.9 million[27] - The Company is evaluating the impact of ASU No. 2016-13 (Credit Losses) and ASU No. 2018-13 (Fair Value Measurement), both effective after December 15, 2019, but does not expect a material impact on its consolidated financial statements[30] 2. Investments This note details the Company's investment portfolio, including fair values, unrealized gains/losses, net investment income, and impairment analysis | Investment Type | June 30, 2019 Fair Value ($ thousands) | December 31, 2018 Fair Value ($ thousands) | |:---|:---|:---|\n| Debt securities, at fair value | $124,118 | $120,440 | | Equity securities, at fair value | $11,862 | $10,737 | | Short-term investments, at fair value | $4,614 | $8,925 | | Total investments | $140,594 | $140,102 | | Metric | Three Months Ended June 30, 2019 ($ thousands) | Three Months Ended June 30, 2018 ($ thousands) | Six Months Ended June 30, 2019 ($ thousands) | Six Months Ended June 30, 2018 ($ thousands) | |:---|:---|:---|:---|:---|\n| Net investment income | $1,051 | $838 | $1,961 | $1,639 | | Total net realized investment gains (losses) | $715 | $12 | $734 | $173 | - The Company did not record any credit-related other-than-temporary impairment (OTTI) losses for the three and six months ended June 30, 2019 and 2018[39] 3. Fair Value Measurements This note details fair value measurements for financial instruments, categorizing them into a three-level hierarchy based on input observability | Fair Value Level | June 30, 2019 Total Marketable Investments ($ thousands) | December 31, 2018 Total Marketable Investments ($ thousands) | |:---|:---|:---|\n| Level 1 | $11,256 | $15,248 | | Level 2 | $124,382 | $120,704 | | Level 3 | $0 | $0 | | Investments measured at NAV | $4,956 | $4,150 | | Total assets measured at fair value | $140,594 | $140,102 | - As of June 30, 2019, Level 1 investments (equity securities, money market funds) comprised 8.0% of the total investment portfolio, while Level 2 investments (debt securities) comprised 88.5%[52] - Level 3 is entirely comprised of the Company's subordinated debt, with its fair value determined using a valuation model incorporating security attributes and market rates[55] 4. Deferred Policy Acquisition Costs This note explains the Company's policy for deferring and amortizing policy acquisition costs and summarizes related activity | Metric | June 30, 2019 ($ thousands) | June 30, 2018 ($ thousands) | |:---|:---|:---|\n| Balance at beginning of period (Six Months) | $12,011 | $12,781 | | Deferred policy acquisition costs (Six Months) | $12,090 | $12,225 | | Amortization of policy acquisition costs (Six Months) | $(11,799) | $(12,985) | | Net change (Six Months) | $291 | $(760) | | Balance at end of period (Six Months) | $12,302 | $12,021 | - The Company anticipates full recoverability of its deferred policy acquisition costs and reported no premium deficiencies for the six months ended June 30, 2019 and 2018[56] 5. Unpaid Losses and Loss Adjustment Expenses This note details the Company's methodology for establishing and updating reserves for unpaid losses and loss adjustment expenses | Metric | June 30, 2019 ($ thousands) | June 30, 2018 ($ thousands) | |:---|:---|:---|\n| Gross reserves - beginning of period (Six Months) | $92,807 | $87,896 | | Net incurred losses and LAE (Six Months) | $28,838 | $28,396 | | Total net loss and LAE payments (Six Months) | $20,571 | $30,619 | | Gross reserves - end of period (Six Months) | $97,981 | $83,662 | - The Company's incurred losses for the six months ended June 30, 2019, included $4.4 million of adverse prior-year reserve development, primarily from commercial liability and Florida homeowners lines, net of $5.2 million amortization of deferred gain on the ADC[61] - As of June 30, 2019, the Company had ceded to the limit of the ADC, with $481,000 of deferred gain remaining to be recognized[61] 6. Reinsurance This note describes the Company's use of reinsurance to manage loss exposure and its impact on premiums and losses | Metric | Three Months Ended June 30, 2019 ($ thousands) | Three Months Ended June 30, 2018 ($ thousands) | Six Months Ended June 30, 2019 ($ thousands) | Six Months Ended June 30, 2018 ($ thousands) | |:---|:---|:---|:---|:---|\n| Net written premiums | $21,434 | $22,595 | $41,756 | $42,439 | | Net earned premiums | $21,349 | $23,938 | $43,036 | $47,739 | | Net Losses and LAE | $14,382 | $15,067 | $28,838 | $28,396 | - Reinsurance reinstatement costs related to Hurricane Irma were $93,000 for the three months and $343,000 for the six months ended June 30, 2019[65] - The Company primarily ceded specific property risks exceeding $300,000 and specific liability risks exceeding $400,000 in 2019[65] 7. Debt This note details the Company's debt instruments, including terms, interest rates, maturity dates, and covenant compliance | Debt Instrument | June 30, 2019 ($ thousands) | December 31, 2018 ($ thousands) | |:---|:---|:---|\n| Senior unsecured notes | $24,153 | $24,018 | | Subordinated notes | $9,510 | $9,484 | | Line of credit | $995 | $0 | | Total | $34,658 | $33,502 | - In May 2019, lenders waived the March 31, 2019, tangible net worth covenant non-compliance for the Subordinated Notes and line of credit[70] - The Company renewed its $10.0 million line of credit and amended the Subordinated Notes agreement on June 21, 2019, modifying tangible net worth and debt-to-total capital ratio covenants, and was in compliance with all debt covenants as of June 30, 2019[70] 8. Shareholders' Equity This note details changes in shareholders' equity, including common stock issuance, repurchases, and outstanding shares - In June 2019, the Company issued $5.0 million of common equity through a private placement of 1,176,471 shares at $4.25 per share, with proceeds used for growth capital in specialty core business segments[74] - For the six months ended June 30, 2019, the Company repurchased 142,815 shares of common stock valued at approximately $608,000 under its stock repurchase program[74] | Metric | June 30, 2019 | December 31, 2018 | |:---|:---|:---|\n| Issued and outstanding common shares | 9,519,550 | 8,478,202 | 9. Accumulated Other Comprehensive Income (Loss) This note presents changes in accumulated other comprehensive income (loss), primarily from unrealized gains/losses on available-for-sale securities | Metric | Three Months Ended June 30, 2019 ($ thousands) | Three Months Ended June 30, 2018 ($ thousands) | Six Months Ended June 30, 2019 ($ thousands) | Six Months Ended June 30, 2018 ($ thousands) | |:---|:---|:---|:---|:---|\n| Balance at beginning of period | $(915) | $(2,688) | $(2,612) | $(363) | | Other comprehensive income (loss) before reclassifications | $1,366 | $(376) | $2,923 | $(2,222) | | Net other comprehensive income (loss) | $1,336 | $(372) | $3,033 | $(2,218) | | Balance at end of period | $421 | $(3,060) | $421 | $(3,060) | 10. Earnings Per Share This note details the calculation of basic and diluted earnings (loss) per common share for the reporting periods | Metric | Three Months Ended June 30, 2019 ($ thousands) | Three Months Ended June 30, 2018 ($ thousands) | Six Months Ended June 30, 2019 ($ thousands) | Six Months Ended June 30, 2018 ($ thousands) | |:---|:---|:---|:---|:---|\n| Net income (loss) | $(2,884) | $(1,113) | $(3,564) | $(900) | | Weighted average common shares, basic and diluted | 8,370,782 | 8,520,328 | 8,411,835 | 8,520,328 | | Earnings (loss) per common share, basic and diluted | $(0.34) | $(0.13) | $(0.42) | $(0.11) | - Nonvested restricted stock units were anti-dilutive, resulting in equal basic and diluted weighted average common shares for the periods presented[78] 11. Stock-based Compensation This note summarizes the Company's restricted stock unit (RSU) activity and related compensation expense recognized | RSU Activity | Number of Units (thousands) | Average Grant-Date Value | |:---|:---|:---|\n| Outstanding at December 31, 2018 | 264 | $8.91 | | Units vested (Six Months Ended June 30, 2019) | (8) | $5.65 | | Units forfeited (Six Months Ended June 30, 2019) | (6) | $6.13 | | Outstanding at June 30, 2019 | 250 | $9.08 | - The Company recorded $485,000 and $460,000 of compensation expense related to RSUs for the six months ended June 30, 2019 and 2018, respectively[83] - Total unrecognized compensation cost for non-vested RSUs as of June 30, 2019, was $1.8 million[83] 12. Commitments and Contingencies This note addresses legal proceedings and other claims, with management expecting no material loss beyond accrued amounts - The Company is subject to various claims and lawsuits, primarily related to alleged errors or omissions in insurance placement and claims administration[84] - Management believes there is no reasonable possibility of a material loss exceeding currently accrued amounts from these legal proceedings[84] 13. Segment Information This note provides financial information for the Company's commercial lines, personal lines, and wholesale agency operating segments - The Company's operating segments are commercial lines, personal lines (underwriting businesses), and wholesale agency business (non-risk bearing revenue)[87] | Segment | Three Months Ended June 30, 2019 Underwriting Gain (Loss) ($ thousands) | Three Months Ended June 30, 2018 Underwriting Gain (Loss) ($ thousands) | |:---|:---|:---|\n| Commercial Lines | $(1,563) | $(968) | | Personal Lines | $(1,214) | $(1,134) | | Total Underwriting | $(2,777) | $(2,102) | | Wholesale Agency | $466 | $542 | | Corporate | $(72) | $106 | | Eliminations | $(619) | $0 | | Total underwriting income (loss) | $(3,002) | $(1,454) | | Segment | Six Months Ended June 30, 2019 Underwriting Gain (Loss) ($ thousands) | Six Months Ended June 30, 2018 Underwriting Gain (Loss) ($ thousands) | |:---|:---|:---|\n| Commercial Lines | $(1,765) | $(66) | | Personal Lines | $(2,780) | $(1,665) | | Total Underwriting | $(4,545) | $(1,731) | | Wholesale Agency | $380 | $392 | | Corporate | $(477) | $15 | | Eliminations | $(619) | $0 | | Total underwriting income (loss) | $(5,261) | $(1,324) | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's analysis of the Company's financial condition, operational results, liquidity, and capital resources Forward-Looking Statements This section cautions that the report contains forward-looking statements subject to risks and uncertainties - The report contains forward-looking statements based on management's current expectations and judgment, which are subject to important factors, risks, and uncertainties that could cause actual results to differ materially[102][103] Business Overview This section describes the Company's insurance operations, revenue sources, expenses, and strategic business adjustments - Conifer Holdings, Inc. is an insurance holding company offering specialty commercial and personal insurance lines, authorized as an excess and surplus lines carrier in 45 states and licensed as an admitted carrier in 42 states[104] - Revenues are primarily from earned premiums, supplemented by investment income and other fees; expenses include losses, commissions, and administrative costs[105][106] - The Company is de-emphasizing its Florida homeowners' business and reducing exposures in other wind-exposed states due to recent industry events, while expanding its wholesale agency business for non-risk revenue streams[107] Critical Accounting Policies and Estimates This section highlights the significant accounting policies and estimates used in preparing the financial statements - Management makes estimates and assumptions that affect reported financial amounts, with no material changes to critical accounting policies during the six months ended June 30, 2019[109] Executive Overview This section provides a high-level summary of key financial performance metrics for the reporting period | Metric | Three Months Ended June 30, 2019 ($ millions) | Three Months Ended June 30, 2018 ($ millions) | Six Months Ended June 30, 2019 ($ millions) | Six Months Ended June 30, 2018 ($ millions) | |:---|:---|:---|:---|:---|\n| Net loss | $(2.9) | $(1.1) | $(3.6) | $(0.9) | | Net loss per share | $(0.34) | $(0.13) | $(0.42) | $(0.11) | | Adjusted operating loss (non-GAAP) | $(5.6) | $(0.173) | $(9.8) | $1.6 | | Adjusted operating loss per share (non-GAAP) | $(0.67) | $(0.02) | $(1.17) | $0.18 | | Combined ratio | 113.0% | 108.8% | 110.5% | 103.6% | Results of Operations For The Three Months Ended June 30, 2019 and 2018 Net loss increased to $2.9 million for the three months ended June 30, 2019, with the combined ratio worsening to 113.0% | Metric | 3 Months Ended June 30, 2019 ($ thousands) | 3 Months Ended June 30, 2018 ($ thousands) | Change ($ thousands) | Change (%) | |:---|:---|:---|:---|:---|\n| Gross written premiums | $25,169 | $26,562 | $(1,393) | (5.2)% | | Net earned premiums | $21,349 | $23,938 | $(2,589) | (10.8)% | | Underwriting gain (loss) | $(3,002) | $(1,454) | $(1,548) | * | | Net income (loss) | $(2,884) | $(1,113) | $(1,771) | * | | Loss ratio | 67.1% | 62.8% | 4.3 pp | | | Expense ratio | 45.9% | 46.0% | (0.1) pp | | | Combined ratio | 113.0% | 108.8% | 4.2 pp | | Premiums Gross written premiums decreased by 5.2% due to strategic reductions, while net earned premiums declined by 10.8% | Premium Type | 3 Months Ended June 30, 2019 ($ thousands) | 3 Months Ended June 30, 2018 ($ thousands) | Change ($ thousands) | Change (%) | |:---|:---|:---|:---|:---|\n| Gross written premiums | $25,169 | $26,562 | $(1,393) | (5.2)% | | Commercial lines GWP | $23,459 | $25,008 | $(1,549) | (6.2)% | | Personal lines GWP | $1,710 | $1,554 | $156 | 10.0% | | Net written premiums | $21,434 | $22,595 | $(1,161) | (5.1)% | | Net earned premiums | $21,349 | $23,938 | $(2,589) | (10.8)% | - Commercial lines gross written premiums decreased due to strategic reduction in areas generating higher loss results, partially offset by growth in historically more profitable areas[117] - New catastrophe reinsurance treaties effective June 1, 2019, are expected to reduce the average cost of catastrophe reinsurance on property lines from 12.2% to 4.2% of gross earned premium[118] Other Income Other income increased by 29.1%, driven by higher commission income from Agency operations and increased policyholder fees | Metric | 3 Months Ended June 30, 2019 ($ thousands) | 3 Months Ended June 30, 2018 ($ thousands) | Change ($ thousands) | Change (%) | |:---|:---|:---|:---|:---|\n| Other income | $581 | $450 | $131 | 29.1% | - The increase in other income was mainly due to additional commission income in Agency operations and higher fees charged on existing business[121] Losses and Loss Adjustment Expenses Net losses and LAE decreased by 4.5%, but the loss ratio worsened to 67.1% due to adverse prior-year reserve development | Metric | 3 Months Ended June 30, 2019 ($ thousands) | 3 Months Ended June 30, 2018 ($ thousands) | Change ($ thousands) | Change (%) | |:---|:---|:---|:---|:---|\n| Net losses and LAE | $14,382 | $15,067 | $(685) | (4.5)% | | Calendar year loss ratio | 67.1% | 62.8% | 4.3 pp | | | Net adverse development | $2,388 | $1,485 | $903 | * | - Adverse prior-year reserve development of $2.4 million for Q2 2019 was mainly from commercial liability ($1.5 million) and personal lines ($0.9 million, partly Florida homeowners), net of $2.9 million ADC deferred gain amortization[123] Expense Ratio The overall expense ratio slightly decreased to 45.9%, despite negative impacts from reduced net earned premiums and reinsurance costs | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | |:---|:---|:---|\n| Total Underwriting Expense Ratio | 45.9% | 46.0% | | Commercial Lines Expense Ratio | 45.6% | 45.6% | | Personal Lines Expense Ratio | 50.1% | 48.8% | - The expense ratio was negatively impacted by 0.6 percentage points due to reinsurance reinstatement and minimum premium costs[129] - Personal lines operating expense ratio increased significantly due to a steep decrease in net earned premiums from planned reductions in wind-exposed business[129] Underwriting Results Total underwriting loss increased to $3.0 million for the three months, driven by higher losses in commercial and personal lines | Segment | 3 Months Ended June 30, 2019 Underwriting Gain (Loss) ($ thousands) | 3 Months Ended June 30, 2018 Underwriting Gain (Loss) ($ thousands) | |:---|:---|:---|\n| Commercial Lines | $(1,563) | $(968) | | Personal Lines | $(1,214) | $(1,134) | | Total Underwriting | $(2,777) | $(2,102) | | Wholesale Agency | $466 | $542 | | Total underwriting income (loss) | $(3,002) | $(1,454) | Results of Operations For The Six Months Ended June 30, 2019 and 2018 Net loss increased to $3.6 million for the six months ended June 30, 2019, with the combined ratio worsening to 110.5% | Metric | 6 Months Ended June 30, 2019 ($ thousands) | 6 Months Ended June 30, 2018 ($ thousands) | Change ($ thousands) | Change (%) | |:---|:---|:---|:---|:---|\n| Gross written premiums | $49,385 | $50,299 | $(914) | (1.8)% | | Net earned premiums | $43,036 | $47,739 | $(4,703) | (9.9)% | | Underwriting gain (loss) | $(5,261) | $(1,324) | $(3,937) | * | | Net income (loss) | $(3,564) | $(900) | $(2,664) | * | | Loss ratio | 66.8% | 59.2% | 7.6 pp | | | Expense ratio | 43.7% | 44.4% | (0.7) pp | | | Combined ratio | 110.5% | 103.6% | 6.9 pp | | Premiums Gross written premiums decreased by 1.8% due to strategic reductions, while net earned premiums declined by 9.9% | Premium Type | 6 Months Ended June 30, 2019 ($ thousands) | 6 Months Ended June 30, 2018 ($ thousands) | Change ($ thousands) | Change (%) | |:---|:---|:---|:---|:---|\n| Gross written premiums | $49,385 | $50,299 | $(914) | (1.8)% | | Commercial lines GWP | $46,043 | $46,796 | $(753) | (1.6)% | | Personal lines GWP | $3,342 | $3,503 | $(161) | (4.6)% | | Net written premiums | $41,756 | $42,439 | $(683) | (1.6)% | | Net earned premiums | $43,036 | $47,739 | $(4,703) | (9.9)% | - Personal lines gross written premiums decreased due to planned reductions in wind-exposed homeowners business, partially offset by growth in low-value dwelling lines[140] - New catastrophe reinsurance treaties effective June 1, 2019, are expected to reduce the overall weighted average rate of reinsurance premiums to gross earned premiums by approximately 2.5 percentage points going forward[141] Other Income Other income increased by 24.3%, driven by additional commission income from Agency operations and increased fees | Metric | 6 Months Ended June 30, 2019 ($ thousands) | 6 Months Ended June 30, 2018 ($ thousands) | Change ($ thousands) | Change (%) | |:---|:---|:---|\n| Other income | $1,003 | $807 | $196 | 24.3% | - The increase in other income was primarily due to additional commission income in the Agency operations and increased fees charged on existing business[145] Losses and Loss Adjustment Expenses Net losses and LAE increased by 1.6%, with the loss ratio worsening to 66.8% due to adverse prior-year reserve development | Metric | 6 Months Ended June 30, 2019 ($ thousands) | 6 Months Ended June 30, 2018 ($ thousands) | Change ($ thousands) | Change (%) | |:---|:---|:---|\n| Net losses and LAE | $28,838 | $28,396 | $442 | 1.6% | | Calendar year loss ratio | 66.8% | 59.2% | 7.6 pp | | | Net adverse development | $4,373 | $1,470 | $2,903 | * | - Adverse prior-year reserve development of $4.4 million for H1 2019 was mainly from commercial liability ($2.4 million) and personal lines ($2.0 million, including $1.4 million from Florida homeowners), net of $5.2 million ADC deferred gain amortization[147] Expense Ratio The overall expense ratio decreased to 43.7%, despite negative impacts from reduced net earned premiums and reinsurance costs | Metric | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | |:---|:---|:---|\n| Total Underwriting Expense Ratio | 43.7% | 44.4% | | Commercial Lines Expense Ratio | 43.0% | 45.3% | | Personal Lines Expense Ratio | 57.4% | 38.9% | - The expense ratio was negatively impacted by 0.5 percentage points due to reinsurance reinstatement and minimum premium costs[152] - Personal lines operating expense ratio increased significantly in 2019 due to a steep decrease in net earned premiums from planned reductions in wind-exposed business[152] Underwriting Results Total underwriting loss significantly increased to $5.3 million for the six months, driven by higher losses in both segments | Segment | 6 Months Ended June 30, 2019 Underwriting Gain (Loss) ($ thousands) | 6 Months Ended June 30, 2018 Underwriting Gain (Loss) ($ thousands) | |:---|:---|:---|\n| Commercial Lines | $(1,765) | $(66) | | Personal Lines | $(2,780) | $(1,665) | | Total Underwriting | $(4,545) | $(1,731) | | Wholesale Agency | $380 | $392 | | Total underwriting income (loss) | $(5,261) | $(1,324) | Liquidity and Capital Resources This section discusses the Company's liquidity, capital resources, cash flow activities, and outstanding debt obligations Sources and Uses of Funds The Company's funding sources include premiums and investment income, with liquidity primarily from intercompany service fees - As of June 30, 2019, the Company had $25.0 million in cash, cash equivalents, and short-term investments[157] - The Parent Company's ability to service debt and pay administrative expenses relies primarily on intercompany service fees from its Insurance Company Subsidiaries[157] Cash Flows Cash used in operating activities significantly decreased, while financing activities provided $5.4 million from stock issuance and debt | Cash Flow Activity | 6 Months Ended June 30, 2019 ($ millions) | 6 Months Ended June 30, 2018 ($ millions) | |:---|:---|:---|\n| Operating Activities | $(0.2) | $(7.1) | | Investing Activities | $4.5 | $12.3 | | Financing Activities | $5.4 | $0.0 | - The $6.9 million decrease in cash used in operations was mostly due to an $11.3 million reduction in paid claims, partially offset by a $3.1 million reduction in premiums collected[158] - Financing activities were boosted by a $5.0 million common stock issuance and a $1.0 million line of credit drawdown, partially offset by $608,000 in stock repurchases[158] Outstanding Debt The Company's debt includes $25.3 million senior notes and $10.5 million subordinated notes, with modified covenant compliance - The Company issued $25.3 million in public senior unsecured notes in September and October 2018, maturing September 30, 2023, with a 6.75% annual interest rate[160] - Subordinated Notes were amended to a principal value of $10.5 million, maturing September 30, 2038, with interest rates of 7.5% until September 30, 2023, and 12.5% thereafter[160] - The $10.0 million line of credit was renewed on June 21, 2019, with modified tangible net worth and debt-to-total capital ratio covenants, and $995,000 was outstanding as of June 30, 2019[160] Non-GAAP Financial Measures This section presents non-GAAP financial measures, including statutory capital and surplus and adjusted operating income, for performance assessment Statutory Capital and Surplus Statutory capital and surplus for insurance subsidiaries decreased to $59.3 million at June 30, 2019 | Metric | June 30, 2019 ($ millions) | December 31, 2018 ($ millions) | |:---|:---|:---|\n| Statutory capital and surplus | $59.3 | $64.0 | Adjusted Operating Income and Adjusted Operating Income Per Share Adjusted operating loss was $5.6 million for three months and $9.8 million for six months, reflecting a significant decline | Metric | 3 Months Ended June 30, 2019 ($ thousands) | 3 Months Ended June 30, 2018 ($ thousands) | 6 Months Ended June 30, 2019 ($ thousands) | 6 Months Ended June 30, 2018 ($ thousands) | |:---|:---|:---|:---|:---|\n| Net income (loss) | $(2,884) | $(1,113) | $(3,564) | $(900) | | Adjusted operating income (loss) | $(5,597) | $(173) | $(9,844) | $1,607 | | Diluted income (loss) per common share | $(0.34) | $(0.13) | $(0.42) | $(0.11) | | Adjusted operating income (loss) per share | $(0.67) | $(0.02) | $(1.17) | $0.18 | - Adjusted operating income excludes net realized investment gains/losses, changes in fair value of equity securities, and the net decrease/increase in deferred gain on losses ceded to ADC to provide a clearer view of ongoing business performance[163] Recently Issued Accounting Pronouncements This section refers to detailed information on recently issued accounting pronouncements in Note 1 - Refer to Note 1, 'Summary of Significant Accounting Policies – Recently Issued Accounting Guidance,' for detailed information on recently issued accounting pronouncements[165] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section discusses the Company's market risk exposures, including interest rate and credit risk, and the effects of inflation Interest Rate Risk This section details the Company's exposure to interest rate fluctuations and its mitigation strategies for the investment portfolio - The Company's primary market risk exposure for its $140.6 million investment portfolio (excluding cash and cash equivalents) is interest rate risk, as it consists principally of investment-grade, available-for-sale debt securities[168] - Interest rate risks are mitigated by investing in securities with varied maturity dates and managing the investment portfolio's duration to a defined range of three to four years; the effective duration was 3.5 years at June 30, 2019[168] | Hypothetical Change in Interest Rates | Estimated Fair Value ($ thousands) | Estimated Change in Fair Value ($ thousands) | Percentage (Decrease) in Shareholders' Equity | |:---|:---|:---|:---|\n| 200 basis point increase | $120,364 | $(8,368) | (18.0)% | | 100 basis point increase | $124,613 | $(4,119) | (8.9)% | | No change | $128,732 | $0 | 0% | | 100 basis point decrease | $132,336 | $3,604 | 7.7% | | 200 basis point decrease | $135,297 | $6,565 | 14.1% | Credit Risk This section describes how the Company manages credit risk within its debt securities portfolio and with reinsurers - Credit risk in the debt securities portfolio is managed by investing only in investment-grade securities and complying with statutory limits on investment concentration[169] - The Company mitigates credit risk to reinsurers by selecting financially strong reinsurers (A.M. Best rating of 'A-' or better) and continuously evaluating their financial condition[169] - As of June 30, 2019, the net amount due from reinsurers, including prepaid reinsurance premiums, was $33.5 million, all believed to be recoverable[169] Effects of Inflation This section discusses the Company's assessment of inflation's impact on its operations, interest rates, and claims costs - The Company does not believe inflation materially affects its results of operations, except for its impact on interest rates and claims costs, which are considered in pricing and reserving[170] ITEM 4. CONTROLS AND PROCEDURES This section addresses the effectiveness of disclosure controls and procedures and reports on internal control changes Disclosure Controls and Procedures This section confirms the effectiveness of the Company's disclosure controls and procedures as evaluated by management - Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of June 30, 2019, and concluded they were effective at a reasonable assurance level[174] Changes in Internal Control over Financial Reporting This section reports that no material changes occurred in internal control over financial reporting during the period - There were no changes in internal control over financial reporting during the three months ended June 30, 2019, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[175] PART II — OTHER INFORMATION This section includes legal proceedings, risk factors, equity sales, and required exhibits for the report ITEM 1. LEGAL PROCEEDINGS This section incorporates legal proceedings information by reference from Note 12 of the financial statements - Information regarding legal proceedings is incorporated by reference from Note 12, 'Commitments and Contingencies,' of the Notes to the Consolidated Financial Statements[178] ITEM 1A. RISK FACTORS This section confirms no material changes to risk factors previously disclosed in the Annual Report on Form 10-K - There were no material changes to the risk factors disclosed in the Company's Annual Report on Form 10-K filed on March 13, 2019[179] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section details unregistered equity sales, including a $5.0 million private placement, and stock repurchase program updates - On June 28, 2019, the Company issued $5.0 million of common equity (1,176,471 shares at $4.25 per share) through a private placement to accredited investors, including Board members, using proceeds for growth capital in specialty core commercial business segments[182] - For the six months ended June 30, 2019, the Company repurchased 142,815 shares of stock valued at approximately $608,000 under its authorized stock repurchase program[182] ITEM 6. EXHIBITS This section lists all exhibits filed as part of the Form 10-Q, including required certifications and XBRL documents - The exhibits include Section 302 Certifications from the CEO and CFO, Section 906 Certifications from the CEO and CFO, and various XBRL Instance and Taxonomy Extension Documents[185] SIGNATURES This section contains the required signatures for the Form 10-Q, certifying its official submission - The report was signed by Harold J. Meloche, Chief Financial Officer, Principal Financial Officer, and Principal Accounting Officer, on August 7, 2019[190]