Conifer Holdings, Inc. — Q2 2016 Form 10-Q
Entity note: The supplied filing is for Conifer Holdings, Inc. and subsidiaries, not Presurance Holdings, Inc.
Business context and reporting period
Unaudited results cover the quarter and six months ended June 30, 2016, compared with the same periods in 2015. Conifer is a U.S. property and casualty insurance holding company focused on specialty commercial and personal lines, including commercial multi-peril, workers’ compensation, low-value dwelling and wind-exposed homeowners coverage. Nonstandard personal automobile business is in run-off.
Financial performance and position
| Metric | Q2 2016 | Six months 2016 |
|---|---|---|
| Net earned premiums | $21.7 million | $41.8 million |
| Total revenue | $23.0 million | $43.9 million |
| Net income (loss) | $(0.5) million | $(2.5) million |
| Net loss per common share | $(0.07) | $(0.33) |
| Combined ratio | 109.7% | 110.9% |
| Operating income (loss), non-GAAP | $(1.1) million | $(3.1) million |
For the six months, gross written premiums increased 24.5% to $55.1 million; net written premiums rose 62.9% to $48.2 million, partly reflecting termination of a 25% quota-share reinsurance agreement in August 2015. Net earned premiums increased 41.1%. Net investment income was $1.1 million and realized investment gains were $0.5 million.
Six-month operating cash flow was positive $5.2 million, versus negative $4.9 million in 2015. Investing activities used $5.3 million and financing activities provided $1.5 million; cash increased by $1.5 million to $14.2 million. Cash and short-term investments totaled $30.5 million at June 30.
Total assets were $200.1 million and shareholders’ equity was $76.0 million. Senior debt was $14.75 million, up from $12.75 million at year-end 2015. The company had $11.0 million available under its revolving credit line and reported compliance with its financial covenants. Aggregate insurance-subsidiary statutory capital and surplus was $69.0 million, compared with $71.2 million at December 31, 2015.
Material changes versus prior periods
- Q2 net loss of $0.5 million compared with net income of $0.6 million; first-half net loss of $2.5 million compared with income of $1.1 million.
- First-half combined ratio rose to 110.9% from 98.4%, indicating an underwriting loss. The loss ratio increased to 62.0% from 57.4%, while the expense ratio increased to 48.9% from 41.0%.
- Prior-year reserve development was adverse by $3.1 million in the first half of 2016, versus $0.2 million in the first half of 2015. Management attributed the 2016 strengthening mainly to Florida homeowners and commercial automobile claims.
- Policy acquisition costs rose substantially, partly because the terminated quota-share agreement had provided a 37% ceding commission. Management also cited underwriting hires and infrastructure investment; operating expenses increased 18.7% for the first half.
- Commercial and personal gross written premiums grew 23.2% and 29.0%, respectively, in the first half. Personal-lines net earned premiums grew only 6.0%, while personal-lines underwriting recorded a $2.6 million loss.
Outlook, risks and unusual items
- No quantified earnings or premium guidance was provided. Management said existing cash, investments and available revolver capacity should meet short- and long-term liquidity needs, and expected the operating expense ratio to decline in the near term as the business grows on a more fixed cost base.
- The $17.5 million revolving line was scheduled to expire August 1, 2016; after quarter-end, on July 21, its expiration was extended to October 1, 2016 while renewal discussions continued. Estimated minimum senior-debt principal and interest payments were $7.6 million for the rest of 2016, $5.6 million for 2017–2018 and $2.0 million for 2019–2020.
- Insurance loss reserves involve significant estimation uncertainty; actual claim costs may materially differ from recorded estimates. Reinsurance does not remove the insurers’ primary obligation to policyholders, and amounts due from reinsurers were $9.9 million net of related items.
- Investment portfolio fair value was $133.2 million, primarily investment-grade fixed income, with average duration of 3.1 years. The filing describes interest-rate and reinsurer credit risks. A hypothetical 200-basis-point rate increase would reduce estimated fixed-income fair value by $7.5 million.
- A $0.6 million income-tax benefit in the first half was largely related to changes in the deferred-tax valuation allowance. The company repurchased 66,663 shares for approximately $0.45 million under a program authorizing up to $2.1 million. Management reported no material legal loss reasonably possible beyond amounts accrued and no material change in disclosed risk factors.
Important facts for investors to verify
- Whether reserve strengthening in Florida homeowners and commercial automobile adequately reflects ultimate claim costs, and whether adverse development continues.
- Whether underwriting profitability improves, particularly in personal lines, as premium growth and the post-quota-share cost structure develop.
- Whether the revolving credit facility is renewed beyond the October 1, 2016 extension, and whether debt maturities and covenant requirements remain manageable.
- Whether statutory capital and surplus, liquidity and reinsurance recoverables remain adequate to support growth and claims obligations.
- How much reported earnings depend on realized investment gains and tax benefits rather than underwriting performance.