Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2018
OR
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| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-37536
Conifer Holdings, Inc.
(Exact name of registrant as specified in its charter)
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| | |
Michigan | | 27-1298795 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
550 West Merrill Street, Suite 200 | | |
Birmingham, Michigan | | 48009 |
(Address of principal executive offices) | | (Zip code) |
(248) 559-0840
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| | | | |
Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated filer ☐ (Do not check if a smaller reporting company) | Smaller reporting company þ | Emerging growth company þ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
The number of outstanding shares of the registrant’s common stock, no par value, as of May 7, 2018, was 8,520,328.
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Form 10-Q
INDEX
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| 5 |
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| 22 |
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| 30 |
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| 31 |
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| 32 |
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| 32 |
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| 33 |
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| 34 |
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
|
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
| (Unaudited) | | |
Assets | | | |
Investment securities: | | | |
Debt securities, at fair value (amortized cost of $137,025 and $137,004, respectively) | $ | 134,711 |
| | $ | 136,536 |
|
Equity securities, at fair value (cost of $8,664 and $8,629, respectively) | 9,425 |
| | 9,687 |
|
Short-term investments, at fair value | 2,505 |
| | 11,427 |
|
Total investments | 146,641 |
| | 157,650 |
|
| | | |
Cash | 14,406 |
| | 11,868 |
|
Premiums and agents' balances receivable, net | 19,895 |
| | 22,845 |
|
Receivable from Affiliate | 1,783 |
| | 1,195 |
|
Reinsurance recoverables on unpaid losses | 20,063 |
| | 20,066 |
|
Reinsurance recoverables on paid losses | 4,595 |
| | 4,473 |
|
Prepaid reinsurance premiums | 1,050 |
| | 1,081 |
|
Deferred policy acquisition costs | 12,050 |
| | 12,781 |
|
Other assets | 9,171 |
| | 7,073 |
|
Total assets | $ | 229,654 |
| | $ | 239,032 |
|
| | | |
Liabilities and Shareholders' Equity | | | |
Liabilities: | | | |
Unpaid losses and loss adjustment expenses | $ | 85,491 |
| | $ | 87,896 |
|
Unearned premiums | 53,685 |
| | 57,672 |
|
Reinsurance premiums payable | 3,398 |
| | 3,299 |
|
Debt | 29,043 |
| | 29,027 |
|
Accounts payable and other liabilities | 6,613 |
| | 8,312 |
|
Total liabilities | 178,230 |
| | 186,206 |
|
| | | |
Commitments and contingencies | — |
| | — |
|
| | | |
Shareholders' equity: | | | |
Common stock, no par value (100,000,000 shares authorized; 8,520,328 issued and outstanding, respectively) | 86,430 |
| | 86,199 |
|
Accumulated deficit | (32,318 | ) | | (33,010 | ) |
Accumulated other comprehensive loss | (2,688 | ) | | (363 | ) |
Total shareholders' equity | 51,424 |
| | 52,826 |
|
Total liabilities and shareholders' equity | $ | 229,654 |
| | $ | 239,032 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(dollars in thousands, except per share data)
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Revenue | | | |
Premiums | | | |
Gross earned premiums | $ | 27,724 |
| | $ | 28,264 |
|
Ceded earned premiums | (3,924 | ) | | (4,124 | ) |
Net earned premiums | 23,800 |
| | 24,140 |
|
Net investment income | 802 |
| | 577 |
|
Net realized investment gains (losses) | 161 |
| | (8 | ) |
Change in fair value of equity securities | (297 | ) | | — |
|
Other income | 357 |
| | 354 |
|
Total revenue | 24,823 |
| | 25,063 |
|
| | | |
Expenses | | | |
Losses and loss adjustment expenses, net | 13,328 |
| | 15,733 |
|
Policy acquisition costs | 6,513 |
| | 6,472 |
|
Operating expenses | 4,187 |
| | 4,530 |
|
Interest expense | 619 |
| | 224 |
|
Total expenses | 24,647 |
| | 26,959 |
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| | | |
Income (loss) before equity earnings of affiliates and income taxes | 176 |
| | (1,896 | ) |
Equity earnings of affiliates, net of tax | 55 |
| | 104 |
|
Income tax expense | 18 |
| | 6 |
|
| | | |
Net income (loss) | $ | 213 |
| | $ | (1,798 | ) |
| | | |
Earnings (loss) per common share, basic and diluted | $ | 0.02 |
| | $ | (0.24 | ) |
| | | |
Weighted average common shares outstanding, basic and diluted | 8,520,328 |
| | 7,633,069 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(dollars in thousands)
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Net income (loss) | $ | 213 |
| | $ | (1,798 | ) |
| | | |
Other comprehensive income (loss), net of tax: | | | |
Unrealized investment gains (losses): | | | |
Unrealized investment gains (losses) during the period | (1,846 | ) | | 385 |
|
Income tax expense (benefit) | — |
| | — |
|
Unrealized investment gains (losses), net of tax | (1,846 | ) | | 385 |
|
| | | |
Less: reclassification adjustments to: | | | |
Net realized investment gains (losses) included in net income (loss) | — |
| | 51 |
|
Income tax expense (benefit) | — |
| | — |
|
Total reclassifications included in net income (loss), net of tax | — |
| | 51 |
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| | | |
Other comprehensive income (loss) | (1,846 | ) | | 334 |
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| | | |
Total comprehensive income (loss) | $ | (1,633 | ) | | $ | (1,464 | ) |
The accompanying notes are an integral part of the Consolidated Financial Statements.
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
(dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| | No Par, Common Stock | | | | Accumulated Other | | Total Shareholders' Equity |
| | Shares | | Amount | | Accumulated deficit | | Comprehensive Income (Loss) | |
Balances at December 31, 2016 | | 7,633,070 |
| | $ | 80,342 |
| | $ | (11,468 | ) | | $ | (1,080 | ) | | $ | 67,794 |
|
Net loss | | — |
| | — |
| | (1,798 | ) | | — |
| | (1,798 | ) |
Restricted stock unit expense, net | | (1 | ) | | 243 |
| | — |
| | — |
| | 243 |
|
Other comprehensive income | | — |
| | — |
| | — |
| | 334 |
| | 334 |
|
Balances at March 31, 2017 | | 7,633,069 |
| | 80,585 |
| | (13,266 | ) | | (746 | ) | | 66,573 |
|
Net loss | | — |
| | — |
| | (19,744 | ) | | — |
| | (19,744 | ) |
Issuance of common stock in private placement | | 800,000 |
| | 5,000 |
| | — |
| | — |
| | 5,000 |
|
Common stock issuance costs | | — |
| | (38 | ) | | — |
| | — |
| | (38 | ) |
Restricted stock unit expense, net | | 87,259 |
| | 652 |
| | — |
| | — |
| | 652 |
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Other comprehensive income | | — |
| | — |
| | — |
| | 383 |
| | 383 |
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Balances at December 31, 2017 | | 8,520,328 |
| | 86,199 |
| | (33,010 | ) | | (363 | ) | | 52,826 |
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Net income | | — |
| | — |
| | 213 |
| | — |
| | 213 |
|
Restricted stock unit expense, net | | — |
| | 231 |
| | — |
| | — |
| | 231 |
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Other comprehensive loss | | — |
| | — |
| | — |
| | (1,846 | ) | | (1,846 | ) |
Cumulative effect of adoption of ASU No. 2016-01, net of taxes | | — |
| | — |
| | 556 |
| | (556 | ) | | — |
|
Cumulative effect of adoption of ASU No. 2018-02, net of taxes | | — |
| | — |
| | (77 | ) | | 77 |
| | — |
|
Balances at March 31, 2018 | | 8,520,328 |
| | $ | 86,430 |
| | $ | (32,318 | ) | | $ | (2,688 | ) | | $ | 51,424 |
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| | | | | | | | | | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
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| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Cash Flows From Operating Activities | | | |
Net income (loss) | $ | 213 |
| | $ | (1,798 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Depreciation and amortization | 88 |
| | 100 |
|
Amortization of bond premium and discount, net | 139 |
| | 175 |
|
Net realized investment (gains) losses | (161 | ) | | 8 |
|
Change in fair value of equity securities | 297 |
| | — |
|
Restricted stock unit expenses | 231 |
| | 243 |
|
Other | (55 | ) | | 104 |
|
Changes in operating assets and liabilities: | | | |
(Increase) decrease in: | | | |
Premiums and agents' balances and other receivables | 2,362 |
| | 1,616 |
|
Reinsurance recoverables | (119 | ) | | (2,688 | ) |
Prepaid reinsurance premiums | 31 |
| | 314 |
|
Deferred policy acquisition costs | 731 |
| | 334 |
|
Other assets | (2,075 | ) | | (1,037 | ) |
Increase (decrease) in: | | | |
Unpaid losses and loss adjustment expenses | (2,405 | ) | | 7,484 |
|
Unearned premiums | (3,987 | ) | | (1,790 | ) |
Accounts payable and other liabilities | 802 |
| | 861 |
|
Net cash provided by (used in) operating activities | (3,908 | ) | | 3,926 |
|
Cash Flows From Investing Activities | | | |
Purchase of investments | (25,175 | ) | | (51,207 | ) |
Proceeds from maturities and redemptions of investments | 5,079 |
| | 8,889 |
|
Proceeds from sales of investments | 26,563 |
| | 36,729 |
|
Purchases of property and equipment | (21 | ) | | (9 | ) |
Net cash provided by (used in) investing activities | 6,446 |
| | (5,598 | ) |
Cash Flows From Financing Activities | | | |
Repayment of borrowings under debt arrangements | — |
| | (625 | ) |
Net cash provided by (used in) financing activities | — |
| | (625 | ) |
Net increase (decrease) in cash | 2,538 |
| | (2,297 | ) |
Cash at beginning of period | 11,868 |
| | 12,493 |
|
Cash at end of period | $ | 14,406 |
| | $ | 10,196 |
|
Supplemental Disclosure of Cash Flow Information: | | | |
Interest paid | $ | 619 |
| | $ | 128 |
|
Net income taxes paid | — |
| | — |
|
Receivable (Payable) for securities - non cash item | 3,094 |
| | (444 | ) |
The accompanying notes are an integral part of the Consolidated Financial Statements.
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include accounts, after elimination of intercompany accounts and transactions, of Conifer Holdings, Inc. (the “Company” or “Conifer”), its wholly owned subsidiaries, Conifer Insurance Company ("CIC"), White Pine Insurance Company ("WPIC"), Red Cedar Insurance Company ("RCIC"), and Sycamore Insurance Agency, Inc ("SIA"). CIC, WPIC, and RCIC are collectively referred to as the "Insurance Company Subsidiaries." On a stand-alone basis, Conifer Holdings, Inc. is referred to as the "Parent Company."
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Company has applied the rules and regulations of the United States Securities and Exchange Commission (“SEC”) regarding interim financial reporting and therefore the consolidated financial statements do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of Management, all adjustments, consisting of items of a normal recurring nature, necessary for a fair presentation of the consolidated interim financial statements, have been included. The results of operations for the three months ended March 31, 2018, are not necessarily indicative of the results expected for the year ended December 31, 2018.
These consolidated financial statements and the notes thereto should be read in conjunction with the Company's audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on March 15, 2018.
Business
The Company is engaged in the sale of property and casualty insurance products and has organized its business model around two classes of insurance businesses: commercial and personal lines. The Company underwrites a variety of specialty insurance products, including property, general liability, liquor liability, automobile, homeowners and dwelling policies. The Company markets and sells its insurance products through a network of independent retail agents and managing general agents. Policies are written in all 50 states. The Company’s corporate headquarters is located in Birmingham, Michigan with additional office facilities in Florida, Pennsylvania and Tennessee.
The Company also generates other revenues through investment income and other income which mainly consists of installment fees and policy issuance fees generally related to the policies we write. We also generate equity earnings from SIA's 50% owned agency (the "Affiliate"). The Affiliate places small commercial risks mainly for alarm and security guard markets.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes the amounts included in the consolidated financial statements reflect Management's best estimates and assumptions, actual results may differ from these estimates.
Recently Issued Accounting Guidance
Effective January 1, 2018, the Company adopted FASB Accounting Standards Update ("ASU") No. 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. As a result of adoption of this ASU, equity instruments that do not result in consolidation and are not accounted for under the equity method are measured at fair value and any changes in fair value are recognized in net income. Previously, the Company’s equity securities were classified as available-for-sale and changes in fair value were recorded in other comprehensive income. Upon adoption of this ASU, cumulative net unrealized gains on equity securities of $1.1 million, net of deferred income taxes of $0.5 million, were reclassified from accumulated other comprehensive income into accumulated deficit. Prior periods have not been recast to conform to the current presentation. See Note 2 ~ Investments for details regarding the change in net unrealized gains on equity securities included in net income for the quarter ended March 31, 2018.
Effective January 1, 2018, the Company early adopted ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU provides an option to reclassify tax effects remaining in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act (TCJA) to retained earnings. Upon enactment of the TCJA, the U.S. corporate tax rate was reduced from 35% to 21% and the Company's U.S. deferred tax balances were remeasured to the lower enacted U.S. corporate tax rate. GAAP requires the effects of changes in tax rates and laws on deferred tax balances to be recorded as a component of income tax expense in the period of enactment, even if the assets and liabilities relate to items of accumulated other comprehensive
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
income. As a result of adopting the ASU, the Company reclassified $77,000 of previously recognized deferred taxes from accumulated other comprehensive income into accumulated deficit as of January 1, 2018.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which addresses the financial reporting of leasing transactions. This update will require the recognition of a right-of-use asset and a corresponding lease liability, discounted to the present value, for all leases that extend beyond 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the consolidated statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from the amortization of the right-of-use asset in the consolidated statement of operations and the repayment of the principal portion of the lease liability will be classified as a financing activity while the interest component will be included in the operating section of the consolidated statement of cash flows. This ASU is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. Management is currently evaluating the impact of the guidance.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which amends the current methodology and timing for recognizing credit losses. This amendment will replace the current GAAP "incurred loss" methodology for credit losses with a methodology based on expected credit losses. The new guidance will also require expanded consideration of a broader range of reasonable and increased supportable information for the credit loss estimates. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted for years beginning after December 15, 2018. Management is currently evaluating the impact of the guidance.
2. Investments
The cost or amortized cost, gross unrealized gain or loss, and estimated fair value of the investments in securities classified as available for sale at March 31, 2018 and December 31, 2017, were as follows (dollars in thousands):
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| | | | | | | | | | | | |
| March 31, 2018 |
| Cost or Amortized Cost | Gross Unrealized | Estimated Fair Value |
| Gains | Losses |
Debt Securities: | | | | |
U.S. Government | $ | 15,896 |
| $ | 4 |
| $ | (222 | ) | $ | 15,678 |
|
State and local government | 16,668 |
| 85 |
| (201 | ) | 16,552 |
|
Corporate debt | 38,806 |
| 92 |
| (651 | ) | 38,247 |
|
Asset-backed securities | 25,331 |
| 37 |
| (110 | ) | 25,258 |
|
Mortgage-backed securities | 33,981 |
| 22 |
| (1,242 | ) | 32,761 |
|
Commercial mortgage-backed securities | 3,935 |
| — |
| (85 | ) | 3,850 |
|
Collateralized mortgage obligations | 2,408 |
| 12 |
| (54 | ) | 2,365 |
|
Total debt securities available for sale | $ | 137,025 |
| $ | 252 |
| $ | (2,565 | ) | $ | 134,711 |
|
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | |
| December 31, 2017 |
| Cost or Amortized Cost | Gross Unrealized | Estimated Fair Value |
| Gains | Losses |
Debt Securities: | | | | |
U.S. Government | $ | 17,179 |
| $ | 10 |
| $ | (99 | ) | $ | 17,090 |
|
State and local government | 17,302 |
| 255 |
| (54 | ) | 17,503 |
|
Corporate debt | 38,947 |
| 170 |
| (209 | ) | 38,908 |
|
Asset-backed securities | 23,539 |
| 36 |
| (35 | ) | 23,540 |
|
Mortgage-backed securities | 33,942 |
| 38 |
| (522 | ) | 33,458 |
|
Commercial mortgage-backed securities | 3,532 |
| 3 |
| (44 | ) | 3,491 |
|
Collateralized mortgage obligations | 2,563 |
| 19 |
| (36 | ) | 2,546 |
|
Total debt securities available for sale | 137,004 |
| 531 |
| (999 | ) | 136,536 |
|
Equity Securities (1) | 8,629 |
| 1,240 |
| (182 | ) | 9,687 |
|
Total securities available for sale | $ | 145,633 |
| $ | 1,771 |
| $ | (1,181 | ) | $ | 146,223 |
|
(1) Effective January 1, 2018, the Company adopted ASU No. 2016-01. As a result, equity securities are no longer classified as available-for-sale. Prior periods have not been recast to conform to the current presentation. Refer to Note 1 ~ Summary of Significant Accounting Policies for further details.
The following table summarizes the aggregate fair value and gross unrealized losses, by security type, of the available-for-sale securities in unrealized loss positions. The table segregates the holdings based on the length of time that individual securities have been in a continuous unrealized loss position, as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2018 |
| Less than 12 months | | Greater than 12 months | | Total |
| No. of Issues | Fair Value of Investments with Unrealized Losses | Gross Unrealized Losses | | No. of Issues | Fair Value of Investments with Unrealized Losses | Gross Unrealized Losses | | No. of Issues | Fair Value of Investments with Unrealized Losses | Gross Unrealized Losses |
Fixed Maturity Securities: | | | | | | | | | | | |
U.S. Government | 12 |
| $ | 12,889 |
| $ | (175 | ) | | 6 |
| $ | 1,960 |
| $ | (47 | ) | | 18 |
| $ | 14,849 |
| $ | (222 | ) |
State and local government | 39 |
| 10,338 |
| (145 | ) | | 7 |
| 1,380 |
| (56 | ) | | 46 |
| 11,718 |
| (201 | ) |
Corporate debt | 62 |
| 21,989 |
| (284 | ) | | 10 |
| 6,350 |
| (367 | ) | | 72 |
| 28,339 |
| (651 | ) |
Asset-backed securities | 23 |
| 14,448 |
| (101 | ) | | 3 |
| 793 |
| (9 | ) | | 26 |
| 15,241 |
| (110 | ) |
Mortgage-backed securities | 11 |
| 8,175 |
| (191 | ) | | 27 |
| 23,390 |
| (1,051 | ) | | 38 |
| 31,565 |
| (1,242 | ) |
Commercial mortgage-backed securities | 4 |
| 2,732 |
| (32 | ) | | 2 |
| 667 |
| (53 | ) | | 6 |
| 3,399 |
| (85 | ) |
Collateralized mortgage obligations | 9 |
| 1,869 |
| (54 | ) | | — |
| — |
| — |
| | 9 |
| 1,869 |
| (54 | ) |
Total debt securities available for sale | 160 |
| $ | 72,440 |
| $ | (982 | ) | | 55 |
| $ | 34,540 |
| $ | (1,583 | ) | | 215 |
| $ | 106,980 |
| $ | (2,565 | ) |
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 |
| Less than 12 months | | Greater than 12 months | | Total |
| No. of Issues | Fair Value of Investments with Unrealized Losses | Gross Unrealized Losses | | No. of Issues | Fair Value of Investments with Unrealized Losses | Gross Unrealized Losses | | No. of Issues | Fair Value of Investments with Unrealized Losses | Gross Unrealized Losses |
Fixed Maturity Securities: | | | | | | | | | | | |
U.S. Government | 12 |
| $ | 11,555 |
| $ | (64 | ) | | 7 |
| $ | 2,207 |
| $ | (35 | ) | | 19 |
| $ | 13,762 |
| $ | (99 | ) |
State and local government | 10 |
| 3,511 |
| (20 | ) | | 7 |
| 1,424 |
| (34 | ) | | 17 |
| 4,935 |
| (54 | ) |
Corporate debt | 38 |
| 15,236 |
| (46 | ) | | 10 |
| 6,555 |
| (163 | ) | | 48 |
| 21,791 |
| (209 | ) |
Asset-backed securities | 20 |
| 13,948 |
| (29 | ) | | 3 |
| 915 |
| (6 | ) | | 23 |
| 14,863 |
| (35 | ) |
Mortgage-backed securities | 6 |
| 4,935 |
| (19 | ) | | 26 |
| 24,939 |
| (503 | ) | | 32 |
| 29,874 |
| (522 | ) |
Commercial mortgage-backed securities | 3 |
| 2,026 |
| (12 | ) | | 2 |
| 722 |
| (32 | ) | | 5 |
| 2,748 |
| (44 | ) |
Collateralized mortgage obligations | 8 |
| 1,870 |
| (36 | ) | | — |
| — |
| — |
| | 8 |
| 1,870 |
| (36 | ) |
Total debt securities available for sale | 97 |
| 53,081 |
| (226 | ) | | 55 |
| 36,762 |
| (773 | ) | | 152 |
| 89,843 |
| (999 | ) |
Equity Securities (1) | 13 |
| 436 |
| (75 | ) | | 4 |
| 266 |
| (107 | ) | | 17 |
| 702 |
| (182 | ) |
Total securities | 110 |
| $ | 53,517 |
| $ | (301 | ) | | 59 |
| $ | 37,028 |
| $ | (880 | ) | | 169 |
| $ | 90,545 |
| $ | (1,181 | ) |
(1) Effective January 1, 2018, the Company adopted ASU No. 2016-01. As a result, equity securities are no longer classified as available-for-sale. Prior periods have not been recast to conform to the current presentation. Refer to Note 1 ~ Summary of Significant Accounting Policies for further details.
The Company analyzed its investment portfolio in accordance with its other-than-temporary impairment ("OTTI") review procedures and determined the Company did not need to record a credit-related OTTI loss in net income, nor recognize a non-credit related OTTI loss in other comprehensive income for the three months ended March 31, 2018 and 2017.
The Company’s sources of net investment income are as follows (dollars in thousands):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Debt securities | $ | 826 |
| | $ | 601 |
|
Equity securities | 27 |
| | 25 |
|
Cash and short-term investments | 23 |
| | 11 |
|
Total investment income | 876 |
| | 637 |
|
Investment expenses | (74 | ) | | (60 | ) |
Net investment income | $ | 802 |
| | $ | 577 |
|
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The following table summarizes the gross realized gains and losses from sales or maturities of available-for-sale fixed maturity and equity securities (dollars in thousands):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Debt securities: | | | |
Gross realized gains | $ | 2 |
| | $ | — |
|
Gross realized losses | (5 | ) | | (7 | ) |
Total debt securities | (3 | ) | | (7 | ) |
Equity securities: | | | |
Gross realized gains | 170 |
| | 29 |
|
Gross realized losses | (6 | ) | | (30 | ) |
Total equity securities | 164 |
| | (1 | ) |
Total net realized gains (losses) | $ | 161 |
| | $ | (8 | ) |
Proceeds from the sales of debt and equity securities available for sale, maturities and other redemptions (primarily the return of capital) were $8.1 million and $6.6 million for the three months ended March 31, 2018 and 2017, respectively.
Effective January 1, 2018, the Company adopted ASU No. 2016-01. As a result, equity securities are no longer classified as available-for-sale with unrealized gains and losses recognized in other comprehensive income; rather, all changes in fair value of equity securities are now recognized in net income. The change in fair value of equity securities included in net income for the quarter ended March 31, 2018, was a $297 thousand loss, prior periods have not been recast for the adoption of this guidance.
The table below summarizes the amortized cost and fair value of available-for-sale debt securities by contractual maturity at March 31, 2018. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties (dollars in thousands):
|
| | | | | | | |
| Amortized Cost | | Estimated Fair Value |
Due in one year or less | $ | 13,283 |
| | $ | 13,258 |
|
Due after one year through five years | 36,167 |
| | 35,701 |
|
Due after five years through ten years | 12,271 |
| | 12,011 |
|
Due after ten years | 9,649 |
| | 9,507 |
|
Securities with contractual maturities | 71,370 |
| | 70,477 |
|
Asset-backed securities | 25,331 |
| | 25,258 |
|
Mortgage-backed securities | 33,981 |
| | 32,761 |
|
Commercial mortgage-backed securities | 3,935 |
| | 3,850 |
|
Collateralized mortgage obligations | 2,408 |
| | 2,365 |
|
Total debt securities | $ | 137,025 |
| | $ | 134,711 |
|
At March 31, 2018 and December 31, 2017, the Insurance Company Subsidiaries had an aggregate of $7.8 million and $8.2 million, respectively, on deposit in trust accounts to meet the deposit requirements of various state insurance departments. At March 31, 2018 and December 31, 2017, the Company had $29.4 million and $18.4 million, respectively, held in trust accounts to meet collateral requirements with other third-party insurers, relating to various fronting arrangements. There are withdrawal and other restrictions on these deposits, including the type of investments that may be held, however, the Company may generally invest in high-grade bonds and short-term investments and earn interest on the funds.
3. Fair Value Measurements
The Company’s financial instruments include assets and liabilities carried at fair value, as well as assets and liabilities carried at cost or amortized cost but disclosed at fair value in these consolidated financial statements. Fair value is defined as the price that would be received for an asset or paid to transfer a liability in the principally most advantageous market for the asset or liability in an orderly transaction between market participants. In determining fair value, the Company applies the market approach, which uses prices and other relevant data based on market transactions involving identical or comparable
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
assets and liabilities. The inputs to valuation techniques used to measure fair value are prioritized into a three-level hierarchy. The hierarchy gives the highest priority to quoted prices from sources independent of the reporting entity (“observable inputs”) and the lowest priority to prices determined by the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”). The fair value hierarchy is as follows:
Level 1—Valuations that are based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2—Valuations that are based on observable inputs (other than Level 1 prices) such as quoted prices for similar assets or liabilities at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3—Unobservable inputs that are supported by little or no market activity. The unobservable inputs represent the Company’s best assumption of how market participants would price the assets or liabilities.
The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis, classified by the valuation hierarchy as of March 31, 2018 and December 31, 2017 (dollars in thousands):
|
| | | | | | | | | | | | | | | |
| March 31, 2018 |
| Fair Value Measurements Using |
| Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | |
Debt Securities: | | | | | | | |
U.S. Government | $ | 15,678 |
| | $ | — |
| | $ | 15,678 |
| | $ | — |
|
State and local government | 16,552 |
| | — |
| | 16,552 |
| | — |
|
Corporate debt | 38,247 |
| | — |
| | 38,247 |
| | — |
|
Asset-backed securities | 25,258 |
| | — |
| | 25,258 |
| | — |
|
Mortgage-backed securities | 32,761 |
| | — |
| | 32,761 |
| | — |
|
Commercial mortgage-backed securities | 3,850 |
| | — |
| | 3,850 |
| | — |
|
Collateralized mortgage obligations | 2,365 |
| | — |
| | 2,365 |
| | — |
|
Total debt securities | 134,711 |
| | — |
| | 134,711 |
| | — |
|
Equity Securities | 5,327 |
| | 5,082 |
| | 245 |
| | — |
|
Short-term investments | 2,505 |
| | 2,505 |
| | — |
| | — |
|
Total marketable investments measured at fair value | $ | 142,543 |
| | $ | 7,587 |
| | $ | 134,956 |
| | $ | — |
|
| | | | | | | |
Investments measured at NAV: | | | | | | | |
Investment in limited partnership | $ | 4,098 |
| | | | | | |
Total investments measured at NAV | $ | 4,098 |
| | | | | | |
| | | | | | | |
Total assets measured at fair value | 146,641 |
| | | | | | |
| | | | | | | |
Liabilities: | | | | | | | |
Debt * | $ | 29,804 |
| | $ | — |
| | $ | — |
| | $ | 29,804 |
|
Total Liabilities measured at fair value | $ | 29,804 |
| | $ | — |
| | $ | — |
| | $ | 29,804 |
|
* Carried at cost or amortized cost on the consolidated balance sheet
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | |
| December 31, 2017 |
| Fair Value Measurements Using |
| Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | |
Debt Securities: | | | | | | | |
U.S. Government | $ | 17,090 |
| | $ | — |
| | $ | 17,090 |
| | $ | — |
|
State and local government | 17,503 |
| | — |
| | 17,503 |
| | — |
|
Corporate debt | 38,908 |
| | — |
| | 38,908 |
| | — |
|
Asset-backed securities | 23,540 |
| | — |
| | 23,540 |
| | — |
|
Mortgage-backed securities | 33,458 |
| | — |
| | 33,458 |
| | — |
|
Commercial mortgage-backed securities | 3,491 |
| | — |
| | 3,491 |
| | — |
|
Collateralized mortgage obligations | 2,546 |
| | — |
| | 2,546 |
| | — |
|
Total debt securities | 136,536 |
| | — |
| | 136,536 |
| | — |
|
Equity Securities | 5,627 |
| | 5,381 |
| | 246 |
| | — |
|
Short-term investments | 11,427 |
| | 8,429 |
| | 2,998 |
| | — |
|
Total assets measured at fair value | $ | 153,590 |
| | $ | 13,810 |
| | $ | 139,780 |
| | $ | — |
|
| | | | | | | |
Investments measured at NAV: | | | | | | | |
Investment in limited partnership | $ | 4,060 |
| | | | | | |
Total investments measured at NAV | $ | 4,060 |
| | | | | | |
| | | | | | | |
Total assets measured at fair value | $ | 157,650 |
| | | | | | |
| | | | | | | |
Liabilities: | | | | | | | |
Debt * | $ | 29,888 |
| | $ | — |
| | $ | — |
| | $ | 29,888 |
|
Total Liabilities measured at fair value | $ | 29,888 |
| | $ | — |
| | $ | — |
| | $ | 29,888 |
|
* Carried at cost or amortized cost on the consolidated balance sheet
Level 1 investments consist of equity securities traded in an active exchange market. The Company uses unadjusted quoted prices for identical instruments to measure fair value. Level 1 also includes money market funds and other interest-bearing deposits at banks, which are reported as short-term investments. The fair value measurements that were based on Level 1 inputs comprise 5.2% of the fair value of the total investment portfolio as of March 31, 2018.
Level 2 investments include debt securities, which consist of U.S. government agency securities, state and local municipal bonds (including those held as restricted securities), corporate debt securities, mortgage-backed and asset-backed securities. The fair value of securities included in the Level 2 category were based on the market values obtained from a third party pricing service that were evaluated using pricing models that vary by asset class and incorporate available trade, bid and other observable market information. The third party pricing service monitors market indicators, as well as industry and economic events. The fair value measurements that were based on Level 2 inputs comprise 92.0% of the fair value of the total investment portfolio as of March 31, 2018.
The Company obtains pricing for each security from independent pricing services, investment managers or consultants to assist in determining fair value for its Level 2 investments. To validate that these quoted prices are reasonable estimates of fair value, the Company performs various quantitative and qualitative procedures, such as (i) evaluation of the underlying methodologies, (ii) analysis of recent sales activity, (iii) analytical review of our fair values against current market prices and (iv) comparison of the pricing services’ fair value to other pricing services’ fair value for the same investment. No markets for the investments were determined to be inactive at period-ends. Based on these procedures, the Company did not adjust the prices or quotes provided from independent pricing services, investment managers or consultants.
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
As of March 31, 2018, Level 3 is entirely comprised of the Company's subordinated debt. In determining the fair value of the subordinated debt outstanding at March 31, 2018, the security attributes (issue date, maturity, coupon, calls, etc.) and market rates on September 29, 2017 (the date of issuance) were fed into a valuation model. A lognormal trinomial interest rate lattice was created within the model to compute the option adjusted spread (“OAS”) which is the amount, in basis points, of interest rate required to be paid under the debt agreement over the risk-free U.S. Treasury rates. The OAS was then fed back into the model along with the March 31, 2018, U.S. Treasury rates. A new lattice was generated and the fair value was computed from the OAS. There were no changes in assumptions of credit risk from the issuance date.
The Company’s policy on recognizing transfers between hierarchy levels is applied at the end of each reporting period. There were no transfers between Levels 1, 2 and 3 for the three months ended March 31, 2018 and 2017, respectively.
4. Deferred Policy Acquisition Costs
The Company defers costs incurred which are incremental and directly related to the successful acquisition of new or renewal insurance business, net of corresponding amounts of ceded reinsurance commissions. Net deferred policy acquisition costs are amortized and charged to expense in proportion to premium earned over the estimated policy term. The Company anticipates that its deferred policy acquisition costs will be fully recoverable and there were no premium deficiencies for the three months ended March 31, 2018 and 2017. The activity in deferred policy acquisition costs, net of reinsurance transactions, is as follows (dollars in thousands):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Balance at beginning of period | $ | 12,781 |
| | $ | 13,290 |
|
| | | |
Deferred policy acquisition costs | 5,782 |
| | 6,138 |
|
Amortization of policy acquisition costs | (6,513 | ) | | (6,472 | ) |
Net change | (731 | ) | | (334 | ) |
| | | |
Balance at end of period | $ | 12,050 |
| | $ | 12,956 |
|
5. Unpaid Losses and Loss Adjustment Expenses
The Company establishes reserves for unpaid losses and loss adjustment expenses ("LAE") which represent the estimated ultimate cost of all losses incurred that were both reported and unreported (i.e., incurred but not yet reported losses; or “IBNR”) and LAE incurred that remain unpaid at the balance sheet date. The Company’s reserving process takes into account known facts and interpretations of circumstances and factors including the Company’s experience with similar cases, actual claims paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management programs, product mix and contractual terms, changes in law and regulation, judicial decisions, and economic conditions. In the normal course of business, the Company may also supplement its claims processes by utilizing third party adjusters, appraisers, engineers, inspectors, and other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims. The effects of inflation are implicitly considered in the reserving process.
Reserves are estimates of unpaid portions of losses that have occurred, including IBNR losses; therefore the establishment of appropriate reserves is an inherently uncertain and complex process. The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimates. The highest degree of uncertainty is associated with reserves for losses incurred in the current reporting period as it contains the greatest proportion of losses that have not been reported or settled. The Company regularly updates its reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in reserve estimates, which may be material, are reported in the results of operations in the period such changes are determined to be needed and recorded.
Management believes that the reserve for losses and LAE, net of reinsurance recoverables, is appropriately established in the aggregate and adequate to cover the ultimate net cost of reported and unreported claims arising from losses which had
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
occurred by the date of the consolidated financial statements based on available facts and in accordance with applicable laws and regulations.
The table below provides the changes in the reserves for losses and LAE, net of reinsurance recoverables, for the periods indicated as follows (dollars in thousands):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Gross reserves - beginning of period | $ | 87,896 |
| | $ | 54,651 |
|
Less: reinsurance recoverables on unpaid losses | 20,066 |
| | 6,658 |
|
Net reserves - beginning of period | 67,830 |
| | 47,993 |
|
| | | |
Add: incurred losses and LAE, net of reinsurance: | | | |
Current period | 13,344 |
| | 12,654 |
|
Prior period | (16 | ) | | 3,079 |
|
Total net incurred losses and LAE | 13,328 |
| | 15,733 |
|
| | | |
Deduct: loss and LAE payments, net of reinsurance: | | | |
Current period | 1,588 |
| | 1,903 |
|
Prior period | 12,711 |
| | 8,813 |
|
Total net loss and LAE payments | 14,299 |
| | 10,716 |
|
| | | |
Net reserves - end of period | 66,859 |
| | 53,010 |
|
Plus: reinsurance recoverables on unpaid losses | 20,063 |
| | 9,125 |
|
Less: deferred gain on ADC | (1,431 | ) | | — |
|
Gross reserves - end of period | $ | 85,491 |
| | $ | 62,135 |
|
On September 28, 2017, the Company entered into an adverse development cover reinsurance agreement (the "ADC") to cover loss development of up to $17.5 million in excess of stated reserves as of June 30, 2017. The ADC provides up to $17.5 million of reinsurance for adverse net loss reserve development for accident years 2005 through 2016. The ADC attaches when net losses exceed $1.4 million of the $36.6 million carried reserves at June 30, 2017, and extends to $19.5 million in coverage up to $57.5 million. The Company retains a 10% co-participation for any development in excess of the retention.
The Company accounts for the agreement as retroactive reinsurance. For the quarter ended March 31, 2018, the Company recorded $1.7 million of net adverse loss development covered under this agreement, which increased the retroactive reinsurance recoverable to $8.9 million, leaving $8.6 million of coverage remaining on the ADC. The Company recorded the retroactive reinsurance recoverable in excess of the consideration as a deferred gain that is amortized to earnings using the interest method over the estimated claims settlement period. As of March 31, 2018, the deferred gain of $1.4 million, net of amortization, is included in Other Liabilities on the consolidated balance sheets.
The Company’s incurred losses during the three months ended March 31, 2018, included favorable prior-year reserve development of $16,000. Excluding the effect of the ADC, the commercial lines of business reported $104,000 of favorable prior-year development offset by $366,000 of unfavorable development from the personal lines of business of which $266,000 was attributable to additional 2017 losses from Hurricane Harvey. The ADC had a favorable impact of $278,000 on prior year reserve development.
The Company’s incurred losses during the three months ended March 31, 2017, included prior-year adverse reserve development of $3.1 million. For the three months ended March 31, 2017, there was adverse development of $1.6 million from the commercial property line, $1.3 million from the commercial liability line of business, $325,000 from the Florida homeowners line, and $201,000 from the personal auto line of business. The adverse development was offset by $456,000 of favorable development in other lines of business for the same period.
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
6. Reinsurance
In the normal course of business, the Company seeks to minimize the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with reinsurers. The Company participates in reinsurance agreements in order to limit its loss exposure including protecting against catastrophe losses. The Company primarily ceded all specific commercial risks in excess of $500,000 in both 2018 and 2017. Reinsurance does not discharge the direct insurer from liability to its policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors the concentration of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. To date, the Company has not experienced any significant difficulties in collecting reinsurance recoverables.
The Company assumes written premiums under a few fronting arrangements, most of which are net of other reinsurance arrangements. The fronting arrangements are with unaffiliated insurers who write on behalf of the Company in markets that require a higher A.M. Best rating than the Company’s current rating, or where the policies are written in a state where the Company is not licensed or for other strategic reasons.
The consideration for the ADC entered into in the third quarter of 2017 was a payment of $7.2 million, which resulted in a one-time charge to ceded premiums fully earned in the third quarter. There is a 35% contingent recovery depending on the performance of the reserves over time. No recovery is currently reflected in the financial statements.
The following table presents the effects of such reinsurance and assumption transactions on premiums and losses and LAE (dollars in thousands). The 2018 ceded written and earned premium amounts include $367,000 of reinsurance reinstatement costs relating to Hurricane Irma.
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Written premiums: | | | |
Direct | $ | 18,855 |
| | $ | 20,900 |
|
Assumed | 4,882 |
| | 5,574 |
|
Ceded | (3,892 | ) | | (4,150 | ) |
Net written premiums | $ | 19,845 |
| | $ | 22,324 |
|
| | | |
Earned premiums: | | | |
Direct | $ | 21,224 |
| | $ | 22,060 |
|
Assumed | 6,500 |
| | 6,204 |
|
Ceded | (3,924 | ) | | (4,124 | ) |
Net earned premiums | $ | 23,800 |
| | $ | 24,140 |
|
| | | |
Losses and LAE: | | | |
Direct | $ | 12,958 |
| | $ | 16,033 |
|
Assumed | 3,554 |
| | 3,875 |
|
Ceded | (3,184 | ) | | (4,175 | ) |
Net Losses and LAE | $ | 13,328 |
| | $ | 15,733 |
|
| | | |
7. Debt
On September 29, 2017, the Company executed $30.0 million in private placement subordinated notes (the "Notes"). The Notes have a maturity date of September 29, 2032, bear interest, payable quarterly at a fixed annual rate of 8.0%, and allow for up to four quarterly interest deferrals. On the fifth and tenth anniversary of the notes, the interest rate resets to 1,250 basis points and 1,500 basis points, respectively, above the 5-year mid-swap rate. The Notes include an issuer call option at par from July 31, 2018, through October 31, 2018, and at 105% of par any time after September 29, 2020.
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The carrying value of the Notes is offset by $957,000 of debt issuance costs that will be amortized through interest expense over the life of the loan. The carrying value of the Notes was $29.0 million at March 31, 2018 and December 31, 2017, respectively.
The Notes replaced the Company's senior debt facility ("Credit Facility"), which was terminated upon execution of the Notes. The Credit Facility was comprised of three notes: a $17.5 million revolving line of credit ("Revolver") which commenced in October 2013; a $5.0 million five-year term note ("Term Note") which commenced in October 2013; and a $7.5 million five-year term note which commenced in September 2014 ("2014 Term Note").
The proceeds from the Notes were utilized, in part, to repay the outstanding balances on the Credit Facility, which were $16.4 million in total.
The Notes contain various restrictive covenants that relate to the Company’s tangible net worth, fixed-charge coverage ratios, dividend paying capacity, reinsurance retentions, and risk-based capital ratios. At March 31, 2018, the Company was in compliance with all of its subordinated debt financial covenants.
8. Shareholders’ Equity
In September 2017, the Company issued $5.0 million of common equity through a private placement for 800,000 shares priced at $6.25 per share. The participants in the private placement consisted mainly of members of the Company’s management team and insiders, including Chairman and CEO James Petcoff. The Company used the proceeds to strengthen its balance sheet through contributions to the Insurance Company Subsidiaries to support their future growth, and to cover the cost of the ADC and reserve strengthening.
On February 25, 2016, the Company's Board of Directors authorized a stock repurchase program, under which the Company may repurchase up to $2.1 million of its outstanding common stock. Under this program, Management was authorized to repurchase shares at prevailing market prices through open market purchases, privately negotiated transactions, block purchases or otherwise in accordance with applicable federal securities laws, including Rule 10b5-1 and 10b-18 of the Securities Exchange Act of 1934, as amended. The actual timing, number and value of shares repurchased under the program was determined by Management in its discretion and depends on a number of factors, including the market price of the Company’s stock, general market conditions, and other factors. For the three months ended March 31, 2018 and 2017, the Company had not repurchased any shares of stock. Repurchased shares remain authorized but not issued or outstanding, and are available to be reissued in the future.
As of March 31, 2018 and December 31, 2017, the Company had 8,520,328 issued and outstanding shares of common stock, respectively.
Holders of common stock are entitled to one vote per share and to receive dividends only when and if declared by the board of directors. The holders have no preemptive, conversion or subscription rights.
9. Other Comprehensive Income (Loss)
The following table presents changes in accumulated other comprehensive income (loss) for unrealized gains and losses on available-for-sale securities (dollars in thousands):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Balance at beginning of period | $ | (363 | ) | | $ | (1,080 | ) |
Other comprehensive income (loss) before reclassifications | (1,846 | ) | | 385 |
|
Less: amounts reclassified from accumulated other comprehensive income (loss) | — |
| | 51 |
|
Plus: cumulative effect of adoption of ASU No. 2016-01, net of taxes | (556 | ) | | — |
|
Plus: cumulative effect of adoption of ASU No. 2018-02, net of taxes | 77 |
| | |
Net current period other comprehensive income (loss) | (2,325 | ) | | 334 |
|
Balance at end of period | $ | (2,688 | ) | | $ | (746 | ) |
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
10. Earnings Per Share
Basic and diluted earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. The following table presents the calculation of basic and diluted earnings (loss) per common share, as follows (dollars in thousands, except per share amounts):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Net income (loss) | $ | 213 |
| | $ | (1,798 | ) |
| | | |
Weighted average common shares, basic and diluted* | 8,520,328 |
| | 7,633,069 |
|
| | | |
Earnings (loss) per common share, basic and diluted | $ | 0.02 |
| | $ | (0.24 | ) |
* The 304,000 and 413,000 nonvested shares of the restricted stock units were anti-dilutive as of March 31, 2018 and 2017, respectively. Therefore, the basic and diluted weighted average common shares are equal for the three months ended March 31, 2018 and 2017, respectively.
11. Stock-based Compensation
In 2015, the Company issued 390,352 restricted stock units "RSUs" to executive officers and other employees to be settled in shares of common stock. The total RSUs were valued at $4.1 million on the date of grant. In 2016, the Company issued 111,281 RSUs to executive officers and other employees valued at $909,000 on the date of grant.
The following summarizes our RSU activity (units in thousands):
|
| | | | | | |
| Number of Units | | Weighted Average Grant-Date Fair Value |
| | | |
Outstanding at December 31, 2016 | 416 |
| | $ | 9.87 |
|
Units forfeited | (3 | ) | | 9.01 |
|
Outstanding at March 31, 2017 | 413 |
| | 9.88 |
|
Units vested | (95 | ) | | 9.97 |
|
Units forfeited | (11 | ) | | 10.19 |
|
Outstanding at December 31, 2017 | 307 |
| | 9.84 |
|
Units forfeited | (3 | ) | | 9.91 |
|
Outstanding at March 31, 2018 | 304 |
| | $ | 9.84 |
|
| | | |
The Company recorded $231,000 and $243,000 of compensation expense related to the RSUs for the three months ended March 31, 2018 and 2017, respectively. The total compensation cost related to the non-vested portion of the restricted stock units which has not been recognized as of March 31, 2018, was $2.7 million.
12. Commitments and Contingencies
Legal proceedings
The Company and its subsidiaries are subject at times to various claims, lawsuits and proceedings relating principally to alleged errors or omissions in the placement of insurance, claims administration, and other business transactions arising in the ordinary course of business. Where appropriate, the Company vigorously defends such claims, lawsuits and proceedings. Some of these claims, lawsuits and proceedings seek damages, including consequential, exemplary or punitive damages, in amounts that could, if awarded, be significant. Most of the claims, lawsuits and proceedings arising in the ordinary course of business
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
are related to the insurance policy issued. On the basis of current information, the Company does not believe that there is a reasonable possibility that any material loss exceeding amounts already accrued, if any, will result from any of the claims, lawsuits and proceedings to which the Company is subject, either individually, or in the aggregate.
13. Segment Information
The Company is engaged in the sale of property and casualty insurance products and has organized its business model around two classes of insurance businesses: commercial and personal lines. Within these two insurance businesses, the Company offers various insurance products. Such insurance businesses are engaged in underwriting and marketing insurance coverages, and administering claims processing for such policies.
The Company defines its operating segments as components of the business where separate financial information is available and used by the chief operating decision-making group in deciding how to allocate resources to its segments and in assessing its performance. In assessing performance of its operating segments, the Company’s chief operating decisionmaking group, comprised of key senior executives, reviews a number of financial measures including gross written premiums, net earned premiums and losses and LAE, net of reinsurance recoveries. The primary measure used for making decisions about resources to be allocated to an operating segment and assessing its performance is segment underwriting gain or loss which is defined as segment revenues, consisting of net earned premiums and other income, less segment expenses, consisting of losses and LAE, policy acquisition costs and operating expenses of the operating segments. Operating expenses primarily include compensation and related benefits for underwriting personnel, policy issuance and claims systems, rent and utilities. The Company markets, distributes and sells its insurance products through its own insurance agencies and a network of independent agents. All of the Company’s insurance activities are conducted in the United States with a concentration of activity in Florida, Michigan, Texas and Pennsylvania. For the three months ended March 31, 2018 and 2017, gross written premiums attributable to these four states were 60% and 58% of the Company’s total gross written premiums.
In addition to the reportable operating segments, the Company maintains a Corporate and Other category to reconcile segment results to the consolidated totals. The Corporate and Other category includes: (i) corporate operating expenses such as salaries and related benefits of the Company’s executive management team, and other corporate headquarters expenses, (ii) interest expense on the Company’s debt obligations; and (iii) all investment income activity. All investment income activity is reported within net investment income and net realized investment gains on the consolidated statements of operations. The Company’s assets on the consolidated balance sheet are not allocated to the reportable segments.
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2018 | | Commercial Lines | | Personal Lines | | Corporate & Other | | Total |
Gross written premiums | | $ | 21,788 |
| | $ | 1,949 |
| | $ | — |
| | $ | 23,737 |
|
Net written premiums | | $ | 19,422 |
| | $ | 423 |
| | $ | — |
| | $ | 19,845 |
|
| | | | | | | | |
Net earned premiums | | $ | 20,127 |
| | $ | 3,673 |
| | $ | — |
| | $ | 23,800 |
|
Other income | | 143 |
| | 180 |
| | 34 |
| | 357 |
|
Segment revenue | | 20,270 |
| | 3,853 |
| | 34 |
| | 24,157 |
|
Losses and loss adjustment expenses, net | | 10,200 |
| | 3,128 |
| | — |
| | 13,328 |
|
Policy acquisition costs | | 5,442 |
| | 1,071 |
| | — |
| | 6,513 |
|
Operating expenses | | 3,498 |
| | 370 |
| | 319 |
| | 4,187 |
|
Segment expenses | | 19,140 |
| | 4,569 |
| | 319 |
| | 24,028 |
|
Segment underwriting gain (loss) | | $ | 1,130 |
| | $ | (716 | ) | | (285 | ) | | 129 |
|
| | | | | | | | |
Net investment income | | |
| | |
| | 802 |
| | 802 |
|
Net realized investment gains | | |
| | |
| | 161 |
| | 161 |
|
Change in fair value of equity securities | | | | | | (297 | ) | | (297 | ) |
Interest expense | | | | | | (619 | ) | | (619 | ) |
Income (loss) before equity earnings of affiliates and income taxes | | |
| | |
| | $ | (238 | ) | | $ | 176 |
|
|
| | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2017 | | Commercial Lines | | Personal Lines | | Corporate & Other | | Total |
Gross written premiums | | $ | 21,644 |
| | $ | 4,830 |
| | $ | — |
| | $ | 26,474 |
|
Net written premiums | | $ | 19,479 |
| | $ | 2,845 |
| | $ | — |
| | $ | 22,324 |
|
| | | | | | | | |
Net earned premiums | | $ | 19,689 |
| | $ | 4,451 |
| | $ | — |
| | $ | 24,140 |
|
Other income | | 164 |
| | 151 |
| | 39 |
| | 354 |
|
Segment revenue | | 19,853 |
| | 4,602 |
| | 39 |
| | 24,494 |
|
Losses and loss adjustment expenses, net | | 12,468 |
| | 3,265 |
| | — |
| | 15,733 |
|
Policy acquisition costs | | 5,022 |
| | 1,450 |
| | — |
| | 6,472 |
|
Operating expenses | | 2,472 |
| | 569 |
| | 1,489 |
| | 4,530 |
|
Segment expenses | | 19,962 |
| | 5,284 |
| | 1,489 |
| | 26,735 |
|
Segment underwriting gain (loss) | | $ | (109 | ) | | $ | (682 | ) | | (1,450 | ) | | (2,241 | ) |
| | | | | | | | |
Net investment income | | |
| | |
| | 577 |
| | 577 |
|
Net realized investment losses | | |
| | |
| | (8 | ) | | (8 | ) |
Interest expense | | |
| | |
| | (224 | ) | | (224 | ) |
Income (loss) before equity earnings of affiliates and income taxes | | |
| | |
| | $ | (1,105 | ) | | $ | (1,896 | ) |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Periods Ended March 31, 2018 and 2017
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements (Unaudited), related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K, filed on March 15, 2018 with the U. S. Securities and Exchange Commission.
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q, which are not statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, as Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements give current expectations or forecasts of future events or our future financial or operating performance. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek” and similar terms and phrases, or the negative thereof, may be used to identify forward-looking statements.
The forward-looking statements contained in this report are based on Management’s good-faith belief and reasonable judgment based on current information. The forward-looking statements are qualified by important factors, risks and uncertainties, many of which are beyond our control, that could cause our actual results to differ materially from those in the forward-looking statements, including those described in our Form 10-K (“Item 1A Risk Factors”) filed with the SEC on March 15, 2018 and subsequent reports filed with or furnished to the SEC. Any forward-looking statement made by us in this report speaks only as of the date hereof or as of the date specified herein. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by any applicable laws or regulations.
Business Overview
We are an insurance holding company that markets and services our product offerings through specialty commercial and specialty personal insurance business lines. Our growth has been significant since our founding in 2009. Currently, we are authorized to write insurance as an excess and surplus lines carrier in 44 states, including the District of Columbia. We are also licensed to write insurance as an admitted carrier in 42 states, including the District of Columbia, and we offer our insurance products in all 50 states.
Our revenues are primarily derived from premiums earned from our insurance operations. We also generate other revenues through investment income and other income which mainly consists of installment fees and policy issuance fees generally related to the policies we write.
Our expenses consist primarily of losses and loss adjustment expenses, agents’ commissions, and other underwriting and administrative expenses. We organize our operations in two insurance businesses: commercial insurance lines and personal insurance lines.
Through our commercial insurance product lines, we offer coverage for both commercial property and commercial liability exposures. We also offer coverage for commercial automobiles and workers’ compensation. Our insurance policies are sold to targeted small and mid-sized businesses on a single or multiple-coverage basis.
Through our personal insurance product lines, we offer homeowners insurance and dwelling fire insurance policies to individuals in several states. Our specialty homeowners insurance product line is primarily comprised of either wind-exposed homeowners insurance providing hurricane and wind coverage to underserved homeowners in Texas, Hawaii and Florida or low-value dwelling insurance tailored for owners of lower valued homes, which we offer in Illinois, Indiana, Louisiana and Texas. Due to recent Florida-based industry events, we have been de-emphasizing our Florida homeowners' business and reducing our exposures in that state, as well as other wind-exposed states.
Recent Developments
In September 2017, we entered into several strategic transactions designed to strengthen our financial position and accelerate our goals of returning to profitability in the coming quarters. The strategic transactions include the following:
| |
• | We strengthened our reserve position through an agreement with a reinsurer that provides adverse loss development cover (the "ADC") of up to $17.5 million in excess of stated reserves as of June 30, 2017. |
| |
• | We completed $30.0 million in private placement subordinated notes providing long-term flexibility and less restrictive terms. |
| |
• | We repaid our outstanding Senior Credit Facility of $16.4 million. |
| |
• | We issued $5.0 million of additional common equity through a private placement. |
Reinsurance Agreement
The ADC, effective September 28, 2017, provides up to $17.5 million of reinsurance for adverse net loss reserve development for accident years 2005 through 2016. We retain sole responsibility for all claims activities, which is important to our ongoing value proposition to all of our customers.
The agreement attaches when net losses exceed $1.4 million of the $36.6 million carried reserves at June 30, 2017, and extends to $19.5 million in coverage up to $57.5 million (inclusive of a 10% co-participation). The consideration for this agreement was $7.2 million. There is a 35% contingent recovery depending on the performance of the reserves over time.
The agreement resulted in a one-time charge to ceded premiums of $7.2 million, or approximately $0.84 per common share.
Debt Re-financing
We completed a private placement of $30.0 million in aggregate principal amount of subordinated notes. The subordinated notes mature on September 29, 2032, bear interest, payable quarterly at a fixed annual rate of 8.0%, and allow for up to four quarterly interest deferrals. On the fifth and tenth anniversary of the notes, the interest rate resets to 1,250 basis points and 1,500 basis points, respectively, above the 5-year mid-swap rate. The notes include an issuer call option at par from July 31, 2018, through October 31, 2018, and at 105% of par any time after September 29, 2020.
We utilized the proceeds to repay and terminate the $16.4 million outstanding balance on our $30.0 million senior credit facility that consisted of two term notes totaling $12.5 million and a $17.5 million revolver.
We intend to use additional proceeds from the financing to support general working capital purposes and finance growth strategies.
Management Equity Infusion
In conjunction with the ADC and the re-financing, we also issued $5 million of common equity through a private placement at a price of $6.25 per share. Our common stock closing market price on the Nasdaq Stock Market on Thursday, September 28, 2017, was $6.05 per share. We will use the proceeds to strengthen our balance sheet.
The participants in the private placement consisted mainly of members of our management team and insiders, including our Chairman and CEO, James Petcoff.
Catastrophe Losses from Hurricane Harvey and Hurricane Irma
We have recorded pre-tax losses and reinsurance reinstatement costs on an inception to date basis of $6.8 million, net of expected reinsurance recoveries, for catastrophe losses related to two category 4 hurricanes, Hurricane Harvey in Texas and Hurricane Irma in Florida. The aggregate impact to the first quarter ended March 31, 2018 was $633,000 in losses and ceded premium expenses.
Critical Accounting Policies and Estimates
In certain circumstances, we are required to make estimates and assumptions that affect amounts reported in our consolidated financial statements and related footnotes. We evaluate these estimates and assumptions periodically on an on-going basis based on a variety of factors. There can be no assurance, however, that actual results will not be materially different than our estimates and assumptions, and that reported results of operation will not be affected by accounting adjustments needed to reflect changes in these estimates and assumptions. During the three months ended March 31, 2018, there were no material changes to our critical accounting policies and estimates, which are disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2018.
Executive Overview
The Company reported net income of $0.2 million, or $0.02 per share, for the three months ended March 31, 2018, compared to a net loss of $1.8 million, or $0.24 per share, for the same period in 2017.
Adjusted operating income, a non-GAAP measure, was $1.8 million, or $0.21 per share, for the three months ended March 31, 2018, compared to an adjusted operating loss of $1.8 million, or $0.24 per share, for the same period in 2017.
Our combined ratio was 99.5% for the three months ended March 31, 2018, compared to 109.1% for the same period in 2017. This was primarily due to a 9.0 percentage point improvement in the loss ratio, as well as a 0.6 percentage point reduction in the expense ratio compared to the prior year period.
Our net earned premium was down 1.4% for the three months ended months ended March 31, 2018, due to a combination of the expansion of our commercial lines, which was up 2.2% year over year, and the repositioning of our personal lines, which was down (17.5)% compared to the same period in the prior year.
Results of Operations For The Three Months Ended March 31, 2018 and 2017
The following table summarizes our operating results for the periods indicated (dollars in thousands):
|
| | | | | | | | | | | | | | |
Summary of Operating Results |
| Three Months Ended March 31, | | | | |
| 2018 | | 2017 | | $ Change | | % Change |
Gross written premiums | $ | 23,737 |
| | $ | 26,474 |
| | $ | (2,737 | ) |
| (10.3 | )% |
Net written premiums | $ | 19,845 |
| | $ | 22,324 |
| | $ | (2,479 | ) | | (11.1 | )% |
| | | | | | | |
Net earned premiums | $ | 23,800 |
| | $ | 24,140 |
| | $ | (340 | ) | | (1.4 | )% |
Other income | 357 |
| | 354 |
| | 3 |
| | 0.8 | % |
Losses and loss adjustment expenses, net | 13,328 |
| | 15,733 |
| | (2,405 | ) | | (15.3 | )% |
Policy acquisition costs | 6,513 |
| | 6,472 |
| | 41 |
| | 0.6 | % |
Operating expenses | 4,187 |
| | 4,530 |
| | (343 | ) | | (7.6 | )% |
Underwriting gain (loss) | 129 |
| | (2,241 | ) | | 2,370 |
| | * |
Net investment income | 802 |
| | 577 |
| | 225 |
| | 39.0 | % |
Net realized investment gains | 161 |
| | (8 | ) | | 169 |
| | * |
Change in fair value of equity securities (1) | (297 | ) | | — |
| | (297 | ) | | * |
Interest expense | 619 |
| | 224 |
| | 395 |
| | 176.3 | % |
Income (loss) before equity earnings in affiliate and income taxes | 176 |
| | (1,896 | ) | | 2,072 |
| | * |
Equity earnings (losses) of affiliates, net of tax | 55 |
| | 104 |
| | (49 | ) | | (47.1 | )% |
Income tax expense (benefit) | 18 |
| | 6 |
| | 12 |
| | 200.0 | % |
Net income (loss) | $ | 213 |
| | $ | (1,798 | ) | | $ | 2,011 |
| | * |
| | | | | | | |
Book value per common share outstanding | $6.04 | | $8.72 | | | | |
| | | | | | | |
Underwriting Ratios: | | | | | | | |
Loss ratio (2) | 55.2 | % | | 64.2 | % | | |
| | |
|
Expense ratio (3) | 44.3 | % | | 44.9 | % | | |
| | |
|
Combined ratio (4) | 99.5 | % | | 109.1 | % | | |
| | |
|
| |
(1) | Effective January 1, 2018, the Company adopted ASU No. 2016-01. As a result, equity securities are no longer classified as available-for-sale. Prior periods have not been recast to conform to the current presentation. Refer to Note 1 ~ Summary of Significant Accounting Policies for further details. |
| |
(2) | The loss ratio is the ratio, expressed as a percentage, of net losses and loss adjustment expenses to net earned premiums and other income. |
| |
(3) | The expense ratio is the ratio, expressed as a percentage, of policy acquisition costs and operating expenses to net earned premiums and other income. |
| |
(4) | The combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio under 100% indicates an underwriting profit. A combined ratio over 100% indicates an underwriting loss. |
*Percentage change is not meaningful
Premiums
Earned premiums are earned ratably over the term of the policy, whereas written premiums are reflected on the effective date of the policy. Almost all commercial lines and homeowners products have annual policies, under which premiums are earned evenly over one year. The resulting net earned premiums are impacted by the gross and ceded written premiums, earned ratably over time.
Our premiums are presented below for the three months ended March 31, 2018 and 2017 (dollars in thousands):
|
| | | | | | | | | | | | | | |
Summary of Premium Revenue |
| | | | | |
| Three Months Ended March 31, | | | | |
| 2018 | | 2017 | | $ Change | | % Change |
Gross written premiums | | | | | | | |
Commercial lines | $ | 21,788 |
| | $ | 21,644 |
| | $ | 144 |
| | 0.7 | % |
Personal lines | 1,949 |
| | 4,830 |
| | (2,881 | ) | | (59.6 | )% |
Total | $ | 23,737 |
| | $ | 26,474 |
| | $ | (2,737 | ) | | (10.3 | )% |
| | | | | | | |
Net written premiums | | | | | | | |
|
Commercial lines | $ | 19,422 |
| | $ | 19,479 |
| | $ | (57 | ) | | (0.3 | )% |
Personal lines | 423 |
| | 2,845 |
| | (2,422 | ) | | (85.1 | )% |
Total | $ | 19,845 |
| | $ | 22,324 |
| | $ | (2,479 | ) | | (11.1 | )% |
| | | | | | | |
Net Earned premiums | | | | | | | |
|
Commercial lines | $ | 20,127 |
| | $ | 19,689 |
| | $ | 438 |
| | 2.2 | % |
Personal lines | 3,673 | |