Conifer Holdings, Inc. - Quarter Report: 2022 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, 2022

☐	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.)

3001 West Big Beaver Road, Suite 200
Troy, Michigan		48084
(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 9, 2022, was 12,216,324.

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	26
Item 3 — Quantitative and Qualitative Disclosures about Market Risk	39
Item 4 — Controls and Procedures	40
Part II — Other Information
Item 1 — Legal Proceedings	41
Item 1A — Risk Factors	41
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 6 — Exhibits	42
Signatures	43

PART 1 - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(dollars in thousands)

	September 30, 2022			December 31, 2021
	(Unaudited)
Assets
Investment securities:
Debt securities, at fair value (amortized cost of $129,372 and $150,732, respectively)	$	111,847		$	149,783
Equity securities, at fair value (cost of $1,906 and $10,972, respectively)		1,312			9,931
Short-term investments, at fair value		30,562			23,013
Total investments		143,721			182,727

Cash and cash equivalents		35,413			9,913
Premiums and agents' balances receivable, net		21,856			21,197
Receivable from Affiliate		5,862			5,784
Reinsurance recoverables on unpaid losses		41,749			40,344
Reinsurance recoverables on paid losses		2,489			1,347
Prepaid reinsurance premiums		15,333			8,301
Deferred policy acquisition costs		10,483			12,267
Other assets		9,096			8,524
Total assets	$	286,002		$	290,404

Liabilities and Shareholders' Equity
Liabilities:
Unpaid losses and loss adjustment expenses	$	144,557		$	139,085
Unearned premiums		67,792			65,269
Reinsurance premiums payable		3,352			5,318
Debt		48,298			33,564
Accounts payable and accrued expenses		5,838			6,665
Total liabilities		269,837			249,901

Commitments and contingencies

Shareholders' equity:
Common stock, no par value (100,000,000 shares authorized; 12,215,324 and 9,707,817 issued and outstanding, respectively)		97,857			92,692
Accumulated deficit		(62,871	)		(50,079	)
Accumulated other comprehensive income (loss)		(18,821	)		(2,110	)
Total shareholders' equity		16,165			40,503
Total liabilities and shareholders' equity	$	286,002		$	290,404

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,
	2022			2021			2022			2021
Revenue and Other Income
Premiums
Gross earned premiums	$	34,401			31,770		$	100,947		$	90,245
Ceded earned premiums		(9,443	)		(6,829	)		(27,458	)		(17,631	)
Net earned premiums		24,958			24,941			73,489			72,614
Net investment income		860			514			1,931			1,549
Net realized investment gains (losses)		—			(101	)		(1,505	)		3,883
Change in fair value of equity securities		(151	)		(2,169	)		446			(3,234	)
Other gains (losses)		66			2,778			60			11,688
Other income		603			752			1,964			1,974
Total revenue and other income		26,336			26,715			76,385			88,474

Expenses
Losses and loss adjustment expenses, net		16,671			16,159			56,940			53,447
Policy acquisition costs		6,230			7,173			17,419			20,819
Operating expenses		4,380			4,077			13,010			12,768
Interest expense		778			701			2,216			2,154
Total expenses		28,059			28,110			89,585			89,188

Income (loss) before equity earnings in Affiliate and income taxes		(1,723	)		(1,395	)		(13,200	)		(714	)
Equity earnings in Affiliate, net of tax		199			184			368			612
Income tax expense (benefit)		(1	)		(2	)		(40	)		191

Net income (loss)	$	(1,523	)	$	(1,209	)	$	(12,792	)	$	(293	)

Earnings (loss) per common share, basic and diluted	$	(0.14	)	$	(0.12	)	$	(1.26	)	$	(0.03	)

Weighted average common shares outstanding, basic and diluted		11,101,194			9,692,150			10,178,975			9,686,874

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,
	2022			2021			2022			2021
Net income (loss)	$	(1,523	)	$	(1,209	)	$	(12,792	)	$	(293	)

Other comprehensive income (loss), net of tax:
Unrealized investment gains (losses):
Unrealized investment gains (losses) during the period		(4,347	)		(570	)		(16,641	)		(2,100	)
Income tax (benefit) expense		—			—			—			—
Unrealized investment gains (losses), net of tax		(4,347	)		(570	)		(16,641	)		(2,100	)

Less: reclassification adjustments to:
Net realized investment gains (losses) included in net income (loss)		—			44			70			85
Income tax (benefit) expense		—			—			—			—
Total reclassifications included in net income (loss), net of tax		—			44			70			85

Other comprehensive income (loss)		(4,347	)		(614	)		(16,711	)		(2,185	)

Total comprehensive income (loss)	$	(5,870	)	$	(1,823	)	$	(29,503	)	$	(2,478	)

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

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders' Equity (Unaudited)

(dollars in thousands)

	No Par, Common Stock						Accumulated			Accumulated Other Comprehensive			Total Shareholders'
	Shares			Amount			Deficit			Income (Loss)			Equity
Balances at June 30, 2022		9,715,324		$	92,799		$	(61,348	)	$	(14,474	)	$	16,977
Net income (loss)		—			—			(1,523	)		—			(1,523	)
Repurchase of common stock		—			—			—			—			—
Issuance of common stock private placement		2,500,000			5,000			—			—			5,000
Stock-based compensation expense		—			58			—			—			58
Other comprehensive income (loss)		—			—			—			(4,347	)		(4,347	)
Balances at September 30, 2022		12,215,324		$	97,857		$	(62,871	)	$	(18,821	)	$	16,165


Balances at June 30, 2021		9,689,421		$	92,612		$	(48,069	)	$	(659	)	$	43,884
Net income (loss)		—			—			(1,209	)		—			(1,209	)
Repurchase of common stock		(1,240	)		(4	)		—			—			(4	)
Stock-based compensation expense		17,975			51			—			—			51
Other comprehensive income (loss)		—			—			—			(614	)		(614	)
Balances at September 30, 2021		9,706,156		$	92,659		$	(49,278	)	$	(1,273	)	$	42,108

	No Par, Common Stock						Accumulated			Accumulated Other Comprehensive			Total Shareholders'
	Shares			Amount			Deficit			Income (Loss)			Equity
Balances at December 31, 2021		9,707,817		$	92,692		$	(50,079	)	$	(2,110	)	$	40,503
Net income (loss)		—			—			(12,792	)		—			(12,792	)
Repurchase of common stock		(1,493	)		11			—			—			11
Issuance of common stock private placement		2,500,000			5,000			—			—			5,000
Stock-based compensation expense		9,000			154			—			—			154
Other comprehensive income (loss)		—			—			—			(16,711	)		(16,711	)
Balances at September 30, 2022		12,215,324		$	97,857		$	(62,871	)	$	(18,821	)	$	16,165


Balances at December 31, 2020		9,681,728		$	92,486		$	(48,985	)	$	912		$	44,413
Net income (loss)		—			—			(293	)		—			(293	)
Repurchase of common stock		(3,547	)		(11	)		—			—			(11	)
Stock-based compensation expense		27,975			184			—			—			184
Other comprehensive income (loss)		—			—			—			(2,185	)		(2,185	)
Balances at September 30, 2021		9,706,156		$	92,659		$	(49,278	)	$	(1,273	)	$	42,108

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,
	2022			2021
Cash Flows From Operating Activities
Net income (loss)	$	(12,792	)	$	(293	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Gain on sale of agency business		—			(8,910	)
Depreciation and amortization		306			320
Amortization of bond premium and discount, net		292			388
Net realized investment (gains) losses		1,505			(3,917	)
Change in fair value of equity securities		(446	)		3,234
Stock-based compensation expenses		154			184
Equity earnings in Affiliate, net of tax		(368	)		(612	)
Other gains/losses		93			(2,728	)
Changes in operating assets and liabilities:
(Increase) decrease in:
Premiums and agents' balances and other receivables		(737	)		(2,022	)
Reinsurance recoverables		(2,547	)		(1,040	)
Prepaid reinsurance premiums		(7,032	)		(2,909	)
Deferred policy acquisition costs		1,784			(1,368	)
Other assets		(469	)		408
Increase (decrease) in:
Unpaid losses and loss adjustment expenses		5,472			8,584
Unearned premiums		2,523			8,812
Reinsurance premiums payable		(1,966	)		750
Accounts payable and other liabilities		137			(869	)
Net cash provided by (used in) operating activities		(14,091	)		(1,988	)
Cash Flows From Investing Activities
Purchase of investments		(234,620	)		(149,486	)
Proceeds from maturities and redemptions of investments		17,638			17,859
Proceeds from sales of investments		237,062			135,591
Proceeds from sale of agency business		—			1,000
Dividends from Affiliate		—			900
Other purchases		—			(531	)
Purchases of property and equipment		—			(20	)
Net cash provided by (used in) investing activities		20,080			5,313
Cash Flows From Financing Activities
Proceeds from issuance of common stock		5,000			—
Repurchase of common stock		11			(11	)
Borrowings under line of credit		5,000			3,000
Borrowings under Federal Home Loan Bank of Indianapolis		14,500			—
Repayment of borrowings under debt arrangements		(5,000	)		(7,000	)
Net cash provided by (used in) financing activities		19,511			(4,011	)
Net increase (decrease) in cash		25,500			(686	)
Cash at beginning of period		9,913			8,193
Cash at end of period	$	35,413		$	7,507
Supplemental Disclosure of Cash Flow Information:
Interest paid	$	2,196		$	2,183
Income taxes paid (refunded), net		(12	)		140
Note receivable from sale of agency business		—			9,000
Payable from purchase of agency		—			520

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

CONIFER HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

1. Summary of Significant Accounting Policies

Recent Developments

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

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

Basis of Presentation and Management Representation

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

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which differ from statutory accounting practices prescribed or permitted for insurance companies by regulatory authorities. The Company has applied the rules and regulations of the United States Securities and Exchange Commission (“SEC”) regarding interim financial reporting and therefore the consolidated financial statements do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of management, all adjustments, consisting of items of a normal recurring nature, necessary for a fair presentation of the consolidated interim financial statements, have been included.

These consolidated financial statements and the notes thereto should be read in conjunction with the Company's audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC.

The results of operations for the nine months ended September 30, 2022, are not necessarily indicative of the results expected for the year ended December 31, 2022.

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 Troy, Michigan with additional office facilities in Florida and Michigan.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes the amounts included in the consolidated financial statements reflect management's best estimates and assumptions, actual results may differ from these estimates.

Cash, Cash Equivalents, and Short-term Investments

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

Recently Issued Accounting Guidance

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which amends the current methodology and timing for recognizing credit losses. This amendment will replace the current GAAP "incurred loss" methodology for credit losses with a methodology based on expected credit losses. The new guidance will also require expanded consideration of a broader range of reasonable and increased supportable information for the credit loss estimates. This ASU is effective for annual and interim reporting periods beginning after December 15, 2022. Management is currently evaluating the impact of the guidance. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). This guidance provides optional expedients and exceptions that are intended to ease the burden of updating contracts to contain a new reference rate due to the discontinuation of the London Inter-Bank Offered Rate (LIBOR). This guidance is available immediately and may be implemented in any period prior to the guidance expiration on December 31, 2022. Management does not expect the new guidance to have a material impact on the Company’s consolidated financial statements.

2. Investments

The cost or amortized cost, gross unrealized gains or losses, and estimated fair value of the investments in securities classified as available for sale at September 30, 2022 and December 31, 2021, were as follows (dollars in thousands):

	September 30, 2022
	Cost or		Gross Unrealized					Estimated
	Amortized Cost		Gains		Losses			Fair Value
Debt Securities:
U.S. Government	$	7,830	$	—	$	(367	)	$	7,463
State and local government		25,661		—		(4,516	)		21,145
Corporate debt		35,544		—		(5,398	)		30,146
Asset-backed securities		22,896		—		(1,173	)		21,723
Mortgage-backed securities		29,772		—		(5,442	)		24,330
Commercial mortgage-backed securities		3,418		—		(181	)		3,237
Collateralized mortgage obligations		4,251		—		(448	)		3,803
Total debt securities available for sale	$	129,372	$	—	$	(17,525	)	$	111,847

	December 31, 2021
	Cost or		Gross Unrealized					Estimated
	Amortized Cost		Gains		Losses			Fair Value
Debt Securities:
U.S. Government	$	20,723	$	74	$	(77	)	$	20,720
State and local government		30,063		555		(189	)		30,429
Corporate debt		30,808		88		(550	)		30,346
Asset-backed securities		28,652		10		(224	)		28,438
Mortgage-backed securities		33,178		105		(762	)		32,521
Commercial mortgage-backed securities		1,659		31		0			1,690
Collateralized mortgage obligations		5,649		35		(45	)		5,639
Total debt securities available for sale	$	150,732	$	898	$	(1,847	)	$	149,783

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, 2022
	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		9	$	3,746	$	(161	)		4	$	3,717	$	(206	)		13	$	7,463	$	(367	)
State and local government		93		16,323		(3,165	)		32		4,518		(1,351	)		125		20,841		(4,516	)
Corporate debt		42		16,035		(2,568	)		28		14,111		(2,830	)		70		30,146		(5,398	)
Asset-backed securities		16		8,267		(162	)		12		13,456		(1,011	)		28		21,723		(1,173	)
Mortgage-backed securities		60		4,947		(780	)		9		19,347		(4,662	)		69		24,294		(5,442	)
Commercial mortgage-backed securities		4		3,212		(181	)		—		—		—			4		3,212		(181	)
Collateralized mortgage obligations		26		2,397		(239	)		7		1,370		(209	)		33		3,767		(448	)
Total debt securities available for sale		250	$	54,927	$	(7,256	)		92	$	56,519	$	(10,269	)		342	$	111,446	$	(17,525	)

	December 31, 2021
	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		6	$	10,323	$	(47	)		1	$	4,728	$	(30	)		7	$	15,051	$	(77	)
State and local government		41		8,875		(172	)		4		446		(17	)		45		9,321		(189	)
Corporate debt		41		22,748		(505	)		1		705		(45	)		42		23,453		(550	)
Asset-backed securities		24		24,305		(219	)		2		1,893		(5	)		26		26,198		(224	)
Mortgage-backed securities		12		27,034		(762	)		—		—		—			12		27,034		(762	)
Commercial mortgage-backed securities		—		—		—			—		—		—			—		—		—
Collateralized mortgage obligations		10		2,638		(45	)		2		29		—			12		2,667		(45	)
Total debt securities available for sale		134	$	95,923	$	(1,750	)		10	$	7,801	$	(97	)		144	$	103,724	$	(1,847	)

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 nine months ended September 30, 2022 and 2021.

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,
	2022			2021			2022			2021
Debt securities	$	636		$	562		$	1,814		$	1,716
Equity securities		3			63			41			166
Cash, cash equivalents and short-term investments		279			1			316			2
Total investment income		918			626			2,171			1,884
Investment expenses		(58	)		(112	)		(240	)		(335	)
Net investment income	$	860		$	514		$	1,931		$	1,549

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,
	2022		2021			2022			2021
Debt securities:
Gross realized gains	$	—	$	2		$	6		$	29
Gross realized losses		—		—			(155	)		(6	)
Total debt securities		—		2			(149	)		23
Equity securities:
Gross realized gains	$	—		55			375			4,063
Gross realized losses		—		(158	)		(1,731	)		(203	)
Total equity securities		—		(103	)		(1,356	)		3,860
Total net realized investment gains (losses)	$	—	$	(101	)	$	(1,505	)	$	3,883

Proceeds from available-for-sale debt securities were $29.3 million and $25.6 million for the nine months ended September 30, 2022 and 2021, respectively.

There were no gross realized gains or losses from the sale of available-for-sale debt securities for the three months ended September 30, 2022. The gross realized gains and losses from the sale of available-for-sale debt securities for the nine months ended September 30, 2022, were $5,000 and $155,000, respectively.

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

As of September 30, 2022 and 2021, there were $0 and $43,000 of payables from securities purchased, respectively. There were $0 and $3,000 of receivables from securities sold as of September 30, 2022, and 2021, respectively.

The Company’s gross unrealized losses related to its equity investments were $595,000 and $1.0 million as of September 30, 2022 and December 31, 2021, respectively. The Company also 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 2022 related to the Company's equity securities without readily determinable fair value. These investments are included in Other Assets in the Consolidated Balance Sheets and amounted to $1.7 million as of September 30, 2022 and $1.2 million as of December 31, 2021.

The table below summarizes the amortized cost and fair value of available-for-sale debt securities by contractual maturity at September 30, 2022. 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	$	3,955	$	3,886
Due after one year through five years		28,544		25,944
Due after five years through ten years		23,584		19,261
Due after ten years		12,952		9,663
Securities with contractual maturities		69,035		58,754
Asset-backed securities		22,896		21,723
Mortgage-backed securities		29,772		24,330
Commercial mortgage-backed securities		3,418		3,237
Collateralized mortgage obligations		4,251		3,803
Total debt securities	$	129,372	$	111,847

At September 30, 2022 and December 31, 2021, the Insurance Company Subsidiaries had $7.9 million and $8.5 million, respectively, on deposit in trust accounts to meet the deposit requirements of various state insurance departments. At September 30, 2022 and December 31, 2021, the Company had $99.9 million and $76.1 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.

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, 2022 and December 31, 2021 (dollars in thousands):

	September 30, 2022
	Fair Value Measurements
	Total		Level 1		Level 2		Level 3
Assets:
Debt Securities:
U.S. Government	$	7,463	$	—	$	7,463	$	—
State and local government		21,145		—		21,145		—
Corporate debt		30,146		—		30,146		—
Asset-backed securities		21,723		—		21,723		—
Mortgage-backed securities		24,330		—		24,330		—
Commercial mortgage-backed securities		3,237		—		3,237		—
Collateralized mortgage obligations		3,803		—		3,803		—
Total debt securities		111,847		—		111,847		—
Equity Securities		947		190		757		—
Short-term investments		30,562		30,562		—		—
Total marketable investments measured at fair value	$	143,356	$	30,752	$	112,604	$	—

Investments measured at NAV:
Investment in limited partnership		365
Total assets measured at fair value	$	143,721

Liabilities:
Senior Unsecured Notes *	$	23,113	$	—	$	23,113	$	—
Subordinated Notes *		11,186		—		—		11,186
FHLB of Indianapolis		14,500		—		14,500		—
Total Liabilities measured at fair value	$	48,799	$	—	$	37,613	$	11,186

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

	December 31, 2021
	Fair Value Measurements
	Total		Level 1		Level 2		Level 3
Assets:
Debt Securities:
U.S. Government	$	20,720	$	—	$	20,720	$	—
State and local government		30,429		—		30,429		—
Corporate debt		30,346		—		30,346		—
Asset-backed securities		28,438		—		28,438		—
Mortgage-backed securities		32,521		—		32,521		—
Commercial mortgage-backed securities		1,690		—		1,690		—
Collateralized mortgage obligations		5,639		—		5,639		—
Total debt securities		149,783		—		149,783		—
Equity securities		9,437		9,154		283		—
Short-term investments		23,013		23,013		—		—
Total marketable investments measured at fair value	$	182,233	$	32,167	$	150,066	$	—

Investments measured at NAV:
Investment in limited partnership		494
Total assets measured at fair value	$	182,727

Liabilities:
Senior Unsecured Notes *	$	24,118	$	—	$	24,118	$	—
Subordinated Notes *		11,704		—		—		11,704
Total Liabilities measured at fair value	$	35,822	$	—	$	24,118	$	11,704

*	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 21.4% and 17.6% of the fair value of the total investment portfolio as of September 30, 2022 and December 31, 2021, respectively.

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 78.4% and 82.1% of the fair value of the total investment portfolio as of September 30, 2022 and December 31, 2021, respectively.

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 and its loan with the FHLB of Indianapolis. The fair value of the borrowings under the senior revolving credit facility, and the FHLB of Indianapolis loan, approximates its carrying amount because interest is based on a short-term, variable, market-based rate.

As of September 30, 2022 and December 31, 2021, Level 3 is entirely comprised of the Company's subordinated debt. In determining the fair value of the subordinated debt outstanding at September 30, 2022 and December 31, 2021, the security attributes (issue date, maturity, coupon, calls, etc.) and market rates on September 24, 2018 (the date of the restated and amended agreement which was repriced at that time) were entered into a valuation model. A lognormal trinomial interest rate

lattice was created within the model to compute the option adjusted spread (“OAS”) which is the amount, in basis points, of interest rate required to be paid under the debt agreement over the risk-free U.S. Treasury rates. The OAS was then used in the model along with the September 30, 2022 and December 31, 2021 U.S. Treasury rates. A new lattice was generated and the fair value was computed from the OAS. There were no changes in assumptions of credit risk from the issuance date.

The Company did not have any assets or liabilities that were measured at fair value on a nonrecurring basis at September 30, 2022 or December 31, 2021.

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, 2022 and 2021. 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,
	2022			2021			2022			2021
Balance at beginning of period	$	10,747		$	13,121		$	12,267		$	12,243

Deferred policy acquisition costs		5,966			7,663			15,635			22,187
Amortization of policy acquisition costs		(6,230	)		(7,173	)		(17,419	)		(20,819	)
Net change		(264	)		490			(1,784	)		1,368

Balance at end of period	$	10,483		$	13,611		$	10,483		$	13,611

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,
	2022			2021			2022			2021
Gross reserves - beginning of period	$	140,996		$	117,852		$	139,085		$	111,270
Less: reinsurance recoverables on unpaid losses		(37,769	)		(22,824	)		(40,344	)		(24,218	)
Net reserves - beginning of period		103,227			95,028			98,741			87,052
Add: incurred losses and LAE, net of reinsurance:
Current period		13,541			12,513			38,765			37,813
Prior period		3,130			3,646			18,175			15,634
Total net incurred losses and LAE		16,671			16,159			56,940			53,447
Deduct: loss and LAE payments, net of reinsurance:
Current period		5,634			5,802			13,313			14,102
Prior period		11,456			8,587			39,560			29,599
Total net loss and LAE payments		17,090			14,389			52,873			43,701
Net reserves - end of period		102,808			96,798			102,808			96,798
Plus: reinsurance recoverables on unpaid losses		41,749			23,056			41,749			23,056
Gross reserves - end of period	$	144,557		$	119,854		$	144,557		$	119,854

Net losses and LAE were $16.7 million during the third quarter of 2022. Adverse development contributed $3.1 million to the total incurred losses in the third quarter of 2022. Of the $3.1 million of adverse development, $2.3 million was related to 2019 and prior accident years and $1.8 million was related to the 2021 accident year. This was offset by $958,000 of favorable development experienced in the 2020 accident year. Of the $3.1 million of adverse development, $2.7 million was related to the commercial lines of business, while $381,000 was related to the personal lines of business.

Net losses and LAE were $56.9 million for the nine months ended September 30, 2022. Adverse development contributed $18.2 million to the total incurred losses during the nine months ended September 30, 2022. Of the $18.2 million of adverse development, $14.3 million was related to 2019 and prior accident years, $2.2 million was related to the 2020 accident year, and $1.7 million was related to the 2021 accident year. Of the $18.2 million of adverse development, $17.7 million was related to the commercial lines of business, while $430,000 came from the personal lines of business.

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

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

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 ceded primarily all specific commercial liability risks in excess of $340,000 in 2022, and $400,000 in 2021. The Company ceded specific commercial property risks in excess of $300,000 in 2022 and ceded specific commercial property risks in excess of $200,000 in 2021. The Company ceded homeowners specific risks in excess of $300,000 in both 2022 and 2021.

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,
	2022			2021			2022			2021
Written premiums:
Direct	$	22,682		$	24,239		$	73,789		$	73,825
Assumed		10,406			9,465			29,681			25,233
Ceded		(9,395	)		(7,635	)		(34,490	)		(19,974	)
Net written premiums	$	23,693		$	26,069		$	68,980		$	79,084

Earned premiums:
Direct	$	24,679		$	23,858		$	73,667		$	67,455
Assumed		9,722			7,912			27,280			22,790
Ceded		(9,443	)		(6,829	)		(27,458	)		(17,631	)
Net earned premiums	$	24,958		$	24,941		$	73,489		$	72,614

Losses and LAE:
Direct	$	15,837		$	14,511		$	46,375		$	50,628
Assumed		7,225			4,422			26,136			11,251
Ceded		(6,391	)		(2,774	)		(15,571	)		(8,432	)
Net Losses and LAE	$	16,671		$	16,159		$	56,940		$	53,447

Some of the excess of loss treaties that renewed on December 31, 2021 and January 1, 2022, included ceding commissions equal to 40% of the ceded premiums. The ceding commission is reflected as a reduction in acquisition costs and amounted to $2.1 million and $6.4 million for the three and nine months ended September 30, 2022. There were no ceding commissions reflected in the Consolidated Statements of Operations in 2021, relating to the excess of loss reinsurance treaties during 2021.

7. Debt

As of September 30, 2022, the Company's debt is comprised of four instruments: $24.4 million of publicly traded senior unsecured notes which were issued in 2018, a $10.0 million line of credit which commenced in June 2018, $10.5 million of privately placed subordinated notes, and a loan of $14.5 million from the Federal Home Loan Bank (“FHLB”) of Indianapolis, which commenced in July 2022. A summary of the Company's outstanding debt is as follows (dollars in thousands):

	September 30, 2022		December 31, 2021
Senior unsecured notes *	$	24,121	$	23,926
Subordinated notes *		9,677		9,638
FHLB of Indianapolis		14,500		—
Total	$	48,298	$	33,564

*Net of unamortized debt issuance costs

Senior unsecured notes

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

The Company did not repurchase any of the Notes for the three and nine months ended September 30, 2022 and 2021.

Management plans to issue new public debt that will provide sufficient cash flow to pay off the senior unsecured notes that are coming due within the next twelve months. Management believes it is probable that it will be able to issue new public debt and repay the senior unsecured notes by September 30, 2023.

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, 2022, the carrying value of the Notes and Subordinated Notes are offset by $260,000 and $823,000 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 restrictive financial debt covenants that relate to the Company’s minimum tangible net worth, minimum fixed-charge coverage ratios, dividend paying capacity, reinsurance retentions, risk-based capital ratios, and debt-to-total capital. As of March 31, 2022, the Company was not in compliance with the tangible net worth and the debt-to-total capital financial covenants, principally due to changes in unrealized fair values of the bond portfolio resulting from the significant increase in the interest rate environment. On May 9, 2022, the holders of the Subordinated Notes waived the March 31, 2022 tangible net worth and debt-to-total capital requirements and the agreement was amended to exclude changes in unrealized gains or losses in the debt securities investment portfolio of the Company subsequent to December 31, 2021, when calculating the debt covenant ratios.

As of June 30, 2022, the Company was not in compliance on the tangible net worth covenant of the Subordinated Notes. On August 8, 2022, the holders of the Subordinated Notes waived the June 30, 2022 tangible net worth requirement. The $5.0 million contribution to the Company on August 10, 2022 (see Note 8 ~ Shareholder’s Equity), increased the net worth sufficiently to bring the Company back into compliance. At September 30, 2022, the Company was in compliance with all of its financial covenants.

Line of credit

The Company maintains a $10.0 million line of credit with a national bank (the “Lender”). The line of credit bears interest at the London Interbank rate ("LIBOR") plus 2.75% per annum, payable monthly. On June 18, 2021, the line of credit was renewed with a maturity of December 1, 2022. The line of credit contains restrictive financial debt covenants that relate to the Company’s minimum tangible net worth, minimum fixed-charge coverage ratios, dividend paying capacity, reinsurance retentions, risk-based capital ratios, and debt-to-total capital. On August 8, 2022, the Company entered into an amendment with the Lender which eliminated the financial debt covenant requirements if there is no outstanding balance going forward, and requires prior bank approval for any future draws on the line of credit. As of September 30, 2022, the Company had no balance outstanding on the line of credit.

FHLB of Indianapolis loan

On July 7, 2022, the Company borrowed $14.5 million from the FHLB of Indianapolis. The loan is fully collateralized with high-quality federally guaranteed debt securities and cash. The loan was drawn for short-term cash needs to avoid realizing losses on a statutory accounting basis due to temporary market-timing issues caused by the recent fluctuations in the interest rate markets. The loan has a daily floating interest rate that was 3.45% per annum as of September 30, 2022. The loan matures on January 9, 2023.

Paycheck Protection Program loan

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

8. Shareholder’s Equity

On August 10, 2022, the Company issued $5.0 million of equity through a private placement for 2,500,000 shares priced at $2.00 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.

For the three months ended September 30, 2022, the Company had no restricted stock units vest, and made no repurchases of stock. For the three months ended September 30, 2021, the Company repurchase 1,240 shares of stock valued at approximately $4,000, related to the vesting of the Company’s restricted stock units. For the nine months ended September 30, 2022 and 2021, the Company repurchased 1,493 and 3,547 shares of stock valued at approximately $3,000 and $11,000, respectively. Upon the repurchase of the Company’s shares, the shares remain authorized, but not issued or outstanding.

As of September 30, 2022 and December 31, 2021, the Company had 12,215,324 and 9,707,817 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,
	2022			2021			2022			2021
Balance at beginning of period	$	(14,474	)	$	(659	)	$	(2,110	)	$	912
Other comprehensive income (loss) before reclassifications, net of tax		(4,347	)		(570	)		(16,641	)		(2,100	)
Less: amounts reclassified from accumulated other comprehensive income (loss), net of tax		—			44			70			85
Net other comprehensive income (loss)		(4,347	)		(614	)		(16,711	)		(2,185	)
Balance at end of period	$	(18,821	)	$	(1,273	)	$	(18,821	)	$	(1,273	)

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 and share amounts):

	Three Months Ended September 30,						Nine months ended September 30,
	2022			2021			2022			2021
Net income (loss)	$	(1,523	)	$	(1,209	)	$	(12,792	)	$	(293	)

Weighted average common shares, basic and diluted *		11,101,194			9,692,150			10,178,975			9,686,874

Earnings (loss) per common share, basic and diluted	$	(0.14	)	$	(0.12	)	$	(1.26	)	$	(0.03	)

*	The non-vested shares of the restricted stock units and stock options were anti-dilutive as of September 30, 2022 and 2021. Therefore, the basic and diluted weighted average common shares are equal for the three months and nine months ended September 30, 2022 and 2021.

11. Stock-based Compensation

On March 8, 2022, the Company issued options to purchase 630,000 shares of the Company’s common stock to two named executive officers. The right to exercise the options will vest over a five-year period on a straight-line basis. The options will have a strike price of $4.53 per share and will expire on March 8, 2032. The estimated value of these options is $612,000, which is being expensed ratably over the vesting period.

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

In 2016 and 2018, the Company issued 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 $909,000 and $404,000, respectively, on the dates of grant.

The Company recorded $43,000 and $145,000 of compensation expense related to the RSUs for the nine months ended September 30, 2022 and 2021, respectively. There were 10,000 unvested RSUs as of September 30, 2022, which will generate an estimated future expense of $30,000.

The Company recorded $111,000 and $39,000 of compensation expense related to the stock options for the nine months ended September 30, 2022 and 2021, respectively. There were 783,000 unvested options as of September 30, 2022, which will generate an estimated future expense of $685,000.

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 financial statements. Periodic expenses related to the defense of such claims are included in the accompanying consolidated statements of operations. On the basis of current information, the Company does not believe that there is a reasonable possibility that any material loss exceeding amounts already accrued, if any, will result from any of the claims, lawsuits and proceedings to which the Company is subject to, either individually or in the aggregate.

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 co-chief operating decision makers in deciding how to allocate resources to its segments and in assessing its performance. In assessing performance of its operating segments, the Company’s co-chief operating decision makers, the Co-Chief Executive Officers, review 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, 2022 and 2021, gross written premiums attributable to these four states were 56.2% and 51.4%, respectively, of the Company’s total gross written premiums.

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

In addition to the reportable operating segments, the Company maintains a Corporate category to reconcile segment results to the consolidated totals. The Corporate category includes: (i) corporate operating expenses such as salaries and related benefits of the Company’s executive management team and finance and information technology personnel, and other corporate headquarters expenses, (ii) interest expense on the Company’s debt obligations; (iii) depreciation and amortization on property and equipment, and (iv) all investment income activity. All investment income activity is reported within net investment income, net realized investment gains, and change in fair value of equity securities on the consolidated statements of operations. The Company’s assets on the consolidated balance sheet are not allocated to the reportable segments.

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

Three months ended September 30, 2022	Commercial Lines			Personal Lines			Total Underwriting			Wholesale Agency		Corporate			Eliminations			Total

Gross written premiums	$	27,635		$	5,453		$	33,088		$	—	$	—		$	—		$	33,088

Net written premiums	$	18,730		$	4,963		$	23,693		$	—	$	—		$	—		$	23,693

Net earned premiums	$	20,789		$	4,169		$	24,958		$	—	$	—		$	—		$	24,958
Other income		57			26			83			793		113			(386	)		603
Segment revenue		20,846			4,195			25,041			793		113			(386	)		25,561

Losses and LAE, net		13,348			3,323			16,671			—		—			—			16,671
Policy acquisition costs		4,950			1,214			6,164			498		—			(432	)		6,230
Operating expenses		3,297			519			3,816			245		319			—			4,380
Segment expenses		21,595			5,056			26,651			743		319			(432	)		27,281

Segment gain (loss)	$	(749	)	$	(861	)	$	(1,610	)	$	50	$	(206	)	$	46		$	(1,720	)
Investment income													860						860
Net realized investment gains (losses)													—						—
Change in fair value of equity securities													(151	)					(151	)
Other gains (losses)													66						66
Interest expense													(778	)					(778	)
Income (loss) before equity earnings in Affiliate and income taxes	$	(749	)	$	(861	)	$	(1,610	)	$	50	$	(209	)	$	46		$	(1,723	)

Three months ended September 30, 2021	Commercial Lines			Personal Lines		Total Underwriting			Wholesale Agency			Corporate			Eliminations			Total

Gross written premiums	$	29,849		$	3,855	$	33,704		$	—		$	—		$	—		$	33,704

Net written premiums	$	22,456		$	3,613	$	26,069		$	—		$	—		$	—		$	26,069

Net earned premiums	$	21,975		$	2,966	$	24,941		$	—		$	—		$	—		$	24,941
Other income		50			29		79			1,235			148			(710	)		752
Segment revenue		22,025			2,995		25,020			1,235			148			(710	)		25,693

Losses and LAE, net		14,697			1,462		16,159			—			—			—			16,159
Policy acquisition costs		6,458			838		7,296			778			—			(901	)		7,173
Operating expenses		2,954			336		3,290			500			287			—			4,077
Segment expenses		24,109			2,636		26,745			1,278			287			(901	)		27,409

Segment gain (loss)	$	(2,084	)	$	359	$	(1,725	)	$	(43	)	$	(139	)	$	191		$	(1,716	)
Investment income													514						514
Net realized investment gains (losses)													(101	)					(101	)
Change in fair value of equity securities													(2,169	)					(2,169	)
Other gains													2,778						2,778
Interest expense													(701	)					(701	)
Income (loss) before equity earnings in Affiliate and income taxes	$	(2,084	)	$	359	$	(1,725	)	$	(43	)	$	182		$	191		$	(1,395	)

Nine months ended September 30, 2022	Commercial Lines			Personal Lines			Total Underwriting			Wholesale Agency		Corporate			Eliminations			Total

Gross written premiums	$	88,297		$	15,173		$	103,470		$	—	$	—		$	—		$	103,470

Net written premiums	$	55,456		$	13,524		$	68,980		$	—	$	—		$	—		$	68,980

Net earned premiums	$	62,097		$	11,392		$	73,489		$	—	$	—		$	—		$	73,489
Other income		195			58			253			2,969		407			(1,665	)		1,964
Segment revenue		62,292			11,450			73,742			2,969		407			(1,665	)		75,453

Losses and LAE, net		49,864			7,076			56,940			—		—			—			56,940
Policy acquisition costs		13,717			3,530			17,247			2,026		—			(1,854	)		17,419
Operating expenses		9,966			1,405			11,371			811		828			—			13,010
Segment expenses		73,547			12,011			85,558			2,837		828			(1,854	)		87,369

Segment gain (loss)	$	(11,255	)	$	(561	)	$	(11,816	)	$	132	$	(421	)	$	189		$	(11,916	)
Investment income													1,931						1,931
Net realized investment gains (losses)													(1,505	)					(1,505	)
Change in fair value of equity securities													446						446
Other gains													60						60
Interest expense													(2,216	)					(2,216	)
Income (loss) before equity earnings in Affiliate and income taxes	$	(11,255	)	$	(561	)	$	(11,816	)	$	132	$	(1,705	)	$	189		$	(13,200	)

Nine months ended September 30, 2021	Commercial Lines			Personal Lines			Total Underwriting			Wholesale Agency			Corporate			Eliminations			Total

Gross written premiums	$	88,017		$	11,041		$	99,058		$	—		$	—		$	—		$	99,058

Net written premiums	$	68,685		$	10,399		$	79,084		$	—		$	—		$	—		$	79,084

Net earned premiums	$	64,869		$	7,745		$	72,614		$	—		$	—		$	—		$	72,614
Other income		158			113			271			4,932			219			(3,448	)		1,974
Segment revenue		65,027			7,858			72,885			4,932			219			(3,448	)		74,588

Losses and LAE, net		48,592			4,855			53,447			—			—			—			53,447
Policy acquisition costs		19,102			2,178			21,280			3,147			—			(3,608	)		20,819
Operating expenses		8,761			1,076			9,837			2,060			871			—			12,768
Segment expenses		76,455			8,109			84,564			5,207			871			(3,608	)		87,034

Segment gain (loss)	$	(11,428	)	$	(251	)	$	(11,679	)	$	(275	)	$	(652	)	$	160		$	(12,446	)
Investment income														1,549						1,549
Net realized investment gains (losses)														3,883						3,883
Change in fair value of equity securities														(3,234	)					(3,234	)
Other gains														11,688						11,688
Interest expense														(2,154	)					(2,154	)
Income (loss) before equity earnings in Affiliate and income taxes	$	(11,428	)	$	(251	)	$	(11,679	)	$	(275	)	$	11,080		$	160		$	(714	)

14. Subsequent Events

On October 13, 2022, the Company purchased the 50% ownership interest in Venture that was owned by a third party for $9.7 million, resulting in Venture being owned 100% by the Company.

On October 14, 2022, Venture completed the sale of certain producer business assets with Whitetail Insurance Services, LLC (the “Buyer”), a wholly-owned subsidiary of Acrisure, LLC (“Acrisure”), for a purchase price of $38.2 million. The effective date of the asset purchase agreement is October 1, 2022. There is no material relationship between the Company or any director or officer of the Company, or any associate of any director or officer of the Company, and the Buyer, other than with respect to the Company's disposition of assets to the Buyer. The assets involved in this transaction relate to Venture Agency Holdings, Inc. insurance brokerage and associated services provided largely to the security sector. This sale, along with related transactions including the cost of the Company purchasing the other 50% of Venture, is expected to generate approximately $8.0 million of non-operating gains for the Company, net of taxes, in the fourth quarter of 2022. This sale is not expected to result in discontinued operations related to agency business.

On November 1, 2022, Conifer Holdings, Inc. (the “Company”), entered into a loss portfolio transfer (“LPT”) reinsurance agreement with Fleming Reinsurance Ltd (“Fleming Re”). Under the agreement, Fleming Re will cover an aggregate limit of $66.3 million of paid losses on $40.8 million of stated net reserves as of June 30, 2022, relating to accident years 2019 and prior. Within the aggregate limit, there is a $5.5 million loss corridor in which the Company and WPIC retains losses in excess of $40.8 million. Fleming Re is then responsible to cover paid losses in excess of $46.3 million up to $66.3 million. Accordingly, there is $20.0 million of adverse development cover for accident years 2019 and prior. Under the agreement, Fleming Re retains $40.8 million for stated net reserves as of June 30, 2022, plus a one-time risk fee of $5.4 million. Recoverables due to the Company under this agreement will be recorded as reinsurance recoverables. The agreement is between CIC and WPIC and Fleming Re.

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

For the Periods Ended September 30, 2022 and 2021

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 10, 2022 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 10, 2022 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

Private Placement

Sale of Certain Agency Business

On June 30, 2021, our agency (Sycamore Insurance Agency) sold to Venture Agency Holdings, Inc., a related party, the customer accounts and other related assets of some of its personal and commercial lines of business (the “Venture Transaction”). Sycamore will continue to produce various personal and commercial lines that it did not sell which is substantially all produced for, and underwritten by, our Insurance Company Subsidiaries. We recognized an $8.9 million gain on the sale which is reflected in Other Gains in the Consolidated Statement of Operations. In order to determine the value of the portion of the business sold, the Company obtained a third party valuation based on a weighting of discounted cash flows and earnings before interest, taxes, depreciation and amortization (EBITDA) multiple valuation methods. The valuation included significant estimates and assumptions related to (i) forecasted revenue and EBITDA and (ii) the selection of the EBITDA multiple and discount rate.

The purchase price was $10.0 million of which $1.0 million was paid in cash on June 30, 2021, and $9.0 million was in the form of two promissory notes (one for $6.0 million and one for $3.0 million). Both notes require interest-only quarterly payments at a per annum rate of 7.0%, with a five-year maturity. There are no prepayment penalties. On December 14, 2021, Venture paid off the $3.0 million note.

The assets sold included the customer accounts (mainly agency-related new and renewal rights) of substantially all of the personal lines business and a small subset of the commercial lines business underwritten by our Insurance Company Subsidiaries, and all of the customer accounts Sycamore produced for third-party insurers. The Venture Transaction included the transition of 21 employees from Conifer to Venture as well as necessary systems and office functions to operate the business. Venture did not assume any in-force business or liabilities. The business will transition to Venture as it produces new or renewal business effective July 1, 2021. We expect our Insurance Company Subsidiaries will continue to underwrite substantially all of the business we sold to Venture that we underwrote prior to the transaction. We expect Venture to be able to grow both the business we underwrite as well as the third-party business more effectively as a separate entity outside of Conifer. As of September 30, 2022, the Company had a non-controlling 50% interest in Venture.

Loss Portfolio Transfer

On November 1, 2022, the Company entered into an LPT reinsurance agreement with Fleming Re. Under the agreement, Fleming Re will cover an aggregate limit of $66.3 million of paid losses on $40.8 million of stated net reserves as of June 30, 2022, relating to accident years 2019 and prior. Within the aggregate limit, there is a $5.5 million loss corridor in which the Company and WPIC retains losses in excess of $40.8 million. Fleming Re is then responsible to cover paid losses in excess of $46.3 million up to $66.3 million. Accordingly, there is $20.0 million of adverse development cover for accident years 2019 and prior. Under the agreement, Fleming Re retains $40.8 million for stated net reserves as of June 30, 2022, plus a one-time risk fee of $5.4 million. The agreement is between CIC and WPIC and Fleming Re.

A.M. Best

On April 21, 2022, A.M. Best downgraded the Company’s Long-Term Issuer Credit Rating (Long-Term ICR) from “bb” (Fair) to “bb-” (Fair), and downgraded the Company’s insurance subsidiaries Financial Strength Rating from “B++” (Good) to “B+” (Good) and the Long-Term ICR from “bbb” (Good) to “bbb-” (Good). The outlook assigned to all these ratings by A.M. Best was Stable. We do not believe the rating changes will have a material effect on our business.

Business Overview

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

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

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

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

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

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

Critical Accounting Policies and Estimates

In certain circumstances, we are required to make estimates and assumptions that affect amounts reported in our consolidated financial statements and related footnotes. We evaluate these estimates and assumptions periodically on an on-going basis based on a variety of factors. There can be no assurance, however, that actual results will not be materially different than our estimates and assumptions, and that reported results of operations will not be affected by accounting adjustments needed to reflect changes in these estimates and assumptions. During the nine months ended September 30, 2022, 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 10, 2022.

Executive Overview

The Company reported $33.1 million of gross written premiums in the third quarter of 2022, representing a 1.8% decrease as compared to the same period in 2021. Our commercial lines gross written premiums decreased by $2.2 million, or 7.4%, to $27.6 million in the third quarter of 2022, compared to $29.8 million for the same period in 2021. Personal lines gross written premiums increased by $1.6 million, or 41.5%, to $5.5 million in the third quarter of 2022, compared to $3.9 million for the same period in 2021.

The Company reported $103.5 million of gross written premiums for the nine months ended September 30, 2022, compared to $99.1 million for the same period in 2021.

The Company reported a net loss of $1.5 million, or $0.14 per share, and a net loss of $12.8 million, or $1.26 per share, for the three and nine months ended September 30, 2022, respectively. The Company reported a net loss of $1.2 million, or $0.12 per share, and a net loss of $293,000, or $0.03 per share, for the three and nine months ended September 30, 2021, respectively.

Adjusted operating loss, a non-GAAP measure, was $1.4 million, or $0.13 per share, and $11.8 million, or $1.16 per share, for the three and nine months ended September 30, 2022, respectively. Adjusted operating loss was $1.7 million, or $0.18 per share, and $12.6 million, or $1.30 per share, for the three and nine months ended September 30, 2021.

Our underwriting combined ratio was 106.5% and 116.0% for the three and nine months ended September 30, 2022, compared to 106.9 and 116.0% for the three and nine months ended September 30, 2021, respectively.

Results of Operations For The Three Months Ended September 30, 2022 and 2021

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

Summary of Operating Results

	Three Months Ended September 30,
	2022			2021			$ Change			% Change
Gross written premiums	$	33,088		$	33,704		$	(616	)		(1.8	%)

Net written premiums	$	23,693		$	26,069		$	(2,376	)		(9.1	%)

Net earned premiums	$	24,958		$	24,941		$	17			0.1	%
Other income		603			752			(149	)		(19.8	%)
Losses and loss adjustment expenses, net		16,671			16,159			512			3.2	%
Policy acquisition costs		6,230			7,173			(943	)		(13.1	)%
Operating expenses		4,380			4,077			303			7.4	%
Underwriting gain (loss)		(1,720	)		(1,716	)		(4	)	*
Net investment income		860			514			346			67.3	%
Net realized investment gains (losses)		—			(101	)		101		*
Change in fair value of equity securities		(151	)		(2,169	)		2,018		*
Other gains (losses)		66			2,778			(2,712	)	*
Interest expense		778			701			77			11.0	%
Income (loss) before equity earnings in Affiliate, net of tax		(1,723	)		(1,395	)		(328	)	*
Equity earnings in Affiliate, net of tax		199			184			15		*
Income tax expense		(1	)		(2	)		1		*
Net income (loss)	$	(1,523	)	$	(1,209	)	$	(314	)	*

Book value per common share outstanding	$	1.32		$	4.34

Underwriting Ratios:
Loss ratio (1)		66.6	%		64.6	%
Expense ratio (2)		39.9	%		42.3	%
Combined ratio (3)		106.5	%		106.9	%

(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, 2022 and 2021 (dollars in thousands):

Summary of Premium Revenue

	Three Months Ended September 30,
	2022		2021		$ Change			% Change
Gross written premiums
Commercial lines	$	27,635	$	29,849	$	(2,214	)		(7.4	)%
Personal lines		5,453		3,855		1,598			41.5	%
Total	$	33,088	$	33,704	$	(616	)		(1.8	)%

Net written premiums
Commercial lines	$	18,730	$	22,456	$	(3,726	)		(16.6	)%
Personal lines		4,963		3,613		1,350			37.4	%
Total	$	23,693	$	26,069	$	(2,376	)		(9.1	)%

Net earned premiums
Commercial lines	$	20,789	$	21,975	$	(1,186	)		(5.4	)%
Personal lines		4,169		2,966		1,203			40.6	%
Total	$	24,958	$	24,941	$	17			0.1	%

Gross written premiums decreased $616,000, or 1.8%, to $33.1 million for the three months ended September 30, 2022, as compared to $33.7 million for the same period in 2021.

Commercial lines gross written premiums decreased $2.2 million, or 7.4%, to $27.6 million in the third quarter of 2022, as compared to $29.8 million for the third quarter of 2021.

Personal lines gross written premiums increased $1.6 million, or 41.5%, to $5.5 million in the third quarter of 2022, as compared to $3.9 million for the same period in 2021. The increased gross written premiums were due to $1.0 million of quarter-over-quarter premium growth in the Company’s low-value dwelling book of business.

Net written premiums decreased $2.4 million, or 9.1%, to $23.7 million for the three months ended September 30, 2022, as compared to $26.1 million for the same period in 2021. The Company entered into new specific loss reinsurance treaties on December 31, 2021 and January 1, 2022, which included a 40% ceding commission. This increased ceded written premiums by $1.7 million in the third quarter of 2022. There was no ceding commission on excess of loss treaties during 2021. Ceded earned premiums also increased due to the new treaties by $2.1 million. The increase in ceded earned premiums was offset by the same increase in ceding commissions, which reduced acquisition costs.

Other Income

Other income consists primarily of fees charged to policyholders by the Company for services outside of the premium charge, such as installment billings and policy issuance costs. Other income also includes the interest income from the $6.0 million promissory note receivable from Venture relating to the Venture Transaction. Commission income is also received by the Company’s insurance agency for writing policies for third-party insurance companies. All of the third-party business was sold to Venture at June 30, 2021. Accordingly, other income from that business will diminish over the next few quarters as it transitions over to Venture, and will ultimately no longer occur. Other income decreased by $149,000, or 19.8%, to $603,000 for the three months ended September 30, 2022, as compared to $752,000 for the same period in 2021.

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, 2022 and 2021 (dollars in thousands).

Three months ended September 30, 2022	Commercial Lines			Personal Lines			Total
Accident year net losses and LAE	$	10,599		$	2,942		$	13,541
Net (favorable) adverse development		2,749			381			3,130
Calendar year net losses and LAE	$	13,348		$	3,323		$	16,671

Accident year loss ratio		50.8	%		70.1	%		54.0	%
Net (favorable) adverse development		13.2	%		9.1	%		12.6	%
Calendar year loss ratio		64.0	%		79.2	%		66.6	%

Three months ended September 30, 2021	Commercial Lines			Personal Lines			Total
Accident year net losses and LAE	$	11,341		$	1,172		$	12,513
Net (favorable) adverse development		3,356			290			3,646
Calendar year net losses and LAE	$	14,697		$	1,462		$	16,159

Accident year loss ratio		51.5	%		39.1	%		50.0	%
Net (favorable) adverse development		15.2	%		9.7	%		14.6	%
Calendar year loss ratio		66.7	%		48.8	%		64.6	%

Net losses and LAE increased by $512,000, or 3.2%, to $16.7 million during the third quarter of 2022, compared to $16.2 million for the same period in 2021. The increase in losses was driven by current accident year losses increasing by $1.8 million during the third quarter of 2022 in the Company’s personal lines, compared to the same period in 2021.

The Company experienced $3.1 million of adverse development for the three months ended September 30, 2022, of which $2.3 million was related to 2019 and prior accident years and $1.8 million was related to the 2021 accident year. This was offset by $958,000 of favorable development experienced in the 2020 accident year. Of the $3.1 million of adverse development, $2.7 million was related to the commercial lines of business, while $381,000 was related to the personal lines of business.

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

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,
	2022			2021
Commercial Lines
Policy acquisition costs		23.8	%		29.3	%
Operating expenses		15.8	%		13.4	%
Total		39.6	%		42.7	%
Personal Lines
Policy acquisition costs		28.9	%		28.0	%
Operating expenses		12.4	%		11.2	%
Total		41.3	%		39.2	%
Total Underwriting
Policy acquisition costs		24.6	%		29.2	%
Operating expenses		15.3	%		13.1	%
Total		39.9	%		42.3	%

Our expense ratio decreased by 2.4 percentage points in the third quarter of 2022 as compared to the same period in 2021. The decrease was largely due to a reduction in policy acquisition costs attributable to $1.7 million of ceding commission from new excess of loss reinsurance treaties. There were no ceding commissions on excess of loss treaties in 2021.

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 ceding commissions from reinsurers. The percentage of policy acquisition costs to net earned premiums and other income decreased by 4.6%, from 29.2% in the third quarter of 2021, to 24.6% for the same period in 2022, mostly due to the new ceding commission mentioned above.

Operating expenses consist primarily of employee compensation, information technology and occupancy costs, such as rent and utilities. Operating expenses as a percent of net earned premiums and other underwriting income increased by 2.2% during the third quarter of 2022 to 15.3%, compared to 13.1% for the same period in 2021. While overall operating expenses were fairly consistent quarter-over-quarter, the new excess of loss reinsurance treaties with the ceding commission drove net earned premiums lower, resulting in a slightly higher operating expense ratio.

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, 2022 and 2021 (dollars in thousands):

Segment Gain (Loss)

	Three Months Ended September 30,
	2022			2021			$ Change
Commercial Lines	$	(749	)	$	(2,084	)	$	1,335
Personal Lines		(861	)		359			(1,220	)
Total Underwriting		(1,610	)		(1,725	)		115
Wholesale Agency		50			(43	)		93
Corporate		(206	)		(139	)		(67	)
Eliminations		46			191			(145	)
Total segment gain (loss)	$	(1,720	)	$	(1,716	)	$	(4	)

Results of Operations For The Nine Months Ended September 30, 2022 and 2021

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

	Nine months ended September 30,
	2022			2021			$ Change			% Change
Gross written premiums	$	103,470		$	99,058		$	4,412			4.5	%

Net written premiums	$	68,980		$	79,084		$	(10,104	)		(12.8	)%

Net earned premiums	$	73,489		$	72,614		$	875			1.2	%
Other income		1,964			1,974			(10	)		(0.5	)%
Losses and loss adjustment expenses, net		56,940			53,447			3,493			6.5	%
Policy acquisition costs		17,419			20,819			(3,400	)		(16.3	)%
Operating expenses		13,010			12,768			242			1.9	%
Underwriting gain (loss)		(11,916	)		(12,446	)		530			4.3	%
Net investment income		1,931			1,549			382			24.7	%
Net realized investment gains (losses)		(1,505	)		3,883			(5,388	)	*
Change in fair value of equity securities		446			(3,234	)		3,680		*
Other gains		60			11,688			(11,628	)	*
Interest expense		2,216			2,154			62			2.9	%
Income (loss) before equity earnings in Affiliate and income taxes		(13,200	)		(714	)		(12,486	)	*
Equity earnings in Affiliate, net of tax		368			612			(244	)	*
Income tax expense		(40	)		191			(231	)	*
Net income (loss)	$	(12,792	)	$	(293	)	$	(12,499	)	*

Book value per common share outstanding	$	1.32		$	4.34

Underwriting Ratios:
Loss ratio (1)		77.2	%		73.3	%
Expense ratio (2)		38.8	%		42.7	%
Combined ratio (3)		116.0	%		116.0	%

(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, 2022 and 2021 (dollars in thousands):

	Nine months ended September 30,
	2022		2021		$ Change			% Change
Gross written premiums
Commercial lines	$	88,297	$	88,017	$	280			0.3	%
Personal lines		15,173		11,041		4,132			37.4	%
Total	$	103,470	$	99,058	$	4,412			4.5	%
Net written premiums
Commercial lines	$	55,456	$	68,685	$	(13,229	)		(19.3	)%
Personal lines		13,524		10,399		3,125			30.1	%
Total	$	68,980	$	79,084	$	(10,104	)		(12.8	)%
Net earned premiums
Commercial lines	$	62,097	$	64,869	$	(2,772	)		(4.3	)%
Personal lines		11,392		7,745		3,647			47.1	%
Total	$	73,489	$	72,614	$	875			1.2	%

Gross written premiums increased $4.4 million, or 4.5%, to $103.5 million for the nine months ended September 30, 2022, as compared to $99.1 million for the same period in 2021.

Commercial lines gross written premiums increased $280,000, or 0.3%, and was $88.3 million for the nine months ended September 30, 2022, as compared to $88.0 million for the same period in 2021.

Personal lines gross written premiums increased $4.1 million, or 37.4%, to $15.2 million for the nine months ended September 30, 2022, as compared to $11.0 million for the same period in 2021. The increased gross written premiums were due to $3.0 million of premium growth in the Company’s low-value dwelling book of business for the nine months ended September 30, 2022 compared to the same period in 2021.

Net written premiums decreased $10.1 million, or 12.8%, to $69.0 million for the nine months ended September 30, 2022, as compared to $79.1 million for the same period in 2021. The Company entered into new specific loss reinsurance treaties on December 31, 2021 and January 1, 2022, which included a 40% ceding commission. This increased ceded written premiums by approximately $8.4 million for the nine months ended September 30, 2022. There was no ceding commission on excess of loss treaties during 2021. Ceded earned premiums also increased due to the new treaties by $6.3 million. The increase in ceded earned premiums was offset by the same increase in ceding commissions, which reduced acquisition costs.

Other Income

Other income consists primarily of fees charged to policyholders by the Company for services outside of the premium charge, such as installment billings and policy issuance costs. Other income also includes the interest income from the $6.0 million promissory note receivable from Venture relating to the Venture Transaction. Commission income is also received by the Company’s insurance agency for writing policies for third-party insurance companies. All of the third-party business was sold to Venture at June 30, 2021. Accordingly, other income from that business will diminish over the next few quarters as it transitions over to Venture, and will ultimately no longer occur. Other income remained consistent and was $2.0 million for the nine months ended September 30, 2022 and September 30, 2021, respectively.

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, 2022 and 2021 (dollars in thousands).

Nine months ended September 30, 2022	Commercial Lines			Personal Lines			Total
Accident year net losses and LAE	$	32,119		$	6,646		$	38,765
Net (favorable) adverse development		17,745			430			18,175
Calendar year net losses and LAE	$	49,864		$	7,076		$	56,940

Accident year loss ratio		51.6	%		58.0	%		52.6	%
Net (favorable) adverse development		28.4	%		3.8	%		24.6	%
Calendar year loss ratio		80.0	%		61.8	%		77.2	%

Nine months ended September 30, 2021	Commercial Lines			Personal Lines			Total
Accident year net losses and LAE	$	33,884		$	3,929		$	37,813
Net (favorable) adverse development		14,708			926			15,634
Calendar year net losses and LAE	$	48,592		$	4,855		$	53,447

Accident year loss ratio		52.1	%		50.0	%		51.9	%
Net (favorable) adverse development		22.6	%		11.8	%		21.4	%
Calendar year loss ratio		74.7	%		61.8	%		73.3	%

Net losses and LAE increased by $3.5 million, or 6.5%, to $56.9 million for the nine months ended September 30, 2022, compared to $53.4 million for the same period in 2021. The increase in losses was driven by adverse development that occurred during the first nine months of 2022. The Company experienced $18.2 million of adverse development for the nine months ended September 30, 2022, as compared to $15.6 million of adverse development for the same period in 2021.

Of the $18.2 million of adverse development experienced in the first nine months of 2022, $14.3 million was related to 2019 and prior accident years, $2.2 million was related to the 2020 accident year, and $1.7 million was related to the 2021 accident year. Substantially all of the $18.2 million of adverse development was related to the Company’s commercial lines of business.

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

Expense Ratio

The table below provides the expense ratio by major component.

	Nine months ended September 30,
	2022			2021
Commercial Lines
Policy acquisition costs		22.0	%		29.4	%
Operating expenses		16.0	%		13.5	%
Total		38.0	%		42.9	%
Personal Lines
Policy acquisition costs		30.8	%		27.7	%
Operating expenses		12.3	%		13.7	%
Total		43.1	%		41.4	%
Total Underwriting
Policy acquisition costs		23.4	%		29.2	%
Operating expenses		15.4	%		13.5	%
Total		38.8	%		42.7	%

Our expense ratio decreased by 3.9 percentage points for the nine months ended September 30, 2022, as compared to the same period in 2021. The decrease was largely due to a reduction in policy acquisition costs attributable to $8.4 million of ceding commission from new excess of loss reinsurance treaties. There were no commissions on excess of loss treaties in 2021. The expense ratio also decreased as a result of a $865,000 increase in underwriting revenue for the nine months ended September 30, 2022, as compared to the same period in 2021, while operating expenses were slightly higher in 2022.

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. The percentage of policy acquisition costs to net earned premiums and other income decreased by 5.8%, from 29.2% in the first nine months of 2021, to 23.4% for the same period in 2022, mostly due to the new ceding commission mentioned above.

Operating expenses consist primarily of employee compensation, information technology and occupancy costs, such as rent and utilities. Operating expenses as a percent of net earned premiums and other underwriting income increased by 1.9% to 15.4% for the nine months ended September 30, 2022, as compared to 13.5% for the same period in 2021. The new excess of loss reinsurance treaties with the ceding commission drove net earned premiums lower, resulting in a slightly higher operating expense ratio.

The personal lines operating expense ratio was lower for the nine months ended September 30, 2022 due to significant growth in premium volume on substantially the same operating expense base.

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, 2022 and 2021 (dollars in thousands):

Segment Gain (Loss)

	Nine months ended September 30,
	2022			2021			$ Change
Commercial Lines	$	(11,255	)	$	(11,428	)	$	173
Personal Lines		(561	)		(251	)		(310	)
Total Underwriting		(11,816	)		(11,679	)		(137	)
Wholesale Agency		132			(275	)		407
Corporate		(421	)		(652	)		231
Eliminations		189			160			29
Total segment gain (loss)	$	(11,916	)	$	(12,446	)	$	530

Liquidity and Capital Resources

Sources and Uses of Funds

At September 30, 2022, we had $66.0 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.

Management plans to issue new public debt that will provide sufficient cash flow to pay off the senior unsecured notes that are coming due within the next twelve months. We believe it is probable that we will be able to issue new public debt and repay the senior unsecured notes by September 30, 2023. We believe that our existing cash, cash equivalents, short-term investments and investment securities balances will be adequate to meet our operating liquidity needs and the needs of our subsidiaries on a short-term and long-term basis. With the expected execution of the senior debt refinancing, we believe we can meet our capital needs as well over the next twelve months.

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, 2022 and 2021.

The FHLB of Indianapolis loan matures on January 9, 2023. It is 100% collateralized with high quality readily marketable securities and cash. Management plans to repay this debt by year end with existing cash and investments. However, we also believe the FHLB of Indianapolis would refinance this debt if we chose to keep it for a longer period, due to the very low risk associated with a fully collateralized loan.

Cash Flows

Operating Activities. Cash used in operating activities for the nine months ended September 30, 2022 was $14.1 million compared to $2.0 million for the same period in 2021. The $12.1 million increase was primarily due to a $16.7 million increase in ceded premiums paid during the nine months ended September 30, 2022, compared to the same period in 2021. This was due to the new specific commercial liability treaty the Company entered into as of December 31, 2021, which includes a 40% ceding commission. The increase in ceded premiums paid was offset by a $6.7 million decrease in acquisition costs paid for the nine months ended September 30, 2022, compared to the same period in 2021. This decrease was also related to the new specific commercial liability treaty the Company entered into on December 31, 2021. There was also an $8.1 million increase in paid losses as the Company has accelerated closing outstanding claims.

Investing Activities. Cash provided by investing activities for the nine months ended September 30, 2022 was $20.1 million, compared to $5.3 million in the same period in 2021. The $14.8 million increase of cash provided by investing activities was driven by a $101.5 million increase in the sales of investment during the first nine months of 2022, compared to the same period in 2021. This was offset by an increase of $85.1 million increase in the purchases of investment for the nine months ended September 30, 2022, compared to the same period in 2021.

Financing Activities. Cash provided by financing activities for the nine months ended September 30, 2022 was $19.5 million compared to $4.0 million of cash used in the same period in 2021. The $23.5 million increase was driven by the Company borrowing an additional $14.5 million related to the FHLB of Indianapolis loan during the third quarter of 2022. The Company also raised $5.0 million through the issuance of additional common stock on August 8, 2022.

Statutory Capital and Surplus

Our Insurance Company Subsidiaries are required to file quarterly and annual financial reports with state insurance regulators. These financial reports are prepared using statutory accounting practices promulgated by the Insurance Company Subsidiaries’ state of domiciliary, rather than GAAP. The Insurance Company Subsidiaries’ aggregate statutory capital and surplus (which is a statutory measure of equity) was $58.9 million and $63.9 million at September 30, 2022 and December 31, 2021, respectively.

Non-GAAP Financial Measures

Adjusted Operating Income and Adjusted Operating Income Per Share

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

	Three Months Ended September 30,						Nine months ended September 30,
	2022			2021			2022			2021
Net income (loss)	$	(1,523	)	$	(1,209	)	$	(12,792	)	$	(293	)
Exclude:
Net realized investment gains (losses), net of tax		—			(101	)		(1,505	)		3,883
Other gains (losses), net of tax		66			2,778			60			11,688
Change in fair value of equity securities, net of tax		(151	)		(2,169	)		446			(3,234	)
Adjusted operating income (loss)	$	(1,438	)	$	(1,717	)	$	(11,793	)	$	(12,630	)

Weighted average common shares diluted		11,101,194			9,692,150			10,178,975			9,686,874
Diluted income (loss) per common share:
Net income (loss)	$	(0.14	)	$	(0.12	)	$	(1.26	)	$	(0.03	)
Exclude:
Net realized investment gains (losses), net of tax		—			(0.01	)		(0.15	)		0.40
Other gains (losses), net of tax		—			0.29			0.01			1.20
Change in fair value of equity securities, net of tax		(0.01	)		(0.22	)		0.04			(0.33	)
Adjusted operating income (loss) per share	$	(0.13	)	$	(0.18	)	$	(1.16	)	$	(1.30	)

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

Recently Issued Accounting Pronouncements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in market rates and prices such as interest rates, other relevant market rates or price changes. The volatility and liquidity in the markets in which the underlying assets are traded directly influence market risk. The following is a discussion of our primary market risk exposures and how those exposures are currently managed as of September 30, 2022. 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, 2022, the fair value of our investment portfolio, excluding cash and cash equivalents, was $143.7 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, 2022 and December 31, 2021 was 3.4 and 3.6 years, respectively.

The table below illustrates the sensitivity of the fair value of our debt investments, classified as debt securities and short-term investments, to selected hypothetical changes in interest rates as of September 30, 2022. 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, 2022	Fair Value		Fair Value			Fair Value			Equity
200 basis point increase	$	133,395	$	(9,014	)		(6.33	)%		(55.77	)%
100 basis point increase		137,724		(4,685	)		(3.29	)%		(28.98	)%
No change		142,409		—			—			—
100 basis point decrease		147,479		5,070			3.56	%		31.36	%
200 basis point decrease		152,919		10,510			7.38	%		65.02	%

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, 2022, the net amount due to the Company from reinsurers, including prepaid reinsurance premiums, was $62.9 million. We believe all amounts recorded as due from reinsurers are recoverable.

Effects of Inflation

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

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company’s management, including its Co-Chief Executive Officers 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, 2022. Based on such evaluations, the Co-Chief Executive Officers 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 Co-Company’s Chief Executive Officers 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, 2022, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect the Company's internal control over financial reporting.

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, 2022, which is hereby incorporated by reference.

ITEM 1A. RISK FACTORS

There were no material changes to the risk factors disclosed in our Annual Report on Form 10-K (“Item 1A Risk Factors”) filed with the SEC on March 10, 2022.

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

On May 9, 2022, the Company’s Board of Directors authorized a subscription agreement for a private placement stock purchase offering wherein the Company was authorized to sell a maximum of $5.0 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. 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 2,500,000 shares at a price of $2.00 per share on August 10, 2022. The Company's common stock closing market price on the Nasdaq Stock Market on August 9, 2022, was $1.51 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.

ITEM 6. EXHIBITS

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	Period Ending	Exhibit / Appendix Number	Filing Date

31.1	Section 302 Certification — Co-CEO

31.2	Section 302 Certification — Co-CEO

31.3	Section 302 Certification — CFO

32.1*	Section 906 Certification — Co-CEO

32.2*	Section 906 Certification — Co-CEO

32.3*	Section 906 Certification — CFO

101.INS	inline XBRL Instance Document

101.SCH	inline XBRL Taxonomy Extension Schema Document

101.CAL	inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF	inline XBRL Taxonomy Extension Definition Linkbase

101.LAB	inline XBRL Taxonomy Extension Label Linkbase

101.PRE	inline XBRL Taxonomy Extension Presentation Linkbase

104	Cover Page Interactive Date File (embedded within the Inline XBRL document)

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

SIGNATURES

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

	CONIFER HOLDINGS, INC.

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

Dated: November 9, 2022