Business context and reporting period
This is Conifer Holdings, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. The request metadata names Presurance Holdings, Inc., but the filing identifies Conifer Holdings, Inc. as the registrant. Conifer is a property-and-casualty insurance holding company focused on specialty commercial and personal lines, distributed through independent agents.
Financial results and position
Amounts are in millions of dollars except per-share data and ratios. Balance-sheet amounts compare September 30, 2016 with December 31, 2015.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net earned premiums | $23.38 | $17.88 | $65.16 | $47.49 |
| Total revenue | $24.31 | $19.02 | $68.22 | $50.79 |
| Net income (loss) | $(1.48) | $1.15 | $(4.02) | $2.29 |
| Net income (loss) per common share | $(0.19) | $0.21 | $(0.53) | $0.40 |
| Combined ratio | 107.9% | 96.4% | 109.9% | 97.7% |
| Operating cash flow | Not presented for the quarter | $6.21 | $(9.83) |
- Gross written premiums rose 17.6% in Q3 and 22.1% year to date. Nine-month growth was 23.7% in commercial lines and 17.5% in personal lines.
- For the first nine months, net losses and loss adjustment expenses were $40.82 million, policy acquisition costs were $18.28 million, operating expenses were $13.38 million, and interest expense was $0.47 million.
- At September 30, total assets were $195.92 million, cash was $8.54 million, investments were $132.39 million, total liabilities were $121.42 million, senior debt was $14.25 million, and shareholders’ equity was $74.50 million. Cash plus short-term investments was $22.59 million.
- Insurance subsidiaries’ statutory capital and surplus was $66.7 million, down from $71.2 million at year-end 2015.
Material changes versus the prior comparable period
- Despite premium growth, the company moved from profit to loss: nine-month net loss was $4.02 million versus net income of $2.29 million in 2015. The nine-month underwriting loss was $6.50 million versus underwriting income of $1.15 million.
- The nine-month combined ratio increased to 109.9% from 97.7%, indicating an underwriting loss. Management also reported an accident-year combined ratio, excluding prior-year reserve development, of 101.4% versus 97.4%.
- Prior-year reserve development was adverse by $5.69 million for the first nine months of 2016, compared with $0.13 million adverse in 2015. Management cited Florida homeowners and commercial automobile reserve strengthening; Q3 also included adverse development in commercial multi-peril liability.
- Policy acquisition costs increased 85.8% year over year for the nine-month period, partly because the 25% quota-share reinsurance arrangement, which provided ceding commissions, ended in August 2015. Hiring and infrastructure investment also contributed to higher expenses.
- Cash decreased $4.16 million from year-end. Operating cash flow was positive, but investing activities used $11.25 million, and financing activities provided $0.88 million.
Outlook, commentary, risks and unusual items
- Management said available cash, short-term investments, investment securities, and $11.0 million of undrawn revolver capacity should meet short- and long-term liquidity needs. It expected the operating expense ratio to decline as earned premiums grow.
- No formal earnings or premium guidance was provided. Management cautioned that nine-month results are not necessarily indicative of full-year results.
- After quarter-end, Hurricane Matthew affected Florida and the eastern U.S. The company estimated gross liabilities of approximately $1.85 million, below the $5 million retention under its reinsurance program; the amount was expected to be reported in Q4 and remained an estimate.
- The $17.5 million revolving credit line was being renewed; its expiration was extended on October 28, 2016 to December 1, 2016. The company reported compliance with credit-facility covenants at quarter-end. Estimated minimum principal and interest payments were $7.1 million for the remainder of 2016, $5.6 million for 2017–2018, and $2.0 million for 2019–2020.
- Key risks include uncertainty in loss-reserve estimates, potential reinsurer nonperformance, interest-rate and investment credit risk, and restrictions on dividends from insurance subsidiaries. The company reported no material change to previously disclosed risk factors and no material loss expected from disclosed ordinary-course legal proceedings.
- Nonstandard personal auto policies were discontinued in the first half of 2015 and are in run-off; the run-off was expected to be substantially complete by year-end 2016. No premiums were written or earned in this line in 2016.
- The company repurchased 88,650 shares for approximately $0.63 million under a $2.1 million one-year authorization. Disclosure controls were assessed as effective; a new general ledger system was implemented during the quarter.
Most important facts for investors to verify
- Whether adverse reserve development continues, especially in Florida homeowners and commercial automobile, and whether recorded loss reserves prove adequate.
- Whether underwriting performance improves: nine-month combined ratio was 109.9%, while commercial lines generated $3.60 million of underwriting gain and personal lines recorded a $4.21 million underwriting loss.
- Whether the revolver renewal was completed before its extended December 1, 2016 expiration, and the resulting borrowing terms and covenant headroom.
- Final Hurricane Matthew claims and the amount recoverable under reinsurance, given the estimated gross liabilities were below the stated retention.
- Whether premium growth translates into sustainable profitability after the quota-share commission benefit ended and staffing and infrastructure costs increased.