Conifer Holdings, Inc. — FY2020 Form 10-K
Entity note: The request identifies Presurance Holdings, Inc., but the filing is for Conifer Holdings, Inc. (Nasdaq: CNFR). The summary below reflects the filing. Fiscal year ended December 31, 2020; filed March 11, 2021. Unless noted, dollar amounts are in millions.
Business context and reporting period
Conifer is a property-and-casualty insurance holding company focused on specialty commercial and personal lines, plus a wholesale agency business. It distributes primarily through independent agents and writes admitted and excess-and-surplus coverage. Commercial lines accounted for 92% of 2020 gross written premiums. This is an annual report; the filing also provides unaudited fourth-quarter results.
Financial performance and key metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Gross written premiums | $111.3 | $101.9 |
| Net written premiums | $92.9 | $87.7 |
| Net earned premiums | $89.1 | $89.1 |
| Total revenue | $103.5 | $96.0 |
| Net income (loss) | $0.6 | $(7.8) |
| Adjusted operating income (loss), non-GAAP | $(8.0) | $(15.1) |
| Combined ratio | 108.4% | 110.8% |
| Cash from operating activities | $3.0 | $15.4 |
FY2020 net income was supported by $8.1 million of realized investment gains; the company continued to report an underwriting loss, and its adjusted operating loss was $0.83 per share. The combined ratio remained above 100%, indicating underwriting losses. Net investment income declined 21.7% to $3.2 million as investment yields fell.
At year-end, total assets were $261.6 million, shareholders’ equity was $44.4 million, and reported debt was $41.0 million. Cash and cash equivalents were $8.2 million and short-term investments were $13.3 million. The investment portfolio totaled $183.2 million and had an average credit quality of AA+ and a 3.6-year option-adjusted duration. Net loss and LAE reserves were $87.1 million; gross unpaid loss and LAE liabilities were $111.3 million.
Fourth-quarter 2020 unaudited results included net earned premiums of $23.1 million, net income of $3.3 million, diluted EPS of $0.34, and a 110.6% combined ratio.
Material changes versus the prior comparable period
- Gross written premiums rose 9.3%; commercial premiums grew 8.9% and personal premiums 14.9%. Small-business program premiums increased 41.5%, while hospitality premiums fell 22.1%, reflecting the company’s reduction of exposure amid the pandemic and strategic shift.
- Net earned premiums were essentially flat. Net losses and LAE decreased 5.9%, and the combined ratio improved by 2.4 percentage points, but the expense ratio increased to 45.6% from 44.0%, partly due to higher ceded reinsurance rates.
- Prior-year reserve development worsened to $15.6 million adverse from $10.6 million adverse in 2019, mostly affecting commercial lines and accident years 2017 and 2018. Management attributed lower current-year commercial claims activity partly to pandemic-related business restrictions.
- Realized investment gains increased to $8.1 million from $1.2 million, while net investment income fell. Operating cash flow declined to $3.0 million from $15.4 million.
- Debt increased to $41.0 million from $35.8 million, including a $2.7 million Paycheck Protection Program loan. The company repurchased senior notes at a discount, recognizing a $0.26 million gain.
Outlook, commentary, risks and unusual items
Management provided no additional forward-looking guidance, citing substantial uncertainty about COVID-19. It said the company continued operating with most staff remote and considered direct pandemic coverage exposure limited because most policies exclude bacterial or viral business-interruption losses and require physical property damage. Hospitality remains an important exposure and was severely disrupted.
- Reserves and underwriting: Reserve estimates are inherently uncertain and actual claims may exceed recorded reserves. The 2020 adverse development, particularly in commercial hospitality and small-business lines, is an important monitoring point.
- Debt and liquidity: The $10 million line of credit had $7.7 million outstanding, including the PPP loan, and matured June 18, 2021. The company reported covenant compliance at year-end. Senior unsecured notes bear 6.75% interest and mature in 2023; subordinated notes bear 7.5% through September 2023 and 12.5% thereafter. The company had applied for PPP forgiveness but had not assumed forgiveness in its year-end accounts.
- Insurance capital and distributions: Subsidiaries were reported in compliance with statutory capital requirements; CIC and WPIC RBC ratios were 346% and 544%, respectively. Insurance-subsidiary dividends require regulatory approval, and none were paid in 2020.
- Other risks: Catastrophes, reinsurance availability and counterparty credit, agent concentration, investment-market and interest-rate changes, COVID-19 litigation or regulatory action, and the transition away from LIBOR could affect results and liquidity. The company’s six largest commercial agencies generated about 33% of commercial gross written premiums.
- Tax and unusual items: A $13.3 million valuation allowance was recorded against deferred tax assets, reflecting cumulative losses; reversal could increase book value, but realization is uncertain. The $8.1 million of investment gains materially distinguished GAAP net income from the adjusted operating loss.
Management stated that existing cash and investments were expected to meet short- and long-term capital and liquidity needs. It also stated that pending ordinary-course legal proceedings were not expected to have a material adverse effect; outcomes remain uncertain.
Important facts for investors to verify
- Confirm the intended issuer: the supplied company name differs from the registrant named in this 10-K.
- Assess whether premium growth and improved loss ratios can translate into underwriting profitability, given the combined ratio above 100% and $15.6 million of adverse reserve development.
- Review the subsequent status of the line-of-credit renewal, debt covenant compliance, and the PPP loan forgiveness application.
- Track hospitality and COVID-19-related premium, claims, litigation, and regulatory developments, as well as renewal terms and cost of reinsurance.
- Evaluate statutory capital, dividend restrictions, and the recoverability of deferred tax assets independently of management’s expectations.