Washington, D.C. 20549





For the Fiscal Year Ended December 31, 2020





For the transition period from                 to

Commission file number 001-37536


Conifer Holdings, Inc.

(Exact name of registrant as specified in its charter)





(State or other jurisdiction of

incorporation or organization)


(I.R.S. Employer

Identification No.)




550 West Merrill Street, Suite 200



Birmingham, Michigan



(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




The Nasdaq Stock Market LLC

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.       Yes  No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  No 

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 aggregate market value of the registrant’s Common Stock held by non-affiliates at June 28, 2019 was approximately $21.3 million, based on the Nasdaq closing price for such shares on that date.  The registrant has no non-voting common equity.

The number of outstanding shares of the registrant’s common stock, no par value, as of March 11, 2021, was 9,681,728.








Form 10-K







Page No.

Part I





Item 1.





Item 1A.


Risk Factors



Item 1B.


Unresolved Staff Comments



Item 2.





Item 3.


Legal Proceedings



Item 4.


Mine Safety Disclosures



Part II





Item 5.


Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities



Item 6.


Selected Consolidated Financial Data



Item 7.


Management's Discussion and Analysis of Financial Condition and Results of Operations



Item 7A.


Quantitative and Qualitative Disclosures About Market Risk



Item 8.


Financial Statements and Supplementary Data



Item 9.


Changes in and Disagreements with Accountants on Accounting and Financial Disclosure



Item 9A.


Controls and Procedures



Item 9B.


Other Information



Part III





    Items 10-14.  





Part IV





Item 15.


Exhibits and Financial Statement Schedules

















Legal Organization

Conifer Holdings, Inc. (Nasdaq: CNFR) is a Michigan‑domiciled insurance holding company formed in 2009.  Our principal executive offices are located at 550 W. Merrill, Suite 200, Birmingham, MI 48009 (telephone number: (248) 559-0840).  Our corporate website address is www.cnfrh.com.

As used in this Form 10-K, references to “Conifer,” “Conifer Holdings,” “the Company,” “our Company,” “we,” “us,” and “our” refer to Conifer Holdings, Inc., a Michigan corporation, and its wholly owned subsidiaries Conifer Insurance Company (“CIC”), Red Cedar Insurance Company (“RCIC”), White Pine Insurance Company (“WPIC”), American Colonial Insurance Services and Sycamore Insurance Agency, Inc. (“SIA”).  CIC, RCIC and WPIC are collectively referred to as the "Insurance Company Subsidiaries."  On a stand-alone basis Conifer Holdings, Inc. is referred to as the "Parent Company."  

Business Overview

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.  

Through our Insurance Company Subsidiaries, we offer insurance coverage in specialty commercial and specialty personal product lines.  Currently, we are authorized to write insurance as an excess and surplus lines (“E&S”) 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, as well as commission revenue to our wholesale agency business from third-party insurers.

Many of our products are targeted to traditionally profitable classes of policyholders that we believe are under-served by other insurers.  We market and sell these insurance products through a growing network of over 6,100 independent agents that distribute our policies through approximately 1,800 sales offices.  We are focused on growing our business in non‑commoditized property and casualty insurance markets, while maintaining underwriting discipline and a conservative investment strategy.

We have substantial expertise in serving the unique commercial insurance needs of owner‑operated businesses in the following markets:


Hospitality, such as restaurants, bars, taverns, and bowling centers (that require, among other lines, liquor liability insurance), as well as small grocery and convenience stores;


Artisan contractors, such as plumbers, painters, carpenters, electricians and other independent contractors; and


Security service providers, such as companies that provide security guard services, security alarm products and services, and private investigative services.

In our commercial lines business, we seek to differentiate ourselves and provide value to small business owner‑operators by bundling different insurance products that meet a significant portion of their insurance needs.  For example, in the hospitality market we offer property, casualty, and liquor liability, as well as, in some jurisdictions, workers’ compensation coverage.  The breadth of our specialty commercial insurance products enables our agents and their small business clients to avoid the administrative costs and time required to seek coverage for each of these items from separate insurers.  As such, we



compete for commercial lines business based on our flexible product offerings and customer service, rather than on pricing alone.  Our target commercial lines customer has an average account size of $5,300 in premium.

We also have substantial expertise in providing specialty homeowners insurance products to targeted customers that are often under-served by other homeowners' insurance carriers.  Our personal lines products primarily include low-value dwelling insurance tailored for owners of lower valued homes, which we currently offer in Illinois, Indiana, Louisiana and Texas.

In our personal lines business, we largely target homeowners in need of dwelling insurance that is currently under-served by the insurance market, due to the modest value of their homes or the exposure to natural catastrophes in their geographic area.  Because these homeowners are under-served, this portion of the market is typically subject to less pricing pressure from larger nationwide insurers that offer a more commoditized product.  We believe our underwriting expertise enables us to compete effectively in these markets by evaluating and appropriately pricing risk.  In addition, we believe our willingness to meet these under-served segments of the personal lines insurance market fosters deeper relationships with, and increased loyalty from, the agents who distribute our products.  Our target personal lines customer has an average account size of $1,000 in premium.

Overall, we structure the multi-line distribution of our premium between commercial and personal lines to better diversify our business and mitigate the potential cyclical nature of either market.  In serving these markets, we write business on both an “admitted” and “E&S” basis.  As of December 31, 2020, approximately 44.4% of our gross written premiums were admitted, and approximately 55.6% were E&S.  Insurance companies writing on an admitted basis are licensed by the states in which they sell policies and are required to offer policies using premium rates and forms that are typically filed with and approved by the state insurance regulators.  Carriers writing in the E&S market are not bound by most of the rate and form regulations imposed on standard market companies, allowing them the flexibility to change the coverage offered and the rate charged without the time constraints and financial costs associated with the filing process.  Our corporate structure allows us to offer both admitted and E&S products in select markets through either CIC or WPIC.  Our experience with specialty insurance products enables us to react to new market opportunities and underwrite multiple specialty lines.

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.  

Geographic Diversity and Mix of Business

Over the past several years, we have increased our focus on specific core commercial lines of business.  As part of this business strategy, we have deemphasized our Florida homeowners' business and other wind-exposed business in Texas and Hawaii.  We plan to continue to shift focus to low-value dwelling lines of business in order to bring personal lines premium levels back up and to maintain a strategic balance of commercial and personal lines of business.

While we pursue top line premium growth, we do not do so at the expense of losing underwriting discipline.  Our underwriters have the experience and institutional flexibility to recognize when to exit certain products in favor of more profitable opportunities as insurance market conditions dictate.  The following tables summarize our gross written premiums by segment and state for the years indicated therein (dollars in thousands):



Gross Written Premium by Segment






















































































Gross Written Premiums by State










































































































New York














































































































New Jersey












































All Other States













































The Conifer Approach

We have built our business in a manner that is designed to adapt to changing market conditions and deliver predictable results over time.  The following highlights key aspects of our model that contribute to our balanced approach:


Focus on under-served markets.  We focus on providing specialty insurance products to targeted policyholders in under-served markets.  We believe that most of our small business customers, many of which are owner‑operated, value the efficiency of dealing with a single insurer for multiple products.  By targeting small- to medium-sized accounts, we add value to the business owner directly without competing solely on price.


Strong relationships with our agents.  We develop strong relationships with our independent agents providing them with responsive service, attractive commissions and competitive products to offer policyholders.  We believe our agents understand that we view them as key partners in risk selection that help us serve our ultimate client-the insured.


Deep understanding of the business and regulatory landscapes of our markets.  The competition for insurance business and the regulatory operating environment vary significantly from state to state.  We focus on tailoring our business to concentrate on the geographic markets and regulatory environments with the greatest opportunities for growth and profitability.  Our business plan centers on identification of market opportunities in jurisdictions where our insurance products can profitably suit the needs of our potential customers.


Emphasis on flexibility.  We offer coverage to our insureds both on an E&S and admitted basis.  We believe this flexibility enables us to pivot effectively between E&S and admitted policies as customer needs and regulatory conditions dictate.


Conservative risk management with an emphasis on lowering volatility.  We focus on the risk/reward of insurance underwriting, while maintaining a prudent investment policy.  We employ conservative risk management practices and opportunistically purchase reinsurance to minimize our exposure to liability for individual risks.  In addition, we seek to maintain a diversified liquid investment portfolio to reduce overall balance sheet volatility.  As of December 31, 2020, our investments primarily consisted of fixed income investments with an average credit rating of “AA+” and an option adjusted duration of 3.6 years.



Our Competitive Strengths

We believe the following competitive strengths have allowed us to grow our business and will continue to support our strategic growth initiatives:


Talented underwriters with broad expertise.  Our underwriters have significant experience managing account profitability across market cycles.  With an average of over 27 years of experience, our senior underwriters possess the required expertise to respond appropriately to market forces.


Controlled and disciplined underwriting.  We underwrite substantially all policies to our specific guidelines with our experienced, in-house underwriting team.  We customize the coverages we offer, and continually monitor our markets and respond to changes in our markets by adjusting our pricing, product structures and underwriting guidelines.  By tailoring the terms and conditions of our policies, we align our actual underwriting risk with the profit of each insurance account that we write.


Proactive claims handling.  We employ a proactive claims handling philosophy that utilizes an internal team of experienced in-house attorneys to manage and supervise our claims from inception until resolution.  We pay what we owe, contest what we don't, and make sound judgment for those claims that fall in between.  Our proactive handling of claims reinforces our relationships with our customers and agents by demonstrating our willingness to defend our insureds aggressively and help them mitigate losses.


Proven management team.  Our senior management team has an average of over 27 years of experience in the insurance industry.  Our senior management team has successfully created, managed and grown numerous insurance companies and books of business, and has longstanding relationships with many independent agents and policyholders in our targeted markets.


Ability to leverage technology to drive efficiency.  We utilize a web‑based information technology system that creates greater organizational efficiency in our company.  Leveraging the infrastructure of programmers and support staff of third‑party vendors allows our in‑house business analysts to focus on new product development and roll‑out.  We believe this capability reduces our time to market for new products, enhances services for insureds, increases our ability to capture data, and reduces cost.

Marketing and Distribution

Independent agents are our main distribution source.  The selection of an insurance company by a business or individual is strongly influenced by the business or individual’s agent.  We seek to maintain favorable relationships with our select group of agents.  Our distribution philosophy is to treat our agents as partners, and we provide them with competitive products, personal service and attractive commissions.  We believe these factors contribute to our positive agency retention.

In 2020, our top six independent agencies accounted for approximately 33% of our gross written premiums in our commercial lines, and our top four independent agencies accounted for approximately 26% of our gross written premiums in our personal lines.  We have long term relationships with each of these agencies.  We anticipate our concentration in these agencies will decrease in future periods as we establish relationships with additional agencies, as part of our strategic growth plan.  Our Insurance Company Subsidiaries market and distribute their products mainly through an independent agency network, however we utilize managing general agents and certain key wholesalers when appropriate.

We recruit our producers through referrals from our existing network of agents, word‑of‑mouth, advertisement, as well as direct contacts initiated by potential agents.  Our marketing efforts are directed through our offices in Michigan, Florida and Pennsylvania.

We view our agents as key partners in risk selection.  We actively solicit their input regarding potential improvements to our business methods and consult with them in developing new products and entering new customer markets.  At the same time, we take careful measure to appropriately control and monitor our agents’ operations.  Controls include frequent review of the quality of business, loss experience and other mechanisms.  We retain sole binding authority on the majority of our business.  Binding authority is only granted to select long-term agents.  When binding authority is granted, we restrict this authority to a specific set of guidelines that are provided to each agent.  Moreover, our experienced underwriters review each risk to ensure the guidelines are followed.



In addition to marketing to individual agents, our Sycamore Insurance Agency reviews specific opportunities to write select business on a direct basis.  SIA also owns 50% of a small insurance agency that places small commercial risks, mainly for alarm and security guard markets.


We are focused on underwriting profitability and effective enterprise risk management.  With an average of over 27 years of experience, our senior underwriters have the experience to properly manage account profitability across market cycles.

Our underwriting philosophy for our specialty commercial risks in the hospitality industry is to look at each risk individually and selectively before writing any policies.  We remain focused on small- to medium-sized businesses where the owner is often on site and in a better position to efficiently and safely run the overall operations.  We understand the risks associated with the smaller enterprises and, due to lighter competition, believe we can receive a fair premium to compensate for the risk taken.

With respect to commercial property coverages, we believe it is important to focus on the profitability of the insureds’ business, as well as the traditional risk factors.  Therefore, in addition to obtaining inspections on commercial risks, we strive to understand the insureds’ business operations and bottom line to verify the underlying business is an acceptable risk.

All commercial and personal policy applications are underwritten according to established guidelines that have been provided to our independent agency force.  These guidelines have been integrated into our information technology system framework and only policies that meet our guidelines are accepted by our system.  Our underwriting staff has substantial industry experience in matching policy terms, conditions, and pricing to the risk profiles of our policyholders and therefore strengthens our ability to achieve profitability in the product lines we write.

Commercial Lines.  In writing commercial lines policies, we frequently employ tailored limiting endorsements, rating surcharges and customized limits to align our product offerings to the risk profile of the class and the specific policyholder being underwritten.  Furthermore, we consistently monitor our markets so that we are able to quickly implement changes in pricing, underwriting guidelines and product offerings as necessary to remain competitive.  We do not pursue commercial product lines where competition is based primarily on price.  We augment our own internally developed pricing models with benchmark rates and policy terms set forth by the Insurance Services Office, or ISO.  The ISO system is a widely recognized industry resource for common and centralized rates and forms.  It provides advisory ratings, statistical and actuarial services, sample policy provisions and other services to its members.

Personal Lines.  We employ internal product managers to review our position relative to our competition, create better segmentation of pricing and originate premium rate changes as appropriate.  Consistent with industry practice, we grant our personal lines agents limited binding authority within our specific guidelines.  Once a completed application and premium payment are submitted to us, the application is placed in a bound status, and reviewed for final approval.  If the agent has underwritten and submitted the account according to our guidelines, we process the application as complete.  If our guidelines have not been followed, the application may be cancelled or updated and re‑submitted for further underwriting review.


We believe that effective claims management is vitally important to our success, allowing us to cost effectively pay valid claims, while vigorously defending those claims that lack merit.  Our claims department consists of experienced claims professionals located in Michigan, Florida, Pennsylvania and Texas. We utilize a proactive claims handling philosophy to internally manage or supervise all of our claims from inception through final disposition. By handling our claims internally, we can quickly assess claims, improve communication with our policyholders and claimants and better control our claims management costs.



We have several in‑house attorneys with considerable legal experience in trying cases in the lines of business we write.  Included among these attorneys is our head in‑house litigator, who consults on all trials and has 26 years of litigation experience.  We also have numerous seasoned property and liability adjusters which allow us to manage our claims exposures more carefully, across all markets.  In addition, our claims professionals utilize a network of independent local adjusters and appraisers to assist with specific aspects of claims investigations, such as securing witness statements and conducting initial appraisals in states where it is practical to do so.  These outside vendors are mainly compensated based on pre‑negotiated fee schedules to control overall costs.

Claims personnel are organized by line of business, with specific managers assigned as supervisors for each line of business.  Reserving and payment authority levels of claims personnel are set by our Senior Vice President of claims and our Executive Vice President.  Those limits of authority are integrated into our claims information technology systems to ensure strict compliance.

Initial claim reserves are determined and set using our statistical averages of paid indemnity and loss adjustment expenses by line of business.  After reviewing statistical data and consulting with our internal actuary, our Senior Vice President of claims, together with other members of management, set initial reserves by line of business.  Once initial reserves have been set, reserves are evaluated periodically as specific claim information changes to generate management’s overall best estimate of reserves.  In addition, claim reviews with in‑house adjusters and attorneys provide a regular opportunity to review the adequacy of reserves.  Changes to claims reserves are made by senior management based on claim developments and input from these attorneys and adjusters.  We utilize an in‑house, experienced and fully credentialed actuary to support our financial efforts.


We routinely purchase reinsurance for our commercial and personal lines to reduce volatility by limiting our exposure to large losses and to provide capacity for growth.  In a reinsurance transaction, an insurance company transfers, or cedes, all or part of its exposure in return for a portion of the premium.  We remain legally responsible for the entire obligation to policyholders, irrespective of any reinsurance coverage we may purchase.

On September 28, 2017, the Company entered into an adverse development cover (ADC) reinsurance agreement to cover loss development of up to $17.5 million in excess of stated reserves as of June 30, 2017, for accident years 2005 through 2016.  The agreement attaches when net losses exceed $1.4 million of the $36.6 million carried reserves at June 30, 2017, and extends to $19.5 million in coverage up to $57.5 million.  The Company retains a 10% co-participation for any development in excess of the retention.

Information relating to our reinsurance structure and treaty information is included within Note 6 ~ Reinsurance.



Loss Reserve Development

The following table presents the development of our loss and loss adjustment expenses ("LAE") reserves from 2010 through 2020, net of reinsurance recoverables (dollars in thousands).








Year Ended December 31,




































Net liability for losses and loss expenses













































Liability re-estimated as of:













































One year later













































Two years later













































Three years later













































Four years later













































Five years later













































Six years later













































Seven years later













































Eight years later













































Nine years later













































Ten years later













































Net cumulative redundancy (deficiency)


























































































Cumulative amount of net liability paid as of:













































One year later













































Two years later













































Three years later













































Four years later













































Five years later













































Six years later













































Seven years later













































Eight years later













































Nine years later













































Ten years later


























































































Gross liability-end of year













































Reinsurance recoverable on unpaid losses













































Net liability-end of year


























































































Gross liability re-estimated - latest













































Reinsurance recoverable on unpaid losses re-estimated - latest













































Net liability re-estimated - latest













































Gross cumulative

  redundancy (deficiency)














































The first line of the table presents the unpaid loss and LAE reserves at December 31 for each year, including the incurred but not reported ("IBNR") reserve.  The next section of the table sets forth the re‑estimates of incurred losses from later years, including payments, for the years indicated.  The increase/decrease from the original estimate would generally be a combination of factors, including, but not limited to:


Claims being settled for amounts different from the original estimates;


Reserves being increased or decreased for individual claims that remain open as more information becomes known about those individual claims; and


More or fewer claims being reported after the related year end, than had been expected to be reported before that date.



As our historical data for a particular line of business increases, both in terms of the number of years of loss experience and the size of our data pool, we will increasingly rely upon our own loss experience rather than industry loss experience in establishing our loss and LAE reserves.  We applied reserving practices consistent with historical methodologies and incorporated specific analyses where appropriate.

Additional information relating to our reserves is included within the Losses and Loss Adjustment Expenses section of Note 1 ~ Summary of Significant Accounting Policies and Note 5 ~ Unpaid Losses and Loss Adjustment Expenses of the Notes to the Consolidated Financial Statements, as well as in the Critical Accounting Policies: Loss and Loss Adjustment Expense Reserves section of Item 7, Management’s Discussion and Analysis.


Insurance Company Regulation

Our Insurance Company Subsidiaries are subject to regulation in the states where they conduct business.  State insurance regulations generally are designed to protect the interests of policyholders, consumers or claimants rather than shareholders or other investors. The nature and extent of such state regulation varies by jurisdiction, but generally involves:


Prior approval of the acquisition of control of an insurance company or of any company controlling an insurance company;


Regulation of certain transactions entered into by such insurance company subsidiary with any of its affiliates;


Approval of premium rates, forms and policies used for many lines of admitted insurance;


Standards of solvency and minimum amounts of capital and surplus that must be maintained;


Limitations on types and concentration of investments;


Licensing of insurers and agents;


Deposits of securities for the benefit of policyholders; and


The filing of periodic reports with state insurance regulators with respect to financial condition and other matters.

In addition, state regulatory examiners perform periodic examinations of our Insurance Company Subsidiaries.  The results of these examinations can give rise to regulatory orders requiring remedial, injunctive or other corrective action.

Insurance Holding Company Regulation

We operate as an insurance holding company and are subject to regulation in the jurisdictions in which we conduct business.  These regulations require that each of our Insurance Company Subsidiaries register with the insurance department of its state of domicile and furnish information concerning the operations of companies within the holding company system that may materially affect the operations, management or financial condition of the insurers within the system.  The insurance laws similarly provide that all transactions among members of a holding company system must be fair and reasonable.  Certain types of transactions between our Insurance Company Subsidiaries and the Company and our other affiliates generally must be disclosed to the state regulators, and prior approval of the state insurance regulator generally is required for any material or extraordinary transaction.  In addition, a change of control of a domestic insurer or of any controlling person requires the prior approval of the state of domicile insurance regulator.



Various State and Federal Regulations

Insurance companies are also affected by a variety of state and federal legislative and regulatory measures and judicial decisions that define and extend the risks and benefits for which insurance is sought and provided.  In addition, for some classes of insureds individual state insurance departments may prevent premium rates for some classes of insureds from reflecting the level of risk assumed by the insurer for those classes.  Such developments may adversely affect the profitability of various lines of insurance.  In some cases, if permitted by applicable regulations, these adverse effects on profitability can be minimized through repricing of coverages or limitations or cessation of the affected business.

Reinsurance Intermediary

Our reinsurance intermediaries are also subject to regulation.  Under applicable regulations, an intermediary is responsible, as a fiduciary, for funds received on account of the parties to the reinsurance transaction.  The intermediaries are required to hold such funds in appropriate bank accounts subject to restrictions on withdrawals and prohibitions on commingling.

Licensing and Agency Contracts

We, or certain of our designated employees, must be licensed to act as agents by regulatory authorities in the states in which we conduct business.  Regulations and licensing laws vary in each state and are often complex.

Insurance licenses are issued by state insurance regulators upon application and may be of perpetual duration or may require periodic renewal.  There are often requirements to obtain appropriate new licenses before we can begin writing or offer new coverages in a new state.  The requirements are more stringent when writing on an admitted basis, as opposed to on an E&S basis where there is greater form and rate flexibility.

Insurers operating on an admitted basis must file premium rate schedules and policy or coverage forms for review and approval by the insurance regulators.  In many states, rates and policy forms must be approved prior to use, and insurance regulators have broad discretion in judging whether or not an insurer’s rates are adequate, excessive and unfairly discriminatory.

The applicable licensing laws and regulations in all states are subject to amendment or reinterpretation by state regulatory authorities, and such authorities are vested in most cases with relatively broad discretion as to the granting, revocation, suspension and renewal of licenses.  We, or our employees, could be excluded, or temporarily suspended, from continuing with some or all of our activities in, or otherwise subjected to penalties by, a particular state.

Membership in Insolvency Funds and Associations, Mandatory Pools and Insurance Facilities

Most states require admitted property and casualty insurers to become members of insolvency funds or associations, which generally protect policyholders against the insolvency of insurers.  Members of the fund or association must contribute to the payment of certain claims made against insolvent insurers.  The Company's assessments from insolvency funds were minimal for the years ended December 31, 2020, 2019, and 2018.

Our Insurance Company Subsidiaries are also required to participate in various mandatory insurance facilities or in funding mandatory pools, which are generally designed to provide insurance coverage for consumers who are unable to obtain insurance in the voluntary insurance market.  Among the pools participated in are those established in certain states to provide windstorm and other similar types of property coverage.  These pools typically require all companies writing applicable lines of insurance in the state for which the pool has been established to fund deficiencies experienced by the pool based upon each company’s relative premium writings in that state, with any excess funding typically distributed to the participating companies on the same basis.  To the extent that reinsurance treaties do not cover these assessments, they may have an adverse effect on the Company.  For the years ended December 31, 2020, 2019, and 2018, total assessments paid to all such facilities were minimal.



Restrictions on Dividends and Risk-Based Capital

For information on Restrictions on Dividends and Risk-based Capital that affect us please refer to Note 9 ~ Statutory Financial Data, Risk-Based Capital and Dividend Restrictions of the Notes to the Consolidated Financial Statements and the Regulatory and Rating Issues section within Item 7, Management’s Discussion and Analysis.


The National Association of Insurance Commissioners’ (“NAIC”) Insurance Regulatory Information System (“IRIS”) was developed by a committee of state insurance regulators and is primarily intended to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states.  IRIS identifies thirteen industry ratios and specifies “usual values” for each ratio.  Departure from the usual values on four or more ratios generally leads to inquiries or possible further review from individual state insurance commissioners.  However, the generation of ratios outside of the usual values does not necessarily indicate a financial problem.  For example, premium growth, alone, can trigger one or more unusual values.  Refer to the Regulatory and Rating Issues section within Item 7, Management’s Discussion and Analysis.

Effect of Federal Legislation

The Terrorism Risk Insurance Act, (“TRIA”), was enacted in November 2002.  After several extensions, Congress enacted the Terrorism Risk Insurance Program Reauthorization of 2015 (“Act”).  The Act was extended through December 31, 2027 in December of 2019.  The Act continues to require insurance companies to offer terrorism coverage.  There is minimal exposure to this coverage as most of our policyholders decline this coverage option.


At December 31, 2020, we had 148 employees.  Substantially all of our employees are full-time.  Our employees are not subject to any collective bargaining agreement, and we are not aware of any current efforts to implement such an agreement.  We believe we have good working relations with our employees.

Available Information

We maintain an internet website at http://www.cnfrh.com, where we make available, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Statements of Beneficial Ownership (Forms 3, 4, and 5), and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish to, the SEC.  In addition, the SEC maintains an Internet site that contains reports, proxy statements, and other information that we file at www.sec.gov.  The public may read and copy any materials we file with the Commission at the SEC's Public Reference Room at 100 F Street, NE., Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m.  The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330.  Information found on our website or any other website is not part of this annual report on Form 10-K or any other report we file with, or furnish to the SEC.





Accident year


The annual calendar accounting period in which loss events occurred, regardless of when the losses are actually reported, booked or paid.

Accident year combined ratio

The accident year combined ratio is an insurance industry measure that excludes changes in net ultimate loss estimates from prior accident year loss reserves.  The accident year combined ratio provides management with an assessment of the specific policy year’s profitability (which matches policy pricing with related losses) and assists management in their evaluation of product pricing levels and quality of business written.  Management uses accident year combined ratio as one component to assess the Company's current year performance and as a measure to evaluate, and if necessary, adjust current year pricing and underwriting.

Adjusted operating income (loss)

Net income (loss) excluding net realized investment and other gains (losses), net of tax, the effects of tax reform, the tax effect of changes in unrealized gains to the extent included in net income, the change in the fair value of equity securities, net of tax, and the capitalization and amortization of deferred gains from the ADC.

Adjusted operating income (loss), per share

Adjusted operating income (loss) on a per share basis.

Assignment of Benefits

A legal tool that allows a third party to assert a claim and be paid for services performed for an insured who would normally be reimbursed directly by the insurance company after making a claim themselves.

Book value per share

Total common shareholders' equity divided by the number of common shares outstanding.

Case reserves

Estimates of anticipated future payments to be made on each specific reported claim.

Combined Ratio based on accounting principles generally accepted in the United States of America (“GAAP”)

The Combined Ratio is the sum of the Loss Ratio and the Expense Ratio.  These ratios differ from statutory ratios to reflect GAAP accounting, as management evaluates the performance of our underwriting operations using the GAAP combined ratio.

Combined Ratio based on statutory accounting practices (“SAP”)

The combined ratio based on SAP, expressed as a percentage, is the key measure of underwriting profitability traditionally used in the property and casualty insurance business.  The combined ratio is a statutory accounting measurement, which represents the sum of (i) the ratio of losses and loss expenses to net earned premiums (loss ratio), plus (ii) the ratio of underwriting expenses to net written premiums (expense ratio).

Combined Ratio (Overall)

When the combined ratio is under 100%, underwriting results are generally considered profitable; when the combined ratio is over 100%, underwriting results are generally considered unprofitable.

Deferred policy acquisition costs


Primarily commissions and premium-related taxes that vary with, and are primarily related to, the production of new contracts and are deferred and amortized to achieve a matching of revenues and expenses when reported in financial statements prepared in accordance with GAAP.



With regard to reserves for a given liability, a deficiency exists when it is estimated or determined that the reserves are insufficient to pay the ultimate settlement value of the related liabilities.  Where the deficiency is the result of an estimate, the estimated amount of deficiency (or even the finding of whether or not a deficiency exists) may change as new information becomes available.

Expense Ratio

For GAAP, it is the ratio of GAAP underwriting expenses incurred to net earned premiums plus other income.  For SAP, it is the ratio of Statutory underwriting expenses incurred to net written premiums.



Incurred but not reported (IBNR) reserves


Reserves for estimated losses and LAE that have been incurred but not yet reported to the insurer.  This includes amounts for unreported claims, development on known cases, and re-opened claims.



An occurrence that is the basis for submission and/or payment of a claim.  Losses may be covered, limited or excluded from coverage, depending on the terms of the policy.

Loss adjustment expenses (LAE)


The expenses of settling claims, including legal and other fees and the portion of general expenses allocated to claim settlement costs.

Loss ratio

The ratio of incurred losses and loss adjustment expenses to net earned premiums plus other income.

Loss reserves


Liabilities established by insurers and reinsurers to reflect the estimated cost of claims incurred that the insurer or reinsurer will ultimately be required to pay in respect of insurance or reinsurance it has written.  Reserves are established for losses and for LAE, and consist of case reserves and IBNR reserves.  As the term is used in this document, “loss reserves” is meant to include reserves for both losses and LAE, unless stated otherwise.

Loss reserve development


The increase or decrease in Loss or LAE as a result of the re-estimation of claims and claim adjustment expense reserves at successive valuation dates for a given group of claims.  Loss reserve development may be related to prior year or current year development.

Losses incurred

The total losses sustained by an insurance company under a policy or policies, whether paid or unpaid.  Incurred losses include a provision for IBNR.

NAIC-IRIS ratios

Financial ratios calculated by the NAIC to assist state insurance departments in monitoring the financial condition of insurance companies.

Policyholders' surplus


As determined under SAP, the amount remaining after all liabilities are subtracted from all admitted assets.  Admitted assets are assets of an insurer prescribed or permitted by a state to be recognized on the statutory balance sheet.  Policyholders' surplus is also referred to as “surplus” or “statutory surplus” for statutory accounting purposes.

Premium leverage ratio

The ratio of written premium (gross or net) to consolidated statutory surplus.



With regard to reserves for a given liability, a redundancy exists when it is estimated or determined that the reserves are greater than what will be needed to pay the ultimate settlement value of the related liabilities.  Where the redundancy is the result of an estimate, the estimated amount of redundancy (or even the finding of whether or not a redundancy exists) may change as new information becomes available.

Risk-Based Capital (RBC)

A measure adopted by the NAIC and enacted by states for determining the minimum statutory policyholders' surplus requirements of insurers.  Insurers having total adjusted capital less than that required by the RBC calculation will be subject to varying degrees of regulatory action.

Statutory accounting practices (SAP)

The practices and procedures prescribed or permitted by domiciliary state insurance regulatory authorities in the United States for recording transactions and preparing financial statements.

Underwriting gain or loss

Net earned premiums plus other income, less losses, LAE, commissions, and operating expenses.





Risk Factors

You should read the following risk factors carefully in connection with evaluating our business and the forward-looking information contained in this Annual Report on Form 10-K.  Any of the following risks could materially and adversely affect our business, operating results, financial condition and the actual outcome of matters as to which forward-looking statements are made in this Annual Report on Form 10-K.  While we believe we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our business, operating results or financial condition in the future.


We have listed below the material risk factors applicable to us grouped into the following categories: Operational Risks; Investment Risks; Liquidity Risks; Legal and Regulatory Risks Rating Agency Risks; Ownership of Our Common Stock Risks; and Ownership of Our Publicly Traded Debt Risks.  



Operational Risks


The effects of the COVID-19 pandemic and its economic and societal impact could adversely impact our businesses, assets and financial performance.

COVID-19 has caused significant disruption to public health, the global economy, financial markets, and commercial, social and community activity generally. The pandemic and the economic uncertainty may result in higher levels of loss and claims activity in certain lines of business and our premium revenue may reduce by a suppression of national and global commercial activity. If the ongoing pandemic continues to create disruptions or turmoil in the credit or financial markets, it could adversely affect our ability to access capital on favorable terms, or at all, and continue to meet our liquidity needs.  Additionally, the financial markets were particularly volatile in the first half of 2020 resulting in a significant decline in our investment portfolio asset values and correspondingly our Insurance Company Subsidiaries’ capital and surplus. While much of the market has rebounded, if there are further disruptions to the financial markets, they could again negatively impact the value and quality of our investment portfolio and impact our access to capital markets.


Governmental, regulatory and judicial actions in response to the COVID-19 pandemic may adversely affect our financial performance and our ability to conduct our businesses.

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


The disruption and other effects caused by COVID-19 could adversely impact the efficiency and productivity of our Business operations.

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

Our actual incurred losses may be greater than our loss and loss adjustment expense reserves, which could have a material adverse effect on our financial condition and results of operations.

Insurance companies’ financial condition and results of operations depend upon their ability to accurately assess the potential losses and loss adjustment expenses under the terms of the insurance policies they underwrite.  Reserves do not represent an exact calculation of liability.  Rather, reserves represent an estimate of what the expected ultimate settlement and administration of claims will cost, and the ultimate liability may be greater or less than the current estimate.  In the insurance industry, there is always the risk that reserves may prove inadequate as it is possible for insurance companies to underestimate the cost of claims.

We base our estimates on our assessment of known facts and circumstances, as well as estimates of future trends in claim severity, claim frequency, judicial theories of liability and other factors.  These variables are affected by both internal and external events that could increase our exposure to losses, including changes in actuarial projections, claims handling procedures, inflation, severe weather, climate change, economic and judicial trends, and legislative changes.  We continually monitor reserves using new information on reported claims and a variety of statistical techniques to update our current estimate.  Our estimates could prove to be inadequate, and this underestimation could have a material adverse effect on our financial strength.

The uncertainties we encounter in establishing our loss reserves include:


For the majority of our policies, we are obligated to pay any covered loss that occurs while the policy is in force.  Accordingly, claims may be reported and develop many years after a policy has lapsed;


Even when a claim is received, it may take considerable time to fully appreciate the extent of the covered loss suffered by the insured and, consequently, estimates of loss associated with specific claims can increase over time;




New theories of liability are enforced retroactively from time to time by courts;


Volatility in the financial markets, economic events, weather events and other external factors may result in an increase in the number of claims and the severity of the claims reported.  In addition, elevated inflationary conditions would, among other things, drive loss costs to increase;


When we enter new lines of business, or encounter new theories of claims liability, we may encounter an increase in claims frequency and greater claims handling costs than we had anticipated; and


Estimation of IBNR losses is a complex and inherently uncertain process which involves a considerable degree of judgment and expertise, which adds to the overall difficulty of estimating loss reserves.

If any of our insurance reserves should prove to be inadequate for the reasons discussed above, or for any other reason, we will be required to increase reserves, resulting in a reduction in our net income and shareholders’ equity in the period in which the deficiency is identified.  

If we are unable to underwrite risks accurately and charge competitive yet profitable rates to our policyholders, our business, financial condition and results of operations will be adversely affected.

In general, the premiums for our insurance policies are established at the time a policy is issued and, therefore, before all of our underlying costs are known.  Like other insurance companies, we rely on estimates and assumptions in setting our premium rates.  Establishing adequate premium rates is necessary, together with investment income, to generate sufficient revenue to offset losses, LAE and other underwriting costs and to earn a profit.  If we do not accurately assess the risks that we underwrite, we may not charge adequate premiums to cover our losses and expenses, which would adversely affect our results of operations and our profitability.  Alternatively, we could set our premiums too high, which could reduce our competitiveness and lead to lower revenues.

Pricing involves the acquisition and analysis of historical loss data and the projection of future trends, loss costs and expenses, and inflation trends, among other factors, for each of our products in multiple risk tiers and many different markets.  In order to accurately price our policies, we must:


Collect and properly analyze a substantial volume of data from our insureds;


Develop, test and apply appropriate actuarial projections and rating formulas;


Closely monitor and timely recognize changes in trends; and


Project both frequency and severity of our insureds’ losses with reasonable accuracy.

We seek to implement our pricing accurately in accordance with our assumptions.  Our ability to undertake these efforts successfully and, as a result, accurately price our policies, is subject to a number of risks and uncertainties, including:


Insufficient or unreliable data;


Incorrect or incomplete analysis of available data;


Uncertainties generally inherent in estimates and assumptions;


Our failure to implement appropriate actuarial projections and rating formulas or other pricing methodologies;


Regulatory constraints on rate increases; and


Our failure to accurately estimate investment yields and the duration of our liability for loss and loss adjustment expenses, as well as unanticipated court decisions, legislation or regulatory action.

In addition, as a result of current industry non-weather factors, such as the increase in litigation surrounding the Assignment of Benefits claims and lawsuits in Florida, in particular, we may experience additional losses that could adversely affect our financial position and results of operations.



We may not be able to manage our growth effectively.

We intend to continue to grow our business, which could require additional capital, systems development and skilled personnel.  We cannot assure you that we will be able to locate profitable business opportunities, meet our capital needs, expand our systems and our internal controls effectively, allocate our human resources optimally, identify qualified employees or agents or incorporate effectively the components of any businesses we may acquire in our effort to achieve growth.  The failure to manage our growth effectively and maintain underwriting discipline could have a material adverse effect on our business, financial condition and results of operations.

We operate in a highly competitive environment and we may not continue to be able to compete effectively against larger or more wellestablished business rivals.

We compete with a large number of other companies in our selected lines of business.  Many of our competitors are substantially larger and may enjoy better name recognition, substantially greater financial resources, higher financial strength ratings by rating agencies, broader and more diversified product lines and more widespread agency relationships than we do.  Insurers in our markets generally compete on the basis of price, consumer recognition, coverages offered, claims handling, financial stability, customer service and geographic coverage.  Although pricing is influenced to some degree by that of our competitors, it is not in our best interests to compete solely on price, and we may from time-to-time experience a loss of market share during periods of intense price competition.  A number of new, proposed or potential legislative or industry developments could further increase competition in our industry including, but not limited to:


An increase in capital‑raising by companies in our lines of business, which could result in new entrants to our markets and an excess of capital in the industry;


The deregulation of commercial insurance lines in certain states and the possibility of federal regulatory reform of the insurance industry, which could increase competition from standard carriers for our E&S lines of insurance business; and


Changing practices caused by the Internet may lead to greater competition in the insurance business.  Among the possible changes are shifts in the way insurance is purchased.  If our distribution model were to be significantly altered by changes in the way products are marketed, including, without limitation, through use of the Internet, it could have a material adverse effect on our premiums, underwriting results and profits.

There is no assurance that we will be able to continue to compete successfully in the insurance markets in which we participate.  Increased competition in our market could result in a change in the supply and/or demand for insurance, affect our ability to price our products at risk‑adequate rates and retain existing business, or underwrite new business on favorable terms.  If this increased competition so limits our ability to transact business, our operating results could be adversely affected.

Increased information technology security threats and more sophisticated computer crimes pose a risk to our systems, networks, products and services.

Our business is dependent upon the uninterrupted functioning of our information technology and telecommunication systems.  We rely upon our systems, as well as the systems of our vendors, to underwrite and process our business; make claim payments; provide customer service; provide policy administration services, such as endorsements, cancellations and premium collections; comply with insurance regulatory requirements; and perform actuarial and other analytical functions necessary for pricing and product development.  

Our systems may be damaged, disrupted, or shut down due to unauthorized access, malicious software, undetected intrusion, hardware failures, or other events, and in these circumstances our disaster recovery planning may be ineffective or inadequate.  Information technology security threats from user error to cybersecurity attacks are increasing in frequency and sophistication.  These threats pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data.  The potential consequences of a material cybersecurity attack include reputational damage, litigation with third parties, and increased cybersecurity protection and remediation costs.  A sustained business interruption or system failure could adversely impact our ability to process our business, provide customer service, pay claims in a timely manner or



perform other necessary business functions.  We could also be subject to fines and penalties related to a security breach.  The cost to remedy a severe breach could be substantial.

Severe weather conditions and other catastrophes are inherently unpredictable and may have a material adverse effect on our financial results and financial condition.

Our property insurance business is exposed to the risk of severe weather conditions and other catastrophes.  Catastrophes can be caused by various events, including natural events such as hurricanes, winter weather, tornadoes, windstorms, earthquakes, hailstorms, severe thunderstorms, fires and other non-natural events such as explosions or riots.

The incidence and severity of catastrophes and severe weather conditions are inherently unpredictable.  The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event.  Severe weather conditions and catastrophes can cause greater losses in our property lines and cause our liquidity and financial condition to deteriorate.  In addition, our inability to obtain reinsurance coverage at reasonable rates and in amounts adequate to mitigate the risks associated with severe weather conditions and other catastrophes could have a material adverse effect on our business and results of operations.

We may be unable to obtain reinsurance coverage at reasonable prices or on terms that provide us adequate protection.

We purchase reinsurance in many of our lines of business to help manage our exposure to insurance risks that we underwrite and to reduce volatility in our results.

The availability and cost of reinsurance are subject to prevailing market conditions, both in terms of price and available capacity, each of which can affect our business volume and profitability.  The availability of reasonably affordable reinsurance is a critical element of our business plan.  One important way we utilize reinsurance is to reduce volatility in claims payments by limiting our exposure to losses from large risks.  Another way we use reinsurance is to purchase substantial protection against concentrated losses when we enter new markets.  As a result, our ability to manage volatility and avoid significant losses, expand into new markets or grow by offering insurance to new kinds of enterprises may be limited by the unavailability of reasonably priced reinsurance.  We may not be able to obtain reinsurance on acceptable terms or from entities with satisfactory creditworthiness.  Under such circumstances, we may have to reduce the level of our underwriting commitments, which would reduce our revenues.

Many reinsurance companies have begun to exclude certain coverages from, or alter terms in, the reinsurance contracts we enter into with them.  Some exclusions relate to risks that we cannot exclude from the policies we write due to business or regulatory constraints.  In addition, reinsurers are imposing terms, such as lower per occurrence and aggregate limits, on direct insurers that do not wholly cover the risks written.  As a result, we, like other direct insurance companies, write insurance policies which, to some extent, do not have the benefit of reinsurance protection.  These gaps in reinsurance protection expose us to greater risk and greater potential losses.  For example, certain reinsurers have excluded coverage for terrorist acts or priced such coverage at unreasonably high rates.

We distribute our insurance products through a select group of agents, several of which account for a significant portion of our business, and there can be no assurance that such relationships will continue, or if they do continue, that the relationship will be on favorable terms to us. In addition, reliance on agents subjects us to their credit risk.

Our distribution model depends almost entirely on the agencies that distribute our products.  In 2020, six independent agencies accounted for approximately 33% of our gross written premiums in our commercial lines, and four independent agencies, accounted for approximately 26% of our gross written premiums in our personal lines.  We cannot assure you that these relationships, or our relationships with any of our agencies will continue.  Even if the relationships do continue, they may not be on terms that are profitable for us.  The termination of a relationship with one or more significant agents could result in lower premium revenue and could have a material adverse effect on our results of operations or business prospects.

Certain premiums from policyholders, where the business is produced by agents, are collected directly by the agents and forwarded to our Insurance Company Subsidiaries.  In certain jurisdictions, when the insured pays its policy premium to these agents for payment on behalf of our Insurance Company Subsidiaries, the premiums might be considered to have been



paid under applicable insurance laws and regulations.  Accordingly, the insured would no longer be liable to us for those amounts, whether or not we have actually received the premiums from that agent.  Consequently, we assume a degree of credit risk associated with agents.  There may be instances where agents collect premiums but do not remit them to us and we may be required to provide the coverage set forth in the policy despite the absence of premiums.  If we are unable to collect premiums from agents, underwriting profits may decline and our financial condition and results of operations could be materially and adversely affected.

The property and casualty insurance business is historically cyclical in nature, and we may experience periods with excess underwriting capacity and unfavorable premium rates, which could adversely affect our business.

Historically, insurers have experienced significant fluctuations in operating results due to competition, frequency and severity of catastrophic events, levels of capacity, adverse litigation trends, regulatory constraints, general economic conditions and other factors.  The supply of insurance is related to prevailing prices, the level of insured losses and the level of capital available to the industry that, in turn, may fluctuate in response to changes in rates of return on investments being earned in the insurance industry.  As a result, the insurance business historically has been a cyclical industry characterized by periods of intense price competition due to excessive underwriting capacity as well as periods when shortages of capacity increased premium levels.  Demand for insurance depends on numerous factors, including the frequency and severity of catastrophic events, levels of capacity, the introduction of new capital providers, and general economic conditions.  All of these factors fluctuate and may contribute to price declines generally in the insurance industry.

We cannot predict with certainty whether market conditions will improve, remain constant or deteriorate.  Negative market conditions may impair our ability to underwrite insurance at rates we consider appropriate and commensurate relative to the risk assumed.  If we cannot underwrite insurance at appropriate rates, our ability to transact business will be materially and adversely affected.  Any of these factors could lead to an adverse effect on our business, financial condition and results of operations.

Adverse economic factors, including recession, inflation, periods of high unemployment or lower economic activity could result in the sale of fewer policies than expected or an increase in the infrequency or severity of claims and premium defaults or both, which, in turn, could affect our growth and profitability.

Factors, such as business revenue, economic conditions, the volatility and strength of the capital markets and inflation can all affect the business and economic environment in which we operate.  These same factors affect our ability to generate revenue and profits.  In an economic downturn that is characterized by higher unemployment, declining spending and reduced corporate revenues, the demand for insurance products is adversely affected, which directly affects our premium levels and profitability.  Negative economic factors may also affect our ability to receive the appropriate rate for the risk we insure with our policyholders and may adversely affect the number of policies we can write, including with respect to our opportunities to underwrite profitable business.  In an economic downturn, our customers may have less need for insurance coverage, cancel existing insurance policies, modify their coverage or not renew with us.  Existing policyholders may exaggerate or even falsify claims to obtain higher claims payments.  These outcomes would reduce our underwriting profit to the extent these factors are not reflected in the rates we charge.

The failure of any of the loss limitations or exclusions we employ, or changes in other claims or coverage issues, could have a material adverse effect on our financial condition or results of operations.

Our policies include provisions to limit our exposure to known risks. In addition, we design our policy terms to manage our exposure to expanding theories of legal liability like those which have given rise to claims for lead paint, asbestos, mold, construction defects and environmental matters.  Many of the policies we issue also include conditions requiring the prompt reporting of claims to us and entitle us to decline coverage in the event of a violation of that condition.  Also, many of our policies limit the period during which a policyholder may bring a claim under the policy, which in many cases is shorter than the statutory period under which such claims can be brought against our policyholders.  

As industry practices and legal, judicial, social and other conditions change, unexpected and unintended issues related to claims and coverage may emerge.  These issues may adversely affect our business by either extending coverage beyond the underwriting intent or by increasing the size or number of claims.



It is possible that a court or regulatory authority could nullify or void any number of the provisions we put in place to limit our exposure.  Regulatory authorities or courts may not interpret the limitations or exclusions that we included in the policies in the manner we intended.  Or legislation could be enacted modifying or barring the use of such endorsements and limitations.  These types of governmental actions could result in higher than anticipated losses and loss adjustment expenses, which could have a material adverse effect on our financial condition or results of operations.  In some instances, these changes may not become apparent until sometime after we have issued insurance policies that are affected by the changes.  As a result, the full extent of liability under our insurance contracts may not be known for many years after a contract is issued.

If we are unable to retain key management and employees or recruit other qualified personnel, we may be adversely affected.

We believe that our future success depends, in large part, on our ability to retain our experienced management team and key employees, particularly our chairman and chief executive officer, James G. Petcoff. There can be no assurance that we can attract and retain the necessary employees to conduct our business activities on a timely basis or at all.  Our competitors may offer more favorable compensation arrangements to our key management or employees to incentivize them to leave our Company.  Furthermore, our competitors may make it more difficult for us to hire their personnel by offering excessive compensation arrangements to certain employees to induce them not to leave their current employment and bringing litigation against employees who do leave (and possibly us as well) to join us.  The loss of any of our executive officers or other key personnel, or our inability to recruit and retain additional qualified personnel as we grow, could materially and adversely affect our business and results of operations, and could prevent us from fully implementing our growth strategies.

We rely on our systems and employees, and those of certain thirdparty vendors and service providers in conducting our operations, and certain failures, including internal or external fraud, operational errors, or systems malfunctions, could materially adversely affect our operations.

We are exposed to many types of operational risk, including the risk of fraud by employees and outsiders, clerical and recordkeeping errors and computer or telecommunications systems malfunctions.  Our business depends on our ability to process a large number of increasingly complex transactions.  If any of our operational, accounting, or other data processing systems fail or have other significant shortcomings, we could be materially adversely affected.  Similarly, we depend on our employees.  We could be materially adversely affected if one or more of our employees cause a significant operational breakdown or failure, either as a result of human error or intentional sabotage or fraudulent manipulation of our operations or systems.

Third parties with whom we do business, including vendors that provide services or security solutions for our operations, could also be sources of operational and information security risk to us, including from breakdowns, failures, or capacity constraints of their own systems or employees.  Any of these occurrences could diminish our ability to operate our business, or cause financial loss, potential liability to insureds, inability to secure insurance, reputational damage or regulatory intervention, which could materially adversely affect us.

Litigation and legal proceedings against our Subsidiaries could have a material adverse effect on our business, financial condition and/or results of operations.

As an insurance holding company, our Subsidiaries are named as defendants in various legal actions in the ordinary course of business.  We believe that the outcome of presently pending matters, individually and in the aggregate, will not have a material adverse effect on our consolidated financial position, operating results or liquidity.  However, the outcomes of lawsuits cannot be predicted and, if determined adversely, could require us to pay significant damage amounts or to change aspects of our operations, which could have a material adverse effect on our financial results.



Our geographic concentration ties our performance to the business, economic, natural perils, man-made perils, and regulatory conditions within our most concentrated region.

Our revenues and profitability are subject to the prevailing regulatory, legal, economic, political, demographic, competitive, weather and other conditions in the principal states in which we do business.  Changes in any of these conditions could make it less attractive for us to do business in such states and would have a more pronounced effect on us compared to companies that are more geographically diversified.  In addition, our exposure to severe losses from localized perils, such as earthquakes, hurricanes, tropical storms, tornadoes, wind, ice storms, hail, fires, terrorism, riots and explosions, is increased in those areas where we have written significant numbers of insurance policies.

We are subject to credit risk with regard to our reinsurance counterparties.

Although reinsurance makes the assuming reinsurer liable to us to the extent of the risk ceded, we are not relieved of our primary liability to our insureds as the direct insurer.  We cannot be sure that our reinsurers will pay all reinsurance claims on a timely basis or at all.  For example, reinsurers may default in their financial obligations to us as the result of insolvency, lack of liquidity, operational failure, fraud, asserted defenses based on agreement wordings or the principle of utmost good faith, asserted deficiencies in the documentation of agreements or other reasons.  The failure of a reinsurer to pay us does not lessen our contractual obligations to insureds.  If a reinsurer fails to pay the expected portion of a claim or claims, our net losses might increase substantially and adversely affect our financial condition.  Any disputes with reinsurers regarding coverage under reinsurance contracts could be time‑consuming, costly and uncertain of success.

Downgrades to the credit ratings of our reinsurance counterparties may result in the reduction of rating agency capital credit provided by those reinsurance contracts and could, therefore, result in a downgrade of our own credit ratings.  We evaluate each reinsurance claim based on the facts of the case, historical experience with the reinsurer on similar claims and existing case law and include any amounts deemed uncollectible from the reinsurer in our reserve for uncollectible reinsurance.


Changes to reference rates could materially adversely affect our earnings.

LIBOR, the interest rate benchmark used as a reference rate on our variable rate debt, including our credit agreement, is expected to be phased out after 2021, when private-sector banks are no longer required to report the information used to set the rate. Without this data, LIBOR may no longer be published, or the lack of quality and quantity of data may cause the rate to no longer be representative of the market. At this time, no consensus exists as to what rate or rates will become accepted alternatives to LIBOR, although the U.S. Federal Reserve, in connection with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate (“SOFR”). SOFR is a more generic measure than LIBOR and considers the cost of borrowing cash overnight, collateralized by U.S. Treasury securities. Given the inherent differences between LIBOR and SOFR or any other alternative benchmark rate that may be established, there are many uncertainties regarding a transition from LIBOR, including but not limited to the need to amend all contracts with LIBOR as the referenced rate and how this will impact the Company’s cost of variable rate debt and certain derivative financial instruments. The Company will also need to consider new contracts and if they should reference an alternative benchmark rate or include suggested fallback language, as published by the Alternative Reference Rates Committee. The consequences of these developments with respect to LIBOR cannot be entirely predicted and span multiple future periods but could result in an increase in the cost of our variable rate debt which may be detrimental to our financial position or operating results.


Damage to our reputation could have a material adverse effect on our business.

Our reputation is one of our key assets. Our ability to attract and retain policyholders is highly dependent upon the external perceptions of our level of service, trustworthiness, business practices, financial condition and other subjective qualities. Negative perceptions or publicity regarding these or other matters, including from actual or alleged conduct by us or our employees, could damage our reputation. Any resulting erosion of trust and confidence among existing and potential policyholders, regulators and other parties important to the success of our business could make it difficult for us to attract new policyholders and maintain existing ones, which could have a material adverse effect on our business, financial condition and results of operations.



Investment Risks

Our investment portfolio is subject to significant market and credit risks, which could result in an adverse impact on our financial conditions or results of operations.

Our results of operations depend, in part, on the performance of our investment portfolio.  We seek to hold a diversified portfolio of investments that is managed by professional investment advisory management firms in accordance with our investment policy and routinely reviewed by our Investment Committee.  However, our investments are subject to general economic conditions and market risks as well as risks inherent to particular securities.

The value of our investment portfolio is subject to the risk that certain investments may default or become impaired due to deterioration in the financial condition of one or more issuers of the securities held, or due to deterioration in the financial condition of an entity that guarantees an issuer’s payments of such investments.  Such defaults and impairments could reduce our net investment income and result in realized investment losses.

A severe economic downturn could cause us to incur substantial realized and unrealized investment losses in future periods, which would have an adverse impact on our financial condition, results of operations, debt and financial strength ratings, Insurance Company Subsidiaries’ capital liquidity and ability to access capital markets.  In addition, losses in our investment portfolio may occur at the same time as underwriting losses and, therefore, exacerbate the adverse effect of the losses on us.

We may be adversely affected by interest rate changes.

Our investment portfolio is predominantly comprised of fixed income securities.  These securities are sensitive to changes in interest rates.  An increase in interest rates typically reduces the fair market value of fixed income securities.  In addition, if interest rates decline, investment income earned from future investments in fixed income securities will be lower.   Rising interest rates could result in a significant reduction of our book value.  A low investment yield environment could adversely impact our net earnings, as a result of fixed income securities maturing and being replaced with lower yielding securities which impact investing results.

Interest rates are highly sensitive to many factors beyond our control including general economic conditions, governmental monetary policy, and political conditions.  See Item 7A ~ Qualitative and Quantitative Disclosures About Market Risk for further discussion on interest rate risk.




Liquidity Risks

Any debt service obligations will reduce the funds available for other business purposes, and the terms and covenants relating to our current and future indebtedness could adversely impact our financial performance and liquidity.

As of December 31, 2020, we had $24.4 million of senior unsecured notes (the “Notes”) outstanding, $10.5 million of subordinated notes (the "Subordinated Notes") outstanding, and $7.7 million outstanding on our line of credit.  The $7.7 million includes a $2.7 million loan from the line of credit Lender pursuant to the Paycheck Protection Program (“PPP loan”) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act administered by the U.S. Small Business Administration (“SBA”).  See Note 7 ~ Debt for additional details.  We are subject to risks typically associated with debt financing, such as insufficient cash flow to meet required debt service payment obligations and the inability to refinance existing indebtedness. Our ability to make payments on our indebtedness is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.  If we are unable to generate sufficient cash flow to service our debt and meet our other commitments, we may need to restructure or refinance all or a portion of our debt, sell material assets or operations or raise additional debt or equity capital.  We may not be able to effect any of these actions on a timely basis, on commercially reasonable terms or at all, and these actions may not be sufficient to meet our capital requirements.  In addition, the terms of our existing or future debt arrangements may restrict us from effecting any of these alternatives.  In addition, the line of credit and the Subordinated Notes contain various restrictive covenants that relate to the Company’s tangible net worth, fixed-charge coverage ratios, dividend paying capacity, reinsurance retentions, and risk-based capital ratios.  If we are unable to meet debt covenant requirements or to obtain future waivers regarding such failures, we could be in breach of our credit agreement.  Any such breach could cause significant disruption to our operations, including a requirement to immediately repay our indebtedness, and would have severe adverse effects on our liquidity and financial flexibility.

Our ability to meet ongoing cash requirements, service debt and pay dividends may be limited by our holding company structure and regulatory constraints restricting dividends or other distributions by our Insurance Company Subsidiaries.

We are a holding company that transacts the majority of our business through our Insurance Company Subsidiaries and, as a result, our principal sources of funds are payments from our Insurance Company Subsidiaries, including intercompany service fees and dividends.  Our ability to meet our obligations on our outstanding debt and pay our expenses, depends on continuing to receive sufficient funds from our Insurance Company Subsidiaries.  We have met our outstanding cash flow obligations at the holding company level primarily through intercompany service fees we receive as well as direct expense reimbursements.  We may also use dividends from our Insurance Company Subsidiaries, however, insurance regulations limit such dividend payments.  At this time any dividend payment from our Insurance Company Subsidiaries would need prior regulatory approval.   Any significant reduction in the intercompany service fees we receive, and any regulatory or other limitations on the payment of dividends to us from our Insurance Company Subsidiaries, may adversely affect our ability to meet our debt obligations and pay our expenses.




Legal and Regulatory Risks

We are subject to extensive regulation, which may adversely affect our ability to achieve our business objectives. In addition, if we fail to comply with these regulations, we may be subject to penalties, including fines and suspensions, which may adversely affect our financial condition and results of operations.

As a holding company which owns insurance companies domiciled in the United States, we and our admitted Insurance Company Subsidiaries are subject to extensive regulation, primarily by Michigan (the domiciliary state for CIC and WPIC) and to a lesser degree, the other jurisdictions in which we operate.  Most insurance regulations are designed to protect the interests of insurance policyholders, as opposed to the interests of shareholders.  These regulations generally are administered by a department of insurance in each state and relate to, among other things, authorizations to write certain lines of business, capital and surplus requirements, reserve requirements, rate and form approvals, investment and underwriting limitations, affiliate transactions, dividend limitations, cancellation and non‑renewal of policies, changes in control, solvency and a variety of other financial and non‑financial aspects of our business.  These laws and regulations are regularly re‑examined and any changes in these laws and regulations or new laws may be more restrictive, could make it more expensive to conduct business or otherwise adversely affect our operations.  State insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to financial condition, holding company issues and other matters.  These regulatory requirements may impose timing and expense or other constraints that could adversely affect our ability to achieve some or all of our business objectives.

In addition, regulatory authorities have broad discretion to deny or revoke licenses for various reasons, including the violation of regulations.  In some instances, where there is uncertainty as to applicability, we follow practices based on our interpretations of regulations or practices that we believe are generally followed by the industry.  These practices may turn out to be different from the interpretations of regulatory authorities.  If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or otherwise penalize us.  This could adversely affect our ability to operate our business.

The admitted market is subject to more state regulation than the E&S market, particularly with regard to rate and form filing requirements, restrictions on the ability to exit lines of business, premium tax payments and membership in various state associations, such as guaranty associations.  Some states have deregulated their commercial insurance markets.  We cannot predict the effect that further deregulation would have on our business, financial condition or results of operations.

The State of Michigan has adopted the NAIC’s calculation to measure the adequacy of statutory capital of U.S.‑based insurers, known as Risk-Based Capital ("RBC").  The RBC calculation establishes the minimum amount of capital necessary for a company to support its overall business operations.  Insurers falling below a calculated threshold may be subject to varying degrees of regulatory action, including supervision, rehabilitation or liquidation.  Failure to maintain adequate RBC at the required levels could adversely affect the ability of our Insurance Company Subsidiaries to maintain regulatory authority to conduct their business.

The State of Michigan has adopted the NAIC’s holding company act and regulations.  This act requires, among other things, that:


An insurance holding company system’s ultimate controlling person submit an annual enterprise risk report to its domiciliary state insurance regulator which identifies activities, circumstances or events involving one or more affiliates of an insurer that may have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole,


A controlling person to submit prior notice to its domiciliary insurance regulator of a divestiture of control, and