Presurance Holdings, Inc. quarterly report, Q1 FY2023

Business context and reporting period

The supplied filing is Conifer Holdings, Inc.’s Form 10-Q for the quarter ended March 31, 2023, not a filing identified as Presurance Holdings, Inc. Conifer is a property and casualty insurer with commercial lines, personal lines, and wholesale agency operations.

Unless otherwise noted, financial amounts below are in millions of dollars. Comparisons are with the three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2022.

Financial performance and condition

Gross written premiums grew principally through personal lines, up 65.3% to $7.2 million, including growth in low-value dwelling coverage in Texas and Oklahoma. Commercial lines gross written premiums rose 1.4% to $29.0 million. Net earned premiums fell as commercial-line ceded premiums increased, including under a new quota-share treaty effective January 1, 2023.

Net losses and loss adjustment expenses were $13.7 million, down 23.9%. The loss ratio improved to 62.2% from 75.0%; the expense ratio was nearly unchanged at 37.3% versus 37.5%. Investment income and the improvement in losses supported the return to GAAP profitability. The $0.7 million change in fair value of equity securities also contributed to reported net income; adjusted operating income excludes that item.

At March 31, 2023, total assets were $293.2 million, total liabilities $270.9 million, and shareholders’ equity $22.3 million. Cash and cash equivalents were $21.5 million; short-term investments were $28.1 million. Total investments were $141.1 million. Debt was $34.0 million, including $24.3 million of senior unsecured notes and $9.7 million of subordinated notes. Book value per share was $1.82, compared with $3.13 a year earlier. Insurance subsidiaries’ statutory capital and surplus was $61.0 million, up from $59.9 million at year-end 2022.

Material changes versus the prior comparable period

• Net income improved by $3.9 million, from a $2.9 million loss to $1.0 million income. Underwriting results improved by $2.9 million.
• Prior-year loss development shifted from $5.5 million adverse in Q1 2022 to $1.2 million favorable in Q1 2023. The filing attributes much of the favorable development to lower-than-expected commercial property losses and quick-service restaurant claim frequency.
• Net earned premiums declined despite growth in gross written premiums, as reinsurance cessions rose. Ceded earned premiums increased to $12.3 million from $8.8 million.
• Cash and cash equivalents fell by $6.5 million from year-end. Operating activities used $6.0 million of cash; investing activities used $0.5 million, and financing activities provided no cash.
• Available-for-sale debt securities had $14.6 million of gross unrealized losses at quarter-end, attributed by the Company to market conditions and interest-rate changes. Accumulated other comprehensive loss improved to $15.9 million from $18.2 million at year-end.

Outlook, risks, and unusual items

Near-term debt maturity: The $24.3 million senior unsecured notes mature September 30, 2023 and bear interest at 6.75%. Management plans to issue new public debt and/or sell assets to repay them, and states it believes repayment by maturity is probable. The filing provides no completed refinancing or asset-sale commitment. Subordinated notes bear 7.5% interest until September 30, 2023, then 12.5%; the Company reported compliance with their financial covenants at quarter-end.

Liquidity: Management reported $49.6 million in cash, cash equivalents, and short-term investments and believes available cash and investments will meet operating and capital needs, including following the expected senior-debt refinancing. Some investment assets are held in trust for regulatory or fronting-arrangement collateral, limiting access. No dividends were paid by insurance subsidiaries during the quarter, and statutory restrictions limit their ability to pay dividends to the parent.

Reinsurance and reserves: The Company’s loss portfolio transfer with Fleming Re covers specified commercial liability losses for accident years 2019 and prior, with $20.0 million of adverse-development cover after a $5.5 million corridor. By March 31, the Company had recorded losses through the corridor and $2.4 million into the covered layer. Reinsurance does not remove the insurers’ primary obligation to policyholders; reinsurer nonpayment remains a risk. Management considers the loss reserves adequate, but notes that reserve estimates are uncertain and actual outcomes may differ materially.

Investments and ratings: The investment portfolio is predominantly investment-grade fixed income, exposed to interest-rate movements. The filing’s hypothetical 200-basis-point rate increase would reduce debt and short-term investment fair value by $8.7 million. A.M. Best downgraded the Company’s ratings in April 2022 and assigned stable outlooks; management said it did not expect a material business effect.

Other items: The Company reported $1.8 million of adverse development on 2019 and prior accident years covered under the LPT, resulting in no net development from that component. The 2022 sale of the security guard and alarm brokerage business and the partial divestiture of SSU preceded this quarter; SSU is accounted for under the equity method. The filing reports no material change in risk factors, no material subsequent event, and no material change in internal control over financial reporting. It provides no specific earnings or premium guidance.

Important facts for investors to verify

• Confirm the intended issuer: the supplied document is for Conifer Holdings, Inc., not Presurance Holdings, Inc.
• Track the senior-note maturity and whether refinancing or asset sales actually provide sufficient funds by September 30, 2023.
• Assess liquidity available after considering trust restrictions, claims payments, and the absence of insurance-subsidiary dividends.
• Monitor reserve development, especially whether favorable development persists and how the LPT’s remaining adverse-development cover is used.
• Review reinsurance recoverability and counterparty exposure; the filing reports $92.1 million net due from reinsurers, including prepaid reinsurance premiums.
• Distinguish recurring underwriting performance from investment valuation effects: Q1 GAAP net income was $1.0 million versus adjusted operating income of $0.3 million.