ifer (CNFR) - 2023 Q4 - Annual Report

Part I Business Overview Conifer Holdings, Inc. is a Michigan-based insurance holding company primarily engaged in selling property and casualty insurance products, with a business model centered on commercial, personal, and wholesale agency operations, undergoing a strategic transformation to an MGA model. Legal Organization Conifer Holdings, Inc. is a Michigan-domiciled insurance holding company established in 2009, with wholly-owned subsidiaries including Conifer Insurance Company, White Pine Insurance Company, Red Cedar Insurance Company, and Conifer Insurance Services. - Conifer Holdings, Inc. is a Michigan-registered insurance holding company, founded in 2009, headquartered in Troy, Michigan[25] - Wholly-owned subsidiaries include Conifer Insurance Company (CIC), White Pine Insurance Company (WPIC), Red Cedar Insurance Company (RCIC), and Conifer Insurance Services (CIS); VSRM, Inc. also became a wholly-owned subsidiary as of October 13, 2022, with CIC, WPIC, and RCIC collectively referred to as "Insurance Subsidiaries"[25] Business Overview The company's historical business focuses on property and casualty insurance, structured around commercial, personal, and wholesale agency operations, distributing products through a network of over 4,400 independent agents. - The company's historical business focused on selling property and casualty insurance products, structuring its business model around three main insurance categories: commercial, personal, and wholesale agency business[26] - The company offers specialty commercial and personal lines products through its insurance subsidiaries, currently authorized as an Excess and Surplus Lines (E&S) carrier in 45 states (including the District of Columbia) and licensed in 42 states (including the District of Columbia), with products available in all 50 states nationwide[26] - Company revenue primarily derives from earned premiums from insurance operations, as well as investment income and other income, which mainly includes installment fees and policy issuance fees[26] - The company sells insurance products through a network of over 4,400 independent agents, who distribute policies through approximately 950 sales offices[26][27] - The company focuses on developing business in non-commoditized property and casualty insurance markets while maintaining underwriting discipline and a conservative investment strategy[27] - The company possesses expertise in meeting the commercial insurance needs of small business owners in the hospitality industry (e.g., restaurants, bars, small grocery stores), artisan contractors (e.g., plumbers, painters), and security service providers[27] - In its personal lines business, the company primarily offers specialty homeowners insurance products for low-value homes, currently available in Illinois, Indiana, Louisiana, and Texas[27] - As of December 31, 2023, approximately 48.0% of the company's gross premiums were licensed business, and approximately 52.0% were E&S business[27] - The wholesale agency business provides non-risk-bearing income through commissions and policy fees, offering independent retail agents a broader selection of products, including those from insurance subsidiaries and other insurance companies[27] Strategic Shift to Non Risk-Bearing Revenue Starting in 2024, the company's wholesale agency business will transition to a full Managing General Agent (MGA) model, underwriting nearly 100% of gross premiums through third-party insurers, primarily relying on commission income. - Starting in 2024, the company's wholesale agency business will transition to a full Managing General Agent (MGA) model, with nearly 100% of gross premiums expected to be underwritten through third-party insurance companies, primarily relying on commission income[28] - This shift will significantly reduce earned premium income and investment income for the insurance subsidiaries in the short term and long term, respectively, with operating cash flow transitioning from premiums and investment income to commission income[28] - The company plans to have all commercial lines business underwritten directly by third-party insurance companies with an A.M. Best rating of A- or better by the end of the second quarter of 2024[28] - The company will continue to underwrite low-value homeowners business in Texas and the Midwest but will cease underwriting all homeowners business in Oklahoma in the second half of 2024[28] Geographic Diversity and Mix of Business The company's business mix in 2023 showed commercial lines accounting for 74% and personal lines for 26% of gross premiums, with Michigan, Texas, and Oklahoma being the top states by premium volume. 2023 and 2022 Gross Premiums by Business Type ($ thousands) | Business Type | 2023 Amount | 2023 Percentage | 2022 Amount | 2022 Percentage | | :------- | :--------- | :--------- | :--------- | :--------- | | Commercial Lines | $107,078 | 74% | $116,868 | 85% | | Personal Lines | $36,756 | 26% | $21,151 | 15% | | Total | $143,834 | 100% | $138,019 | 100% | 2023 and 2022 Gross Premiums by State ($ thousands) | State | 2023 Amount | 2023 Percentage | 2022 Amount | 2022 Percentage | | :----------- | :--------- | :--------- | :--------- | :--------- | | Michigan | $34,996 | 24.3% | $33,739 | 24.5% | | Texas | $21,783 | 15.1% | $14,236 | 10.3% | | Oklahoma | $17,972 | 12.5% | $11,882 | 8.6% | | California | $11,479 | 8.0% | $12,967 | 9.4% | | New York | $9,269 | 6.4% | $10,622 | 7.7% | | Florida | $7,632 | 5.3% | $13,705 | 9.9% | | Ohio | $4,996 | 3.5% | $4,378 | 3.2% | | Pennsylvania | $4,314 | 3.0% | $4,499 | 3.3% | | Illinois | $3,839 | 2.7% | $2,644 | 1.9% | | Indiana | $3,422 | 2.4% | $3,232 | 2.3% | | Colorado | $2,723 | 1.9% | $3,010 | 2.2% | | All Other States | $21,409 | 14.9% | $23,105 | 16.7% | | Total | $143,834 | 100.0% | $138,019 | 100.0% | The Conifer Approach The Conifer approach emphasizes adapting to market changes and delivering predictable results by focusing on underserved markets, strong agent relationships, deep market understanding, and underwriting flexibility. - The company's business model aims to adapt to market changes and provide predictable results, characterized by focusing on underserved markets, building strong relationships with agents, possessing deep market and regulatory understanding, and emphasizing flexibility (offering E&S and licensed underwriting)[30] Our Competitive Strengths The company's competitive strengths include controlled and disciplined underwriting, proactive claims handling, an experienced management team, and leveraging technology for efficiency. - The company's competitive strengths include controlled and disciplined underwriting, proactive claims handling, an experienced management team, and the ability to leverage technology for increased efficiency[14] Marketing and Distribution The company distributes products primarily through an independent agent network, with the top four agents contributing significantly to both commercial and personal lines gross premiums in 2023. - The company primarily distributes products through a network of independent agents, treating them as partners by offering competitive products, personalized service, and attractive commissions[16] - In 2023, the top four independent agents contributed approximately 35% of commercial lines gross premiums and approximately 62% of personal lines gross premiums[16] - The company recruits producers through referrals from its existing agent network, word-of-mouth, advertising, and direct contact, with marketing efforts primarily conducted through its Michigan office[16] Underwriting The company's underwriting philosophy involves individualized and selective assessment of specialty commercial risks, focusing on small to medium-sized businesses, and adjusting pricing and product structures based on risk profiles. - The company's underwriting philosophy involves individualized and selective assessment of specialty commercial risks, such as those in the hospitality industry, focusing on small to medium-sized businesses, and adjusting pricing, product structure, and underwriting guidelines based on risk profiles[32] - All commercial and personal policy applications are underwritten according to established guidelines and integrated into information technology systems, ensuring that only policies meeting these guidelines are accepted[32] - In commercial lines underwriting, the company often uses customized restrictive endorsements, rate surcharges, and tailored limits, and utilizes the ISO system as an industry resource[32] - In personal lines underwriting, internal product managers review competitive conditions, segment pricing, and adjust premium rates as appropriate, granting agents limited binding authority within specific guidelines[32] Claims The company employs a proactive claims handling philosophy, utilizing an experienced in-house legal team to manage and oversee claims from inception to resolution, with reserves regularly assessed and adjusted. - The company adopts a proactive claims handling philosophy, utilizing an experienced in-house legal team to manage and oversee claims from inception to resolution[14][18] - The claims department consists of experienced claims professionals located in Michigan, Florida, Oklahoma, Pennsylvania, and Texas[18] - Initial claim reserves are determined based on statistical averages of paid losses and loss adjustment expenses, and are regularly assessed and adjusted based on changes in specific claim information[18] Reinsurance The company regularly purchases reinsurance for commercial and personal lines to reduce volatility from large losses and provide capacity for growth, while remaining fully liable to policyholders. - The company regularly purchases reinsurance for commercial and personal lines to reduce volatility by limiting exposure to large losses and to provide capacity for growth[51] - In reinsurance transactions, the insurer transfers part or all of the risk in exchange for a portion of the premium, but the company remains fully legally liable to policyholders[51] Loss Reserve Development Loss reserve re-estimation is influenced by differences between claim settlements and initial estimates, adjustments due to updated claim information, and changes in reported claim numbers post-reporting period. 2013-2023 Loss and Loss Adjustment Expense Reserve Development (Net of Reinsurance Recoverables, $ thousands) | Year | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 (1) | 2023 (1) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net Loss and LAE Liability (Dec 31) | $24,956 | $28,307 | $30,017 | $47,993 | $67,830 | $63,122 | $84,667 | $87,052 | $98,741 | $82,888 | $103,805 | | Reestimated One Year Later | 23,763 | 29,321 | 40,239 | 57,452 | 71,186 | 79,351 | 100,261 | 106,482 | 123,668 | 100,698 | | | Reestimated Two Years Later | | | | | | | 118,11 | 129,66 | 144,11 | | | | Reestimated Three Years Later | 25,521 | 33,274 | 52,321 | 60,453 | 87,536 | 94,786 | 108,026 | 137,325 | 143,306 | | | | Reestimated Four Years Later | 26,560 | 38,569 | 58,251 | 69,833 | 95,367 | 102,332 | 117,607 | 146,027 | | | | | Reestimated Five Years Later | 27,784 | 40,822 | 62,185 | 74,381 | 106,705 | 122,597 | | | | | | | Reestimated Six Years Later | 27,920 | 42,274 | 64,547 | 76,860 | 109,865 | | | | | | | | Reestimated Seven Years Later | 28,339 | 42,967 | 66,072 | 79,622 | | | | | | | | | Reestimated Eight Years Later | 28,655 | 43,341 | 66,883 | 80,235 | | | | | | | | | Reestimated Nine Years Later | 28,880 | 43,771 | 67,020 | | | | | | | | | | Reestimated Ten Years Later | 29,487 | 43,712 | | | | | | | | | | | Net Cumulative Redundancy (Deficiency) | $ (4,440) | $ (15,405) | $ (37,003) | $ (32,242) | $ (42,035) | $ (59,475) | $ (61,360) | $ (56,255) | $ (45,375) | $ (17,810) | $103,805 | - Re-estimation of loss reserves is influenced by various factors, including differences between claim settlement amounts and initial estimates, reserve adjustments due to updated information on open claims, and changes in the number of claims reported after the reporting period[34] - As historical data for specific lines of business increases, the company will rely more on its own loss experience rather than industry loss experience to establish loss and loss adjustment expense reserves[34][52] Regulation Insurance subsidiaries are regulated by the states in which they operate, with oversight aimed at protecting policyholders, consumers, or claimants, rather than shareholder interests. - Insurance subsidiaries are subject to regulation by the states in which they operate, with regulation designed to protect the interests of policyholders, consumers, or claimants, rather than shareholders[35] - The scope of regulation includes approval for acquisitions of control over insurance companies, regulation of intercompany transactions, approval of premium rates and policy forms, solvency standards, investment limitations, licensing requirements, security deposits, and periodic reporting[35] - As an insurance holding company, the company is subject to regulation in the jurisdictions where it operates, requiring its insurance subsidiaries to register with and provide information to the insurance department of their state of domicile[35] Effect of Federal Legislation The Terrorism Risk Insurance Act (TRIA), extended until December 31, 2027, requires insurers to offer terrorism coverage, though the company's exposure in this area is minimal due to policyholder rejections. - The Terrorism Risk Insurance Act (TRIA) requires insurance companies to offer terrorism insurance, and the act has been extended until December 31, 2027; the company's exposure in such insurance is minimal, as most policyholders decline this coverage option[103] Employees As of December 31, 2023, the company had 94 full-time employees, none of whom are subject to collective bargaining agreements, maintaining good employee relations. - As of December 31, 2023, the company had 94 full-time employees, and employees are not subject to any collective bargaining agreements, with the company maintaining good employee relations[104] Available Information The company provides free access to its annual, quarterly, and current reports, along with beneficial ownership statements, on its website and the SEC's website. - The company provides free access to its annual reports (Form 10-K), quarterly reports (Form 10-Q), current reports (Form 8-K), and statements of beneficial ownership (Forms 3, 4, 5) on its website, www.cnfrh.com[105](index=105&type=chunk) - The U.S. Securities and Exchange Commission (SEC) website, www.sec.gov, also provides reports, proxy statements, and other information filed by the company[105] Glossary The report includes a glossary defining various insurance industry terms such as accident year, combined ratio, deferred policy acquisition costs, incurred but not reported (IBNR) reserves, and risk-based capital (RBC). - The report includes definitions for a range of insurance industry terms, such as accident year, combined ratio under GAAP and SAP, deferred policy acquisition costs, deficiency, expense ratio, incurred but not reported (IBNR) reserves, loss, loss adjustment expenses (LAE), loss ratio, loss reserves, incurred losses, NAIC-IRIS ratios, policyholders' surplus, premium leverage ratio, redundancy, risk-based capital (RBC), and underwriting gain or loss[106][108][101] Risk Factors The company faces diverse risks including operational (debt repayment, reserve inadequacy, underwriting inaccuracies, MGA capacity, competition, cyber threats, natural disasters), investment (market, credit, interest rate), liquidity (debt, holding company structure), legal/regulatory (compliance, capital, emerging claims), rating agency (downgrades, guaranty fund assessments), and general risks (stock price, delisting, capital needs, dividends, shareholder control). - Significant risk factors faced by the company include operational risks, investment risks, liquidity risks, legal and regulatory risks, rating agency risks, and general risk factors[87] - Operational risks include the inability to repay debt, potential inadequacy of loss and loss adjustment expense reserves, inaccurate underwriting pricing, limited underwriting capacity from third-party insurers, intense competition, information technology security threats, and adverse weather and catastrophic events[88][89][91][92][74] - Investment risks primarily involve market and credit risks within the investment portfolio, as well as the impact of interest rate changes on the fair value of fixed-income securities and investment income[72][113] - Liquidity risks include debt repayment obligations potentially reducing funds available for other business purposes, and the holding company structure and regulatory restrictions potentially limiting dividends from insurance subsidiaries[114][115] - Legal and regulatory risks encompass extensive regulatory requirements, potential fines and business suspension for non-compliance, minimum capital and surplus requirements, and uncertainties regarding emerging claims and underwriting issues[117][119][121][133] - Rating agency risks include the potential for financial strength rating downgrades to adversely affect business, financial condition, and operating results, as well as assessments from state guaranty funds and mandatory state insurance facilities potentially reducing profitability[136][138] - General risk factors include potential volatility in common stock price and low public float and trading volume, the possibility of needing additional capital that may not be readily available, no intention to pay common stock dividends in the future, and significant control over the company by major shareholders and management[152][153][154] Unresolved Staff Comments The company reports no unresolved staff comments as of the filing date of this report. - The company has no unresolved staff comments[144] Cybersecurity The company integrates cybersecurity risk management into its overall enterprise risk management program, following the CIS Critical Security Controls framework, with no significant known threats impacting operations or financial condition to date. - Identifying, assessing, and managing cybersecurity risks is an important component of Conifer's overall enterprise risk management program[145] - The company and its consolidated subsidiaries develop their respective cybersecurity programs based on the Center for Internet Security Critical Security Controls (CISCSC) framework, including advanced threat protection and detection systems, vulnerability scanning and testing, user authentication, data encryption, disaster recovery testing, and security assessments of third-party service providers[145] - As of the date of this report, the company has not identified any known cybersecurity threats (including any cybersecurity incidents within the past three years) that have had or are reasonably likely to have a material impact on its operations, business strategy, results of operations, or financial condition[145] Cybersecurity Governance The Board of Directors oversees cybersecurity risk, delegating specific oversight to the Audit Committee, while the management team, including the CIO, is responsible for assessing and managing cyber threats. - The company's Board of Directors considers cybersecurity risk as part of its risk oversight function and has delegated oversight of cybersecurity and other information technology risks to the Audit Committee[146] - The management team, including the Chief Information Officer, is responsible for assessing and managing significant risks arising from cybersecurity threats[146] Properties The company leases its main administrative office in Troy, Michigan, and other offices in Southfield, Michigan, and Miami, Florida, deeming current facilities adequate for its needs. - The company leases its primary administrative office in Troy, Michigan, and other offices in Southfield, Michigan, and Miami, Florida[147] - The company believes its existing facilities are sufficient for current needs and that suitable additional or alternative space can be obtained if required[147] Legal Proceedings The company is a party to various legal proceedings arising in the ordinary course of business, none of which are expected to have a material adverse effect on its consolidated financial position, results of operations, or liquidity. - The company is a party to various legal proceedings arising in the ordinary course of business[148] - The company believes that the outcome of these matters, individually or in the aggregate, will not have a material adverse effect on its consolidated financial position, results of operations, or liquidity[148] Mine Safety Disclosures This item is not applicable to the company's operations. - This item is not applicable[160] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the Nasdaq Capital Market under 'CNFR', with 26 shareholders of record as of April 1, 2024, and no plans for cash dividends in the foreseeable future, despite a board-authorized stock repurchase program that saw no activity in 2023. - The company's common stock trades on the Nasdaq Capital Market under the symbol “CNFR”; as of April 1, 2024, the company had 26 shareholders of record of its common stock[162] - The company does not intend to pay cash dividends on its common stock in the foreseeable future and plans to retain future earnings for business development, operations, and expansion[161][153] - The company's Board of Directors authorized a stock repurchase program in December 2018 to repurchase up to 1 million shares of common stock, but no stock repurchases were made under this plan in 2023[169][171] - In December 2023, the company issued $6 million of Series A Preferred Stock in a private placement, at $6,000 per share, maturing on June 30, 2026[172] - In August 2022, the company issued $5 million of common stock in a private placement, at $2.00 per share, with participants including members of the company's Board of Directors[172] Reserved This item is reserved and contains no content. - This item is reserved[173] Management's Discussion and Analysis of Financial Condition and Results of Operations The company's gross premiums grew 4.2% to $143.8 million in 2023, but net loss widened to $25.9 million, with an adjusted operating loss of $28.8 million, as it strategically shifts commercial lines to a third-party MGA model to address capital and rating challenges. - The company's gross premiums increased by 4.2% to $143.9 million in 2023, primarily driven by an increase in personal lines premiums[215] - In 2023, the company reported a net loss of $25.9 million ($2.12 per share), compared to a net loss of $10.7 million ($1.00 per share) in 2022, indicating a widening loss[215] - Adjusted operating loss (a non-GAAP measure) was $28.8 million ($2.36 per share) in 2023, higher than $13.0 million ($1.22 per share) in 2022[215] - The company is implementing a strategic transformation to shift its commercial lines business to a third-party MGA model to address capital inadequacy and rating downgrade issues for its insurance subsidiaries[163][233] - In 2023, the company sold the renewal rights for its security program, resulting in a $2.3 million non-operating net gain[215] - The company underwent debt restructuring, issuing $17.9 million in 9.75% senior unsecured notes and $10.0 million in 12.5% senior secured notes[241] - In 2023, net losses and loss adjustment expenses increased by 1.2% to $82.4 million, with the calendar year loss ratio rising from 83.9% in 2022 to 97.8%, primarily due to adverse development in commercial lines and severe storm activity in Oklahoma homeowners insurance[222][208] - Net investment income increased by 81.6% to $5.5 million in 2023 due to rising interest rates[227] Recent Developments and Significant Transactions Recent developments include a strategic shift to an MGA model, the sale of security program renewal rights for $2.5 million cash, debt restructuring, the acquisition of VSRM, Inc., and a loss portfolio transfer reinsurance agreement, alongside rating downgrades for its insurance subsidiaries. - The company is undergoing a strategic transformation to convert its wholesale agency business into a full Managing General Agent (MGA) model, with nearly 100% of gross premiums expected to be underwritten through third-party insurance companies, primarily relying on commission income[163] - In September 2023, the company sold the renewal rights for its security program to another insurance company for $2.5 million in cash, resulting in a $2.3 million net gain[176] - In September 2023, the company repaid $24.4 million of its old public senior unsecured notes and raised capital by issuing $6.7 million in new public notes and converting $11.2 million of old notes into new ones[165] - In October 2022, the company acquired the remaining 50% equity interest in Venture Agency Holdings, Inc. (later renamed VSRM, Inc.), recognizing an $8.8 million non-operating gain[166] - On November 1, 2022, the company entered into a Loss Portfolio Transfer (LPT) reinsurance agreement with Fleming Re to reduce the risk of future adverse development on reserves for accident years 2019 and prior, paying a one-time risk fee of $5.4 million[179] - In March 2024, both Kroll and A.M. Best downgraded the financial strength ratings of CIC and WPIC, leading the company to subsequently withdraw from the rating process, resulting in both companies becoming unrated[192] Business Overview As an insurance holding company, Conifer markets specialty commercial and personal lines products, with revenue primarily from earned premiums, investment income, and other fees, transitioning to commission-based income with the MGA model shift. - As an insurance holding company, the company markets and services products through its specialty commercial and specialty personal lines business segments, achieving significant growth since its founding in 2009[180] - The company's revenue primarily derives from earned premiums from insurance operations, as well as investment income and other income (such as installment fees and policy issuance fees)[180] - The company's operations are divided into three segments: commercial lines, personal lines, and agency operations, where commercial and personal lines assume insurance risk, and agency operations provide non-risk-bearing commission and policy fee income[180] - The company's commercial lines offer commercial property, commercial general liability, commercial auto, and workers' compensation insurance; personal lines offer homeowners and dwelling fire insurance, primarily for low-value homes[180] - With the transition to an MGA operating model, revenue will primarily come from commissions, while insurance premiums and investment income will gradually decrease[96] Critical Accounting Policies and Estimates Key accounting estimates include unpaid losses and loss adjustment expenses (LAE) reserves, investment valuation and credit losses, and income taxes, with IBNR reserves estimated using various actuarial methods and historical data. - The company identifies unpaid losses and loss adjustment expenses (LAE) reserves, investment valuation and credit losses, and income taxes as critical accounting estimates for understanding its financial condition and results of operations[193] - Unpaid losses and LAE reserves represent management's best estimate of incurred but unpaid losses and LAE, including reported case reserves and incurred but not reported (IBNR) reserves, which are not discounted for the time value of money[194] - IBNR reserves are estimated using various actuarial methods, such as the loss ratio method, loss development method, Bornheutter-Ferguson method, and frequency/severity method, combined with historical experience and industry data[184] - The company performed a sensitivity analysis on net reserves, assuming a ±10% change in loss development factors for the most recent accident year, ±5% for the prior year, and ±2.5% for the year before that[197] December 31, 2023 Net Ultimate Loss and LAE Sensitivity Analysis ($ thousands) | Accident Year | Net Ultimate Loss and LAE (1) | Net Loss and LAE Reserves (1) | Ultimate Loss and LAE Sensitivity Factor | Impact on Pre-Tax Income (2) | Shareholders' Equity (2) | | :------- | :------------------ | :-------------------- | :---------------------- | :--------------- | :----------- | | Increase | | | | | | | 2023 | $64,579 | $37,578 | 10.0% | $(6,458) | $(5,102) | | 2022 | $62,985 | $28,804 | 5.0% | $(3,149) | $(2,488) | | 2021 | $58,958 | $19,666 | 2.5% | $(1,474) | $(1,164) | | Pre-2021 | — | $17,757 | —% | — | — | | Decrease | | | | | | | 2023 | $64,579 | $37,578 | (10.0)% | $6,458 | $5,102 | | 2022 | $62,985 | $28,804 | (5.0)% | $3,149 | $2,488 | | 2021 | $58,958 | $19,666 | (2.5)% | $1,474 | $1,164 | | Pre-2021 | — | $17,757 | —% | — | — | - The company measures available-for-sale debt securities at fair value, with unrealized gains and losses included in other comprehensive income; equity securities are measured at fair value, with changes recognized in net income; the company regularly assesses its investment portfolio for credit losses[187] - As of December 31, 2023, the company had $80.8 million in federal income tax net operating loss (NOL) carryforwards and $120.3 million in state NOL carryforwards; the company has recorded a $28.0 million valuation allowance against deferred tax assets, as cumulative losses over three years represent significant negative evidence of their recoverability[199] Non-GAAP Financial Measures Adjusted operating income (loss) and adjusted operating income (loss) per share are non-GAAP metrics used to evaluate performance, excluding impacts from investment gains/losses, fair value changes, and specific transaction-related items. - Adjusted operating income (loss) and adjusted operating income (loss) per share are non-GAAP metrics used by the company to evaluate performance, excluding the impact of investment gains and losses, fair value changes in equity securities, gains from the sale of renewal rights, gains from the VSRM transaction, loss portfolio transfer risk fees, and other gains and losses[214] Reconciliation of Net Income to Adjusted Operating Income (Loss) ($ thousands, except per share data) | Metric | 2023 | 2022 | | :--- | :----- | :----- | | Net Income (Loss) | $(25,904) | $(10,681) | | Less: | | | | Net Realized Investment Gains (Losses) | $(20) | $(1,505) | | Fair Value Changes in Equity Securities | 608 | 403 | | VSRM Transaction Gain | — | 8,810 | | Loss Portfolio Transfer Risk Fee | — | $(5,400) | | Gain on Sale of Renewal Rights | 2,335 | — | | Other Gains (Losses) | — | 59 | | Income Tax Expense (Benefit) Impact* | — | — | | Adjusted Operating Income (Loss) | $(28,827) | $(13,048) | | Weighted Average Common Shares (Diluted) | 12,220,511 | 10,692,090 | | Diluted Income (Loss) Per Share: | | | | Net Income (Loss) | $(2.12) | $(1.00) | | Less: | | | | Net Realized Investment Gains (Losses) | — | $(0.14) | | Fair Value Changes in Equity Securities | 0.05 | 0.04 | | VSRM Transaction Gain | — | 0.82 | | Loss Portfolio Transfer Risk Fee | — | $(0.51) | | Gain on Sale of Renewal Rights | 0.19 | — | | Other Gains (Losses) | — | 0.01 | | Income Tax Expense (Benefit) Impact* | — | — | | Adjusted Operating Income (Loss) Per Share | $(2.36) | $(1.22) | Executive Overview In 2023, gross premiums increased 4.2% to $143.9 million, driven by a 73.8% rise in personal lines, while net loss widened to $25.9 million and adjusted operating loss to $28.8 million, reflecting non-operating gains and reinsurance costs. - In 2023, the company's gross premiums increased by 4.2% to $143.9 million, with personal lines gross premiums growing by 73.8% to $36.8 million[215] - The company reported a net loss of $25.9 million ($2.12 per share) in 2023, compared to $10.7 million ($1.00 per share) in 2022[215] - Adjusted operating loss was $28.8 million ($2.36 per share) in 2023, compared to $13.0 million ($1.22 per share) in 2022[215] - The 2023 results include a $2.3 million non-operating net gain from the sale of the security program[215] - The 2022 results included an $8.8 million non-operating gain from the VSRM step acquisition and a $9.4 million tax benefit from NOL carryforwards[215] - The company entered into a loss portfolio transfer reinsurance agreement in November 2022 to reduce the risk of future adverse reserve development, paying a $5.4 million risk fee[215] - In the fourth quarter of 2022, the company incurred $2.0 million in losses and $1.6 million in reinsurance reinstatement costs due to Hurricane Ian[215] Results of Operations - 2023 Compared to 2022 In 2023, gross premiums increased by 4.2% to $143.8 million, but net earned premiums decreased by 13.2%, leading to a wider underwriting loss of $30.9 million and a combined ratio of 134.9%. Summary of Results of Operations - 2023 Compared to 2022 ($ thousands) | Metric | 2023 | 2022 | Change Amount | Change Percentage | | :--- | :----- | :----- | :------- | :--------- | | Gross Premiums | $143,834 | $138,019 | $5,815 | 4.2% | | Net Written Premiums | $68,688 | $91,232 | $(22,544) | (24.7%) | | Net Earned Premiums | $83,935 | $96,711 | $(12,776) | (13.2%) | | Agency Commission Income | $5,680 | $1,414 | $4,266 | * | | Other Income | $694 | $1,354 | $(660) | (48.7%) | | Net Losses and Loss Adjustment Expenses | $82,413 | $81,440 | $973 | 1.2% | | Policy Acquisition Costs | $20,892 | $22,179 | $(1,287) | (5.8%) | | Operating Expenses | $17,891 | $18,789 | $(898) | (4.8%) | | Loss Portfolio Transfer Risk Fee | — | $5,400 | $(5,400) | * | | Underwriting Gain (Loss) | $(30,887) | $(28,329) | $(2,558) | (9.0%) | | Net Investment Income | $5,526 | $3,043 | $2,483 | 81.6% | | Net Realized Investment Gains (Losses) | $(20) | $(1,505) | $1,485 | * | | Fair Value Changes in Equity Securities | $608 | $403 | $205 | * | | Gain on Sale of Renewal Rights | $2,335 | — | $2,335 | * | | VSRM Transaction Gain | — | $8,810 | $(8,810) | * | | Other Gains (Losses) | — | $59 | $(59) | * | | Interest Expense | $3,206 | $2,971 | $235 | 7.9% | | Income (Loss) Before Income Taxes | $(25,644) | $(20,490) | $(5,154) | * | | Equity in Earnings (Loss) of Affiliates, Net of Tax | $(251) | $368 | $(619) | (168.2%) | | Income Tax Expense (Benefit) | $9 | $(9,441) | $9,450 | * | | Net Income (Loss) | $(25,904) | $(10,681) | $(15,223) | * | | Underwriting Ratios: | | | | | | Loss Ratio (1) | 97.8% | 83.9% | | | | Expense Ratio (2) | 37.1% | 38.4% | | | | Combined Ratio (3) | 134.9% | 122.3% | | | Liquidity and Capital Resources As of December 31, 2023, the company held $32 million in cash and short-term investments, with $16.8 million unrestricted, relying on insurance premiums, investment income, and internal service fees for liquidity, while facing capital inadequacy and debt covenant non-compliance. - As of December 31, 2023, the company had $32.0 million in cash, cash equivalents, and short-term investments, of which $16.8 million was unrestricted[231] - The company's primary sources of funds are insurance premiums, investment income, proceeds from maturities and sales of investment assets, and other income, which are primarily used to pay claims, commissions, employee compensation, taxes, operating expenses, and debt service[231] - In December 2023, the company issued $6.0 million of Series A Preferred Stock, with proceeds used for working capital and general corporate purposes[231] - In 2024, the company is required to pay $1.0 million in principal on senior secured notes, $0.63 million in preferred stock dividends, and approximately $3.3 million in debt interest[231] - The company primarily relies on intercompany service fees paid by its insurance subsidiaries and wholesale agency to service its debt and pay administrative expenses, with dividends from insurance subsidiaries subject to state insurance laws[231][233] - In 2023, the company reported a consolidated net loss of $25.9 million due to increased reserves and severe storm activity in Oklahoma homeowners insurance, used $13.6 million in cash from operating activities, and had total shareholders' equity of $2.9 million[233] - The company received waivers for non-compliance with several debt covenants and is implementing a strategic transformation to shift its commercial lines business to a third-party MGA model to address capital inadequacy and rating downgrades[233] - The company expects to generate most of its revenue primarily through commission income after the second quarter of 2024 by entering into producer agreements with third-party insurance companies, which it believes will be sufficient to meet its obligations for the next 12 months[233] Quantitative and Qualitative Disclosures About Market Risk The company primarily faces interest rate risk and credit risk. Its investment portfolio, predominantly in investment-grade fixed-income securities, is sensitive to interest rate changes, which the company mitigates by diversifying maturities and managing portfolio duration. Credit risk from reinsurance counterparties is managed by selecting financially strong reinsurers and continuous financial assessment. The company considers inflation's impact on operating results to be minor but accounts for its effects on interest rates and claims costs in pricing and loss reserve estimates. - The company's primary market risk exposure is interest rate risk, mainly from its fixed-income securities investment portfolio[250][251] - The company mitigates interest rate risk by investing in securities with varying maturities and managing the investment portfolio's duration within a range of 3 to 4 years; as of December 31, 2023, the option-adjusted duration of the debt securities portfolio was 2.9 years[251] December 31, 2023 Sensitivity Analysis of Interest Rate Changes on Investment Fair Value and Shareholders' Equity ($ thousands) | Interest Rate Assumption Change | Estimated Fair Value | Estimated Fair Value Change | Fair Value Change Percentage | Shareholders' Equity Change Percentage | | :----------- | :----------- | :--------------- | :----------------- | :----------------- | | Increase 200 Basis Points | $135,941 | $(7,714) | (5.4)% | (267.0)% | | Increase 100 Basis Points | $139,647 | $(4,008) | (2.8)% | (138.7)% | | No Change | $143,655 | — | — | — | | Decrease 100 Basis Points | $147,979 | $4,324 | 3.0% | 149.7% | | Decrease 200 Basis Points | $152,590 | $8,935 | 6.2% | 309.3% | - The company manages credit risk by primarily investing in investment-grade securities and adhering to statutory requirements that limit the proportion of investments in a single security or issuer[272] - The company is exposed to credit risk from reinsurance counterparties; although reinsurers assume risk, the company remains primarily liable to policyholders; this risk is mitigated by selecting reinsurers with an A.M. Best rating of “A-” or better[272] - The company does not believe inflation has a material impact on its operating results but considers its effects on interest rates and claims costs when pricing and estimating unpaid losses and LAE reserves[273] Financial Statements and Supplementary Data This item refers to the list of financial statements and supplementary data detailed in Item 15 of Form 10-K. - This item refers to the list of financial statements and supplementary data listed in Item 15 of Form 10-K[274] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with accountants regarding accounting and financial disclosure. - The company reports no changes in or disagreements with accountants regarding accounting and financial disclosure[254] Controls and Procedures As of December 31, 2023, management (including the Chief Executive Officer and Chief Financial Officer) assessed and determined the company's disclosure controls and procedures to be effective. Management also assessed and determined the company's internal controls over financial reporting to be effective. This annual report does not include an attestation report of the company's registered public accounting firm regarding the effectiveness of internal controls over financial reporting, as the company has elected to be a smaller reporting company. - As of December 31, 2023, the company's management, including the Chief Executive Officer and Chief Financial Officer, evaluated and concluded that the company's disclosure controls and procedures were effective[275] - The company's management, including the Chief Executive Officer and Chief Financial Officer, evaluated and concluded that the company's internal controls over financial reporting were effective as of December 31, 2023[277] - This annual report does not include an attestation report of the company's registered public accounting firm regarding the effectiveness of internal controls over financial reporting, as the company has elected to be a smaller reporting company[278] - There were no material changes in internal controls over financial reporting during the quarter ended December 31, 2023[277] Other Information This item is not applicable. - This item is not applicable[258] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable. - This item is not applicable[279] Part III Items 10-14 Items 10 through 14, inclusive, are omitted from this report as the registrant will file a definitive proxy statement within 120 days after the fiscal year-end, incorporating the required information by reference. - Information for Items 10 through 14, inclusive, in this report has been incorporated by reference from the company's definitive proxy statement to be filed[259][281] Part IV Exhibits and Financial Statement Schedules This section lists the exhibits and financial statement schedules filed as part of or incorporated by reference into the report, including the independent registered public accounting firm's report, consolidated financial statements, and supplementary schedules. - This section lists the exhibits and financial statement schedules filed as part of or incorporated by reference into the report[283] List of Financial Statements The list of financial statements includes the report of the independent registered public accounting firm, consolidated balance sheets, statements of operations, comprehensive income (loss), changes in shareholders' equity, and cash flows. - The list of financial statements includes the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Comprehensive Income (Loss), Consolidated Statements of Changes in Shareholders' Equity, and Consolidated Statements of Cash Flows[261] Report of Independent Registered Public Accounting Firm Plante & Moran, PLLC issued an unqualified opinion on the company's consolidated financial statements for 2023 and 2022, affirming fair presentation in accordance with U.S. GAAP. - The independent registered public accounting firm, Plante & Moran, PLLC, issued an unqualified opinion on the company's consolidated financial statements as of December 31, 2023, and 2022, stating they are fairly presented in all material respects in accordance with U.S. Generally Accepted Accounting Principles[310][285] Opinion on the Consolidated Financial Statements The auditor concluded that the company's consolidated financial statements for December 31, 2023, and 2022, fairly present its financial position, results of operations, and cash flows in all material respects, in accordance with U.S. GAAP. - The auditor believes that the company's consolidated financial statements as of December 31, 2023, and 2022, fairly present, in all material respects, the financial position, results of operations, and cash flows of the company in accordance with U.S. Generally Accepted Accounting Principles[285] Basis for Opinion The auditor conducted the audit in accordance with PCAOB standards, assessing risks of material misstatement, examining evidence for financial statement amounts and disclosures, and evaluating accounting principles and significant management estimates. - The auditor performed the audit in accordance with PCAOB standards, assessing the risks of material misstatement in the financial statements, examining evidence supporting the amounts and disclosures in the financial statements, and evaluating the accounting principles used and significant estimates made by management[312] - The company was not required to undergo an audit of internal control over financial reporting, and the auditor did not perform such an audit, thus expressing no opinion on the effectiveness of internal control over financial reporting[286] Critical Audit Matters Critical audit matters include the estimation of unpaid losses and loss adjustment expenses (LAE) liabilities and management's analysis of the company's ability to continue as a going concern. - Critical audit matters include the estimation of unpaid losses and loss adjustment expenses (LAE) liabilities, and management's analysis of the company's ability to continue as a going concern[313][287][289] Consolidated Balance Sheets The consolidated balance sheets present the company's financial position, showing total assets of $311.8 million and total liabilities of $308.9 million as of December 31, 2023, with shareholders' equity at $2.9 million. Consolidated Balance Sheets ($ thousands) | Metric | December 31, 2023 | December 31, 2022 | | :--- | :------------- | :------------- | | Assets | | | | Investment Securities: Debt Securities (Fair Value) | $122,113 | $110,201 | | Equity Securities (Fair Value) | $2,354 | $1,267 | | Short-Term Investments (Fair Value) | $20,838 | $25,929 | | Total Investments | $145,305 | $137,397 | | Cash and Cash Equivalents | $11,125 | $28,035 | | Premiums Receivable and Agents' Balances, Net | $29,369 | $21,802 | | Due from Affiliates | $1,047 | $1,261 | | Reinsurance Recoverables on Unpaid Losses | $70,807 | $82,651 | | Reinsurance Recoverables on Paid Losses | $12,619 | $6,653 | | Prepaid Reinsurance Premiums | $28,908 | $16,399 | | Deferred Policy Acquisition Costs | $6,285 | $10,290 | | Other Assets | $6,339 | $7,862 | | Total Assets | $311,804 | $312,350 | | Liabilities and Shareholders' Equity | | | | Liabilities: | | | | Unpaid Losses and Loss Adjustment Expenses | $174,612 | $165,539 | | Unearned Premiums | $65,150 | $67,887 | | Reinsurance Premiums Payable | $246 | $6,144 | | Debt | $25,061 | $33,876 | | Funds Held Under Reinsurance Agreements | $24,550 | $11,084 | | Premiums Payable to Other Insureds | $13,986 | — | | Accounts Payable and Accrued Expenses | $5,310 | $8,870 | | Total Liabilities | $308,915 | $293,400 | | Commitments and Contingencies | — | — | | Shareholders' Equity: | | | | Preferred Stock | $6,000 | — | | Common Stock | $98,100 | $97,913 | | Accumulated Deficit | $(86,683) | $(60,760) | | Accumulated Other Comprehensive Income (Loss) | $(14,528) | $(18,203) | | Total Shareholders' Equity | $2,889 | $18,950 | | Total Liabilities and Shareholders' Equity | $311,804 | $312,350 | Consolidated Statements of Operations The consolidated statements of operations show a net loss of $25.9 million for the year ended December 31, 2023, compared to a $10.7 million net loss in 2022, with net earned premiums decreasing to $83.9 million. Consolidated Statements of Operations ($ thousands, except per share data) | Metric | Year Ended December 31, 2023 | Year Ended December 31, 2022 | | :--- | :------------------- | :------------------- | | Revenue and Other Income | | | | Gross Earned Premiums | $146,572 | $135,401 | | Ceded Earned Premiums | $(62,637) | $(38,690) | | Net Earned Premiums | $83,935 | $96,711 | | Net Investment Income | $5,526 | $3,043 | | Net Realized Investment Gains (Losses) | $(20) | $(1,505) | | Fair Value Changes in Equity Securities | $608 | $403 | | VSRM Transaction Gain | — | $8,810 | | Loss Portfolio Transfer Risk Fee | — | $(5,400) | | Gain on Sale of Renewal Rights | $2,335 | — | | Other Gains (Losses) | — | $59 | | Agency Commission Income | $5,680 | $1,414 | | Other Income | $694 | $1,354 | | Total Revenue and Other Income | $98,758 | $104,889 | | Expenses | | | | Net Losses and Loss Adjustment Expenses | $82,413 | $81,440 | | Policy Acquisition Costs | $20,892 | $22,179 | | Operating Expenses | $17,891 | $18,789 | | Interest Expense | $3,206 | $2,971 | | Total Expenses | $124,402 | $125,379 | | Income (Loss) Before Income Taxes | $(25,644) | $(20,490) | | Equity in Earnings (Loss) of Affiliates, Net of Tax | $(251) | $368 | | Income Tax Expense (Benefit) | $9 | $(9,441) | | Net Income (Loss) | $(25,904) | $(10,681) | | Preferred Stock Dividends | $19 | — | | Net Income (Loss) Attributable to Common Shareholders | $(25,885) | $(10,681) | | Basic and Diluted Earnings (Loss) Per Share | $(2.12) | $(1.00) | | Weighted Average Common Shares (Basic and Diluted) | 12,220,511 | 10,692,090 | Consolidated Statements of Comprehensive Income (Loss) The consolidated statements of comprehensive income (loss) report a total comprehensive loss of $22.2 million for 2023, an improvement from the $26.8 million loss in 2022, primarily due to changes in unrealized investment gains (losses). Consolidated Statements of Comprehensive Income (Loss) ($ thousands) | Metric | Year Ended December 31, 2023 | Year Ended December 31, 2022 | | :--- | :------------------- | :------------------- | | Net Income (Loss) | $(25,904) | $(10,681) | | Other Comprehensive Income (Loss), Net of Tax: | | | | Unrealized Investment Gains (Losses): | | | | Unrealized Investment Gains (Losses) Arising During Period | $3,624 | $(16,024) | | Income Tax Expense (Benefit) | — | — | | Unrealized Investment Gains (Losses), Net of Tax | $3,624 | $(16,024) | | Less: Reclassification Adjustment to: | | | | Net Realized Investment Gains (Losses) Included in Net Income (Loss) | $(51) | $69 | | Income Tax Expense (Benefit) | — | — | | Total Reclassification Included in Net Income (Loss), Net of Tax | $(51) | $69 | | Other Comprehensive Income (Loss) | $3,675 | $(16,093) | | Total Comprehensive Income (Loss) | $(22,229) | $(26,774) | Consolidated Statement of Changes in Shareholders' Equity The consolidated statement of changes in shareholders' equity reflects a decrease in total shareholders' equity from $19.0 million in 2022 to $2.9 million in 2023, driven by net losses and other comprehensive losses, partially offset by preferred stock issuance. Consolidated Statement of Changes in Shareholders' Equity ($ thousands) | Metric | Preferred Stock Shares | Preferred Stock Amount | Common Stock Shares | Common Stock Amount | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Income (Loss) | Total Shareholders' Equity | | :--- | :--------- | :--------- | :--------- | :--------- | :------------------- | :----------------------- | :----------- | | Balance at January 1, 2022 | — | — | 9,707,817 | $92,692 | $(50,079) | $(2,110) | $40,503 | | Net Income (Loss) | — | — | — | — | $(10,681) | — | $(10,681) | | Common Stock Repurchases | (1,968) | $10 | — | — | — | — | $10 | | Private Placement of Common Stock | 2,500,000 | $5,000 | — | — | — | — | $5,000 | | Stock-Based Compensation Expense | 10,000 | $211 | — | — | — | — | $211 | | Other Comprehensive Income (Loss) | — | — | — | — | — | $(16,093) | $(16,093) | | Balance at December 31, 2022 | — | — | 12,215,849 | $97,913 | $(60,760) | $(18,203) | $18,950 | | Net Income (Loss) | — | — | — | — | $(25,904) | — | $(25,904) | | Issuance of Preferred Stock | 1,000 | $6,000 | — | — | — | — | $6,000 | | Common Stock Repurchases | (1,968) | $(3) | — | — | — | — | $(3) | | Preferred Stock Cash Dividends | — | — | — | — | $(19) | — | $(19) | | Stock-Based Compensation Expense | 9,000 | $190 | — | — | — | — | $190 | | Other Comprehensive Income (Loss) | — | — | — | — | — | $3,675 | $3,675 | | Balance at December 31, 2023 | 1,000 | $6,000 | 12,222,881 | $98,100 | $(86,683) | $(14,528) | $2,889 | Consolidated Statements of Cash Flows The consolidated statements of cash flows indicate a net decrease in cash of $16.9 million in 2023, primarily due to cash used in operating activities and financing activities, partially offset by cash from investing activities. Consolidated Statements of Cash Flows ($ thousands) | Cash Flow Category | Year Ended December 31, 2023 | Year Ended December 31, 2022 | | :--- | :------------------- | :------------------- | | Cash Flows from Operating Activities | | | | Net Income (Loss) | $(25,904) | $(10,681) | | Adjustments to Reconcile Net Income (Loss) to Net Cash Used in Operating Activities: | | | | Gain on Sale of Renewal Rights | $(2,335) | — | | Gain on VSRM Consolidation and Sale of Agency Business | — | $(10,052) | | Depreciation and Amortization | $545 | $417 | | Amortization of Bond Premiums and Discounts, Net | $(871) | $320 | | Net Realized Investment (Gains) Losses | $20 | $1,505 | | Fair Value Changes in Equity Securities | $(608) | $(403) | | Loss on Sale of Property and Equipment | — | $33 | | Deferred Income Tax Expense | $(17) | $(9,396) | | Stock-Based Compensation Expense | $190 | $211 | | Equity in (Earnings) Loss of Affiliates, Net of Tax | $251 | $(368) | | Other | — | $60 | | Changes in Operating Assets and Liabilities: | | | | (Increase) Decrease in: Premiums Receivable, Agents' Balances, and Other Receivables | $(7,549) | $(594) | | Reinsurance Recoverables | $5,878 | $(47,613) | | Prepaid Reinsurance Premiums | $(12,509) | $(8,098) | | Deferred Policy Acquisition Costs | $4,005 | $1,977 | | Other Assets | $250 | $(138) | | Increase (Decrease) in: Unpaid Losses and Loss Adjustment Expenses | $9,073 | $26,454 | | Unearned Premiums | $(2,737) | $2,618 | | Funds Held Under Reinsurance Agreements | $13,450 | $11,100 | | Reinsurance Premiums Payable | $(5,898) | $826 | | Premiums Payable to Other Insureds | $13,986 | — | | Accounts Payable and Other Liabilities | $(2,612) | $1,348 | | Net Cash Used in Operating Activities | $(13,392) | $(40,474) | | Cash Flows from Investing Activities | | | | Purchases of Investments | $(234,869) | $(318,227) | | Proceeds from Maturities and Redemptions of Investments | $10,424 | $20,324 | | Proceeds from Sales of Investments | $222,772 | $324,091 | | Proceeds from Sale of Renewal Rights | $2,335 | — | | Proceeds from Sale of Agency Business, Net of Cash Disposed | — | $32,759 | | Purchase of VSRM, Net of Cash Acquired | — | $(1,947) | | Deconsolidation of SSU | — | $(497) | | Contributions to SSU | $(934) | — | | Net Cash Provided by (Used in) Investing Activities | $(272) | $56,503 | | Cash Flows from Financing Activities | | | | Proceeds from Issuance of Preferred Stock | $6,000 | — | | Proceeds from Issuance of Common Stock | — | $5,000 | | Proceeds from Issuance of Long-Term Debt | $6,727 | — | | Repurchases of Common Stock | $(3) | $10 | | Borrowings Under Line of Credit | — | $19,500 | | Repayments Under Line of Credit | — | $(19,500) | | Repayments of Long-Term Debt | $(13,971) | $(2,917) | | Debt Issuance Costs | $(1,999) | — | | Net Cash Provided by (Used in) Financing Activities | $(3,246) | $2,093 | | Net Increase (Decrease) in Cash | $(16,910) | $18,122 | | Cash at Beginning of Period | $28,035 | $9,913 | | Cash at End of Period | $11,125 | $28,035 | Notes to Consolidated Financial Statements The notes provide detailed explanations of the company's significant accounting policies, estimates, and financial statement line items, prepared in accordance with U.S. GAAP. 1. Summary of Significant Accounting Policies This section outlines the company's key accounting policies, including the basis of consolidation, use of estimates, lease accounting, cash and investments, revenue recognition, reinsurance, deferred policy acquisition costs, loss reserves, and income taxes. - The company's consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) and include the accounts of Conifer Holdings, Inc. and its wholly-owned subsidiaries (CIC, RCIC, WPIC, CIS, and VSRM)[358] - The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as the disclosure of contingent assets and liabilities[359] -