Presurance Holdings, Inc. quarterly report, Q1 FY2019

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Business context and reporting period

This is Conifer Holdings, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2019. The request metadata names Presurance Holdings, Inc.; that does not match the registrant identified in the filing and should be verified. Conifer writes specialty property and casualty insurance through commercial, personal, and wholesale agency businesses.

Financial results and position

  • Revenue: $24.3 million, down 2.1% from $24.8 million a year earlier. Net earned premiums fell 8.9% to $21.7 million; net investment income was $0.9 million.
  • Profitability: Net loss was $0.68 million, or $0.08 per share, versus net income of $0.21 million, or $0.02 per share. Adjusted operating loss, a non-GAAP measure, was $4.25 million ($0.50 per share), versus adjusted operating income of $1.78 million ($0.21 per share).
  • Underwriting: Underwriting loss was $2.26 million versus a $0.13 million gain. The combined ratio increased to 108.1% from 99.7%; the loss ratio rose to 66.5% from 55.7%, while the expense ratio improved to 41.6% from 44.0%.
  • Cash flow: Operating activities used $2.2 million, compared with $3.9 million used in Q1 2018. Investing activities provided $1.3 million, and financing activities provided $0.5 million. Cash ended the quarter at $10.4 million.
  • Liquidity and capital: Cash plus short-term investments totaled $18.5 million. Total investments were $144.2 million; total assets were $238.1 million and shareholders’ equity was $42.9 million. Insurance subsidiaries’ statutory capital and surplus was $63.5 million.
  • Debt: Debt was $34.6 million, including $24.1 million of senior unsecured notes, $9.5 million of subordinated notes, and a $1.0 million line-of-credit draw. Interest expense was $0.71 million.

Material changes versus the prior comparable period

  • Gross written premiums increased 2.0% to $24.2 million, while net written premiums increased 2.4% to $20.3 million. Commercial gross written premiums rose 3.7%; personal lines fell 16.3% as the company reduced wind-exposed business.
  • Net earned premiums declined 8.9%, primarily reflecting a 73.1% decrease in personal-lines earned premiums. Commercial earned premiums increased 2.8%.
  • Net losses and loss-adjustment expenses increased 8.5% to $14.5 million. Q1 2019 included $2.0 million of adverse prior-year reserve development, compared with $16,000 of favorable development in Q1 2018.
  • A $1.27 million gain from changes in equity-security fair value contrasted with a $0.30 million loss in Q1 2018, partially supporting reported results. Other comprehensive income was $1.70 million, and accumulated other comprehensive loss narrowed to $0.92 million.
  • Cash declined $0.38 million during the quarter. Debt increased by $1.08 million from year-end 2018, including the new $1.0 million line-of-credit draw.

Outlook, commentary, risks and unusual items

  • Management said it was de-emphasizing Florida homeowners and reducing wind-exposed exposure in Florida, Texas, and Hawaii; it expected the personal-lines expense ratio to stabilize as the transition progresses. No specific financial guidance was provided.
  • The adverse development cover (ADC) had reached its coverage limit as of March 31, 2019. The quarter’s reported prior-year adverse development was net of $2.3 million of ADC deferred-gain amortization; $3.4 million of deferred gain remained for recognition in future periods.
  • The company was not in compliance at quarter-end with the tangible-net-worth covenants on its subordinated notes and line of credit. Lenders waived the March 31 requirement in May 2019; management was negotiating amendments and expected future compliance. The line of credit matures June 21, 2019.
  • Management stated existing cash and investments should meet short- and long-term liquidity needs. However, parent-company funding depends primarily on intercompany service fees, while dividends from insurance subsidiaries are subject to regulatory restrictions.
  • Insurance reserves are estimates and may differ materially from ultimate claim costs. Reinsurance recoverables expose the company to reinsurer credit risk; management considered recorded amounts recoverable. Ordinary-course legal proceedings were disclosed, with no material loss beyond amounts accrued considered reasonably possible based on current information.
  • The company adopted lease accounting on January 1, 2019, recording a $3.8 million right-of-use asset and $3.9 million lease liabilities. Disclosure controls were reported effective at the reasonable-assurance level, with no material change in internal control over financial reporting.

Important facts for investors to verify

  1. Confirm the intended issuer: the filing is for Conifer Holdings, Inc., not Presurance Holdings, Inc.
  2. Track lender amendments and covenant compliance, including the June 21, 2019 line-of-credit maturity.
  3. Assess the adequacy of loss reserves, the $2.0 million adverse prior-year development, and the remaining $3.4 million ADC deferred gain after the cover reached its limit.
  4. Monitor whether premium and underwriting results improve as the company reduces wind-exposed personal-lines business, particularly given the 108.1% combined ratio.
  5. Review cash needs, restricted trust assets, reinsurance recoverability, and the company’s ability to service debt while operating cash flow is negative.