Conifer Holdings, Inc. — Q2 2019 Form 10-Q
Issuer note: The supplied filing is for Conifer Holdings, Inc., not Presurance Holdings, Inc. It reports the quarter and six months ended June 30, 2019; financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
Conifer is a property and casualty insurance holding company, with commercial and personal underwriting operations and a wholesale agency business. It sells specialty products through independent agents and managing general agents. Management says it is reducing wind-exposed homeowners exposure, particularly in Florida, while building lower-value dwelling and selected commercial business.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net earned premiums | $21.35 | $23.94 | $43.04 | $47.74 |
| Total revenue | $22.78 | $25.27 | $47.08 | $50.09 |
| Net income (loss) | $(2.88) | $(1.11) | $(3.56) | $(0.90) |
| Loss per share | $(0.34) | $(0.13) | $(0.42) | $(0.11) |
| Combined ratio | 113.0% | 108.8% | 110.5% | 103.6% |
| Adjusted operating income (loss), non-GAAP | $(5.60) | $(0.17) | $(9.84) | $1.61 |
Underwriting losses were $3.00 million in Q2 and $5.26 million for the first half, versus $1.45 million and $1.32 million, respectively, in 2018. The first-half loss ratio increased to 66.8% from 59.2%; the expense ratio improved to 43.7% from 44.4%. A combined ratio above 100% indicates an underwriting loss. Q2 net investment income was $1.05 million and realized investment gains were $0.72 million, partly offset by a $0.92 million fair-value loss on equity securities.
At June 30, total assets were $243.4 million, investments $140.6 million, cash and cash equivalents $20.4 million, and shareholders’ equity $46.5 million. Debt was $34.7 million, including $24.2 million of senior unsecured notes, $9.5 million of subordinated notes, and $1.0 million drawn on the line of credit. Six-month operating cash flow was negative $0.2 million, compared with negative $7.1 million in 2018; cash increased $9.6 million to $20.4 million. Cash, cash equivalents and short-term investments totaled $25.0 million. Insurance subsidiaries’ statutory capital and surplus was $59.3 million, down from $64.0 million at December 31, 2018.
Material changes versus the prior comparable period
- First-half net earned premiums fell 9.9%, mainly reflecting a planned reduction in personal wind-exposed business; personal-lines earned premiums declined 67.6%. Gross written premiums declined 1.8%.
- First-half net losses and loss adjustment expenses rose 1.6% despite lower earned premiums. Prior-year adverse reserve development was $4.4 million, versus $1.5 million in the first half of 2018; reported 2019 losses include the effect of the adverse development cover (ADC).
- First-half underwriting loss widened by $3.9 million. Commercial and personal underwriting both reported losses; wholesale agency reported a $0.38 million underwriting gain.
- June’s $5.0 million private placement issued 1,176,471 shares at $4.25 each, primarily to board members. The company also repurchased 142,815 shares for approximately $0.61 million during the half-year.
- Cash from operations improved substantially year over year, principally because paid claims were lower, while cash from investing activities fell to $4.5 million from $12.3 million.
Outlook, management commentary, risks and unusual items
- Management expects commercial premiums to grow over the next few quarters as it expands existing lines and adds programs; it expects moderate growth in low-value dwelling products. These are expectations, not formal financial guidance.
- New catastrophe reinsurance treaties effective June 1, 2019 reduced the stated average property catastrophe reinsurance cost from 12.2% to 4.2% of gross earned premium. Management estimated this would reduce the overall weighted-average reinsurance rate by about 2.5 percentage points going forward.
- The company reported adverse reserve development concentrated in commercial liability and Florida homeowners. The ADC had reached its coverage limit; $0.481 million of deferred gain remained for recognition in future periods. Reserve estimates are inherently uncertain and ultimate claim costs may differ materially.
- Conifer was out of compliance with tangible-net-worth covenants at March 31, 2019; lenders waived the breach in May. Covenants were amended in June, and the company reported compliance at June 30 and expected future compliance. The renewed $10 million credit line matures June 19, 2020.
- Liquidity and capital risks include claims obligations, reliance on reinsurance recoveries, and restrictions on insurance-subsidiary dividends. Reinsurers owed the company a net $33.5 million, including prepaid reinsurance premiums; management believed recorded amounts were recoverable. Certain trust assets are restricted.
- Investment portfolio exposure is primarily to interest rates and credit. Portfolio duration was 3.5 years; a hypothetical 100-basis-point rate increase was estimated to reduce debt-investment fair value by $4.1 million. The filing also describes exposure to claims-cost inflation and rising judicial awards.
- Management reported no material change in risk factors from the 2018 Form 10-K, no material legal loss considered reasonably possible beyond amounts accrued, and effective disclosure controls as of June 30, 2019. The filing gives no formal full-year earnings or revenue guidance.
Most important facts for investors to verify
- Confirm the issuer identity: this filing names Conifer Holdings, Inc., notwithstanding the request metadata naming Presurance Holdings, Inc.
- Review reserve adequacy and the implications of the ADC reaching its limit, including the $4.4 million first-half adverse development and remaining deferred gain.
- Track whether premium reductions, new business mix and lower reinsurance costs improve underwriting results and combined ratios.
- Monitor liquidity, statutory capital, debt covenant compliance, and the company’s ability to service debt without insurance-subsidiary dividends.
- Assess the quality and sustainability of results, including the gap between GAAP net loss and non-GAAP adjusted operating loss and the effect of investment gains and fair-value changes.
- Verify the execution and terms of the related-party private placement and share repurchases, and the use of placement proceeds for growth capital.