Presurance Holdings, Inc. quarterly report, Q3 FY2015

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Business context and reporting period

Registrant identity: The supplied filing is Conifer Holdings, Inc.’s Form 10-Q, not a filing for Presurance Holdings, Inc. It covers the quarter and nine months ended September 30, 2015; financial-statement amounts below are in U.S. dollars.

Conifer is a property-and-casualty insurer focused on specialty commercial and personal lines, distributed primarily through independent agents. In January 2015 it stopped writing new nonstandard personal auto policies and moved that business into run-off, expected to be substantially complete by the end of 2016. It completed an IPO on August 18, 2015.

Financial results and key metrics

  • Revenue and earnings: Q3 net earned premiums were $17.9 million, up 22.7% year over year; total revenue was $19.0 million. Net income was $1.1 million versus a $2.3 million loss in Q3 2014; income allocable to common shareholders was $1.2 million, or $0.21 per share, versus a $2.3 million loss, or $0.89 per share. For the first nine months, net earned premiums rose 15.3% to $47.5 million; net income was $2.3 million versus a $7.0 million loss, and common-shareholder earnings were $1.8 million, or $0.40 per share.
  • Premium growth: Q3 gross written premiums increased 28.2% to $24.2 million. Nine-month gross written premiums increased 23.3% to $68.5 million, led by commercial lines, up 34.5%; personal lines were nearly flat, down 0.5%. Q3 net written premiums rose sharply, partly because the quota-share reinsurance agreement ended; excluding that effect, management reported growth of 27.9%.
  • Underwriting and margins: The combined ratio improved to 96.4% in Q3 from 116.2%, and to 97.7% for nine months from 118.5%. Management attributed improvement chiefly to lower weather-related property losses, a changing business mix, and lower expense ratios. A combined ratio below 100% indicates underwriting profit.
  • Cash flow and liquidity: Net cash used in operating activities was $9.8 million for nine months, versus $1.3 million used in 2014; management attributed the increase to the quota-share arrangement. Cash was $13.6 million at quarter-end, and cash plus short-term investments was $20.1 million. Management said available cash, investments, and the undrawn $17.5 million revolving facility should meet liquidity and capital needs.
  • Debt and capital: Senior debt was $9.8 million at September 30, down from $27.6 million at year-end 2014; the revolver was fully repaid using IPO proceeds. The company reported compliance with debt covenants. Insurance subsidiaries’ statutory capital and surplus was $70.0 million, compared with $66.6 million at December 31, 2014. Total assets were $172.6 million and shareholders’ equity was $80.2 million.
  • Investments: Total investments were $108.1 million. The fixed-income portfolio was investment grade, with average credit quality AA and duration of 3.4 years. Nine-month net investment income rose 77.4% to $1.5 million.

Material changes versus the prior comparable period

  • Results turned profitable year over year, supported by improved loss experience and underwriting ratios.
  • Commercial lines expanded, while personal auto premiums and losses declined as the business entered run-off; wind-exposed homeowners grew.
  • The company ended its 25% quota-share reinsurance arrangement in August after the IPO, citing increased capital. The arrangement had materially affected ceded premiums and acquisition-cost measures.
  • The IPO raised $30.7 million net of underwriting discounts and offering expenses. Proceeds were used in part to repay approximately $17.0 million of revolving debt and repurchase preferred stock for approximately $6.3 million.
  • Conifer deconsolidated a 50%-owned affiliate after losing control at September 30, retaining significant influence and accounting for it as an equity-method investment.

Outlook, commentary, risks and unusual items

  • Management said IPO capital was intended to support insurance-subsidiary surplus and premium growth over the next two years. It expected ceded earned premiums to decline following termination of the quota share and said other income could decrease after affiliate deconsolidation. No specific earnings or premium guidance was provided.
  • Management identified reserve estimation as inherently uncertain. Prior-period reserve development was favorable by $81,000 in Q3 2015 but adverse by $125,000 for the nine months; the comparable nine-month period in 2014 had $1.3 million of favorable development. Auto lines generated adverse development in 2015.
  • Risks include catastrophe and claims severity, reserve-estimation uncertainty, reinsurer credit/default exposure, interest-rate and investment-market risk, and the possibility that actual inflation in claims costs differs from estimates. The company reported $15.6 million due from reinsurers, which it believed recoverable.
  • The filing describes ordinary-course claims and legal proceedings and states management did not believe material losses beyond amounts accrued were reasonably possible. It reported no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting; management concluded disclosure controls were effective at a reasonable-assurance level.
  • The filing’s cover page marks “No” for the question asking whether all required reports had been filed during the preceding 12 months and whether the company had been subject to those requirements for 90 days. This is notable in light of the recent IPO and should be checked against the filing’s status and context.

Important facts for investors to verify

  1. Confirm the registrant: this filing identifies Conifer Holdings, Inc., not Presurance Holdings, Inc.
  2. Reconcile Q3 net written premiums: the MD&A summary states $28.559 million, while the financial statements and premium discussion report $28.599 million.
  3. Assess the sustainability of the improved combined ratio, including weather-loss comparisons, business-mix changes, and adverse auto reserve development.
  4. Review the effects of ending quota-share reinsurance on net retention, capital needs, ceded premiums, and acquisition costs, and evaluate catastrophe exposure in growing wind-exposed homeowners business.
  5. Verify liquidity and financing capacity, including the $17.5 million undrawn revolver, its August 2016 expiry, and scheduled term-debt payments.
  6. Review the cover-page “No” filing-status response and the risks and disclosures concerning reserve adequacy, reinsurance recoverables, and affiliate deconsolidation.