An offering statement pursuant to Regulation A relating to these securities has been filed with the Securities and Exchange Commission. Information contained in this Preliminary Offering Circular is subject to completion or amendment. These securities may not be sold nor may offers to buy be accepted before the offering statement filed with the Commission is qualified. This Preliminary Offering Circular shall not constitute an offer to sell or the solicitation of an offer to buy nor may there be any sales of these securities in any state in which such offer, solicitation, or sale would be unlawful before registration or qualification under the laws of any such state. We may elect to satisfy our obligation to deliver a Final Offering Circular by sending you a notice within two business days after the completion of our sale to you that contains the URL where the Final Offering Circular or the offering statement in which such Final Offering Circular was filed may be obtained.

 

Preliminary Offering Circular        Subject to Completion, dated February [    ], 2022

Forge Group, Inc.

We are offering up to 2,300,000 shares of our common stock for sale at a price of $10.00 per share in connection with the conversion of Amalgamated Casualty Insurance Company, or ACIC, from the mutual to stock form of organization. Immediately following the conversion, we will acquire all of the newly issued shares of ACIC common stock. This is our initial public offering. For a description of our common stock, see “Description of Our Capital Stock.”

We are offering shares of our common stock in a subscription offering and a public offering. The subscription offering will be made in the following order of priority: (1) first, to eligible members of ACIC, who were the policyholders of ACIC as of February 3, 2021, which we refer to herein as “eligible members”; (2) second, to our employee stock ownership plan, which we refer to as our ESOP; and (3) third, to the trustees, officers, and employees of ACIC. The minimum number of shares that a person may subscribe to purchase is 50 shares. For information regarding limitations on the number of shares that may be purchased, see “The Conversion and Offering — Limitations on Purchases of Common Stock.”

Each eligible member will receive the right to purchase shares of our common stock. In addition to the right to purchase shares of our common stock, if the offering and the conversion are completed, ACIC will distribute $4,594 to each eligible member. See “The Conversion and Offering — Cash Distribution to Eligible Members.”

The subscription offering will end at noon, Eastern Time, on March 7, 2022. Concurrently with the subscription offering and subject to the prior right of subscribers in the subscription offering, shares will be offered in a public offering to the general public. This phase of the stock offering is referred to as the public offering. We refer to the subscription offering and the public offering as the offering.

Our ability to complete this offering is subject to two conditions. First, a minimum of 1,700,000 shares of common stock must be sold to complete this offering. Second, ACIC’s plan of conversion must be approved by the affirmative vote of at least a majority of the votes cast at the special meeting of members to be held on March 7, 2022. Until such time as these conditions are satisfied, all funds submitted to purchase shares will be held in escrow with Computershare Trust Company, N.A. If the offering is terminated, purchasers will have their funds promptly returned without interest.

Shares purchased by the ESOP and by trustees, employees and officers of ACIC will be counted toward satisfaction of the minimum amount needed to complete this offering. If more orders are received than shares offered, shares will be allocated in the manner and priority described in this offering circular.

Generally, no sale may be made to you in this offering if the aggregate purchase price you pay is more than 10% of the greater of your annual income or net worth. Different rules apply to accredited investors and non-natural persons. Before making any representation that your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(C) of Regulation A. For general information on investing, we encourage you to refer to www.investor.gov.

Griffin Financial Group LLC will act as our placement agent and will use its best efforts to assist us in selling our common stock in this offering, but Griffin Financial is not obligated to purchase any shares of common stock that are being offered for sale. Any commissions paid in connection with the purchase of shares of common stock in this offering will be paid by us from the gross proceeds of the offering.

There is currently no public market for our common stock. We do not intend to apply for the listing of our common stock on any stock exchange. This will materially and adversely affect the liquidity of our stock. We intend to apply to have “buy” and “sell” quotes for shares of our common stock reported on the “OTC Pink” market by broker-dealers that agree to make a market in our common stock. See “Risk Factors — Risks Relating to Ownership of Our Common Stock — Our shares will not be listed on any stock exchange, and there will not be an active, liquid market for our common stock.”

Our principal executive offices are located at 8401 Connecticut Avenue, Suite 300, Chevy Chase, Maryland 20815, our phone number is (202) 547-8700 and our website address is asginsurance.com. This is a Regulation A+ Tier 2 offering. This offering circular is intended to provide the information required by the Offering Circular format of Part II of Form 1-A.

Investing in our common stock involves risks. For a discussion of the material risks that you should consider, see “Risk Factors” beginning on page 13 of this offering circular.

OFFERING SUMMARY

Price: $10.00 per share

 

		Minimum				Midpoint				Maximum
Number of shares			1,700,000				2,000,000				2,300,000
Gross offering proceeds		$	17,000,000			$	20,000,000			$	23,000,000
Less: Proceeds from ESOP shares(1)		$	1,683,000			$	1,980,000			$	2,277,000
Estimated offering expenses		$	3,270,269			$	3,270,269			$	3,270,269
Commissions(2)(3)		$	728,886			$	891,141			$	1,053,396
Cash distribution to eligible members		$	7,300,000			$	7,300,000			$	7,300,000
Net proceeds(4)		$	4,017,845			$	6,558,900			$	9,099,335
Net proceeds per share		$	2.36			$	3.28			$	3.96

 

(1)

The calculation of net proceeds from this offering does not include the shares being purchased by our ESOP because ACIC will loan a portion of the proceeds to the ESOP to fund the purchase of such shares. The ESOP is purchasing such number of shares as will equal 9.9% of the total number of shares sold in the offering.

(2)

Represents the amount to be paid to Griffin Financial, based on (i) 2.0% of the proceeds from shares sold in the offering to policyholders, trustees, officers, and employees of ACIC and the ESOP, and (ii) 6.25% of the proceeds from all other shares sold in the offering. See “The Conversion and Offering — Marketing Arrangements” for a description of the placement agent compensation.

(3)	Assumes that at the offering minimum, the offering midpoint, and at the offering maximum 916,525, 1,157,125, and 1,397,725 shares, respectively, are sold in the offering to persons other than the policyholders, trustees, officers and employees and the ESOP.

(4)	Does not include the $7,300,000 cash distribution that will be paid to eligible members shortly after completion of the conversion and offering.

The District of Columbia Department of Insurance, Securities and Banking has not approved or disapproved of these securities or determined if this offering circular is accurate or complete.

The United States Securities and Exchange Commission does not pass upon the merits of or give its approval to any securities offered or the terms of the offering, nor does it pass upon the accuracy or completeness of any offering circular or other solicitation materials. These securities are offered pursuant to an exemption from registration with the Commission; however, the Commission has not made an independent determination that the securities offered are exempt from registration.

For assistance, please call the Stock Information Center at (610) 205-6005.

Griffin Financial Group LLC

The date of this Offering Circular is February [    ], 2022

TABLE OF CONTENTS

 

OFFERING CIRCULAR SUMMARY			1
RISK FACTORS			13
FORWARD-LOOKING STATEMENTS			27
SELECTED FINANCIAL AND OTHER DATA			28
USE OF PROCEEDS			30
MARKET FOR THE COMMON STOCK			31
DIVIDEND POLICY			31
CAPITALIZATION			32
UNAUDITED PRO FORMA FINANCIAL INFORMATION			34
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			44
BUSINESS			79
THE CONVERSION AND OFFERING			99
FEDERAL INCOME TAX CONSIDERATIONS			117
MANAGEMENT			121
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS			132
DESCRIPTION OF OUR CAPITAL STOCK			133
LEGAL MATTERS			143
EXPERTS			143
ADDITIONAL INFORMATION			143
INDEX TO FINANCIAL STATEMENTS			F-1

 

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CERTAIN IMPORTANT INFORMATION

This Offering Circular

You should rely only on the information contained in this offering circular. We have not, and Griffin Financial has not, authorized any other person to provide information that is different from that contained in this offering circular. If anyone provides you with different or inconsistent information, you should not rely on it. We and Griffin Financial are offering to sell and seeking offers to buy our common stock only in jurisdictions where such offers and sales are permitted. You should assume that the information contained in this offering circular is accurate only as of the date of this offering circular, regardless of the time of delivery of this offering circular or of any sale of our common stock. Our business, financial condition, results of operations, and prospects may have changed since that date. Information contained on our website, or any other website operated by us, is not part of this offering circular.

Frequently Used Terms

Unless the context otherwise requires, as used in this offering circular:

 

•

“ACIC” refers to Amalgamated Casualty Insurance Company and its consolidated subsidiaries;

 

•

“the Company,” “we,” “us,” and “our” refer to Forge Group, Inc. prior to the conversion as described in this offering circular, and to Forge Group, Inc. and its consolidated subsidiaries after the conversion;

 

•

“conversion” refers to a series of transactions by which ACIC will convert from mutual to stock form and become a subsidiary of Forge Group, Inc. under the terms of the plan of conversion adopted by the board of trustees of ACIC;

 

•

“Department” means the District of Columbia Department of Insurance, Securities and Banking;

 

•

“ESOP” means our employee stock ownership plan;

 

•

“mutual form” refers to an insurance company organized as a mutual company, which is a form of organization in which the policyholders or members have certain membership rights in the mutual company, such as the right to vote with respect to the election of directors and approval of certain fundamental transactions, including the conversion from mutual to stock form; however, unlike shares held by shareholders, membership rights are not transferable and do not exist separately from the related insurance policy;

 

•

“stock form” is a form of organization in which the only rights that policyholders have are contractual rights under their insurance policies and in which voting rights reside with shareholders under state corporate law;

 

•

“subscription offering” refers to this offering of up to 2,300,000 shares of our common stock under the plan of conversion to eligible members, the ESOP, and trustees, officers, and employees of ACIC;

 

•

“public offering” refers to this offering of up to 2,300,000 shares of our common stock to the general public under the plan of conversion;

 

•

“offering” refers to the subscription offering and the public offering taken together;

 

•

“eligible member” refers to a person who was an owner of an insurance policy issued by ACIC and in-force on February 3, 2021, the date the plan of conversion was adopted by the board of trustees of ACIC;

 

•

“member” refers to a person who is the owner of an in-force insurance policy issued by ACIC;

 

•

“ARM” refers to American Risk Management, Inc., a producer for ACIC under a nonexclusive agency agreement; and

 

•

“MCIF” refers to Mutual Capital Investment Fund, LP, an investment fund that intends to purchase up to 550,000 shares of the common stock of the Company being offered in the offering. MCIF has no agreement or other obligation to purchase any shares in the offering.

 

ii

Market and Industry Data

Market data and other statistical information used throughout this offering circular are based on independent industry publications, government publications, publicly available information, reports by market research firms, or other published independent sources. Independent industry publications, government publications, and other published independent sources generally indicate that the information included therein was obtained from sources believed to be reliable. Some data are based upon good faith estimates derived from our management’s review of the independent sources referenced herein and from experience with partners, licensees, and other contacts in the markets in which ACIC operates.

 

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5

 

6

 

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9

 

10

 

11

 

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RISK FACTORS

An investment in our common stock involves a number of risks. Before making a decision to purchase our common stock, you should carefully consider the following information about these risks, together with the other information contained in this offering circular. Many factors, including the risks described below, could result in a significant or material adverse effect on our business, financial condition, and results of operations. If this were to happen, the price of our common stock could decline significantly and you could lose all or part of your investment.

Risks Relating to Our Business

ACIC has incurred both statutory and GAAP net losses in recent years.

ACIC has incurred both statutory and GAAP net losses in three of the last six years. ACIC’s losses are due principally to high loss ratios resulting from our expansion into unprofitable non-core product lines such as non-emergency medical transportation and into unprofitable states, as well as prevailing low returns on our investment portfolio. We need to increase the sales of our profitable core insurance products and deploy new profitable insurance products, by investing in new product development, expanding distribution capability, and implementing technology solutions in order to continue our return to profitability.

If we cannot expand our distribution network and resulting sales of our products, we may incur further losses.

Our ability to increase sales of our existing and new insurance products will depend on our success in expanding our distribution network. We depend on ARM, ACIC’s controlling producer, and on its network of independent insurance agents to generate almost all of the sales of our insurance products. If we are unable to increase sales to customers by establishing relationships with other distribution partners, it may be difficult to remain profitable.

The impact of COVID-19 and responses thereto, and related risks, could continue to materially affect our results of operations, financial position, and/or liquidity.

Beginning in March 2020, the global pandemic related to novel coronavirus COVID-19 started to impact the global and U.S. economy. The extent of this pandemic continues to evolve, thus the full direct and indirect impacts of COVID-19 are not yet known and may not emerge for some time. ACIC has experienced a decrease in premiums due to the COVID-19 pandemic, that has negatively impacted our taxi cab and sedan customers, who are highly exposed to the travel and leisure industries. Those industries have been adversely impacted by COVID-19, and our premiums may continue to decrease as the travel and leisure industries remain depressed and our insureds seek to limit expenses, including the cost of insurance.

Federal, state, and local government actions to address and contain the impact of COVID-19 may adversely affect us. For example, we could be subject to proposed legislative and/or regulatory action that seeks to retroactively mandate coverage for losses which our insurance policies were not designed or priced to cover. Currently, in some states, there is proposed legislation to require insurers to cover business interruption claims irrespective of terms, exclusions, or other conditions included in the policies that would otherwise preclude coverage. Regulatory restrictions or requirements could also impact pricing, risk selection, and our rights and obligations with respect to our policies and insureds, including our ability to cancel policies or our right to collect premiums. At least one state regulator has issued an order requiring insurers to issue premium refunds, and regulators in other states could take similar actions. It is also possible that changes in economic conditions and steps taken by federal, state, and local governments in response to COVID-19 could require an increase in taxes at the federal, state, and local levels, which would adversely impact our results of operations and place further stress on our insureds.

Our corporate fixed income portfolio may be adversely impacted by ratings downgrades, increased bankruptcies, and credit spread widening in distressed industries. In addition, many state and local governments

 

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may be operating under deficits or projected deficits. These deficits may be exacerbated by the costs of responding to COVID-19 and reduced tax revenues due to adverse economic conditions. The severity and duration of these deficits could have an adverse impact on the collectability and valuation of our municipal bond portfolio. Our investment portfolio also includes residential and commercial mortgage-backed securities, which could be adversely impacted by declines in real estate valuations and/or financial market disruption, including a heightened collection risk on the underlying mortgages. Further disruptions in global financial markets due to the continuing impact of COVID-19 could result in additional net realized and unrealized investment losses. In addition, declines in fixed income yields would result in decreases in net investment income from future investment activity, including re-investments.

We expect that the impact of COVID-19 on general economic activity may continue to negatively impact our premium volumes. We have experienced this impact in the last three quarters of 2020 and this impact may further persist for much of 2021, but the degree of the impact will depend on the extent and duration of the economic contraction. As a result of the anticipated impact of the pandemic on our earned premiums, our underwriting expense ratio may increase in the near term.

It is possible that changes in economic conditions and steps taken by the federal government and the Federal Reserve in response to COVID-19 could lead to higher inflation than we had anticipated, which could in turn lead to an increase in our loss costs and the need to strengthen claims and claim adjustment expense reserves. These impacts of inflation on loss costs and claims and claim adjustment expense reserves could be more pronounced for those types of claims that require a relatively longer period of time to finalize and settle and, accordingly, are relatively more inflation sensitive. Inflation could also adversely impact our general and administrative expenses. Changes in interest rates caused by inflation affect the carrying value of our fixed maturity investments and returns on our fixed maturity and short-term investments. An increase in interest rates reduces the market value of existing fixed maturity investments, thereby negatively impacting our book value.

Our results of operations have been adversely affected by the current low interest rate environment and will continue to be adversely affected if interest rates remain low or if interest rates should rapidly increase.

Although the Federal Reserve moved to marginally increase short-term interest rates from 2015 to December 2019, medium and long-term interest rates have remained at historically low levels. In response to the economic downturn resulting from the COVID-19 pandemic, the Federal Reserve has cut short-term interest rates to near record lows. During a period of decreasing interest rates or a prolonged period of low interest rates, our investment earnings may decrease because the interest earnings on our recently purchased fixed income investments will likely have declined in parallel with market interest rates. In addition, callable fixed income securities in our investment portfolio will be more likely to be prepaid or redeemed as borrowers seek to borrow at lower interest rates. Consequently, we may be required to reinvest the proceeds in securities bearing lower interest rates. An extended period of declining or prolonged low interest rates may also cause us to change our assumptions of the interest rates that we can earn on our investments and the long-term interest rate that we assume in our calculation of insurance assets and liabilities under GAAP. This revision would result in increased reserves, accelerated amortization of deferred acquisition costs (“DAC”), and other unfavorable consequences. In addition, certain statutory capital and reserve requirements are based on formulas or models that consider interest rates, and an extended period of low interest rates may increase the statutory capital we are required to hold and the amount of assets we must maintain to support statutory reserves.

Conversely, an increase in market interest rates could also have a material adverse effect on the value of our investment portfolio by, for example, decreasing the estimated fair values of the fixed income securities within our investment portfolio. Also, certain statutory reserve requirements are based on formulas or models that consider forward interest rates and an increase in forward interest rates may increase the statutory reserves we are required to hold, thereby reducing statutory capital.

 

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Our B++ rating from A.M. Best limits our ability to attract agents and to sell rating sensitive products.

ACIC is rated B++ by A.M. Best. This rating adversely affects our ability to attract agents and sell our products because ratings assigned by A.M. Best are an important factor influencing the competitive position of insurance companies. Financial strength ratings are used by producers and customers as a means of assessing the financial strength and quality of insurers. A.M. Best ratings, which are reviewed at least annually, represent independent opinions of financial strength and ability to meet obligations to policyholders and are not directed toward the protection of investors. Any future downgrade of our A.M. Best rating could negatively affect our ability to implement our strategy. See “Business — Competition and Ratings.”

We rely on our systems and employees, and those of certain third-party vendors and service providers, in conducting our operations, and certain failures, operational errors, systems malfunctions, or cyber-security incidents, could materially adversely affect our operations.

We are exposed to many types of operational risk, including clerical and recordkeeping errors, and computer or telecommunications systems malfunctions. If any of our operational, accounting, or other data processing systems fail or have other significant shortcomings, we could be materially adversely affected. We use a third party servicer to provide all of our data processing and storage functions. While our third party provider takes commercially reasonable measures to keep their systems and our data secure, it is difficult or impossible to defend against all risks being posed by changing technologies as well as criminals intent on committing cybercrime. Increasing sophistication of cyber criminals and terrorists make keeping up with new threats difficult and could result in a breach. As a result, our outside service provider may be unable to anticipate the type or manner of attempts to breach their security or to implement adequate preventative measures against these attempts. We may be required to expend significant capital to alleviate problems caused by security breaches.

Any breach or perceived breach of our security could damage our reputation and our relationship with our policyholders and agents. Reputational damage of this kind could significantly harm our business. For example, insureds and agents may be less likely to use our products following a breach because of a perceived weakness in our information security measures. Additionally, we could be subject to significant liability as well as regulatory action, which would have a material and adverse effect on our business, financial condition, results of operations, and prospects.

Our operations are dependent on access to key technology tools; if we lose access to these tools, our ability to conduct business could be significantly impaired.

In the event of a disaster such as a natural catastrophe, an epidemic, an industrial accident, a blackout, a computer virus, a terrorist attack, a cyber-attack, or a war that causes the data processing systems of our third party servicers to not function, unanticipated problems with our disaster recovery systems would have an adverse impact on our ability to conduct business and on our results of operations and financial position, particularly if those problems affect our internet access, computer-based data processing, transmission, storage and retrieval systems or destroy valuable data. Despite such third party servicers’ implementation of security measures, disaster recovery plans, system backup plans, and offsite arrangements to reduce the risk of a loss of access to these critical systems, there is no assurance that these security measures and backup plans will work when needed or would protect the Company in all circumstances that could arise. An interruption in our business because of our inability to access our key technology tools could result in the loss of revenue and damage to our reputation, and could have a material and adverse effect on our business, financial condition, results of operations, and prospects.

In the ordinary course of our business we can face coverage disputes and lawsuits that are expensive and time consuming and may include claims for extra-contractual damages, which, if resolved adversely, could harm our business, financial condition, or results of operations.

From time to time, we are involved in coverage and other types of lawsuits in the ordinary course of our business. Defending these claims is costly and can impose a significant burden on our management and

 

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employees. We utilize reinsurance to limit our exposure on the insurance policies we issue. Our reinsurance arrangements provide a level of coverage for extra-contractual damages, subject to the terms and limits of those arrangements. If we are found to be liable for significant extra-contractual damages in future cases, however, there could be a material and adverse effect on our business, financial condition, results of operations, and prospects.

Legal and regulatory investigations and actions are increasingly common in the insurance business and may result in financial losses and harm our reputation.

We face a risk of litigation and regulatory investigations and actions in the ordinary course of operating our business, including the risk of class action lawsuits. ACIC may become subject to class actions and regulatory actions or may become subject to individual lawsuits relating, among other things, to sales or underwriting practices, payment of contingent or other sales commissions, claims payments and procedures, product design, disclosure, administration, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits, and breaches of fiduciary or other duties to customers. Plaintiffs in class action and other lawsuits against ACIC may seek very large or indeterminate amounts, including punitive and treble damages, which may remain unknown for substantial periods of time.

ACIC is also subject to various regulatory inquiries, such as information requests, subpoenas, market conduct exams, and books and record examinations, from state and federal regulators and other authorities, which may result in fines, recommendations for corrective action or other regulatory actions. Current or future investigations, proceedings, or regulatory actions could have an adverse effect on our business, results of operations, and financial condition. Moreover, even if we ultimately prevail in the investigation, proceeding, or regulatory action, we could suffer significant reputational harm, which could have an adverse effect on our business. Increased regulatory scrutiny and any resulting investigations or proceedings could result in new legal actions or precedents and industry-wide regulations or practices that could have a material and adverse effect on our business, financial condition, results of operations, and prospects.

We rely on the leadership of the members of our executive management team. The loss of any of these executives could have an adverse impact on our business and our ability to implement our business strategy.

The success of our business is dependent, to a large extent, on our ability to attract and retain key employees including the following members of our executive management team: Patrick Bracewell, Chairman, President and Chief Executive Officer; Daniel McFadden, Treasurer and Secretary; Richard Hutchinson, President and Chief Operating Officer of ACIC, Brian Mancino, Vice President — Distribution of ACIC; Michael McColley, Vice President — Insurance Operations of ACIC; and Joseph Niemer, Vice President — Digital Commerce and Technology of ACIC. Our executive management team has extensive experience in the insurance business. Were we to lose any of these employees, it may be challenging for us to attract a replacement employee with comparable skills and experience in our market niches. Except for the employment agreement with Patrick Bracewell, we do not have employment agreements with our executive officers. See “Executive Compensation- Employment Agreements.” We do not currently maintain key man life insurance policies with respect to any member of our senior management team.

We may be required to establish an additional valuation allowance against deferred income tax assets if our business does not generate sufficient taxable income or if our tax planning strategies are modified, which could have a material adverse effect on our results of operations and financial condition.

Deferred income tax represents the tax effect of the differences between the financial accounting and tax basis of assets and liabilities. Deferred tax assets represent the tax benefit of future deductible temporary differences, operating loss carryforwards, and tax credit carryforwards. We periodically evaluate and test our ability to realize our deferred tax assets. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be

 

16

realized. In assessing the more likely than not criteria, we consider future taxable income as well as prudent tax planning strategies. Future facts, circumstances, tax law changes, and financial accounting or GAAP developments may result in an increase in the valuation allowance. An increase in the valuation allowance could have a material adverse effect on the Company’s results of operations and financial condition.

As of December 31, 2020, ACIC had recorded a valuation allowance equal to the net deferred tax asset of $221 thousand. To the extent we are required to establish an additional valuation allowance against future deferred income tax assets, the amount of such valuation allowance would be charged against our net income for the period in which that valuation allowance is established, which could have a material and adverse effect on our business, financial condition, results of operations, and prospects.

We operate in a heavily state regulated industry, and the prospect exists for further federal involvement in the regulation of insurance companies.

Our business is regulated by government agencies in the states in which we do business, and we must comply with a number of state and federal laws and regulations. Most insurance regulations are intended to protect the interests of current and potential policyholders rather than those of shareholders and other investors in insurance services companies.

State laws and regulations that apply to us include those governing the financial condition of insurers, 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 requirements, and those governing the business conduct of insurers, including transactions with affiliates, 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.

We may be unable to comply fully with the wide variety of applicable laws and regulations that are frequently undergoing revision. In addition, we follow practices based on our interpretations of laws and regulations that we believe are generally followed by the insurance industry. These practices may be different from interpretations of insurance regulatory agencies. Moreover, in order to enforce applicable laws and regulations or to protect policyholders, insurance regulatory agencies have relatively broad discretion to impose a variety of sanctions, including examinations, corrective orders, suspension, revocation or denial of licenses, and the takeover of insurance companies. As a result, if we fail to comply with these laws and regulations, state insurance departments can exercise a range of remedies from the imposition of fines to being placed in rehabilitation or liquidation. State insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual, quarterly, and other reports relating to financial condition, holding company issues and other matters. These regulatory requirements may adversely affect or inhibit our ability to achieve some or all of our business objectives. Changes in the level of regulation of the insurance industry or changes in laws or regulations or interpretations of laws and regulations by regulatory authorities could adversely affect our ability to operate our business.

We are subject to various accounting and financial requirements established by the National Association of Insurance Commissioners (“NAIC”) as adopted by the states in which we operate. In addition, state regulators and the NAIC continually re-examine existing laws and regulations, with an emphasis on insurance company solvency issues and fair treatment of policyholders. Insurance laws and regulations could change or additional restrictions could be imposed that are more burdensome. Because these laws and regulations are for the protection of policyholders, any changes may not be in your best interest as a shareholder.

The commercial auto specialty transportation insurance industry in which we operate is highly competitive, which may limit our ability to maintain and increase our share of our target market.

Our competition includes companies that are almost all larger and which have significantly more resources at their disposal. Competition in the commercial auto specialty transportation insurance industry is based on

 

17

many factors. These factors include the perceived financial strength of the insurer, premiums charged, policy terms and conditions, services provided, reputation, financial ratings assigned by independent rating agencies, and the experience of the insurer in the line of insurance to be written.

Certain of the insurance companies we compete against have substantially greater financial, technical, and operating resources than we have. The line of insurance we write is subject to significant price competition. If our competitors price their products aggressively, our ability to grow or renew our business may be adversely affected. We pay producers on a commission basis to produce business. Some of our competitors may offer higher commissions or offer insurance products at lower premium rates. Increased competition could adversely affect our ability to attract and retain business and thereby adversely affect our business, financial condition, or results of operations.

We also compete for access to talented independent agents. Much of the competition for talent involves agent recruitment. If our competitors provide the agents with better technology, pay higher commissions, or provide access to products that are perceived to be better than those we can provide, our ability to attract and retain agents may be reduced, which could have a material and adverse effect on our business, financial condition, results of operations, and prospects.

We expect that our ability to use beneficial U.S. tax attributes will be subject to limitations.

At December 31, 2020, ACIC had $11.6 million in tax loss carryforwards. Section 382 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), operates as an anti-abuse rule, the general purpose of which is to prevent trafficking in tax losses, but which can apply without regard to whether a “loss trafficking” transaction occurs or is intended. Similar rules apply to capital loss carryforwards. These rules are triggered when an “ownership change” -generally defined as when the ownership of a company, or its parent, changes by more than 50% (measured by value) on a cumulative basis in any three-year period-occurs and the company is a “loss” corporation. A company is a loss corporation if, at the date of the ownership change, the company has a tax loss carryforward which may be used in a tax year after the ownership change. When triggered, the amount of the taxable income for any post-change year which may be offset by a pre-change loss is subject to an annual limitation. An annual limitation not used in one year may be carried over to a subsequent year. Generally speaking, the annual limitation is derived by multiplying the fair market value of the stock of the taxpayer immediately before the date of the ownership change by the applicable federal long-term tax-exempt rate. In addition, to the extent that a company has a net unrealized built-in loss or deduction at the time of an ownership change, Section 382 of the Code limits the utilization of any such loss or deduction which is realized and recognized during the 5-year period following the ownership change.

The Tax Cut and Jobs Act enacted in December 2017 limits the deduction for net operating losses to 80% of current year taxable income and eliminates the deduction for net operating loss carrybacks. Following the completion of this offering, we expect that these limitations will apply, which could substantially limit our ability to utilize our net operating loss carryforwards.

Our pension plan obligations are currently underfunded, and we may have to make significant cash contributions to our plan, which could reduce the cash available for our business.

Our pension plan is estimated to be underfunded by $444 thousand as of December 31, 2020. We incur costs relating to pension benefits, which can vary substantially as a result of volatility in investment returns on pension plan assets and changes in discount rates used to calculate related liabilities. Our estimates of liabilities and expenses for pension benefits require the use of assumptions, including assumptions relating to the rate used to discount the future estimated liability, the rate of return on plan assets, and several assumptions relating to the employees covered by our pension plan, such as mortality. Actual results may differ, which may have a material adverse effect on our business, prospects, financial condition or results of operations. Future volatility and disruption in the financial markets could cause a decline in the asset values of our pension plan. In addition, a

 

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decrease in the discount rate used to determine minimum funding requirements could result in increased future contributions. If either occurs, we may need to make additional pension contributions above what is currently estimated, which could reduce the cash available for our businesses.

Risks Relating to Our Insurance Business

Our results may fluctuate as a result of many factors, including cyclical changes in the insurance industry, which may lead to reduced premium volume.

Results of companies in the insurance industry, and particularly the property and casualty insurance industry, historically have been subject to significant fluctuations and uncertainties. The industry’s profitability can be affected significantly by:

 

•

rising levels of actual costs that are not known by companies at the time they price their products;

 

•

volatile and unpredictable developments, including man-made and natural catastrophes;

 

•

changes in reserves resulting from the general claims and legal environments as different types of claims arise and judicial interpretations relating to the scope of insurers’ liability develop; and

 

•

fluctuations in interest rates, inflationary pressures and other changes in the investment environment, which affect returns on invested capital and may impact the ultimate payout of losses.

Historically, the financial performance of the insurance industry has fluctuated in cyclical periods of low premium rates and excess underwriting capacity resulting from increased competition (a so-called “soft market”), followed by periods of high premium rates and a shortage of underwriting capacity resulting from decreased competition (a so-called “hard market”). Fluctuations in underwriting capacity, demand and competition, and the impact on our business of the other factors identified above, could have a negative impact on our results of operations and financial condition.

Because estimating future losses is difficult and uncertain, if our actual losses exceed our loss reserves, our operating results may be adversely affected.

ACIC maintains reserves to cover amounts it estimates will be needed to pay for insured losses and for the expenses necessary to settle claims. Estimating loss and loss expense reserves is a difficult and complex process involving many variables and subjective judgments. ACIC regularly reviews its reserve estimate protocols and its overall amount of reserves. ACIC reviews historical data and considers the impact of various factors such as:

 

•

trends in claim frequency and severity;

 

•

information regarding each claim for losses;

 

•

legislative enactments, judicial decisions and legal developments regarding damages; and

 

•

trends in general economic conditions, including inflation.

Our actual losses could exceed our reserves. If we determine that our loss reserves are inadequate, we will have to increase them. This adjustment would reduce income during the period in which the adjustment is made, which could have a material adverse impact on our financial condition and results of operations. Such adjustments to loss reserve estimates are referred to as “loss development.” If existing loss reserves exceed the revised estimate, it is referred to as positive loss development. Negative loss development occurs when the revised estimate of expected losses with respect to a calendar year exceed existing loss reserves. For additional information, see “Business — Loss and LAE Reserves.”

Assessments and premium surcharges for state guaranty funds may reduce our profitability.

Most states require insurance companies licensed to do business in their state to participate in guaranty funds, which require the insurance companies to bear a portion of the unfunded obligations of impaired, insolvent

 

19

or failed insurance companies. These obligations are funded by assessments, which are expected to continue in the future. State guaranty associations levy assessments, up to prescribed limits, on all member insurance companies in the state based on their proportionate share of premiums written in the lines of business in which the impaired, insolvent or failed insurance companies are engaged. Accordingly, the assessments levied on us may increase as we increase our written premiums. See “Business — Regulation.”

The actual experience of our insurance products can differ from the assumptions used to develop and price our insurance products, which can cause us to experience losses from these products.

To develop our insurance products we make assumptions regarding policy persistency, frequency and severity of claims, the level of investment income that will be earned from investing the product cash flows, and our expenses to underwrite, sell, and service the policies. These assumptions, along with our anticipated profit levels, are used to develop the premiums that we will charge customers for our products. In many cases, these premium rates are level and cannot be raised during the initial term of the policy. Our operating results may be materially adversely impacted by variances between our pricing assumptions and our actual experience.

Our key product pricing assumptions are based on a combination of industry studies and other third party data as well as our own experience. We regularly monitor our experience and can adjust premium rates on new business sales should the actual results indicate trends or results that we believe need to be reflected. If the actual product experience for any of these areas varies adversely from the assumptions used to price our products, it could have a material and adverse effect on our business, financial condition, results of operations, and prospects.

Our investment performance may suffer as a result of adverse capital market developments, which may adversely affect our financial results and ability to conduct business.

We allocate a portion of the insurance premiums we receive from policyholders to fund reserves, which are invested until these amounts are needed to pay insured claims. We invest in various securities to earn incremental income. As of December 31, 2020, ACIC held fixed income and equity securities with an estimated fair value of $34.9 million. For the year ended December 31, 2020, ACIC had net investment income of $1.4 million.

Our investments are subject to a variety of risks that are outside of our control, including risks relating to general economic conditions, market volatility, the extended low interest environment that currently exists, interest rate fluctuations, liquidity risk, and credit risk. For example, an unexpected increase in the number or level of claims may force us to liquidate securities in order to pay such claims. If the duration of our investments does not match our need for liquidity, we may be forced to liquidate investments prior to maturity at a significant loss to cover such payments. Investment losses could significantly decrease our asset base and capital position, thereby adversely affecting our ability to conduct business.

In the current economic environment, we are experiencing historically low interest rates across all fixed income investment markets. The effective yield or rate of our fixed income investments has declined as currently available interest rates on investments purchased are lower than the rates on our maturing investments. Low current interest rates have resulted in unrealized holding gains recorded as Other Comprehensive Income. However, if interest rates were to rise, it is possible that the market value of the securities and other investments we hold may decline, negatively affecting our earnings and capital level through realized and unrealized investment losses. If market interest rates remain at historically low levels our investment returns will continue to decline and our investment earnings will be reduced. This could have a material and adverse effect on our business, financial condition, results of operations, and prospects.

Some of our investments are relatively illiquid and are in asset classes that have been experiencing significant market valuation fluctuations.

ACIC holds certain assets that lack liquidity, such as privately placed fixed income securities, real estate and other illiquid assets. These asset classes represented a significant percentage of the carrying value of our total

 

20

cash and invested assets as of December 31, 2020. If we require significant amounts of cash on short notice in excess of normal cash requirements, we may have difficulty selling these investments in a timely manner, be forced to sell them for less than we otherwise would have been able to realize, or both.

The reported fair values of our relatively illiquid types of investments do not necessarily reflect the current market price for the asset. If we were forced to sell certain of our assets in the current market, there can be no assurance that we would be able to sell them for the prices at which we have recorded them and we might be forced to sell them at significantly lower prices.

If we are unable to enter into reinsurance transactions on a cost-effective basis, we will be less profitable and subject to greater risk and we may be unable to expand our business because of capital limitations.

ACIC relies on the availability of reinsurance to manage the risks of its insurance products and to manage the level of capital required to write new business. Reinsurance is the practice of transferring part of an insurance company’s liability under an insurance policy and the premium associated with that insurance policy to another insurance company. We enter into reinsurance contracts to limit and manage the amount of risk we retain relating to the insurance policies we issue. This reduction in risk is intended to reduce volatility in year-to-year operating results. For example, ACIC limits its retention of exposure under any insurance policy or policies it issues to a maximum of $400 thousand. Our ability to write policies in excess of this amount is therefore typically dependent on the availability of reinsurance for the excess amount of the issued policy at commercially reasonable rates. We also use reinsurance to manage the level of capital required to write new business.

The availability and cost of reinsurance are subject to current market conditions and our experience and may vary significantly over time. Any decrease in the amount of reinsurance available will increase the amount of loss that we retain and could decrease our regulatory capital position. ACIC currently relies on its reinsurance arrangement with its reinsurers to continue to write new business. Should these reinsurers cease to reinsure our business, or should we be unable to obtain replacement reinsurance or otherwise be unable to obtain reinsurance coverage in desired amounts, our inability to obtain such reinsurance could increase the amount of risk that we retain, expose our financial results to more year-to-year variability, and limit the amount of new business that we can write. If the cost of reinsurance coverage increases, we may charge higher premiums and that could reduce future sales. Alternatively, we may decide to absorb all or a part of the increased reinsurance costs, which could have a material and adverse effect on our business, financial condition, results of operations, and prospects.

Should any of our reinsurers fail to meet their contractual commitments to us, our financial condition and results of operations could be adversely affected.

The reinsurance contracts that we enter into to help manage our risks require us to pay premiums to the reinsurance carriers who will in turn reimburse us for a portion of covered policy claims. In many cases, a reinsurer will be called upon to reimburse us for policy claims many years after we paid insurance premiums to the insurer. We remain liable to each of our policyholders for their claims, and we rely on our reinsurers to reimburse us for that portion of a claim for which it is responsible. Accordingly, we are subject to loss and credit risk if our reinsurers are not capable of fulfilling their financial obligations to us. We purchase reinsurance coverage from a number of reinsurers. We have not entered into reinsurance agreements with companies that have an A.M. Best financial rating lower than “A-” (Excellent), which is the fourth highest of fifteen ratings. ACIC had no material reinsurance recovery receivable as of December 31, 2020.

During the contract term, the financial position of our reinsurers can deteriorate and our reinsurers could become insolvent or otherwise unable to reimburse us for ceded claims. Should the financial condition of a reinsurer to which we have ceded premiums deteriorate, it may be unable to reimburse us for losses under its contractual obligations to us. This could materially adversely affect our results of operations and financial condition.

 

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Risks Relating to this Offering

The broad valuation range of the subscription offering make your percentage ownership of our common stock uncertain.

The number of shares offered in the subscription offering is based on Boenning’s valuation of the consolidated pro forma market value of ACIC. Boenning has determined that, as of October 15, 2021, the estimated consolidated pro forma market value of ACIC is $20.0 million at the midpoint, and the range of value of the total number of shares of Company common stock to be issued in the offering is between $17.0 million and $23.0 million.

There is a difference of $6.0 million between the minimum and maximum of the estimated valuation range. The aggregate dollar value of the shares sold in the subscription offering must be within this estimated valuation range. As a result, the percentage interest in the Company that a subscriber acquires can vary based on the number of shares sold in the subscription offering. A subscriber for a fixed number of shares of our common stock will have approximately a 26% smaller ownership at the maximum of the range than at the minimum. See “The Conversion and Offering.”

The amount of the net proceeds from the offerings is uncertain, and we will have broad discretion over the use of the net proceeds from the offerings.

The amount of proceeds from the sale of common stock in the offerings will depend on the total number of shares actually sold in the subscription and public offerings. As a result, the net proceeds from the sale of common stock cannot be determined until this offering is completed. See “Use of Proceeds.”

Although we expect to use the net proceeds of the offerings to support the growth of our business and potentially to make open market purchases of our shares for our stock-based incentive plan, our management will have broad discretion with respect to the use of net proceeds from these offerings. Except as specified above, we expect to use the net proceeds for general corporate purposes, which may include, among other things, purchasing investment securities.

Risks Relating to Ownership of Our Common Stock

Our shares will not be listed on any stock exchange, and there will not be an active, liquid market for our common stock.

We do not intend to list our shares of common stock on the NASDAQ Stock Market or any other stock exchange. Moreover, it is highly likely that approximately 70% of our common stock will be purchased by MCIF, the ESOP, our directors, and the officers and trustees of ACIC and their affiliates. The shares purchased by trustees, directors, and officers will be subject to lockup periods for up to one year. Accordingly, there will be a limited market for your shares, and you may be unable to sell your shares if you need to do so for any reason. In addition, the value of your shares may be impaired because of the lack of any market for the shares.

Our independent auditor noted significant accounting and control weaknesses and indicated that we needed significant changes to our technical expertise and internal controls.

ACIC has been in business since 1938 as a mutual insurance company. While ACIC has been required in the past to file, and has filed, statutory financial statements with the Department, ACIC has not been required to maintain, and has not maintained, its financial records in accordance with generally accepted accounting principles, nor has ACIC sought or obtained an independent audit of its financial statements in accordance with generally accepted accounting principles. In preparation for this offering, the Company engaged Johnson Lambert, LLP to perform such an audit. The auditors issued an unqualified opinion on the financial statements; however, as part of its required communications to our audit committee, Johnson Lambert, LLP called to the attention of the Board a

 

22

number of significant accounting and control weaknesses. In response to these concerns, management has decided to supplement its finance and accounting team with a combination of additional full-time resources and external consultants.

MCW and MCIF are each expected to own a significant percentage of our outstanding capital stock after completion of the offering, which may prevent removal of management of the Company and may prevent shareholders from forcing a sale of the Company.

Upon completion of the offering, MCW and MCIF are each expected to own shares of our capital stock with the right to vote in excess of 18% of the total number of votes entitled to be cast by our shareholders. The votes cast by MCW and MCIF may not be in your personal best interests as a shareholder. For example, MCW and MCIF may exercise their voting rights to defeat a shareholder nominee for election to the board of directors of the Company. In addition, shareholders will not be able to force a merger or similar transaction in which shareholders typically receive a premium for their shares unless MCW and MCIF vote in favor of such transaction.

We are an “emerging growth company,” and we intend to take advantage of reduced disclosure and governance requirements applicable to emerging growth companies, which could result in our common stock being less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, which we refer to as the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. For example:

 

•

We will not be required to comply with the auditor attestation requirement on the effectiveness of our internal control over financial reporting contained in Section 404(b) of the Sarbanes-Oxley Act;

 

•

We will be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements;

 

•

We will not be required to hold a non-binding advisory vote on executive compensation and golden parachute arrangements not previously approved;

 

•

We will be exempt from certain audit requirements of the Public Company Accounting Oversight Board, unless the SEC determines otherwise; and

 

•

We will take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards.

We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company, which in certain circumstances could be for up to five years. See “Offering Circular Summary — Implications of Being an Emerging Growth Company.”

The stock-based incentive plan and the ESOP will increase our costs, which will reduce our net income.

We have adopted a stock-based incentive plan under which we may award participants restricted shares or restricted stock units or options to purchase shares of our common stock. We will make restricted stock and restricted stock unit awards at no cost to the participants. The number of shares of common stock that may be issued pursuant to restricted stock or restricted stock unit awards or upon exercise of stock option awards under the stock-based incentive plan may not exceed 14.0% of the number of shares issued in the offerings, of which no more than 4.0% can be issued as restricted shares or restricted stock units.

 

23

The costs associated with the grant of restricted stock or restricted stock units awarded under the stock-based incentive plan will be recognized and expensed over the related vesting period at the fair market value of the shares on the date they are awarded. We intend to issue 15,000 shares of restricted stock and options to purchase 190,000 shares to our directors and officers upon the closing of the conversion from our authorized but unissued shares of common stock.

Finally, accounting rules require companies to recognize as compensation expense the award-date fair value of stock options. This compensation expense will be recognized over the appropriate vesting period. When we record an expense for the award of options using the fair value method, we will incur significant compensation and benefits expense, which will reduce our net income.

In addition, the additional compensation expense resulting from the ESOP will adversely affect our profitability. We will recognize expenses for our ESOP when shares are committed to be released to participants’ accounts. For further discussion of these plans, see “Management — Benefit Plans.”

The implementation of the stock-based incentive plan may dilute your percentage ownership interest and may also result in downward pressure on the price of our stock.

The proposed stock-based incentive plan will be funded from the issuance of authorized but unissued shares and possibly in part through open market purchases. In the event that authorized but unissued shares are used to fund restricted stock or restricted stock unit awards and the exercise of stock option awards under the plan in an amount equal 4.0% and 10.0% of the number of shares issued in the offerings, respectively, shareholders would experience a reduction in ownership interest of approximately 12.3%. In addition, the number of shares of common stock available for issuance pursuant to restricted stock or upon the vesting of restricted stock unit awards or exercise of stock option awards may be perceived by the market as having a dilutive effect, which could lead to a decrease in the price of our common stock.

The valuation of our common stock in this offering is not necessarily indicative of the future price of our common stock, and the price of our common stock may decline after this offering.

There can be no assurance that shares of our common stock will be able to be sold in the market at or above the $10.00 per share initial offering price in the future. The final aggregate purchase price of our common stock sold in this offering will be based upon an independent appraisal. The appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. The valuation is based on estimates and projections of a number of matters, all of which are subject to change from time to time. See “The Conversion and Offering — The Appraisal” for the factors considered by Boenning in determining the appraised value.

The trading price of our common stock may be volatile and subject to wide price fluctuations in response to various factors, including:

 

•

market conditions in the broader stock market in general;

 

•

actual or anticipated fluctuations in our quarterly financial and operating results;

 

•

changes in interest rates;

 

•

departure of key executives;

 

•

introduction of new services or announcements of significant contracts, acquisitions, or capital commitments by us or our competitors;

 

•

regulatory or political developments;

 

•

issuance of new or changed securities analysts’ reports or recommendations, or any negative change in our A.M. Best rating;

 

24

•

availability of capital;

 

•

litigation and government investigations;

 

•

legislative and regulatory developments;

 

•

future sales of our common stock;

 

•

investor perceptions of us and the commercial automobile insurance industry; and

 

•

economic conditions.

These and other factors may cause the market price of our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock.

In addition, the stock market has in the past experienced substantial price and volume fluctuations that sometimes have been unrelated or disproportionate to the operating performance of companies. As a result, the trading price of shares of our common stock may be below the initial public offering price, and you may not be able to sell your shares at or above the price you pay to purchase them.

Anti-takeover provisions contained in our articles of incorporation, which we refer to as our articles, and our amended and restated bylaws, which we refer to as our bylaws, as they will be in effect upon completion of this offering, as well as provisions of District of Columbia law, may render more difficult or discourage takeover attempts on the Company that you may believe are in your best interests or that might result in a substantial profit to you.

The District of Columbia Official Code requires prior approval by the District of Columbia Department of Insurance, Securities, and Banking (the “Department of Insurance”) for a change of control of an insurance holding company. Under District of Columbia law, the acquisition of 10% or more of the outstanding voting stock of an insurer or its holding company is presumed to be a change in control. Approval by the Department of Insurance may be withheld even if the transaction would be in the shareholders’ best interest if the Department of Insurance determines that the transaction would be detrimental to policyholders. In addition, for 5 years following the effective date of the conversion, no person may acquire more than 5% of the capital stock of the Company in this offering or any other public offering without the approval of the Department of Insurance.

In 2011, MCW received approval to be the ultimate controlling party of ACIC in its mutual form. As detailed in the conversion application, which was approved on December 22, 2021, MCW will have a controlling interest in our stock.

Additionally, our articles and bylaws contain provisions that could have the effect of rendering more difficult or discouraging a change in control. These provisions include:

 

•

A prohibition on a person, including a group acting in concert, other than MCIF and MCW Holdings, Inc., from acquiring voting control of more than 10% of our outstanding stock without prior approval of our board of directors;

 

•

A classified board of directors divided into three classes serving for successive terms of three years each;

 

•

The prohibition of cumulative voting in the election of directors;

 

•

The requirement that nominations for the election of directors made by shareholders and any shareholder proposals for inclusion on the agenda at any shareholders’ meeting must be made by notice (in writing) delivered or mailed to us not less than 90 days prior to the meeting;

 

•

The prohibition of shareholders’ action without a meeting and of shareholders’ right to call a special meeting;

 

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•

The requirement imposing a mandatory tender offer requirement on a shareholder that has a combined voting power of 35% or more of the votes that our shareholders are entitled to cast, unless acquisition of such voting power by such shareholder was approved by our board of directors;

 

•

The requirement that the foregoing provisions of our articles of incorporation can only be amended by an affirmative vote of shareholders entitled to cast at least 80% of all votes that shareholders are entitled to cast, unless approved by an affirmative vote of at least 80% of the members of the board of directors; and

 

•

The requirement that certain provisions of our bylaws can only be amended by an affirmative vote of shareholders entitled to cast at least 66 2/3%, or in certain cases 80%, of all votes that shareholders are entitled to cast.

These provisions of our articles and bylaws, alone or together with certain provisions of District of Columbia and Pennsylvania law, could serve to entrench management and may discourage a takeover attempt that you may consider to be in your best interest or in which you would receive a substantial premium over the current market price. These provisions may make it extremely difficult for any one person, entity, or group of affiliated persons or entities to acquire voting control of the Company, with the result that it may be extremely difficult to bring about a change in the board of directors or management. Some of these provisions also may perpetuate present management because of the additional time required to cause a change in the control of the board of directors. See “Description of Our Capital Stock.”

Our ability to pay dividends will be limited.

Upon completion of this offering, the Company will be a holding company with no operations of its own. The Company’s primary assets will be its equity interests in ACIC and ARM and any net proceeds of the offerings that are not contributed to ACIC. Thus, the ability of the Company to pay dividends to holders of our common stock depends upon the cash and liquid investments held at the holding company and our subsidiaries ability to pay dividends to the Company. In addition, all accrued dividends on our Series A Preferred Stock must be paid in full before any cash dividends can be paid on our common stock. ACIC’s ability to pay dividends to the Company is subject to limitations under District of Columbia insurance laws and regulations. See “Dividend Policy.”

 

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FORWARD-LOOKING STATEMENTS

This offering circular contains “forward-looking” statements that are intended to enhance the reader’s ability to assess our future financial and business performance. Forward-looking statements include, but are not limited to, statements that represent our beliefs concerning future operations, strategies, financial results or other developments, and contain words and phrases such as “may,” “expects,” “should,” “believes,” “anticipates,” “estimates,” “intends” or similar expressions. In addition, statements that refer to our future financial performance, anticipated growth, trends in our business and in our industry, and other characterizations of future events or circumstances are forward-looking statements. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic, and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different.

Consequently, such forward-looking statements should be regarded solely as our current plans, estimates, and beliefs with respect to, among other things, future events and financial performance. Except as required under the federal securities laws, we do not intend, and do not undertake, any obligation to update any forward-looking statements to reflect future events or circumstances after the date of such statements.

The forward-looking statements include, among other things, the factors discussed under “Risk Factors” and those listed below:

 

•

future economic conditions in the markets in which we compete that could be less favorable than expected and could have impacts on demand for our products and services;

 

•

our ability to grow and develop our insurance business and successfully develop and market new products and new distribution channels;

 

•

our inability to maintain or grow our strategic partnerships;

 

•

our inability to manage future growth and integration of any businesses that we may acquire;

 

•

our ability to enter new markets successfully and capitalize on growth opportunities either through acquisitions or organically;

 

•

financial market conditions, including, but not limited to, changes in interest rates and the level and trends of stock market prices causing a reduction of investment income or realized losses and reduction in the value of our investment portfolios;

 

•

increased competition in our business, including the potential impacts of aggressive price competition by other insurance companies, payment of higher commissions to agents that could affect demand for our insurance products and impact the ability to grow and retain agents, and the entry of new competitors and the development of new products by new or existing competitors, resulting in a reduction in the demand for our products and services;

 

•

the effect of legislative, judicial, economic, demographic and regulatory events in the jurisdictions where we do business;

 

•

costs, availability and collectability of reinsurance;

 

•

the potential impact on our reported net income that could result from the adoption of future accounting standards issued by the Public Company Accounting Oversight Board or the Financial Accounting Standards Board or other standard-setting bodies; and

 

•

changes in industry trends and financial strength ratings assigned by nationally recognized rating organizations.

You should review carefully the section captioned “Risk Factors” in this offering circular for a complete discussion of the material risks of an investment in our common stock.

 

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SELECTED FINANCIAL AND OTHER DATA

The following table sets forth selected consolidated financial and other data for ACIC prior to this offering. You should read this data in conjunction with our financial statements and accompanying notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in this offering circular. The balance sheet data as of December 31, 2020 and 2019, and the statement of operations data for each of the years in the two-year period ended December 31, 2020 are derived from our audited financial statements that are included elsewhere in this offering circular. The balance sheet data as of June 30, 2021, and the statement of operations data for each of the six-month periods ended June 30, 2021 and 2020 are derived from our unaudited financial statements that are included elsewhere in this offering circular.

These historical results are not necessarily indicative of future results.

 

		For the Six-Months Ended June 30,								For the Years Ended December 31,
(dollars in thousands)		2021				2020				2020				2019
Statement of Operations Data:			(unaudited	)			(unaudited	)
Premiums written		$	4,227			$	2,341			$	6,302			$	13,128
Ceded premiums			166				90				240				533
Net premiums written			4,061				2,251				6,062				12,595
Net premiums earned			3,614				4,438				8,133				11,728
Income from real estate held for investment			1,056				1,011				2,064				2,276
Net investment income			584				702				1,447				1,516
Net realized investment (losses)			95				5				(15	)			(214	)
Net unrealized gains (losses) on equity securities			1,172				(517	)			814				735
Service fee income			72				41				67				94
Gain on extinguishment of related party loan			—				—				400				—
Other income			1				—				2				3
Total revenues			6,594				5,680				12,912				16,138
Expenses
Loss and loss adjustment expense			1,410				2,181				2,684				8,829
Policy acquisition costs and other operating expenses			1,725				1,106				2,334				2,542
Related party commissions incurred			774				400				1,094				2,376
Depreciation and amortization			542				559				1,111				1,098
Real estate operating expense			92				47				142				122
Interest expense on debt			657				602				1,314				1,329
Lease expense			154				154				308				308
Sublease income			(24	)			(24	)			(47	)			(47	)
Other expenses			(10	)			14				285				251
Total expenses			5,320				5,039				9,255				16,808
Income (loss) before income taxes			1,274				641				3,687				(670	)
Deferred income tax (benefit)			46				18				(146	)			(206	)
Net income (loss)			1,228				623				3,833				(464	)
Net loss attributable to non-controlling interest			17				15				37				23
Net gain (loss) attributable to Amalgamated		$	1,245			$	638			$	3,870			$	(441	)

 

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		June 30,				December 31,
(dollars in thousands)		2021				2020				2019
Balance Sheet Data:
Total investments, cash and cash equivalents		$	72,939			$	74,521			$	75,097
Premiums and reinsurance balances receivable			4,493				3,545				5,430
Deferred policy acquisition costs			684				378				218
Ceded unearned premiums			139				125				212
Reinsurance balances recoverable on unpaid losses			877				1,200				833
Deferred Rent			1,879				1,690				1,448
Leases in place			3,215				3,364				3,743
Right of use asset, net			1,876				1,974				2,191
Prepaid stock offering expenses			1,698				710				—
Accrued investment income			232				255				281
Other assets			295				531				486
Total Assets		$	88,327			$	88,293			$	89,939
Unpaid losses and loss adjustment expenses		$	8,079			$	9,861			$	12,415
Unearned premiums			3,765				3,304				5,461
Reinsurance payable			—				4				117
Accrued expenses			770				686				614
Commissions payable to related party			901				646				957
Notes payable			27,778				28,019				28,353
Defined benefit plan unfunded liability			379				444				820
Related party loan			398				—				—
Operating lease liability, net			2,750				2,829				2,979
Other liabilities			256				306				409
Total Liabilities		$	45,076			$	46,099			$	52,125
Retained earnings			42,876				41,631				37,762
Accumulated other comprehensive income (loss)			(355	)			(184	)			(732	)
Noncontrolling interest			730				747				784
Total equity		$	43,251			$	42,194			$	37,814
Total liabilities and equity		$	88,327			$	88,293			$	89,939
Non GAAP Ratios(1):
Loss and loss adjustment expense ratio(2)			39	%			33	%			75	%
Expense ratio(3)			73	%			48	%			40	%
Combined ratio(4)			112	%			81	%			115	%
Statutory Data(1):
Statutory surplus		$	38,745			$	39,082			$	35,186
Ratio of net premiums written to statutory surplus			10.5	%			15.5	%			35.8	%

 

(1)	Applies only to ACIC, excluding its subsidiaries.

(2)	Calculated by dividing loss and loss adjustment expense by net premiums earned.

(3)	Calculated by dividing amortization of deferred policy acquisition costs and net underwriting expenses and administrative expenses by net premiums earned.

(4)	The sum of the loss and loss adjustment expense ratio and the underwriting expense ratio. A combined ratio of less than 100% means a company is making an underwriting profit.

 

29

USE OF PROCEEDS

Although the actual proceeds from the sale of our common stock cannot be determined until the offering is complete, we estimate the net proceeds from the offerings, after taking into account the repayment of $1.4 million of indebtedness that we will assume as part of the purchase of ARM, will be approximately $2.6 million at the minimum, $5.2 million at the midpoint, and $7.7 million at the maximum of the offering range. See the “Offering Summary” on the front cover of the offering circular for the assumptions used to arrive at these amounts. The amount of net proceeds from the sale of common stock in the offerings will depend on the total number of shares actually sold in the subscription and public offerings. As a result, the net proceeds from the sale of common stock cannot be determined until the offerings are completed.

After the payment of our conversion and offering expenses and commissions, we will use proceeds received from the sale of our shares of common stock in the offering to make a loan to our ESOP in an amount sufficient to permit the ESOP to buy an amount equal to 9.9% of the shares sold in the offering. We will also use $7.3 million of the proceeds of the offering to pay a one-time cash distribution to the eligible members.

We plan to contribute substantially all of the net proceeds to ACIC, retaining $0.5 million to fund twelve months’ of working capital obligations at the Company. ACIC plans to use the remaining net proceeds for general corporate purposes, including (i) supporting organic growth of our insurance business; (ii) funding new product launches; and (iii) selectively deploying new capital to retain, acquire, and bolster talent in key areas. ACIC may also use such remaining net proceeds to acquire other insurance companies or related businesses or to pay dividends to the Company so that the Company can pay dividends on the Series A Preferred Stock. See “Dividend Policy.” On a short-term basis, the remaining net proceeds will be invested by ACIC primarily in securities consistent with our investment policy until utilized. We have no other current specific plans for the use of the net proceeds of the offering, and we have no current understandings or agreements with anyone to acquire any company or business.

Under the District of Columbia mutual-to-stock conversion statute, the plan of conversion must provide that the total consideration for the stock to be issued in the conversion offering is equal to the estimated pro forma market value of the converted insurance company. Accordingly, the amount of the offering is established by the independent valuation required by the conversion statute, and we cannot sell shares at an aggregate price less than the minimum of the range established by such valuation.

No proceeds of the offering will be used to compensate or otherwise make payments to officers or directors of the Company or any of its subsidiaries.

 

30

MARKET FOR THE COMMON STOCK

We do not intend to apply for the listing of our common stock on the NASDAQ Capital Market or any other stock exchange. Accordingly, there will be no market for our common stock and it will be very illiquid. We cannot assure you that you will be able to sell your shares of common stock for a price at or above $10.00 per share, or that you will be able to sell your shares at all if you need to do so.

See “Risk Factors — Risks Relating to Ownership of Our Common Stock — Our shares will not be listed on any stock exchange, and there will not be an active, liquid market for our common stock.”

DIVIDEND POLICY

Following completion of this offering we do not intend to pay a dividend on our common stock. However, our board of directors will have the authority to declare dividends on our shares of common stock, subject to statutory and regulatory requirements. Any decision to pay a dividend will depend on many factors, including our financial condition and results of operations, liquidity requirements, market opportunities, capital requirements of our subsidiaries, legal requirements, regulatory constraints, dividends from our subsidiaries, and other factors as the board of directors deems relevant. We currently expect to pay quarterly cash dividends on our Series A Preferred Stock when such dividends are due. The accrued dividends payable on our Series A Preferred Stock will total $468 thousand per year.

The Company initially will have no significant source of cash flow other than intercompany dividends from ACIC and ARM, if any. Therefore, the payment of dividends by us to shareholders would depend significantly upon our receipt of dividends from ACIC and ARM.

ACIC’s ability to pay dividends is subject to restrictions contained in the insurance laws of District of Columbia, which require that all dividends be approved by the District of Columbia Department of Insurance prior to their payment. An extraordinary dividend is generally defined as a dividend that, together with all other dividends paid within the last twelve months, exceeds the lesser of 10% of its statutory policyholders’ surplus as of the preceding year end or the statutory net income of the company (excluding realized capital gains) for the preceding year. Statutory net income from the previous two years that has not been used to pay dividends can be carried forward and used to pay dividends. Statutory policyholders’ surplus, as determined under statutory accounting principles, or SAP, is the amount remaining after all liabilities, including loss and loss adjustment expenses, are subtracted from all admitted assets. Admitted assets are assets of an insurer prescribed or permitted by a state insurance regulator to be recognized on the statutory balance sheet. 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.

As part of the order issued by the Department approving the conversion, the Company will be prohibited from paying any cash dividends on the Company’s common stock for three years after completion of the conversion without the prior approval of the Department.

 

31

CAPITALIZATION

The following table displays information regarding the consolidated historical capitalization of ACIC and its subsidiaries as of June 30, 2021. The table also displays the pro forma consolidated capitalization of the Company. The pro forma information gives effect to the sale of common stock at the minimum, midpoint, and maximum of the estimated valuation range of our consolidated pro forma market value, as determined by the independent evaluation of Boenning. The pro forma consolidated capitalization of the Company also gives effect to the acquisition of American Risk Management, Inc. See “Business — Acquisition of American Risk Management, Inc.” The various capital positions are displayed based upon the assumptions set forth under “Use of Proceeds.” For additional financial information regarding ACIC, see our consolidated financial statements and related notes beginning on page F-1 of this offering circular. The total number of shares to be issued in the conversion will range from 1,700,000 shares to 2,300,000 shares. See “Use of Proceeds” and the subsection entitled “The Conversion and Offering — Stock Pricing and Number of Shares to be Issued.”

 

						Pro Forma Capitalization of the Company as of June 30, 2021(2)
						(dollars in thousands except share and per share data)
		Historical Consolidated Capitalization of ACIC and ARM at June 30, 2021				Minimum				Midpoint				Maximum
Shareholders’ equity(1):
Common Stock, par value $0.01 per share; authorized 10,000,000 shares; shares to be outstanding — 1,700,000 at the minimum and 23,000,000 at the maximum(2)(3)		$	1			$	17			$	20			$	23
Preferred Stock, no par value, authorized 1,000,000 shares; 550,000 shares of Series A to be outstanding			-0-				5,500				5,500				5,500
Additional paid-in capital(2)(3)			-0-				12,984				15,819				18,653
Retained earnings			43,254				35,353				35,353				35,353
Accumulated other comprehensive income (loss), net of tax			(355	)			(355	)			(355	)			(355	)
Less: common stock to be acquired by ESOP(4)			-0-				(1,683	)			(1,980	)			(2,277	)
Noncontrolling interest			730				730				730				730
Total shareholders’ equity		$	43,630			$	52,546			$	55,087			$	57,627

 

Capitalization table footnotes (in thousands except share and per share data)

 

(1)

Pro forma shareholders’ equity is not intended to represent the fair market value of the common stock or the net fair market value of the Company’s assets and liabilities. The amounts indicated also are not intended to represent what would be available for distribution to shareholders, if any, in the event of liquidation. The pro forma data may be materially affected by a change in the number of shares sold in the conversion and by other factors.

(2)	These pro forma amounts include the estimated net proceeds from the conversion.

(3)

Does not reflect additional shares of common stock that could be issued under our stock-based incentive plan. The aggregate amount of common stock issuable under this plan is equal to 14.0% of the number of shares issued in the offerings. We expect that grants of stock options to purchase 260,000 shares and 15,000 shares of restricted stock will be made to our executive officers, directors, and certain employees under the stock-based incentive plan subject to completion of this offering. An undetermined portion of the remaining

 

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shares available for issuance under the stock-based incentive plan may be issued from any treasury shares purchased by the Company in the open market. Each of these methods and amounts would have different and varying effects on our shareholders’ equity. Your ownership percentage would decrease by approximately 12.3% if all of the shares available under the plan were issued from our authorized but unissued shares upon the grant of all potential restricted stock awards and upon the vesting of restricted stock units and the exercise of all potential stock options. No decrease in your ownership percentage will occur if such shares are purchased for the plan on the open market, but shareholders equity will be reduced. See “Unaudited Pro Forma Financial Information — Additional Pro Forma Data” and “Executive Compensation — Equity Compensation in Connection With This Offering — Stock-Based Incentive Plan.”

(4)

Assumes that 9.9% of the common stock sold in the offering will be purchased by the ESOP. The common stock acquired by the ESOP is reflected as a reduction in shareholders’ equity. Assumes the funds used to acquire the ESOP shares will be borrowed from the Company. See Note 1 to the table set forth under “Unaudited Pro Forma Financial Information — Additional Pro Forma Data” and “Management — Benefit Plans and Employment Agreements — Employee Stock Ownership Plan.”

 

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following unaudited pro forma condensed balance sheet as of June 30, 2021 gives effect to the conversion and completion of this offering and the acquisition of American Risk Management, Inc., as if it had occurred as of June 30, 2021. The data is based on the assumption that 2,000,000 shares of common stock (the midpoint of the offering) are sold to eligible members of ACIC, the ESOP, and the trustees, officers, and employees of ACIC. For information on the impact of transaction sizes above the midpoint level, see “Additional Pro Forma Data” beginning on page 41.

The following unaudited pro forma condensed statements of operations six-months ended June 30, 2021 and for the year ended December 31, 2020, present our operating results as if this offering was completed as of January 1, 2021 and January 1, 2020, respectively.

Completion of this offering is contingent on the sale of a minimum of 1,700,000 shares of common stock in this offering. If less than 1,700,000 shares are subscribed for in the subscription offering, the remaining shares will be sold in the public offering.

The unaudited pro forma information does not claim to represent what our financial position or results of operations would have been had this offering occurred on the dates indicated. This information is not intended to project our financial position or results of operations for any future date or period. The pro forma adjustments are based on available information and certain assumptions that we believe are factually supportable and reasonable under the circumstances. The unaudited pro forma financial information should be read in conjunction with our financial statements, the accompanying notes, and the other financial information included elsewhere in this offering circular.

The pro forma adjustments and pro forma amounts are provided for informational purposes only. Our financial statements will reflect the effects of this offering only from the date it is completed.

 

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Unaudited Pro Forma Financial Information — Balance Sheet⁽¹⁾⁽⁷⁾

June 30, 2021

(in thousands)

 

		ACIC Historical Consolidated				ARM Historical				Pro Forma Adjustments				Forge Group, Inc. Pro Forma Consolidated
Assets
Total investments, cash and cash equivalents		$	72,939			$	1,413			$	5,800	(2)		$	80,152
Premiums and other receivables			4,493				—				(904	)(3)			3,589
Ceded unearned premiums			139				—				—				139
Reinsurance receivable			878				—				—				878
Deferred policy acquisition costs			684				—				(224	)			460
Accrued investment income			232				—				—				232
Deferred rent			1,879				—				—				1,879
Leases in place			3,215				—				—				3,215
Right of use asset			1,876				—				—				1,876
Prepaid stock offering expenses			1,698				—				(1,698	)			—
Due from affiliates			—				1,644				(1,644	)			—
Intangible assets			—				—				2,004				2,004
Goodwill			—				—				4,891				4,891
Other assets			294				17				—				311
Total assets		$	88,327			$	3,074			$	8,225			$	99,626

 

		ACIC Historical Consolidated				ARM Historical				Pro Forma Adjustments				Forge Group, Inc. Pro Forma Consolidated
Liabilities
Reserve for Losses and LAE		$	8,079			$	—			$	—			$	8,079
Unearned premiums			3,765				—				—				3,765
Notes payable			27,778				1,493				(1,493	)			27,778
Operating lease liabilities			2,750				—				—				2,750
Accrued expenses			770				359				—				1,129
Due to affiliates			901				614				(1,515	)			—
Related party loan			398				—				—				398
Other liabilities			635				5				—				640
Total liabilities			45,076				2,471				(3,008	)			44,539
Common stock			—				1				19	(1)(4)(5)			20
Additional paid in capital			—				—				15,819				15,819
Retained earnings			42,876				602				(8,125	)			35,353
Accumulated other comprehensive income (loss)			(355	)			—				—				(355	)
ESOP/Unearned compensation			—				—				(1,980	)(8)			(1,980	)
Preferred stock			—				—				5,500				5,500
Non-controlling interest			730				—				—				730
Total shareholders’ equity			43,251				603				11,233				55,087
Total liabilities and shareholders’ equity		$	88,327			$	3,074			$	8,225			$	99,626

 

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Balance sheet footnotes (in thousands, except share and per share data):

 

(1)

The unaudited pro forma condensed balance sheet, as prepared, gives effect to the sale of the common stock at the midpoint of the estimated range of ACIC’s consolidated pro forma market value, as determined by the independent valuation of Boenning. The unaudited pro forma condensed balance sheet is based on the assumptions set forth under “Use of Proceeds.”

(2)

As shown in the table below, represents the net cash proceeds expected to be received by the Company after the offering at the midpoint of the offering and the acquisition of ARM. On a short-term basis, the proceeds retained at the holding company will be invested primarily in U.S. government securities, other federal agency securities, and other securities consistent with our investment policy until utilized.

 

Net offering proceeds
Sale of 2,000,000 shares at $10 per share		$	20,000
Less: Estimated offering expenses			(3,270	)
Less: Cash distribution to eligible members			(7,300	)
Less: Commissions			(891	)
Less: Proceeds from ESOP shares			(1,980	)
Net offering proceeds		$	6,559
Pre-closing cash adjustments related to ARM acquisition
Repayment of debt			(93	)
Distribution of excess working capital			(964	)
Pre-closing cash adjustments related to ARM acquisition		$	(1,057	)
Adjustments to proceeds
Transaction costs paid to date			1,698
Payoff of ARM loan			(1,400	)
Adjustments to proceeds		$	298
Net cash proceeds
Net offering proceeds			6,559
Pre-closing cash adjustments related to ARM acquisition			(1,057	)
Adjustments to proceeds			298
Net cash proceeds		$	5,800

(3)	Represents premiums collected by ARM and payable to ACIC.

(4)	Pro forma common stock and additional paid in capital includes the net proceeds from the conversion as follows:

 

Sale of 2,000,000 shares at $10 per share		$	20,000
Conversion and offering expenses			(3,270	)
Commissions			(891	)
Total		$	15,839
Common stock			20
Additional paid in capital			15,819
Total		$	15,839

 

(5)

No effect has been given to any issuances of additional shares in connection with the grant of options or awards of stock under the stock-based incentive plan that we have adopted. Under the stock-based incentive plan, we may issue shares of our common stock equal to 14.0% of the number of shares issued in the offerings. Of this up to 4.0% may be granted as awards of restricted stock or restricted stock units and the rest may be used to award stock options under the stock-based incentive plan. The issuance of authorized but unissued shares of our

 

36

common stock upon the exercise of stock options or for purposes of making restricted stock awards or the vesting of restricted stock unit awards under the stock-based incentive plan instead of open market purchases would dilute the voting interests of existing shareholders by approximately 12.3%.

(6)

Reflects the $1,980,000 loan from us to our ESOP, the proceeds of which will be used to purchase 9.9% of the common stock issued in the offering at a purchase price of $10.00 per share. The amount of this borrowing has been reflected as a reduction from net proceeds to determine the estimated funds available for investment. The amount of the ESOP loan will increase to $2.3 million if 2,300,000 shares are sold in the offering. The ESOP loan will bear interest at an annual rate equal to the current long-term Applicable Federal Rate with annual compounding in effect on the closing date of the offering.

(7)

The aggregate consideration for American Risk Management, Inc. paid by the Company was calculated to be $6,900,000. The purchase price included 550,000 shares of the Company’s Series A Preferred Stock to be issued to MCW and the assumption by the Company of $1,400,000 of ARM indebtedness. The 550,000 shares of Series A Preferred Stock were determined to have a value of approximately $5,500,000 based on a liquidation preference of $10 per share. Pursuant to the stock purchase agreement with MCW Holdings, Inc., ARM will have $5,000 of net working capital at the closing of the acquisition. The purchase price was allocated among the net tangible and intangible assets and the good will of ARM based on a valuation of ARM’s assets and liabilities prepared by an independent valuation firm engaged by the Company for the purpose preparing the Company’s financial statements. The independent valuation firm valued ARM’s net tangible and intangible assets as follows:

 

Net tangible assets purchased
Cash and cash equivalents			356,683
Commissions receivable, net			610,314
Other receivables and prepaid expenses			17,013
Less: Commissions and accounts payable			(359,157	)
Less: Due to affiliate			(614,073	)
Less: Deferred commissions revenue			(5,780	)
Total			5,000
Net intangible assets purchased
Agency relationships			1,840,000
Trade name			120,000
Licenses			44,000
Goodwill			4,891,000
Total			6,895,000
Total net tangible and intangible assets purchased			6,900,000

 

Such allocation was made in compliance with Accounting Standards Codification Topic 805.

 

(8)

The ESOP loan will require at least annual payments of principal and interest for a term of 10 years. The Company intends to make contributions to the ESOP at least equal to the principal and interest requirement of the ESOP loan. As the ESOP loan is repaid, the shareholders’ equity of the Company will increase. The ESOP expense reflects adoption of Accounting Standards Codification (ASC) 718-40, which requires recognition of expense based upon shares committed to be allocated under the ESOP, and the exclusion of unallocated shares from earnings per share computations. The valuation of shares committed to be allocated under the ESOP would be based upon the average market value of the shares during the year. For purposes of this calculation, the average market value was assumed to be equal to $10.00 per share. See “Management — Benefit Plans and Employment Agreements.”

 

37

Unaudited Pro Forma Financial Information — Statement of Operations

Six Months Ended June 30, 2021

(Dollars in thousands)		ACIC Historical Consolidated				ARM Historical				Pro Forma Adjustments				Forge Group, Inc. Pro Forma Consolidated
Revenues
Net premiums earned		$	3,614			$	—			$	—			$	3,614
Income from real estate held for investment			1,056				—				—				1,056
Net investment income, incl. gains & losses			1,851				1				—	(1)			1,852
Service fee and other income			72				—				—				72
Commission revenue			—				776				(776	)			—
Total revenue		$	6,593				777				(776	)		$	6,594
Expenses
Loss and loss adjustment expense		$	1,410			$	—			$	39	(2)(3)(5)		$	1,449
Policy acquisition costs and other operating expenses			1,725				—				329	(2)(3)(5)			2,054
Related and third party commissions			774				357				(776	)			355
Depreciation and amortization			542				—				109	(6)			651
Interest expense on debt			657				38				—				695
Other expense, net			212				217				—				429
Total expenses			5,320				612				(299	)			5,632
Net income before taxes			1,273				165				(477	)			962
Tax (expense) benefit			45				—				—				45
Net income			1,228				165				(477	)			917
Net loss attributable to non-controlling interest			17				—				—				17
Net gain (loss) attributable to Amalgamated		$	1,245			$	165			$	(477	)		$	933
Earnings per share data
Basic earnings per common share														$	0.51
Diluted earnings per common share														$	0.38
Weighted average common shares outstanding															1,818,900	(5)
Diluted common shares outstanding															2,465,333	(7)

 

Statement of Operations Footnotes (dollars in thousands, except share and per share data):

 

(1)

We anticipate that we would earn approximately $98 thousand of investment income, assuming the net proceeds after the redemption of subscription rights and the purchase of the ESOP shares were received and available for investment as of January 1, 2021, and that they were invested with an average annual pre tax rate of return of 3.4%. This income is not included as it is not “factually supportable” as that term is used in the Securities and Exchange Commission’s rules and regulations and therefore no pro forma adjustment of investment income or realized investment gains is reflected.

(2)

General operating expenses include a pro forma adjustment to recognize compensation expense under the ESOP for shares of common stock committed to be released to participants as the principal and interest of the $2.0 million loan from us to the ESOP is repaid. The pro forma adjustment reflects the amounts repaid on the ESOP loan based on ten equal annual installments of principal.

 

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(3)

Includes $75 thousand of compensation expense in connection with the granting of 15,000 shares of restricted stock to the Company’s directors and options to purchase 190,000 shares to the Company’s executive officers upon the closing of the offerings, a portion of which will vest at the end of each year after the date of grant.

(4)	No adjustment has been made to reflect any federal income tax effects of notes (2) and (3) above because the Company has net operating loss carryforwards.

(5)

Includes 15,000 shares expected to be granted as restricted stock awards to the Company’s directors at the closing of the offerings. No effect has been given to any issuances of additional shares in connection with the grant of options or awards of stock under the stock-based incentive plan that we have adopted. Under the stock-based incentive plan, we may issue shares of our common stock equal to 14.0% of the number of shares issued in the offerings. Of this, up to 4.0% may be granted as restricted stock or restricted stock unit awards and the rest may be used to award stock options under the stock-based incentive plan. The issuance of authorized but unissued shares of our common stock upon the exercise of stock options or for purposes of making restricted stock awards or the vesting of restricted stock unit awards under the stock-based incentive plan instead of open market purchases would dilute the voting interests of existing shareholders by approximately 12.3%.

(6)	Gives effect to the amortization of intangible assets arising from allocating part of the excess of the ARM purchase price over the net assets acquired to intangible assets (agency relationships, the trade name, and licenses), which are amortized over periods between two and ten years.

(7)	Includes 458,333 shares of common stock issuable upon conversion of the 550,000 shares of Series A Preferred Stock at the current conversion price of $12.00 per share.

 

39

Unaudited Pro Forma Financial Information — Statement of Operations

Year Ended December 31, 2020

 

(Dollars in thousands)		ACIC Historical Consolidated				ARM Historical				Pro Forma Adjustments				Forge Group, Inc. Pro Forma Consolidated
Revenues
Net premiums earned		$	8,133			$	—			$	—			$	8,133
Income from real estate held for investment			2,064				—				—				2,064
Net investment income, incl. gains & losses			2,246				—				—	(1)			2,246
Gain on extinguishment of loan			400				—				—				400
Service fee and other income			69				—				—				69
Commission revenue			—				1,171				(1,171	)			—
Total revenue			12,912				1,171				(1,171	)			12,912
Expenses
Loss and loss adjustment expense			2,684				—				141	(2)(3)(5)			2,825
Policy acquisition costs and other operating expenses			2,335				—				200	(2)(3)(5)			2,535
Related and third party commissions			1,094				503				(1,094	)			503
Depreciation and amortization			1,111				—				218	(6)			1,329
Interest expense on debt			1,314				—				—				1,314
Other expense, net			687				265				—				952
Total expenses			9,225				768				(535	)			9,458
Income (loss) before taxes			3,687				403				(636	)			3,454
Tax benefit			(146	)(4)			—				—				(146	)
Net gain (loss)			3,833				403				(636	)			3,600
Net loss attributable to non-controlling interest			37				—				—				37
Net gain (loss) attributable to Amalgamated		$	3,870			$	403			$	(636	)		$	3,637
Earnings per share data
Basic earnings per common share														$	1.59
Diluted earnings per common share															1.23
Weighted average common shares outstanding															2,424,827	(5)
Diluted common shares outstanding															3,133,333	(7)

 

Statement

of Operations Footnotes (dollars in thousands, except share and per share data):

 

(1)

We anticipate that we would earn approximately $197 thousand of investment income, assuming the net proceeds after the redemption of subscription rights and the purchase of the ESOP shares were received and available for investment as of January 1, 2020, and that they were invested with an average annual pre-tax rate of return of 3.4%. This income is not included as it is not “factually supportable” as that term is used in the Securities and Exchange Commission’s rules and regulations and therefore no pro forma adjustment of investment income or realized investment gains is reflected.

(2)

General operating expenses include a pro forma adjustment to recognize compensation expense under the ESOP for shares of common stock committed to be released to participants as the principal and interest of the $2.0 million loan from us to the ESOP is repaid. The pro forma adjustment reflects the amounts repaid on the ESOP loan based on ten equal annual installments of principal.

(3)

Includes $150 thousand of compensation expense in connection with the granting of 15,000 shares of restricted stock to the Company’s directors and options to purchase 190,000 shares to the Company’s executive officers upon the closing of the offerings, a portion of which will vest at the end of each year after the date of grant.

 

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(4)	No adjustment has been made to reflect any federal income tax effects of notes (2) and (3) above because the Company has net operating loss carryforwards.

(5)

Includes 15,000 shares expected to be granted as restricted stock awards to the Company’s directors at the closing of the offerings. No effect has been given to any issuances of additional shares in connection with the grant of options or awards of stock under the stock-based incentive plan that we have adopted. Under the stock-based incentive plan, we may issue shares of our common stock equal to 14.0% of the number of shares issued in the offerings. Of this, up to 4.0% may be granted as restricted stock or restricted stock unit awards and the rest may be used to award stock options under the stock-based incentive plan. The issuance of authorized but unissued shares of our common stock upon the exercise of stock options or for purposes of making restricted stock awards or the vesting of restricted stock unit awards under the stock-based incentive plan instead of open market purchases would dilute the voting interests of existing shareholders by approximately 12.3%.

(6)	Gives effect to the amortization of intangible assets arising from allocating part of the excess of the ARM purchase price over the net assets acquired to intangible assets (agency relationships, the trade name, and licenses), which are amortized over periods between two and ten years.

(7)	Includes 458,333 shares of common stock issuable upon conversion of the 550,000 shares of Series A Preferred Stock at the current conversion price of $12.00 per share.

Additional Pro Forma Data

The actual net proceeds from the sale of our common stock in the offering cannot be determined until the offering is completed. However, the offering net proceeds, after taking into account the repayment of $1.4 million of indebtedness that we will assume as part of the purchase of ARM, are currently estimated to be between $2.6 million and $7.7 million, based on the following assumptions:

 

•

Our ESOP will purchase an amount equal to 9.9% of the shares of common stock sold in the offering with a loan from us;

 

•

Expenses of the conversion and the offering will be $3.3 million;

 

•

Distribution of $7.3 million eligible members upon completion of the conversion and the offering; and

 

•

Placement agent commissions will be between $0.7 million and $1.1 million.

We have prepared the following table which sets forth our historical net loss and retained earnings prior to the offering and pro forma net loss and shareholders’ equity following the offering. In preparing this table and in calculating the pro forma data, the following assumptions have been made:

 

•

Pro forma earnings have been calculated assuming the stock had been sold at the beginning of the period;

 

•

Pro forma per share amounts have been calculated by dividing historical and pro forma amounts by the indicated number of shares, as adjusted to give effect to the purchase of shares by our ESOP; and

 

•

Pro forma shareholders’ equity amounts have been calculated as if our common stock had been sold in the offering on January 1, 2020, and, accordingly, no effect has been given to the assumed earning effect of the net proceeds from the offering.

The following pro forma information may not be representative of the financial effects of the offering at the date on which the offering actually occurs and should not be taken as indicative of future results of operations. The pro forma shareholders’ equity is not intended to represent the fair market value of the common stock and may be different from amounts that would be available for distribution to shareholders in the event of liquidation.

 

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The following table summarizes historical data and our pro forma data at June 30, 2021, based on the assumptions set forth above and in the table and should not be used as a basis for projection of the market value of the common stock following the completion of the offering.

 

		At or for the Six Months Ended June 30, 2021
		1,700,000 shares sold at $10.00 per share (Minimum of Range)				2,000,000 shares sold at $10.00 per share (Midpoint of Range)				2,300,000 shares sold at $10.00 per share (Maximum of Range)
		(dollars in thousands, except share and per share data)
Pro forma offering proceeds
Gross proceeds of public offering		$	17,000			$	20,000			$	23,000
Less offering expenses and commissions			(3,999	)			(4,161	)			(4,324	)
Net proceeds			13,001				15,839				18,676
Less cash distribution to eligible members			(7,300	)			(7,300	)			(7,300	)
Less ESOP shares(1)			(1,683	)			(1,980	)			(2,277	)
Net proceeds after ESOP shares		$	4,018			$	6,559			$	9,098
Pro forma consolidated equity (adjusted for non-controlling interest)
Historical Equity		$	42,298			$	42,298			$	42,298
Net proceeds after ESOP shares(1)			4,018				6,559				9,098
Issuance of Series A Preferred(2)			5,500				5,500				5,500
Pro forma shareholders’ equity(2)		$	51,816			$	54,357			$	56,898
Pro forma per share data
Total shares outstanding after the offering(3)			2,158,333				2,458,333				2,758,333
Pro forma book value per share		$	24.01			$	22.11			$	20.63
Pro forma price-to-book value per share			41.7	%			45.2	%			48.5	%
Pro forma book value per share (net of good will)			21.74				20.12				18.85
Pro forma price-to-book value per share (net of good will)			46.0	%			49.7	%			53.0	%
Pro forma net income
Historical net income		$	1,157			$	1,157			$	1,157
Amortization of intangible assets			109				109				109
ESOP expense(5)			100				115				129
Pro forma income		$	948			$	933			$	919
Weighted average shares outstanding(4)											1,818,900
Pro forma income per share		$	0.61			$	0.51			$	0.44
Pro forma diluted income per share			0.44				0.38				0.33

 

(1)

It is assumed that 9.9% of the aggregate shares sold in the offering will be purchased by the ESOP. The funds used to acquire such shares are assumed to have been borrowed by the ESOP from us. The amount to be borrowed is reflected as a reduction to shareholders’ equity. Annual contributions are expected to be made to the ESOP in an amount at least equal to the principal and interest requirement of the debt. The pro forma net income assumes: (i) that the contribution to the ESOP is equivalent to the debt service requirements for the six months ended June 30, 2021; and (ii) only the ESOP shares committed to be released were considered outstanding for purposes of the net income per share calculations.

(2)	Gives effect to the acquisition of ARM and the issuance of 550,000 shares of Series A Preferred Stock in connection with that acquisition.

 

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