The following tables set forth selected consolidated historical financial information of Conifer Holdings, Inc. and Subsidiaries as of the dates and for the periods indicated. The selected financial data for the years ended December 31, 2019, 2018, 2017, 2016, and 2015 were derived from our audited consolidated financial statements and related notes thereto.
For our Insurance Company Subsidiaries, the excess of assets over liabilities are determined in accordance with statutory accounting principles as determined by the domiciliary state for each Insurance Company Subsidiary. In 2018, CIC issued a surplus note to WPIC for $10.0 million. The regulatory capital and surplus balance as of year ended December 31, 2019 eliminates the $10.0 million surplus note from the consolidated balance.
We are an insurance holding company that markets and services our product offerings through specialty commercial and specialty personal insurance business lines. Our growth has been significant since our founding in 2009. Currently, we are authorized to write insurance as an excess and surplus lines carrier in 45 states, including the District of Columbia. We are 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.
Through our personal insurance lines, we offer homeowners insurance and dwelling fire insurance products to individuals in several states. Our specialty homeowners insurance product line is primarily comprised of low-value dwelling insurance tailored for owners of lower valued homes, which we offer in Illinois, Indiana and Texas. Due to recent Florida-based industry events, we have been de-emphasizing our Florida homeowners’ business and reducing our exposures in that state, as well as other wind-exposed states like Texas and Hawaii.
Expenses intended to cover the ultimate cost of settling claims, including investigation and defense of lawsuits resulting from such claims, costs of outside adjusters and experts, and all other expenses which are identified to the case; and
Expected initial loss and LAE ratio, which is the ratio of incurred losses and LAE to earned premiums; and
Frequency/severity method-This method projects claim counts and average cost per claim on a paid or reported basis for high frequency, low severity products.
Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. We are subject to income taxes in the United States and numerous state jurisdictions. Significant judgment is required in determining the consolidated income tax expense.
On December 22, 2017, the U.S. federal government enacted H.R. 1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Act”). The Act provided for significant changes to corporate taxation including the decrease of the corporate tax rate from 34% to 21%.
In 2018, the Company recognized a measurement period adjustment of $42,735 related to loss reserve discounting, which reduced deferred tax expense. The Company also recognized a measurement period adjustment of $42,735 related to the loss reserve discounting transitional adjustment, which increased deferred tax expense. The measurement period adjustments were based upon obtaining additional information about facts and circumstances that existed as of the enactment date that, if known, would have affected the income tax effects initially reported as provisional amounts under the Act. The measurement period adjustments had no effect on the effective tax rate for the year ending December 31, 2018. The accounting for the income tax effects of the Act pursuant to SAB 118 has been completed as of the end of the December 22, 2018, measurement period and for the year ended December 31, 2018.
Adjusted operating loss, a non-GAAP measure, was $15.1 million, or $1.69 per share, for the year ended December 31, 2019, compared to an adjusted operating loss of $3.7 million, or $0.44 per share, for the year ended December 31, 2018.
In 2019, there was $313,000 of loss development on Hurricane Harvey and $495,000 of catastrophe reinsurance statement costs relating to Hurricane Irma. In 2018, there was $583,000 of loss development on Hurricane Harvey and $1.0 million of catastrophe reinsurance reinstatement costs relating to Hurricane Irma. The reinstatement costs, plus a short-term reduction in net earned premiums as we repositioned our business profile, contributed to a slightly higher expense ratio.
In an effort to reduce interest costs, we restructured our debt during 2018 by issuing $25.3 million of public senior unsecured notes (the "Notes") and paid down $19.5 million of our subordinated notes to $10.5 million.
In 2017, we purchased the ADC to greatly reduce our exposure to prior-year adverse development. In 2017, we recorded $7.2 million in ceded premiums under the ADC, and ceded $7.2 million in losses. The benefits of the ADC can be seen during 2018 wherein we ceded $10.3 million of adverse development to the ADC. Of the $10.3 million of ceded losses, $4.6 million was amortized in 2018, and reduced losses and LAE expense. The remaining $5.7 million was recognized in 2019. As of December 31, 2019, the deferred gain from the ADC was fully utilized.
Our premiums are presented below for the years ended December 31, 2019 and 2018 (dollars in thousands):
Gross written premiums decreased by $2.5 million, or 2.4%, to $101.9 million for the year ended December 31, 2019, as compared to $104.4 for the year ended December 31, 2018. The decrease was attributable to a reduction in written premium in our hospitality programs, which was slightly offset by an increase in written premium in our small business programs.
The tables below detail our losses and LAE and loss ratios for the years ended December 31, 2019 and 2018 (dollars in thousands).
The $10.6 million of adverse development in 2019 consisted of $7.6 million from commercial lines and $3.0 million from personal lines and mostly related to the 2017 and 2016 accident years.
Our expense ratio decreased by 1.9%, to 44.0% for the year ended December 31, 2019, as compared to the same period in 2018. The decrease in the expense ratio was primarily due to lower operating and reinsurance costs in 2019 compared to 2018. The reduction in the expense ratio was partially offset by lower net earned premium in 2019 compared to 2018.
The Company received a one-time dividend from an investment for $213,000 in the third quarter of 2019.
For the year ended December 31, 2019, the Company reported $0 of current federal income tax expense and $27,000 of current state income tax expense. The Company reported a deferred tax benefit of $940,000 and $0 for the years ended December 31, 2019 and 2018, respectively. The increase in the deferred tax benefit in 2019 was a result of the change in the net deferred tax asset valuation allowance related to the changes in unrealized gains.
The loss ratio is the ratio, expressed as a percentage, of net losses and loss adjustment expenses to net earned premiums and other income from underwriting operations. The 2018 and 2017 ratios have been recast to reflect the new presentation. Refer to Note 17 ~ Segment Information for further details.
The tables below detail our losses and LAE and loss ratios for the years ended December 31, 2018 and 2017 (dollars in thousands).
Policy acquisition costs are costs we incur to issue policies, which include commissions, premium taxes, underwriting reports and underwriter compensation costs. The Company offsets direct commissions with ceded commissions from reinsurers. The percentage of policy acquisition costs to net earned premiums and other income decreased by 2.1 percentage points from 31.3% in 2017, to 29.2% in 2018.
Operating expenses consist primarily of employee compensation, information technology and occupancy costs, such as rent and utilities. Operating expenses as a percent of net earned premiums and other income were 16.7% and 13.5% for the years ended December 31, 2018 and 2017, respectively.
We measure the performance of our consolidated results, in part, based on our underwriting gain or loss. The following table provides the underwriting gain or loss for the years ended December 31, 2018 and 2017 (dollars in thousands):
We believe that our existing cash, cash equivalents, short-term investments and investment securities balances will be adequate to meet our capital and liquidity needs and the needs of our subsidiaries on a short-term and long-term basis.
We conduct our business operations primarily through our Insurance Company Subsidiaries. Our ability to service debt, and pay administrative expenses is primarily reliant upon our intercompany service fees paid by the Insurance Company Subsidiaries to the holding company for management, administrative, and information technology services provided to the Insurance Company Subsidiaries by the Parent Company. Secondarily, the Parent Company may receive dividends from the Insurance Company Subsidiaries; however, this is not the primary means in which the holding company supports its funding as state insurance laws restrict the ability of our Insurance Company Subsidiaries to declare dividends to the Parent Company. Generally, the limitations are based on the greater of statutory net income for the preceding year or 10% of statutory surplus at the end of the preceding year. No dividends were paid from our Insurance Company Subsidiaries in 2019, 2018 or 2017.
Operating Activities. Cash provided by operating activities for the year ended December 31, 2019, was $15.4 million as compared to cash used in operating activities of $17.0 million for the year ended December 31, 2018. The $32.4 million increase in cash from operations was mostly due to a $28.4 million increase in cash received from reinsurers due to ceded losses, including $12.5 million of cash received in 2019 from the ADC. Also, ceded premiums paid to reinsurers decreased by $2.6 million in 2019 compared to 2018.
Cash used in operating activities for the year ended December 31, 2018, was $17.0 million as compared to cash provided by operating activities of $9.1 million for the year ended December 31, 2017. The $26.1 million fluctuation in cash from operations was due to a $10.0 million decrease in cash collected on gross premiums, mostly due to the reduction in wind-exposed homeowners premiums, a $2.8M increase in paid ceded premiums due to the ceded premiums paid on the ADC and
reinstatement premiums, and a $10.1 million increase in net paid losses due, in part, to losses incurred from the 2017 hurricanes.
Cash provided by financing activities for the years ended December 31, 2018 and 2017, were $3.7 million and $16.2 million, respectively. There was a $5.0 million issuance of common stock in 2017 and none in 2018. Also, there was $6.9 million greater cash flow from debt, net of repayments and debt issuance costs in 2017, than in 2018.
In September and October 2018, we issued $25.3 million of public senior unsecured notes (the “Notes”). The Notes mature on September 30, 2023, and bear interest, payable quarterly, at the annual rate of 6.75%. We used a portion of the proceeds from the Notes to pay down $19.5 million of the $30.0 million subordinated notes originally entered into on September 29, 2017 (“Subordinated Notes”). Effective September 24, 2018, the Subordinated Notes agreement was amended. Under the new terms, the Subordinated Notes carry a principle value of $10.5 million, mature on September 30, 2038, and bear an annual interest rate of 7.5% until September 30, 2023, and 12.5% thereafter. Interest is payable quarterly. Beginning September 30, 2021, the Company may redeem the Subordinated Notes, in whole or in part, or any quarter thereafter, for a call premium of $1.1 million. The call premium escalates quarterly to $1.75 million on September 30, 2023, then steps up to $3.05 million on December 31, 2023, and increases quarterly at a 12.5% per annum rate thereafter. The debt covenants are consistent with the existing Subordinated Note terms. A $105,000 loan origination fee was paid on the effective date.
On June 21, 2018, the Company entered into a $10.0 million line of credit. The line of credit bears interest at the London Interbank rate ("LIBOR") plus 2.75% per annum, payable monthly. The agreement includes several covenants, including but not limited to a minimum tangible net worth, a minimum fixed-charge coverage ratio, and minimum statutory risk-based capital levels. As of December 31, 2019, the Company had $2.0 million outstanding on the line of credit, and was in compliance with all of its debt financial covenants.
The following table is a summary of our contractual obligations and commitments as of December 31, 2019 (dollars in thousands):
At December 31, 2019, all of our Insurance Company Subsidiaries were in excess of any minimum threshold at which corrective action would be required.