CONIFER HOLDINGS, INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Periods Ended
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
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
furnished to the
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.
Recent Developments COVID-19
COVID-19 (the "Pandemic") caused significant disruption to public health, the
global economy, financial markets, and commercial, social and community activity
in general. As there has been a significant reduction in reported cases and
correspondingly a reduction in government restrictions, we see reduced risk to
our business. We continue to monitor potential risks the Pandemic may present
including a potential resurgence. Our exposure to the Pandemic is manifold. The
majority of our employees continue to work remotely however strict
"shelter-in-place" or "stay-at-home" orders have been lifted. A significant
portion of our revenues are generated from the hospitality sector within the
shortages that resulted from the Pandemic.
We have continued to provide customer service, process new and renewal business,
handle claims and otherwise manage all operations even though the vast majority
of the staff is working remotely. To date, we have not seen a major disruption
in our business as a result of the Pandemic and currently do not expect to see a
material negative impact to our financial position or results of operations as a
result of the Pandemic.
Sale of Certain Agency Business
On
Holdings, Inc.
of some of its personal and commercial lines of business (the "Venture
Transaction"). Sycamore will continue to produce various personal and commercial
lines that it did not sell which is substantially all produced for, and
underwritten by, our Insurance Company Subsidiaries. We recognized an
million
Statement of Operations. In order to determine the value of the portion of the
business sold, the Company obtained a third party valuation based on a weighting
of discounted cash flows and earnings before interest, taxes, depreciation and
amortization (EBITDA) multiple valuation methods. The valuation included
significant estimates and assumptions related to (i) forecasted revenue and
EBITDA and (ii) the selection of the EBITDA multiple and discount rate.
The purchase price was
quarterly payments at a per annum rate of 7.0%, with a five-year maturity. There
are no prepayment penalties. On
million
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The assets sold included the customer accounts (mainly agency-related new and
renewal rights) of substantially all of the personal lines business and a small
subset of the commercial lines business underwritten by our Insurance Company
Subsidiaries, and all of the customer accounts Sycamore produced for third-party
insurers. The Venture Transaction included the transition of 21 employees from
Conifer to Venture as well as necessary systems and office functions to operate
the business. Venture did not assume any in-force business or liabilities. The
business will transition to Venture as it produces new or renewal business
effective
continue to underwrite substantially all of the business we sold to Venture that
we underwrote prior to the transaction. We expect Venture to be able to grow
both the business we underwrite as well as the third-party business more
effectively as a separate entity outside of Conifer. As of
Company had a non-controlling 50% interest in Venture.
On
Rating (Long-Term ICR) from "bb" (Fair) to "bb-" (Fair), and downgraded the
Company's insurance subsidiaries Financial Strength Rating from "B++" (Good) to
"B+" (Good) and the Long-Term ICR from "bbb" (Good) to "bbb-" (Good). The
outlook assigned to all these ratings by
the rating changes will have a material effect on our business.
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 45
states, including the
insurance as an admitted carrier in 42 states, including the
Columbia
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 into three insurance businesses: commercial insurance lines, personal
insurance lines, and wholesale agency business. Together, the commercial and
personal lines refer to "underwriting" operations that take insurance risk, and
the wholesale agency business refers to non-risk insurance business.
Through our commercial insurance product lines, we offer coverage for both
commercial property and commercial liability. 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 low-value dwelling
insurance tailored for owners of lower valued homes, which we offer in
de-emphasizing our
that state, as well as other wind-exposed states like
Through our wholesale agency business segment, we offer commercial and personal
lines insurance products for our Insurance Company Subsidiaries as well as
third-party insurers. We have expanded the wholesale agency business to develop
more non-risk revenue streams, and provide our agents with more insurance
product options. However, as a result of the sale of certain agency business on
significant amounts of business for third-party insurers and will produce
approximately 50% less business for the Insurance Company Subsidiaries.
24
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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 operations will not be affected by
accounting adjustments needed to reflect changes in these estimates and
assumptions. During the three months ended
material changes to our critical accounting policies and estimating
methodologies, 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
Executive Overview
The Company reported
quarter of 2022, representing an 8.5% increase as compared to the same period in
2021. Our commercial lines gross written premiums increased by
5.0%, to
for the same period in 2021. Personal lines gross written premiums increased by
to
The Company reported a net loss of
three months ended
million
Adjusted operating loss, a non-GAAP measure, was
share for the three months ended
operating loss of
Our underwriting combined ratio was 112.5% for the three months ended
2022
decreased 7.1% to 37.5% for the three months ended
44.6% for the same period in 2021.
25
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Results of Operations For The Three Months Ended
The following table summarizes our operating results for the periods indicated
(dollars in thousands):
Summary of Operating Results
Three Months Ended
March 31,
2022 2021 $ Change % Change
Gross written premiums $ 32,964 $ 30,373 $ 2,591 8.5 %
Net written premiums $ 18,021 $ 24,483 $ (6,462 ) (26.4 %)
Net earned premiums $ 23,955 $ 22,835 $ 1,120 4.9 %
Other income 698 556 142 25.5 %
Losses and loss adjustment expenses, net 18,018 19,362 (1,344 ) (6.9 )%
Policy acquisition costs
5,464 6,750 (1,286 ) (19.1 )% Operating expenses 4,160 4,349 (189 ) (4.3 )% Underwriting gain (loss) (2,989 ) (7,070 ) 4,081 * Net investment income 507 532 (25 ) (4.7 )% Net realized investment gains (losses) (69 ) 2,924 (2,993 ) * Change in fair value of equity securities 280 (540 ) 820 * Other gains (losses) (5 ) - (5 ) * Interest expense 711 721 (10 ) (1.4 )% Income (loss) before equity earnings in Affiliate, net of tax (2,987 ) (4,875 ) 1,888 * Equity earnings in Affiliate, net of tax 76 248 (172 ) * Income tax expense (41 ) 9 (50 ) * Net income (loss)$ (2,870 ) $ (4,636 ) $ 1,766 *
Book value per common share outstanding
Underwriting Ratios: Loss ratio (1) 75.0 % 84.4 % Expense ratio (2) 37.5 % 44.6 % Combined ratio (3) 112.5 % 129.0 %
(1) The loss ratio is the ratio, expressed as a percentage, of net losses and
loss adjustment expenses to net earned premiums and other income from
underwriting operations.
(2) The expense ratio is the ratio, expressed as a percentage, of policy
acquisition costs and other underwriting expenses to net earned premiums and
other income from underwriting operations.
(3) 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
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 the terms
of the policies.
26
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Our premiums are presented below for the three months ended
2021 (dollars in thousands):
Summary of Premium Revenue
Three Months Ended
March 31,
2022 2021 $ Change % Change
Gross written premiums
Commercial lines $ 28,586 $ 27,221 $ 1,365 5.0 %
Personal lines 4,378 3,152 1,226 38.9 %
Total $ 32,964 $ 30,373 $ 2,591 8.5 %
Net written premiums
Commercial lines $ 14,340 $ 21,557 $ (7,217 ) (33.5 )%
Personal lines 3,681 2,926 755 25.8 %
Total $ 18,021 $ 24,483 $ (6,462 ) (26.4 )%
Net earned premiums
Commercial lines $ 20,524 $ 20,706 $ (182 ) (0.9 )%
Personal lines 3,431 2,129 1,302 61.2 %
Total $ 23,955 $ 22,835 $ 1,120 4.9 %
Gross written premiums increased
three months ended
period in 2021.
Commercial lines gross written premiums increased
first quarter of 2021. The increase was due to
the small business programs, partially offset by a
written premium in the Company's hospitality programs.
Personal lines gross written premiums increased
million
period in 2021. The increased gross written premiums were due to
premium growth in the Company's low-value dwelling book of business.
Net written premiums decreased
three months ended
period in 2021. The Company entered into new specific loss reinsurance treaties
on
commission. This increased ceded written premiums by approximately
in the first quarter of 2022. There was no ceding commission on excess of loss
treaties during 2021. Ceded earned premiums also increased due to the new
treaties by
the same increase in ceding commissions, which reduced acquisition costs. Ceded
earned premiums also increased by
compared to 2021 due to growth in umbrella insurance premiums which are 94.0%
ceded under existing quota share reinsurance agreements.
Other Income
Other income consists primarily of fees charged to policyholders by the Company
for services outside of the premium charge, such as installment billings and
policy issuance costs. Other income also includes the interest income from the
Transaction. Commission income is also received by the Company's insurance
agency for writing policies for third-party insurance companies. All of the
third-party business was sold to Venture at
income from that business will diminish over the next few quarters as it
transitions over to Venture, and will ultimately no longer occur. Other income
for the three months ended
relating to installment billings and policy issuance costs was lower in the
first quarter of 2022, as the business that was sold to Venture at
2021
by an increase in the interest income from the notes payable of
first quarter of 2022.
27
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Losses and Loss Adjustment Expenses
The tables below detail our losses and loss adjustment expenses and loss ratios
in our underwriting business for the three months ended
(dollars in thousands).
Commercial Personal
Three months ended March 31, 2022 Lines Lines Total
Accident year net losses and LAE
Net (favorable) adverse development 5,740
(219 ) 5,521
Calendar year net losses and LAE
Accident year loss ratio 52.8 % 47.3 % 52.0 %
Net (favorable) adverse development 27.9 % (6.3 )% 23.0 %
Calendar year loss ratio 80.7 % 41.0 % 75.0 %
Commercial Personal
Three months ended March 31, 2021 Lines Lines Total
Accident year net losses and LAE
Net (favorable) adverse development 5,166
612 5,778
Calendar year net losses and LAE
Accident year loss ratio 56.8 % 82.8 % 59.2 % Net (favorable) adverse development 24.9 % 28.2 % 25.2 % Calendar year loss ratio 81.7 % 111.0 % 84.4 %
Net losses and LAE decreased by
the first quarter of 2022, compared to
2021. The decrease in losses was driven by current accident year losses
decreasing by
2022
The Company experienced
ended
accident years,
was related to the 2019 accident year, and
accident year. Of the
related to the Company's commercial lines of business, while the Company's
personal lines of business experienced
first quarter of 2022.
Net losses and LAE increased were
2021. The Company experienced
reinsurance recoverables, during the first quarter of 2021 from Winter Storm
Uri. In addition to these losses, the Company experienced
adverse development for the three months ended
million
and
Expense Ratio
Our expense ratio is a measure of the efficiency and performance of the
commercial and personal lines of business (our risk-bearing underwriting
operations). It is calculated by dividing the sum of policy acquisition costs
and other underwriting expenses by the sum of net earned premiums and other
income of the underwriting business. Costs that cannot be readily identifiable
as a direct cost of a segment or product line remain in Corporate for segment
reporting purposes. The expense ratio excludes wholesale agency and Corporate
expenses.
28
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The table below provides the expense ratio by major component.
Three Months Ended
March 31,
2022 2021
Commercial Lines
Policy acquisition costs 21.2 % 30.4 %
Operating expenses 15.3 % 14.2 %
Total 36.5 % 44.6 %
Personal Lines
Policy acquisition costs 31.8 % 27.7 %
Operating expenses 11.7 % 16.1 %
Total 43.5 % 43.8 %
Total Underwriting
Policy acquisition costs 22.7 % 30.2 %
Operating expenses 14.8 % 14.4 %
Total 37.5 % 44.6 %
Our expense ratio decreased by 7.1 percentage points in the first quarter of
2022 as compared to the same period in 2021. The decrease was largely due to a
reduction in policy acquisition costs attributable to
commission from new excess of loss reinsurance treaties. There were no
commissions on excess of loss treaties in 2021. The expense ratio also decreased
as a result of a
quarter of 2022 as compared to a first quarter in 2021, while operating expenses
were slightly lower in 2022.
Policy acquisition costs are costs we incur to issue policies, which include
commissions, premium taxes, underwriting reports and underwriter compensation
costs. The Company offsets direct commissions with ceded commissions from
reinsurers. The percentage of policy acquisition costs to net earned premiums
and other income decreased by 7.5%, from 30.2% in the first three months of
2021, to 22.7% for the same period in 2022, mostly due to the new ceding
commission mentioned above.
Operating expenses consist primarily of employee compensation, information
technology and occupancy costs, such as rent and utilities. Operating expenses
as a percent of net earned premiums and other underwriting income were 14.8% and
14.4% for the three months ended
overall operating expenses were lower in 2022, the new excess of loss
reinsurance treaties with the ceding commission drove net earned premiums lower,
resulting in a slightly higher operating expense ratio.
The personal lines operating expense ratio was lower in 2022 due to significant
growth in premium volume on substantially the same operating expense base.
Segment Results
We measure the performance of our consolidated results, in part, based on our
underwriting gain or loss. The following table provides the underwriting gain or
loss for the three months ended
Segment Gain (Loss)
Three Months Ended
March 31,
2022 2021 $ Change
Commercial Lines $ (3,533 ) $ (5,466 ) $ 1,933
Personal Lines 534 (1,187 ) 1,721
Total Underwriting (2,999 ) (6,653 ) 3,654
Wholesale Agency 62 (145 ) 207
Corporate (158 ) (258 ) 100
Eliminations 106 (14 ) 120
Total segment gain (loss) $ (2,989 ) $ (7,070 ) $ 4,081
29
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Liquidity and Capital Resources
Sources and Uses of Funds
At
investments. Our principal sources of funds are insurance premiums, investment
income, proceeds from maturities and sales of invested assets and installment
fees. These funds are primarily used to pay claims, commissions, employee
compensation, taxes and other operating expenses, and service debt.
We believe that our existing cash, cash equivalents, short-term investments and
investment securities balances will be adequate to meet our capital and
liquidity needs and the needs of our subsidiaries on a short-term and long-term
basis.
We conduct our business operations primarily through our Insurance Company
Subsidiaries. Our ability to service debt, and pay administrative expenses is
primarily reliant upon our intercompany service fees paid by the Insurance
Company Subsidiaries to the Parent Company for management, administrative, and
information technology services provided to the Insurance Company Subsidiaries
by the Parent Company. Secondarily, the Parent Company may receive dividends
from the Insurance Company Subsidiaries; however, this is not the primary means
in which the Parent Company supports its funding as state insurance laws
restrict the ability of our Insurance Company Subsidiaries to declare dividends
to the Parent Company. There were no dividends paid from our Insurance Company
Subsidiaries during the three months ended
Cash Flows
Operating Activities. Cash used in operating activities for the three months
ended
period in 2021. The
increase in ceded premiums paid during the first quarter of 2022, compared to
the same period in 2021. This was due to the new specific commercial liability
treaty the Company entered into as of
ceding commission. The increase in ceded premiums paid was offset by a
million
compared to the same period in 2021. This decrease was also related to the new
specific commercial liability treaty the Company entered into on
2021
Investing Activities. Cash provided by investing activities for the three months
ended
period in 2021. The
was driven by a
first quarter of 2022, compared to the same period in 2021. This was offset by
an increase of
million
during the first quarter of 2022, compared to the same period in 2021.
Financing Activities. Cash provided by financing activities for the three months
ended
the same period in 2021. The
Company borrowing
2022, while the Company paid down a net amount of
outstanding balance on its line of credit during the first quarter of 2021.
Our Insurance Company Subsidiaries are required to file quarterly and annual
financial reports with state insurance regulators. These financial reports are
prepared using statutory accounting practices promulgated by the Insurance
Company Subsidiaries' state of domiciliary, rather than GAAP. The Insurance
Company Subsidiaries' aggregate statutory capital and surplus (which is a
statutory measure of equity) was
2022
Non-GAAP Financial Measures
Adjusted Operating Income and Adjusted Operating Income Per Share
Adjusted operating income and adjusted operating income per share are non-GAAP
measures that represent net income allocable to common shareholders excluding
net realized investment gains or losses, other gains or losses, and changes in
fair value of equity securities; all net of tax. The most directly comparable
financial GAAP measures to adjusted operating income and adjusted operating
income per share are net income and net income per share, respectively. Adjusted
operating income and adjusted operating income per share are intended as
supplemental information and are not meant to replace net income or net income
per share. Adjusted operating income and adjusted operating income per share
should be read in conjunction with the GAAP financial results. Our definition of
adjusted operating income may be different from that used by other
companies. The
30
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following is a reconciliation of net income (loss) to adjusted operating income
(loss) (dollars in thousands), as well as net income (loss) per share to
adjusted operating income (loss) per share:
Three Months Ended
March 31,
2022 2021
Net income (loss) $ (2,870 ) $ (4,636 )
Exclude:
Net realized investment gains (losses), net of tax (69 ) 2,924
Other gains (losses), net of tax (5 ) -
Change in fair value of equity securities, net of tax 280 (540 )
Adjusted operating income (loss) $ (3,076 ) $ (7,020 )
Weighted average common shares diluted 9,707,817 9,681,728
Diluted income (loss) per common share:
Net income (loss) $ (0.30 ) $ (0.48 )
Exclude:
Net realized investment gains (losses), net of tax (0.01 ) 0.30 Other gains (losses), net of tax - - Change in fair value of equity securities, net of tax 0.03 (0.06 ) Adjusted operating income (loss) per share$ (0.32 ) $ (0.72 )
We use adjusted operating income and adjusted operating income per share to
assess our performance and to evaluate the results of our overall business. We
believe these measures provide investors with valuable information relating to
our ongoing performance that may be obscured by the net effect of realized gains
and losses as a result of our market risk sensitive instruments, which primarily
relate to debt securities that are available for sale and not held for trading
purposes. The change in fair value of equity securities and realized gains and
losses may vary significantly between periods and are generally driven by
external economic developments, such as capital market conditions. Accordingly,
adjusted operating income excludes the effect of items that tend to be highly
variable from period to period and highlights the results from our ongoing
business operations and the underlying results of our business. We believe that
it is useful for investors to evaluate adjusted operating income and adjusted
operating income per share, along with net income and net income per share, when
reviewing and evaluating our performance.
Recently Issued Accounting Pronouncements
Refer to Note 1 ~ Summary of Significant Accounting Policies - Recently Issued
Accounting Guidance of the Notes to the Consolidated Financial Statements for
detailed information regarding recently issued accounting pronouncements.
31
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