UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 1−K

ANNUAL REPORT PURSUANT TO REGULATION A

OF THE SECURITIES ACT OF 1933

For the fiscal year ended December 31, 2022

Forge Group, Inc.

(Exact name of registrant as specified in its charter)

P.O. Box 15033

Worcester, MA 01615

(Full mailing address of principal executive offices)

(202) 547-8700

(Issuer’s telephone number, including area code)

Common Stock

(Title of each class of securities issued pursuant to Regulation A)

PART II

Use of Terms

Unless the context otherwise requires, as used in this report:

Special Note Regarding Forward Looking Statements

Certain information contained in this report includes forward-looking statements. The statements herein which are not historical reflect our current expectations and projections about our company’s future results, performance, liquidity, financial condition, prospects and opportunities and are based upon information currently available to our company and our management and our interpretation of what is believed to be significant factors affecting the businesses, including many assumptions regarding future events.

Forward-looking statements are generally identifiable by use of the words “may,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. Actual results, performance, liquidity, financial condition, prospects and opportunities could differ materially from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including matters described in this report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this report will in fact occur.

Undue reliance should not be placed on any forward-looking statements. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.

ITEM 1. BUSINESS

Overview

Forge Group, Inc. (the “Company”) is a Pennsylvania corporation that was organized in 2021. The Company was formed so that it could (i) acquire all of the capital stock of Forge Insurance Company (“FIC”) in a mutual to stock conversion and (ii) acquire FIC’s affiliated insurance agency, Forge Risk Management, Inc. (“FRM”). Prior to the conversion, the Company did not engage in any operations. After the conversion, the Company’s primary assets consisted of (i) the outstanding capital stock of FIC, (ii) the outstanding capital stock of FRM, and (iii) a portion of the net proceeds from the offering completed in connection with the conversion of FIC. ACIC Consolidated Properties, LLC (“ACIC Properties”) is a majority-owned subsidiary of FIC and the intermediate holding company for (i) 717 8^th Street, LLC, (ii) 2805 M Street, LLC, and (iii) 810 5^th Street, LLC, each of which directly own commercial real estate in the District of Columbia. The Company’s initial public offering, and the concurrent acquisition of FRM, were completed on March 11, 2022. Please see Item 1. Business — Completion of Offering, Conversion and Agency Acquisition for more information. References to the Company’s financial information in this report is to the financial information for Forge Group, Inc., FIC, and FRM on a consolidated basis after March 11, 2022. References to the Company’s financial information in this report is to the financial information for FIC on a consolidated basis prior to March 11, 2022. Our current corporate structure is as shown in the following chart:

Through our wholly owned subsidiaries, we operate as a specialist commercial automobile insurance business. FIC was incorporated in the District of Columbia in 1938 and is rated B++ by A.M. Best. As of December 31, 2022, FIC was licensed as a property and casualty insurer in 34 states and the District of Columbia. FIC’s insurance products are marketed and distributed through FRM, its appointed insurance producer. FRM solicits business directly from customers and works with insurance agency sub-producers, referred to as “distribution partners”. As of December 31, 2022, FRM was licensed as a property and casualty insurance producer in 34 states and the District of Columbia. Through our wholly owned subsidiaries, we market and underwrite commercial automobile insurance products. We are focused on delivering these commercial automobile insurance products to small business owners and operators that operate in (i) certain business class segments and (ii) in certain geographic markets in the U.S. Historically, we have focused on the public automobile business class segment (“public auto segment”) within the commercial automobile insurance line. In the public auto segment, vehicles are used to transport passengers from one location to another. Specifically, we have historically focused on the following public auto sub-segments: taxi cabs, passenger sedans, golf carts, school vans, and other light transportation vehicles. Recently, we have developed commercial auto insurance products targeting additional business class segments, namely trade and service providers such as electricians, plumbers, and carpenters (collectively, the “small business segment”).

Our executive offices are located at 7910 Woodmont Avenue, Suite 925, Bethesda, Maryland, 20814. Our mailing address is P.O. Box 15033, Worcester, Massachusetts, 01615. Our phone number is (202) 547-8700 and our website address is www.forgeinsurance.com.

Completion of Offering, Conversion and Agency Acquisition

On March 11, 2022, the Company completed the sale of 2,050,000 shares of common stock at $10.00 per share for a total gross offering of $20.5 million, thereby completing the conversion of Forge Insurance Company, previously named Amalgamated Casualty Insurance Company, from mutual form to stock form. Following the conversion, FIC became a wholly owned subsidiary of the Company. Pursuant to the amended and restated plan of conversion, upon completion of the conversion and the offering, FIC distributed $4,594 in cash to each of the eligible members, which totaled $7.3 million, and which was recorded as a dividend. In addition, on March 11, 2022, pursuant to a stock purchase agreement with MCW Holdings, Inc., the Company completed the acquisition of all the outstanding capital stock of FIC’s affiliated agency, FRM, previously named American Risk Management, Inc. Pursuant to the stock purchase agreement, the Company assumed $1.4 million of FRM’s outstanding debt and issued to MCW Holdings, Inc. 550,000 shares of the Company’s Series A 8.5% cumulative convertible preferred stock.

Market for Registrant’s Common Equity

“Buy” and “Sell” quotes for shares of the Company’s common stock are reported on the “OTC Pink” market under the symbol “FIGP”.

Business Segments

We manage our business through two segments: insurance and commercial real estate investments. Through our wholly owned subsidiaries, namely FIC and FRM, the Company engages in the principal business line of insurance. See Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations — Real Estate Held for the Production of Income for more detailed information concerning our commercial real estate investment segment.

Our Market and Opportunities

We principally operate within the commercial automobile insurance line of business. We estimate that the U.S. commercial automobile insurance line of business is approximately $60 billion of annual premium written.

Historically, we have focused on the public auto segment within the commercial automobile insurance line. In the public auto segment, vehicles are used to transport passengers from one location to another. In this business class segment, operation of the commercial vehicle is generally the primary source of business revenue. Specifically, we have historically focused on the following public auto sub-segments: taxi cabs, passenger sedans, golf carts, school vans, and other light transportation vehicles. We estimate that the public auto segment in our target geographic markets is approximately $200 million of annual premium written.

Recently, we have developed commercial auto insurance products targeting additional business class segments, namely trade and service providers such as electricians, plumbers, and carpenters (collectively, the “small business segment”) that our research has indicated present lower loss risk and other favorable business characteristics. In the small business segment, operation of the commercial vehicle is generally not the primary source of business revenue; rather, the commercial vehicle is used as a tool in the overall business. We estimate that the small business segment in our target geographic markets is approximately $12 billion of annual premium written.

Our Competitive Strengths

We believe that we are strategically positioned to take advantage of the following competitive strengths:

Our Growth Strategies

We intend to use our competitive strengths to grow our business through the following strategies:

Our Challenges and Risks

Our Company and our business are subject to numerous challenges and risks, including:

Business Operations – Insurance Segment

Our insurance segment engages in the principal business line of commercial automobile insurance. In our insurance segment, we market and underwrite commercial automobile insurance products targeted to small business owners and operators. Historically, we have focused on the public auto segment within the commercial automobile insurance line. We currently offer our commercial auto insurance products in the District of Columbia and 14 states. In 2021, we began developing commercial auto insurance products targeting the small business segment.

Products

Our product language is based on Insurance Services Offices (“ISO”) forms, which is an industry standard, but tailored to the specific needs of our customers. In 2021, we began developing commercial auto insurance products targeting additional business class segments, namely trade and service providers such as electricians, plumbers, and carpenters (collectively, the “small business class segment”).

Marketing and Distribution

Our products are marketed and distributed through FRM. FRM solicits business directly from customers and also works with insurance agency sub-producers, referred to as “distribution partners”. Our distribution partners access multiple insurance companies and are typically established businesses in the communities in which they operate. We view our distribution partners as our primary customers because they are in a position to recommend either our insurance products or those of a competitor to their customers. We consider our relationships with our distribution partners to be a core strength of the Company. Our distribution partners are generally compensated through a fixed commission specified in their agency agreement, generally 10% of premiums collected on business they generate. For the year ended December 31, 2022, 3 of our distribution partners were responsible for approximately 30.4% of our gross premiums written and our top 10 distribution partners accounted for approximately 69.8% of gross premiums written. We intend to significantly expand our force of active distribution partners (i.e., those distribution partners with which we write business). In 2022, we had 54 active distribution partners, compared to 39 active distribution partners in 2021, or an increase in the number of active distribution partners of 38%.

Underwriting, Risk Assessment and Pricing

Our underwriting philosophy is aimed at consistently generating acceptable loss ratios through sound risk selection, stringent loss control, and pricing discipline. One key element in sound risk selection is our use of data and analytics. We rely on both internal data, developed over years of operation, and external data. The use of data allows us to more effectively price risks, thereby improving our profitability and allowing us to compete favorably with other insurance carriers. Our philosophy is to understand our industry and be disciplined in our underwriting efforts. We will not compromise profitability for top line growth. Our competitive strategy in underwriting is:

We strive to be disciplined in our pricing by pursuing targeted rate changes to continually improve our underwriting profitability while still being able to attract and retain profitable customers. Our pricing reviews involve evaluating our claims experience, loss trends, data acquired from inspections, applications and other data sources to identify characteristics that drive the frequency and severity of our claims. These results drive changes to rates and rating metrics as well as understanding what portions of our business are most profitable. This knowledge and analysis enables us to price risks accurately, improve account retention, and drive profitable new business.

Claims and Litigation Management

Our claims team supports our underwriting strategy by working to provide a timely, good faith claims handling response to our policyholders. Claims excellence is achieved by timely investigation and handling of claims, settlement of meritorious claims for equitable amounts, maintenance of adequate case reserves, and control of claims loss adjustment expenses. Claims on insurance policies are received directly from the insured or through our distribution partners. Our claims department supports our distribution partner relationship strategy by working to provide a consistently responsive level of claim service to our policyholders.

Technology

We utilize a third-party, cloud-based policy administration system that includes policy issuance, claims processing, accounting, loss payment, and document management. This cloud-based system provides online access to electronic copies of policies, quotes, inspections, and any other correspondence enabling our associates to quickly and efficiently underwrite policies and adjust claims as well as respond to our producers’ inquiries. Since the system integrates all aspects of the policy life cycle, from underwriting to billing to claims, we are able to better automate internal workflows through electronic routing thus lowering costs and providing better service to our customers. This system allows us to leverage loss control data for predictive analytics in both the claims and underwriting areas. This third-party system permits us to limit each employee’s access by functional area and managerial level to protect confidential data. Our third-party vendor implements virus and malware protections while still enabling our employees to work from any location. The system is tested on a periodic basis for vulnerability to outside penetration to ensure the system’s protections are sufficient. We have the ability to scale since we are almost entirely a paperless organization. This allows us to integrate off-site employees just as if they are in the office. We intend to remain a leader in the industry by utilizing technology and data analysis to price our coverage based on the risk assumed and to both reduce accidents and provide a prompt response to claims. Our third-party vendor maintains an off-site co-location facility with real-time, redundant data replication as part of its disaster recovery program. If our offices are affected by a natural disaster or other disruption, we can access this cloud-based system to continue our business operations with minimal interruption.

Reinsurance

In accordance with insurance industry practice, we reinsure a portion of our exposure and pay to the reinsurers a portion of the premiums received on all policies reinsured. Insurance policies written by us are reinsured with other insurance companies principally to:

Reinsurance can be facultative reinsurance or treaty reinsurance. Under facultative reinsurance, each policy or portion of a risk is reinsured individually. Under treaty reinsurance, an agreed-upon portion of a class of business is automatically reinsured. Reinsurance also can be classified as quota share reinsurance, pro rata reinsurance or excess of loss reinsurance. Under quota share reinsurance and pro rata reinsurance, the insurance company issuing the policy cedes a percentage of its insurance liability to the reinsurer in exchange for a like percentage of premiums, less a ceding commission. The company issuing the policy in turn recovers from the reinsurer the reinsurer’s share of all losses and loss adjustment expenses incurred on those risks. Under excess of loss reinsurance, an insurer limits its liability to all or a particular portion of the amount in excess of a predetermined deductible or retention. Regardless of type, reinsurance does not legally discharge the insurance company issuing the policy from primary liability for the full amount due under the reinsured policies. However, the assuming reinsurer is obligated to reimburse the company issuing the policy to the extent of the coverage ceded. We determine the amount and scope of reinsurance coverage to purchase each year based on a number of factors. These factors include the evaluation of the risks accepted, consultations with reinsurance intermediates and a review of market conditions, including the availability and pricing of reinsurance. A primary factor in the selection of reinsurers from whom we purchase reinsurance is their financial strength. Our reinsurance arrangements are generally renegotiated annually. For the year ended December 31, 2022, we ceded to reinsurers $625 thousand of premiums written, compared to $469 thousand of premiums written for the year ended December 31, 2021. Ceded premiums written as a percentage of gross premiums written were 5.1% in 2022, and 5.0% in 2021. The increase is primarily a result of a hardening reinsurance pricing environment. We expect the recent dislocation in the capital markets, which has reduced overall capital capacity in the reinsurance marketplace, and dislocation in certain segments of the insurance marketplace, to lead to further hardening of reinsurance pricing. We expect the cost of our reinsurance to increase over the next 12 months.

Losses and LAE Reserves

We are required by applicable insurance laws and regulations to maintain reserves for payment of losses and loss adjustment expenses (“LAE”). These reserves are established for both reported claims and for claims incurred but not reported (“IBNR”), arising from the policies we have issued. The laws and regulations require that provision be made for the ultimate cost of those claims without regard to how long it takes to settle them or the time value of money. The determination of reserves involves actuarial and statistical projections of what we expect to be the cost of the ultimate settlement and administration of such claims. The reserves are set based on facts and circumstances then known, estimates of future trends in claims severity, and other variable factors such as inflation and changing judicial theories of liability.

Estimating the ultimate liability for losses and LAE is an inherently uncertain process. Therefore, the reserve for losses and LAE does not represent an exact calculation of that liability. Our reserve policy recognizes this uncertainty by maintaining reserves at a level providing for the possibility of adverse development relative to the estimation process. We do not discount our reserves to recognize the time value of money.

When a claim is reported to us, our claims personnel establish a “case reserve” for the estimated amount of the ultimate payment. This estimate reflects an informed judgment based upon general insurance reserving practices and on the experience and knowledge of our claims staff. In estimating the appropriate reserve, our claims staff considers the nature and value of the specific claim, the severity of injury or damage, and the policy provisions relating to the type of loss. Case reserves are adjusted by our claims staff as more information becomes available. It is our policy to resolve each claim as expeditiously as possible. These estimates are reported net of amounts estimated to be recoverable from salvage and subrogation.

We maintain IBNR reserves to provide for already incurred claims that have not yet been reported and developments on reported claims. The IBNR reserve is determined by estimating our ultimate net liability for both reported and IBNR claims and then subtracting the case reserves and paid losses and LAE for reported claims.

Each quarter, we compute our estimated ultimate liability using principles and procedures applicable to the lines of business written. However, because the establishment of loss reserves is an inherently uncertain process, we cannot assure you that ultimate losses will not exceed the established loss reserves. Adjustments in aggregate reserves, if any, are reflected in the operating results of the period during which such adjustments are made.

The following table provides information about open claims, reserves, and paid losses and LAE as of December 31, 2022 and December 31, 2021, with dollars in thousands.

The following tables provide a reconciliation of beginning and ending unpaid losses and LAE reserve balances for the years ended December 31, 2022 and 2021, prepared in accordance with GAAP with dollars in thousands.

The estimation process for determining the liability for unpaid losses and LAE inherently results in adjustments each year for claims incurred (but not paid) in preceding years. Negative amounts reported for claims incurred related to prior years are a result of claims being settled for amounts less than originally estimated (favorable development). Positive amounts reported for claims incurred related to prior years are a result of claims being settled for amounts greater than originally estimated (unfavorable or adverse development).

Reconciliation of Reserve for Losses and Loss Adjustment Expenses

The following table shows the development of our reserves for unpaid losses and LAE from 2013 through 2022 on a GAAP basis. The top line of the table shows the liabilities at the balance sheet date, including losses incurred but not yet reported. The upper portion of the table shows the cumulative amounts subsequently paid as of successive years with respect to the liability. The lower portion of the table shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimates change as more information becomes known about the frequency and severity of claims for individual years. The redundancy (deficiency) exists when the re-estimated liability for each reporting period is less (greater) than the prior liability estimate. The “cumulative redundancy (deficiency)” depicted in the table, for any particular calendar year, represents the aggregate change in the initial estimates over all subsequent calendar years. Gross deficiencies and redundancies may be significantly more or less than net deficiencies and redundancies due to the nature and extent of applicable reinsurance. As noted in the table below, since 2013 the Company has consistently selected initial ultimate loss picks that have proven to be redundant over time (dollars in thousands).

Investments

Our investments in debt and equity securities are classified as available for sale and are carried at fair value with unrealized gains and losses reflected as a component of equity net of taxes. The goal of our investment activities is to complement and support our overall mission. As such, the investment portfolio’s goal is to maximize after-tax investment income and price appreciation while maintaining the portfolio’s target risk profile. An important component of our operating results has been the return on invested assets. Our investment objectives are (i) to preserve and grow capital and surplus, in order to improve our competitive position and allow for expansion of insurance operations; (ii) to ensure sufficient cash flow and liquidity to fund expected liability payments and otherwise support our underwriting strategy; (iii) to provide a reasonable and stable level of income; and (iv) to maintain a portfolio which will assist in attaining the highest possible rating from A.M. Best. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Information about Market Risk. In addition to any investments prohibited by the insurance laws and regulations of District of Columbia and any other applicable states, our investment policy prohibits the following investments and investing activities:

Our board of directors developed our investment policy and reviews the policy periodically. Exceptions to prohibitions discussed above are allowed with express written authority of the investment committee of our board of directors, but under no circumstance may such exception exceed 10% of our invested assets. Our investment portfolio is managed internally. The following table sets forth information concerning our available for sale, fixed maturity investments (dollars in thousands).

The following table summarizes the distribution of our portfolio of fixed maturity investments as a percentage of total estimated fair value based on credit ratings assigned by Standard & Poor’s Financial Services, LLC (“S&P”) at December 31, 2022 and December 31, 2021 (dollars in thousands).

The table below sets forth the maturity profile of our investments in available for sale, fixed maturity securities by contractual maturities as of December 31, 2022. Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties (dollars in thousands).

Other invested assets consist of (i) non-controlling interests in unaffiliated limited partnerships that invest primarily in small-cap public equities, (ii) an equity interest in Trustar Bank, a related entity, (iii) an investment in a limited liability company, and (iv) a non-controlling equity interest in a private company. The following table shows the cost and estimated fair values of such assets at December 31, 2022 and 2021 (dollars in thousands).

At December 31, 2022, the average maturity of our fixed maturity investment portfolio was 4.7 years and the average duration was 4.1 years. As a result, the fair value of our investments may fluctuate significantly in response to changes in interest rates. In addition, we may experience investment losses to the extent our liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate environments.

We use quoted values and other data provided by independent pricing services as inputs in our process for determining fair values of our investments. The pricing services cover substantially all of the securities in our portfolio for which publicly quoted values are not available. The pricing services’ evaluations represent an exit price, a good faith opinion as to what a buyer in the marketplace would pay for a security in a current sale. The pricing is based on observable inputs either directly or indirectly, such as quoted prices in markets that are active, quoted prices for similar securities at the measurement date, or other inputs that are observable.

Our independent third-party investment management technology provider delivers to us pricing information that they obtain from independent pricing services to determine the fair value of our fixed maturity securities. After performing a detailed review of the information obtained from the pricing service, limited adjustments may be made by management to the values provided.

Our average cash and invested assets, net investment income, and return on average cash and invested assets for the years ended December 31, 2022 and 2021 were as follows (dollars in thousands):

A.M. Best Rating

A.M. Best Company, Inc. (“A.M. Best”) rates insurance companies based on factors of concern to policyholders. The latest rating evaluation by A.M. Best was published on April 12, 2022. In its latest evaluation, A.M. Best affirmed FIC’s Financial Strength Rating of “B++” (Good). According to the A.M. Best guidelines, companies rated “B++” are considered by A.M. Best to have “a good ability to meet their ongoing insurance obligations.” In addition, in its most recent evaluation, A.M. Best upgraded FIC’s Long-Term Issuer Credit Rating to “bbb+” (Good) from “bbb” (Good). According to the A.M. Best guidelines, companies rated “bbb+” are considered by A.M. Best to have “a good ability to meet their ongoing senior financial obligations.” The outlook assigned to both the Financial Strength Rating and the Long-Term Issuer Credit Rating is stable. These ratings evaluate the claims paying ability and financial strength of a company and are not an investment recommendation. In evaluating a company’s financial and operating performance, A.M. Best reviews:

In its ratings report on FIC, A.M. Best recognized FIC’s strong balance sheet position, noting its “Strongest” level of risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (“BCAR”). A.M. Best noted that FIC had experienced underwriting losses during the most recent five (5) years, primarily related to (i) discontinued operations (including coverage for non-emergency medical transportation vehicles and certain higher-severity states) and (ii) elevated fixed costs in 2021 as it has invested in its business ahead of anticipated premium growth. A.M. Best also noted FIC’s limited business profile as it is concentrated in the commercial auto segment. Finally, A.M. Best noted FIC’s enterprise risk management (“ERM”) as being appropriate for its business, citing improvements made in the ERM function since its prior rating evaluation. Specifically, A.M. Best noted that FIC had created a formal ERM committee, with representation across each department. A.M Best noted that the ERM committee held regular meetings, with documented meeting minutes and progress reports.

Competition

Given our focus on certain business class segments within the commercial automobile insurance line of business, the market conditions for our business varies geographically. The level of competition we face in each of our target geographies is based upon the number and nature of the other market participants that are also actively seeking to write business for the business class segments that we target. In states that have less competition, our primary competitors are Progressive and National Indemnity. In states with a high degree of competition such as Ohio, Wisconsin, and Maryland, we compete with the competitors listed above, in addition to other specialty carriers such as Philadelphia Insurance Company, Lancer Insurance Company, and New York Marine & General, as well as competition from other regional mutual carriers, excess and surplus lines companies, and risk retention groups. Despite significant competition, our management team believes the Company can continue to maintain and grow its market share.

Enterprise Risk Management

The enterprise risk management (“ERM”) function is the responsibility of our management team, the board of directors, and certain board committees. We have established ERM policies and procedures which have been approved by our board of directors. To ensure that the organization is operating in a manner consistent with these policies and procedures, we have established an ERM committee that consists of certain members of our senior management team, with each member representing a core functional area within the organization. The functional areas include: (i) strategic, (ii) investments, (iii) digital commerce and technology, (iv) finance, (v) business development, (vi) insurance operations, and (vii) product. Each member of the ERM committee is responsible for identifying and defining key risks and risk events for their respective functional area, prioritizing risks based on estimated impact and likelihood, establishing root cause analysis (“RCA”) maps, and developing risk mitigation action plans for each of the identified risks and risk events. The ERM committee meets on a regular basis and periodically reports to the board of directors and certain board committees throughout the year. To limit its exposure in the event of a lawsuit, the Company maintains a full line of insurance coverages, including errors and omissions, directors’ and officers’ liability, employment practices liability, and cyber liability insurance.

Legal Proceedings

We are, from time to time, involved in various legal proceedings in the ordinary course of business. While it is not possible to forecast the outcome of such legal proceedings, in light of existing insurance, reinsurance, and established reserves, we believe that there is no individual case pending that is likely to have a material adverse effect on our financial condition or results of operations.

Properties

We lease approximately 9,544 square feet of office space at 8401 Connecticut Avenue, Chevy Chase, Maryland. As of December 31, 2022, we subleased all of such space to three tenants. We have adopted a hybrid work-from-home employment model and anticipate needing less leased office than we have had historically. We entered into a new lease for one office suite, totaling 1,579 square feet, in Bethesda, Maryland under an operating lease that commenced September 1, 2022, and has a term expiring 41 months after commencement. We believe this office space will be adequate to accommodate the Company’s existing needs and any increase in workforce for the foreseeable future.

Employees

As of December 31, 2022 the Company had 19 employees, all of which are full-time. We provide health, dental, disability, vision, and life insurance to our full-time employees who have completed 90 days of full-time employment. Full-time employees are also eligible for paid vacation and to participate in the FIC 401(k) plan, which features a safe harbor contribution by FIC equal to 3% of the employee’s eligible compensation. We have the option to make an additional profit-sharing contribution to the plan. The Company’s Employee Stock Ownership Plan (“ESOP”) is an integral component of long-term compensation and is also a valuable employee retention tool. The Company’s ESOP is a qualified retirement plan that grants shares of the Company’s stock to eligible employees. The ESOP provides a mechanism whereby employees can actively participate in building long-term value in alignment with the interests of other shareholders. None of our employees are covered by a collective bargaining agreement. We believe that relations with our employees are good.

Federal Income Tax

We file a U.S. federal income tax return that includes the pass-through income or loss of majority owned direct and indirect subsidiaries. State tax returns are filed depending on applicable laws. We record adjustments related to prior years’ taxes during the period in which they are identified, generally when the tax returns are filed. The effect of these adjustments on the current and prior periods (during which the differences originated) is evaluated based upon quantitative and qualitative factors and are considered in relation to the consolidated financial statements taken as a whole for the respective years. The provision for income taxes for the years ended December 31, 2022 and 2021, is comprised of the following (dollars in thousands):

A reconciliation of the expected income tax expense to the actual income tax expense and the reconciliation of the federal statutory rate to our effective tax rate for the periods ended December 31, 2022 and 2021 is presented below (dollars in thousands):

Significant components of our deferred tax assets and liabilities at December 31, 2022 and 2021 were as follows (dollars in thousands):

At December 31, 2022, we had net operating loss (“NOL”) carry forwards available for tax purposes of $12.0 million that will begin to expire in 2037, and foreign tax credit carry-forwards of $1.0 thousand. In 2015, ACIC Consolidated Properties, LLC sold a building, placed the proceeds in trust and then reinvested the proceeds in similar use (like-kind) property, availing itself of the ability (pursuant to Section 1031 of the tax code) to defer the taxes that would otherwise have been due on the gain. As a result, we established a deferred tax liability of $1.9 million (as shown above). In assessing the valuation of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. A valuation allowance against deferred tax assets has been established, as we believe it is more likely than not the deferred tax assets will not be realized based on its historical taxable income, or be offset to deferred tax liabilities. We had no material unrecognized tax benefits and no adjustments to liabilities or operations were required. There were no interest or penalties related to income taxes that have been accrued or recognized as of and for the years ended December 31, 2022 and 2021. If any had been recognized, these would have been reported in income tax expense. Generally, taxing authorities may examine our tax returns for the three years from the date of filing. Our tax returns for the years ended December 31, 2020 through December 31, 2022 remain subject to examination.

Regulation

Our businesses are subject to a number of federal and state laws and regulations. These laws and regulations apply to FIC’s operations as an insurance company and FRM’s operations as a licensed insurance producer. Our operations are subject to extensive laws and governmental regulations, including administrative determinations, court decisions, and similar constraints. The purpose of the laws and regulations affecting our operations is primarily to protect our policyholders and not our shareholders. Many of the laws and regulations to which we are subject are regularly re-examined, and existing or future laws and regulations may become more restrictive or otherwise adversely affect our operations. State insurance laws regulate most aspects of our insurance business, and we are regulated by the insurance departments of the states in which we sell insurance policies. The NAIC assists the various state insurance regulators in the development, review, and implementation of a wide range of financial and other regulations over the insurance industry.

Insurance Regulation

FIC is licensed as a property and casualty insurer in 34 states and the District of Columbia. State insurance laws regulate many aspects of our business. Such regulation is vested primarily in state agencies having broad administrative and in some instances discretionary power dealing with many aspects of our business, which may include, among other things, required reserve liability levels, permitted classes of investments, transactions among affiliates, marketing practices, advertising, privacy, policy forms, reinsurance reserve requirements, acquisitions, mergers, and capital adequacy, and is concerned primarily with the protection of policyholders and other consumers rather than shareholders. We are subject to financial and market conduct examinations by insurance regulators from our domiciliary states and from other states in which we do business. State laws and regulations governing the financial condition of insurers apply to FIC, including standards of solvency, risk-based capital requirements, types, quality and concentration of investments, establishment and maintenance of reserves, required methods of accounting, reinsurance and minimum capital and surplus requirements, and the business conduct of insurers, including sales and marketing practices, claim procedures and practices, and policy form content. In addition, state insurance laws require licensing of insurers and their agents. State insurance regulators have the power to grant, suspend, and revoke licenses to transact business and to impose substantial fines and other penalties.

Agent Licensing

FIC sells its insurance products through FRM, its appointed insurance producer. FRM in turn also works with other independent distributors and independent agents. The states in which insurance agents operate require agents to obtain and maintain licenses to sell insurance products. In order to sell insurance products, the agents must be licensed by their resident state and by any other state in which they do business and must comply with regulations regarding licensing, sales and marketing practices, premium collection and safeguarding, and other market conduct practices. Consistent with various federal and state legal requirements, FRM monitors all of the agents that sell FIC policies, and FRM monitors the agencies with which the independent distributors and independent agents work in order to understand and evaluate the agencies’ training and general supervision programs relevant to regulatory compliance.

Financial Review

FIC is required to file detailed annual and quarterly financial reports with the insurance departments in the states in which we do business, and its business and accounts are subject to examination by such agencies at any time. These examinations generally are conducted under NAIC guidelines. Under the rules of these jurisdictions, insurance companies are examined periodically (generally every three to five years) by one or more of the supervisory agencies on behalf of the states in which they do business.

Market Conduct Regulation

The laws and regulations governing our insurance businesses include numerous provisions governing the marketplace activities of insurers, such as FIC, including regulations governing the form and content of disclosures to consumers, advertising, product replacement, sales and underwriting practices, complaint handling, and claims handling. State insurance regulators enforce compliance, in part, through periodic market conduct examinations.

Insurance Holding Company Regulation

All states in which FIC conducts insurance business have enacted legislation that requires each insurance company in a holding company system to register with the insurance regulatory authority of its state of domicile and to furnish that regulatory authority financial and other information concerning the operations of, and the interrelationships and transactions among, companies within its holding company system that may materially affect the operations, management, or financial condition of the insurers within the system. These laws and regulations also regulate transactions between insurance companies and their parents and affiliates. Generally, these laws and regulations require that all transactions within a holding company system between an insurer and its affiliates be fair and reasonable and that the insurer’s statutory surplus following any transaction with an affiliate be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. Statutory surplus is the excess of admitted assets over statutory liabilities. For certain types of agreements and transactions between an insurer and its affiliates, these laws and regulations require prior notification to, and non-disapproval or approval by, the insurance regulatory authority of the insurer’s state of domicile. These laws and regulations also require the holding company system to file an annual report identifying certain risks (“enterprise risks”) that, if not remedied, are likely to have a material adverse effect upon the financial condition of the insurer or its holding company system as a whole.

Dividend Limitations

As a holding company with no significant business operations of its own, the Company will depend on intercompany dividends or other distributions from its subsidiaries as the principal source of cash to meet its obligations. FIC’s ability to pay dividends is subject to restrictions contained in the insurance laws of District of Columbia, which require that dividends be approved by the District of Columbia Department of Insurance, Securities and Banking prior to their payment. Insurance regulators have broad powers to prevent the reduction of statutory surplus to inadequate levels, and there is no assurance that dividend payments will be permitted. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and capital resources for additional information regarding on the restrictions on FIC’s ability to pay dividends with the prior approval of the Department.

Change of Control

District of Columbia law requires advance approval by the Commissioner of Insurance of any direct or indirect change of control of a District of Columbia domiciled insurer, such as FIC. In considering an application to acquire control of an insurer, the Commissioner generally will consider such factors as experience, competence, and the financial strength of the applicant, the integrity of the applicant’s board of directors and officers, the acquirer’s plans for the management and operation of the insurer, and any anti-competitive effects that may result from the acquisition. Under District of Columbia law, there exists a presumption of “control” when an acquiring party acquires 10% or more of the voting securities of an insurance company or of a company which itself controls an insurance company. Therefore, any person acquiring, directly or indirectly, 10% or more of our common stock would need the prior approval of the District of Columbia Commissioner of Insurance, or a determination from the Commissioner that “control” has not been acquired. Under Section 31-906(l) of the D.C. Official Code, no person, together with such purchaser’s associates or a group acting in concert, may acquire, directly or indirectly, more than 5% of the capital stock of the Company for a period of five years from the effective date of the conversion without the approval of the District of Columbia Commissioner of Insurance. In addition, a person seeking to acquire, directly or indirectly, control of an insurance company is required in some states to make filings prior to completing an acquisition if the acquirer and the target insurance company and their affiliates have sufficiently large market shares in particular lines of insurance in those states. Approval of an acquisition may not be required in these states, but the state insurance departments could take action to impose conditions on an acquisition that could delay or prevent its consummation.

Risk Based Capital (RBC) Requirements

The NAIC has established a standard for assessing the solvency of insurance companies using a formula for determining each insurer’s RBC. The RBC model act provides that insurance companies must submit an annual RBC report to state regulators reporting their RBC based upon four categories of risk: asset risk, insurance risk, interest rate risk, and business risk. For each category, the capital requirement is determined by applying factors to various asset, premium, and reserve items, with the factor being higher for those items with greater underlying risk and lower for less risky items. The formula is intended to be used by insurance regulators as an early warning tool to identify possible weakly capitalized companies for purposes of initiating further regulatory action. If an insurer’s Total Adjusted Capital (“TAC”) falls below specified levels in relation to its RBC, the insurer would be subject to different degrees of regulatory action depending upon the relationship of its TAC to its RBC. These actions range from requiring the insurer to propose actions to correct the capital deficiency to placing the insurer under regulatory control. For example, if FIC’s TAC is equal to or less than its “company action level RBC,” then FIC could be subject to a wide range of regulatory oversight, including a requirement to submit a written plan for capital strengthening to the District of Columbia Commissioner of Insurance. A company’s “company action level RBC” is equal to two times its “authorized control level RBC,” which is the product of the RBC formula as described above. FIC’s “authorized control level RBC” was $4.0 million, which results in a “company action level RBC” of $8.0 million. At December 31, 2022, FIC’s TAC was significantly in excess of its “company action level RBC” by $29.4 million. Our other operating subsidiaries and the Company are not subject to RBC requirements.

NAIC Ratios

The NAIC is a voluntary association of state insurance commissioners formed to discuss issues and formulate policy with respect to regulation, reporting, and accounting of insurance companies. Although the NAIC has no legislative authority and insurance companies are at all times subject to the laws of their respective domiciliary states, and to a lesser extent, other states in which they conduct business, the NAIC is influential in determining the form in which such laws are enacted. Model insurance laws, regulations, and guidelines have been promulgated by the NAIC as minimum standards by which state regulatory systems and regulations are measured. The NAIC also has established a set of 13 financial ratios to assess the financial strength of insurance companies. The key financial ratios of the NAIC’s Insurance Regulatory Information System, or IRIS, which were developed to assist insurance departments in overseeing the financial condition of insurance companies, are reviewed by experienced financial examiners of the NAIC and state insurance departments to select those companies that merit highest priority in the allocation of the regulators’ resources. IRIS identifies these key financial ratios and specifies a range of “unusual values” for each ratio. The NAIC suggests that insurance companies that fall outside the “usual” range in four or more financial ratios are those most likely to require analysis by state regulators. However, according to the NAIC, it may not be unusual for a financially sound company to have several ratios outside the “usual” range. For the year ended December 31, 2022, FIC was within the “usual” range for all but two ratios. The two ratios outside the “usual” range were the two-year operating ratio and change in adjusted policyholders’ surplus. Both ratios were adversely affected by the $7.3 million policyholder dividend made in connection with the conversion and offering.

Statutory Accounting Principles (SAP)

SAP is a basis of accounting developed by U.S. insurance regulators to monitor and regulate the solvency of insurance companies. In developing SAP, insurance regulators were primarily concerned with evaluating an insurer’s ability to pay all its current and future obligations to policyholders. As a result, statutory accounting focuses on conservatively valuing the assets and liabilities of insurers, generally in accordance with standards specified by the insurer’s domiciliary jurisdiction. Uniform statutory accounting practices are established by the NAIC and generally adopted by regulators in the various U.S. jurisdictions. These accounting principles differ somewhat from GAAP, which are designed to measure a business on a going concern basis. GAAP gives consideration to matching of revenue and expenses and, as a result, certain insurer expenses are capitalized when incurred and then amortized over the life of the associated policies. The valuation of assets and liabilities under GAAP is based in part upon best estimate assumptions made by the insurer. Shareholders’ equity under GAAP represents both amounts currently available and amounts expected to emerge over the life of the business. As a result, the values for assets, liabilities, and equity reflected in financial statements prepared in accordance with GAAP may be different from those reflected in financial statements prepared under SAP. State insurance laws and regulations require FIC to file with state insurance departments publicly available quarterly and annual financial statements, prepared in accordance with statutory guidelines that generally follow NAIC uniform standards. State insurance laws require that the annual statutory financial statements be audited by an independent public accountant and that the audited statements be filed with the insurance departments in states where the insurer transacts business.

State Insurance Guaranty Funds Laws

In most states, there is a requirement that property and casualty insurers doing business within the state participate in a guaranty association, which is organized to pay contractual benefits owed pursuant to insurance policies issued by impaired, insolvent, or failed insurers. These associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the written premium in the state by member insurers in the lines of business in which the impaired, insolvent, or failed insurer is engaged. Some states permit member insurers to recover such paid assessments through full or partial premium tax offsets. Property and casualty insurance company insolvencies or failures may result in additional guaranty association assessments against FIC in the future. At this time, we are not aware of any material liabilities for guaranty fund assessments that apply to FIC with respect to impaired or insolvent insurers that are currently subject to insolvency proceedings.

Regulation of Investments

FIC is subject to state laws and regulations that require diversification of its investment portfolio and limit the amount of investments in certain asset categories, such as below investment grade fixed income securities, equity real estate, mortgages, other equity investments, foreign investments, and derivatives. Failure to comply with these laws and regulations would cause investments exceeding regulatory limitations to be treated as non-admitted assets for purposes of measuring statutory surplus, and, in most instances, require divestiture.

Federal and State Legislative and Regulatory Changes

From time to time, various regulatory and legislative changes have been proposed for the insurance industry. Among the proposals that have in the past been or are at present being considered are the possible introduction of federal regulation in addition to, or in lieu of, the current system of state regulation of insurers and proposals in various state legislatures (some of which proposals have been enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the NAIC. We are unable to predict whether any of these proposed laws and regulations will be adopted, the form in which any such laws and regulations would be adopted or the effect, if any, these developments would have on our business, financial condition, and results of operations.

Other Laws and Regulations

USA Patriot Act and similar regulations

The USA Patriot Act of 2001, enacted in response to the terrorist attacks on September 11, 2001, contains anti money laundering and financial transparency laws and mandates the implementation of various regulations applicable to broker dealers and other financial services companies, including insurance companies. The Patriot Act seeks to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. The increased obligations of financial institutions to identify their customers, watch for and report suspicious transactions, respond to requests for information by regulatory authorities and law enforcement agencies, and share information with other financial institutions, require the implementation and maintenance of internal practices, procedures, and controls.

Privacy of consumer information

U.S. federal and state laws and regulations require financial institutions, including insurance companies, to protect the security and confidentiality of consumer financial information and to notify consumers about their policies and practices relating to their collection and disclosure of consumer information and their policies relating to protecting the security and confidentiality of that information. Similarly, federal and state laws and regulations also govern the disclosure and security of consumer health information. In particular, regulations promulgated by the U.S. Department of Health and Human Services regulate the disclosure and use of protected health information by health insurers and others, the physical and procedural safeguards employed to protect the security of that information, and the electronic transmission of such information.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes included elsewhere in this Form 1-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 1-K constitutes forward-looking information that involves risks and uncertainties. Please see Forward-Looking Information for more information.

Overview

As described in this report, the Company was organized in 2021 so that it could (i) acquire all of the capital stock of FIC in a mutual to stock conversion and (ii) acquire FIC’s affiliated insurance agency, FRM. Prior to the conversion, the Company did not engage in any operations. After the conversion, the Company’s primary assets consisted of (i) the outstanding capital stock of FIC, (ii) the outstanding capital stock of FRM, and (iii) a portion of the net proceeds from the offering completed in connection with the conversion of FIC. ACIC Properties is a majority-owned subsidiary of FIC and the intermediate holding company for (i) 717 8^th Street, LLC, (ii) 2805 M Street, LLC, and (iii) 810 5^th Street, LLC, each of which directly own commercial real estate in the District of Columbia. The Company’s initial public offering, and the concurrent acquisition of FRM, were completed on March 11, 2022. Please see Item 1. Business — Completion of Offering, Conversion and Agency Acquisition for more information. References to the Company’s financial information in this report is to the financial information for Forge Group, Inc., FIC, and FRM on a consolidated basis after March 11, 2022. References to the Company’s financial information in this report is to the financial information for FIC on a consolidated basis prior to March 11, 2022.

Through our wholly owned subsidiaries, we operate as a specialist commercial automobile insurance business. FIC was incorporated in the District of Columbia in 1938 and is rated B++ by A.M. Best. As of December 31, 2022, FIC was licensed as a property and casualty insurer in 34 states and the District of Columbia. FIC’s insurance products are marketed and distributed through FRM, its appointed insurance producer. FRM solicits business directly from customers and works with insurance agency sub-producers, referred to as “distribution partners”. As of December 31, 2022, FRM was licensed as a property and casualty insurance producer in 34 states and the District of Columbia. Through our wholly owned subsidiaries, we market and underwrite commercial automobile insurance products. We are focused on delivering these commercial automobile insurance products to small business owners and operators that operate in (i) certain business class segments and (ii) in certain geographic markets in the U.S. Historically, we have focused on the public automobile business class segment (“public auto segment”) within the commercial automobile insurance line. In the public auto segment, vehicles are used to transport passengers from one location to another. Specifically, we have historically focused on the following public auto sub-segments: taxi cabs, passenger sedans, golf carts, school vans, and other light transportation vehicles. Recently, we have developed commercial auto insurance products targeting additional business class segments, namely trade and service providers such as electricians, plumbers, and carpenters (collectively, the “small business segment”).

For the year ended December 31, 2022, we had net premiums written of $11.5 million, net premiums earned of $9.4 million, and net loss attributable to the Company of $12.5 million. For the year ended December 31, 2021, we had net premiums written of $8.9 million, net premiums earned of $7.9 million, and a net loss attributable to the Company of $0.7 million.

Principal Revenue and Expense Items

We derive our revenue primarily from premiums earned, net investment income and net realized gains (losses) from investments.

Gross and net premiums written

Gross premiums written is equal to direct and assumed premiums before the effect of ceded reinsurance. Net premiums written is the difference between gross premiums written and premiums ceded or paid to reinsurers (ceded premiums written).

Premiums earned

Premiums earned is the earned portion of our net premiums written. Gross premiums written include all premiums recorded by an insurance company during a specified policy period. Insurance premiums on property and casualty insurance contracts are recognized in proportion to the underlying risk insured and are earned ratably over the duration of the policies. At the end of each accounting period, the portion of the premiums that is not yet earned is included in unearned premiums and is realized as revenue in subsequent periods over the remaining term of the policy. Our policies typically have a term of twelve months. Thus, for example, for a policy that is written on July 1, 2022, one-half of the premiums would be earned in 2022 and the other half would be earned in 2023.

Net investment income and net realized gains (losses) on investments

We invest our surplus and the funds supporting our insurance liabilities (including unearned premiums and unpaid losses and loss adjustment expenses) in cash, cash equivalents, equities, fixed maturity securities and real estate. Investment income includes interest and dividends earned on invested assets. Net realized gains and losses on invested assets are reported separately from net investment income. We recognize realized gains when invested assets are sold for an amount greater than their cost or amortized cost (in the case of fixed maturity securities) and recognize realized losses when investment securities are written down as a result of an other than temporary impairment (“OTTI”) or sold for an amount less than their cost or amortized cost, as applicable. Our portfolio of investment securities is managed internally.

Loss and loss adjustment expense

Loss and loss adjustment expenses represent the largest expense item and include: (1) claim payments made, (2) estimates for future claim payments and changes in those estimates for prior periods, and (3) costs associated with investigating, defending and adjusting claims.

Amortization of deferred policy acquisition costs and underwriting and administrative expenses

Expenses incurred to underwrite risks are referred to as policy acquisition expenses. Variable policy acquisition costs consist of commission expenses, premium taxes and certain other underwriting expenses that vary with, and are primarily related to, the writing and acquisition of new and renewal business. These policy acquisition costs are deferred and amortized over the effective period of the related insurance policies. Fixed policy acquisition costs, referred to herein as underwriting and administrative expenses, are expensed as incurred. These costs include salaries, rent, office supplies, depreciation and all other operating expenses not otherwise classified separately.

Income taxes

We use the asset and liability method of accounting for income taxes. Deferred income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the tax basis of our assets and liabilities. A valuation allowance is provided when it is more likely than not that some or all of the deferred tax asset will not be realized. The effect of a change in tax rates is recognized in the period of the enactment date.

Key Financial Measures

We evaluate our insurance operations by monitoring certain key measures of growth and profitability. In addition to reviewing our financial performance based on results determined in accordance with generally accepted accounting principles in the United States (GAAP), we utilize certain non-GAAP financial measures that we believe are valuable in managing our business and for comparison to our peers. These non-GAAP measures are written premium, loss and loss adjustment expense ratio, expense ratio, GAAP combined ratio, net premiums written to statutory surplus ratio, underwriting income (loss), net income (loss) and return on average equity.

We measure growth by monitoring changes in gross premiums written and net premiums written. We measure underwriting profitability by examining loss and loss adjustment expense, underwriting expense, loss and loss adjustment expense ratio, expense ratio, GAAP combined ratio, and underwriting income (loss). We measure consolidated profitability by examining net income (loss).

Premiums written

Gross premiums written represents the premiums from policies written during the period, before taking into account any premiums ceded to reinsurers. Ceded premiums written represents the premiums ceded to reinsurers during the period. Net premiums written represent the premiums from policies written during the period, less any premiums ceded to reinsurers.

Loss and loss adjustment expense ratio

The loss and loss adjustment expense ratio is the ratio (expressed as a percentage) of losses and loss adjustment expenses incurred to premiums earned. We measure the loss ratio on an accident year and calendar year loss basis to measure underwriting profitability. An accident year loss ratio measures losses and loss adjustment expenses for insured events occurring in a particular year, regardless of when they are reported, as a percentage of premiums earned during that year. A calendar year loss ratio measures losses and loss adjustment expense for insured events occurring during a particular year and the change in loss reserves from prior accident years as a percentage of premiums earned during that year.

Expense ratio

The expense ratio is the ratio (expressed as a percentage) of underwriting expenses to premiums earned. As described in this report, we define underwriting expenses as policy acquisition costs and other operating expenses attributable to our insurance segment (net of service fee and other income). In calculating our underwriting expenses, we also include the following items: (i) related party commissions, (ii) depreciation and amortization expenses attributable to our insurance segment and (iii) rent expense (net of sublease income). The expense ratio measures our operational efficiency in producing, underwriting and administering our insurance business.

GAAP combined ratio

Our GAAP combined ratio is the sum of the loss and loss adjustment expense ratio and the expense ratio and measures our overall underwriting profit. If the GAAP combined ratio is below 100%, we are making an underwriting profit. If the GAAP combined ratio is at or above 100%, we are not profitable without investment income and may not be profitable if investment income is insufficient.

Net premiums written to statutory surplus ratio

The net premiums written to statutory surplus ratio represents the ratio of net premiums written, after reinsurance ceded, to statutory surplus. This ratio measures our exposure to pricing errors in our current book of business. The higher the ratio, the greater the impact on surplus should pricing prove inadequate.

Underwriting income (loss)

Underwriting income (loss) measures the pre-tax profitability of our insurance operations. It is derived by subtracting loss and loss adjustment expense and underwriting expenses from earned premiums.

Net income (loss) and return on average equity

We use net income (loss) to measure our profit and return on average equity to measure our effectiveness in utilizing equity to generate net income. In determining return on average equity for a given year, net income (loss) is divided by the average of the beginning and ending equity for that year.

Critical Accounting Policies

General

The preparation of financial statements in accordance with GAAP requires both the use of estimates and judgment relative to the application of appropriate accounting policies. We are required to make estimates and assumptions in certain circumstances that affect amounts reported in our financial statements and related footnotes. We evaluate these estimates and assumptions on an on-going basis based on historical developments, market conditions, industry trends and other information that we believe to be reasonable under the circumstances. There can be no assurance that actual results will conform to our estimates and assumptions and that reported results of operations will not be materially adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time. We believe the following policies are the most sensitive to estimates and judgments.

Investments

We classify our investments in all debt and equity securities as available-for-sale.

Available-for-sale securities

Debt and equity securities are classified as available-for-sale and reported at fair value. Unrealized gains and losses on debt securities are excluded from net earnings but are recorded as a separate component of comprehensive earnings and shareholders’ equity, net of deferred income taxes. Changes in the fair value of equity securities are recognized as a component of net earnings.

Other than temporary impairment

Under current accounting standards, an OTTI write-down of debt securities, where fair value is below amortized cost, is triggered by circumstances where (1) an entity has the intent to sell a security, (2) it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis or (3) the entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the difference between the security’s amortized cost and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income. Impairment losses result in a reduction of the underlying investment’s cost basis.

We regularly evaluates its fixed income securities using both quantitative and qualitative criteria to determine impairment losses for other-than-temporary declines in the fair value of the investments. The following are the key factors for determining if a security is other-than-temporarily impaired:

Quantitative and qualitative criteria are considered during this process to varying degrees depending on the sector the analysis is being performed.

Corporate securities

We perform a qualitative evaluation of holdings that fall below the price threshold. The analysis begins with an opinion of industry and competitive position. This includes an assessment of factors that enable the profit structure of the business (e.g., reserve profile for exploration and production companies), competitive advantage (e.g., distribution system), management strategy, and an analysis of trends in return on invested capital. We may also review other factors to determine whether an impairment exists including liquidity, asset value cash flow generation, and industry multiples.

Municipal securities

We analyze the screened impairment candidates on a quantitative and qualitative basis. This includes an assessment of the factors that may be contributing to the unrealized loss and whether the recovery value is greater or less than current market value.

Structured securities

The “stated assumptions” analytic approach relies on actual 6-month average collateral performance measures (voluntary prepayment rate, gross default rate, and loss severity) sourced through third party data providers or remittance reports. The analysis applies the stated assumptions throughout the remaining term of the transaction using forecasted cash flows, which are then applied through the transaction structure (reflecting the priority of payments and performance triggers) to determine whether there is a loss to the security (“Loss to Tranche”). For securities or sectors for which no actual loss or minimal loss has been observed (certain Prime Residential Mortgage-Backed Securities (“RMBS”) and Commercial Mortgage-Backed Securities (“CMBS”), for example), sector-based assumptions are applied or an alternative quantitative or qualitative analysis is performed.

Property and equipment

Property and equipment (including major renewals, replacements and betterments) with a cost of $5,000 or greater are capitalized and stated at cost. Expenditures for ordinary maintenance and repair items are charged to operations as incurred. Upon the sale or other disposition of property, the cost and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is reflected in the results of operations.

Other invested assets

Other invested assets consist of (i) non-controlling interests in unaffiliated limited partnerships that invest primarily in small-cap public equities, (ii) an equity interest in Trustar Bank, a related entity, (iii) an investment in a limited liability company, and (iv) a non-controlling equity interest in a private company. For our interest in unaffiliated limited partnerships, our pro rata share of the audited GAAP equity of the partnership is the fair value equivalent. For the other investments, we have used internal estimates of fair market value.

Investment income

Interest on fixed maturities and short-term investments is credited to earnings on an accrual basis. Premiums and discounts are amortized or accreted over the lives of the related fixed maturities. Dividends on equity securities are credited to earnings on the ex-dividend date. Realized gains and losses on disposition of investments are based on specific identification of the investments sold on the settlement date, which does not differ significantly from trade date accounting.

Cash and cash equivalents

Cash consists of uninvested balances in bank accounts. Cash equivalents consist of investments with original maturities of 90 days or less, primarily AAA-rated prime and government money market funds. Cash equivalents are carried at cost, which approximates fair value. The Company has not experienced losses on these instruments.

Unpaid losses and loss adjustment expense reserves

We maintain reserves for the payment of claims (incurred losses) and expenses related to adjusting those claims (loss adjustment expenses or “LAE”). Our loss reserves consist of case reserves, which are reserves for claims that have been reported to us; defense and cost containment expense (“DCC”) reserve, which includes all defense and litigation-related expenses, whether internal or external to us; Adjusting and Other reserves (“A&O”), which includes internal claims adjustment expenses; and reserves for claims that have been incurred but have not yet been reported or for case reserve deficiencies or redundancies (“IBNR”).

When a claim is reported to us, our claims personnel establish a case reserve for the estimated amount of the ultimate payment. The amount of the loss reserve for the reported claim is based primarily upon a claim-by-claim evaluation of coverage, liability, injury severity or scope of property damage, and any other information considered pertinent to estimating the exposure presented by the claim. Each claim is settled individually based upon its merits, and some claims may take years to settle, especially if legal action is involved. Case reserves are reviewed on a regular basis and are updated as new data becomes available.

In addition to case reserves, we maintain an estimate of reserves for losses and loss adjustment expenses incurred but not reported. Some claims may not be reported for several years. As a result, the liability for unpaid losses and loss adjustment reserves includes significant estimates for IBNR.

We utilize an independent actuary to assist with the estimation of our loss and LAE reserves on an annual basis. This actuary prepares estimates of the ultimate liability for unpaid losses and LAE based on established actuarial methods described below. Our management reviews these estimates and supplements the actuarial analysis with information not fully incorporated into the actuarially based estimate, such as changes in the external business environment and changes in internal company processes and strategy. We may adjust the actuarial estimates based on this supplemental information in order to arrive at the amount recorded in the financial statements.

We accrue liabilities for unpaid losses and loss adjustment expenses based upon estimates of the ultimate amount payable.

Policy acquisition costs

We defer commissions, premium taxes, and certain other costs that are incrementally or directly related to the successful acquisition of new or renewal insurance contracts. Acquisition-related costs may be deemed ineligible for deferral when they are based on contingent or performance criteria beyond the basic acquisition of the insurance contract or when efforts to obtain or renew the insurance contract are unsuccessful. All eligible costs are capitalized and charged to expense in proportion to premium revenue recognized. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value. This deferral methodology applies to both gross and ceded premiums and acquisition costs.

Premiums

Premiums are recorded and billed and recognized as income ratably over the term of the contracts, net of ceded reinsurance. Unearned premiums represent the portion of premiums written relative to the unexpired terms of coverage. Unearned premiums are calculated on a daily pro rata basis. A premium deficiency reserve is recognized if the sum of expected claim costs and claim adjustment expenses, unamortized acquisition costs, and maintenance costs exceed related unearned premiums. We anticipate investment income, if applicable, as a factor in the premium deficiency calculation.

Reinsurance

Ceded unearned premiums and reinsurance balances recoverable on paid and unpaid losses and settlement expenses are reported separately as assets instead of being netted with the related liabilities, since reinsurance does not relieve us of our legal liability to our policyholders. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy and in accordance with the terms of the reinsurance agreement.

Quarterly, we monitor the financial condition of our reinsurers. Our monitoring efforts include, but are not limited to, the review of annual summarized financial data and analysis of the credit risk associated with reinsurance balances recoverable by monitoring the A.M. Best and Standard & Poor’s (“S&P”) ratings. If necessary, our policy is to charge to earnings, in the form of an allowance, an estimate of unrecoverable amounts from reinsurers.

Real estate held for the production of income

Real estate leases are recognized in accordance with GAAP, which often requires significant judgment due to complex provisions. The two primary criteria that are used to classify transactions as sales-type or operating leases are (i) review of the lease term to determine if it is equal to or greater than 75% of the economic life of the building and (ii) review of the present value of the minimum lease payments to determine if they are equal to or greater than 90% of the fair market value of the equipment at lease inception. Operating lease income is recognized on a straight-line basis over the life of the lease.

Income taxes

Federal income taxes are accounted for using the asset and liability method under which deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities, operating losses and tax credit carry forwards. Deferred income tax assets and liabilities are established for temporary differences between the financial reporting basis and tax basis of assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance if it is more likely than not all or some of the deferred tax assets will not be realized.

We consider uncertainties in income taxes and recognizes those in its financial statements as required. As it relates to uncertainties in income taxes, unrecognized tax benefits, including interest and penalty accruals, are not considered material to the consolidated financial statements. Also, no tax uncertainties are expected to result in significant increases or decreases to unrecognized tax benefits within the next 12-month period. Penalties and interest related to income tax uncertainties, should they occur, would be included in income tax expense in the period in which they are incurred.

As an insurance company, FIC is subject to minimal state income tax liabilities. On a state basis, since the majority of income is from insurance operations, FIC pays premium taxes in lieu of state income tax. Premium taxes are a component of policy acquisition costs and calculated as a percentage of gross premiums written.

Comprehensive earnings

Comprehensive earnings include net earnings plus unrealized gains/losses on available-for-sale debt securities, net of tax. In reporting the components of comprehensive earnings on a net basis in the statement of earnings, we used a 21% percent tax rate.

Reserving methods

In developing our losses and DCC reserve estimates, we relied upon several widely used and accepted loss reserving methods (described below). Based on the deemed predictive qualities of each of the applied methods, we selected estimated ultimates by year in order to determine our reserve estimates.

Range of estimates

In addition to our actuarial reported estimate, we have also developed a range of estimates. This range is not designed to represent minimum or maximum possible outcomes. It is developed to represent low and high ends for a reasonable range of expected outcomes given the selection of alternative, but reasonable assumptions. Actual results may fall outside of this range.

High and low net reserve estimates were developed by stressing our expected loss ratio and loss development factor selections. By applying a factor to increase (and decrease) these assumptions, we developed high (and low) ultimate losses and DCC estimates. These estimates, along with paid and incurred loss information, result in a range of reserves. The gross reserve range is based on selected percentages which produce a range which is slightly wider than the net range.

We estimate IBNR reserves by first deriving an actuarially based estimate of the ultimate cost of total losses and loss adjustment expenses incurred by line of business as of the financial statement date. We then reduce the estimated ultimate losses and loss adjustment expenses by losses and loss adjustment expense payments and case reserves carried as of the financial statement date. The actuarially determined estimate is based upon indications from one of the above actuarial methodologies or uses a weighted average of these results. The specific method used to estimate the ultimate losses for individual lines of business, or individual accident years within a line of business, will vary depending on the judgment of the actuary as to what is the most appropriate method for a line of business’ unique characteristics. Finally, we consider other factors that impact reserves that are not fully incorporated in the actuarially based estimate, such as changes in the external business environment and changes in internal company processes and strategy.

The process of estimating loss reserves involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both internal and external events, such as changes in claims handling procedures, economic inflation, legal trends, and legislative changes, among others. The impact of many of these items on ultimate costs for claims and claim adjustment expenses is difficult to estimate. Loss reserve estimation difficulties also differ significantly by line of business due to differences in claim complexity, the volume of claims, the potential severity of individual claims, the determination of occurrence date for a claim, and reporting lags (the time between the occurrence of the policyholder event and when it is actually reported to the insurer). Informed judgment is applied throughout the process, including the application of various individual experiences and expertise to multiple sets of data and analyses. We continually refine our loss reserve estimates in a regular ongoing process as historical loss experience develops and additional claims are reported and settled. We consider all significant facts and circumstances known at the time loss reserves are established.

Due to the inherent uncertainty underlying loss reserve estimates, final resolution of the estimated liability for losses and loss adjustment expenses may be higher or lower than the related loss reserves at the reporting date. Therefore, actual paid losses, as claims are settled in the future, may be materially higher or lower in amount than current loss reserves. We reflect adjustments to loss reserves in the results of operations in the period the

estimates are changed.

Results of Operations

Our results of operations are influenced by factors affecting the commercial auto insurance industry in general. The operating results of the United States commercial auto insurance industry are subject to significant variations due to competition, weather, catastrophic events, regulation, general economic conditions, judicial trends, fluctuations in interest rates and other changes in the investment environment.

Our premium growth and underwriting results have been, and continue to be, influenced by market conditions. Pricing in the commercial auto insurance industry historically has been cyclical. During a soft market cycle, price competition is more significant than during a hard market cycle and makes it difficult to attract and retain properly priced commercial business. A hard market typically has a positive effect on premium growth.

The major components of operating revenues and net (loss) income for the years ended December 31, 2022 and 2021 are as follows (dollars in thousands):

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Premiums

For the year ended December 31, 2022, gross premiums written were $12.2 million, compared to $9.3 million for the year ended December 31, 2021. Gross premiums written increased by $2.8 million, or 30%, in 2022 primarily due to an increase in the number of active distribution partners, which grew from 39 in 2021 to 54 in 2022. For the year ended December 31, 2022, net premiums written were $11.5 million, compared to $8.9 million for the year ended December 31, 2021. Net premiums written increased by $2.6 million, or 30%, and net premiums earned increased by $1.5 million, or 19%, in 2022.

For the year ended December 31, 2022, we ceded to reinsurers $625 thousand of premiums written, compared to $469 thousand of premiums written for the year ended December 31, 2021. Ceded premiums written as a percentage of gross premiums written were 5.1% in 2022, and 5.0% in 2021. The increase is primarily a result of a hardening reinsurance pricing environment.

Premiums are earned ratably over the term of the policy whereas written premiums are reflected on the effective date of the policy.

Income from real estate held for investment

Real estate assets held for the production of income, which were $30.2 million and $30.9 million at December 31, 2022 and 2021, respectively, generated income of $2.3 million during 2022, an increase of $178 thousand over the prior year, principally due to an $84 thousand increase in percentage rent, which is rent that is tied to tenant sales, and incremental increases in base rents.

Investment income and realized gains (losses)

Our investment portfolio, excluding real estate assets held for the production of income, is generally highly liquid and 85.0% and 89.1% of the fixed income portfolio consisted of readily marketable, investment-grade fixed-income securities as of December 31, 2022 and 2021, respectively. The remainder of the portfolio is generally comprised of unrated fixed income securities, preferred stocks, common stocks, and limited partnership interests in funds which primarily invest in small-capitalization public equities. Net investment income is primarily comprised of interest earned and dividends paid on these securities, net of related investment expenses, and excludes realized gains and losses.

Net investment income decreased by $15 thousand for the year ended December 31, 2022 as compared to 2021. Excluding real estate held for the production of income, average cash and invested assets were $40.9 million in 2022, which were comparable to $41.6 million in 2021. For additional information, see Item 1. Business — Investments.

Unrealized gains (losses) on equity securities, net

For the year ended December 31, 2022, net unrealized (losses) gains on equity securities were $(2.2) million, compared to $0.9 million in 2021. This represents a decrease of $3.1 million versus 2021. This decrease is primarily due to the downturn experienced in the equity markets during 2022.

Other income

Other income includes additional charges to policyholders for services outside of the premium charge, such as installment billing or policy endorsement costs, and other miscellaneous sources of revenue. For the year ended December 31, 2022, other income was $506 thousand compared to $52 thousand in 2021. This represents an increase of $454 thousand compared to 2021. The increase is primarily due to a $401 thousand gain on extinguishment of related party debt related to the Paycheck Protection Program.

Loss and loss adjusting expense

The table below details our unpaid losses and settlement expenses (“LAE”) and loss reserves for the years ended December 31, 2022 and 2021.

Differences from the initial reserve estimates emerged as changes in the ultimate loss estimates as those estimates were updated through the reserve analysis process. The recognition of the changes in initial reserve estimates occurred over time as claims were reported, initial case reserves were established, initial reserves were reviewed in light of additional information and ultimate payments were made on the collective set of claims incurred as of that evaluation date. The new information on the ultimate settlement value of claims is updated until all claims in a defined set are settled. As a small specialty insurer with a niche product portfolio, our experience will ordinarily exhibit fluctuations from period to period. While management attempts to identify and react to systematic changes in the loss environment, management must also consider the volume of experience directly available to us and interpret any particular period’s indications with a realistic technical understanding of the reliability of those observations.

For the year ended December 31, 2022, net losses and LAE incurred were $4.5 million, compared to $5.2 million in 2021. The calendar year loss and loss adjustment expense ratios were 48.0% and 65.3% for the years ended December 31, 2022 and 2021, respectively. We experienced favorable development in 2022 relative to the December 31, 2021, reserve estimates primarily from the 2021 and 2020 accident years.

Policy acquisition costs and other operating expenses and related party commissions

For the year ended December 31, 2022, our policy acquisition costs and other operating expenses and related party commissions totaled $8.2 million. Included in this amount is the net impact of the settlement loss recorded upon the Company’s acquisition of FRM, which totaled $749 thousand. This settlement loss is a one-time item and was recorded to eliminate the deferred acquisition costs FIC had recorded related to commissions incurred with FRM. Excluding the net impact of the settlement loss of $749 thousand, our policy acquisition costs and other operating expenses and related party commissions totaled $7.4 million, compared to $5.3 million in 2021. This represents an increase of $2.2 million compared to 2021. The increase was the result of higher commission expenses associated with higher premium revenue, additional personnel and technology costs related to the Company’s long-term business plan, and expenses related to stock-based compensation, including expenses related to our ESOP and grants of restricted stock and stock options.

Expense ratio

For the year ended December 31, 2022, our underwriting expenses were $7.7 million, comprised of (i) $7.4 million of policy acquisition costs and other operating expenses and related party commissions (excluding the net impact of the settlement loss of $749 thousand), (ii) $273 thousand of depreciation and amortization expenses attributable to our insurance segment (which primarily relates to amortization of intangible assets related to our acquisition of FRM), (iii) $142 thousand of net lease expenses (lease expense net of sublease income), and (iv) $106 thousand of service fee and other income (presented as an offsetting amount). For the year ended December 31, 2022, our expense ratio was 82.2%. For the year ended December 31, 2021, our underwriting expenses were $5.4 million, comprised of (i) $5.3 million of policy acquisition costs and other operating expenses and related party commissions, (ii) $22 thousand of depreciation and amortization expenses attributable to our insurance segment, (iii) $184 thousand of net lease expenses (lease expense net of sublease income), and (iv) $53 thousand of service fee and other income (presented as an offsetting amount). For the year ended December 31, 2021, our expense ratio was 68.5%.

Underwriting results

The table below details our underwriting results for the years ended December 31, 2022 and 2021.

Policyholder dividend

Upon the completion of the offering, pursuant to the plan of conversion, FIC distributed $4,594 to each eligible member, which totaled $7.3 million. This distribution was recorded as a dividend in our financial statements for the year ended December 31, 2022. Please see Item 1. Business — Completion of Offering, Conversion and Agency Acquisition for additional information.

Income tax expense (benefit)

The table below details our income tax expense for 2022 and 2021.

The Company has federal net operating loss carryforwards of $12.0 million as of December 31, 2022 and has a full valuation allowance equal to the net deferred tax assets as of December 31, 2022 and 2021. FRM incurred $42 thousand of state income tax in 2022. The deferred federal and state income tax expense resulted from recording other comprehensive income net of tax.

Financial Position

The major components of our assets and liabilities as of December 31, 2022 and 2021 are as follows (dollars in thousands):

Unpaid losses and LAE

Our reserves for unpaid losses and LAE are summarized below (dollars in thousands):

Actuarial ranges

The selection of the ultimate loss is based on information unique to each line of business and accident year and the judgment and expertise of our actuary and management.

The following table provides case and IBNR reserves for losses and loss adjustment expenses as of December 31, 2022 and 2021.

Our actuary determined a range of reasonable reserve estimates which reflect the uncertainty inherent in the loss reserve process. This range does not represent the range of all possible outcomes. We believe that the actuarially-determined ranges represent reasonably likely changes in the losses and LAE estimates, however actual results could differ significantly from these estimates. The range was determined by line of business and accident year after a review of the output generated by the various actuarial methods utilized. The actuary reviewed the variance around the select loss reserve estimates for each of the actuarial methods and selected reasonable low and high estimates based on his knowledge and judgment. In making these judgments the actuary typically assumed, based on his experience, that the larger the reserve the less volatility and that property reserves would exhibit less volatility than casualty reserves. In addition, when selecting these low and high estimates, the actuary considered:

Our actuary is required to exercise a considerable degree of judgment in the evaluation of all of these and other factors in the analysis of our losses and LAE reserves, and related range of anticipated losses. Because of the level of uncertainty impacting the estimation process, it is reasonably possible that different actuaries would arrive at different conclusions. The method of determining the reserve range has not changed and the reserve range generated by our actuary is consistent with the observed development of our loss reserves over the last few years.

The width of the range in reserves arises primarily because specific losses may not be known and reported for some period and the ultimate losses paid and loss adjustment expenses incurred with respect to known losses may be larger than currently estimated. The ultimate frequency or severity of these claims can be very different than the assumptions we used in our estimation of ultimate reserves for these exposures.

Specifically, the following factors could impact the frequency and severity of claims, and therefore, the ultimate amount of losses and LAE paid:

The estimation process for determining the liability for unpaid losses and LAE inherently results in adjustments each year for claims incurred (but not paid) in preceding years. Negative amounts reported for claims incurred related to prior years are a result of claims being settled for amounts less than originally estimated (favorable development). Positive amounts reported for claims incurred related to prior years are a result of claims being settled for amounts greater than originally estimated (unfavorable development). For the years ended December 31, 2022 and 2021, we experienced favorable development on prior year reserves of $1.4 million and $0.9 million, respectively.

As discussed earlier, the estimation of our reserves is based on several actuarial methods, each of which incorporates many quantitative assumptions. The judgment of the actuary plays an important role in selecting among various loss development factors and selecting the appropriate method, or combination of methods, to use for a given accident year. The ranges presented above represent reasonable variability around the actuarially determined central estimate. The total variability around the midpoint of our actuarially determined range at December 31, 2022 was +/- 8.4%. As shown in the table below, since 2018, the variance in our originally estimated accident year loss reserves has ranged from 12.1% to 51.4% redundant.