Conifer Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The filing identifies the registrant as Conifer Holdings, Inc.; the request metadata names Presurance Holdings, Inc. Verify the intended issuer. Unless noted otherwise, financial amounts below are in millions of dollars.
Business context and results
Conifer is a U.S. property and casualty insurer, with commercial lines, personal lines and a wholesale agency business. It distributes through independent agents and writes specialty products across all 50 states. The company reported Q2 net income of $1.505 million, but a six-month net loss of $3.220 million.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Gross written premiums | $27.545 | $25.169 | $52.629 | $49.385 |
| Net earned premiums | $21.758 | $21.349 | $43.775 | $43.036 |
| Total revenue | $25.300 | $22.781 | $46.886 | $47.084 |
| Net income (loss) | $1.505 | $(2.884) | $(3.220) | $(3.564) |
| Net income (loss) per share | $0.16 | $(0.34) | $(0.34) | $(0.42) |
| Underwriting combined ratio | 100.5% | 113.0% | 106.1% | 110.5% |
Q2 net income included a $1.576 million gain from changes in equity-security fair value and $245,000 of net realized investment gains. Adjusted operating loss, a non-GAAP measure, was $461,000 for Q2 and $3.143 million for the first half. Underwriting operations still recorded a $728,000 loss in Q2 and a $3.670 million loss for the six months.
- Cash flow: Operating cash used was $4.601 million in the first half, versus $223,000 used in 2019. Investing activities used $861,000; financing activities provided $2.810 million. Cash declined to $4.812 million from $7.464 million at year-end.
- Balance sheet and liquidity: Total assets were $250.013 million and shareholders’ equity $43.280 million at June 30. Cash, cash equivalents and short-term investments totaled $15.681 million. Management said available cash and investments should meet short- and long-term liquidity needs.
- Debt: Total debt was $38.842 million, up from $35.824 million at year-end, including $23.536 million senior notes, $9.561 million subordinated notes, $3.000 million drawn on a $10 million credit line, and a $2.745 million PPP loan. The company reported compliance with debt covenants. The credit line was renewed through June 18, 2021.
- Capital and reserves: Insurance subsidiaries’ statutory capital and surplus was $59.8 million, compared with $59.6 million at December 31, 2019. Gross unpaid losses and LAE were $106.734 million; the company had $20.892 million of reinsurance recoverables on unpaid losses.
Material changes versus prior comparable periods
- Q2 gross written premiums rose 9.4% year over year, while net earned premiums rose 1.9%. First-half gross written premiums increased 6.6%, but net earned premiums rose only 1.7%; higher reinsurance rates dampened growth in net premiums.
- Q2 combined ratio improved to 100.5% from 113.0%; the first-half ratio improved to 106.1% from 110.5%. The improvement reflected lower current accident-year losses, including reduced commercial liability claims during pandemic-related business closures, and better personal-lines experience.
- Prior-year adverse reserve development remained material: $3.0 million in Q2 and $6.8 million in the first half of 2020, primarily in commercial lines. The adverse development cover (ADC) had reached its $17.5 million limit by June 30, 2020; its deferred gain was fully used.
- Net investment income fell 17.9% in Q2 and 7.3% in the first half. Equity fair-value movements swung from a $915,000 Q2 loss in 2019 to a $1.576 million gain in 2020; for the first half, the result shifted from a $350,000 gain to a $1.510 million loss.
- First-half operating cash use increased to $4.6 million, primarily because cash paid on losses rose by $5.2 million. First-half debt increased, including receipt of the PPP loan and additional credit-line borrowings.
Outlook, commentary and risks
- Management provided no additional forward-looking guidance, citing uncertainty about the duration and severity of COVID-19 and its effects on business, results and financial condition.
- Management attributed improved underwriting performance to a better business mix, tighter underwriting in retained lines and expansion in historically profitable low-value dwelling products. It is reducing Florida homeowners exposure and other wind-exposed business.
- The company cited potential pandemic effects on sales, product margins, investment income and asset values, regulatory capital, insurance liabilities and access to capital. It also flagged possible regulatory or judicial actions concerning pandemic-related coverage, despite exclusions in most business-interruption policies.
- Most employees were working remotely. Management reported continued operations but warned that prolonged remote work or disruption to technology and telecommunications could impair efficiency.
- Investment and reinsurance credit risks remain relevant. The company held $30.5 million due from reinsurers, including prepaid reinsurance premiums, and stated it believed recorded recoverables were recoverable. Insurance subsidiaries remain primarily liable to policyholders if reinsurers fail to pay.
- Ordinary-course legal claims include matters involving insurance placement, claims administration and other business transactions. The company said it did not believe material losses beyond amounts accrued were reasonably possible. Management reported disclosure controls were effective and no material internal-control changes during the quarter.
Important facts for investors to verify
- Confirm issuer identity: the filing is for Conifer Holdings, Inc., not Presurance Holdings, Inc.
- Assess the sustainability of underwriting improvement, particularly the effects of temporarily lower COVID-era claims and continued adverse prior-year commercial reserve development.
- Review reserve adequacy and reinsurance recoverability, including the exhausted ADC protection and the concentration of adverse development in hospitality and small-business programs.
- Evaluate liquidity, restricted trust assets, debt service and refinancing needs; the filing states $65.2 million was held in trust for third-party insurer collateral requirements, in addition to state-required trust deposits.
- Distinguish recurring operating performance from investment volatility and debt-extinguishment gains. The filing’s narrative gives Q2 adjusted operating loss per share as $(0.05), while its reconciliation reports $(0.04); verify the correct figure.
- Monitor COVID-19 impacts, insurance-market regulation and litigation, and changes in claims costs, investment values and access to capital.