(C) ProPublica.
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cnfr-10q_20210630.htm
Author Name, ProPublica
2021-10
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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
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-37536
Conifer Holdings, Inc.
(Exact name of registrant as specified in its charter)
Michigan 27-1298795 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 550 West Merrill Street , Suite 200 Birmingham , Michigan 48009 (Address of principal executive offices) (Zip code)
( 248 ) 559-0840
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock, no par value CNFR The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☑ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The number of outstanding shares of the registrant’s common stock, no par value, as of August 11, 2021, was 9,689,421 .
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Form 10-Q
INDEX
2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
(dollars in thousands)
June 30, 2021 December 31, 2020 (Unaudited) Assets Investment securities: Debt securities, at fair value (amortized cost of $ 148,699 and $ 149,954 , respectively) $ 149,188 $ 151,999 Equity securities, at fair value (cost of $ 20,080 and $ 16,912 , respectively) 19,994 17,891 Short-term investments, at fair value 11,435 13,317 Total investments 180,617 183,207 Cash and cash equivalents 4,668 8,193 Premiums and agents' balances receivable, net 22,887 20,162 Receivable from Affiliate 9,002 8 Reinsurance recoverables on unpaid losses 22,824 24,218 Reinsurance recoverables on paid losses 3,269 2,138 Prepaid reinsurance premiums 4,964 1,316 Deferred policy acquisition costs 13,121 12,243 Other assets 8,383 10,112 Total assets $ 269,735 $ 261,597 Liabilities and Shareholders' Equity Liabilities: Unpaid losses and loss adjustment expenses $ 117,852 $ 111,270 Unearned premiums 63,103 56,224 Debt 37,153 40,997 Accounts payable and accrued expenses 7,743 8,693 Total liabilities 225,851 217,184 Commitments and contingencies — — Shareholders' equity: Common stock, no par value ( 100,000,000 shares authorized; 9,689,421 and 9,681,728 issued and outstanding, respectively) 92,612 92,486 Accumulated deficit ( 48,069 ) ( 48,985 ) Accumulated other comprehensive income (loss) ( 659 ) 912 Total shareholders' equity 43,884 44,413 Total liabilities and shareholders' equity $ 269,735 $ 261,597
The accompanying notes are an integral part of the Consolidated Financial Statements.
3
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
(dollars in thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Revenue and Other Income Premiums Gross earned premiums $ 30,228 25,959 $ 58,475 $ 52,012 Ceded earned premiums ( 5,390 ) ( 4,201 ) ( 10,802 ) ( 8,237 ) Net earned premiums 24,838 21,758 47,673 43,775 Net investment income 503 863 1,035 1,817 Net realized investment gains 1,060 245 3,984 1,173 Change in fair value of equity securities ( 525 ) 1,576 ( 1,065 ) ( 1,510 ) Other gains 8,910 145 8,910 260 Other income 666 713 1,222 1,371 Total revenue and other income 35,452 25,300 61,759 46,886 Expenses Losses and loss adjustment expenses, net 17,926 11,945 37,288 26,214 Policy acquisition costs 6,896 6,395 13,646 12,698 Operating expenses 4,342 4,859 8,691 9,904 Interest expense 732 731 1,453 1,462 Total expenses 29,896 23,930 61,078 50,278 Income (loss) before equity earnings in Affiliate and income taxes 5,556 1,370 681 ( 3,392 ) Equity earnings in Affiliate, net of tax 180 179 428 229 Income tax expense 184 44 193 57 Net income (loss) $ 5,552 $ 1,505 $ 916 $ ( 3,220 ) Earnings (loss) per common share, basic and diluted $ 0.57 $ 0.16 $ 0.09 $ ( 0.34 ) Weighted average common shares outstanding, basic and diluted 9,686,631 9,595,668 9,684,193 9,594,221
The accompanying notes are an integral part of the Consolidated Financial Statements.
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CONIFER HOLDINGS, INC. AND SUBSIDIARIES
(dollars in thousands)
Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Net income (loss) $ 5,552 $ 1,505 $ 916 $ ( 3,220 ) Other comprehensive income (loss), net of tax: Unrealized investment gains (losses): Unrealized investment gains (losses) during the period 394 5,017 ( 1,530 ) 3,702 Income tax (benefit) expense — — — — Unrealized investment gains (losses), net of tax 394 5,017 ( 1,530 ) 3,702 Less: reclassification adjustments to: Net realized investment gains (losses) included in net income (loss) ( 902 ) 2 41 386 Income tax (benefit) expense — — — — Total reclassifications included in net income (loss), net of tax ( 902 ) 2 41 386 Other comprehensive income (loss) 1,296 5,015 ( 1,571 ) 3,316 Total comprehensive income (loss) $ 6,848 $ 6,520 $ ( 655 ) $ 96
The accompanying notes are an integral part of the Consolidated Financial Statements.
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CONIFER HOLDINGS, INC. AND SUBSIDIARIES
(dollars in thousands)
No Par, Common Stock Accumulated Accumulated Other Comprehensive Total Shareholders' Shares Amount Deficit Income (Loss) Equity Balances at March 31, 2021 9,681,728 $ 92,552 $ ( 53,621 ) $ ( 1,955 ) $ 36,976 Net income (loss) — — 5,552 — 5,552 Repurchase of common stock ( 2,307 ) ( 7 ) — — ( 7 ) Stock-based compensation expense 10,000 67 — — 67 Other comprehensive income (loss) — — — 1,296 1,296 Balances at June 30, 2021 9,689,421 $ 92,612 $ ( 48,069 ) $ ( 659 ) $ 43,884 Balances at March 31, 2020 9,592,161 $ 92,053 $ ( 54,305 ) $ ( 1,210 ) $ 36,538 Net income (loss) — — 1,505 — 1,505 Repurchase of common stock ( 4,006 ) ( 14 ) — — ( 14 ) Restricted stock unit expense 10,000 236 — — 236 Other comprehensive income (loss) — — — 5,015 5,015 Balances at June 30, 2020 9,598,155 $ 92,275 $ ( 52,800 ) $ 3,805 $ 43,280
No Par, Common Stock Accumulated Accumulated Other Comprehensive Total Shareholders' Shares Amount Deficit Income (Loss) Equity Balances at December 31, 2020 9,681,728 $ 92,486 $ ( 48,985 ) $ 912 $ 44,413 Net income (loss) — — 916 — 916 Repurchase of common stock ( 2,307 ) ( 7 ) — — ( 7 ) Stock-based compensation expense 10,000 133 — — 133 Other comprehensive income (loss) — — — ( 1,571 ) ( 1,571 ) Balances at June 30, 2021 9,689,421 92,612 ( 48,069 ) ( 659 ) 43,884 Balances at December 31, 2019 9,592,861 $ 91,816 $ ( 49,580 ) $ 489 $ 42,725 Net income (loss) — — ( 3,220 ) — ( 3,220 ) Repurchase of common stock ( 4,706 ) ( 16 ) — — ( 16 ) Restricted stock unit expense, net 10,000 475 — — 475 Other comprehensive income (loss) — — — 3,316 3,316 Balances at June 30, 2020 9,598,155 92,275 ( 52,800 ) 3,805 43,280
The accompanying notes are an integral part of the Consolidated Financial Statements.
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CONIFER HOLDINGS, INC. AND SUBSIDIARIES
(dollars in thousands)
Six Months Ended June 30, 2021 2020 Cash Flows From Operating Activities Net income (loss) 916 $ ( 3,220 ) 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 217 255 Amortization of bond premium and discount, net 255 301 Net realized investment (gains) losses ( 3,984 ) ( 1,173 ) Change in fair value of equity securities 1,065 1,510 Stock-based compensation expenses 133 475 Equity earnings in Affiliate, net of tax ( 428 ) ( 229 ) Other 17 — Changes in operating assets and liabilities: (Increase) decrease in: Premiums and agents' balances and other receivables ( 2,719 ) ( 2,075 ) Reinsurance recoverables 263 1,379 Prepaid reinsurance premiums ( 3,648 ) ( 2,944 ) Deferred policy acquisition costs ( 878 ) 213 Other assets 344 ( 202 ) Increase (decrease) in: Unpaid losses and loss adjustment expenses 6,582 ( 512 ) Unearned premiums 6,879 617 Accounts payable and other liabilities ( 564 ) 1,004 Net cash provided by (used in) operating activities ( 4,460 ) ( 4,601 ) Cash Flows From Investing Activities Purchase of investments ( 112,849 ) ( 160,445 ) Proceeds from maturities and redemptions of investments 11,793 10,476 Proceeds from sales of investments 104,118 149,156 Proceeds from sale of agency business 1,000 — Dividends from Affiliate 900 — Purchases of property and equipment ( 20 ) ( 48 ) Net cash provided by (used in) investing activities 4,942 ( 861 ) Cash Flows From Financing Activities Repurchase of common stock ( 7 ) ( 16 ) Repurchase of senior unsecured notes — ( 919 ) Borrowings under debt arrangements 3,000 3,745 Repayment of borrowings under debt arrangements ( 7,000 ) — Net cash provided by (used in) financing activities ( 4,007 ) 2,810 Net increase (decrease) in cash ( 3,525 ) ( 2,652 ) Cash at beginning of period 8,193 7,464 Cash at end of period $ 4,668 $ 4,812 Supplemental Disclosure of Cash Flow Information: Interest paid $ 1,450 $ 535 Note receivable from sale of agency business 9,000 — Payable from purchase of agency 1,051 —
The accompanying notes are an integral part of the Consolidated Financial Statements.
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CONIFER HOLDINGS, INC. AND SUBSIDIARIES
1. Summary of Significant Accounting Policies Basis of Presentation and Management Representation The consolidated financial statements include accounts, after elimination of intercompany accounts and transactions, of Conifer Holdings, Inc. (the “Company” or “Conifer”), its wholly owned subsidiaries, Conifer Insurance Company ("CIC"), White Pine Insurance Company ("WPIC"), Red Cedar Insurance Company ("RCIC"), and Sycamore Insurance Agency, Inc. ("Sycamore"). CIC, WPIC, and RCIC are collectively referred to as the "Insurance Company Subsidiaries." On a stand-alone basis, Conifer Holdings, Inc. is referred to as the "Parent Company." Sycamore owns a 50 % non-controlling interest in Venture Holdings, Inc. (“Venture” or “Affiliate”). The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which differ from statutory accounting practices prescribed or permitted for insurance companies by regulatory authorities. The Company has applied the rules and regulations of the United States Securities and Exchange Commission (“SEC”) regarding interim financial reporting and therefore the consolidated financial statements do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of management, all adjustments, consisting of items of a normal recurring nature, necessary for a fair presentation of the consolidated interim financial statements, have been included. These consolidated financial statements and the notes thereto should be read in conjunction with the Company's audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC. The results of operations for the six months ended June 30, 2021, are not necessarily indicative of the results expected for the year ended December 31, 2021. In addition, there are risks and uncertainties associated with the novel coronavirus ("COVID-19") and the impact it may have on our business, results of operations and financial condition. The COVID-19 pandemic has negatively impacted the U.S. and global economies, created significant volatility and disruption in the capital markets, dramatically increased unemployment levels and has fueled concerns that it has led to a global recession. Depending on the duration and severity of the pandemic, we foresee the potential for adverse impacts related to, among other things: (i) sales results; (ii) insurance product margin; (iii) net investment income; (iv) invested assets; (v) regulatory capital; (vi) liabilities for insurance products; (vii) access to capital markets; and (viii) the present value of future profits. The full extent to which COVID-19 will impact our business, results of operations and financial condition remains uncertain. Business The Company is engaged in the sale of property and casualty insurance products and has organized its principal operations into three types of insurance businesses: commercial lines, personal lines, and agency business. The Company underwrites a variety of specialty insurance products, including property, general liability, liquor liability, automobile, and homeowners and dwelling policies. The Company markets and sells its insurance products through a network of independent agents, including managing general agents, whereby policies are written in all 50 states in the United States of America (“U.S.”). The Company’s corporate headquarters are located in Birmingham, Michigan with additional office facilities in Florida, Michigan and Pennsylvania. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes the amounts included in the consolidated financial statements reflect management's best estimates and assumptions, actual results may differ from these estimates. Cash, Cash Equivalents, and Short-term Investments Cash consists of cash deposits in banks, generally in operating accounts. Cash equivalents consist of money-market funds that are specifically used as overnight investments tied to cash deposit accounts. Short-term investments, consisting of money-market funds, are classified as investments in the consolidated balance sheets as they relate to the Company’s investment activities.
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Recently Issued Accounting Guidance In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which amends the current methodology and timing for recognizing credit losses. This amendment will replace the current GAAP "incurred loss" methodology for credit losses with a methodology based on expected credit losses. The new guidance will also require expanded consideration of a broader range of reasonable and increased supportable information for the credit loss estimates. This ASU is effective for annual and interim reporting periods beginning after December 15, 2022. Management is currently evaluating the impact of the guidance. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides optional expedients and exceptions that are intended to ease the burden of updating contracts to contain a new reference rate due to the discontinuation of the London Inter-Bank Offered Rate (LIBOR). This guidance is available immediately and may be implemented in any period prior to the guidance expiration on December 31, 2022. Management does not expect the new guidance to have a material impact on the Company’s consolidated financial statements.
2. Sale of Certain Agency Business On June 30, 2021, Sycamore Insurance Agency sold to Venture Holdings, Inc. the customer accounts and other related assets of some of its personal and commercial lines of business. The customer accounts consist substantially of new and renewal rights and customer lists of the agency. Sycamore will continue to produce various personal and commercial lines that it did not sell to Venture, which is substantially all produced for, and underwritten by, the Insurance Company Subsidiaries. The Company recognized an $ 8.9 million gain on the sale which is reflected in Other Gains on the Consolidated Statements of Operations. The purchase price was $ 10.0 million of which $ 1.0 million was paid in cash on June 30, 2021, and $ 9.0 million was in the form of two promissory notes (one for $ 6.0 million and one for $ 3.0 million). Both notes require interest-only quarterly payments at a per annum rate of 7.0 %, with a five-year maturity. There are no prepayment penalties. The assets sold included the customer accounts of substantially all of the personal lines business and a small subset of the commercial lines business underwritten by the Insurance Company Subsidiaries, and all of the customer accounts Sycamore produced for third-party insurers. The transaction included the transition of 21 employees from Conifer to Venture as well as necessary systems and office functions to operate the business. Venture is not assuming any in-force business or liabilities.
3. 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 June 30, 2021 and December 31, 2020, were as follows (dollars in thousands): June 30, 2021 Cost or Gross Unrealized Estimated Amortized Cost Gains Losses Fair Value Debt Securities: U.S. Government $ 21,936 $ 148 $ ( 27 ) $ 22,057 State and local government 31,467 778 ( 74 ) 32,171 Corporate debt 19,989 162 ( 208 ) 19,943 Asset-backed securities 31,691 28 ( 92 ) 31,627 Mortgage-backed securities 34,811 145 ( 499 ) 34,457 Commercial mortgage-backed securities 1,844 62 — 1,906 Collateralized mortgage obligations 6,961 90 ( 24 ) 7,027 Total debt securities available for sale $ 148,699 $ 1,413 $ ( 924 ) $ 149,188
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December 31, 2020 Cost or Gross Unrealized Estimated Amortized Cost Gains Losses Fair Value Debt Securities: U.S. Government $ 30,743 $ 225 $ ( 1 ) $ 30,967 State and local government 32,253 1,040 ( 28 ) 33,265 Corporate debt 19,015 311 ( 23 ) 19,303 Asset-backed securities 20,987 49 ( 73 ) 20,963 Mortgage-backed securities 38,512 345 ( 3 ) 38,854 Commercial mortgage-backed securities 2,083 65 ( 22 ) 2,126 Collateralized mortgage obligations 6,361 161 ( 1 ) 6,521 Total debt securities available for sale $ 149,954 $ 2,196 $ ( 151 ) $ 151,999 The following table summarizes the aggregate fair value and gross unrealized losses, by security type, of the available-for-sale securities in unrealized loss positions. The table segregates the holdings based on the length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands): June 30, 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 5 $ 10,610 $ ( 27 ) — $ — $ — 5 $ 10,610 $ ( 27 ) State and local government 35 6,081 ( 74 ) — — — 35 6,081 ( 74 ) Corporate debt 17 10,853 ( 208 ) — — — 17 10,853 ( 208 ) Asset-backed securities 13 16,064 ( 89 ) 5 3,906 ( 3 ) 18 19,970 ( 92 ) Mortgage-backed securities 8 28,500 ( 499 ) — — — 8 28,500 ( 499 ) Commercial mortgage-backed securities — — — — — — — — — Collateralized mortgage obligations 8 2,473 ( 23 ) 1 51 ( 1 ) 9 2,524 ( 24 ) Total debt securities available for sale 86 $ 74,581 $ ( 920 ) 6 $ 3,957 $ ( 4 ) 92 $ 78,538 $ ( 924 )
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December 31, 2020 Less than 12 months Greater than 12 months Total No. of Issues Fair Value of Investments with Unrealized Losses Gross Unrealized Losses No. of Issues Fair Value of Investments with Unrealized Losses Gross Unrealized Losses No. of Issues Fair Value of Investments with Unrealized Losses Gross Unrealized Losses Debt Securities: U.S. Government 2 $ 6,764 $ ( 1 ) — $ — $ — 2 $ 6,764 $ ( 1 ) State and local government 16 3,905 ( 28 ) — — — 16 3,905 ( 28 ) Corporate debt 2 1,051 ( 23 ) — — — 2 1,051 ( 23 ) Asset-backed securities 7 6,050 ( 34 ) 11 6,551 ( 39 ) 18 12,601 ( 73 ) Mortgage-backed securities 2 1,652 ( 3 ) — — — 2 1,652 ( 3 ) Commercial mortgage-backed securities 1 899 ( 22 ) — — — 1 899 ( 22 ) Collateralized mortgage obligations 2 195 ( 1 ) — — — 2 195 ( 1 ) Total debt securities available for sale 32 $ 20,516 $ ( 112 ) 11 $ 6,551 $ ( 39 ) 43 $ 27,067 $ ( 151 ) The Company analyzed its investment portfolio in accordance with its other-than-temporary impairment ("OTTI") review procedures and determined the Company did not need to record a credit-related OTTI loss in net income, nor recognize a non-credit related OTTI loss in other comprehensive income for the three and six months ended June 30, 2021 and 2020. The Company’s sources of net investment income and losses are as follows (dollars in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Debt securities $ 554 $ 929 $ 1,154 $ 1,796 Equity securities 55 53 103 108 Cash, cash equivalents and short-term investments — 24 1 143 Total investment income 609 1,006 1,258 2,047 Investment expenses ( 106 ) ( 143 ) ( 223 ) ( 230 ) Net investment income $ 503 $ 863 $ 1,035 $ 1,817 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 Debt securities: Gross realized gains $ — $ — $ 27 $ 720 Gross realized losses — — ( 6 ) ( 4 ) Total debt securities — — 21 716 Equity securities: Gross realized gains 1,105 604 4,008 948 Gross realized losses ( 45 ) ( 359 ) ( 45 ) ( 491 ) Total equity securities 1,060 245 3,963 457 Total net realized investment gains (losses) $ 1,060 $ 245 $ 3,984 $ 1,173 Proceeds from the sales of available-for-sale debt securities were $ 20.0 million and $ 23.9 million for the six months ended June 30, 2021 and 2020, respectively. There were no gross realized gains or losses from the sales of available-for-sale securities for the three months ended June 30, 2021. The gross realized gains and losses from the sales of available-for-sale debt securities for the six months ended June 30, 2021, were $ 27,000 and $ 6,000 , respectively. The gross realized gains and losses from the sales of available-for-sale debt securities for the three months ended June 30, 2020 were $ 3,000 and $ 0 ,
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respectively. The gross realized gains and losses from the sales of available-for-sale debt securities for the six months ended June 30, 2020, were $ 722,000 and $ 0 , respectively. As of June 30, 2021 and 2020, there were $ 249,000 and $ 125,000 of payables from securities purchased, respectively. There were $ 11,000 and $ 17,000 of receivables from securities sold as of June 30, 2021, and 2020, respectively. The Company carries other equity investments that do not have a readily determinable fair value at cost, less impairment or observable changes in price. We review these investments for impairment during each reporting period. There were no impairments or observable changes in price recorded during 2021 related to the Company's equity securities without readily determinable fair value. These investments are included in Other Assets in the Consolidated Balance Sheets and amounted to $ 1.2 million as of June 30, 2021 and December 31, 2020. At June 30, 2021 and December 31, 2020, the Insurance Company Subsidiaries had $ 9.7 million and $ 8.8 million, respectively, on deposit in trust accounts to meet the deposit requirements of various state insurance departments. At June 30, 2021 and December 31, 2020, the Company had $ 65.7 million and $ 67.6 million, respectively, held in trust accounts to meet collateral requirements with other third-party insurers, relating to various fronting arrangements. There are withdrawal and other restrictions on these deposits, including the type of investments that may be held, however, the Company may generally invest in high-grade bonds and short-term investments and earn interest on the funds.
4. Fair Value Measurements The Company’s financial instruments include assets and liabilities carried at fair value, as well as assets and liabilities carried at cost or amortized cost but disclosed at fair value in these consolidated financial statements. Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principally most advantageous market for the asset or liability in an orderly transaction between market participants. In determining fair value, the Company applies the market approach, which uses prices and other relevant data based on market transactions involving identical or comparable assets and liabilities. The inputs to valuation techniques used to measure fair value are prioritized into a three-level hierarchy. The hierarchy gives the highest priority to quoted prices from sources independent of the reporting entity (“observable inputs”) and the lowest priority to prices determined by the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”). The fair value hierarchy is as follows: Level 1—Valuations that are based on quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2—Valuations that are based on observable inputs (other than Level 1 prices) such as quoted prices for similar assets or liabilities at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability. The Level 2 financial instruments also include our line of credit and our Paycheck Protection Program loan. Level 3—Unobservable inputs that are supported by little or no market activity. The unobservable inputs represent the Company’s best assumption of how market participants would price the assets or liabilities. Net Asset Value (NAV)—The fair values of investment company limited partnership investments are based on the capital account balances reported by the investment funds subject to their management review and adjustment. These capital account balances reflect the fair value of the investment funds.
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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 June 30, 2021 and December 31, 2020 (dollars in thousands): June 30, 2021 Fair Value Measurements Total Level 1 Level 2 Level 3 Assets: Debt Securities: U.S. Government $ 22,057 $ — $ 22,057 $ — State and local government 32,171 — 32,171 — Corporate debt 19,943 — 19,943 — Asset-backed securities 31,627 — 31,627 — Mortgage-backed securities 34,457 — 34,457 — Commercial mortgage-backed securities 1,906 — 1,906 — Collateralized mortgage obligations 7,027 — 7,027 — Total debt securities 149,188 — 149,188 — Equity Securities 19,314 19,031 283 — Short-term investments 11,435 11,435 — — Total marketable investments measured at fair value $ 179,937 $ 30,466 $ 149,471 $ — Investments measured at NAV: Investment in limited partnership 680 Total assets measured at fair value $ 180,617 Liabilities: Senior Unsecured Notes * $ 24,283 $ — $ 24,283 $ — Subordinated Notes * 11,604 — — 11,604 Line of credit * 1,000 — 1,000 — Paycheck Protection Program loan * 2,745 — 2,745 — Total Liabilities measured at fair value $ 39,632 $ — $ 28,028 $ 11,604 * Carried at face value of debt net of unamortized debt issuance costs on the consolidated balance sheets
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December 31, 2020 Fair Value Measurements Total Level 1 Level 2 Level 3 Assets: Debt Securities: U.S. Government $ 30,967 $ — $ 30,967 $ — State and local government 33,265 — 33,265 — Corporate debt 19,303 — 19,303 — Asset-backed securities 20,963 — 20,963 — Mortgage-backed securities 38,854 — 38,854 — Commercial mortgage-backed securities 2,126 — 2,126 — Collateralized mortgage obligations 6,521 — 6,521 — Total debt securities 151,999 — 151,999 — Equity securities 17,336 17,053 283 — Short-term investments 13,317 13,317 — — Total marketable investments measured at fair value $ 182,652 $ 30,370 $ 152,282 $ — Investments measured at NAV: Investment in limited partnership 555 Total assets measured at fair value $ 183,207 Liabilities: Senior Unsecured Notes * $ 20,675 $ — $ 20,675 $ — Subordinated Notes * 11,616 — — 11,616 Line of Credit * 5,000 — 5,000 — Paycheck Protection Program loan * 2,745 — 2,745 — Total Liabilities measured at fair value $ 40,036 $ — $ 28,420 $ 11,616 * Carried at face value of debt net of unamortized debt issuance costs on the consolidated balance sheets Level 1 investments consist of equity securities traded in an active exchange market. The Company uses unadjusted quoted prices for identical instruments to measure fair value. Level 1 also includes money market funds and other interest-bearing deposits at banks, which are reported as short-term investments. The fair value measurements that were based on Level 1 inputs comprise 16.9 % of the fair value of the total investment portfolio as of June 30, 2021. Level 2 investments include debt securities, which consist of U.S. government agency securities, state and local municipal bonds (including those held as restricted securities), corporate debt securities, mortgage-backed and asset-backed securities. The fair value of securities included in the Level 2 category were based on the market values obtained from a third party pricing service that were evaluated using pricing models that vary by asset class and incorporate available trade, bid and other observable market information. The third party pricing service monitors market indicators, as well as industry and economic events. The fair value measurements that were based on Level 2 inputs comprise 82.8 % of the fair value of the total investment portfolio as of June 30, 2021. The Company obtains pricing for each security from independent pricing services, investment managers or consultants to assist in determining fair value for its Level 2 investments. To validate that these quoted prices are reasonable estimates of fair value, the Company performs various quantitative and qualitative procedures, such as (i) evaluation of the underlying methodologies, (ii) analysis of recent sales activity, (iii) analytical review of our fair values against current market prices and (iv) comparison of the pricing services’ fair value to other pricing services’ fair value for the same investment. No markets for the investments were determined to be inactive at period-ends. Based on these procedures, the Company did not adjust the prices or quotes provided from independent pricing services, investment managers or consultants. The Level 2 financial instruments also include the Company's senior debt. The fair value of the borrowings under the senior revolving credit facility approximates its carrying amount because interest is based on a short-term, variable, market-based rate. As of June 30, 2021 and December 31, 2020, Level 3 is entirely comprised of the Company's subordinated debt. In determining the fair value of the subordinated debt outstanding at June 30, 2021 and December 31, 2020, the security attributes (issue date, maturity, coupon, calls, etc.) and market rates on September 24, 2018 (the date of the restated and amended agreement which was repriced at that time) were entered into a valuation model. A lognormal trinomial interest rate lattice was
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created within the model to compute the option adjusted spread (“OAS”) which is the amount, in basis points, of interest rate required to be paid under the debt agreement over the risk-free U.S. Treasury rates. The OAS was then fed back into the model along with the June 30, 2021 and December 31, 2020 U.S. Treasury rates. A new lattice was generated and the fair value was computed from the OAS. There were no changes in assumptions of credit risk from the issuance date.
5. 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 six months ended June 30, 2021 and 2020. The activity in deferred policy acquisition costs, net of reinsurance transactions, is as follows (dollars in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Balance at beginning of period $ 12,459 $ 11,508 $ 12,243 $ 11,906 Deferred policy acquisition costs 7,558 6,580 14,524 12,485 Amortization of policy acquisition costs ( 6,896 ) ( 6,395 ) ( 13,646 ) ( 12,698 ) Net change 662 185 878 ( 213 ) Balance at end of period $ 13,121 $ 11,693 $ 13,121 $ 11,693
6. 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.
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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 June 30, Six months ended June 30, 2021 2020 2021 2020 Gross reserves - beginning of period $ 118,676 $ 109,657 $ 111,270 $ 107,246 Less: reinsurance recoverables on unpaid losses ( 26,559 ) ( 22,022 ) ( 24,218 ) ( 22,579 ) Net reserves - beginning of period 92,117 87,635 87,052 84,667 Add: incurred losses and LAE, net of reinsurance: Current period 11,716 8,908 25,300 19,428 Prior period 6,210 3,037 11,988 6,786 Total net incurred losses and LAE 17,926 11,945 37,288 26,214 Deduct: loss and LAE payments, net of reinsurance: Current period 5,120 3,044 8,300 3,918 Prior period 9,895 10,694 21,012 21,121 Total net loss and LAE payments 15,015 13,738 29,312 25,039 Net reserves - end of period 95,028 85,842 95,028 85,842 Plus: reinsurance recoverables on unpaid losses 22,824 20,892 22,824 20,892 Gross reserves - end of period $ 117,852 $ 106,734 $ 117,852 $ 106,734 Net losses and LAE increased by $ 6.0 million, or 50.1 %, to $ 17.9 million during the second quarter of 2021, compared to $ 11.9 million for the same period in 2020. The increase in losses was driven by adverse development that occurred during the second quarter of 2021. The Company experienced $ 6.2 million of adverse development for the three months ended June 30, 2021. Of the $6.2 million in adverse development, $ 1.9 million was related to 2017 and prior accident years, $ 2.4 million was related to the 2018 accident year, and $ 1.9 million was related to the 2019 and 2020 accident years. Substantially all of the development was from the Company’s commercial lines of business. Net losses and LAE increased by $ 11.1 million, or 42.2 %, to $ 37.3 million for the six months ended June 30, 2021, compared to $ 26.2 million for the same period in 2020. The Company experienced $ 2.0 million of catastrophe losses, net of reinsurance recoverables, during the first quarter of 2021 from Winter Storm Uri. The Company also experienced $ 12.0 million of adverse development for the six months ended June 30, 2021, which increased losses further. Of the $12.0 million in adverse development, $ 11.4 million was related to commercial lines, while $ 636,000 was related to personal lines. The adverse development was mostly attributable to the 2018 and 2017 and prior accident years. The Company’s incurred losses during the three and six months ended June 30, 2020 included prior-year adverse reserve development of $ 3.0 million and $ 6.7 million, respectively. These losses were related to the Company’s commercial lines of business.
7. Reinsurance In the normal course of business, the Company participates in reinsurance agreements in order to limit losses that may arise from catastrophes or other individually severe events. The Company primarily ceded all specific commercial liability risks in excess of $ 400,000 in 2021 and 2020. The Company ceded specific commercial property risks in excess of $ 200,000 in 2021. The Company ceded 40 % of specific commercial property risks in excess of $ 400,000 , and 60 % in excess of $ 300,000 in 2020. The Company ceded homeowners specific risks in excess of $ 300,000 in both 2021 and 2020. A "treaty" is a reinsurance agreement in which coverage is provided for a class of risks and does not require policy by policy underwriting of the reinsurer. "Facultative" reinsurance is where a reinsurer negotiates an individual reinsurance agreement for every policy it will reinsure on a policy by policy basis. A loss is covered under a reinsurance contract if the loss occurs within the effective dates of the agreement notwithstanding when the loss is reported. Reinsurance does not discharge the direct insurer from liability to its policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors the concentration of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. To date, the Company has not experienced any significant difficulties in collecting reinsurance recoverables.
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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 June 30, Six months ended June 30, 2021 2020 2021 2020 Written premiums: Direct $ 26,153 $ 19,595 $ 49,586 $ 39,225 Assumed 8,828 7,950 15,768 13,404 Ceded ( 6,449 ) ( 4,480 ) ( 12,339 ) ( 8,513 ) Net written premiums $ 28,532 $ 23,065 $ 53,015 $ 44,116 Earned premiums: Direct $ 22,607 $ 17,913 $ 43,597 $ 35,371 Assumed 7,621 8,046 14,878 16,641 Ceded ( 5,390 ) ( 4,201 ) ( 10,802 ) ( 8,237 ) Net earned premiums $ 24,838 $ 21,758 $ 47,673 $ 43,775 Losses and LAE: Direct $ 15,367 $ 10,739 $ 36,117 $ 23,065 Assumed 48 4,347 6,829 9,969 Ceded 2,511 ( 3,141 ) ( 5,658 ) ( 6,820 ) Net Losses and LAE $ 17,926 $ 11,945 $ 37,288 $ 26,214
8. Debt The Company's debt is comprised of four instruments: $ 24.4 million of publicly traded senior unsecured notes which were issued in September and October of 2018, a $ 10.0 million line of credit which commenced in June 2018, $ 10.5 million of privately placed subordinated notes (the “Subordinated Notes”), and a $ 2.7 million Paycheck Protection Program loan (the “PPP loan”) issued as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. A summary of the Company's outstanding debt is as follows (dollars in thousands): June 30, 2021 December 31, 2020 Senior unsecured notes $ 23,795 $ 23,665 Subordinated notes 9,613 9,587 Line of credit 1,000 5,000 Paycheck Protection Program loan * 2,745 2,745 Total $ 37,153 $ 40,997 * The PPP loan was embedded into the line of credit facility. See below. Senior unsecured notes The Company issued $ 25.3 million of public senior unsecured notes (the "Notes") in 2018. The Notes bear an interest rate of 6.75 % per annum, payable quarterly at the end of March, June, September and December and mature on . The Company may redeem the Notes, in whole or in part, at face value at any time after September 30, 2021. The Company did no t repurchase any of the Notes for the three and six months ended June 30, 2021. For the three and six months ended June 30, 2020, the Company repurchased in the public market 9,761 and 36,761 units of the Notes with a face value of $ 244,000 and $ 919,000 , respectively. The Notes were repurchased at a discount to face value, which resulted in a $ 145,000 and $ 260,000 gain on extinguishment for the three and six months ended June 30, 2020.
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Subordinated notes The Company also has outstanding $ 10.5 million of Subordinated Notes maturing on . 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 June 30, 2021, the carrying value of the Notes and Subordinated Notes are offset by $ 585,000 and $ 887,000 of debt issuance costs, respectively. The debt issuance costs will be amortized through interest expense over the life of the loans. The Subordinated Notes contain various restrictive financial debt covenants that relate to the Company’s minimum tangible net worth, minimum fixed-charge coverage ratios, dividend paying capacity, reinsurance retentions, and risk-based capital ratios. At June 30, 2021, the Company was in compliance with all of its financial covenants. Line of credit The Company maintains a $ 10.0 million line of credit with a national bank (the “Lender”). The line of credit bears interest at the London Interbank rate ("LIBOR") plus 2.75 % per annum, payable monthly. The agreement includes several financial debt covenants, including a minimum tangible net worth, a minimum fixed-charge coverage ratio, and minimum statutory risk-based capital levels. As of June 30, 2021, the Company had $ 3.7 million outstanding on the line of credit (including the PPP loan described below), and was in compliance with all of its financial debt covenants. On June 18, 2021, the line of credit was renewed with a maturity of December 1, 2022. Paycheck Protection Program loan On April 24, 2020, the Company received a $ 2.7 million loan from the line of credit Lender pursuant to the Paycheck Protection Program of the CARES Act administered by the U.S. Small Business Administration (“SBA”). The PPP loan was incorporated into the existing line of credit facility and utilizes a portion of the line of credit’s limit. However, the PPP loan has a different maturity date ( April 24, 2022 ) in accordance with the SBA requirements and bears interest at a rate of 1.0 % per annum. The Company amended its $10.0 million line of credit facility with the Lender to incorporate this loan as a reduction of the available line of credit. The loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The Company applied for forgiveness of the loan in 2020, at which point the principal and interest payments were deferred until the SBA remits the loan forgiveness amount to the Lender. As of June 30, 2021, the loan remains on the Company’s balance sheet as a liability. The Company received notice from the SBA that the loan was 100% forgiven on . The Company will recognize the forgiveness of the loan in the Other Gains section of the Consolidated Statement of Operations in the third quarter of 2021.
9. Shareholders’ Equity On December 5, 2018, the Company's Board of Directors authorized a stock repurchase program, under which the Company may repurchase up to one million shares of the Company's common stock. The Company did no t repurchase any shares of stock for the three and six months ended June 30, 2021 related to the stock repurchase program. For the three and six months ended June 30, 2020, the Company repurchased 1,698 and 2,398 shares of stock valued at $ 6,000 and $ 8,000 , respectively, related to the stock repurchase program. For the three months ended June 30, 2021, and 2020, the Company repurchased 2,307 and 2,308 shares of stock valued at approximately $ 7,000 and $ 8,000 , respectively, related to the vesting of the Company’s restricted stock units. The Company made no repurchases of stock relating to the vesting of restricted stock units during the first quarters of 2021 and 2020. Upon the repurchase of the Company’s shares, the shares remain authorized, but not issued or outstanding. As of June 30, 2021 and December 31, 2020, the Company had 9,689,421 and 9,681,728 issued and outstanding shares of common stock, respectively. Holders of common stock are entitled to one vote per share and to receive dividends only when and if declared by the board of directors. The holders have no preemptive, conversion or subscription rights.
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10. 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 June 30, Six months ended June 30, 2021 2020 2021 2020 Balance at beginning of period $ ( 1,955 ) $ ( 1,210 ) $ 912 $ 489 Other comprehensive income (loss) before reclassifications 394 5,017 ( 1,530 ) 3,702 Less: amounts reclassified from accumulated other comprehensive income (loss) ( 902 ) 2 41 386 Net other comprehensive income (loss) 1,296 5,015 ( 1,571 ) 3,316 Balance at end of period $ ( 659 ) $ 3,805 $ ( 659 ) $ 3,805
11. Earnings Per Share Basic and diluted earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. The following table presents the calculation of basic and diluted earnings (loss) per common share, as follows (dollars in thousands, except per share amounts): Three Months Ended June 30, Six months ended June 30, 2021 2020 2021 2020 Net income (loss) $ 5,552 $ 1,505 $ 916 $ ( 3,220 ) Weighted average common shares, basic and diluted * 9,686,631 9,595,668 9,684,193 9,594,221 Earnings (loss) per common share, basic and diluted $ 0.57 $ 0.16 $ 0.09 $ ( 0.34 ) * The non-vested shares of the restricted stock units and stock options were anti-dilutive as of June 30, 2021 and 2020. Therefore, the basic and diluted weighted average common shares are equal for the three and six months ended June 30, 2021 and 2020 .
12. Stock-based Compensation On June 30, 2020, the Company issued options to purchase 280,000 shares of the Company’s common stock, to certain executive officers and other employees. The right to exercise the options will vest over a five-year period on a straight-line basis. The options have a strike price of $ 3.81 per share and expire on . The estimated value of these options is $ 290,000 , which is being expensed ratably over the vesting period. In 2015, 2016, and 2018, the Company issued 390,352 , 111,281 , and 70,000 , respectively, of restricted stock units (“RSUs”) to various employees to be settled in shares of common stock, which were valued at $ 4.1 million, $ 909,000 , and $ 404,000 , respectively, on the dates of grant. The Company recorded $ 108,000 and $ 475,000 of compensation expense related to the RSUs for the six months ended June 30, 2021 and 2020, respectively. There were 41,941 unvested RSUs as of June 30, 2021, which will generate an estimated future expense of $ 150,000 . The Company recorded $ 25,000 of compensation expense for the six months ended June 30, 2021 related to the stock options granted on June 30, 2020. There were 209,000 unvested options as of June 30, 2021, which will generate an estimated future expense of $ 219,000 .
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13. Commitments and Contingencies Legal proceedings The Company and its subsidiaries are subject at times to various claims, lawsuits and proceedings relating principally to alleged errors or omissions in the placement of insurance, claims administration, and other business transactions arising in the ordinary course of business. Where appropriate, the Company vigorously defends such claims, lawsuits and proceedings. Some of these claims, lawsuits and proceedings seek damages, including consequential, exemplary or punitive damages, in amounts that could, if awarded, be significant. Most of the claims, lawsuits and proceedings arising in the ordinary course of business are covered by the insurance policy at issue. We account for such activity through the establishment of unpaid losses and LAE reserves. In accordance with accounting guidance, if it is probable that a liability has been incurred as of the date of the financial statements and the amount of loss is reasonably estimable; then an accrual for the costs to resolve these claims is recorded by the Company in the accompanying consolidated balance sheets. Periodic expenses related to the defense of such claims are included in the accompanying consolidated statements of operations. On the basis of current information, the Company does not believe that there is a reasonable possibility that any material loss exceeding amounts already accrued, if any, will result from any of the claims, lawsuits and proceedings to which the Company is subject to, either individually or in the aggregate.
14. Segment Information The Company is engaged in the sale of property and casualty insurance products and has organized its business model around three classes of insurance businesses: commercial lines, personal lines, and wholesale agency business. Within these three businesses, the Company offers various insurance products and insurance agency services. Such insurance businesses are engaged in underwriting and marketing insurance coverages, and administering claims processing for such policies. The Company views the commercial and personal lines segments as underwriting business (business that takes on insurance underwriting risk). The wholesale agency business provides non-risk bearing revenue through commissions and policy fees. The wholesale agency business increases the product options to the Company’s independent retail agents by offering both insurance products from the Insurance Company Subsidiaries as well as products offered by other insurers. The Company defines its operating segments as components of the business where separate financial information is available and used by the chief operating decision maker in deciding how to allocate resources to its segments and in assessing its performance. In assessing performance of its operating segments, the Company’s chief operating decision maker, the Chief Executive Officer, reviews a number of financial measures including gross written premiums, net earned premiums, losses and LAE, net of reinsurance recoveries, and other revenue and expenses. The primary measure used for making decisions about resources to be allocated to an operating segment and assessing its performance is segment underwriting gain or loss which is defined as segment revenues, consisting of net earned premiums and other income, less segment expenses, consisting of losses and LAE, policy acquisition costs and operating expenses of the operating segments. Operating expenses primarily include compensation and related benefits for personnel, policy issuance and claims systems, rent and utilities. The Company markets, distributes and sells its insurance products through its own insurance agencies and a network of independent agents. All of the Company’s insurance activities are conducted in the United States with a concentration of activity in Michigan, Florida, Texas and California. For the six months ended June 30, 2021 and 2020 gross written premiums attributable to these four states were 51.7 % and 50.5 %, 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.
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The following tables present information by reportable operating segment (dollars in thousands): Three months ended June 30, 2021 Commercial Lines Personal Lines Total Underwriting Wholesale Agency Corporate Eliminations Total Gross written premiums $ 30,947 $ 4,034 $ 34,981 $ — $ — $ — $ 34,981 Net written premiums $ 24,672 $ 3,860 $ 28,532 $ — $ — $ — $ 28,532 Net earned premiums $ 22,188 $ 2,650 $ 24,838 $ — $ — $ — $ 24,838 Other income 52 44 96 1,971 28 ( 1,429 ) 666 Segment revenue 22,240 2,694 24,934 1,971 28 ( 1,429 ) 25,504 Losses and LAE, net 16,940 986 17,926 — — — 17,926 Policy acquisition costs 6,326 740 7,066 1,242 — ( 1,412 ) 6,896 Operating expenses 2,852 391 3,243 816 283 — 4,342 Segment expenses 26,118 2,117 28,235 2,058 283 ( 1,412 ) 29,164 Segment gain (loss) $ ( 3,878 ) $ 577 $ ( 3,301 ) $ ( 87 ) $ ( 255 ) $ ( 17 ) $ ( 3,660 ) Investment income 503 503 Net realized investment gains 1,060 1,060 Change in fair value of equity securities ( 525 ) ( 525 ) Other gains 8,910 8,910 Interest expense ( 732 ) ( 732 ) Income (loss) before equity earnings in Affiliate and income taxes $ ( 3,878 ) $ 577 $ ( 3,301 ) $ ( 87 ) $ 8,961 $ ( 17 ) $ 5,556 Three months ended June 30, 2020 Commercial Lines Personal Lines Total Underwriting Wholesale Agency Corporate Eliminations Total Gross written premiums $ 25,600 $ 1,945 $ 27,545 $ — $ — $ — $ 27,545 Net written premiums $ 21,377 $ 1,688 $ 23,065 $ — $ — $ — $ 23,065 Net earned premiums $ 20,105 $ 1,653 $ 21,758 $ — $ — $ — $ 21,758 Other income 82 36 118 2,081 132 ( 1,618 ) 713 Segment revenue 20,187 1,689 21,876 2,081 132 ( 1,618 ) 22,471 Losses and LAE, net 11,275 670 11,945 — — — 11,945 Policy acquisition costs 6,119 506 6,625 1,448 — ( 1,678 ) 6,395 Operating expenses 3,145 272 3,417 736 706 — 4,859 Segment expenses 20,539 1,448 21,987 2,184 706 ( 1,678 ) 23,199 Segment gain (loss) $ ( 352 ) $ 241 $ ( 111 ) $ ( 103 ) $ ( 574 ) $ 60 $ ( 728 ) Investment income 863 863 Net realized investment gains 245 245 Change in fair value of equity securities 1,576 1,576 Other gains 145 145 Interest expense ( 731 ) ( 731 ) Income (loss) before equity earnings in Affiliate and income taxes $ ( 352 ) $ 241 $ ( 111 ) $ ( 103 ) $ 1,524 $ 60 $ 1,370
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Six months ended June 30, 2021 Commercial Lines Personal Lines Total Underwriting Wholesale Agency Corporate Eliminations Total Gross written premiums $ 58,168 $ 7,186 $ 65,354 $ — $ — $ — $ 65,354 Net written premiums $ 46,229 $ 6,786 $ 53,015 $ — $ — $ — $ 53,015 Net earned premiums $ 42,894 $ 4,779 $ 47,673 $ — $ — $ — $ 47,673 Other income 108 84 192 3,697 71 ( 2,738 ) 1,222 Segment revenue 43,002 4,863 47,865 3,697 71 ( 2,738 ) 48,895 Losses and LAE, net 33,895 3,393 37,288 — — — 37,288 Policy acquisition costs 12,644 1,340 13,984 2,369 — ( 2,707 ) 13,646 Operating expenses 5,807 740 6,547 1,560 584 — 8,691 Segment expenses 52,346 5,473 57,819 3,929 584 ( 2,707 ) 59,625 Segment gain (loss) $ ( 9,344 ) $ ( 610 ) $ ( 9,954 ) $ ( 232 ) $ ( 513 ) $ ( 31 ) $ ( 10,730 ) Investment income 1,035 1,035 Net realized investment gains 3,984 3,984 Change in fair value of equity securities ( 1,065 ) ( 1,065 ) Other gains 8,910 8,910 Interest expense ( 1,453 ) ( 1,453 ) Income (loss) before equity earnings in Affiliate and income taxes $ ( 9,344 ) $ ( 610 ) $ ( 9,954 ) $ ( 232 ) $ 10,898 $ ( 31 ) $ 681 Six months ended June 30, 2020 Commercial Lines Personal Lines Total Underwriting Wholesale Agency Corporate Eliminations Total Gross written premiums $ 49,044 $ 3,585 $ 52,629 $ — $ — $ — $ 52,629 Net written premiums $ 41,064 $ 3,052 $ 44,116 $ — $ — $ — $ 44,116 Net earned premiums $ 40,536 $ 3,239 $ 43,775 $ — $ — $ — $ 43,775 Other income 156 72 228 4,015 163 ( 3,035 ) 1,371 Segment revenue 40,692 3,311 44,003 4,015 163 ( 3,035 ) 45,146 Losses and LAE, net 24,736 1,478 26,214 — — — 26,214 Policy acquisition costs 12,283 995 13,278 2,656 — ( 3,236 ) 12,698 Operating expenses 6,648 547 7,195 1,641 1,068 — 9,904 Segment expenses 43,667 3,020 46,687 4,297 1,068 ( 3,236 ) 48,816 Segment gain (loss) $ ( 2,975 ) $ 291 $ ( 2,684 ) $ ( 282 ) $ ( 905 ) $ 201 $ ( 3,670 ) Investment income 1,817 1,817 Net realized investment gains 1,173 1,173 Change in fair value of equity securities ( 1,510 ) ( 1,510 ) Other gains 260 260 Interest expense ( 1,462 ) ( 1,462 ) Income (loss) before equity earnings in Affiliate and income taxes $ ( 2,975 ) $ 291 $ ( 2,684 ) $ ( 282 ) $ ( 627 ) $ 201 $ ( 3,392 )
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15. Subsequent Events On July 8, 2021, the Company received forgiveness under the CARES Act from the SBA for the entire amount of its $ 2.7 million PPP loan. The Company will recognize the forgiveness of the loan in the Other Gains section of the Consolidated Statement of Operations in the third quarter of 2021.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Periods Ended June 30, 2021 and 2020
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements (Unaudited), related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K, filed on March 11, 2021 with the U. S. Securities and Exchange Commission.
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q, which are not statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, as Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements give current expectations or forecasts of future events or our future financial or operating performance. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek” and similar terms and phrases, or the negative thereof, may be used to identify forward-looking statements.
The forward-looking statements contained in this report are based on management’s good-faith belief and reasonable judgment based on current information. The forward-looking statements are qualified by important factors, risks and uncertainties, many of which are beyond our control, that could cause our actual results to differ materially from those in the forward-looking statements, including those described in our Form 10-K (“Item 1A Risk Factors”) filed with the SEC on March 11, 2021 and subsequent reports filed with or furnished to the SEC. Any forward-looking statement made by us in this report speaks only as of the date hereof or as of the date specified herein. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by any applicable laws or regulations.
Recent Developments
COVID-19
COVID-19 (the “Pandemic”) continues to cause significant disruption to public health, the global economy, financial markets, and commercial, social and community activity in general. As there has been a significant reduction in reported cases and correspondingly a reduction in government restrictions, we see reduced risk to our business. We continue to monitor potential risks the Pandemic may present including a potential resurgence. Our exposure to the Pandemic is manifold. The majority of our employees continue to work remotely however strict “shelter-in-place” or “stay-at-home” orders have been lifted. A significant portion of our revenues are generated from the hospitality sector within the U.S. which remains under stress due to the threats of resurgence and resource shortages that resulted from the Pandemic.
We have continued to provide customer service, process new and renewal business, handle claims and otherwise manage all operations even though the vast majority of the staff is working remotely. To date, we have not seen a major disruption in our business as a result of the Pandemic and currently do not expect to see a material negative impact to our financial position or results of operations as a result of the Pandemic.
Sale of Certain Agency Business
On June 30, 2021, our agency (Sycamore Insurance Agency) sold to Venture Holdings, Inc. the customer accounts and other related assets of some of its personal and commercial lines of business. Sycamore will continue to produce various personal and commercial lines that it did not sell which is substantially all produced for, and underwritten by, our Insurance Company Subsidiaries. We recognized an $8.9 million gain on the sale which is reflected in Other Gains on the Consolidated Statement of Operations.
The purchase price was $10.0 million of which $1 million was paid in cash on June 30, 2021, and $9 million was in the form of two promissory notes (one for $6 million and one for $3 million). Both notes require interest-only quarterly payments at a per annum rate of 7.0%, with a five-year maturity. However, we expect the $3 million note to be paid in full within the next quarter. There are no prepayment penalties.
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 transaction included the
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transition of 21 employees from CHI to Venture as well as necessary systems and office functions to operate the business. Venture did not assume any in-force business or liabilities. The business will roll over to Venture as it produces new or renewal business effective July 1, 2021. We expect our Insurance Company Subsidiaries will continue to underwrite substantially all of the business we sold to Venture that we underwrote prior to the transaction. We expect Venture to be able to grow both the business we underwrite plus the third-party business more effectively as a separate entity outside of CHI’s group. As of June 30, 2021, we had a non-controlling 50% interest in Venture.
Business Overview
We are an insurance holding company that markets and services our product offerings through specialty commercial and specialty personal insurance business lines. Our growth has been significant since our founding in 2009. Currently, we are authorized to write insurance as an excess and surplus lines carrier in 45 states, including the District of Columbia. We are also licensed to write insurance as an admitted carrier in 42 states, including the District of Columbia, and we offer our insurance products in all 50 states.
Our revenues are primarily derived from premiums earned from our insurance operations. We also generate other revenues through investment income and other income which mainly consists of installment fees and policy issuance fees generally related to the policies we write.
Our expenses consist primarily of losses and loss adjustment expenses, agents’ commissions, and other underwriting and administrative expenses. We organize our operations into three insurance businesses: commercial insurance lines, personal insurance lines, and wholesale agency business. Together, the commercial and personal lines refer to "underwriting" operations that take insurance risk, and the wholesale agency business refers to non-risk insurance business.
Through our commercial insurance product lines, we offer coverage for both commercial property and commercial liability. We also offer coverage for commercial automobiles and workers’ compensation. Our insurance policies are sold to targeted small and mid-sized businesses on a single or multiple-coverage basis.
Through our personal insurance product lines, we offer homeowners insurance and dwelling fire insurance policies to individuals in several states. Our specialty homeowners insurance product line is primarily comprised of low-value dwelling insurance tailored for owners of lower valued homes, which we offer in Illinois, Indiana and Texas. Due to recent Florida-based industry events, we have been de-emphasizing our Florida homeowners' business and reducing our exposures in that state, as well as other wind-exposed states like Texas and Hawaii.
Through our wholesale agency business segment, we offer commercial and personal lines insurance products for our Insurance Company Subsidiaries as well as third-party insurers. We have expanded the wholesale agency business to develop more non-risk revenue streams, and provide our agents with more insurance product options. However, as a result of the sale of certain agency business on 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 operation will not be affected by accounting adjustments needed to reflect changes in these estimates and assumptions. During the six months ended June 30, 2021, there were no material changes to our critical accounting policies and estimating methodologies, which are disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2021.
Executive Overview
The Company reported $35.0 million of gross written premiums in the second quarter of 2021, representing a 27.0% increase as compared to the same period in 2020. Gross written premiums were $65.4 million for the six months ended June 30, 2021, representing a 24.2% increase as compared to the same period in 2020. The increase in both periods was the result of growth in both commercial and personal lines business as we continue to penetrate markets where we have been the most successful while still reducing exposure to less profitable lines.
The Company reported net income of $5.6 million, or $0.57 per share, and net income of $916,000, or $0.09 per share, for the three and six months ended June 30, 2021, respectively. The Company reported net income of $1.5 million, or $0.16 per share, and a net loss of $3.2 million, or $0.34 per share, for three and six months ended June 30, 2020, respectively.
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Adjusted operating loss, a non-GAAP measure, was $3.9 million, or $0.40 per share for the three months ended June 30, 2021. Adjusted operating loss was $10.9 million, or $1.13 per share for the six months ended June 30, 2021. Adjusted operating loss was $461,000, or $0.04 per share for the three months ended June 30, 2020. Adjusted operating loss was $3.1 million, or $0.33 per share for the six months ended June 30, 2020.
Our underwriting combined ratio was 113.2% and 120.8% for the three and six months ended June 30, 2021, compared to 100.5% and 106.1% for the three and six months ended June 30, 2020, respectively.
Results of Operations For The Three Months Ended June 30, 2021 and 2020
The following table summarizes our operating results for the periods indicated (dollars in thousands):
Summary of Operating Results
Three Months Ended June 30, 2021 2020 $ Change % Change Gross written premiums $ 34,981 $ 27,545 $ 7,436 27.0 % Net written premiums $ 28,532 $ 23,065 $ 5,467 23.7 % Net earned premiums $ 24,838 $ 21,758 $ 3,080 14.2 % Other income 666 713 (47 ) (6.6 %) Losses and loss adjustment expenses, net 17,926 11,945 5,981 50.1 % Policy acquisition costs 6,896 6,395 501 7.8 % Operating expenses 4,342 4,859 (517 ) (10.6 )% Underwriting gain (loss) (3,660 ) (728 ) (2,932 ) * Net investment income 503 863 (360 ) (41.7 )% Net realized investment gains 1,060 245 815 * Change in fair value of equity securities (525 ) 1,576 (2,101 ) * Other gains 8,910 145 8,765 * Interest expense 732 731 1 0.1 % Income (loss) before equity earnings in Affiliate and income taxes 5,556 1,370 4,186 * Equity earnings in Affiliate, net of tax 180 179 1 * Income tax expense 184 44 140 * Net income (loss) $ 5,552 $ 1,505 $ 4,047 * Book value per common share outstanding $ 4.53 $ 4.51 Underwriting Ratios: Loss ratio (1) 71.9 % 54.6 % Expense ratio (2) 41.3 % 45.9 % Combined ratio (3) 113.2 % 100.5 %
(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
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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 June 30, 2021 and 2020 (dollars in thousands):
Summary of Premium Revenue
Three Months Ended June 30, 2021 2020 $ Change % Change Gross written premiums Commercial lines $ 30,947 $ 25,600 $ 5,347 20.9 % Personal lines 4,034 1,945 2,089 107.4 % Total $ 34,981 $ 27,545 $ 7,436 27.0 % Net written premiums Commercial lines $ 24,672 $ 21,377 $ 3,295 15.4 % Personal lines 3,860 1,688 2,172 128.7 % Total $ 28,532 $ 23,065 $ 5,467 23.7 % Net earned premiums Commercial lines $ 22,188 $ 20,105 $ 2,083 10.4 % Personal lines 2,650 1,653 997 60.3 % Total $ 24,838 $ 21,758 $ 3,080 14.2 %
Gross written premiums increased $7.4 million, or 27.0%, to $35.0 million for the three months ended June 30, 2021, as compared to $27.5 million for the same period in 2020.
Commercial lines gross written premiums increased $5.3 million, or 20.9%, to $30.9 million in the second quarter of 2021, as compared to $25.6 million for the second quarter of 2020. The increase was due to $7.1 million of additional gross written premium in the Company’s small business programs during the second quarter of 2021, as compared the second quarter of 2020. This increase was offset by a $1.8 million reduction of gross written premium in the Company’s hospitality programs during the second quarter of 2021, as compared to the second quarter of 2020.
Personal lines gross written premiums increased $2.1 million, or 107.4%, to $4.0 million in the second quarter of 2021, as compared to $1.9 million for the same period in 2020. The increased gross written premiums were due to continued growth in the Company’s low-value dwelling book of business.
Net written premiums increased $5.5 million, or 23.7%, to $28.5 million for the three months ended June 30, 2021, as compared to $23.1 million for the same period in 2020. Net written premiums did not increase as much as gross written premiums due to a combination of factors that increased our ceded premium rates. Our blended ratio of ceded earned premiums to gross earned premiums increased from 16.2% to 17.8% in the second quarters of 2020 and 2021, respectively. The increase was due to a combination of: 1) a change in the mix of business to more property exposure which has a higher ceding rate; 2) general reinsurance rate increases; 3) we purchased more reinsurance as of January 1, 2021 to reduce our commercial property specific loss retention to $200,000, from $340,000, and we are writing more business in select areas that are mostly ceded under quota share agreements that skew the blended ceded earned premium to gross earned premium ratio.
Other Income
Other income consists primarily of fees charged to policyholders by the Company for services outside of the premium charge, such as installment billings and policy issuance costs. Commission income is also received by the Company’s insurance agencies for writing policies for third party insurance companies. Other income for the three months ended June 30, 2021, decreased $47,000, or 6.6%, to $666,000 as compared to $713,000 for the same period in 2020. The decrease in other income was primarily due to a one-time item in 2020 that did not occur in 2021. However, revenue in the Agency operations in the second quarter of 2021 continued to grow moderately, compared to the same period in 2020.
Other Gains
Other gains were $8.9 million for the three months ended June 30, 2021, compared to $145,000 for the same period in 2020. The Company sold a portion of its Agency business during the second quarter of 2021, resulting in an $8.9 million gain.
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The $145,000 gain in the second quarter of 2020 was due to the repurchase of 9,761 units of the Notes at a discount to face value.
Losses and Loss Adjustment Expenses
The tables below detail our losses and loss adjustment expenses and loss ratios in our underwriting business for the three months ended June 30, 2021 and 2020 (dollars in thousands).
Three months ended June 30, 2021 Commercial Lines Personal Lines Total Accident year net losses and LAE $ 10,754 $ 962 $ 11,716 Net (favorable) adverse development 6,186 24 6,210 Calendar year net losses and LAE $ 16,940 $ 986 $ 17,926 Accident year loss ratio 48.4 % 35.7 % 47.0 % Net (favorable) adverse development 27.8 % 0.9 % 24.9 % Calendar year loss ratio 76.2 % 36.6 % 71.9 %
Three months ended June 30, 2020 Commercial Lines Personal Lines Total Accident year net losses and LAE $ 8,218 $ 690 $ 8,908 Net (favorable) adverse development 3,057 (20 ) 3,037 Calendar year net losses and LAE $ 11,275 $ 670 $ 11,945 Accident year loss ratio 40.7 % 40.8 % 40.7 % Net (favorable) adverse development 15.2 % (1.2 )% 13.9 % Calendar year loss ratio 55.9 % 39.6 % 54.6 %
Net losses and LAE increased by $6.0 million, or 50.1%, to $17.9 million during the second quarter of 2021, compared to $11.9 million for the same period in 2020. The increase in losses was driven by adverse development that occurred during the second quarter of 2021. The Company experienced $6.2 million of adverse development for the three months ended June 30, 2021. Of the $6.2 million in adverse development, $1.9 million was related to 2017 and prior accident years, $2.4 million was related to the 2018 accident year, and $1.9 million was related to the 2019 and 2020 accident years. Substantially all of the development was from the Company’s commercial lines of business.
The Company's incurred losses during the three months ended June 30, 2020, included adverse prior-year reserve development of $3.0 million. The Commercial lines experienced $3.1 million of unfavorable reserve development mostly attributable to small business lines in 2018 and 2017 and prior accident years, most notably in commercial auto lines.
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.
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The table below provides the expense ratio by major component.
Three Months Ended June 30, 2021 2020 Commercial Lines Policy acquisition costs 28.4 % 30.3 % Operating expenses 12.8 % 15.5 % Total 41.2 % 45.8 % Personal Lines Policy acquisition costs 27.5 % 30.0 % Operating expenses 14.5 % 16.1 % Total 42.0 % 46.1 % Total Underwriting Policy acquisition costs 28.3 % 30.3 % Operating expenses 13.0 % 15.6 % Total 41.3 % 45.9 %
Our expense ratio decreased by 4.6 percentage points in the second quarter of 2021 as compared to the same period of 2020. The decrease was largely due to underwriting revenue, which consists of net earned premiums and other underwriting income, increasing by $3.0 million, or 14.0% to $24.9 million for the three months ended June 30, 2021, compared to $21.9 million during the same period in 2020.
Policy acquisition costs are costs we incur to issue policies, which include commissions, premium taxes, underwriting reports and underwriter compensation costs. The Company offsets direct commissions with ceded commissions from reinsurers. For the three
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