Conifer Holdings, Inc. — Q1 2020 Form 10-Q
Filing identity: The supplied filing is for Conifer Holdings, Inc. (Nasdaq: CNFR), not Presurance Holdings, Inc. The reporting period is the three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. Financial amounts below are in millions of dollars unless noted otherwise.
Business context and reporting period
Conifer is a U.S. property and casualty insurer with commercial lines, personal lines, and a wholesale agency business. It sells specialty insurance through independent agents and operates across all 50 states. The interim statements are unaudited; management cautions that the quarter’s results are not necessarily indicative of full-year performance, particularly given COVID-19 uncertainty.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Gross written premiums | $25.1 | $24.2; up 3.6% |
| Net written premiums | $21.1 | $20.3; up 3.6% |
| Net earned premiums | $22.0 | $21.7; up 1.5% |
| Total revenue | $21.6 | $24.3 |
| Net loss | $4.7; loss per share $0.49 | $0.7; loss per share $0.08 |
| Adjusted operating loss, non-GAAP | $2.7; loss per share $0.28 | $4.2; loss per share $0.50 |
| Net investment income | $1.0 | $0.9 |
| Net cash from operating activities | $4.0 | $(2.2) |
| Combined ratio | 111.6% | 108.1% |
Revenue and GAAP earnings were pressured by a $3.1 million decline in the fair value of equity securities, compared with a $1.3 million gain in Q1 2019. Net realized investment gains were $0.9 million, versus $0.02 million. Underwriting remained loss-making: the loss ratio improved to 64.5% from 66.5%, but the expense ratio rose to 47.1% from 41.6%. The combined ratio above 100% indicates an underwriting loss.
Commercial lines generated an underwriting loss of $2.6 million, compared with a $0.2 million loss a year earlier. Personal lines improved to a $0.05 million underwriting gain from a $1.6 million loss. Commercial gross written premiums rose 3.8%; personal lines gross written premiums were essentially flat.
At March 31, total assets were $249.0 million, total investments $174.2 million, cash and cash equivalents $8.1 million, and shareholders’ equity $36.5 million, down from $42.7 million at year-end. Cash, cash equivalents, and short-term investments totaled approximately $35.3 million. Debt was $36.7 million, up from $35.8 million, including $24.1 million of senior unsecured notes, $9.5 million of subordinated notes, and $3.0 million drawn on a $10.0 million credit line. Insurance subsidiaries’ statutory capital and surplus was $57.1 million, compared with $59.6 million at December 31, 2019.
Material changes, outlook, risks, and unusual items
- Prior-period adverse reserve development was $3.7 million, primarily commercial hospitality liability losses from 2018 and 2019 accident years; Q1 2019 adverse development was $2.0 million. The adverse development cover had reached its limit and its deferred gain was fully utilized.
- Policy acquisition costs increased 12.8% and operating expenses increased 16.7% year over year. Management attributed the higher expense ratio partly to a commission-allocation change begun in Q2 2019 and expense timing. Management expected the operating expense ratio to ease in subsequent quarters as premiums grew and cost-reduction efforts continued.
- COVID-19 had not materially affected operating results through March 31, other than the equity portfolio valuation decline. Management cited risks to hospitality-related revenue, premiums, claims, investment income and asset values, regulatory capital, and access to capital markets. It could not provide further forward guidance because the pandemic’s duration and effects were uncertain. Most employees were working remotely, while operations continued.
- On April 24, 2020, the company received a $2.745 million Paycheck Protection Program loan at 1% interest, maturing April 24, 2022. The company intended to use the proceeds for qualifying expenses that could permit forgiveness; the loan reduced available capacity under its credit line.
- The company repurchased $244,000 face value of senior notes at a discount, recording a $115,000 extinguishment gain. It reported compliance with debt covenants at quarter-end. The $10.0 million credit line was due to mature June 19, 2020, according to the filing.
- Investment-market, interest-rate, credit, and reinsurer risks remain relevant. The company reported $67.9 million held in trust for fronting collateral and $8.8 million in insurance-department trust accounts, subject to restrictions. It stated that it believed recorded reinsurance recoverables were recoverable.
- Ordinary-course legal claims include alleged errors or omissions in insurance placement, claims administration, and other transactions. The company did not believe material losses beyond amounts accrued were reasonably possible based on information then available.
Important facts for investors to verify
- Confirm the issuer identity: the filing is Conifer Holdings, Inc. (CNFR), despite the request metadata naming Presurance Holdings, Inc.
- Track commercial hospitality liability reserve development and adequacy of unpaid-loss reserves, especially after exhaustion of the adverse development cover.
- Assess whether COVID-19 affects hospitality exposure, new and renewal premiums, claims, investment values, and statutory capital beyond the quarter-end disclosures.
- Review liquidity and financing after the credit-line maturity date, including the PPP loan’s effect on available credit and any forgiveness determination.
- Distinguish GAAP net loss from management’s non-GAAP adjusted operating loss and examine the investment valuation movements underlying the difference.
- Monitor the combined ratio and expense ratio for evidence that underwriting performance and costs are improving.