Filing Summary: Conifer Holdings, Inc. 2016 Form 10-K
Entity note: The filing identifies the registrant as Conifer Holdings, Inc. (Nasdaq: CNFR), not Presurance Holdings, Inc. It covers the fiscal year ended December 31, 2016; quarterly data includes the fourth quarter. Figures are in U.S. dollars.
Business context and reporting period
Conifer is a property and casualty insurance holding company writing specialty commercial and personal lines through subsidiaries and independent agents. Commercial products serve niche small-business markets; personal lines include low-value dwelling and catastrophe-exposed homeowners coverage. The company reported operations in all 50 states. On December 30, 2016, subsidiary American Colonial Insurance Company was merged into White Pine Insurance Company.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Gross written premiums | $114.9 million | $93.8 million |
| Net written premiums | $99.9 million | $79.7 million |
| Net earned premiums | $89.6 million | $66.8 million |
| Total revenue | $93.9 million | $70.7 million |
| Net income (loss) | $(8.4) million | $(17,000) |
| Loss ratio | 65.0% | 56.8% |
| Expense ratio | 47.2% | 45.3% |
| Combined ratio | 112.2% | 102.1% |
| Operating cash flow | $6.2 million provided | $3.1 million used |
| Total assets | $203.7 million | $177.9 million |
| Shareholders’ equity | $67.8 million | $77.3 million |
| Senior debt | $17.8 million | $12.8 million |
Commercial gross written premiums increased 29.4% to $88.2 million; personal gross written premiums rose 4.4% to $26.7 million. Net investment income was $2.2 million, and net realized investment gains were $1.4 million. Adjusted operating loss, a non-GAAP measure, was $9.5 million, or $1.26 per share, versus $865,000, or $0.16 per share, in 2015.
At year-end, cash was $12.5 million, short-term investments were $10.8 million, and total investments were $128.5 million. Management reported $7.0 million available on the revolving credit line and said available liquidity and investments were adequate for expected needs. The fixed-income portfolio had an average credit rating of AA and duration of 3.2 years. Net loss and LAE reserves were $54.7 million, including $6.7 million of reinsurance recoverables on unpaid losses.
Material changes versus the prior year
- Net loss worsened to $8.4 million from a near break-even result; the combined ratio rose 10.1 percentage points, indicating underwriting losses.
- Net losses and LAE increased 51.7% to $59.0 million. Prior-year reserve development was adverse by $10.2 million, compared with $1.5 million in 2015. Significant deterioration included commercial liability, commercial auto, wind-exposed homeowners, and runoff personal auto claims.
- Commercial lines underwriting gain declined to $1.5 million from $7.0 million; personal lines underwriting loss widened to $4.9 million from $2.0 million.
- Policy acquisition costs rose, partly because a 25% quota-share reinsurance agreement that had reduced commission expense ended in August 2015. The consolidated expense ratio increased 1.9 percentage points.
- Cash from operations improved to $6.2 million, while senior debt increased $5.0 million and shareholders’ equity fell $9.5 million. Accumulated other comprehensive income moved from $182,000 to a loss of $1.1 million, primarily reflecting investment valuation changes.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing provides no specific earnings or premium guidance. Management described continued commercial-lines growth and personal-lines repositioning, including reducing Florida homeowners exposure amid assignment-of-benefits litigation concerns. It expected existing statutory surplus and holding-company funds to support premium growth over the next two years.
- Debt covenant: At December 31, 2016, tangible net worth was $64.1 million, below the credit agreement’s then-required $65.0 million. The company obtained a waiver on March 13, 2017, and the minimum was amended to $62.0 million through December 30, 2017, then $64.0 million. The revolver matures August 1, 2018; total debt was $17.8 million.
- Capital and dividends: Insurance subsidiaries were above regulatory risk-based capital intervention thresholds, but dividends to the parent in 2017 require regulatory approval. The parent said it did not anticipate common cash dividends for the foreseeable future.
- Tax assets: The company recorded an $8.4 million valuation allowance against deferred tax assets, citing cumulative three-year losses. Federal net operating loss carryforwards were $22.8 million, of which $15.1 million are subject to annual Section 382 limitations.
- Insurance risks: Key exposures include reserve uncertainty, catastrophe losses in Florida, Texas, and Hawaii, adverse litigation and claims trends, pricing and competition, reinsurance availability and collectability, investment and interest-rate risk, and reliance on a concentrated agency network. The top six commercial agencies generated about 59% of commercial gross written premiums; the top four personal agencies generated about 52% of personal premiums.
- Unusual item: The ACIC merger resulted in a $400,000 loss from writing off insurance-license intangible assets. The company repurchased $625,000 of common stock during 2016.
- Legal matters and controls: The company said ordinary-course legal proceedings were not expected to have a material adverse effect. Management concluded disclosure controls and internal control over financial reporting were effective at year-end; the auditor did not provide an internal-control attestation.
Most important facts for investors to verify
- Whether reserve strengthening continues, particularly for commercial liability, commercial auto, and Florida homeowners claims, and how actual development compares with the $54.7 million year-end reserve.
- Whether underwriting performance improves from the 112.2% combined ratio and whether premium growth remains profitable rather than worsening claims or acquisition costs.
- Compliance with amended credit covenants, debt maturities and liquidity needs, and the availability of regulatory approval for subsidiary dividends.
- Florida homeowners exposure and claims trends, catastrophe reinsurance limits and renewal terms, and reinsurer credit quality.
- Realizability of deferred tax assets and use of NOL carryforwards, including Section 382 restrictions.