1025-00001 · Client 1025 · Diligence

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CALDERWOOD & HARKNESS LLP

MEMORANDUM

PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT

TO: File — C&H Matter No. 1025-00001

FROM: Natasha Forbes; Eric Johannsen

DATE: May 20, 2021

RE: Summary of Management Due Diligence Call — May 19, 2021 Quorum Insurance Holdings Corp. Follow-On Offering

This memorandum summarizes the substance of the management due diligence call conducted on May 19, 2021, in connection with the contemplated follow-on offering (the "Offering") of shares of common stock of Quorum Insurance Holdings Corp. (the "Company" or "Quorum"). This memorandum has been prepared for internal Calderwood & Harkness LLP ("C&H") file purposes and is protected by the attorney-client privilege and the attorney work product doctrine. It is not intended for distribution to any third party without the prior written consent of the undersigned or C&H partnership authorization.

I. Participants

The following individuals participated in the due diligence call:

Company Participants:

• Martin R. Calloway, Chief Executive Officer, Quorum Insurance Holdings Corp.

• Diana L. Prescott, Chief Financial Officer, Quorum Insurance Holdings Corp.

• Yusuf A. Okafor, General Counsel & Corporate Secretary, Quorum Insurance Holdings Corp.

Calderwood & Harkness LLP (Issuer's Counsel):

• Robert Adeyemi, Partner

• Natasha Forbes, Associate

• Eric Johannsen, Associate

Greystone Harwick & Co. (Lead Underwriter):

• Sarah P. Langford, Vice President, Equity Capital Markets (Deal Captain)

Duval & Pressler LLP (Underwriters' Counsel):

• Gregory R. Tannenbaum, Partner

• Megan S. Cavallo, Associate

Call Logistics: The call commenced at 2:00 p.m. (Eastern Time) and concluded at approximately 3:45 p.m. (Eastern Time). The call was conducted via conference line. No recording was made.

II. Business Overview and Strategy

Mr. Calloway opened the call by providing an overview of the Company's business segments and corporate strategy. He described Quorum Insurance Holdings Corp. as a specialty-focused property and casualty insurance holding company organized under the laws of the State of Delaware, with its principal executive offices located in Hartford, Connecticut.

Mr. Calloway explained that the Company conducts its insurance operations through two principal insurance subsidiaries:

(a) Quorum Specialty Insurance Company — a stock insurance company domiciled in the State of Connecticut. Quorum Specialty focuses on professional liability, cyber liability, and management liability lines of business. Mr. Calloway noted that Quorum Specialty is the Company's largest operating subsidiary and represents the majority of the Company's gross written premium. It is licensed to write business on an admitted basis in 48 states and the District of Columbia and writes cyber liability coverage on a surplus lines basis in select jurisdictions.

(b) Quorum National Casualty Co. — a stock insurance company domiciled in the State of Delaware. Quorum National underwrites excess and surplus casualty business, including general liability, excess casualty, and miscellaneous professional liability on a non-admitted basis. Mr. Calloway noted that Quorum National operates as an eligible surplus lines insurer in all states in which it currently writes business.

Mr. Calloway reported that the combined gross written premium for the two insurance subsidiaries for fiscal year 2020 was approximately $412 million. He stated that he expects mid-single-digit premium growth in fiscal year 2021, driven primarily by rate hardening in specialty lines, particularly in the cyber liability and management liability segments, where the Company has experienced favorable renewal rate increases in the range of 8% to 15% during the first quarter of 2021. Mr. Calloway added that the excess and surplus casualty market continues to benefit from dislocation in the standard market, with new business submissions at Quorum National increasing approximately 22% year-over-year in Q1 2021.

Mr. Calloway also described the Company's technology subsidiary, QuorumEdge Technology Solutions, Inc., a Delaware corporation and a wholly owned subsidiary of the Company. QuorumEdge operates a proprietary InsurTech platform that provides automated underwriting, claims processing, and distribution capabilities across the Company's insurance operations. Mr. Calloway stated that the QuorumEdge platform currently processes approximately 35% of the Company's new business submissions and that management expects this figure to reach approximately 50% by year-end 2022, reflecting ongoing investment in the platform's capabilities and integration across additional product lines.

Mr. Calloway noted that a portion of the net proceeds from the Offering is intended to fund further development of the QuorumEdge platform, including its expansion into small-commercial lines of business, which management views as a significant growth opportunity. He emphasized that the platform provides a competitive advantage by reducing underwriting cycle times, improving loss ratio performance through more granular risk selection, and enhancing distribution capabilities through digital broker portals and API integrations with third-party distribution partners.

In response to a question from Ms. Langford regarding competitive positioning, Mr. Calloway stated that the Company competes primarily with mid-sized specialty carriers and that the QuorumEdge platform differentiates the Company from competitors that rely on legacy technology infrastructure. He noted that the Company's combined ratio performance has consistently outperformed the specialty lines industry average over the past three fiscal years.

III. Financial Condition

Ms. Prescott presented a summary of the Company's financial condition. The following key financial metrics were discussed:

Income Statement Highlights:

Ms. Prescott noted that the improvement in the combined ratio from FY 2020 to Q1 2021 was attributable to favorable rate adequacy improvements across the specialty portfolio and continued expense discipline, partially offset by modest pandemic-related loss development discussed further in Section X below. She stated that the Company's loss ratio for Q1 2021 was 62.1% and the expense ratio was 32.7%, both consistent with management's expectations and trending favorably relative to the Company's long-term targets.

Balance Sheet and Capital Highlights:

Ms. Prescott reported that, as of March 31, 2021, the Company's total invested assets were approximately $1.83 billion, consisting primarily of investment-grade fixed maturity securities, with an average credit quality of A+ and an average duration of approximately 3.8 years. She stated that the investment portfolio is managed by Ashford Capital Advisors LLC under an investment management agreement and that there have been no material changes to the Company's investment policy or asset allocation strategy since the most recent annual report.

The total statutory surplus of the Company's insurance subsidiaries, on a combined basis as of December 31, 2020, was approximately $389 million. Ms. Prescott provided the following risk-based capital ("RBC") ratios:

• Quorum Specialty Insurance Company: RBC ratio of 412% of company action level

• Quorum National Casualty Co.: RBC ratio of 385% of company action level

Ms. Prescott confirmed that both RBC ratios are well above the regulatory minimums established by the National Association of Insurance Commissioners and the respective domiciliary state regulators. She noted that the company action level is the first regulatory trigger under the RBC framework, and neither subsidiary is near any action level threshold.

Ms. Prescott further confirmed that no extraordinary dividends were paid from either insurance subsidiary in 2020 or during the first quarter of 2021. She stated that the ordinary dividend capacity of Quorum Specialty Insurance Company for 2021 is approximately $19.5 million, calculated as the greater of 10% of prior-year statutory surplus or prior-year statutory net income, in accordance with the Connecticut Insurance Holding Company System Act (Conn. Gen. Stat. § 38a-136, et seq.). Ms. Prescott noted that the ordinary dividend capacity of Quorum National Casualty Co. was still being confirmed by the Company's regulatory counsel and that Mr. Okafor would follow up with the Delaware Department of Insurance filing records to verify the calculation (see Section XI below for further discussion of this open item).

Credit Facility:

Ms. Prescott reported that the Company maintains a $75 million revolving credit facility with Sycamore National Bank, N.A., as administrative agent. As of March 31, 2021, $20 million was drawn on the facility, leaving $55 million of availability. The facility matures in October 2023. Ms. Prescott confirmed that the Company is not in default of any financial covenants under the credit facility and that no event of default or potential event of default exists under the credit agreement. Additional details regarding the credit facility are discussed in Section IV below.

IV. Outstanding Indebtedness

Ms. Prescott confirmed the following material indebtedness of the Company:

Revolving Credit Facility:

The Company is party to a $75 million senior secured revolving credit facility (the "Credit Facility") with Sycamore National Bank, N.A., as administrative agent, and Ridgeline Commercial Lending Corp., as a participating lender. The Credit Facility bears interest at SOFR plus 175 basis points. As of March 31, 2021, $20 million was drawn under the Credit Facility and approximately $55 million remained available, subject to borrowing base and other conditions. The Credit Facility matures in October 2023. Ms. Prescott stated that the Company has been in compliance with all covenants under the Credit Facility since its inception and does not anticipate any covenant compliance issues in connection with the Offering.

Senior Notes:

The Company has outstanding $125 million aggregate principal amount of 4.875% Senior Notes due 2028 (CUSIP: 74917R207) (the "Senior Notes"), which were issued in August 2020 pursuant to an indenture with Meridian Trust Company, N.A., as trustee. The Senior Notes do not contain financial maintenance covenants but are subject to standard incurrence-based covenants, including limitations on the incurrence of additional indebtedness, the creation of liens, and certain restricted payments. Ms. Prescott confirmed that the restricted payments covenant in the indenture does not restrict the issuance of common equity by the parent holding company and that the Offering would not trigger any provisions of the indenture requiring consent, notice, or any other action under the Senior Notes indenture.

In response to a question from Mr. Tannenbaum, Ms. Prescott confirmed that neither the Credit Facility nor the Senior Notes indenture contains a change of control provision that would be triggered by the issuance of additional shares in the Offering, given that no single investor is expected to acquire a controlling position as a result of the Offering and the Company will not be using proceeds to repay or redeem any outstanding indebtedness.

Mr. Adeyemi noted that C&H would review the Credit Facility agreement and the Senior Notes indenture to confirm the foregoing representations and to identify any provisions requiring disclosure in the prospectus supplement. Mr. Okafor agreed to provide copies of both agreements to C&H for review (see Section XI below).

V. Litigation

Mr. Okafor reported that there is no material pending or threatened litigation involving the Company or any of its subsidiaries. He stated that the Company is subject to routine insurance coverage disputes arising in the ordinary course of its insurance business, but that none of these disputes, individually or in the aggregate, exceeds $5 million in potential exposure. Mr. Okafor confirmed that the Company's outside litigation counsel has not communicated any assessment of probable or reasonably possible losses in excess of established reserves.

Mr. Okafor reported that the Company's litigation reserve as of March 31, 2021 stood at $14.2 million, which he characterized as consistent with prior periods and reflective of the Company's ordinary course claims and litigation activity. He noted that the litigation reserve is reviewed quarterly by the Company's actuarial department and outside actuarial consultants and that no significant adjustments were recorded in Q1 2021.

Mr. Okafor further confirmed that there is no pending regulatory enforcement action or investigation by the Connecticut Department of Insurance ("CT DOI"), the Delaware Department of Insurance ("DE DOI"), or any other state or federal regulatory authority involving the Company or any of its subsidiaries. He stated that the Company has not received any subpoenas, civil investigative demands, or formal or informal requests for information from any governmental authority that have not been previously disclosed.

In response to a question from Ms. Cavallo, Mr. Okafor confirmed that the Company has not been the subject of any market conduct examination or targeted examination by any insurance regulator within the past 24 months and that no such examination is currently pending or, to the Company's knowledge, anticipated.

VI. Regulatory Matters

Mr. Okafor addressed the regulatory landscape applicable to the Offering and the Company's ongoing regulatory compliance. He confirmed the following:

Offering-Related Regulatory Requirements: Mr. Okafor confirmed that the issuance of common stock at the holding company level does not require prior approval from the CT DOI, the DE DOI, or any other state insurance regulator. He explained that the issuance of equity securities by the parent holding company, as distinguished from the regulated insurance subsidiaries, falls outside the scope of the prior approval requirements of the Connecticut and Delaware insurance holding company acts. No Form A or other change of control filing is required, as the Offering is a primary issuance of common stock by the holding company and is not expected to result in any person or entity acquiring control of the Company or its insurance subsidiaries.

Holding Company Filings: Mr. Okafor confirmed that the Company's most recent holding company filings — specifically, the Form B Annual Registration Statements required under the Connecticut Insurance Holding Company System Act and the Delaware Insurance Holding Company System Regulation — were filed on time with the CT DOI and the DE DOI, respectively. He stated that no deficiency notices or requests for amendment have been received from either regulator in connection with any such filings.

Financial Examinations: Mr. Okafor reported that the most recent triennial financial examination of Quorum Specialty Insurance Company by the CT DOI was completed in 2019, covering the examination period from 2016 through 2018. He stated that the examination resulted in no material findings, and the examination report was adopted by the CT DOI without any requirement for corrective action. The next scheduled triennial financial examination is expected to cover the period from 2019 through 2021 and is anticipated to commence in 2022.

Mr. Okafor noted that Quorum National Casualty Co. is subject to periodic financial examination by the DE DOI and that its most recent examination was completed in 2020, covering the period from 2017 through 2019. He reported no material findings from that examination.

VII. Capitalization and Stockholder Matters

Mr. Okafor confirmed the following with respect to the Company's capitalization and stockholder matters:

Authorized and Outstanding Capital Stock:

Significant Stockholders:

Mr. Okafor identified the following holders of 5% or more of the Company's outstanding common stock, based on the most recent Schedule 13G and 13D filings available:

• Birchwood Capital Partners, L.P. — holding approximately 4,270,000 shares, representing approximately 11.2% of the outstanding common stock. Mr. Okafor stated that Birchwood Capital Partners is a financial investor and does not have any board representation or contractual governance rights.

• Redfield Mutual Fund Group — holding approximately 2,150,000 shares, representing approximately 5.6% of the outstanding common stock. Mr. Okafor noted that Redfield holds these shares across several of its registered investment company funds and has filed a Schedule 13G indicating passive investment intent.

Equity Incentive Plan:

Mr. Okafor described the Company's 2018 Equity Incentive Plan (the "Plan"), which was approved by the Company's stockholders at the 2018 annual meeting. The following equity awards are currently outstanding under the Plan:

• Approximately 1,450,000 stock options outstanding, with a weighted-average exercise price of $12.40 per share. Mr. Okafor stated that the options vest ratably over a four-year period and have a ten-year contractual term. He noted that a significant portion of the outstanding options are currently in the money based on the Company's recent trading price.

• Approximately 820,000 restricted stock units ("RSUs") outstanding. Mr. Okafor stated that the RSUs vest ratably over a three-year period and settle in shares of common stock upon vesting.

Mr. Okafor noted that the Plan contains an "evergreen" provision that automatically increases the share reserve on January 1 of each year by an amount equal to the lesser of 1,000,000 shares or 2% of the fully diluted shares outstanding as of the immediately preceding December 31. He stated that the Company has sufficient shares available under the Plan to accommodate currently outstanding awards without the need for a new stockholder vote.

Stockholder Agreements:

Mr. Okafor confirmed that there are no stockholder agreements, registration rights agreements, voting agreements, or other agreements or arrangements among stockholders currently in effect. He noted that the only agreements restricting the transfer of Company common stock will be the lock-up agreements to be entered into in connection with the Offering by the Company's officers, directors, and certain significant stockholders, in customary form, for a period of 90 days following the date of the prospectus supplement.

VIII. Intellectual Property

Mr. Calloway addressed the Company's intellectual property portfolio, with particular focus on the QuorumEdge platform. He confirmed that the Company owns all material intellectual property related to the QuorumEdge platform, including the underlying source code, algorithms, data models, and user interface designs. All intellectual property developed in connection with the QuorumEdge platform has been developed by Company employees or by contractors subject to work-for-hire agreements containing appropriate intellectual property assignment provisions.

Mr. Calloway identified the following registered intellectual property:

• Patents: The Company holds three issued United States patents relating to automated underwriting algorithms and data integration protocols utilized in the QuorumEdge platform. Mr. Calloway stated that these patents were issued by the United States Patent and Trademark Office between 2019 and 2021, and that no patent challenges, inter partes review proceedings, or reexamination requests are pending with respect to any of these patents.

• Trademarks: The Company holds 14 registered trademarks with the United States Patent and Trademark Office, covering the "Quorum" name, the "QuorumEdge" name and logo, and various product-line designations used in the Company's insurance and technology businesses. All trademark registrations are current and in good standing.

Mr. Calloway confirmed that there is no pending intellectual property litigation involving the Company, either as plaintiff or defendant, and that the Company has not received any cease-and-desist letters, infringement claims, or other assertions of third-party intellectual property rights relating to the QuorumEdge platform or any other aspect of the Company's business.

Mr. Calloway noted that the Company licenses certain third-party data analytics tools from Meridian DataWorks, Inc. under a five-year master license agreement that expires in December 2024. He described the Meridian tools as supplementary data enrichment and analytics capabilities that enhance the QuorumEdge platform's risk assessment functionality. Mr. Calloway stated that the license is non-exclusive, fully paid through 2022 with annual renewal payments thereafter, and that the Company has the right to renew the license for two additional one-year terms at the Company's option. He characterized the Meridian license as commercially important but stated that the Company could develop or source alternative data analytics capabilities if the license were not renewed.

IX. Use of Proceeds

Mr. Calloway reiterated that the net proceeds from the Offering are intended for general corporate purposes, with a particular focus on two strategic priorities:

(a) Potential Bolt-On Acquisitions. Mr. Calloway stated that management has identified two to three potential targets involving specialty insurance books of business that would complement the Company's existing underwriting capabilities and geographic footprint. He characterized these opportunities as being in the early stages of evaluation and emphasized that no letters of intent have been signed, no binding or non-binding term sheets have been exchanged, and no definitive agreements are in negotiation with respect to any specific acquisition target. Mr. Calloway stated that the Company regularly evaluates acquisition opportunities as part of its ordinary course strategic planning process.

(b) Continued QuorumEdge Platform Development. Mr. Calloway stated that a portion of the proceeds would be allocated to funding the continued development and enhancement of the QuorumEdge platform, including the buildout of capabilities to support small-commercial lines of business, investment in data science and engineering talent, and infrastructure improvements to support increased transaction volumes as platform adoption increases.

Ms. Prescott added that, given the preliminary nature of the potential acquisition opportunities, the prospectus supplement should reflect general corporate purposes language rather than identifying specific acquisition targets. She noted that premature disclosure of potential targets could compromise the Company's competitive position in any future negotiations and that the Company is not under any obligation to consummate any particular acquisition. Mr. Adeyemi concurred with this approach and noted that the use of proceeds disclosure in the preliminary prospectus supplement would reflect customary language for a follow-on offering of this nature.

Ms. Langford noted that Greystone Harwick would review the use of proceeds disclosure in the preliminary prospectus supplement to ensure it is consistent with the marketing narrative and investor expectations.

X. COVID-19 Impact

Ms. Prescott addressed the impact of the COVID-19 pandemic on the Company's insurance operations and financial results. She stated that COVID-19-related claims, principally in the business interruption and event cancellation lines of business, have been modest and are within the Company's established reserves.

Ms. Prescott provided the following quantitative summary of pandemic-related loss experience:

Ms. Prescott stated that the Company's reinsurance program, which includes excess of loss treaties and a quota share arrangement on certain specialty lines, has performed as expected with respect to pandemic-related losses and that all reinsurance recoverables related to COVID-19 claims are due from highly rated reinsurers with no collection concerns.

Ms. Prescott further stated that management does not anticipate material additional COVID-19 reserve strengthening based on current claims activity and actuarial analysis. She noted that the Company's actuarial team has conducted stress testing and scenario analysis around potential adverse development of pandemic-related reserves and that the results of this analysis support the adequacy of current reserves. She acknowledged, however, that the ultimate impact of the pandemic on claims development remains subject to uncertainty, including with respect to potential legislative or judicial actions that could retroactively expand coverage obligations under existing policies.

In response to a question from Mr. Tannenbaum, Ms. Prescott confirmed that the Company's business interruption policies generally contain virus exclusion endorsements and that the Company's exposure to business interruption claims arising from government shutdown orders is limited. She stated that the Company has not experienced any material increase in claims frequency or severity related to the pandemic outside of the business interruption and event cancellation lines previously discussed.

XI. Open Items and Next Steps

The following items were identified as open action items requiring follow-up:

(a) Updated Capitalization Table. The Company will provide an updated capitalization table reflecting Q1 2021 stock option exercises and RSU settlements. Mr. Okafor indicated that this information is maintained by the Company's stock plan administrator (Northpoint & Co.) and that the Company expects to deliver the updated table to C&H by no later than May 24, 2021.

(b) Debt Instrument Documentation. The Company will provide copies of the Sycamore National Bank, N.A. revolving credit agreement and the indenture governing the 4.875% Senior Notes due 2028, together with all amendments and supplements thereto, for C&H review. Mr. Okafor stated that he would coordinate delivery of these documents through outside counsel's document management system.

(c) Quorum National Dividend Capacity. The Company will confirm the ordinary dividend capacity calculation for Quorum National Casualty Co. for fiscal year 2021. Mr. Okafor agreed to follow up with the Company's regulatory counsel and with the Delaware Department of Insurance filing records to verify the applicable statutory surplus and net income figures used in the calculation. C&H will review the applicable provisions of the Delaware Insurance Code to confirm the methodology.

(d) Revised Preliminary Prospectus Supplement. C&H will circulate a revised draft of the preliminary prospectus supplement to the working group by May 25, 2021. The revised draft will incorporate the information and disclosures discussed on the call, including updates to the business description, financial data, capitalization, use of proceeds, and risk factor sections.

(e) Comfort Letter. Carver, Bain & Associates LLP (the Company's independent registered public accounting firm) is expected to deliver a draft comfort letter to C&H and Duval & Pressler by May 21, 2021. The comfort letter will cover the customary financial data and interim financial information to be included in the prospectus supplement.

(f) Board Authorization. A meeting of the Company's Board of Directors to authorize the Offering and related matters, including the filing of the prospectus supplement and the execution of the underwriting agreement, is scheduled for June 2, 2021. Mr. Okafor stated that C&H should prepare draft board resolutions for his review in advance of the board meeting.

No other material matters were discussed. The call was adjourned at approximately 3:45 p.m. (Eastern Time).

Prepared by: Natasha Forbes, Eric Johannsen Calderwood & Harkness LLP

Metric	FY 2020	Q1 2021
Total Revenue	$487.3 million	$131.8 million
Net Income	$31.6 million	$9.4 million
Combined Ratio	96.2%	94.8%
Category	Details
Authorized Common Stock	100,000,000 shares, $0.01 par value per share
Outstanding Common Stock	38,125,000 shares
Authorized Preferred Stock	5,000,000 shares (none issued or outstanding)
Metric	Amount
Pandemic-Related Gross Incurred Losses (through Q1 2021)	~$18.7 million
Reinsurance Recoveries	~$11.2 million
Net Exposure (after reinsurance)	~$7.5 million

CALDERWOOD & HARKNESS LLP
MEMORANDUM
PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT
TO: File — C&H Matter No. 1025-00001
FROM: Natasha Forbes; Eric Johannsen
DATE: May 20, 2021
RE: Summary of Management Due Diligence Call — May 19, 2021 Quorum Insurance Holdings Corp. Follow-On Offering
This memorandum summarizes the substance of the management due diligence call conducted on May 19, 2021, in connection with the contemplated follow-on offering (the "Offering") of shares of common stock of Quorum Insurance Holdings Corp. (the "Company" or "Quorum"). This memorandum has been prepared for internal Calderwood & Harkness LLP ("C&H") file purposes and is protected by the attorney-client privilege and the attorney work product doctrine. It is not intended for distribution to any third party without the prior written consent of the undersigned or C&H partnership authorization.
I. Participants
The following individuals participated in the due diligence call:
Company Participants:
• Martin R. Calloway, Chief Executive Officer, Quorum Insurance Holdings Corp.
• Diana L. Prescott, Chief Financial Officer, Quorum Insurance Holdings Corp.
• Yusuf A. Okafor, General Counsel & Corporate Secretary, Quorum Insurance Holdings Corp.
Calderwood & Harkness LLP (Issuer's Counsel):
• Robert Adeyemi, Partner
• Natasha Forbes, Associate
• Eric Johannsen, Associate
Greystone Harwick & Co. (Lead Underwriter):
• Sarah P. Langford, Vice President, Equity Capital Markets (Deal Captain)
Duval & Pressler LLP (Underwriters' Counsel):
• Gregory R. Tannenbaum, Partner
• Megan S. Cavallo, Associate
Call Logistics: The call commenced at 2:00 p.m. (Eastern Time) and concluded at approximately 3:45 p.m. (Eastern Time). The call was conducted via conference line. No recording was made.
II. Business Overview and Strategy
Mr. Calloway opened the call by providing an overview of the Company's business segments and corporate strategy. He described Quorum Insurance Holdings Corp. as a specialty-focused property and casualty insurance holding company organized under the laws of the State of Delaware, with its principal executive offices located in Hartford, Connecticut.
Mr. Calloway explained that the Company conducts its insurance operations through two principal insurance subsidiaries:
(a) Quorum Specialty Insurance Company — a stock insurance company domiciled in the State of Connecticut. Quorum Specialty focuses on professional liability, cyber liability, and management liability lines of business. Mr. Calloway noted that Quorum Specialty is the Company's largest operating subsidiary and represents the majority of the Company's gross written premium. It is licensed to write business on an admitted basis in 48 states and the District of Columbia and writes cyber liability coverage on a surplus lines basis in select jurisdictions.
(b) Quorum National Casualty Co. — a stock insurance company domiciled in the State of Delaware. Quorum National underwrites excess and surplus casualty business, including general liability, excess casualty, and miscellaneous professional liability on a non-admitted basis. Mr. Calloway noted that Quorum National operates as an eligible surplus lines insurer in all states in which it currently writes business.
Mr. Calloway reported that the combined gross written premium for the two insurance subsidiaries for fiscal year 2020 was approximately $412 million. He stated that he expects mid-single-digit premium growth in fiscal year 2021, driven primarily by rate hardening in specialty lines, particularly in the cyber liability and management liability segments, where the Company has experienced favorable renewal rate increases in the range of 8% to 15% during the first quarter of 2021. Mr. Calloway added that the excess and surplus casualty market continues to benefit from dislocation in the standard market, with new business submissions at Quorum National increasing approximately 22% year-over-year in Q1 2021.
Mr. Calloway also described the Company's technology subsidiary, QuorumEdge Technology Solutions, Inc., a Delaware corporation and a wholly owned subsidiary of the Company. QuorumEdge operates a proprietary InsurTech platform that provides automated underwriting, claims processing, and distribution capabilities across the Company's insurance operations. Mr. Calloway stated that the QuorumEdge platform currently processes approximately 35% of the Company's new business submissions and that management expects this figure to reach approximately 50% by year-end 2022, reflecting ongoing investment in the platform's capabilities and integration across additional product lines.
Mr. Calloway noted that a portion of the net proceeds from the Offering is intended to fund further development of the QuorumEdge platform, including its expansion into small-commercial lines of business, which management views as a significant growth opportunity. He emphasized that the platform provides a competitive advantage by reducing underwriting cycle times, improving loss ratio performance through more granular risk selection, and enhancing distribution capabilities through digital broker portals and API integrations with third-party distribution partners.
In response to a question from Ms. Langford regarding competitive positioning, Mr. Calloway stated that the Company competes primarily with mid-sized specialty carriers and that the QuorumEdge platform differentiates the Company from competitors that rely on legacy technology infrastructure. He noted that the Company's combined ratio performance has consistently outperformed the specialty lines industry average over the past three fiscal years.
III. Financial Condition
Ms. Prescott presented a summary of the Company's financial condition. The following key financial metrics were discussed:
Income Statement Highlights:
Ms. Prescott noted that the improvement in the combined ratio from FY 2020 to Q1 2021 was attributable to favorable rate adequacy improvements across the specialty portfolio and continued expense discipline, partially offset by modest pandemic-related loss development discussed further in Section X below. She stated that the Company's loss ratio for Q1 2021 was 62.1% and the expense ratio was 32.7%, both consistent with management's expectations and trending favorably relative to the Company's long-term targets.
Balance Sheet and Capital Highlights:
Ms. Prescott reported that, as of March 31, 2021, the Company's total invested assets were approximately $1.83 billion, consisting primarily of investment-grade fixed maturity securities, with an average credit quality of A+ and an average duration of approximately 3.8 years. She stated that the investment portfolio is managed by Ashford Capital Advisors LLC under an investment management agreement and that there have been no material changes to the Company's investment policy or asset allocation strategy since the most recent annual report.
The total statutory surplus of the Company's insurance subsidiaries, on a combined basis as of December 31, 2020, was approximately $389 million. Ms. Prescott provided the following risk-based capital ("RBC") ratios:
• Quorum Specialty Insurance Company: RBC ratio of 412% of company action level
• Quorum National Casualty Co.: RBC ratio of 385% of company action level
Ms. Prescott confirmed that both RBC ratios are well above the regulatory minimums established by the National Association of Insurance Commissioners and the respective domiciliary state regulators. She noted that the company action level is the first regulatory trigger under the RBC framework, and neither subsidiary is near any action level threshold.
Ms. Prescott further confirmed that no extraordinary dividends were paid from either insurance subsidiary in 2020 or during the first quarter of 2021. She stated that the ordinary dividend capacity of Quorum Specialty Insurance Company for 2021 is approximately $19.5 million, calculated as the greater of 10% of prior-year statutory surplus or prior-year statutory net income, in accordance with the Connecticut Insurance Holding Company System Act (Conn. Gen. Stat. § 38a-136, et seq.). Ms. Prescott noted that the ordinary dividend capacity of Quorum National Casualty Co. was still being confirmed by the Company's regulatory counsel and that Mr. Okafor would follow up with the Delaware Department of Insurance filing records to verify the calculation (see Section XI below for further discussion of this open item).
Credit Facility:
Ms. Prescott reported that the Company maintains a $75 million revolving credit facility with Sycamore National Bank, N.A., as administrative agent. As of March 31, 2021, $20 million was drawn on the facility, leaving $55 million of availability. The facility matures in October 2023. Ms. Prescott confirmed that the Company is not in default of any financial covenants under the credit facility and that no event of default or potential event of default exists under the credit agreement. Additional details regarding the credit facility are discussed in Section IV below.
IV. Outstanding Indebtedness
Ms. Prescott confirmed the following material indebtedness of the Company:
Revolving Credit Facility:
The Company is party to a $75 million senior secured revolving credit facility (the "Credit Facility") with Sycamore National Bank, N.A., as administrative agent, and Ridgeline Commercial Lending Corp., as a participating lender. The Credit Facility bears interest at SOFR plus 175 basis points. As of March 31, 2021, $20 million was drawn under the Credit Facility and approximately $55 million remained available, subject to borrowing base and other conditions. The Credit Facility matures in October 2023. Ms. Prescott stated that the Company has been in compliance with all covenants under the Credit Facility since its inception and does not anticipate any covenant compliance issues in connection with the Offering.
Senior Notes:
The Company has outstanding $125 million aggregate principal amount of 4.875% Senior Notes due 2028 (CUSIP: 74917R207) (the "Senior Notes"), which were issued in August 2020 pursuant to an indenture with Meridian Trust Company, N.A., as trustee. The Senior Notes do not contain financial maintenance covenants but are subject to standard incurrence-based covenants, including limitations on the incurrence of additional indebtedness, the creation of liens, and certain restricted payments. Ms. Prescott confirmed that the restricted payments covenant in the indenture does not restrict the issuance of common equity by the parent holding company and that the Offering would not trigger any provisions of the indenture requiring consent, notice, or any other action under the Senior Notes indenture.
In response to a question from Mr. Tannenbaum, Ms. Prescott confirmed that neither the Credit Facility nor the Senior Notes indenture contains a change of control provision that would be triggered by the issuance of additional shares in the Offering, given that no single investor is expected to acquire a controlling position as a result of the Offering and the Company will not be using proceeds to repay or redeem any outstanding indebtedness.
Mr. Adeyemi noted that C&H would review the Credit Facility agreement and the Senior Notes indenture to confirm the foregoing representations and to identify any provisions requiring disclosure in the prospectus supplement. Mr. Okafor agreed to provide copies of both agreements to C&H for review (see Section XI below).
V. Litigation
Mr. Okafor reported that there is no material pending or threatened litigation involving the Company or any of its subsidiaries. He stated that the Company is subject to routine insurance coverage disputes arising in the ordinary course of its insurance business, but that none of these disputes, individually or in the aggregate, exceeds $5 million in potential exposure. Mr. Okafor confirmed that the Company's outside litigation counsel has not communicated any assessment of probable or reasonably possible losses in excess of established reserves.
Mr. Okafor reported that the Company's litigation reserve as of March 31, 2021 stood at $14.2 million, which he characterized as consistent with prior periods and reflective of the Company's ordinary course claims and litigation activity. He noted that the litigation reserve is reviewed quarterly by the Company's actuarial department and outside actuarial consultants and that no significant adjustments were recorded in Q1 2021.
Mr. Okafor further confirmed that there is no pending regulatory enforcement action or investigation by the Connecticut Department of Insurance ("CT DOI"), the Delaware Department of Insurance ("DE DOI"), or any other state or federal regulatory authority involving the Company or any of its subsidiaries. He stated that the Company has not received any subpoenas, civil investigative demands, or formal or informal requests for information from any governmental authority that have not been previously disclosed.
In response to a question from Ms. Cavallo, Mr. Okafor confirmed that the Company has not been the subject of any market conduct examination or targeted examination by any insurance regulator within the past 24 months and that no such examination is currently pending or, to the Company's knowledge, anticipated.
VI. Regulatory Matters
Mr. Okafor addressed the regulatory landscape applicable to the Offering and the Company's ongoing regulatory compliance. He confirmed the following:
Offering-Related Regulatory Requirements: Mr. Okafor confirmed that the issuance of common stock at the holding company level does not require prior approval from the CT DOI, the DE DOI, or any other state insurance regulator. He explained that the issuance of equity securities by the parent holding company, as distinguished from the regulated insurance subsidiaries, falls outside the scope of the prior approval requirements of the Connecticut and Delaware insurance holding company acts. No Form A or other change of control filing is required, as the Offering is a primary issuance of common stock by the holding company and is not expected to result in any person or entity acquiring control of the Company or its insurance subsidiaries.
Holding Company Filings: Mr. Okafor confirmed that the Company's most recent holding company filings — specifically, the Form B Annual Registration Statements required under the Connecticut Insurance Holding Company System Act and the Delaware Insurance Holding Company System Regulation — were filed on time with the CT DOI and the DE DOI, respectively. He stated that no deficiency notices or requests for amendment have been received from either regulator in connection with any such filings.
Financial Examinations: Mr. Okafor reported that the most recent triennial financial examination of Quorum Specialty Insurance Company by the CT DOI was completed in 2019, covering the examination period from 2016 through 2018. He stated that the examination resulted in no material findings, and the examination report was adopted by the CT DOI without any requirement for corrective action. The next scheduled triennial financial examination is expected to cover the period from 2019 through 2021 and is anticipated to commence in 2022.
Mr. Okafor noted that Quorum National Casualty Co. is subject to periodic financial examination by the DE DOI and that its most recent examination was completed in 2020, covering the period from 2017 through 2019. He reported no material findings from that examination.
VII. Capitalization and Stockholder Matters
Mr. Okafor confirmed the following with respect to the Company's capitalization and stockholder matters:
Authorized and Outstanding Capital Stock:
Significant Stockholders:
Mr. Okafor identified the following holders of 5% or more of the Company's outstanding common stock, based on the most recent Schedule 13G and 13D filings available:
• Birchwood Capital Partners, L.P. — holding approximately 4,270,000 shares, representing approximately 11.2% of the outstanding common stock. Mr. Okafor stated that Birchwood Capital Partners is a financial investor and does not have any board representation or contractual governance rights.
• Redfield Mutual Fund Group — holding approximately 2,150,000 shares, representing approximately 5.6% of the outstanding common stock. Mr. Okafor noted that Redfield holds these shares across several of its registered investment company funds and has filed a Schedule 13G indicating passive investment intent.
Equity Incentive Plan:
Mr. Okafor described the Company's 2018 Equity Incentive Plan (the "Plan"), which was approved by the Company's stockholders at the 2018 annual meeting. The following equity awards are currently outstanding under the Plan:
• Approximately 1,450,000 stock options outstanding, with a weighted-average exercise price of $12.40 per share. Mr. Okafor stated that the options vest ratably over a four-year period and have a ten-year contractual term. He noted that a significant portion of the outstanding options are currently in the money based on the Company's recent trading price.
• Approximately 820,000 restricted stock units ("RSUs") outstanding. Mr. Okafor stated that the RSUs vest ratably over a three-year period and settle in shares of common stock upon vesting.
Mr. Okafor noted that the Plan contains an "evergreen" provision that automatically increases the share reserve on January 1 of each year by an amount equal to the lesser of 1,000,000 shares or 2% of the fully diluted shares outstanding as of the immediately preceding December 31. He stated that the Company has sufficient shares available under the Plan to accommodate currently outstanding awards without the need for a new stockholder vote.
Stockholder Agreements:
Mr. Okafor confirmed that there are no stockholder agreements, registration rights agreements, voting agreements, or other agreements or arrangements among stockholders currently in effect. He noted that the only agreements restricting the transfer of Company common stock will be the lock-up agreements to be entered into in connection with the Offering by the Company's officers, directors, and certain significant stockholders, in customary form, for a period of 90 days following the date of the prospectus supplement.
VIII. Intellectual Property
Mr. Calloway addressed the Company's intellectual property portfolio, with particular focus on the QuorumEdge platform. He confirmed that the Company owns all material intellectual property related to the QuorumEdge platform, including the underlying source code, algorithms, data models, and user interface designs. All intellectual property developed in connection with the QuorumEdge platform has been developed by Company employees or by contractors subject to work-for-hire agreements containing appropriate intellectual property assignment provisions.
Mr. Calloway identified the following registered intellectual property:
• Patents: The Company holds three issued United States patents relating to automated underwriting algorithms and data integration protocols utilized in the QuorumEdge platform. Mr. Calloway stated that these patents were issued by the United States Patent and Trademark Office between 2019 and 2021, and that no patent challenges, inter partes review proceedings, or reexamination requests are pending with respect to any of these patents.
• Trademarks: The Company holds 14 registered trademarks with the United States Patent and Trademark Office, covering the "Quorum" name, the "QuorumEdge" name and logo, and various product-line designations used in the Company's insurance and technology businesses. All trademark registrations are current and in good standing.
Mr. Calloway confirmed that there is no pending intellectual property litigation involving the Company, either as plaintiff or defendant, and that the Company has not received any cease-and-desist letters, infringement claims, or other assertions of third-party intellectual property rights relating to the QuorumEdge platform or any other aspect of the Company's business.
Mr. Calloway noted that the Company licenses certain third-party data analytics tools from Meridian DataWorks, Inc. under a five-year master license agreement that expires in December 2024. He described the Meridian tools as supplementary data enrichment and analytics capabilities that enhance the QuorumEdge platform's risk assessment functionality. Mr. Calloway stated that the license is non-exclusive, fully paid through 2022 with annual renewal payments thereafter, and that the Company has the right to renew the license for two additional one-year terms at the Company's option. He characterized the Meridian license as commercially important but stated that the Company could develop or source alternative data analytics capabilities if the license were not renewed.
IX. Use of Proceeds
Mr. Calloway reiterated that the net proceeds from the Offering are intended for general corporate purposes, with a particular focus on two strategic priorities:
(a) Potential Bolt-On Acquisitions. Mr. Calloway stated that management has identified two to three potential targets involving specialty insurance books of business that would complement the Company's existing underwriting capabilities and geographic footprint. He characterized these opportunities as being in the early stages of evaluation and emphasized that no letters of intent have been signed, no binding or non-binding term sheets have been exchanged, and no definitive agreements are in negotiation with respect to any specific acquisition target. Mr. Calloway stated that the Company regularly evaluates acquisition opportunities as part of its ordinary course strategic planning process.
(b) Continued QuorumEdge Platform Development. Mr. Calloway stated that a portion of the proceeds would be allocated to funding the continued development and enhancement of the QuorumEdge platform, including the buildout of capabilities to support small-commercial lines of business, investment in data science and engineering talent, and infrastructure improvements to support increased transaction volumes as platform adoption increases.
Ms. Prescott added that, given the preliminary nature of the potential acquisition opportunities, the prospectus supplement should reflect general corporate purposes language rather than identifying specific acquisition targets. She noted that premature disclosure of potential targets could compromise the Company's competitive position in any future negotiations and that the Company is not under any obligation to consummate any particular acquisition. Mr. Adeyemi concurred with this approach and noted that the use of proceeds disclosure in the preliminary prospectus supplement would reflect customary language for a follow-on offering of this nature.
Ms. Langford noted that Greystone Harwick would review the use of proceeds disclosure in the preliminary prospectus supplement to ensure it is consistent with the marketing narrative and investor expectations.
X. COVID-19 Impact
Ms. Prescott addressed the impact of the COVID-19 pandemic on the Company's insurance operations and financial results. She stated that COVID-19-related claims, principally in the business interruption and event cancellation lines of business, have been modest and are within the Company's established reserves.
Ms. Prescott provided the following quantitative summary of pandemic-related loss experience:
Ms. Prescott stated that the Company's reinsurance program, which includes excess of loss treaties and a quota share arrangement on certain specialty lines, has performed as expected with respect to pandemic-related losses and that all reinsurance recoverables related to COVID-19 claims are due from highly rated reinsurers with no collection concerns.
Ms. Prescott further stated that management does not anticipate material additional COVID-19 reserve strengthening based on current claims activity and actuarial analysis. She noted that the Company's actuarial team has conducted stress testing and scenario analysis around potential adverse development of pandemic-related reserves and that the results of this analysis support the adequacy of current reserves. She acknowledged, however, that the ultimate impact of the pandemic on claims development remains subject to uncertainty, including with respect to potential legislative or judicial actions that could retroactively expand coverage obligations under existing policies.
In response to a question from Mr. Tannenbaum, Ms. Prescott confirmed that the Company's business interruption policies generally contain virus exclusion endorsements and that the Company's exposure to business interruption claims arising from government shutdown orders is limited. She stated that the Company has not experienced any material increase in claims frequency or severity related to the pandemic outside of the business interruption and event cancellation lines previously discussed.
XI. Open Items and Next Steps
The following items were identified as open action items requiring follow-up:
(a) Updated Capitalization Table. The Company will provide an updated capitalization table reflecting Q1 2021 stock option exercises and RSU settlements. Mr. Okafor indicated that this information is maintained by the Company's stock plan administrator (Northpoint & Co.) and that the Company expects to deliver the updated table to C&H by no later than May 24, 2021.
(b) Debt Instrument Documentation. The Company will provide copies of the Sycamore National Bank, N.A. revolving credit agreement and the indenture governing the 4.875% Senior Notes due 2028, together with all amendments and supplements thereto, for C&H review. Mr. Okafor stated that he would coordinate delivery of these documents through outside counsel's document management system.
(c) Quorum National Dividend Capacity. The Company will confirm the ordinary dividend capacity calculation for Quorum National Casualty Co. for fiscal year 2021. Mr. Okafor agreed to follow up with the Company's regulatory counsel and with the Delaware Department of Insurance filing records to verify the applicable statutory surplus and net income figures used in the calculation. C&H will review the applicable provisions of the Delaware Insurance Code to confirm the methodology.
(d) Revised Preliminary Prospectus Supplement. C&H will circulate a revised draft of the preliminary prospectus supplement to the working group by May 25, 2021. The revised draft will incorporate the information and disclosures discussed on the call, including updates to the business description, financial data, capitalization, use of proceeds, and risk factor sections.
(e) Comfort Letter. Carver, Bain & Associates LLP (the Company's independent registered public accounting firm) is expected to deliver a draft comfort letter to C&H and Duval & Pressler by May 21, 2021. The comfort letter will cover the customary financial data and interim financial information to be included in the prospectus supplement.
(f) Board Authorization. A meeting of the Company's Board of Directors to authorize the Offering and related matters, including the filing of the prospectus supplement and the execution of the underwriting agreement, is scheduled for June 2, 2021. Mr. Okafor stated that C&H should prepare draft board resolutions for his review in advance of the board meeting.
No other material matters were discussed. The call was adjourned at approximately 3:45 p.m. (Eastern Time).
Prepared by: Natasha Forbes, Eric Johannsen Calderwood & Harkness LLP
Metric | FY 2020 | Q1 2021
Total Revenue | $487.3 million | $131.8 million
Net Income | $31.6 million | $9.4 million
Combined Ratio | 96.2% | 94.8%
Category | Details
Authorized Common Stock | 100,000,000 shares, $0.01 par value per share
Outstanding Common Stock | 38,125,000 shares
Authorized Preferred Stock | 5,000,000 shares (none issued or outstanding)
Metric | Amount
Pandemic-Related Gross Incurred Losses (through Q1 2021) | ~$18.7 million
Reinsurance Recoveries | ~$11.2 million
Net Exposure (after reinsurance) | ~$7.5 million

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