Conifer Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. The supplied filing is for Conifer Holdings, Inc. (Nasdaq: CNFR), not Presurance Holdings, Inc. Unless otherwise noted, amounts are in U.S. dollars and financial statement amounts are in thousands.
Business context and financial results
Conifer is a property-and-casualty insurer operating commercial lines, personal lines and a wholesale agency business. It sells specialty products through independent agents and writes policies across the United States.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Gross written premiums | $33.1 million | $33.7 million | $103.5 million | $99.1 million |
| Net written premiums | $23.7 million | $26.1 million | $69.0 million | $79.1 million |
| Net earned premiums | $25.0 million | $24.9 million | $73.5 million | $72.6 million |
| Total revenue and other income | $26.3 million | $26.7 million | $76.4 million | $88.5 million |
| Net income (loss) | $(1.5) million | $(1.2) million | $(12.8) million | $(0.3) million |
| Loss per share, basic and diluted | $(0.14) | $(0.12) | $(1.26) | $(0.03) |
| Net cash from (used in) operations | Not presented by quarter | $(14.1) million | $(2.0) million |
Margins, balance sheet and liquidity
- Underwriting combined ratio: 106.5% for Q3 and 116.0% for the first nine months, versus 106.9% and 116.0%, respectively, in 2021. Ratios above 100% indicate underwriting losses. Nine-month loss ratio rose to 77.2% from 73.3%, while the expense ratio improved to 38.8% from 42.7%.
- Assets and equity: At September 30, total assets were $286.0 million and shareholders’ equity was $16.2 million, down from $290.4 million and $40.5 million at December 31, 2021. Book value per share was $1.32, compared with $4.34 a year earlier.
- Investments: Total investments were $143.7 million, down from $182.7 million at year-end 2021. Accumulated other comprehensive loss widened to $18.8 million from $2.1 million, chiefly reflecting unrealized investment losses amid rising interest rates. Management reported no credit-related other-than-temporary impairment for the period.
- Cash and liquidity: Cash and cash equivalents were $35.4 million; cash, cash equivalents and short-term investments totaled $66.0 million. Operating cash use was $14.1 million for the nine months. Financing provided $19.5 million and investing provided $20.1 million, contributing to a $25.5 million increase in cash.
- Debt: Debt was $48.3 million, up from $33.6 million at year-end 2021. It included $24.1 million of senior unsecured notes due September 30, 2023; $9.7 million carrying value of subordinated notes; and a $14.5 million FHLB loan due January 9, 2023. The $10 million bank line had no balance outstanding at September 30 and matures December 1, 2022.
- Statutory capital: Insurance subsidiaries’ aggregate statutory capital and surplus was $58.9 million, down from $63.9 million at December 31, 2021.
Material changes versus prior periods
- For the first nine months, gross written premiums increased 4.5%, but net written premiums declined 12.8%, primarily as higher ceded premiums followed new reinsurance treaties. Net earned premiums rose 1.2%.
- Nine-month net losses and loss adjustment expenses increased 6.5% to $56.9 million. Adverse prior-year reserve development was $18.2 million, compared with $15.6 million in 2021; most 2022 development related to commercial lines, including $14.3 million from 2019 and prior accident years.
- Nine-month underwriting loss improved modestly to $11.9 million from $12.4 million. The 2022 net loss was substantially worse than 2021, which included $11.7 million of other gains and $3.9 million of realized investment gains; the 2021 other gains included a $2.8 million gain from forgiveness of the PPP loan.
- Q3 commercial gross written premiums decreased 7.4%, while personal lines increased 41.5%, including growth in low-value dwelling policies. Personal lines’ nine-month gross written premiums increased 37.4%.
- Policy acquisition costs benefited from new reinsurance ceding commissions: the company reported $6.4 million for the nine-month period and $2.1 million for Q3. The lower reported expense ratio therefore partly reflects treaty commissions, not solely underlying expense reductions.
Outlook, commentary, risks and unusual items
- Management expects to issue new public debt to repay the senior notes due September 2023 and said it believes refinancing is probable. It also planned to repay the $14.5 million FHLB loan by year-end using cash and investments, while noting that refinancing might be available. These are plans, not completed transactions as of the filing.
- At September 30, the company reported compliance with all subordinated-note financial covenants. Earlier in 2022, it had covenant breaches that were waived; amendments excluded certain unrealized investment changes from covenant calculations, and an August equity contribution helped restore tangible net worth compliance.
- On August 10, the company issued 2.5 million shares in a $5.0 million private placement at $2.00 per share, primarily to board members. Proceeds were designated for growth capital in specialty business segments.
- After quarter-end, the company bought the remaining 50% of Venture for $9.7 million and Venture sold certain agency assets for $38.2 million. Conifer expected the related transactions to generate approximately $8.0 million of after-tax non-operating gains in Q4 2022.
- On November 1, 2022, the company entered a loss portfolio transfer covering specified prior-year losses. The agreement provides up to $20.0 million of adverse-development cover above a $5.5 million company-retained corridor, subject to a $66.3 million aggregate limit, and includes a $5.4 million one-time risk fee.
- A.M. Best downgraded the issuer and insurance-subsidiary ratings in April 2022; outlooks were Stable. Management said it did not expect a material business effect. The company identified interest-rate and investment-value risk, claims inflation and reserve-estimation uncertainty, and potential reinsurer credit risk. Its hospitality-sector customers remained exposed to pandemic-related pressures, though management reported no major operational disruption and did not expect a material pandemic impact.
- The company said ordinary-course legal matters were not expected to result in material losses exceeding amounts accrued. It reported no material changes to the risk factors in its latest Form 10-K and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the company successfully refinanced the $24.1 million senior notes before their September 2023 maturity, and repaid or refinanced the FHLB loan due January 2023.
- The subsequent financial and accounting effects of the Venture acquisition and agency-asset sale, including whether the anticipated approximately $8.0 million after-tax gain was realized.
- The cost, recoverability and actual claims protection under the Fleming Re loss portfolio transfer, including how the risk fee and retained corridor affect reserves and earnings.
- Further reserve development, particularly in commercial lines and accident years 2019 and prior, and progress in achieving a combined ratio below 100%.
- Whether investment portfolio valuations, statutory capital and covenant headroom stabilize, given the significant unrealized losses and reduced shareholders’ equity.