Conifer Holdings, Inc. - Quarter Report: 2020 September (Form 10-Q)

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, 2020

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

For the transition period from to

Commission file number 001-37536

Conifer Holdings, Inc.

(Exact name of registrant as specified in its charter)

Michigan		27-1298795
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

550 West Merrill Street, Suite 200
Birmingham, Michigan		48009
(Address of principal executive offices)		(Zip code)

(248) 559-0840

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, no par value

CNFR

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 12, 2020, was 9,678,463.

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

PART 1 - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(dollars in thousands)

	September 30, 2020			December 31, 2019
	(Unaudited)
Assets
Investment securities:
Debt securities, at fair value (amortized cost of $135,883 and $129,313, respectively)	$	139,441		$	131,000
Equity securities, at fair value (cost of $17,027 and $6,554, respectively)		15,913			7,306
Short-term investments, at fair value		24,898			31,426
Total investments		180,252			169,732

Cash and cash equivalents		7,550			7,464
Premiums and agents' balances receivable, net		20,137			20,168
Receivable from Affiliate		12			313
Reinsurance recoverables on unpaid losses		18,564			22,579
Reinsurance recoverables on paid losses		3,496			5,155
Prepaid reinsurance premiums		4,543			1,250
Deferred policy acquisition costs		12,277			11,906
Other assets		13,062			8,698
Total assets	$	259,893		$	247,265

Liabilities and Shareholders' Equity
Liabilities:
Unpaid losses and loss adjustment expenses	$	103,684		$	107,246
Unearned premiums		55,089			51,503
Debt		40,920			35,824
Accounts payable and accrued expenses		17,614			9,967
Total liabilities		217,307			204,540

Commitments and contingencies		—			—

Shareholders' equity:
Common stock, no par value (100,000,000 shares authorized; 9,678,463 and 9,592,861 issued and outstanding, respectively)		92,417			91,816
Accumulated deficit		(52,259	)		(49,580	)
Accumulated other comprehensive income (loss)		2,428			489
Total shareholders' equity		42,586			42,725
Total liabilities and shareholders' equity	$	259,893		$	247,265

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 September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Revenue
Premiums
Gross earned premiums	$	26,872			25,962		$	78,884		$	76,594
Ceded earned premiums		(4,645	)		(3,187	)		(12,882	)		(10,783	)
Net earned premiums		22,227			22,775			66,002			65,811
Net investment income		776			1,210			2,593			3,171
Net realized investment gains		3,316			390			4,489			1,124
Change in fair value of equity securities		(356	)		(1,065	)		(1,866	)		(715	)
Other gains		—			—			260			—
Other income		642			564			2,013			1,567
Total revenue		26,605			23,874			73,491			70,958

Expenses
Losses and loss adjustment expenses, net		14,553			14,857			40,767			43,695
Policy acquisition costs		6,483			6,153			19,181			17,952
Operating expenses		4,537			4,297			14,441			12,960
Interest expense		723			720			2,185			2,155
Total expenses		26,296			26,027			76,574			76,762

Income (loss) before equity earnings in Affiliate and income taxes		309			(2,153	)		(3,083	)		(5,804	)
Equity earnings (losses) in Affiliate, net of tax		188			121			417			219
Income tax expense (benefit)		(44	)		(802	)		13			(791	)

Net income (loss)	$	541		$	(1,230	)	$	(2,679	)	$	(4,794	)

Earnings (loss) per common share, basic and diluted	$	0.06		$	(0.13	)	$	(0.28	)	$	(0.55	)

Weighted average common shares outstanding, basic and diluted		9,630,600			9,543,535			9,606,436			8,640,409

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 September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Net income (loss)	$	541		$	(1,230	)	$	(2,679	)	$	(4,794	)

Other comprehensive income (loss), net of tax:
Unrealized investment gains (losses):
Unrealized investment gains (losses) during the period		(1,085	)		812			2,617			3,735
Income tax (benefit) expense		—			818			—			818
Unrealized investment gains (losses), net of tax		(1,085	)		(6	)		2,617			2,917

Less: reclassification adjustments to:
Net realized investment gains (losses) included in net income (loss)		292			(41	)		678			(151	)
Income tax (benefit) expense		—			—			—			—
Total reclassifications included in net income (loss), net of tax		292			(41	)		678			(151	)

Other comprehensive income (loss)		(1,377	)		35			1,939			3,068

Total comprehensive income (loss)	$	(836	)	$	(1,195	)	$	(740	)	$	(1,726	)

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						Retained Earnings			Accumulated Other Comprehensive			Total Shareholders'
	Shares			Amount			(Accumulated)			Income (Loss)			Equity
Balances at June 30, 2020		9,598,155		$	92,275		$	(52,800	)	$	3,805		$	43,280
Net income		—			—			541			—			541
Repurchase of common stock		(6,505	)		(19	)		—			—			(19	)
Stock-based compensation expense		86,813			161			—			—			161
Other comprehensive income		—			—			—			(1,377	)		(1,377	)
Balances at September 30, 2020		9,678,463		$	92,417		$	(52,259	)	$	2,428		$	42,586


Balances at June 30, 2019		9,519,550		$	91,410		$	(45,322	)	$	421		$	46,509
Net income (loss)		—			—			(1,230	)		—			(1,230	)
Repurchase of common stock		(17,752	)		(66	)		—			—			(66	)
Issuance of common stock private placement		—			—			—			—			—
Restricted stock unit expense		87,075			234			—			—			234
Other comprehensive income		—			—			—			35			35
Balances at September 30, 2019		9,588,873		$	91,578		$	(46,552	)	$	456		$	45,482

	No Par, Common Stock						Retained Earnings			Accumulated Other Comprehensive			Total Shareholders'
	Shares			Amount			(Accumulated)			Income (Loss)			Equity
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	)
Stock-based compensation expense		96,813			636			—			—			636
Other comprehensive income		—			—			—			1,939			1,939
Balances at September 30, 2020		9,678,463			92,417			(52,259	)		2,428			42,586


Balances at December 31, 2018		8,478,202		$	86,533		$	(41,758	)	$	(2,612	)	$	42,163
Net income (loss)		—			—			(4,794	)		—			(4,794	)
Repurchase of common stock		(162,875	)		(674	)		—			—			(674	)
Issuance of common stock private placement		1,176,471			5,000			—			—			5,000
Restricted stock unit expense, net		97,075			719			—			—			719
Other comprehensive loss		—			—			—			3,068			3,068
Balances at September 30, 2019		9,588,873			91,578			(46,552	)		456			45,482

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,
	2020			2019
Cash Flows From Operating Activities
Net income (loss)		(2,679	)	$	(4,794	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization		330			342
Amortization of bond premium and discount, net		469			342
Net realized investment (gains) losses		(4,489	)		(1,124	)
Change in fair value of equity securities		1,866			715
Stock based compensation expenses		636			719
Other		(678	)		(1,038	)
Changes in operating assets and liabilities:
(Increase) decrease in:
Premiums and agents' balances and other receivables		332			5,667
Reinsurance recoverables		5,674			10,224
Prepaid reinsurance premiums		(3,293	)		(1,692	)
Deferred policy acquisition costs		(371	)		(868	)
Other assets		281			(3,326	)
Increase (decrease) in:
Unpaid losses and loss adjustment expenses		(3,562	)		4,530
Unearned premiums		3,586			(131	)
Accounts payable and other liabilities		(1,097	)		(2,222	)
Net cash provided by (used in) operating activities		(2,995	)		7,344
Cash Flows From Investing Activities
Purchase of investments		(245,583	)		(74,466	)
Proceeds from maturities and redemptions of investments		16,648			13,122
Proceeds from sales of investments		226,993			69,760
Purchases of property and equipment		(62	)		(24	)
Net cash provided by (used in) investing activities		(2,004	)		8,392
Cash Flows From Financing Activities
Proceeds received from issuance of shares of common stock		—			5,000
Repurchase of common stock		(35	)		(674	)
Repurchase of senior unsecured notes		(625	)		—
Borrowings under debt arrangements		5,745			1,000
Repayment of borrowings under debt arrangements		—			(1,000	)
Net cash provided by financing activities		5,085			4,326
Net increase (decrease) in cash		86			20,062
Cash at beginning of period		7,464			10,792
Cash at end of period	$	7,550		$	30,854
Supplemental Disclosure of Cash Flow Information:
Interest paid	$	1,938		$	1,907

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. ("SIA"). CIC, WPIC, and RCIC are collectively referred to as the "Insurance Company Subsidiaries." On a stand-alone basis, Conifer Holdings, Inc. is referred to as the "Parent Company."

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), 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, 2019, as filed with the SEC.

The results of operations for the nine months ended September 30, 2020, are not necessarily indicative of the results expected for the year ended December 31, 2020. Results for interim periods are not necessarily indicative of the results that may be expected for a full year, especially when considering the 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, lowered equity market valuations, created significant volatility and disruption in the capital markets, dramatically increased unemployment levels and has fueled concerns that it will lead 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, Michigan and Pennsylvania.

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.

Early Adoption of ASU No. 2019-12

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU No. 2019-12"). The update is intended to simplify the current rules regarding the accounting for income taxes and addresses several technical topics including accounting for franchise taxes, allocating income taxes between a loss in continuing operations and in other categories such as discontinued operations, reporting income taxes for legal entities that are not subject to income taxes, and interim accounting for enacted changes in tax laws. The new standard is effective for fiscal years beginning after December 15, 2020; however, early adoption is permitted. The Company early adopted the provisions of ASU No. 2019-12 on April 1, 2020, which did not have a material impact on its consolidated financial statements and related disclosures.

2. Investments

The cost or amortized cost, gross unrealized gain or loss, and estimated fair value of the investments in securities classified as available for sale at September 30, 2020 and December 31, 2019, were as follows (dollars in thousands):

	September 30, 2020
	Cost or		Gross Unrealized					Estimated
	Amortized Cost		Gains		Losses			Fair Value
Debt Securities:
U.S. Government	$	9,777	$	257	$	—		$	10,034
State and local government		27,925		926		(50	)		28,801
Corporate debt		30,857		1,425		(137	)		32,145
Asset-backed securities		18,756		195		(136	)		18,815
Mortgage-backed securities		37,148		592		(5	)		37,735
Commercial mortgage-backed securities		5,441		382		(23	)		5,800
Collateralized mortgage obligations		5,979		141		(9	)		6,111
Total debt securities available for sale	$	135,883	$	3,918	$	(360	)	$	139,441

	December 31, 2019
	Cost or		Gross Unrealized					Estimated
	Amortized Cost		Gains		Losses			Fair Value
Debt Securities:
U.S. Government	$	9,392	$	66	$	(6	)	$	9,452
State and local government		14,388		545		—			14,933
Corporate debt		39,550		865		(21	)		40,394
Asset-backed securities		19,549		81		(55	)		19,575
Mortgage-backed securities		31,389		238		(112	)		31,515
Commercial mortgage-backed securities		9,972		116		(45	)		10,043
Collateralized mortgage obligations		5,073		29		(14	)		5,088
Total debt securities available for sale	$	129,313	$	1,940	$	(253	)	$	131,000

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, 2020
	Less than 12 months							Greater than 12 months							Total
	No. of Issues		Fair Value of Investments with Unrealized Losses		Gross Unrealized Losses			No. of Issues		Fair Value of Investments with Unrealized Losses		Gross Unrealized Losses			No. of Issues		Fair Value of Investments with Unrealized Losses		Gross Unrealized Losses
Debt Securities:
U.S. Government		—	$	—	$	—			—	$	—	$	—			—	$	—	$	—
State and local government		22		4,423		(50	)		—		—		—			22		4,423		(50	)
Corporate debt		4		2,683		(137	)		—		—		—			4		2,683		(137	)
Asset-backed securities		8		5,602		(53	)		11		6,507		(83	)		19		12,109		(136	)
Mortgage-backed securities		2		2,869		(5	)		—		—		—			2		2,869		(5	)
Commercial mortgage-backed securities		1		900		(23	)		—		—		—			1		900		(23	)
Collateralized mortgage obligations		3		687		(9	)		—		—		—			3		687		(9	)
Total debt securities available for sale		40	$	17,164	$	(277	)		11	$	6,507	$	(83	)		51	$	23,671	$	(360	)

	December 31, 2019
	Less than 12 months							Greater than 12 months							Total
	No. of Issues		Fair Value of Investments with Unrealized Losses		Gross Unrealized Losses			No. of Issues		Fair Value of Investments with Unrealized Losses		Gross Unrealized Losses			No. of Issues		Fair Value of Investments with Unrealized Losses		Gross Unrealized Losses
Debt Securities:
U.S. Government		—	$	—	$	—			4	$	1,047	$	(6	)		4	$	1,047	$	(6	)
State and local government		—		—		—			—		—		—			—		—		—
Corporate debt		7		3,720		(17	)		3		1,697		(4	)		10		5,417		(21	)
Asset-backed securities		3		2,596		(1	)		18		11,836		(54	)		21		14,432		(55	)
Mortgage-backed securities		3		715		(1	)		13		7,812		(111	)		16		8,527		(112	)
Commercial mortgage-backed securities		6		6,837		(45	)		—		—		—			6		6,837		(45	)
Collateralized mortgage obligations		8		2,081		(14	)		—		—		—			8		2,081		(14	)
Total debt securities available for sale		27	$	15,949	$	(78	)		38	$	22,392	$	(175	)		65	$	38,341	$	(253	)

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, 2020 and 2019.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Debt securities	$	794		$	861		$	2,590		$	2,716
Equity securities		60			247			168			322
Cash, cash equivalents and short-term investments		—			156			143			342
Total investment income		854			1,264			2,901			3,380
Investment expenses		(78	)		(54	)		(308	)		(209	)
Net investment income	$	776		$	1,210		$	2,593		$	3,171

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 September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Debt securities:
Gross realized gains	$	2,037		$	8		$	2,757		$	231
Gross realized losses		(2	)		(1	)		(6	)		(53	)
Total debt securities		2,035			7			2,751			178
Equity securities:
Gross realized gains		1,905			397			2,853			985
Gross realized losses		(624	)		(14	)		(1,115	)		(39	)
Total equity securities		1,281			383			1,738			946
Total net realized investment gains (losses)	$	3,316		$	390		$	4,489		$	1,124

Proceeds from the sales of available-for-sale debt securities were $58.3 million and $24.0 million for the nine months ended September 30, 2020 and 2019, 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. The gross realized gains and losses from the sales of available-for-sale debt securities for the three months ended September 30, 2019 were $7,000 and $2,000. The gross realized gains and losses from the sales of available-for-sale debt securities for the nine months ended September 30, 2019, were $236,000 and $53,000, respectively.

As of September 30, 2020 and 2019, there were $10.8 million and $0 of payables from securities purchased, respectively. There were $3.5 million and $0 of receivables from securities sold as of September 30, 2020 and 2019, 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 2020 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 $665,000 and $1.2 million as of September 30, 2020 and December 31, 2019, respectively.

The table below summarizes the amortized cost and fair value of available-for-sale debt securities by contractual maturity at September 30, 2020. 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 Cost		Estimated Fair Value
Due in one year or less	$	7,796	$	7,852
Due after one year through five years		35,457		37,150
Due after five years through ten years		10,036		10,470
Due after ten years		15,270		15,508
Securities with contractual maturities		68,559		70,980
Asset-backed securities		18,756		18,815
Mortgage-backed securities		37,148		37,735
Commercial mortgage-backed securities		5,441		5,800
Collateralized mortgage obligations		5,979		6,111
Total debt securities	$	135,883	$	139,441

At September 30, 2020 and December 31, 2019, the Insurance Company Subsidiaries had $8.8 million and $8.0 million, respectively, on deposit in trust accounts to meet the deposit requirements of various state insurance departments. At September 30, 2020 and December 31, 2019, the Company had $63.2 million and $58.4 million, respectively, held in trust accounts to meet collateral requirements with other third-party insurers, relating to various fronting arrangements. There are withdrawal and other restrictions on these deposits, including the type of investments that may be held, however, the Company may generally invest in high-grade bonds and short-term investments and earn interest on the funds.

3. Fair Value Measurements

The Company’s financial instruments include assets and liabilities carried at fair value, as well as assets and liabilities carried at cost or amortized cost but disclosed at fair value in these consolidated financial statements. Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principally most advantageous market for the asset or liability in an orderly transaction between market participants. In determining fair value, the Company applies the market approach, which uses prices and other relevant data based on market transactions involving identical or comparable assets and liabilities. The inputs to valuation techniques used to measure fair value are prioritized into a three-level hierarchy. The hierarchy gives the highest priority to quoted prices from sources independent of the reporting entity (“observable inputs”) and the lowest priority to prices determined by the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”). The fair value hierarchy is as follows:

Level 1—Valuations that are based on quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2—Valuations that are based on observable inputs (other than Level 1 prices) such as quoted prices for similar assets or liabilities at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability. 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, 2020 and December 31, 2019 (dollars in thousands):

	September 30, 2020
	Fair Value Measurements
	Total		Level 1		Level 2		Level 3
Assets:
Debt Securities:
U.S. Government	$	10,034	$	—	$	10,034	$	—
State and local government		28,801		—		28,801		—
Corporate debt		32,145		—		32,145		—
Asset-backed securities		18,815		—		18,815		—
Mortgage-backed securities		37,735		—		37,735		—
Commercial mortgage-backed securities		5,800		—		5,800		—
Collateralized mortgage obligations		6,111		—		6,111		—
Total debt securities		139,441		—		139,441		—
Equity Securities		15,239		14,956		283		—
Short-term investments		24,898		24,898		—		—
Total marketable investments measured at fair value	$	179,578	$	39,854	$	139,724	$	—

Investments measured at NAV:
Investment in limited partnership		674
Total assets measured at fair value	$	180,252

Liabilities:
Senior Unsecured Notes *	$	21,192	$	—	$	21,192	$	—
Subordinated Notes *		11,589		—		—		11,589
Line of credit *		5,000		—		5,000		—
Paycheck Protection Program loan *		2,745		—		2,745		—
Total Liabilities measured at fair value	$	40,526	$	—	$	28,937	$	11,589

*	Carried at face value of debt net of unamortized debt issuance costs on the consolidated balance sheets

	December 31, 2019
	Fair Value Measurements
	Total		Level 1		Level 2		Level 3
Assets:
Debt Securities:
U.S. Government	$	9,452	$	—	$	9,452	$	—
State and local government		14,933		—		14,933		—
Corporate debt		40,394		—		40,394		—
Asset-backed securities		19,575		—		19,575		—
Mortgage-backed securities		31,515		—		31,515		—
Commercial mortgage-backed securities		10,043		—		10,043		—
Collateralized mortgage obligations		5,088		—		5,088		—
Total debt securities		131,000		—		131,000		—
Equity securities		6,599		6,335		264		—
Short-term investments		31,426		31,426		—		—
Total marketable investments measured at fair value	$	169,025	$	37,761	$	131,264	$	—

Investments measured at NAV:
Investment in limited partnership		707
Total assets measured at fair value	$	169,732

Liabilities:
Senior Unsecured Notes *	$	22,669	$	—	$	22,669	$	—
Subordinated Notes *		11,222		—		—		11,222
Line of Credit *		2,000		—		2,000		—
Total Liabilities measured at fair value	$	35,891	$	—	$	24,669	$	11,222

*	Carried at face value of debt net of unamortized debt issuance costs on the consolidated balance sheets

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 22.1% of the fair value of the total investment portfolio as of September 30, 2020.

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 77.5% of the fair value of the total investment portfolio as of September 30, 2020.

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, 2020 and December 31, 2019, Level 3 is entirely comprised of the Company's subordinated debt. In determining the fair value of the subordinated debt outstanding at September 30, 2020, the security attributes (issue date, maturity, coupon, calls, etc.) and market rates on September 24, 2018 (the date of issuance) were fed into a valuation model. A lognormal trinomial interest rate lattice was created within the model to compute the option adjusted spread (“OAS”) which is the amount, in basis points, of interest rate required to be paid under the debt agreement over the risk-free U.S. Treasury rates.

The OAS was then fed back into the model along with the September 30, 2020 and December 31, 2019 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.

4. Deferred Policy Acquisition Costs

The Company defers costs incurred which are incremental and directly related to the successful acquisition of new or renewal insurance business, net of corresponding amounts of ceded reinsurance commissions. Net deferred policy acquisition costs are amortized and charged to expense in proportion to premium earned over the estimated policy term. The Company anticipates that its deferred policy acquisition costs will be fully recoverable and there were no premium deficiencies for the nine months ended September 30, 2020 and 2019. The activity in deferred policy acquisition costs, net of reinsurance transactions, is as follows (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Balance at beginning of period	$	11,693		$	12,302		$	11,906		$	12,011

Deferred policy acquisition costs		7,067			6,730			19,552			18,820
Amortization of policy acquisition costs		(6,483	)		(6,153	)		(19,181	)		(17,952	)
Net change		584			577			371			868

Balance at end of period	$	12,277		$	12,879		$	12,277		$	12,879

5. Unpaid Losses and Loss Adjustment Expenses

The Company establishes reserves for unpaid losses and loss adjustment expenses ("LAE") which represent the estimated ultimate cost of all losses incurred that were both reported and unreported (i.e., incurred but not yet reported losses; or “IBNR”) and LAE incurred that remain unpaid at the balance sheet date. The Company’s reserving process takes into account known facts and interpretations of circumstances and factors including the Company’s experience with similar cases, actual claims paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management programs, product mix and contractual terms, changes in law and regulation, judicial decisions, and economic conditions. In the normal course of business, the Company may also supplement its claims processes by utilizing third party adjusters, appraisers, engineers, inspectors, and other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims. The effects of inflation are implicitly considered in the reserving process.

Reserves are estimates of unpaid portions of losses that have occurred, including IBNR losses; therefore, the establishment of appropriate reserves is an inherently uncertain and complex process. The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimates. The highest degree of uncertainty is associated with reserves for losses incurred in the current reporting period as it contains the greatest proportion of losses that have not been reported or settled. The Company regularly updates its reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in reserve estimates, which may be material, are reported in the results of operations in the period such changes are determined to be needed and recorded.

Management believes that the reserve for losses and LAE, net of reinsurance recoverables, is appropriately established in the aggregate and adequate to cover the ultimate net cost of reported and unreported claims arising from losses which had 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 September 30,						Nine months ended September 30,
	2020			2019			2020			2019
Gross reserves - beginning of period	$	106,734		$	97,981		$	107,246		$	92,807
Less: reinsurance recoverables on unpaid losses		(20,892	)		(21,396	)		(22,579	)		(29,685	)
Plus: deferred gain on ADC					481						5,677
Net reserves - beginning of period		85,842			77,066			84,667			68,799
Add: incurred losses and LAE, net of reinsurance:
Current period		9,858			12,154			29,286			36,619
Prior period		4,695			2,703			11,481			7,076
Total net incurred losses and LAE		14,553			14,857			40,767			43,695
Deduct: loss and LAE payments, net of reinsurance:
Current period		5,149			4,933			9,067			8,675
Prior period		10,126			6,515			31,247			23,344
Total net loss and LAE payments		15,275			11,448			40,314			32,019
Net reserves - end of period		85,120			80,475			85,120			80,475
Plus: reinsurance recoverables on unpaid losses		18,564			16,862			18,564			16,862
Less: deferred gain on ADC		—			—			—			—
Gross reserves - end of period	$	103,684		$	97,337		$	103,684		$	97,337

In September 2017, the Company entered into an adverse development cover reinsurance agreement (the "ADC") to cover loss development of up to $17.5 million in excess of stated reserves as of June 30, 2017. The agreement provided up to $17.5 million of reinsurance for adverse net loss reserve development for accident years 2005 through 2016. The Company had ceded to the limit of the ADC and the deferred gain from the ADC had been fully utilized during 2019, thus there was no impact from the ADC in 2020.

The Company’s incurred losses during the three and nine months ended September 30, 2020 include 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.

The Company’s incurred losses during the three and nine months ended September 30, 2019 included prior-year adverse reserve development of $2.7 million and $7.1 million, respectively. The reported reserve development was net of the amortization of the deferred gain on the ADC of $481,000 and $5.7 million for the three and nine months ended September 30, 2019, respectively. As of September 30, 2019, the deferred gain on the ADC was fully recognized. The adverse development mainly stemmed from commercial liability and Florida homeowners lines of business.

6. 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 40% of specific commercial property risks in excess of $400,000 and 60% in excess of $300,000 in both 2020 and 2019 and primarily ceded all specific commercial liability risks in excess of $400,000 in 2020 and 2019. The Company ceded homeowners specific risks in excess of $300,000 in both 2020 and 2019.

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 September 30,						Nine months ended September 30,
	2020			2019			2020			2019
Written premiums:
Direct	$	21,434		$	16,973		$	60,659		$	50,390
Assumed		8,407			10,104			21,811			26,072
Ceded		(4,798	)		(3,271	)		(13,311	)		(10,900	)
Net written premiums	$	25,043		$	23,806		$	69,159		$	65,562

Earned premiums:
Direct	$	19,281		$	17,606		$	54,652		$	52,864
Assumed		7,591			8,356			24,232			23,730
Ceded		(4,645	)		(3,187	)		(12,882	)		(10,783	)
Net earned premiums	$	22,227		$	22,775		$	66,002		$	65,811

Losses and LAE:
Direct	$	11,249		$	13,232		$	34,314		$	47,464
Assumed		5,841			5,667			15,810			15,922
Ceded		(2,537	)		(4,042	)		(9,357	)		(19,691	)
Net Losses and LAE	$	14,553		$	14,857		$	40,767		$	43,695

7. 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 (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, 2020		December 31, 2019
Senior unsecured notes	$	23,601	$	24,288
Subordinated notes		9,574		9,536
Line of credit		5,000		2,000
PPP loan *		2,745		—
Total	$	40,920	$	35,824

*	The PPP loan was embedded into the line of credit facility. See below

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 months ended September 30, 2020. For the nine months ended September 30, 2020, the Company repurchased 36,761 units in the public market with a face value of $919,000. The Notes were repurchased at a discount to face value, which resulted in a $260,000 gain on extinguishment for the nine months ended September 30, 2020. This gain is 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, 2020, the carrying value of the Notes and Subordinated Notes are offset by $780,000 and $926,000 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, 2020, the Company was in compliance with all of its financial debt 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, 2020, the Company had $7.75 million outstanding on the line of credit (including the PPP loan described below), and was in compliance with all of its financial debt covenants. On June 19, 2020, the line of credit was renewed with a maturity of June 18, 2021.

Paycheck Protection Program loan

On April 24, 2020, the Company received a $2,745,000 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 PPP loan was incorporated into the existing line of credit facility and utilizes a portion of the line of credit’s limit. However, the PPP loan has a different maturity date (April 24, 2022) in accordance with the SBA requirements and bears interest at a rate of 1.0% per annum. The Company amended its $10.0 million line of credit facility with the Lender to incorporate this loan as a reduction of the available line of credit. Beginning November 24, 2020, the Company is required to pay the Lender equal monthly payments of principal and interest as necessary to fully amortize by April 24, 2022. The loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties. This loan may be subject to forgiveness under the CARES Act provisions. The Company plans to apply for forgiveness of the loan before November 24, 2020. At which point, principal and interest payments will be deferred until the SBA remits the loan forgiveness amount to the Lender. No assumptions were made relative to potential forgiveness as of September 30, 2020.

8. Shareholders’ Equity

In June 2019, the Company issued $5.0 million of common equity through a private placement for 1,176,471 shares priced at $4.25 per share. The participants in the private placement consisted of members of the Company's Board of Directors. The Company used the proceeds for growth capital in the Company's specialty core business segments.

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. Shares may be purchased in the open market or through negotiated transactions. The program may be terminated or suspended at any time, at the discretion of the Company. The Company may in the future enter into a Rule 10b5-1 trading plan to effect a portion of the authorized purchases, if criteria set forth in the plan are met. Such a plan would enable the Company to repurchase its shares during periods outside of its normal trading windows, when the Company typically would not be active in the market. The timing of purchases, and the exact number of any shares to be purchased, will depend on market conditions. The repurchase program does not include specific price targets or timetables. The Company did not repurchase any shares of stock for the three months ended September 30, 2020. The Company repurchased 11,393 shares of stock valued at approximately $41,000 for the three months ended September 30, 2019. For the nine months ended September 30, 2020 and 2019, the Company repurchased 2,398 and 154,208 shares of stock valued at $8,000 and $638,000, respectively, related to the stock repurchase program.

For the three months ended September 30, 2020 and 2019, the Company repurchased 6,505 and 6,359 shares of stock valued at approximately $19,000 and $25,000, respectively, related to the vesting of the Company’s restricted stock units. For the nine months ended September 30, 2020 and 2019, the Company repurchased 8,813 and 8,667 shares of stock valued at approximately $27,000 and $36,000, respectively. Upon the repurchase of the Company’s shares, the shares remain authorized, but not issued or outstanding.

As of September 30, 2020 and December 31, 2019, the Company had 9,678,463 and 9,592,861 issued and outstanding shares of common stock, respectively. Holders of common stock are entitled to one vote per share and to receive dividends only when and if declared by the board of directors. The holders have no preemptive, conversion or subscription rights.

9. Accumulated Other Comprehensive Income (Loss)

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 September 30,						Nine months ended September 30,
	2020			2019			2020		2019
Balance at beginning of period	$	3,805		$	421		$	489	$	(2,612	)
Other comprehensive income (loss) before reclassifications		(1,085	)		(6	)		2,617		2,917
Less: amounts reclassified from accumulated other comprehensive income (loss)		292			(41	)		678		(151	)
Net other comprehensive income (loss)		(1,377	)		35			1,939		3,068
Balance at end of period	$	2,428		$	456		$	2,428	$	456

10. Earnings Per Share

Basic and diluted earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. The following table presents the calculation of basic and diluted earnings (loss) per common share, as follows (dollars in thousands, except per share amounts):

	Three Months Ended September 30,					Nine months ended September 30,
	2020		2019			2020			2019
Net income (loss)	$	541	$	(1,230	)	$	(2,679	)	$	(4,794	)

Weighted average common shares, basic and diluted *		9,630,600		9,543,535			9,606,436			8,640,409

Earnings (loss) per common share, basic and diluted	$	0.06	$	(0.13	)	$	(0.28	)	$	(0.55	)

*	The nonvested shares of the restricted stock units and stock options were anti-dilutive as of September 30, 2020 and 2019. Therefore, the basic and diluted weighted average common shares are equal for the three and nine months ended September 30, 2020 and 2019.

11. 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 will be 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 $622,000 and $719,000 of compensation expense related to the RSUs for the nine months ended September 30, 2020 and 2019, respectively. There were 47,330 unvested RSUs as of September 30, 2020, which will generate an estimated future expense of $313,000.

The Company recorded $14,000 of compensation expense for the nine months ended September 30, 2020 related to the stock options granted on June 30, 2020. There were 280,000 unvested options as of September 30, 2020, which will generate an estimated future expense of $276,000.

12. 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 balance sheets. 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.

13. 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, 2020 and 2019 gross written premiums attributable to these four states were 49.9% and 51.1%, respectively, of the Company’s total gross written premiums.

The 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 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 September 30, 2020	Commercial Lines			Personal Lines		Total Underwriting			Wholesale 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

Three months ended September 30, 2019	Commercial Lines			Personal Lines			Total Underwriting			Wholesale Agency		Corporate			Eliminations			Total

Gross written premiums	$	25,018		$	2,059		$	27,077		$	—	$	—		$	—		$	27,077

Net written premiums	$	22,095		$	1,711		$	23,806		$	—	$	—		$	—		$	23,806

Net earned premiums	$	21,439		$	1,336		$	22,775		$	—	$	—		$	—		$	22,775
Other income		70			33			103			2,619		47			(2,205	)		564
Segment revenue		21,509			1,369			22,878			2,619		47			(2,205	)		23,339

Losses and LAE, net		13,517			1,340			14,857			—		—			—			14,857
Policy acquisition costs		6,114			447			6,561			1,825		—			(2,233	)		6,153
Operating expenses		3,239			327			3,566			434		297			—			4,297
Segment expenses		22,870			2,114			24,984			2,259		297			(2,233	)		25,307

Segment gain (loss)	$	(1,361	)	$	(745	)	$	(2,106	)	$	360	$	(250	)	$	28		$	(1,968	)
Investment income													1,210						1,210
Net realized investment gains													390						390
Change in fair value of equity securities													(1,065	)					(1,065	)
Other gains													—						—
Interest expense													(720	)					(720	)
Income (loss) before equity earnings in Affiliate and income taxes	$	(1,361	)	$	(745	)	$	(2,106	)	$	360	$	(435	)	$	28		$	(2,153	)

Nine months ended September 30, 2020	Commercial Lines			Personal Lines		Total Underwriting			Wholesale 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	)

Nine months ended September 30, 2019	Commercial Lines			Personal Lines			Total Underwriting			Wholesale Agency		Corporate			Eliminations			Total

Gross written premiums	$	71,061		$	5,401		$	76,462		$	—	$	—		$	—		$	76,462

Net written premiums	$	61,579		$	3,983		$	65,562		$	—	$	—		$	—		$	65,562

Net earned premiums	$	62,291		$	3,520		$	65,811		$	—	$	—		$	—		$	65,811
Other income		144			108			252			7,099		179			(5,963	)		1,567
Segment revenue		62,435			3,628			66,063			7,099		179			(5,963	)		67,378

Losses and LAE, net		38,611			5,084			43,695			—		—			—			43,695
Policy acquisition costs		17,335			1,202			18,537			4,787		—			(5,372	)		17,952
Operating expenses		9,614			867			10,481			1,572		907			—			12,960
Segment expenses		65,560			7,153			72,713			6,359		907			(5,372	)		74,607

Segment gain (loss)	$	(3,125	)	$	(3,525	)	$	(6,650	)	$	740	$	(728	)	$	(591	)	$	(7,229	)
Investment income													3,171						3,171
Net realized investment gains													1,124						1,124
Change in fair value of equity securities													(715	)					(715	)
Other gains													—						—
Interest expense													(2,155	)					(2,155	)
Income (loss) before equity earnings in Affiliate and income taxes	$	(3,125	)	$	(3,525	)	$	(6,650	)	$	740	$	697		$	(591	)	$	(5,804	)

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

For the Periods Ended September 30, 2020 and 2019

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 12, 2020 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 12, 2020 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 (the “Pandemic”) is causing significant disruption to public health, the global economy, financial markets, and commercial, social and community activity generally. Our exposure to the Pandemic is manifold. The majority of our employees are now working remotely in observance of “shelter-in-place” or “stay-at-home” government orders. We experienced a $1.9 million reduction in the fair value of our equity portfolio for the nine months ended September 30, 2020, due to the stock market reaction to the Pandemic, which directly impacted our results of operations. And, a significant portion of our revenues are generated from the hospitality sector of the U.S. economy which has seen unprecedented contraction, at least in the near term, in an effort to mitigate the effects of 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. At this time, however, we are not able to provide additional forward-looking guidance as there is significant uncertainty regarding the ultimate impact of the Pandemic.

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.

Critical Accounting Policies and Estimates

In certain circumstances, we are required to make estimates and assumptions that affect amounts reported in our consolidated financial statements and related footnotes. We evaluate these estimates and assumptions periodically on an on-going basis based on a variety of factors. There can be no assurance, however, that actual results will not be materially different than our estimates and assumptions, and that reported results of operation will not be affected by accounting adjustments needed to reflect changes in these estimates and assumptions. During the three months ended September 30, 2020, 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 12, 2020.

Executive Overview

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. The Company reported a net loss of $1.2 million, or $0.13 per share and $4.8 million, or $0.55 per share, for the three and nine months ended September 30, 2019, respectively.

Adjusted operating loss, a non-GAAP measure, was $2.4 million, or $0.24 per share, and $5.6 million, or $0.58 per share, for the three and nine months ended September 30, 2020. Adjusted operating loss was $1.9 million, or $0.18 per share, and $11.7 million, or $1.35 per share for the nine months ended September 30, 2019.

Our underwriting combined ratio was 110.7% and 107.7% for the three and nine months ended September 30, 2020, compared to 109.2% and 110.0% for the same periods in 2019, respectively.

Both the commercial and personal lines of business have improved current accident year loss ratios. We believe we are seeing the benefits of an improved mix of business as we have, and continue to, move out of higher loss ratio business and into more profitable areas while continuing to improve underwriting requirements in lines we are retaining.

Commercial lines also experienced low claims activity during the third quarter due to COVID-19. While substantially all businesses maintained their insurance, liability losses were lower as restaurants, bars, and other small businesses were required to limit business or totally shut down for a period of time. This reduced the potential to incur liability losses and contributed to the lower current accident year loss ratio. Potential exposures to COVID-19 losses, on the other hand, were minimal as we include strict exclusions to business interruption coverage related to bacterial or viral causes on most policies and require physical property damage for the business interruption coverage to be effective on all policies. We also do not provide coverage relating to event cancellations, travel insurance or other coverages that could directly generate such losses. We believe we also have limited exposures relating to our workers compensation coverages which are generally companion coverages with our existing commercial policies, which represents a small amount of our overall premiums and does not appear to be heavily exposed to COVID-19-related losses.

Our personal lines also performed much better this quarter as the Company continues to expand in the historically profitable low-value dwelling area while the wind-exposed and Florida homeowners business, specifically, is becoming insignificant.

Results of Operations For The Three Months Ended September 30, 2020 and 2019

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

Summary of Operating Results

	Three Months Ended September 30,
	2020			2019			$ Change			% Change
Gross written premiums	$	29,841		$	27,077		$	2,764			10.2	%

Net written premiums	$	25,043		$	23,806		$	1,237			5.2	%

Net earned premiums	$	22,227		$	22,775		$	(548	)		(2.4	)%
Other income		642			564			78			13.8	%
Losses and loss adjustment expenses, net		14,553			14,857			(304	)		(2.0	)%
Policy acquisition costs		6,483			6,153			330			5.4	%
Operating expenses		4,537			4,297			240			5.6	%
Underwriting gain (loss)		(2,704	)		(1,968	)		(736	)		(37.4	)%
Net investment income		776			1,210			(434	)		(35.9	)%
Net realized investment gains		3,316			390			2,926		*
Change in fair value of equity securities		(356	)		(1,065	)		709		*
Interest expense		723			720			3			0.4	%
Income (loss) before equity earnings in Affiliate and income taxes		309			(2,153	)		2,462		*
Equity earnings (losses) in Affiliate, net of tax		188			121			67		*
Income tax expense		(44	)		(802	)		758		*
Net income (loss)	$	541		$	(1,230	)	$	1,771		*

Book value per common share outstanding	$	4.40		$	4.74

Underwriting Ratios:
Loss ratio (1)		65.2	%		64.9	%
Expense ratio (2)		45.5	%		44.3	%
Combined ratio (3)		110.7	%		109.2	%

(1)	The loss ratio is the ratio, expressed as a percentage, of net losses and loss adjustment expenses to net earned premiums and other income 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, 2020 and 2019 (dollars in thousands):

Summary of Premium Revenue

	Three Months Ended September 30,
	2020		2019		$ Change			% Change
Gross written premiums
Commercial lines	$	27,297	$	25,018	$	2,279			9.1	%
Personal lines		2,544		2,059		485			23.6	%
Total	$	29,841	$	27,077	$	2,764			10.2	%

Net written premiums
Commercial lines	$	22,763	$	22,095	$	668			3.0	%
Personal lines		2,280		1,711		569			33.3	%
Total	$	25,043	$	23,806	$	1,237			5.2	%

Net earned premiums
Commercial lines	$	20,586	$	21,439	$	(853	)		(4.0	)%
Personal lines		1,641		1,336		305			22.8	%
Total	$	22,227	$	22,775	$	(548	)		(2.4	)%

Gross written premiums increased $2.8 million, or 10.2%, to $29.8 million for the three months ended September 30, 2020, as compared to $27.1 million for the same period in 2019.

Commercial lines gross written premiums increased $2.3 million, or 9.1%, to $27.3 million in the third quarter of 2020, as compared to $25.0 million for the third quarter of 2019. The increase in gross written premiums was attributed to several new small business programs added to our commercial lines during 2020, as well as growth in our existing small business programs.

Personal lines gross written premiums increased $485,000, or 23.6%, to $2.5 million in the third quarter of 2020, as compared to $2.1 million for the same period in 2019. The increased gross written premiums were due to a new program added to our low-value dwelling book of business, as well as growth in our existing low-value dwelling programs. These increases were offset by a $98,000, or 62.6%, decrease in Florida homeowners premiums.

Net written premiums increased $1.2 million, or 5.2%, to $25.0 million for the three months ended September 30, 2020, as compared to $23.8 million for the same period in 2019. The increase was mostly consistent with the increase in gross written premium for the comparative periods. However, increases in reinsurance rates, effective January 1, 2020, diminished the increase to net written premiums.

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. Commission income is also received by the Company’s insurance agencies for writing policies for third party insurance companies. Other income for the three months ended September 30, 2020, increased $78,000, or 13.8%, to $642,000 as compared to $564,000 for the same period in 2019. The increase in other income was primarily due to additional unaffiliated commission income in the Agency operations as well as increased fees charged on existing business.

Losses and Loss Adjustment Expenses

The tables below detail our losses and loss adjustment expenses and loss ratios in our underwriting business for the three months ended September 30, 2020 and 2019 (dollars in thousands).

Three months ended September 30, 2020	Commercial Lines			Personal 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	%

Three months ended September 30, 2019	Commercial Lines			Personal Lines			Total
Accident year net losses and LAE	$	11,207		$	947		$	12,154
Net (favorable) adverse development		2,310			393			2,703
Calendar year net losses and LAE	$	13,517		$	1,340		$	14,857

Accident year loss ratio		52.1	%		69.2	%		53.1	%
Net (favorable) adverse development		10.7	%		28.7	%		11.8	%
Calendar year loss ratio		62.8	%		97.9	%		64.9	%

Net losses and LAE decreased by $304,000, or 2.0%, for the three months ended September 30, 2020, as compared to the same period in 2019. The calendar year loss ratios were 65.2% and 64.9% for the three months ended September 30, 2020 and 2019, respectively. We believe the improving current accident year loss ratios is a result of an improved mix of business as we have, and continue to, move out of higher loss ratio business and into more profitable areas while continuing to improve underwriting requirements in lines we are retaining. As discussed in the Executive Overview, Commercial lines experienced lower liability claims activity driven by the COVID-19 shut downs. In addition, Personal lines fared well this quarter as the Florida homeowners line is becoming insignificant and growth in the low-value dwelling lines, which have historically performed well, continue to expand.

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.

The Company's incurred losses during the three months ended September 30, 2019, included adverse prior-year reserve development of $2.7 million. The Commercial lines experienced $2.3 million of unfavorable reserve development mostly attributable to hospitality liability lines in 2016 and 2017 accident years. Personal lines was unfavorable by $393,000, partly attributable to the Florida homeowners line, and mostly related to the 2016 and 2017 accident years. The total reserve development is net of the amortization of the deferred gain on the ADC of $481,000, of which almost the entire amount favorably impacted the commercial lines. This provided $481,000 of benefit toward the adverse development for the three months ended September 30, 2019, leaving the benefit from the ADC fully recognized.

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 September 30,
	2020			2019
Commercial Lines
Policy acquisition costs		30.0	%		28.4	%
Operating expenses		15.4	%		15.1	%
Total		45.4	%		43.5	%
Personal Lines
Policy acquisition costs		31.9	%		32.7	%
Operating expenses		14.9	%		23.9	%
Total		46.8	%		56.6	%
Total Underwriting
Policy acquisition costs		30.1	%		28.7	%
Operating expenses		15.4	%		15.6	%
Total		45.5	%		44.3	%

Our expense ratio increased 1.2% to 45.5%, compared to 44.3% for the three months ended September 30, 2020 and 2019, respectively.

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, 2020 and 2019, the percentage of policy acquisition costs to net earned premiums and other underwriting income increased to 30.1% compared to 28.7%, respectively. The acquisition cost ratio was higher mostly due to higher ceded premium rates in 2020 compared to 2019.

Operating expenses consist primarily of employee compensation, information technology and occupancy costs, such as rent and utilities. Operating expenses as a percent of net earned premiums and other income were 15.4% and 15.6% for the three months ended September 30, 2020 and 2019, respectively. The operating expense ratio was lower due to our expense reduction efforts, partially offset by higher ceded premium rates discussed above.

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, 2020 and 2019 (dollars in thousands):

Segment Gain (Loss)

	Three Months Ended September 30,
	2020			2019			$ Change
Commercial Lines	$	(2,932	)	$	(1,361	)	$	(1,571	)
Personal Lines		537			(745	)		1,282
Total Underwriting		(2,395	)		(2,106	)		(289	)
Wholesale Agency		(71	)		360			(431	)
Corporate		(277	)		(250	)		(27	)
Eliminations		39			28			11
Total Segment gain (loss)	$	(2,704	)	$	(1,968	)	$	(736	)

Results of Operations For The Nine Months Ended September 30, 2020 and 2019

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

Summary of Operating Results

	Nine months ended September 30,
	2020			2019			$ Change			% Change
Gross written premiums	$	82,470		$	76,462		$	6,008			7.9	%

Net written premiums	$	69,159		$	65,562		$	3,597			5.5	%

Net earned premiums	$	66,002		$	65,811		$	191			0.3	%
Other income		2,013			1,567			446			28.5	%
Losses and loss adjustment expenses, net		40,767			43,695			(2,928	)		(6.7	)%
Policy acquisition costs		19,181			17,952			1,229			6.8	%
Operating expenses		14,441			12,960			1,481			11.4	%
Underwriting gain (loss)		(6,374	)		(7,229	)		855			11.8	%
Net investment income		2,593			3,171			(578	)		(18.2	)%
Net realized investment gains		4,489			1,124			3,365			299.4	%
Change in fair value of equity securities		(1,866	)		(715	)		(1,151	)	*
Other gains		260			—			260		*
Interest expense		2,185			2,155			30			1.4	%
Income (loss) before equity earnings in Affiliate and income taxes		(3,083	)		(5,804	)		2,721		*
Equity earnings in Affiliate, net of tax		417			219			198		*
Income tax expense		13			(791	)		804		*
Net income (loss)	$	(2,679	)	$	(4,794	)	$	2,115		*

Book value per common share outstanding	$	4.40		$	4.74

Underwriting Ratios:
Loss ratio (1)		61.5	%		66.1	%
Expense ratio (2)		46.2	%		43.9	%
Combined ratio (3)		107.7	%		110.0	%

(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

Our premiums are presented below for the nine months ended September 30, 2020 and 2019 (dollars in thousands):

	Nine months ended September 30,
	2020		2019		$ Change			% Change
Gross written premiums
Commercial lines	$	76,341	$	71,061	$	5,280			7.4	%
Personal lines		6,129		5,401		728			13.5	%
Total	$	82,470	$	76,462	$	6,008			7.9	%
Net written premiums
Commercial lines	$	63,827	$	61,579	$	2,248			3.7	%
Personal lines		5,332		3,983		1,349			33.9	%
Total	$	69,159	$	65,562	$	3,597			5.5	%
Net earned premiums
Commercial lines	$	61,122	$	62,291	$	(1,169	)		(1.9	)%
Personal lines		4,880		3,520		1,360			38.6	%
Total	$	66,002	$	65,811	$	191			0.3	%

Gross written premiums increased $6.0 million, or 7.9%, to $82.5 million for the nine months ended September 30, 2020, as compared to $76.5 million for the same period in 2019.

Commercial lines gross written premiums increased $5.3 million, or 7.4%, to $76.3 million for the nine months ended September 30, 2020, as compared to $71.1 million for the same period in 2019. The increase in gross written premiums was attributed to several new small business programs added to our commercial lines book of business in 2020, as well as continued growth in our existing small business programs.

Personal lines gross written premiums increased $728,000, or 13.5%, to $6.1 million for the nine months ended September 30, 2020, as compared to $5.4 million for the same period in 2019. The increased gross written premiums were due to a new program added to our low-value dwelling book of business, as well as growth in an existing low-value dwelling program. These increases were partially offset by a $630,000, or 76.4%, decline in Florida homeowners premiums (representing only 0.2% of our total gross written premium in 2020).

Net written premiums increased $3.6 million, or 5.5%, to $69.2 million for the nine months ended September 30, 2020, as compared to $65.6 million for the same period in 2019. The increase was consistent with the increase in gross written premium for the comparative periods. However, increases in reinsurance rates, effective January 1, 2020, dampened the increase to net written premiums.

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. Commission income is also received by the Company’s insurance agencies for writing policies for third party insurance companies. Other income for the nine months ended September 30, 2020, increased $446,000, or 28.5%, to $2.0 million as compared to $1.6 million for the same period in 2019. The increase in other income was primarily due to additional unaffiliated commission income in the Agency operations as well as increased fees charged on existing business.

Other Gains

Other gains were $260,000 for the nine months ended September 30, 2020, compared to $0 for the same period in 2019. The Company repurchased 36,761 units of the Notes during the nine months ended September 30, 2020. These repurchases resulted in a gain of $260,000 on extinguishment of the Notes, which was reflected in the Consolidated Statement of Operations as Other gains.

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, 2020 and 2019 (dollars in thousands).

Nine months ended September 30, 2020	Commercial Lines			Personal 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	%

Nine months ended September 30, 2019	Commercial Lines			Personal Lines			Total
Accident year net losses and LAE	$	33,928		$	2,691		$	36,619
Net (favorable) adverse development		4,683			2,393			7,076
Calendar year net losses and LAE	$	38,611		$	5,084		$	43,695

Accident year loss ratio		54.3	%		74.2	%		55.4	%
Net (favorable) adverse development		7.5	%		65.9	%		10.7	%
Calendar year loss ratio		61.8	%		140.1	%		66.1	%

Net losses and LAE decreased by $3.0 million, or 6.7%, for the nine months ended September 30, 2020, as compared to the same period in 2019. The calendar year loss ratios were 61.5% and 66.1% for the nine months ended September 30, 2020 and 2019, respectively.

We believe the improving current accident year loss ratios is a result of an improved mix of business as we have, and continue to, move out of higher loss ratio business and into more profitable areas while continuing to improve underwriting requirements in lines we are retaining. As discussed in the Executive Overview, Commercial lines experienced lower liability claims activity driven by the COVID-19 shut downs. In addition, Personal lines continues to improve as the Florida homeowners line is becoming insignificant and growth in the low-value dwelling lines, which have historically performed well, continue to expand.

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.

The Company's incurred losses during the nine months ended September 30, 2019, included adverse prior-year reserve development of $7.1 million. The Commercial lines experienced $4.7 million of unfavorable reserve development mostly attributable to hospitality liability lines in the 2016 and 2017 accident years. Personal lines was unfavorable by $2.4 million, of which $1.5 million was attributable to the Florida homeowners line, and mostly related to the 2016 and 2017 accident years. The total reserve development is net of the amortization of the deferred gain on the ADC of $5.7 million, of which almost the entire amount favorably impacted the commercial lines. This provided $5.7 million of benefit toward the adverse development for the nine months ended September 30, 2019, leaving the benefit from the ADC fully recognized.

Expense Ratio

The table below provides the expense ratio by major component.

	Nine months ended September 30,
	2020			2019
Commercial Lines
Policy acquisition costs		30.1	%		27.8	%
Operating expenses		16.0	%		15.4	%
Total		46.1	%		43.2	%
Personal Lines
Policy acquisition costs		30.7	%		33.1	%
Operating expenses		16.0	%		23.9	%
Total		46.7	%		57.0	%
Total Underwriting
Policy acquisition costs		30.2	%		28.0	%
Operating expenses		16.0	%		15.9	%
Total		46.2	%		43.9	%

Our expense ratio increased by 2.3% in the nine months ended September 30, 2020, as compared to the same period in 2019.

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, 2020 and 2019, the percentage of policy acquisition costs to net earned premiums and other underwriting income increased to 30.2% compared to 28.0%, respectively. The acquisition cost ratio was higher mostly due to higher ceded premium rates in 2020 compared to 2019.

Operating expenses consist primarily of employee compensation, information technology and occupancy costs, such as rent and utilities. Operating expenses as a percent of net earned premiums and other income was 16.0% and 15.9% for the nine months ended September 30, 2020 and 2019, respectively. The Company has made progress in reducing its overhead costs as part of its cost cutting initiatives. Such efforts were partially offset by higher ceded premium rates discussed above.

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, 2020 and 2019 (dollars in thousands):

	Nine months ended September 30,
	2020			2019			$ Change
Commercial Lines	$	(5,907	)	$	(3,125	)	$	(2,782	)
Personal Lines		828			(3,525	)		4,353
Total Underwriting		(5,079	)		(6,650	)		1,571
Wholesale Agency		(353	)		740			(1,093	)
Corporate		(1,182	)		(728	)		(454	)
Eliminations		240			(591	)		831
Total underwriting income (loss)	$	(6,374	)	$	(7,229	)	$	855

Liquidity and Capital Resources

Sources and Uses of Funds

At September 30, 2020, we had $32.4 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, 2020 and 2019.

Cash Flows

Operating Activities. Cash used in operating activities for the nine months ended September 30, 2020, was $3.0 million, compared to $7.4 million of cash provided by operating activities for the same period in 2019. The differences in cash used in operating activities was primarily due to a $4.0 million increase in paid claims in 2020 and the timing of premium balance settlements with agencies, representing approximately another $4.0 million of additional cash received in 2019 as compared to 2020.

Investing Activities. Cash used in investing activities for the nine months ended September 30, 2020 was $2.0 million, as compared to $8.4 million of cash provided by investing activities for the same period in 2019. The $10.4 million increase in cash used in investing activities was driven by the deployment of additional cash from operations into our investment portfolio. In addition, there was significant repositioning of our investment portfolio during the first nine months of 2020, due to the changing market conditions from the COVID-19 pandemic.

Financing Activities. Cash provided by financing activities for the nine months ended September 30, 2020 was $5.1 million, compared to $4.3 million for the same period in 2019. The $800,000 increase in cash provided by financing activities was due to the Company drawing down an additional $3.0 million from its line of credit during the nine months ended September 30, 2020. The Company also received $2.7 million of funds from the PPP loan during the nine months ended September 30, 2020. These increases were offset by the $5.0 million the Company raised through the issuance of additional common stock during the same period in 2019.

Non-GAAP Financial Measures

Statutory Capital and Surplus

Statutory capital and surplus is a non-GAAP measure. The Company’s insurance subsidiaries’ aggregate statutory capital and surplus was $60.6 million and $59.6 million at September 30, 2020 and December 31, 2019, respectively.

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 and other gains, net of tax. Beginning in 2018, the change in fair value of equity securities, net of tax, and the deferred gain on losses ceded to the ADC are also excluded from net income to arrive at adjusted operating income. 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 September 30,						Nine months ended September 30,
	2020			2019			2020			2019
Net income (loss)	$	541		$	(1,230	)	$	(2,679	)	$	(4,794	)
Exclude:
Net realized investment gains and other gains, net of tax		3,316			390			4,749			1,124
Tax effect of investment unrealized gains and losses		—			818			—			818
Change in fair value of equity securities, net of tax		(356	)		(1,065	)		(1,866	)		(715	)
Net decrease (increase) in deferred gain on losses ceded to ADC, net of tax		—			481			—			5,677
Adjusted operating income (loss)	$	(2,419	)	$	(1,854	)	$	(5,562	)	$	(11,698	)

Weighted average common shares diluted		9,630,600			9,543,535			9,606,436			8,640,409
Diluted income (loss) per common share:
Net income (loss)	$	0.06		$	(0.13	)	$	(0.28	)	$	(0.55	)
Exclude:
Net realized investment gains and other gains, net of tax		0.34			0.04			0.49			0.13
Tax effect of investment unrealized gains and losses		—			0.09			—			0.09
Change in fair value of equity securities, net of tax		(0.04	)		(0.12	)		(0.19	)		(0.08	)
Net decrease (increase) in deferred gain on losses ceded to ADC, net of tax		—			0.04			—			0.66
Adjusted operating income (loss) per share	$	(0.24	)	$	(0.18	)	$	(0.58	)	$	(1.35	)

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. Adjusted operating income also excludes the deferment of ceded losses related to the ADC (“deferred gain”) that are directly related to gross losses reported in the current period. Deferring these ceded losses (while required under GAAP) does not reflect the economics of the reinsurance agreement which allows gross losses subject to the ADC to be offset by ceded losses in that period. 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 loss or profitability 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, 2020. 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, 2020, the fair value of our investment portfolio, excluding cash and cash equivalents, was $180.3 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, 2020 and December 31, 2019 was 3.9 and 3.0 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, 2020. 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 Increase (Decrease) in
Hypothetical Change in Interest Rates	Estimated		Change in						Shareholders'
As of September 30, 2020	Fair Value		Fair Value			Fair Value			Equity
200 basis point increase	$	152,868	$	(11,471	)		(6.98	)%		(26.94	)%
100 basis point increase		158,653		(5,686	)		(3.46	)%		(13.35	)%
No change		164,339		—			—			—
100 basis point decrease		166,985		2,646			1.61	%		6.21	%
200 basis point decrease		167,346		3,007			1.83	%		7.06	%

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, 2020, the net amount due to the Company from reinsurers, including prepaid reinsurance premiums, was $26.6 million. We believe all amounts recorded as due from reinsurers are recoverable.

Effects of Inflation

We do not believe that inflation has a material effect on our results of operations, except for the effect that inflation may have on interest rates and claims costs. We consider the effects of inflation in pricing and estimating reserves for unpaid losses and 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, 2020. 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, 2020, 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 reasonable likely to materially affect the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information required by this item is included under Note 12 ~ 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, 2020, which is hereby incorporated by reference.

ITEM 1A. RISK FACTORS

The Effects of the COVID-19 Pandemic and its Economic and Societal Impact Could Adversely Impact Our Businesses, Assets and Financial Performance.

COVID-19 is causing significant disruption to public health, the global economy, financial markets, and commercial, social and community activity generally. The pandemic and the economic uncertainty that necessarily follows may have a significant effect on our company’s business operations and current and future financial performance. We may experience higher levels of loss and claims activity in certain lines of business and our premiums written and earned may also be adversely affected by a suppression of national and global commercial activity that results in a reduction in insurable assets and other exposure. Financial conditions resulting from the virus have had a negative effect on the value and quality of the assets we hold within our portfolio of invested assets, thereby adversely affecting our investment income and increasing our credit and related risk and restricting our access to capital markets.

Governmental, Regulatory and Judicial Actions in Response to the COVID-19 Pandemic May Adversely Affect Our Financial Performance and Our Ability to Conduct Our Businesses.

Insurance and financial regulators may attempt to impose new obligations on insurers in connection with the pandemic that could materially affect our business or profitability, including any retroactive change to the terms of existing insurance contracts that specifically exclude business interruption losses arising from pandemic. While we cannot be certain of ultimate judicial outcomes, we believe that any retroactive attempt to rewrite the terms of existing contracts would be unconstitutional. In addition, there is a risk that novel litigation theories, in conjunction with a diverse range of potential jury and judicial venues across many jurisdictions, could give rise to unforeseen pandemic related liability.

The Disruption and Other Effects Caused by COVID-19 Could Adversely Impact the Efficiency and Productivity of Our Business Operations.

To protect our employees and in response to the global and regional restrictions on interpersonal contact and travel because of the COVID-19 pandemic, much of our work force is working remotely, placing increased demands on our IT systems. While we have continued to conduct our business effectively, there is no assurance that our ability to continue to function in this new environment will not be adversely affected by an extended period of limited access to our physical facilities or by other developments such as an extended disruption in the telecommunications and internet infrastructure that support our remote work capability.

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

On June 13, 2019, the Company’s Board of Directors authorized a private placement stock purchase offering wherein the Company was authorized to sell a maximum of $10.0 million of the Company’s common stock, no par value per share, pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506(b) of Regulation D as promulgated under the Securities Act and in accordance with applicable federal securities laws, including Rule 10b5-1 and 10b-18 of the Securities Exchange Act of 1934 as amended. The participants in the private placement consisted mainly of members of the Company's Board of Directors.

Under this private placement offering, the Company issued $5.0 million of common equity consisting of 1,176,471 shares at a price of $4.25 per share on June 28, 2019. The Company's common stock closing market price on the Nasdaq Stock Market on June 28, 2019, was $3.99 per share. The offering was made to accredited investors only. No commissions or other remuneration were paid in connection with the issuance. The actual timing, number and value of shares to be issued under the private placement offering was determined by management in its discretion and depended on a number of factors, including the market price of the Company’s stock, general marketing conditions, and other factors. The Company used the proceeds for growth capital in the Company's specialty core commercial business segments.

No underwriters were involved in the sales of securities. The issuances of the securities described above were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering.

ITEM 6. EXHIBITS

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	Period Ending	Exhibit / Appendix 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	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase

101.DEF	XBRL Taxonomy Extension Definition Linkbase

101.LAB	XBRL Taxonomy Extension Label Linkbase

101.PRE	XBRL Taxonomy Extension Presentation Linkbase

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

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 12, 2020