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Equibles

10-Q

Presurance Holdings, Inc. (PRHI)

10-Q 2021-11-10 For: 2021-09-30
View Original
Added on April 09, 2026

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2021

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<br><br><br>incorporation or organization) (I.R.S. Employer<br><br><br>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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered
<br>Common Stock, no par value <br>CNFR <br>The Nasdaq Stock Market LLC

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 ☐ 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 November 10, 2021, was 9,707,817.

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Form 10-Q

INDEX

Page No.
Part I — Financial Information
Item 1 — Financial Statements 3
Consolidated Balance Sheets (Unaudited) 3
Consolidated Statements of Operations (Unaudited) 4
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) 5
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) 6
Consolidated Statements of Cash Flows (Unaudited) 7
Notes to Consolidated Financial Statements (Unaudited) 8
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
Item 3 — Quantitative and Qualitative Disclosures about Market Risk 35
Item 4 — Controls and Procedures 36
Part II — Other Information
Item 1 — Legal Proceedings 37
Item 1A — Risk Factors 37
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds 37
Item 6 — Exhibits 38
Signatures 39

ITEM 1 - FINANCIAL STATEMENTS

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(dollars in thousands)

December 31,<br><br><br>2020
Assets
Investment securities:
Debt securities, at fair value (amortized cost of 146,831 and 149,954, respectively) 146,710 $ 151,999
Equity securities, at fair value (cost of 21,942 and 16,912, respectively) 19,687 17,891
Short-term investments, at fair value 10,142 13,317
Total investments 176,539 183,207
Cash and cash equivalents 7,507 8,193
Premiums and agents' balances receivable, net 22,252 20,162
Receivable from Affiliate 8,940 8
Reinsurance recoverables on unpaid losses 23,056 24,218
Reinsurance recoverables on paid losses 4,340 2,138
Prepaid reinsurance premiums 4,225 1,316
Deferred policy acquisition costs 13,611 12,243
Other assets 8,465 10,112
Total assets 268,935 $ 261,597
Liabilities and Shareholders' Equity
Liabilities:
Unpaid losses and loss adjustment expenses 119,854 $ 111,270
Unearned premiums 65,036 56,224
Reinsurance premiums payable 750 —
Debt 34,486 40,997
Accounts payable and accrued expenses 6,701 8,693
Total liabilities 226,827 217,184
Commitments and contingencies — —
Shareholders' equity:
Common stock, no par value (100,000,000 shares authorized; 9,706,156 and 9,681,728 issued and outstanding, respectively) 92,659 92,486
Accumulated deficit (49,278 ) (48,985 )
Accumulated other comprehensive income (loss) (1,273 ) 912
Total shareholders' equity 42,108 44,413
Total liabilities and shareholders' equity 268,935 $ 261,597

All values are in US Dollars.

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

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)

(dollars in thousands, except per share data)

Three Months Ended<br><br><br>September 30, Nine Months Ended<br><br><br>September 30,
2021 2020 2021 2020
Revenue and Other Income
Premiums
Gross earned premiums $ 31,770 26,872 $ 90,245 $ 78,884
Ceded earned premiums (6,829 ) (4,645 ) (17,631 ) (12,882 )
Net earned premiums 24,941 22,227 72,614 66,002
Net investment income 514 776 1,549 2,593
Net realized investment gains (losses) (101 ) 3,316 3,883 4,489
Change in fair value of equity securities (2,169 ) (356 ) (3,234 ) (1,866 )
Other gains 2,778 — 11,688 260
Other income 752 642 1,974 2,013
Total revenue and other income 26,715 26,605 88,474 73,491
Expenses
Losses and loss adjustment expenses, net 16,159 14,553 53,447 40,767
Policy acquisition costs 7,173 6,483 20,819 19,181
Operating expenses 4,077 4,537 12,768 14,441
Interest expense 701 723 2,154 2,185
Total expenses 28,110 26,296 89,188 76,574
Income (loss) before equity earnings in Affiliate and income taxes (1,395 ) 309 (714 ) (3,083 )
Equity earnings in Affiliate, net of tax 184 188 612 417
Income tax expense (benefit) (2 ) (44 ) 191 13
Net income (loss) $ (1,209 ) $ 541 $ (293 ) $ (2,679 )
Earnings (loss) per common share, basic and diluted $ (0.12 ) $ 0.06 $ (0.03 ) $ (0.28 )
Weighted average common shares outstanding, basic and diluted 9,692,150 9,630,600 9,686,874 9,606,436

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

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(dollars in thousands)

Three Months Ended<br><br><br>September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Net income (loss) $ (1,209 ) $ 541 $ (293 ) $ (2,679 )
Other comprehensive income (loss), net of tax:
Unrealized investment gains (losses):
Unrealized investment gains (losses) during the period (570 ) (1,085 ) (2,100 ) 2,617
Income tax (benefit) expense — — — —
Unrealized investment gains (losses), net of tax (570 ) (1,085 ) (2,100 ) 2,617
Less: reclassification adjustments to:
Net realized investment gains (losses) included in net income (loss) 44 292 85 678
Income tax (benefit) expense — — — —
Total reclassifications included in net income (loss), net of tax 44 292 85 678
Other comprehensive income (loss) (614 ) (1,377 ) (2,185 ) 1,939
Total comprehensive income (loss) $ (1,823 ) $ (836 ) $ (2,478 ) $ (740 )

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

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders' Equity (Unaudited)

(dollars in thousands)

No Par, Common Stock Accumulated Accumulated<br><br><br>Other<br><br><br>Comprehensive Total<br><br><br>Shareholders'
Shares Amount Deficit Income (Loss) Equity
Balances at June 30, 2021 9,689,421 $ 92,612 $ (48,069 ) $ (659 ) $ 43,884
Net income (loss) — — (1,209 ) — (1,209 )
Repurchase of common stock (1,240 ) (4 ) — — (4 )
Stock-based compensation expense 17,975 51 — — 51
Other comprehensive income (loss) — — — (614 ) (614 )
Balances at September 30, 2021 9,706,156 $ 92,659 $ (49,278 ) $ (1,273 ) $ 42,108
Balances at June 30, 2020 9,598,155 $ 92,275 $ (52,800 ) $ 3,805 $ 43,280
Net income (loss) — — 541 — 541
Repurchase of common stock (6,505 ) (19 ) — — (19 )
Restricted stock unit expense 86,813 161 — — 161
Other comprehensive income (loss) — — — (1,377 ) (1,377 )
Balances at September 30, 2020 9,678,463 $ 92,417 $ (52,259 ) $ 2,428 $ 42,586
No Par, Common Stock Accumulated Accumulated<br><br><br>Other<br><br><br>Comprehensive Total<br><br><br>Shareholders'
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Shares Amount Deficit Income (Loss) Equity
Balances at December 31, 2020 9,681,728 $ 92,486 $ (48,985 ) $ 912 $ 44,413
Net income (loss) — — (293 ) — (293 )
Repurchase of common stock (3,547 ) (11 ) — — (11 )
Stock-based compensation expense 27,975 184 — — 184
Other comprehensive income (loss) — — — (2,185 ) (2,185 )
Balances at September 30, 2021 9,706,156 92,659 (49,278 ) (1,273 ) 42,108
Balances at December 31, 2019 9,592,861 $ 91,816 $ (49,580 ) $ 489 $ 42,725
Net income (loss) — — (2,679 ) — (2,679 )
Repurchase of common stock (11,211 ) (35 ) — — (35 )
Restricted stock unit expense, net 96,813 636 — — 636
Other comprehensive income (loss) — — — 1,939 1,939
Balances at September 30, 2020 9,678,463 92,417 (52,259 ) 2,428 42,586

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

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)

Nine Months Ended September 30,
2021 2020
Cash Flows From Operating Activities
Net income (loss) $ (293 ) $ (2,679 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Gain on sale of agency business (8,910 ) —
Depreciation and amortization 320 330
Amortization of bond premium and discount, net 388 469
Net realized investment (gains) losses (3,917 ) (4,489 )
Change in fair value of equity securities 3,234 1,866
Stock-based compensation expenses 184 636
Equity earnings in Affiliate, net of tax (612 ) (417 )
Other (2,728 ) (261 )
Changes in operating assets and liabilities:
(Increase) decrease in:
Premiums and agents' balances and other receivables (2,022 ) 332
Reinsurance recoverables (1,040 ) 5,674
Prepaid reinsurance premiums (2,909 ) (3,293 )
Deferred policy acquisition costs (1,368 ) (371 )
Other assets 408 281
Increase (decrease) in:
Unpaid losses and loss adjustment expenses 8,584 (3,562 )
Unearned premiums 8,812 3,586
Reinsurance premiums payable 750 —
Accounts payable and other liabilities (869 ) (1,097 )
Net cash provided by (used in) operating activities (1,988 ) (2,995 )
Cash Flows From Investing Activities
Purchase of investments (149,486 ) (245,583 )
Proceeds from maturities and redemptions of investments 17,859 16,648
Proceeds from sales of investments 135,591 226,993
Proceeds from sale of agency business 1,000 —
Dividends from Affiliate 900 —
Other purchases (531 ) —
Purchases of property and equipment (20 ) (62 )
Net cash provided by (used in) investing activities 5,313 (2,004 )
Cash Flows From Financing Activities
Repurchase of common stock (11 ) (35 )
Repurchase of senior unsecured notes — (625 )
Borrowings under debt arrangements 3,000 5,745
Repayment of borrowings under debt arrangements (7,000 ) —
Net cash provided by (used in) financing activities (4,011 ) 5,085
Net increase (decrease) in cash (686 ) 86
Cash at beginning of period 8,193 7,464
Cash at end of period $ 7,507 $ 7,550
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 2,183 $ 1,938
Note receivable from sale of agency business 9,000 —
Payable from purchase of agency 520 —

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

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

  1. Summary of Significant Accounting Policies

Basis of Presentation and Management Representation

The consolidated financial statements include accounts, after elimination of intercompany accounts and transactions, of Conifer Holdings, Inc. (the “Company” or “Conifer”), its wholly owned subsidiaries, Conifer Insurance Company ("CIC"), White Pine Insurance Company ("WPIC"), Red Cedar Insurance Company ("RCIC"), and Sycamore Insurance Agency, Inc. ("Sycamore").  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."  Sycamore owns a 50% non-controlling interest in Venture Holdings, Inc. (“Venture” or “Affiliate”).

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which differ from statutory accounting practices prescribed or permitted for insurance companies by regulatory authorities.  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.

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, 2020, as filed with the SEC.

The results of operations for the nine months ended September 30, 2021, are not necessarily indicative of the results expected for the year ended December 31, 2021.  In addition, there are risks and uncertainties associated with the novel coronavirus ("COVID-19") and the impact it may have on our business, results of operations and financial condition. The COVID-19 pandemic has negatively impacted the U.S. and global economies, created significant volatility and disruption in the capital markets, dramatically increased unemployment levels and has fueled concerns that it has led to a global recession. Depending on the duration and severity of the pandemic, we foresee the potential for adverse impacts related to, among other things: (i) sales results; (ii) insurance product margin; (iii) net investment income; (iv) invested assets; (v) regulatory capital; (vi) liabilities for insurance products; (vii) access to capital markets; and (viii) the present value of future profits. The full extent to which COVID-19 will impact our business, results of operations and financial condition remains uncertain.

Business

The Company is engaged in the sale of property and casualty insurance products and has organized its principal operations into three types of insurance businesses: commercial lines, personal lines, and agency business. The Company underwrites a variety of specialty insurance products, including property, general liability, liquor liability, automobile, and homeowners and dwelling policies. The Company markets and sells its insurance products through a network of independent agents, including managing general agents, whereby policies are written in all 50 states in the United States of America (“U.S.”). The Company’s corporate headquarters are located in Birmingham, Michigan with additional office facilities in Florida and Michigan.

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.

Cash, Cash Equivalents, and Short-term Investments

Cash consists of cash deposits in banks, generally in operating accounts.  Cash equivalents consist of money-market funds that are specifically used as overnight investments tied to cash deposit accounts.  Short-term investments, consisting of money-market funds, are classified as investments in the consolidated balance sheets as they relate to the Company’s investment activities.

Recently Issued Accounting 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, 2022.  Management is currently evaluating the impact of the guidance.  The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting.  This guidance provides optional expedients and exceptions that are intended to ease the burden of updating contracts to contain a new reference rate due to the discontinuation of the London Inter-Bank Offered Rate (LIBOR).  This guidance is available immediately and may be implemented in any period prior to the guidance expiration on December 31, 2022. Management does not expect the new guidance to have a material impact on the Company’s consolidated financial statements.

  1. Sale of Certain Agency Business

On June 30, 2021, Sycamore Insurance Agency sold to Venture Agency Holdings, Inc. the customer accounts and other related assets of some of its personal and commercial lines of business, hereby referred to as the (“Venture Transaction”).  The customer accounts consist substantially of new and renewal rights and customer lists of the agency.  Sycamore will continue to produce various personal and commercial lines that it did not sell to Venture, which is substantially all produced for, and underwritten by, the Insurance Company Subsidiaries.  The Company recognized an $8.9 million gain on the sale which is reflected in Other Gains on the Consolidated Statements of Operations.

The purchase price was $10.0 million of which $1.0 million was paid in cash on June 30, 2021, and $9.0 million was in the form of two promissory notes (one for $6.0 million and one for $3.0 million).  Both notes require interest-only quarterly payments at a per annum rate of 7.0%, with a five-year maturity.  There are no prepayment penalties.

The assets sold included the customer accounts of substantially all of the personal lines business and a small subset of the commercial lines business underwritten by the Insurance Company Subsidiaries, and all of the customer accounts Sycamore produced for third-party insurers.

The transaction included the transition of 21 employees from Conifer to Venture as well as necessary systems and office functions to operate the business.  Venture is not assuming any in-force business or liabilities.

  1. Investments

The cost or amortized cost, gross unrealized gains or losses, and estimated fair value of the investments in securities classified as available for sale at September 30, 2021 and December 31, 2020, were as follows (dollars in thousands):

September 30, 2021
Cost or Gross Unrealized Estimated
Amortized Cost Gains Losses Fair Value
Debt Securities:
U.S. Government $ 20,721 $ 124 $ (26 ) $ 20,819
State and local government 30,927 651 (161 ) 31,417
Corporate debt 23,420 97 (309 ) 23,208
Asset-backed securities 31,051 20 (91 ) 30,980
Mortgage-backed securities 32,798 137 (650 ) 32,285
Commercial mortgage-backed securities 1,791 51 — 1,842
Collateralized mortgage obligations 6,123 62 (26 ) 6,159
Total debt securities available for sale $ 146,831 $ 1,142 $ (1,263 ) $ 146,710
December 31, 2020
--- --- --- --- --- --- --- --- --- ---
Cost or Gross Unrealized Estimated
Amortized Cost Gains Losses Fair Value
Debt Securities:
U.S. Government $ 30,743 $ 225 $ (1 ) $ 30,967
State and local government 32,253 1,040 (28 ) 33,265
Corporate debt 19,015 311 (23 ) 19,303
Asset-backed securities 20,987 49 (73 ) 20,963
Mortgage-backed securities 38,512 345 (3 ) 38,854
Commercial mortgage-backed securities 2,083 65 (22 ) 2,126
Collateralized mortgage obligations 6,361 161 (1 ) 6,521
Total debt securities available for sale $ 149,954 $ 2,196 $ (151 ) $ 151,999

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 (dollars in thousands):

September 30, 2021
Less than 12 months Greater than 12 months Total
No. of<br><br><br>Issues Fair Value of<br><br><br>Investments<br><br><br>with Unrealized<br><br><br>Losses Gross<br><br><br>Unrealized<br><br><br>Losses No. of<br><br><br>Issues Fair Value of<br><br><br>Investments<br><br><br>with Unrealized<br><br><br>Losses Gross<br><br><br>Unrealized<br><br><br>Losses No. of<br><br><br>Issues Fair Value of<br><br><br>Investments<br><br><br>with Unrealized<br><br><br>Losses Gross<br><br><br>Unrealized<br><br><br>Losses
Debt Securities:
U.S. Government 5 $ 7,659 $ (26 ) — $ — $ — 5 $ 7,659 $ (26 )
State and local government 44 8,447 (147 ) 3 349 (14 ) 47 8,796 (161 )
Corporate debt 27 15,978 (266 ) 1 707 (43 ) 28 16,685 (309 )
Asset-backed securities 12 14,644 (88 ) 3 2,249 (3 ) 15 16,893 (91 )
Mortgage-backed securities 9 27,195 (650 ) — — — 9 27,195 (650 )
Commercial mortgage-backed securities — — — — — — — — —
Collateralized mortgage obligations 6 2,145 (25 ) 2 47 (1 ) 8 2,192 (26 )
Total debt securities available for sale 103 $ 76,068 $ (1,202 ) 9 $ 3,352 $ (61 ) 112 $ 79,420 $ (1,263 )
December 31, 2020
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Less than 12 months Greater than 12 months Total
No. of<br><br><br>Issues Fair Value of<br><br><br>Investments<br><br><br>with Unrealized<br><br><br>Losses Gross<br><br><br>Unrealized<br><br><br>Losses No. of<br><br><br>Issues Fair Value of<br><br><br>Investments<br><br><br>with Unrealized<br><br><br>Losses Gross<br><br><br>Unrealized<br><br><br>Losses No. of<br><br><br>Issues Fair Value of<br><br><br>Investments<br><br><br>with Unrealized<br><br><br>Losses Gross<br><br><br>Unrealized<br><br><br>Losses
Debt Securities:
U.S. Government 2 $ 6,764 $ (1 ) — $ — $ — 2 $ 6,764 $ (1 )
State and local government 16 3,905 (28 ) — — — 16 3,905 (28 )
Corporate debt 2 1,051 (23 ) — — — 2 1,051 (23 )
Asset-backed securities 7 6,050 (34 ) 11 6,551 (39 ) 18 12,601 (73 )
Mortgage-backed securities 2 1,652 (3 ) — — — 2 1,652 (3 )
Commercial mortgage-backed securities 1 899 (22 ) — — — 1 899 (22 )
Collateralized mortgage obligations 2 195 (1 ) — — — 2 195 (1 )
Total debt securities available for sale 32 $ 20,516 $ (112 ) 11 $ 6,551 $ (39 ) 43 $ 27,067 $ (151 )

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 three and nine months ended September 30, 2021 and 2020.

The Company’s sources of net investment income and losses are as follows (dollars in thousands):

Three Months Ended<br><br><br>September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Debt securities $ 562 $ 794 $ 1,716 $ 2,590
Equity securities 63 60 166 168
Cash, cash equivalents and short-term investments 1 — 2 143
Total investment income 626 854 1,884 2,901
Investment expenses (112 ) (78 ) (335 ) (308 )
Net investment income $ 514 $ 776 $ 1,549 $ 2,593

The following table summarizes the gross realized gains and losses from sales, calls and maturities of available-for-sale debt and equity securities (dollars in thousands):

Three Months Ended<br><br><br>September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Debt securities:
Gross realized gains $ 2 $ 2,037 $ 29 $ 2,757
Gross realized losses — (2 ) (6 ) (6 )
Total debt securities 2 2,035 23 2,751
Equity securities:
Gross realized gains 55 1,905 4,063 2,853
Gross realized losses (158 ) (624 ) (203 ) (1,115 )
Total equity securities (103 ) 1,281 3,860 1,738
Total net realized investment gains (losses) $ (101 ) $ 3,316 $ 3,883 $ 4,489

Proceeds from the sales of available-for-sale debt securities were $25.6 million and $58.3 million for the nine months ended September 30, 2021 and 2020, respectively. There were no gross realized gains or losses from the sales of available-for-sale securities for the three months ended September 30, 2021. The gross realized gains and losses from the sales of available-for-sale debt securities for the nine months ended September 30, 2021, were $27,000 and $6,000, respectively.  The gross realized gains and losses from the sales of available-for-sale debt securities for the three months ended September 30, 2020 were $2.0 million and $0, respectively.  The gross realized gains and losses from the sales of available-for-sale debt securities for the nine months ended September 30, 2020, were $2.8 million and $0, respectively.

As of September 30, 2021 and 2020, there were $43,000 and $10.8 million of payables from securities purchased, respectively.  There were $3,000 and $3.5 million of receivables from securities sold as of September 30, 2021, and 2020, respectively.

The Company carries other equity investments that do not have a readily determinable fair value at cost, less impairment or observable changes in price.  We review these investments for impairment during each reporting period.  There were no impairments or observable changes in price recorded during 2021 related to the Company's equity securities without readily determinable fair value.  These investments are included in Other Assets in the Consolidated Balance Sheets and amounted to $1.2 million as of September 30, 2021 and December 31, 2020.

The table below summarizes the amortized cost and fair value of available-for-sale debt securities by contractual maturity at September 30, 2021.  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):

Amortized<br><br><br>Cost Estimated<br><br><br>Fair Value
Due in one year or less $ 11,001 $ 11,047
Due after one year through five years 29,241 29,600
Due after five years through ten years 17,943 17,827
Due after ten years 16,883 16,970
Securities with contractual maturities 75,068 75,444
Asset-backed securities 31,051 30,980
Mortgage-backed securities 32,798 32,285
Commercial mortgage-backed securities 1,791 1,842
Collateralized mortgage obligations 6,123 6,159
Total debt securities $ 146,831 $ 146,710

At September 30, 2021 and December 31, 2020, the Insurance Company Subsidiaries had $8.6 million and $8.8 million, respectively, on deposit in trust accounts to meet the deposit requirements of various state insurance departments.  At September 30, 2021 and December 31, 2020, the Company had $65.6 million and $67.6 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.

  1. 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.  The Level 2 financial instruments also include our line of credit and our Paycheck Protection Program loan.

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.

Net Asset Value (NAV)—The fair values of investment company limited partnership investments are based on the capital account balances reported by the investment funds subject to their management review and adjustment. These capital account balances reflect the fair value of the investment funds.

The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis, classified by the valuation hierarchy as of September 30, 2021 and December 31, 2020 (dollars in thousands):

September 30, 2021
Fair Value Measurements
Total Level 1 Level 2 Level 3
Assets:
Debt Securities:
U.S. Government $ 20,819 $ — $ 20,819 $ —
State and local government 31,417 — 31,417 —
Corporate debt 23,208 — 23,208 —
Asset-backed securities 30,980 — 30,980 —
Mortgage-backed securities 32,285 — 32,285 —
Commercial mortgage-backed securities 1,842 — 1,842 —
Collateralized mortgage obligations 6,159 — 6,159 —
Total debt securities 146,710 — 146,710 —
Equity Securities 19,144 18,861 283 —
Short-term investments 10,142 10,142 — —
Total marketable investments measured at fair value $ 175,996 $ 29,003 $ 146,993 $ —
Investments measured at NAV:
Investment in limited partnership 543
Total assets measured at fair value $ 176,539
Liabilities:
Senior Unsecured Notes * $ 24,322 $ — $ 24,322 $ —
Subordinated Notes * 11,652 — — 11,652
Line of credit * 1,000 — 1,000 —
Total Liabilities measured at fair value $ 36,974 $ — $ 25,322 $ 11,652
* Carried at face value of debt net of unamortized debt issuance costs on the consolidated balance sheets
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December 31, 2020
--- --- --- --- --- --- --- --- ---
Fair Value Measurements
Total Level 1 Level 2 Level 3
Assets:
Debt Securities:
U.S. Government $ 30,967 $ — $ 30,967 $ —
State and local government 33,265 — 33,265 —
Corporate debt 19,303 — 19,303 —
Asset-backed securities 20,963 — 20,963 —
Mortgage-backed securities 38,854 — 38,854 —
Commercial mortgage-backed securities 2,126 — 2,126 —
Collateralized mortgage obligations 6,521 — 6,521 —
Total debt securities 151,999 — 151,999 —
Equity securities 17,336 17,053 283 —
Short-term investments 13,317 13,317 — —
Total marketable investments measured at fair value $ 182,652 $ 30,370 $ 152,282 $ —
Investments measured at NAV:
Investment in limited partnership 555
Total assets measured at fair value $ 183,207
Liabilities:
Senior Unsecured Notes * $ 20,675 $ — $ 20,675 $ —
Subordinated Notes * 11,616 — — 11,616
Line of Credit * 5,000 — 5,000 —
Paycheck Protection Program loan * 2,745 — 2,745 —
Total Liabilities measured at fair value $ 40,036 $ — $ 28,420 $ 11,616
* Carried at face value of debt net of unamortized debt issuance costs on the consolidated balance sheets
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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 16.4% of the fair value of the total investment portfolio as of September 30, 2021.

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 83.3% of the fair value of the total investment portfolio as of September 30, 2021.

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 the investments were determined to be inactive at period-ends.  Based on these procedures, the Company did not adjust the prices or quotes provided from independent pricing services, investment managers or consultants.  The Level 2 financial instruments also include the Company's senior debt. The fair value of the borrowings under the senior revolving credit facility approximates its carrying amount because interest is based on a short-term, variable, market-based rate.

As of September 30, 2021 and December 31, 2020, Level 3 is entirely comprised of the Company's subordinated debt.  In determining the fair value of the subordinated debt outstanding at September 30, 2021 and December 31, 2020, the security attributes (issue date, maturity, coupon, calls, etc.) and market rates on September 24, 2018 (the date of the restated and amended agreement which was repriced at that time) were entered 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 September 30, 2021 and December 31, 2020 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.

  1. 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 nine months ended September 30, 2021 and 2020.  The activity in deferred policy acquisition costs, net of reinsurance transactions, is as follows (dollars in thousands):

Three Months Ended<br><br><br>September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Balance at beginning of period $ 13,121 $ 11,693 $ 12,243 $ 11,906
Deferred policy acquisition costs 7,663 7,067 22,187 19,552
Amortization of policy acquisition costs (7,173 ) (6,483 ) (20,819 ) (19,181 )
Net change 490 584 1,368 371
Balance at end of period $ 13,611 $ 12,277 $ 13,611 $ 12,277
  1. 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 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<br><br><br>September 30, Nine months ended<br><br><br>September 30,
2021 2020 2021 2020
Gross reserves - beginning of period $ 117,852 $ 106,734 $ 111,270 $ 107,246
Less: reinsurance recoverables on unpaid losses (22,824 ) (20,892 ) (24,218 ) (22,579 )
Net reserves - beginning of period 95,028 85,842 87,052 84,667
Add: incurred losses and LAE, net of reinsurance:
Current period 12,513 9,858 37,813 29,286
Prior period 3,646 4,695 15,634 11,481
Total net incurred losses and LAE 16,159 14,553 53,447 40,767
Deduct: loss and LAE payments, net of reinsurance:
Current period 5,802 5,149 14,102 9,067
Prior period 8,587 10,126 29,599 31,247
Total net loss and LAE payments 14,389 15,275 43,701 40,314
Net reserves - end of period 96,798 85,120 96,798 85,120
Plus: reinsurance recoverables on unpaid losses 23,056 18,564 23,056 18,564
Gross reserves - end of period $ 119,854 $ 103,684 $ 119,854 $ 103,684

Net losses and LAE was $16.2 million during the third quarter of 2021.  Adverse development contributed $3.6 million to the total incurred losses in the third quarter of 2021, of which $1.1 million was related to 2017 and prior accident years, $1.4 million was related to the 2018 accident year, and $1.0 million was related to the 2019.  In the third quarter, $3.4 million of the adverse development came from the commercial lines of business, mostly from liability lines, while $290,000 was related to the personal lines of business.

Net losses and LAE were $53.4 million for the nine months ended September 30, 2021.  The Company experienced $2.0 million of catastrophe losses, net of reinsurance recoverables, during the first quarter of 2021 from Winter Storm Uri.  The Company also experienced $15.6 million of adverse development for the nine months ended September 30, 2021.  Of the $15.6 million in adverse development, $5.0 million was related to 2017 and prior accident years, $4.8 million was related to the 2018 accident year, $3.4 million was related to the 2019 accident year, and $2.4 million was related to the 2020 accident year.  Of the $15.6 million in adverse development, $14.7 million was related to commercial lines, mostly from liability lines, while $926,000 was related to personal lines.

The Company’s incurred losses during the three and nine months ended September 30, 2020 included prior-year adverse reserve development of $4.7 million and $11.5 million, respectively.  The adverse development mostly came from commercial liability lines within the hospitality businesses.

  1. Reinsurance

In the normal course of business, the Company participates in reinsurance agreements in order to limit losses that may arise from catastrophes or other individually severe events.  The Company primarily ceded all specific commercial liability risks in excess of $400,000 in 2021 and 2020.  The Company ceded specific commercial property risks in excess of $200,000 in 2021.  The Company ceded 40% of specific commercial property risks in excess of $400,000, and 60% in excess of $300,000 in 2020.  The Company ceded homeowners specific risks in excess of $300,000 in both 2021 and 2020.

A "treaty" is a reinsurance agreement in which coverage is provided for a class of risks and does not require policy by policy underwriting of the reinsurer. "Facultative" reinsurance is where a reinsurer negotiates an individual reinsurance agreement for every policy it will reinsure on a policy by policy basis. A loss is covered under a reinsurance contract if the loss occurs within the effective dates of the agreement notwithstanding when the loss is reported.

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. 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 following table presents the effects of reinsurance and assumption transactions on written premiums, earned premiums and losses and LAE (dollars in thousands):

Three Months Ended<br><br><br>September 30, Nine months ended<br><br><br>September 30,
2021 2020 2021 2020
Written premiums:
Direct $ 24,239 $ 21,434 $ 73,825 $ 60,659
Assumed 9,465 8,407 25,233 21,811
Ceded (7,635 ) (4,798 ) (19,974 ) (13,311 )
Net written premiums $ 26,069 $ 25,043 $ 79,084 $ 69,159
Earned premiums:
Direct $ 23,858 $ 19,281 $ 67,455 $ 54,652
Assumed 7,912 7,591 22,790 24,232
Ceded (6,829 ) (4,645 ) (17,631 ) (12,882 )
Net earned premiums $ 24,941 $ 22,227 $ 72,614 $ 66,002
Losses and LAE:
Direct $ 14,511 $ 11,249 $ 50,628 $ 34,314
Assumed 4,422 5,841 11,251 15,810
Ceded (2,774 ) (2,537 ) (8,432 ) (9,357 )
Net Losses and LAE $ 16,159 $ 14,553 $ 53,447 $ 40,767
  1. Debt

The Company's debt is comprised of four instruments: $24.4 million of publicly traded senior unsecured notes which were issued in September and October of 2018, a $10.0 million line of credit which commenced in June 2018, $10.5 million of privately placed subordinated notes (the “Subordinated Notes”), and a $2.7 million Paycheck Protection Program loan (the “PPP loan”) issued as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  A summary of the Company's outstanding debt is as follows (dollars in thousands):

September 30,<br><br><br>2021 December 31,<br><br><br>2020
Senior unsecured notes $ 23,861 $ 23,665
Subordinated notes 9,625 9,587
Line of credit 1,000 5,000
Paycheck Protection Program loan * — 2,745
Total $ 34,486 $ 40,997
* The PPP loan was embedded into the line of credit facility.  See below.
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Senior unsecured notes

The Company issued $25.3 million of public senior unsecured notes (the "Notes") in 2018.  The Notes bear an interest rate of 6.75% per annum, payable quarterly at the end of March, June, September and December and mature on September 30, 2023.  The Company may redeem the Notes, in whole or in part, at face value at any time after September 30, 2021.

The Company did not repurchase any of the Notes for the three and nine months ended September 30, 2021.  The Company did not repurchase any of the Notes for the three months ended September 30, 2020. For the nine months ended September 30, 2020, the Company repurchased 36,761 units of the Notes with a face value of $919,000 in the public market. The Notes were repurchased at a discount to face value, which resulted in a $260,000 gain on extinguishment.  This gain was reflected in the Consolidated Statement of Operations as Other gains.

Subordinated notes

The Company also has outstanding $10.5 million of Subordinated Notes maturing on September 30, 2038.  The Subordinated Notes bear an interest rate of 7.5% per annum until September 30, 2023, and 12.5% thereafter, and allow for four quarterly interest payment deferrals.  Interest is payable quarterly at the end of March, June, September and December.  Beginning September 30, 2021, the Company may redeem the Subordinated Notes, in whole or in part, for a call premium of $1.1 million.  The call premium escalates each quarter to ultimately $1.75 million on September 30, 2023, then steps up to $3.05 million on December 31, 2023, and increases quarterly at a 12.5% per annum rate thereafter.

As of September 30, 2021, the carrying value of the Notes and Subordinated Notes are offset by $520,000 and $875,000 of debt issuance costs, respectively.  The debt issuance costs will be amortized through interest expense over the life of the loans.

The Subordinated Notes contain various restrictive financial debt covenants that relate to the Company’s minimum tangible net worth, minimum fixed-charge coverage ratios, dividend paying capacity, reinsurance retentions, and risk-based capital ratios.  At September 30, 2021, the Company was in compliance with all of its financial covenants.

Line of credit

The Company maintains a $10.0 million line of credit with a national bank (the “Lender”).  The line of credit bears interest at the London Interbank rate ("LIBOR") plus 2.75% per annum, payable monthly.  The agreement includes several financial debt covenants, including a minimum tangible net worth, a minimum fixed-charge coverage ratio, and minimum statutory risk-based capital levels.  As of September 30, 2021, the Company had $1.0 million outstanding on the line of credit, and was in compliance with all of its financial debt covenants.  On June 18, 2021, the line of credit was renewed with a maturity of December 1, 2022.

Paycheck Protection Program loan

On April 24, 2020, the Company received a $2.7 million loan from the line of credit Lender pursuant to the Paycheck Protection Program of the CARES Act administered by the U.S. Small Business Administration (“SBA”).  The Company received notice from the SBA that the loan was 100% forgiven, including accrued interest, on July 8, 2021.  This resulted in a $2.8 million gain that is included in Other Gains on the Consolidated Statement of Operations in the third quarter of 2021.

  1. Shareholder’s Equity

On December 5, 2018, the Company's Board of Directors authorized a stock repurchase program, under which the Company may repurchase up to one million shares of the Company's common stock. The Company did not repurchase any shares of stock for the three and nine months ended September 30, 2021 related to the stock repurchase program.  The Company did not purchase any shares of stock for the three months ended September 30, 2020.  For the nine months ended September 30, 2020, the Company repurchased 2,398 shares of stock valued at $8,000, related to the stock repurchase program.

For the three months ended September 30, 2021 and 2020, the Company repurchased 1,240 and 6,505 shares of stock valued at approximately $4,000 and $19,000, respectively, related to the vesting of the Company’s restricted stock units.  For the nine months ended September 30, 2021 and 2020, the Company repurchased 3,547 and 8,813 shares of stock valued at approximately $11,000 and $27,000, respectively.  Upon the repurchase of the Company’s shares, the shares remain authorized, but not issued or outstanding.

As of September 30, 2021 and December 31, 2020, the Company had 9,706,156 and 9,681,728 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.

  1. Accumulated Other Comprehensive Income (Loss)

The following table presents changes in accumulated other comprehensive income (loss) for unrealized gains and losses on available-for-sale securities (dollars in thousands):

Three months ended<br><br><br>September 30, Nine months ended<br><br><br>September 30,
2021 2020 2021 2020
Balance at beginning of period $ (659 ) $ 3,805 $ 912 $ 489
Other comprehensive income (loss) before reclassifications, net of tax (570 ) (1,085 ) (2,100 ) 2,617
Less:  amounts reclassified from accumulated other comprehensive income (loss), net of tax 44 292 85 678
Net other comprehensive income (loss) (614 ) (1,377 ) (2,185 ) 1,939
Balance at end of period $ (1,273 ) $ 2,428 $ (1,273 ) $ 2,428
  1. 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 and share amounts):

Three Months Ended<br><br><br>September 30, Nine months ended<br><br><br>September 30,
2021 2020 2021 2020
Net income (loss) $ (1,209 ) $ 541 $ (293 ) $ (2,679 )
Weighted average common shares, basic and diluted * 9,692,150 9,630,600 9,686,874 9,606,436
Earnings (loss) per common share, basic and diluted $ (0.12 ) $ 0.06 $ (0.03 ) $ (0.28 )
* The non-vested shares of the restricted stock units and stock options were anti-dilutive as of September 30, 2021 and 2020.  Therefore, the basic and diluted weighted average common shares are equal for the three and nine months ended September 30, 2021 and 2020.
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  1. Stock-based Compensation

On June 30, 2020, the Company issued options to purchase 280,000 shares of the Company’s common stock, to certain executive officers and other employees.  The right to exercise the options will vest over a five-year period on a straight-line basis. The options have a strike price of $3.81 per share and expire on June 30, 2030.  The estimated value of these options is $290,000, which is being expensed ratably over the vesting period.

In 2015, 2016, and 2018, the Company issued 390,352, 111,281, and 70,000, respectively, of restricted stock units (“RSUs”) to various employees to be settled in shares of common stock, which were valued at $4.1 million, $909,000, and $404,000, respectively, on the dates of grant.

The Company recorded $145,000 and $622,000 of compensation expense related to the RSUs for the nine months ended September 30, 2021 and 2020, respectively. There were 20,000 unvested RSUs as of September 30, 2021, which will generate an estimated future expense of $87,000.

The Company recorded $39,000 and $14,000 of compensation expense related to the stock options for the nine months ended September 30, 2021 and 2020, respectively.  There were 199,000 unvested options as of September 30, 2021, which will generate an estimated future expense of $198,000.

  1. Commitments and Contingencies

Legal proceedings

The Company and its subsidiaries are subject at times to various claims, lawsuits and proceedings relating principally to alleged errors or omissions in the placement of insurance, claims administration, and other business transactions arising in the ordinary course of business. Where appropriate, the Company vigorously defends such claims, lawsuits and proceedings. Some of these claims, lawsuits and proceedings seek damages, including consequential, exemplary or punitive damages, in amounts that could, if awarded, be significant. Most of the claims, lawsuits and proceedings arising in the ordinary course of business are covered by the insurance policy at issue. We account for such activity through the establishment of unpaid losses and LAE reserves. In accordance with accounting guidance, if it is probable that a liability has been incurred as of the date of the financial statements and the amount of loss is reasonably estimable; then an accrual for the costs to resolve these claims is recorded by the Company in the accompanying consolidated financial statements. Periodic expenses related to the defense of such claims are included in the accompanying consolidated statements of operations. On the basis of current information, the Company does not believe that there is a reasonable possibility that any material loss exceeding amounts already accrued, if any, will result from any of the claims, lawsuits and proceedings to which the Company is subject to, either individually or in the aggregate.

  1. Segment Information

The Company is engaged in the sale of property and casualty insurance products and has organized its business model around three classes of insurance businesses: commercial lines, personal lines, and wholesale agency business.  Within these three businesses, the Company offers various insurance products and insurance agency services. Such insurance businesses are engaged in underwriting and marketing insurance coverages, and administering claims processing for such policies.  The Company views the commercial and personal lines segments as underwriting business (business that takes on insurance underwriting risk).  The wholesale agency business provides non-risk bearing revenue through commissions and policy fees.  The wholesale agency business increases the product options to the Company’s independent retail agents by offering both insurance products from the Insurance Company Subsidiaries as well as products offered by other insurers.

The Company defines its operating segments as components of the business where separate financial information is available and used by the chief operating decision maker 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 maker, the Chief Executive Officer, reviews a number of financial measures including gross written premiums, net earned premiums, losses and LAE, net of reinsurance recoveries, and other revenue and expenses. 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 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 Michigan, Florida, Texas and California. For the nine months ended September 30, 2021 and 2020, gross written premiums attributable to these four states were 51.4% and 49.9%, respectively, of the Company’s total gross written premiums.

The Wholesale Agency business sells insurance products on behalf of the Company’s commercial and personal lines businesses as well as to third-party insurers.  Certain acquisition costs incurred by the commercial and personal lines businesses are reflected as commission revenue for the Wholesale Agency business and are eliminated in the Eliminations category.

In addition to the reportable operating segments, the Company maintains a Corporate category to reconcile segment results to the consolidated totals. The Corporate 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, net realized investment gains, and change in fair value of equity securities on the consolidated statements of operations.  The Company’s assets on the consolidated balance sheet are not allocated to the reportable segments.

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

Three months ended<br><br><br>September 30, 2021 Commercial Lines Personal<br><br><br>Lines Total<br><br><br>Underwriting Wholesale<br><br><br>Agency Corporate Eliminations Total
Gross written premiums $ 29,849 $ 3,855 $ 33,704 $ — $ — $ — $ 33,704
Net written premiums $ 22,456 $ 3,613 $ 26,069 $ — $ — $ — $ 26,069
Net earned premiums $ 21,975 $ 2,966 $ 24,941 $ — $ — $ — $ 24,941
Other income 50 29 80 1,235 148 (710 ) 752
Segment revenue 22,025 2,995 25,020 1,235 148 (710 ) 25,693
Losses and LAE, net 14,697 1,462 16,159 — — — 16,159
Policy acquisition costs 6,458 838 7,296 778 — (901 ) 7,173
Operating expenses 2,954 336 3,290 500 287 — 4,077
Segment expenses 24,109 2,636 26,745 1,278 287 (901 ) 27,409
Segment gain (loss) $ (2,084 ) $ 359 $ (1,725 ) $ (43 ) $ (139 ) $ 191 $ (1,716 )
Investment income 514 514
Net realized investment gains (losses) (101 ) (101 )
Change in fair value of equity securities (2,169 ) (2,169 )
Other gains 2,778 2,778
Interest expense (701 ) (701 )
Income (loss) before equity earnings in Affiliate and income taxes $ (2,084 ) $ 359 $ (1,725 ) $ (43 ) $ 182 $ 191 $ (1,395 )
Three months ended<br><br><br>September 30, 2020 Commercial<br><br><br>Lines Personal<br><br><br>Lines Total<br><br><br>Underwriting Wholesale<br><br><br>Agency Corporate Eliminations Total
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Gross written premiums $ 27,297 $ 2,544 $ 29,841 $ — $ — $ — $ 29,841
Net written premiums $ 22,763 $ 2,280 $ 25,043 $ — $ — $ — $ 25,043
Net earned premiums $ 20,586 $ 1,641 $ 22,227 $ — $ — $ — $ 22,227
Other income 44 42 86 2,036 43 (1,523 ) 642
Segment revenue 20,630 1,683 22,313 2,036 43 (1,523 ) 22,869
Losses and LAE, net 14,195 358 14,553 — — — 14,553
Policy acquisition costs 6,180 537 6,717 1,328 — (1,562 ) 6,483
Operating expenses 3,187 251 3,438 779 320 — 4,537
Segment expenses 23,562 1,146 24,708 2,107 320 (1,562 ) 25,573
Segment gain (loss) $ (2,932 ) $ 537 $ (2,395 ) $ (71 ) $ (277 ) $ 39 $ (2,704 )
Investment income 776 776
Net realized investment gains 3,316 3,316
Change in fair value of equity securities (356 ) (356 )
Other gains — —
Interest expense (723 ) (723 )
Income (loss) before equity earnings in Affiliate and income taxes $ (2,932 ) $ 537 $ (2,395 ) $ (71 ) $ 2,736 $ 39 $ 309
Nine months ended<br><br><br>September 30, 2021 Commercial<br><br><br>Lines Personal<br><br><br>Lines Total<br><br><br>Underwriting Wholesale<br><br><br>Agency Corporate Eliminations Total
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Gross written premiums $ 88,017 $ 11,041 $ 99,058 $ — $ — $ — $ 99,058
Net written premiums $ 68,685 $ 10,399 $ 79,084 $ — $ — $ — $ 79,084
Net earned premiums $ 64,869 $ 7,745 $ 72,614 $ — $ — $ — $ 72,614
Other income 158 113 271 4,932 219 (3,448 ) 1,974
Segment revenue 65,027 7,858 72,885 4,932 219 (3,448 ) 74,588
Losses and LAE, net 48,592 4,855 53,447 — — — 53,447
Policy acquisition costs 19,102 2,178 21,280 3,147 — (3,608 ) 20,819
Operating expenses 8,761 1,076 9,837 2,060 871 — 12,768
Segment expenses 76,455 8,109 84,564 5,207 871 (3,608 ) 87,034
Segment gain (loss) $ (11,428 ) $ (251 ) $ (11,679 ) $ (275 ) $ (652 ) $ 160 $ (12,446 )
Investment income 1,549 1,549
Net realized investment gains 3,883 3,883
Change in fair value of equity securities (3,234 ) (3,234 )
Other gains 11,688 11,688
Interest expense (2,154 ) (2,154 )
Income (loss) before equity earnings in Affiliate and income taxes $ (11,428 ) $ (251 ) $ (11,679 ) $ (275 ) $ 11,080 $ 160 $ (714 )
Nine months ended<br><br><br>September 30, 2020 Commercial<br><br><br>Lines Personal<br><br><br>Lines Total<br><br><br>Underwriting Wholesale<br><br><br>Agency Corporate Eliminations Total
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Gross written premiums $ 76,341 $ 6,129 $ 82,470 $ — $ — $ — $ 82,470
Net written premiums $ 63,827 $ 5,332 $ 69,159 $ — $ — $ — $ 69,159
Net earned premiums $ 61,122 $ 4,880 $ 66,002 $ — $ — $ — $ 66,002
Other income 200 114 314 6,051 206 (4,558 ) 2,013
Segment revenue 61,322 4,994 66,316 6,051 206 (4,558 ) 68,015
Losses and LAE, net 38,931 1,836 40,767 — — — 40,767
Policy acquisition costs 18,463 1,532 19,995 3,984 — (4,798 ) 19,181
Operating expenses 9,835 798 10,633 2,420 1,388 — 14,441
Segment expenses 67,229 4,166 71,395 6,404 1,388 (4,798 ) 74,389
Segment gain (loss) $ (5,907 ) $ 828 $ (5,079 ) $ (353 ) $ (1,182 ) $ 240 $ (6,374 )
Investment income 2,593 2,593
Net realized investment gains 4,489 4,489
Change in fair value of equity securities (1,866 ) (1,866 )
Other gains 260 260
Interest expense (2,185 ) (2,185 )
Income (loss) before equity earnings in Affiliate and income taxes $ (5,907 ) $ 828 $ (5,079 ) $ (353 ) $ 2,109 $ 240 $ (3,083 )

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

For the Periods Ended September 30, 2021 and 2020

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements (Unaudited), related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K, filed on March 11, 2021 with the U. S. Securities and Exchange Commission.

Forward-Looking Statements

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

The forward-looking statements contained in this report are based on management’s good-faith belief and reasonable judgment based on current information.  The forward-looking statements are qualified by important factors, risks and uncertainties, many of which are beyond our control, that could cause our actual results to differ materially from those in the forward-looking statements, including those described in our Form 10-K (“Item 1A Risk Factors”) filed with the SEC on March 11, 2021 and subsequent reports filed with or furnished to the SEC.  Any forward-looking statement made by us in this report speaks only as of the date hereof or as of the date specified herein.  We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by any applicable laws or regulations.

Recent Developments

COVID-19

COVID-19 (the “Pandemic”) continues to cause significant disruption to public health, the global economy, financial markets, and commercial, social and community activity in general.  As there has been a significant reduction in reported cases and correspondingly a reduction in government restrictions, we see reduced risk to our business.  We continue to monitor potential risks the Pandemic may present including a potential resurgence.  Our exposure to the Pandemic is manifold.  The majority of our employees continue to work remotely however strict “shelter-in-place” or “stay-at-home” orders have been lifted.  A significant portion of our revenues are generated from the hospitality sector within the U.S. which remains under stress due to the threats of resurgence and resource shortages that resulted from the Pandemic.

We have continued to provide customer service, process new and renewal business, handle claims and otherwise manage all operations even though the vast majority of the staff is working remotely.  To date, we have not seen a major disruption in our business as a result of the Pandemic and currently do not expect to see a material negative impact to our financial position or results of operations as a result of the Pandemic.

Sale of Certain Agency Business

On June 30, 2021, our agency (Sycamore Insurance Agency) sold to Venture Agency Holdings, Inc. the customer accounts and other related assets of some of its personal and commercial lines of business (the “Venture Transaction”).  Sycamore will continue to produce various personal and commercial lines that it did not sell which is substantially all produced for, and underwritten by, our Insurance Company Subsidiaries. We recognized an $8.9 million gain on the sale which is reflected in Other Gains on the Consolidated Statement of Operations.

The purchase price was $10.0 million of which $1.0 million was paid in cash on June 30, 2021, and $9.0 million was in the form of two promissory notes (one for $6.0 million and one for $3.0 million).  Both notes require interest-only quarterly payments at a per annum rate of 7.0%, with a five-year maturity.

The assets sold included the customer accounts (mainly agency-related new and renewal rights) of substantially all of the personal lines business and a small subset of the commercial lines business underwritten by our Insurance Company Subsidiaries, and all of the customer accounts Sycamore produced for third-party insurers.  The Venture Transaction included the transition of 21 employees from CHI to Venture as well as necessary systems and office functions to operate the business.

Venture did not assume any in-force business or liabilities.  The business will roll over to Venture as it produces new or renewal business effective July 1, 2021.  We expect our Insurance Company Subsidiaries will continue to underwrite substantially all of the business we sold to Venture that we underwrote prior to the transaction.  We expect Venture to be able to grow both the business we underwrite plus the third-party business more effectively as a separate entity outside of CHI’s group.  As of June 30, 2021 and September 30, 2021, we had a non-controlling 50% interest in Venture.

Business Overview

We are an insurance holding company that markets and services our product offerings through specialty commercial and specialty personal insurance business lines.  Our growth has been significant since our founding in 2009.  Currently, we are authorized to write insurance as an excess and surplus lines carrier in 45 states, including the District of Columbia.  We are also licensed to write insurance as an admitted carrier in 42 states, including the District of Columbia, and we offer our insurance products in all 50 states.

Our revenues are primarily derived from premiums earned from our insurance operations.  We also generate other revenues through investment income and other income which mainly consists of installment fees and policy issuance fees generally related to the policies we write.

Our expenses consist primarily of losses and loss adjustment expenses, agents’ commissions, and other underwriting and administrative expenses.  We organize our operations into three insurance businesses: commercial insurance lines, personal insurance lines, and wholesale agency business.  Together, the commercial and personal lines refer to "underwriting" operations that take insurance risk, and the wholesale agency business refers to non-risk insurance business.

Through our commercial insurance product lines, we offer coverage for both commercial property and commercial liability.  We also offer coverage for commercial automobiles and workers’ compensation.  Our insurance policies are sold to targeted small and mid-sized businesses on a single or multiple-coverage basis.

Through our personal insurance product lines, we offer homeowners insurance and dwelling fire insurance policies to individuals in several states.  Our specialty homeowners insurance product line is primarily comprised of low-value dwelling insurance tailored for owners of lower valued homes, which we offer in Illinois, Indiana and Texas.  Due to recent Florida-based industry events, we have been de-emphasizing our Florida homeowners' business and reducing our exposures in that state, as well as other wind-exposed states like Texas and Hawaii.

Through our wholesale agency business segment, we offer commercial and personal lines insurance products for our Insurance Company Subsidiaries as well as third-party insurers.  We have expanded the wholesale agency business to develop more non-risk revenue streams, and provide our agents with more insurance product options.  However, as a result of the sale of certain agency business on September 30, 2021, going forward, our agency segment will not be producing any significant amounts of business for third-party insurers and will produce approximately 50% less business for the Insurance Company Subsidiaries.

Critical Accounting Policies and Estimates

In certain circumstances, we are required to make estimates and assumptions that affect amounts reported in our consolidated financial statements and related footnotes.  We evaluate these estimates and assumptions periodically on an on-going basis based on a variety of factors.  There can be no assurance, however, that actual results will not be materially different than our estimates and assumptions, and that reported results of operations will not be affected by accounting adjustments needed to reflect changes in these estimates and assumptions.  During the nine months ended September 30, 2021, there were no material changes to our critical accounting policies and estimating methodologies, which are disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2021.

Executive Overview

The Company reported $33.7 million of gross written premiums in the third quarter of 2021, representing a 12.9% increase as compared to the same period in 2020.  Gross written premiums were $99.1 million for the nine months ended September 30, 2021, representing a 20.1% increase as compared to the same period in 2020.  The increase in both periods was the result of growth in both commercial and personal lines business as we continue to penetrate markets where we have been the most successful while still reducing exposure to less profitable lines.

The Company reported a net loss of $1.2 million, or $0.12 per share, and a net loss of $293,000, or $0.03 per share, for the three and nine months ended September 30, 2021, respectively.  The Company reported net income of $541,000, or $0.06 per share, and a net loss of $2.7 million, or $0.28 per share, for three and nine months ended September 30, 2020, respectively.

Adjusted operating loss, a non-GAAP measure, was $1.7 million, or $0.18 per share for the three months ended September 30, 2021.  Adjusted operating loss was $12.6 million, or $1.30 per share for the nine months ended September 30, 2021.  Adjusted operating loss was $2.4 million, or $0.24 per share for the three months ended September 30, 2020. Adjusted operating loss was $5.6 million, or $0.58 per share for the nine months ended September 30, 2020.

Our underwriting combined ratio was 106.9% and 116.0% for the three and nine months ended September 30, 2021, compared to 110.7% and 107.7% for the three and nine months ended September 30, 2020, respectively.

Results of Operations For The Three Months Ended September 30, 2021 and 2020

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

Summary of Operating Results

Three Months Ended<br><br><br>September 30,
2021 2020 Change % Change
Gross written premiums $ 33,704 $ 29,841 12.9 %
Net written premiums $ 26,069 $ 25,043 4.1 %
Net earned premiums $ 24,941 $ 22,227 12.2 %
Other income 752 642 17.1 %
Losses and loss adjustment expenses, net 16,159 14,553 11.0 %
Policy acquisition costs 7,173 6,483 10.6 %
Operating expenses 4,077 4,537 ) (10.1 )%
Underwriting gain (loss) (1,716 ) (2,704 ) *
Net investment income 514 776 ) (33.8 )%
Net realized investment gains (101 ) 3,316 ) *
Change in fair value of equity securities (2,169 ) (356 ) ) *
Other gains 2,778 — *
Interest expense 701 723 ) (3.0 )%
Income (loss) before equity earnings in Affiliate and income taxes (1,395 ) 309 ) *
Equity earnings in Affiliate, net of tax 184 188 ) *
Income tax expense (2 ) (44 ) *
Net income (loss) $ (1,209 ) $ 541 ) *
Book value per common share outstanding $ 4.34 $ 4.40
Underwriting Ratios:
Loss ratio (1) 64.6 % 65.2 %
Expense ratio (2) 42.3 % 45.5 %
Combined ratio (3) 106.9 % 110.7 %

All values are in US Dollars.

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

Premiums

Premiums are earned ratably over the term of the policy, whereas written premiums are reflected on the effective date of the policy.  Almost all commercial lines and homeowners products have annual policies, under which premiums are earned

evenly over one year.  The resulting net earned premiums are impacted by the gross and ceded written premiums, earned ratably over the terms of the policies.

Our premiums are presented below for the three months ended September 30, 2021 and 2020 (dollars in thousands):

Summary of Premium Revenue

Three Months Ended<br><br><br>September 30,
2021 2020 Change % Change
Gross written premiums
Commercial lines $ 29,849 $ 27,297 9.3 %
Personal lines 3,855 2,544 51.5 %
Total $ 33,704 $ 29,841 12.9 %
Net written premiums
Commercial lines $ 22,456 $ 22,763 ) (1.3 )%
Personal lines 3,613 2,280 58.5 %
Total $ 26,069 $ 25,043 4.1 %
Net earned premiums
Commercial lines $ 21,975 $ 20,586 6.7 %
Personal lines 2,966 1,641 80.7 %
Total $ 24,941 $ 22,227 12.2 %

All values are in US Dollars.

Gross written premiums increased $3.9 million, or 12.9%, to $33.7 million for the three months ended September 30, 2021, as compared to $29.8 million for the same period in 2020.

Commercial lines gross written premiums increased $2.6 million, or 9.3%, to $29.8 million in the third quarter of 2021, as compared to $27.3 million for the third quarter of 2020.  The increase was due to $4.8 million of premium growth in the small business programs, partially offset by a $2.3 million reduction of gross written premium in the Company’s hospitality programs.

Personal lines gross written premiums increased $1.3 million, or 51.5%, to $3.9 million in the third quarter of 2021, as compared to $2.5 million for the same period in 2020.  The increased gross written premiums were due to continued growth in the Company’s low-value dwelling book of business.

Net written premiums increased $1.0 million, or 4.1%, to $26.1 million for the three months ended September 30, 2021, as compared to $25.0 million for the same period in 2020.  Net written premiums did not increase as much as gross written premiums due to a combination of factors that increased our ceded premium rates.  Our blended ratio of ceded earned premiums to gross earned premiums increased from 17.3% to 21.5% in the third quarters of 2020 and 2021, respectively.  The increase was due to a combination of: 1) a change in the mix of business to more property exposure which has a higher ceding rate; 2) general reinsurance rate increases; 3) we purchased more reinsurance as of January 1, 2021 to reduce our commercial property specific loss retention to $200,000, from $340,000, and 4) we are writing more business in select areas that are mostly ceded under quota share agreements that skew the blended ceded earned premium to gross earned premium ratio.

Other Income

Other income consists primarily of fees charged to policyholders by the Company for services outside of the premium charge, such as installment billings and policy issuance costs.  Other income also includes the interest income from the $9.0 million of the notes payable from Venture relating to the Venture Transaction.  Commission income is also received by the Company’s insurance agency for writing policies for third-party insurance companies.  All of the third-party business was sold to Venture at June 30, 2021.  Accordingly, other income from that business will diminish over the next few quarters as it transitions over to Venture, and will ultimately no longer occur.  Other income for the three months ended September 30, 2021, increased by $110,000, or 17.1%, to $752,000 as compared to $642,000 for the same period in 2020.  Other income relating to installment billings and policy issuance costs was lower in 2021, particularly in the third quarter, as the business that was sold to Venture at June 30, 2021, no longer produces other income for the Company.  This was more than offset by an increase in the interest income from the notes payable of $158,000 in the third quarter of 2021.

Other Gains

Other gains were $2.8 million for the three months ended September 30, 2021, compared to $0 for the same period in 2020.  The Company received notice from the SBA that the PPP loan was 100% forgiven, including accrued interest, on July 8, 2021.  This resulted in a $2.8 million gain that is included in Other Gains on the Consolidated Statement of Operations in the third quarter of 2021.

Losses and Loss Adjustment Expenses

The tables below details our losses and loss adjustment expenses and loss ratios in our underwriting business for the three months ended September 30, 2021 and 2020 (dollars in thousands).

Three months ended September 30, 2021 Commercial<br><br><br>Lines Personal<br><br><br>Lines Total
Accident year net losses and LAE $ 11,341 $ 1,172 $ 12,513
Net (favorable) adverse development 3,356 290 3,646
Calendar year net losses and LAE $ 14,697 $ 1,462 $ 16,159
Accident year loss ratio 51.5 % 39.1 % 50.0 %
Net (favorable) adverse development 15.2 % 9.7 % 14.6 %
Calendar year loss ratio 66.7 % 48.8 % 64.6 %
Three months ended September 30, 2020 Commercial<br><br><br>Lines Personal<br><br><br>Lines Total
--- --- --- --- --- --- --- --- --- ---
Accident year net losses and LAE $ 9,565 $ 294 $ 9,859
Net (favorable) adverse development 4,630 64 4,694
Calendar year net losses and LAE $ 14,195 $ 358 $ 14,553
Accident year loss ratio 46.4 % 17.5 % 44.2 %
Net (favorable) adverse development 22.4 % 3.8 % 21.0 %
Calendar year loss ratio 68.8 % 21.3 % 65.2 %

Net losses and LAE increased by $1.6 million, or 11.0%, to $16.2 million during the third quarter of 2021, compared to $14.6 million for the same period in 2020.  The increase in losses was driven by current accident year losses increasing $3.6 million to $12.5 million for the three months ended September 30, 2021, compared to $8.9 million for the same period in 2020.

The Company experienced $3.6 million of adverse development for the three months ended September 30, 2021, of which $1.1 million was related to 2017 and prior accident years, $1.4 million was related to the 2018 accident year, and $1.0 million was related to the 2019 accident year.  In the third quarter of 2021, $3.4 million of the adverse development was related to the commercial lines of business, mostly from the liability lines, while $290,000 was related to the personal lines of business.

The Company's incurred losses during the three months ended September 30, 2020, included adverse prior-year reserve

development of $4.7 million. The commercial lines experienced $4.6 million of unfavorable reserve development of which

$2.9 million was incurred in our hospitality programs, and $1.7 million was from our small business programs (mostly in the liability coverages). The adverse development was attributable to the 2018 and prior accident years.

Expense Ratio

Our expense ratio is a measure of the efficiency and performance of the commercial and personal lines of business (our risk-bearing underwriting operations).  It is calculated by dividing the sum of policy acquisition costs and other underwriting expenses by the sum of net earned premiums and other income of the underwriting business.  Costs that cannot be readily identifiable as a direct cost of a segment or product line remain in Corporate for segment reporting purposes.  The expense ratio excludes wholesale agency and Corporate expenses.

The table below provides the expense ratio by major component.

Three Months Ended<br><br><br>September 30,
2021 2020
Commercial Lines
Policy acquisition costs 29.3 % 30.0 %
Operating expenses 13.4 % 15.4 %
Total 42.7 % 45.4 %
Personal Lines
Policy acquisition costs 28.0 % 31.9 %
Operating expenses 11.2 % 14.9 %
Total 39.2 % 46.8 %
Total Underwriting
Policy acquisition costs 29.2 % 30.1 %
Operating expenses 13.1 % 15.4 %
Total 42.3 % 45.5 %

Our expense ratio decreased by 3.2 percentage points in the third quarter of 2021 as compared to the same period in 2020.  The decrease was largely due to underwriting revenue, which consists of net earned premiums and other underwriting income, increasing by $2.8 million, or 12.3% to $25.7 million for the three months ended September 30, 2021, compared to $22.9 million during the same period in 2020.

Policy acquisition costs are costs we incur to issue policies, which include commissions, premium taxes, underwriting reports and underwriter compensation costs.  The Company offsets direct commissions with ceded commissions from reinsurers.  For the three months ended September 30, 2021 and 2020, the percentage of policy acquisition costs to net earned premiums and other underwriting income decreased by 0.9 percentage points to 29.2% compared to 30.1%, respectively.  Acquisition costs are lower due to a combination of a change in mix of business with lower average acquisition costs, less expensive fronting arrangements, and more ceding commissions in select areas that are mostly ceded under quota share agreements.

Operating expenses consist primarily of employee compensation, information technology and occupancy costs, such as rent and utilities.  Operating expenses as a percent of net earned premiums and other underwriting income were 13.1% and 15.4% for the three months ended September 30, 2021 and 2020, respectively.  The operating expense ratio was lower due to our expense reduction efforts, where there has been a real nominal dollar decrease in operating expenses, coupled with net earned premium growth.

Segment Results

We measure the performance of our consolidated results, in part, based on our underwriting gain or loss.  The following table provides the underwriting gain or loss for the three months ended September 30, 2021 and 2020 (dollars in thousands):

Segment Gain (Loss)

Three Months Ended<br><br><br>September 30,
2021 2020 Change
Commercial Lines $ (2,084 ) $ (2,932 )
Personal Lines 359 537 )
Total Underwriting (1,725 ) (2,395 )
Wholesale Agency (43 ) (71 )
Corporate (139 ) (277 )
Eliminations 191 39
Total segment gain (loss) $ (1,716 ) $ (2,704 )

All values are in US Dollars.

Results of Operations For The Nine Months Ended September 30, 2021 and 2020

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

Nine months ended<br><br><br>September 30,
2021 2020 Change % Change
Gross written premiums $ 99,058 $ 82,470 20.1 %
Net written premiums $ 79,084 $ 69,159 14.4 %
Net earned premiums $ 72,614 $ 66,002 10.0 %
Other income 1,974 2,013 ) (1.9 )%
Losses and loss adjustment expenses, net 53,447 40,767 31.1 %
Policy acquisition costs 20,819 19,181 8.5 %
Operating expenses 12,768 14,441 ) (11.6 )%
Underwriting gain (loss) (12,446 ) (6,374 ) ) (95.3 )%
Net investment income 1,549 2,593 ) (40.3 )%
Net realized investment gains 3,883 4,489 ) (13.5 )%
Change in fair value of equity securities (3,234 ) (1,866 ) ) *
Other gains 11,688 260 *
Interest expense 2,154 2,185 ) (1.4 )%
Income (loss) before equity earnings in Affiliate and income taxes (714 ) (3,083 ) *
Equity earnings in Affiliate, net of tax 612 417 *
Income tax expense 191 13 *
Net income (loss) $ (293 ) $ (2,679 ) *
Book value per common share outstanding $ 4.34 $ 4.40
Underwriting Ratios:
Loss ratio (1) 73.3 % 61.5 %
Expense ratio (2) 42.7 % 46.2 %
Combined ratio (3) 116.0 % 107.7 %

All values are in US Dollars.

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

Premiums

Premiums are earned ratably over the term of the policy, whereas written premiums are reflected on the effective date of the policy.  Almost all commercial lines and homeowners products have annual policies, under which premiums are earned evenly over one year.  The resulting net earned premiums are impacted by the gross and ceded written premiums, earned ratably over the terms of the policies.

Our premiums are presented below for the nine months ended September 30, 2021 and 2020 (dollars in thousands):

Nine months ended<br><br><br>September 30,
2021 2020 Change % Change
Gross written premiums
Commercial lines $ 88,017 $ 76,341 15.3 %
Personal lines 11,041 6,129 80.1 %
Total $ 99,058 $ 82,470 20.1 %
Net written premiums
Commercial lines $ 68,685 $ 63,827 7.6 %
Personal lines 10,399 5,332 95.0 %
Total $ 79,084 $ 69,159 14.4 %
Net earned premiums
Commercial lines $ 64,869 $ 61,122 6.1 %
Personal lines 7,745 4,880 58.7 %
Total $ 72,614 $ 66,002 10.0 %

All values are in US Dollars.

Gross written premiums increased $16.6 million, or 20.1%, to $99.1 million for the nine months ended September 30, 2021, as compared to $82.5 million for the same period in 2020.

Commercial lines gross written premiums increased $11.7 million, or 15.3%, to $88.0 million for the nine months ended September 30, 2021, as compared to $76.3 million for the same period in 2020.  There was a $17.0 million increase in the small business programs, which was partially offset by a $5.4 million reduction of gross written premium in the Company’s hospitality programs.  Of the $5.4 million decrease in gross written premium in the hospitality programs, $5.1 million was from our quick service restaurant line, which has seen some of the larger losses within the hospitality lines of business.

Personal lines gross written premiums increased $4.9 million, or 80.1%, to $11.0 million for the nine months ended September 30, 2021, as compared to $6.1 million for the same period in 2020.  The increase was due to continued growth in the Company’s low-value dwelling book of business.

Net written premiums increased $9.9 million, or 14.4%, to $79.1 million for the nine months ended September 30, 2021, as compared to $69.2 million for the same period in 2020.  Net written premiums did not increase as much as gross written premiums due to a combination of factors that increased our ceded premium rates.

Our blended ratio of ceded earned premiums to gross earned premiums increased from 16.3% to 19.5% in nine months ended September 30, 2020 and 2021, respectively.  The increase in the ceded earned premium-to-gross earned premium ratio was due, in part, to a $2.3 million increase in gross earned premiums relating to a growing commercial umbrella liability program that is almost entirely ceded under a quota share agreement.  This increased the ratio by 2.4 percentage points.  However, we also received a ceding commission from this business that has reduced our acquisition costs. The remainder of the increase was due to a combination of: 1) a change in the mix of business to more property exposure which has a higher ceding rate; 2) general reinsurance rate increases; and 3) we purchased more reinsurance as of January 1, 2021 to reduce our commercial property specific loss retention to only $200,000, from $340,000.

Other Income

Other income consists primarily of fees charged to policyholders by the Company for services outside of the premium charge, such as installment billings and policy issuance costs.  Other income also includes the interest income from the $9.0 million of notes payable from Venture relating to the Venture Transaction.  Commission income is also received by the Company’s insurance agency for writing policies for third-party insurance companies.  All of the third-party business was sold to Venture at June 30, 2021.  Accordingly, other income from that business will diminish over the next few quarters as it transitions over to Venture, and will ultimately no longer occur.  Other income remained flat at $2.0 million for both the nine months ended September 30, 2021 and 2020.  Other income relating to installment billings and policy issuance costs was lower in 2021, particularly in the third quarter, as the business that was sold to Venture at June 30, 2021, no longer produces other income for the Company.  This was partially offset by an increase in the interest income from the notes payable of $158,000 in the third quarter of 2021.

Other Gains

Other gains were $11.7 million for the nine months ended September 30, 2021, compared to $260,000 for the same period in 2020.  The Company sold a portion of its Agency business during the second quarter of 2021, resulting in an $8.9 million gain.  Additionally, the Company received notice from the SBA that the PPP loan was 100% forgiven, including accrued interest, on July 8, 2021.  This resulted in a $2.8 million gain that is included in Other Gains on the Consolidated Statement of Operations in the third quarter of 2021.  The $260,000 gain for the nine months ended September 30, 2020 was due to the repurchase of 36,761 units of the Notes at a discount to face value.

Losses and Loss Adjustment Expenses

The tables below detail our losses and loss adjustment expenses and loss ratios in our underwriting business for the nine months ended September 30, 2021 and 2020 (dollars in thousands).

Nine months ended September 30, 2021 Commercial<br><br><br>Lines Personal<br><br><br>Lines Total
Accident year net losses and LAE $ 33,884 $ 3,929 $ 37,813
Net (favorable) adverse development 14,708 926 15,634
Calendar year net losses and LAE $ 48,592 $ 4,855 $ 53,447
Accident year loss ratio 52.1 % 50.0 % 51.9 %
Net (favorable) adverse development 22.6 % 11.8 % 21.4 %
Calendar year loss ratio 74.7 % 61.8 % 73.3 %
Nine months ended September 30, 2020 Commercial<br><br><br>Lines Personal<br><br><br>Lines Total
--- --- --- --- --- --- --- --- --- ---
Accident year net losses and LAE $ 27,560 $ 1,727 $ 29,287
Net (favorable) adverse development 11,371 109 11,480
Calendar year net losses and LAE $ 38,931 $ 1,836 $ 40,767
Accident year loss ratio 45.0 % 34.5 % 44.2 %
Net (favorable) adverse development 18.5 % 2.2 % 17.3 %
Calendar year loss ratio 63.5 % 36.7 % 61.5 %

Net losses and LAE increased by $12.7 million, or 31.1%, to $53.4 million for the nine months ended September 30, 2021, compared to $40.8 million for the same period in 2020.  The Company experienced $2.0 million of catastrophe losses, net of reinsurance recoverables, during the first quarter of 2021 from Winter Storm Uri.  The Company also experienced $15.6 million of adverse development for the nine months ended September 30, 2021, which increased losses further.  Of the $15.6 million in adverse development, $14.7 million was related to commercial lines, while $926,000 was related to personal lines.  The adverse development was mostly attributable to the 2019, 2018 and 2017 and prior accident years, and mostly related to commercial liability lines.

The Company's incurred losses during the nine months ended September 30, 2020, included adverse prior-year reserve development of $11.5 million. The Commercial lines experienced $11.4 million of unfavorable reserve development for the nine months ended September 30, 2020, of which $8.5 million was incurred in our hospitality programs, while $2.9 million was from our small business programs (mostly in the liability coverages). The adverse development was mostly attributable to the 2018 and prior accident years.

Expense Ratio

Our expense ratio is a measure of the efficiency and performance of the commercial and personal lines of business (our risk-bearing underwriting operations).  It is calculated by dividing the sum of policy acquisition costs and other underwriting expenses by the sum of net earned premiums and other income of the underwriting business.  Costs that cannot be readily identifiable as a direct cost of a segment or product line remain in Corporate for segment reporting purposes.  The expense ratio excludes wholesale agency and Corporate expenses.

The table below provides the expense ratio by major component.

Nine months ended<br><br><br>September 30,
2021 2020
Commercial Lines
Policy acquisition costs 29.4 % 30.1 %
Operating expenses 13.5 % 16.0 %
Total 42.9 % 46.1 %
Personal Lines
Policy acquisition costs 27.7 % 30.7 %
Operating expenses 13.7 % 16.0 %
Total 41.4 % 46.7 %
Total Underwriting
Policy acquisition costs 29.2 % 30.2 %
Operating expenses 13.5 % 16.0 %
Total 42.7 % 46.2 %

Our expense ratio decreased by 3.5 percentage points for the nine months ended September 30, 2021, as compared to the same period in 2020.

Policy acquisition costs are costs we incur to issue policies, which include commissions, premium taxes, underwriting reports and underwriter compensation costs.  The Company offsets direct commissions with ceded commissions from reinsurers.  For the nine months ended September 30, 2021 and 2020, the percentage of policy acquisition costs to net earned premiums and other underwriting income decreased by 1.0 percentage point to 29.2% compared to 30.2%, respectively.  Acquisition costs are lower due to a combination of a change in mix of business with lower average acquisition costs, less expensive fronting arrangements, and more ceding commissions in select areas that are mostly ceded under quota share agreements.

Operating expenses consist primarily of employee compensation, information technology and occupancy costs, such as rent and utilities.  Total underwriting operating expenses as a percent of net earned premiums and other underwriting income were 13.5% and 16.0% for the nine months ended September 30, 2021 and 2020, respectively.  The operating expense ratio was lower due to our expense reduction efforts, where there has been a real nominal dollar decrease in operating expenses, coupled with net earned premium growth.

Segment Results

We measure the performance of our consolidated results, in part, based on our underwriting gain or loss.  The following table provides the underwriting gain or loss for the nine months ended September 30, 2021 and 2020 (dollars in thousands):

Segment Gain (Loss)

Nine months ended<br><br><br>September 30,
2021 2020 Change
Commercial Lines $ (11,428 ) $ (5,907 ) )
Personal Lines (251 ) 828 )
Total Underwriting (11,679 ) (5,079 ) )
Wholesale Agency (275 ) (353 )
Corporate (652 ) (1,182 )
Eliminations 160 240 )
Total segment gain (loss) $ (12,446 ) $ (6,374 ) )

All values are in US Dollars.

Liquidity and Capital Resources

Sources and Uses of Funds

At September 30, 2021, we had $17.6 million in cash, cash equivalents and short-term investments.  Our principal sources of funds are insurance premiums, investment income, proceeds from maturities and sales of invested assets and installment fees.  These funds are primarily used to pay claims, commissions, employee compensation, taxes and other operating expenses, and service debt.

We believe that our existing cash, cash equivalents, short-term investments and investment securities balances will be adequate to meet our capital and liquidity needs and the needs of our subsidiaries on a short-term and long-term basis.

We conduct our business operations primarily through our Insurance Company Subsidiaries.  Our ability to service debt, and pay administrative expenses is primarily reliant upon our intercompany service fees paid by the Insurance Company Subsidiaries to the Parent Company for management, administrative, and information technology services provided to the Insurance Company Subsidiaries by the Parent Company. Secondarily, the Parent Company may receive dividends from the Insurance Company Subsidiaries; however, this is not the primary means in which the Parent Company supports its funding as state insurance laws restrict the ability of our Insurance Company Subsidiaries to declare dividends to the Parent Company.  There were no dividends paid from our Insurance Company Subsidiaries during the nine months ended September 30, 2021 and 2020.

Cash Flows

Operating Activities. Cash used in operating activities for the nine months ended September 30, 2021, was $2.0 million, compared to $3.0 million used for the same period in 2020.   There was $12.2 million more premiums collected, net of reinsurance costs, in 2021, compared to 2020, as we continue to increase gross written premiums.  This was offset by $7.2 million more claim payments made in 2021, net of reinsurance recovered (in part due to Winter Storm Uri), $3.0 million more acquisition costs paid in 2021, compared to 2020, as gross written premiums increased, and $1.1 million decrease in investment income received.

Investing Activities.  Cash provided by investing activities for the nine months ended September 30, 2021, was $5.3 million, as compared to $2.0 million of cash used in investing activities for the same period in 2020.  The $7.3 million increase in cash provided by investing activities was driven by a reduction in the purchases of investments in the first nine months of 2021, compared to the same period in 2020.  There was a significant repositioning of the Company’s portfolio during the nine months of 2020 from the COVID-19 pandemic, which caused an increase in the purchases of investments.

Financing Activities.  Cash used in financing activities for the nine months ended September 30, 2021, was $4.0 million, compared to $5.1 million of cash provided by financing activities for the same period in 2020.  The $9.1 million decrease in cash provided by financing activities was mostly due to the Company paying down a net amount of $4.0 million of its outstanding balance on its line of credit during the first nine months of 2021.

Statutory Capital and Surplus

Our Insurance Company Subsidiaries are required to file quarterly and annual financial reports with state insurance regulators.  These financial reports are prepared using statutory accounting practices promulgated by the Insurance Company Subsidiaries’ state of domiciliary, rather than GAAP.  The Insurance Company Subsidiaries’ aggregate statutory capital and surplus (which is a statutory measure of equity) was $57.8 million and $64.1 million at September 30, 2021 and December 31, 2020, respectively.

Non-GAAP Financial Measures

Adjusted Operating Income and Adjusted Operating Income Per Share

Adjusted operating income and adjusted operating income per share are non-GAAP measures that represent net income allocable to common shareholders excluding net realized investment gains or losses, changes in fair value of equity securities, and other gains or losses; all net of tax.  The most directly comparable financial GAAP measures to adjusted operating income and adjusted operating income per share are net income and net income per share, respectively.  Adjusted operating income and adjusted operating income per share are intended as supplemental information and are not meant to replace net income or net income per share.  Adjusted operating income and adjusted operating income per share should be read in conjunction with the GAAP financial results.  Our definition of adjusted operating income may be different from that used by other companies.  The following is a reconciliation of net income (loss) to adjusted operating income (loss) (dollars in thousands), as well as net income (loss) per share to adjusted operating income (loss) per share:

Three Months Ended<br><br><br>September 30, Nine months ended<br><br><br>September 30,
2021 2020 2021 2020
Net income (loss) $ (1,209 ) $ 541 $ (293 ) $ (2,679 )
Exclude:
Net realized investment gains and other gains, net of tax 2,677 3,316 15,571 4,749
Change in fair value of equity securities, net of tax (2,169 ) (356 ) (3,234 ) (1,866 )
Adjusted operating income (loss) $ (1,717 ) $ (2,419 ) $ (12,630 ) $ (5,562 )
Weighted average common shares diluted 9,692,150 9,630,600 9,686,874 9,606,436
Diluted income (loss) per common share:
Net income (loss) $ (0.12 ) $ 0.06 $ (0.03 ) $ (0.28 )
Exclude:
Net realized investment gains and other gains, net of tax 0.28 0.34 1.61 0.49
Change in fair value of equity securities, net of tax (0.22 ) (0.04 ) (0.33 ) (0.19 )
Adjusted operating income (loss) per share $ (0.18 ) $ (0.24 ) $ (1.30 ) $ (0.58 )

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

Recently Issued Accounting Pronouncements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in market rates and prices such as interest rates, other relevant market rates or price changes. The volatility and liquidity in the markets in which the underlying assets are traded directly influence market risk. The following is a discussion of our primary market risk exposures and how those exposures are currently managed as of September 30, 2021. Our market risk sensitive instruments are primarily related to fixed income securities, which are available-for-sale and not held for trading purposes.

Interest Rate Risk

At September 30, 2021, the fair value of our investment portfolio, excluding cash and cash equivalents, was $176.5 million. Our investment portfolio consists principally of investment-grade, fixed-income securities, all of which are classified as available for sale. Accordingly, the primary market risk exposure to our debt securities is interest rate risk. In general, the fair market value of a portfolio of debt securities increases or decreases inversely with changes in market interest rates, while net investment income realized from future investments in debt securities increases or decreases along with interest rates. We attempt to mitigate interest rate risks by investing in securities with varied maturity dates and by managing the duration of our investment portfolio to a defined range of three to four years.  The effective duration of our portfolio as of September 30, 2021 and December 31, 2020 was 3.7 and 3.6 years, respectively.

The table below illustrates the sensitivity of the fair value of our debt investments, classified as debt securities and short-term investments, to selected hypothetical changes in interest rates as of September 30, 2021.  The selected scenarios are not predictions of future events, but rather illustrate the effect that events may have on the fair value of the debt portfolio and shareholders’ equity (dollars in thousands).

Estimated Hypothetical Percentage<br><br><br>Increase (Decrease) in
Hypothetical Change in Interest Rates Estimated Change in Shareholders'
As of September 30, 2021 Fair Value Fair Value Fair Value Equity
200 basis point increase $ 145,245 $ (11,607 ) (7.40 )% (27.56 )%
100 basis point increase 150,954 (5,898 ) (3.76 )% (14.01 )%
No change 156,852 — — —
100 basis point decrease 160,867 4,015 2.56 % 9.54 %
200 basis point decrease 162,687 5,835 3.72 % 13.86 %

Credit Risk

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

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

At September 30, 2021, the net amount due to the Company from reinsurers, including prepaid reinsurance premiums, was $30.9 million.  We believe all amounts recorded as due from reinsurers are recoverable.

Effects of Inflation

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

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of September 30, 2021. Based on such evaluations, the Chief Executive Officer and Chief Financial Officer have concluded the Company’s disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, and that information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

For the three months ended September 30, 2021, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect the Company's internal control over financial reporting.

ITEM 1. LEGAL PROCEEDINGS

The information required by this item is included under Note 13 ~ Commitments and Contingencies of the Notes to the Consolidated Financial Statements of the Company’s Form 10-Q for the nine months ended September 30, 2021, which is hereby incorporated by reference.

ITEM 1A. RISK FACTORS

There were no material changes to the risk factors disclosed in our Annual Report on Form 10-K (“Item 1A Risk Factors”) filed with the SEC on March 11, 2021.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 6.  EXHIBITS

Incorporated by Reference
Exhibit<br><br><br>Number Exhibit Description Form Period<br><br><br>Ending Exhibit /<br><br><br>Appendix<br><br><br>Number Filing Date
31.1 Section 302 Certification — CEO
31.2 Section 302 Certification — CFO
32.1* Section 906 Certification — CEO
32.2* Section 906 Certification — CFO
101.INS inline XBRL Instance Document
101.SCH inline XBRL Taxonomy Extension Schema Document
101.CAL inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF inline XBRL Taxonomy Extension Definition Linkbase
101.LAB inline XBRL Taxonomy Extension Label Linkbase
101.PRE inline XBRL Taxonomy Extension Presentation Linkbase
104 Cover Page Interactive Date File (embedded within the Inline XBRL document)
* This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
--- ---

SIGNATURES

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

CONIFER HOLDINGS, INC.
By: /s/ Harold J. Meloche
Harold J. Meloche
Chief Financial Officer,
Principal Financial Officer,
Principal Accounting Officer

Dated: November 10, 2021

39

cnfr-ex311_6.htm

Exhibit 31.1

CHIEF EXECUTIVE OFFICER’S 302 CERTIFICATION

I, James G. Petcoff, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Conifer Holdings, Inc. for the quarterly period ended September 30, 2021;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 10, 2021

/s/ James G. Petcoff
James G. Petcoff
Chief Executive Officer<br><br><br>(principal executive officer)

cnfr-ex312_7.htm

Exhibit 31.2

CHIEF FINANCIAL OFFICER’S 302 CERTIFICATION

I, Harold J. Meloche, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Conifer Holdings, Inc. for the quarterly period ended September 30, 2021;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 10, 2021

/s/ Harold J. Meloche
Harold J. Meloche
Chief Financial Officer<br><br><br>(principal financial officer)

cnfr-ex321_11.htm

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Conifer Holdings, Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James G. Petcoff, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
--- ---

Date: November 10, 2021

/s/ James G. Petcoff
James G. Petcoff
Chief Executive Officer

cnfr-ex322_8.htm

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Conifer Holdings, Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Harold J. Meloche, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
--- ---

Date: November 10, 2021

/s/ Harold J. Meloche
Harold J. Meloche
Chief Financial Officer

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