Conifer Holdings, Inc. - Quarter Report: 2017 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2017
OR
☐ | 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)
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.
Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated filer ☐ (Do not check if a smaller reporting company) | Smaller reporting company ☒ | Emerging growth company ☒ |
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 ☒
The number of outstanding shares of the registrant’s common stock, no par value, as of August 7, 2017, was 7,633,069.
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Form 10-Q
INDEX
Page No. | ||
5 | ||
23 | ||
36 | ||
37 | ||
38 | ||
38 | ||
38 | ||
39 | ||
40 | ||
2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
June 30, 2017 | December 31, 2016 | ||||||
(Unaudited) | |||||||
Assets | |||||||
Investment securities: | |||||||
Fixed maturity securities, at fair value (amortized cost of $116,418 and $113,915, respectively) | $ | 116,276 | $ | 113,163 | |||
Equity securities, at fair value (cost of $4,456 and $4,283, respectively) | 4,969 | 4,579 | |||||
Short-term investments, at fair value | 14,944 | 10,788 | |||||
Total investments | 136,189 | 128,530 | |||||
Cash | 10,863 | 12,493 | |||||
Premiums and agents' balances receivable, net | 23,018 | 24,538 | |||||
Receivable from affiliate | 724 | 1,751 | |||||
Reinsurance recoverables on unpaid losses | 10,552 | 6,658 | |||||
Reinsurance recoverables on paid losses | 1,923 | 840 | |||||
Ceded unearned premiums | 4,103 | 4,120 | |||||
Deferred policy acquisition costs | 12,649 | 13,290 | |||||
Other assets | 11,382 | 11,481 | |||||
Total assets | $ | 211,403 | $ | 203,701 | |||
Liabilities and Shareholders' Equity | |||||||
Liabilities: | |||||||
Unpaid losses and loss adjustment expenses | $ | 66,917 | $ | 54,651 | |||
Unearned premiums | 54,979 | 58,126 | |||||
Senior debt | 16,375 | 17,750 | |||||
Accounts payable and other liabilities | 7,165 | 5,380 | |||||
Total liabilities | 145,436 | 135,907 | |||||
Commitments and contingencies | — | — | |||||
Shareholders' equity: | |||||||
Common stock, no par value (100,000,000 shares authorized; 7,633,069 and 7,633,070 issued and outstanding, respectively) | 80,808 | 80,342 | |||||
Accumulated deficit | (14,334 | ) | (11,468 | ) | |||
Accumulated other comprehensive income (loss) | (507 | ) | (1,080 | ) | |||
Total shareholders' equity | 65,967 | 67,794 | |||||
Total liabilities and shareholders' equity | $ | 211,403 | $ | 203,701 | |||
The accompanying notes are an integral part of the Consolidated Financial Statements.
3
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(dollars in thousands, except per share data)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenue | |||||||||||||||
Premiums | |||||||||||||||
Gross earned premiums | $ | 28,338 | $ | 25,258 | $ | 56,602 | $ | 48,804 | |||||||
Ceded earned premiums | (3,841 | ) | (3,583 | ) | (7,965 | ) | (7,020 | ) | |||||||
Net earned premiums | 24,497 | 21,675 | 48,637 | 41,784 | |||||||||||
Net investment income | 663 | 528 | 1,240 | 1,065 | |||||||||||
Net realized investment gains (losses) | — | 541 | (8 | ) | 533 | ||||||||||
Other gains | 750 | — | 750 | — | |||||||||||
Other income | 372 | 283 | 726 | 528 | |||||||||||
Total revenue | 26,282 | 23,027 | 51,345 | 43,910 | |||||||||||
Expenses | |||||||||||||||
Losses and loss adjustment expenses, net | 16,674 | 13,541 | 32,407 | 26,240 | |||||||||||
Policy acquisition costs | 6,428 | 6,014 | 12,900 | 12,017 | |||||||||||
Operating expenses | 4,370 | 4,536 | 8,900 | 8,675 | |||||||||||
Interest expense | 219 | 143 | 443 | 300 | |||||||||||
Total expenses | 27,691 | 24,234 | 54,650 | 47,232 | |||||||||||
Income (loss) before equity earnings of affiliates and income taxes | (1,409 | ) | (1,207 | ) | (3,305 | ) | (3,322 | ) | |||||||
Equity earnings of affiliates, net of tax | 60 | 71 | 164 | 158 | |||||||||||
Income tax benefit | (282 | ) | (623 | ) | (275 | ) | (623 | ) | |||||||
Net income (loss) | $ | (1,067 | ) | $ | (513 | ) | $ | (2,866 | ) | $ | (2,541 | ) | |||
Earnings (loss) per common share, basic and diluted | $ | (0.14 | ) | $ | (0.07 | ) | $ | (0.38 | ) | $ | (0.33 | ) | |||
Weighted average common shares outstanding, basic and diluted | 7,633,069 | 7,594,862 | 7,633,069 | 7,616,821 | |||||||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
4
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(dollars in thousands)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Net income (loss) | $ | (1,067 | ) | $ | (513 | ) | $ | (2,866 | ) | $ | (2,541 | ) | |||
Other comprehensive income (loss), net of tax: | |||||||||||||||
Unrealized investment gains: | |||||||||||||||
Unrealized investment gains during the period | 519 | 277 | 904 | 1,736 | |||||||||||
Income tax expense | 281 | 585 | 281 | 585 | |||||||||||
Unrealized investment gains (losses), net of tax | 238 | (308 | ) | 623 | 1,151 | ||||||||||
Less: reclassification adjustments to: | |||||||||||||||
Net realized investment gains (losses) included in net income (loss) | (1 | ) | (174 | ) | 50 | (257 | ) | ||||||||
Income tax benefit | — | (86 | ) | — | (86 | ) | |||||||||
Total reclassifications included in net income (loss), net of tax | (1 | ) | (88 | ) | 50 | (171 | ) | ||||||||
Other comprehensive income (loss) | 239 | (220 | ) | 573 | 1,322 | ||||||||||
Total comprehensive income (loss) | $ | (828 | ) | $ | (733 | ) | $ | (2,293 | ) | $ | (1,219 | ) | |||
The accompanying notes are an integral part of the Consolidated Financial Statements.
5
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, 2015 | 7,644,492 | $ | 80,111 | $ | (3,031 | ) | $ | 182 | $ | 77,262 | |||||||||
Net loss | — | — | (2,541 | ) | — | (2,541 | ) | ||||||||||||
Repurchase of common stock | (66,663 | ) | (451 | ) | — | — | (451 | ) | |||||||||||
RSU Expense* | — | 409 | — | — | 409 | ||||||||||||||
Other comprehensive income | — | — | — | 1,322 | 1,322 | ||||||||||||||
Balances at June 30, 2016 | 7,577,829 | 80,069 | (5,572 | ) | 1,504 | 76,001 | |||||||||||||
Net loss | — | — | (5,896 | ) | — | (5,896 | ) | ||||||||||||
Repurchase of common stock | (21,987 | ) | (174 | ) | — | — | (174 | ) | |||||||||||
RSU Expense* | 77,228 | 447 | — | — | 447 | ||||||||||||||
Other comprehensive loss | — | — | — | (2,584 | ) | (2,584 | ) | ||||||||||||
Balances at December 31, 2016 | 7,633,070 | 80,342 | (11,468 | ) | (1,080 | ) | 67,794 | ||||||||||||
Net loss | — | — | (2,866 | ) | — | (2,866 | ) | ||||||||||||
RSU Expense* | (1 | ) | 466 | — | — | 466 | |||||||||||||
Other comprehensive income | — | — | — | 573 | 573 | ||||||||||||||
Balances at June 30, 2017 | 7,633,069 | $ | 80,808 | $ | (14,334 | ) | $ | (507 | ) | $ | 65,967 | ||||||||
* "RSU" - restricted stock units
The accompanying notes are an integral part of the Consolidated Financial Statements.
6
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Six Months Ended June 30, | |||||||
2017 | 2016 | ||||||
Cash Flows From Operating Activities | |||||||
Net income (loss) | $ | (2,866 | ) | $ | (2,541 | ) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||
Depreciation and amortization of property and equipment, and intangibles | 199 | 197 | |||||
Amortization of bond premium and discount, net | 288 | 290 | |||||
Net realized losses on investments | 8 | (533 | ) | ||||
Incentive awards expenses - vesting of RSU | 466 | 409 | |||||
Equity earnings of affiliate | (164 | ) | (158 | ) | |||
Changes in operating assets and liabilities: | |||||||
(Increase) decrease in: | |||||||
Premiums and agents' balances receivable | 2,547 | (4,384 | ) | ||||
Reinsurance recoverables | (4,977 | ) | (1,055 | ) | |||
Ceded unearned premiums | 17 | 1,635 | |||||
Deferred policy acquisition costs | 641 | (1,080 | ) | ||||
Other assets | 67 | (868 | ) | ||||
Increase (decrease) in: | |||||||
Unpaid losses and loss adjustment expenses | 12,266 | 6,410 | |||||
Unearned premiums | (3,147 | ) | 6,314 | ||||
Accounts payable and other liabilities | 2,009 | 608 | |||||
Net cash provided by operating activities | 7,354 | 5,244 | |||||
Cash Flows From Investing Activities | |||||||
Purchase of investments: | |||||||
Fixed maturity securities | (16,504 | ) | (27,375 | ) | |||
Equity securities | (544 | ) | (754 | ) | |||
Short-term investments | (78,964 | ) | (55,197 | ) | |||
Proceeds from maturities and redemptions of investments: | |||||||
Fixed maturity securities | 4,400 | 11,335 | |||||
Other redemptions | 8,662 | — | |||||
Proceeds from sales of investments: | |||||||
Fixed maturity securities | 168 | 20,677 | |||||
Equity securities | 367 | 838 | |||||
Short-term investments | 74,808 | 45,284 | |||||
Purchases of property and equipment | (2 | ) | (138 | ) | |||
Net cash used in investing activities | (7,609 | ) | (5,330 | ) | |||
Cash Flows From Financing Activities | |||||||
Repurchase of common stock | — | (451 | ) | ||||
Borrowings under debt arrangements | 2,000 | 3,000 | |||||
Repayment of borrowings under debt arrangements | (3,375 | ) | (1,000 | ) | |||
Net cash (used in) provided by financing activities | (1,375 | ) | 1,549 | ||||
Net (decrease) increase in cash | (1,630 | ) | 1,463 | ||||
Cash at beginning of period | 12,493 | 12,703 | |||||
Cash at end of period | $ | 10,863 | $ | 14,166 | |||
Supplemental Disclosure of Cash Flow Information: | |||||||
Interest paid | $ | 429 | $ | 219 | |||
Net income taxes paid | — | 45 | |||||
Payable for securities - non cash item | — | 8,063 | |||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
7
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." On December 30, 2016, the Company's wholly owned subsidiary, American Colonial Insurance Company ("ACIC") was merged into WPIC, with WPIC as the surviving entity.
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 six months ended June 30, 2017, are not necessarily indicative of the results expected for the year ended December 31, 2017.
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, 2016, as filed with the SEC on March 15, 2017.
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, and homeowners and dwelling policies. The Company markets and sells its insurance products through a network of independent 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
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU significantly changes the income statement impact of equity investments and the recognition of changes in fair value of financial liabilities attributable to an entity's own credit risk when the fair value option is elected. The ASU requires equity instruments that are not accounted for under the equity method to be measured at fair value and to recognize any changes in fair value in net income rather than other comprehensive income. ASU No. 2016-01 becomes effective for the Company in 2019 and will be applied using a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The provisions related to equity investments without a readily determinable fair value will be applied prospectively to equity investments as of the adoption date. Adoption of this ASU is not expected to have a material impact on the Company's financial position, cash flows, or total comprehensive income, but may have a material impact on the Company's results of operations as changes in fair value of equity instruments will be presented in net income rather than other comprehensive income. For the six months ended June 30, 2017, other comprehensive income includes $623,000 of net unrealized gains on equity securities, net of taxes. See Note 9 ~ Other Comprehensive Income for details regarding the change in net unrealized gains on equity securities included in other comprehensive income (loss) for the six months ended June 30, 2017 and 2016.
8
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires lessees to record most leases on their balance sheets as a lease liability with a corresponding right-of-use asset, but continue to recognize the related leasing expense within net income. ASU No. 2016-02 becomes effective for the Company in 2020 and will be applied using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company's future minimum lease payments, which represent minimum annual rental commitments excluding taxes, insurance and other operating costs for noncancelable operating leases, and will be subject to this new guidance, totaled $5.2 million at December 31, 2016. The calculation of the lease liability and right-of-use asset requires further analysis of the underlying leases to determine which portions of the underlying lease payments are required to be included in the calculation, however, the Company does not believe that this standard will have a material impact on the financial statements.
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, except for debt securities measured at fair value. 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. The Company does not believe this standard will have a material impact on the financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), which clarifies how certain cash receipts and cash payments should be presented and classified in the statement of cash flow under Topic 230, Statement of Cash Flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This ASU becomes effective for the Company beginning in 2019. Early adoption is permitted. The Company does not believe that this standard will have a material impact to the statement of cash flows.
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 June 30, 2017 and December 31, 2016, were as follows (dollars in thousands):
June 30, 2017 | ||||||||||||
Cost or Amortized Cost | Gross Unrealized | Estimated Fair Value | ||||||||||
Gains | Losses | |||||||||||
Fixed Maturity Securities: | ||||||||||||
U.S. Government obligations | $ | 8,904 | $ | 32 | $ | (43 | ) | $ | 8,893 | |||
State and local government | 13,036 | 243 | (74 | ) | 13,205 | |||||||
Corporate debt | 38,836 | 283 | (167 | ) | 38,952 | |||||||
Commercial mortgage-backed and other asset-backed | 55,642 | 158 | (574 | ) | 55,226 | |||||||
Total fixed maturity securities available for sale | 116,418 | 716 | (858 | ) | 116,276 | |||||||
Equity Securities: | ||||||||||||
Common stocks - Public Utilities | 103 | 28 | — | 131 | ||||||||
Common stocks - Banks, Trusts and Insurance Companies | 725 | 96 | (9 | ) | 812 | |||||||
Common stocks - Industrial, miscellaneous and all other | 3,628 | 535 | (137 | ) | 4,026 | |||||||
Total equity securities available for sale | 4,456 | 659 | (146 | ) | 4,969 | |||||||
Total securities available for sale | $ | 120,874 | $ | 1,375 | $ | (1,004 | ) | $ | 121,245 | |||
9
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
December 31, 2016 | ||||||||||||
Cost or Amortized Cost | Gross Unrealized | Estimated Fair Value | ||||||||||
Gains | Losses | |||||||||||
Fixed Maturity Securities: | ||||||||||||
U.S. Government obligations | $ | 5,908 | $ | 31 | $ | (36 | ) | $ | 5,903 | |||
State and local government | 13,618 | 106 | (205 | ) | 13,519 | |||||||
Corporate debt | 34,105 | 205 | (254 | ) | 34,056 | |||||||
Commercial mortgage-backed and other asset-backed | 60,284 | 132 | (731 | ) | 59,685 | |||||||
Total fixed maturity securities available for sale | 113,915 | 474 | (1,226 | ) | 113,163 | |||||||
Equity Securities: | ||||||||||||
Common stocks - Public Utilities | 159 | 25 | (1 | ) | 183 | |||||||
Common stocks - Banks, Trusts and Insurance Companies | 681 | 85 | (9 | ) | 757 | |||||||
Common stocks - Industrial, miscellaneous and all other | 3,443 | 256 | (60 | ) | 3,639 | |||||||
Total equity securities available for sale | 4,283 | 366 | (70 | ) | 4,579 | |||||||
Total securities available for sale | $ | 118,198 | $ | 840 | $ | (1,296 | ) | $ | 117,742 | |||
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):
June 30, 2017 | ||||||||||||||||||||||||||
Less than 12 months | Greater than 12 months | Total | ||||||||||||||||||||||||
No. of Issues | Fair Value of Investments with Unrealized Losses | Gross Un realized Losses | No. of Issues | Fair Value of Investments with Unrealized Losses | Gross Un realized Losses | No. of Issues | Fair Value of Investments with Unrealized Losses | Gross Un realized Losses | ||||||||||||||||||
Fixed Maturity Securities: | ||||||||||||||||||||||||||
U.S. Government obligations | 14 | $ | 6,743 | $ | (43 | ) | — | $ | — | $ | — | 14 | $ | 6,743 | $ | (43 | ) | |||||||||
State and local government | 14 | 3,872 | (72 | ) | 1 | 99 | (2 | ) | 15 | 3,971 | (74 | ) | ||||||||||||||
Corporate debt | 21 | 10,604 | (158 | ) | 2 | 766 | (9 | ) | 23 | 11,370 | (167 | ) | ||||||||||||||
Commercial mortgage and asset-backed | 43 | 32,843 | (572 | ) | 5 | 390 | (2 | ) | 48 | 33,233 | (574 | ) | ||||||||||||||
Total fixed maturity securities available for sale | 92 | 54,062 | (845 | ) | 8 | 1,255 | (13 | ) | 100 | 55,317 | (858 | ) | ||||||||||||||
Equity Securities: | ||||||||||||||||||||||||||
Common stocks | 23 | 1,221 | (137 | ) | 1 | 34 | (9 | ) | 24 | 1,255 | (146 | ) | ||||||||||||||
Total equity securities available for sale | 23 | 1,221 | (137 | ) | 1 | 34 | (9 | ) | 24 | 1,255 | (146 | ) | ||||||||||||||
Total securities | 115 | $ | 55,283 | $ | (982 | ) | 9 | $ | 1,289 | $ | (22 | ) | 124 | $ | 56,572 | $ | (1,004 | ) | ||||||||
10
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
December 31, 2016 | ||||||||||||||||||||||||||
Less than 12 months | Greater than 12 months | Total | ||||||||||||||||||||||||
No. of Issues | Fair Value of Investments with Unrealized Losses | Gross Un realized Losses | No. of Issues | Fair Value of Investments with Unrealized Losses | Gross Un realized Losses | No. of Issues | Fair Value of Investments with Unrealized Losses | Gross Un realized Losses | ||||||||||||||||||
Fixed Maturity Securities: | ||||||||||||||||||||||||||
U.S. Government obligations | 15 | $ | 4,539 | $ | (36 | ) | — | $ | — | $ | — | 15 | $ | 4,539 | $ | (36 | ) | |||||||||
State and local government | 29 | 8,217 | (202 | ) | 1 | 104 | (3 | ) | 30 | 8,321 | (205 | ) | ||||||||||||||
Corporate debt | 22 | 9,031 | (239 | ) | 7 | 3,369 | (15 | ) | 29 | 12,400 | (254 | ) | ||||||||||||||
Commercial mortgage and asset-backed | 59 | 38,048 | (722 | ) | 5 | 802 | (9 | ) | 64 | 38,850 | (731 | ) | ||||||||||||||
Total fixed maturity securities available for sale | 125 | 59,835 | (1,199 | ) | 13 | 4,275 | (27 | ) | 138 | 64,110 | (1,226 | ) | ||||||||||||||
Equity Securities: | ||||||||||||||||||||||||||
Common stock | 76 | 2,472 | (61 | ) | 2 | 66 | (9 | ) | 78 | 2,538 | (70 | ) | ||||||||||||||
Total equity securities available for sale | 76 | 2,472 | (61 | ) | 2 | 66 | (9 | ) | 78 | 2,538 | (70 | ) | ||||||||||||||
Total securities | 201 | $ | 62,307 | $ | (1,260 | ) | 15 | $ | 4,341 | $ | (36 | ) | 216 | $ | 66,648 | $ | (1,296 | ) | ||||||||
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 six months ended June 30, 2017 and 2016.
The Company’s sources of net investment income are as follows (dollars in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Fixed maturity securities | $ | 696 | $ | 570 | $ | 1,297 | $ | 1,156 | |||||||
Equity securities | 25 | 25 | 50 | 51 | |||||||||||
Cash and short-term investments | 16 | 5 | 27 | 7 | |||||||||||
Total investment income | 737 | 600 | 1,374 | 1,214 | |||||||||||
Investment expenses | (74 | ) | (72 | ) | (134 | ) | (149 | ) | |||||||
Net investment income | $ | 663 | $ | 528 | $ | 1,240 | $ | 1,065 | |||||||
11
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 June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Fixed maturity securities: | |||||||||||||||
Gross realized gains | $ | — | $ | 502 | $ | — | $ | 518 | |||||||
Gross realized losses | — | (16 | ) | (7 | ) | (22 | ) | ||||||||
Total fixed maturity securities | — | 486 | (7 | ) | 496 | ||||||||||
Equity securities: | |||||||||||||||
Gross realized gains | — | 94 | 29 | 150 | |||||||||||
Gross realized losses | — | (39 | ) | (30 | ) | (113 | ) | ||||||||
Total equity securities | — | 55 | (1 | ) | 37 | ||||||||||
Total realized gains (losses) | $ | — | $ | 541 | $ | (8 | ) | $ | 533 | ||||||
Proceeds from the sales of debt and equity securities available for sale, maturities and other redemptions (primarily the return of capital) were $13.6 million and $32.9 million for the six months ended June 30, 2017 and 2016, respectively.
The table below summarizes the amortized cost and fair value of available-for-sale fixed maturity securities by contractual maturity at June 30, 2017. 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 | $ | 11,750 | $ | 11,760 | |||
Due after one year through five years | 30,438 | 30,563 | |||||
Due after five years through ten years | 11,389 | 11,540 | |||||
Due after ten years | 7,199 | 7,187 | |||||
Securities with contractual maturities | 60,776 | 61,050 | |||||
Commercial mortgage and asset backed | 55,642 | 55,226 | |||||
Total Fixed maturity securities | $ | 116,418 | $ | 116,276 | |||
At June 30, 2017 and December 31, 2016, the Insurance Company Subsidiaries had an aggregate of $8.2 million and $9.6 million, respectively, on deposit in trust accounts to meet the deposit requirements of various state insurance departments. At June 30, 2017 and December 31, 2016, the Company had $10.5 million and $10.3 million 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 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:
12
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
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 June 30, 2017 and December 31, 2016 (dollars in thousands):
June 30, 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: | |||||||||||||||
Fixed Maturity Securities: | |||||||||||||||
U.S. Government obligations | $ | 8,893 | $ | — | $ | 8,893 | $ | — | |||||||
State and local government | 13,205 | — | 13,205 | — | |||||||||||
Corporate debt | 38,952 | — | 38,952 | — | |||||||||||
Commercial mortgage-backed and other asset-backed | 55,226 | — | 55,226 | — | |||||||||||
Total fixed maturity securities | 116,276 | — | 116,276 | — | |||||||||||
Equity Securities | 4,969 | 4,719 | 250 | — | |||||||||||
Short-term investments | 14,944 | 14,944 | — | — | |||||||||||
Total assets measured at fair value | $ | 136,189 | $ | 19,663 | $ | 116,526 | $ | — | |||||||
Liabilities: | |||||||||||||||
Senior debt | $ | 16,375 | $ | — | $ | 16,375 | $ | — | |||||||
Total Liabilities measured at fair value | $ | 16,375 | $ | — | $ | 16,375 | $ | — | |||||||
13
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
December 31, 2016 | |||||||||||||||
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: | |||||||||||||||
Fixed Maturity Securities: | |||||||||||||||
U.S. Government obligations | $ | 5,903 | $ | — | $ | 5,903 | $ | — | |||||||
State and local government | 13,519 | — | 13,519 | — | |||||||||||
Corporate debt | 34,056 | — | 34,056 | — | |||||||||||
Commercial mortgage-backed and other asset-backed | 59,685 | — | 59,685 | — | |||||||||||
Total fixed maturity securities | 113,163 | — | 113,163 | — | |||||||||||
Equity Securities | 4,579 | 4,469 | 110 | — | |||||||||||
Short-term investments | 10,788 | 10,788 | — | — | |||||||||||
Total assets measured at fair value | $ | 128,530 | $ | 15,257 | $ | 113,273 | $ | — | |||||||
Liabilities: | |||||||||||||||
Senior debt | $ | 17,750 | $ | — | $ | 17,750 | $ | — | |||||||
Total Liabilities measured at fair value | $ | 17,750 | $ | — | $ | 17,750 | $ | — | |||||||
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 14.4% of the fair value of the total investment portfolio as of June 30, 2017.
Level 2 investments include fixed maturity 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 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. The fair value of securities included in the Level 2 category based on the market values obtained from a third party pricing service 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 85.6% of the fair value of the total investment portfolio as of June 30, 2017.
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 for the periods presented. Based on these procedures, the Company did not adjust the prices or quotes provided from independent pricing services, investment managers or consultants.
The Level 2 financial instruments also include our senior debt. The fair value of borrowings under the senior debt, consisting of the revolving credit facility and term loans, approximates its carrying amount because interest is based on a short-term, variable, market-based rate.
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 six months ended June 30, 2017 and 2016, respectively.
14
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
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 six months ended June 30, 2017 and 2016. The activity in deferred policy acquisition costs, net of reinsurance transactions, is as follows (dollars in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Balance at beginning of period | $ | 12,956 | $ | 12,221 | $ | 13,290 | $ | 12,102 | |||||||
Deferred policy acquisition costs | 6,121 | 6,975 | 12,259 | 13,097 | |||||||||||
Amortization of policy acquisition costs | (6,428 | ) | (6,014 | ) | (12,900 | ) | (12,017 | ) | |||||||
Net change | (307 | ) | 961 | (641 | ) | 1,080 | |||||||||
Balance at end of period | $ | 12,649 | $ | 13,182 | $ | 12,649 | $ | 13,182 | |||||||
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 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):
15
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Gross reserves - beginning of period | $ | 62,135 | $ | 38,488 | $ | 54,651 | $ | 35,422 | |||||||
Less: reinsurance recoverables on unpaid losses | 9,125 | 5,015 | 6,658 | 5,405 | |||||||||||
Net reserves - beginning of period | 53,010 | 33,473 | 47,993 | 30,017 | |||||||||||
Add: incurred losses and LAE, net of reinsurance: | |||||||||||||||
Current period | 12,397 | 12,034 | 25,051 | 23,146 | |||||||||||
Prior period | 4,277 | 1,507 | 7,356 | 3,094 | |||||||||||
Total net incurred losses and LAE | 16,674 | 13,541 | 32,407 | 26,240 | |||||||||||
Deduct: loss and LAE payments, net of reinsurance: | |||||||||||||||
Current period | 5,313 | 5,793 | 7,216 | 7,792 | |||||||||||
Prior period | 8,006 | 5,279 | 16,819 | 12,523 | |||||||||||
Total net loss and LAE payments | 13,319 | 11,072 | 24,035 | 20,315 | |||||||||||
Net reserves - end of period | 56,365 | 35,942 | 56,365 | 35,942 | |||||||||||
Plus: reinsurance recoverables on unpaid losses | 10,552 | 5,890 | 10,552 | 5,890 | |||||||||||
Gross reserves - end of period | $ | 66,917 | $ | 41,832 | $ | 66,917 | $ | 41,832 | |||||||
The Company’s incurred losses during the three and six months ended June 30, 2017, include prior-year adverse reserve development of $4.3 million and $7.4 million, respectively. In the second quarter of 2017, there was adverse development of $1.6 million from the commercial liability line of business, $1.3 million from the Florida homeowners line, $613,000 from the commercial property line and $245,000 from the commercial auto line of business. For the six months ended June 30, 2017, there was adverse development of $2.9 million from the commercial liability line of business, $2.3 million from the commercial property line, $1.7 million from the Florida homeowners line, and $329,000 from the commercial auto line of business.
The Company’s incurred losses during the three and six months ended June 30, 2016 include prior-year adverse reserve development of $1.5 million and $3.1 million, respectively. In the second quarter of 2016, there was $695,000 and $613,000 of adverse development in the Florida homeowners and commercial automobile lines, respectively. For the six months ended June 30, 2016, there was adverse development of $1.5 million from the Florida homeowners line and $1.5 million from the commercial automobile line.
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 thousand in both 2017 and 2016. 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, where the policies are written in a state where the Company is not licensed or for other strategic reasons. Assumed premiums are comprised entirely of these arrangements other than where there are premiums assumed from Citizens Property and Casualty Corporation.
The following table presents the effects of such reinsurance and assumption transactions on premiums and losses and LAE (dollars in thousands):
16
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Written premiums: | |||||||||||||||
Direct | $ | 20,719 | $ | 22,533 | $ | 41,619 | $ | 44,133 | |||||||
Assumed | 6,262 | 7,192 | 11,836 | 10,985 | |||||||||||
Ceded | (3,899 | ) | (3,549 | ) | (8,048 | ) | (6,892 | ) | |||||||
Net written premiums | $ | 23,082 | $ | 26,176 | $ | 45,407 | $ | 48,226 | |||||||
Earned premiums: | |||||||||||||||
Direct | $ | 21,960 | $ | 22,574 | $ | 44,020 | $ | 44,815 | |||||||
Assumed | 6,378 | 2,684 | 12,582 | 3,989 | |||||||||||
Ceded | (3,841 | ) | (3,583 | ) | (7,965 | ) | (7,020 | ) | |||||||
Net earned premiums | $ | 24,497 | $ | 21,675 | $ | 48,637 | $ | 41,784 | |||||||
Losses and LAE: | |||||||||||||||
Direct | $ | 16,194 | $ | 13,905 | $ | 32,227 | $ | 27,844 | |||||||
Assumed | 4,830 | 1,447 | 8,704 | 2,356 | |||||||||||
Ceded | (4,350 | ) | (1,811 | ) | (8,524 | ) | (3,960 | ) | |||||||
Net Losses and LAE | $ | 16,674 | $ | 13,541 | $ | 32,407 | $ | 26,240 | |||||||
7. Senior Debt
The Company's senior debt facility ("Credit Facility") is 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"). A summary of the outstanding senior debt is as follows (dollars in thousands):
June 30, 2017 | December 31, 2016 | ||||||
Revolver | $ | 11,000 | $ | 10,500 | |||
Term Note | 1,000 | 1,750 | |||||
2014 Term Note | 4,375 | 5,500 | |||||
Total | $ | 16,375 | $ | 17,750 | |||
The undrawn portion of the Revolver was $6.5 million as of June 30, 2017, and was available to finance working capital, fund other general corporate purposes and provide surplus contributions to the Company's Insurance Company Subsidiaries to support premium growth or strategic acquisitions.
The Credit Facility contains various restrictive covenants that relate to the Company’s shareholders’ equity, premiums-to-statutory capital and surplus ratios, fixed-charge coverage ratios, risk-based capital ratios, and A.M. Best ratings of its Insurance Company Subsidiaries. At June 30, 2017, the Company was in compliance with all of its Credit Facility financial covenants.
8. Shareholders’ Equity
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 over a one-year period. 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 depended on a number of factors, including the market price of the Company’s stock, general market conditions, and other factors. The plan expired on February
17
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
25, 2017. For the six months ended June 30, 2017, the Company had not repurchased or retired any shares of stock. In 2016, the Company repurchased and retired 88,650 shares of stock valued at approximately $625 thousand.
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 June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Balance at beginning of period | $ | (746 | ) | $ | 1,724 | $ | (1,080 | ) | $ | 182 | |||||
Other comprehensive income (loss) before reclassifications | 238 | (308 | ) | 623 | 1,151 | ||||||||||
Less: amounts reclassified from accumulated other comprehensive income (loss) | (1 | ) | (88 | ) | 50 | (171 | ) | ||||||||
Net current period other comprehensive income (loss) | 239 | (220 | ) | 573 | 1,322 | ||||||||||
Balance at end of period | $ | (507 | ) | $ | 1,504 | $ | (507 | ) | $ | 1,504 | |||||
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 June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Net income (loss) | $ | (1,067 | ) | $ | (513 | ) | $ | (2,866 | ) | $ | (2,541 | ) | |||
Weighted average common shares, basic and diluted* | 7,633,069 | 7,594,862 | 7,633,069 | 7,616,821 | |||||||||||
Earnings (loss) per common share, basic and diluted | $ | (0.14 | ) | $ | (0.07 | ) | $ | (0.38 | ) | $ | (0.33 | ) | |||
* The 404,000 nonvested shares of the restricted stock units were anti-dilutive as of June 30, 2017. Therefore, the basic and diluted weighted average common shares are equal for the three and six months ended June 30, 2017.
11. Stock-based Compensation
In 2015, the Company issued 390,352 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 restricted stock unit "RSU" activity (units in thousands):
18
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Number of Units | Weighted Average Grant-Date Fair Value | |||||
Outstanding at December 31, 2015 | 390 | $ | 10.48 | |||
Units granted | — | — | ||||
Units vested | — | — | ||||
Units forfeited | — | — | ||||
Outstanding at June 30, 2016 | 390 | $ | 10.48 | |||
Units granted | 111 | 8.17 | ||||
Units vested | (77 | ) | 10.48 | |||
Units forfeited | (8 | ) | 9.95 | |||
Outstanding at December 31, 2016 | 416 | $ | 9.87 | |||
Units granted | — | — | ||||
Units vested | — | — | ||||
Units forfeited | (12 | ) | 9.87 | |||
Outstanding at June 30, 2017 | 404 | $ | 9.87 | |||
The Company recorded $466,000 and $409,000 of compensation expense related to the RSUs for the six months ended June 30, 2017 and 2016, respectively. The total compensation cost related to the non-vested portion of the restricted stock units which has not been recognized as of June 30, 2017, was $3.2 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 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 maker 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 decision maker, the Chief Executive Officer, reviews a number of financial measures including gross written premiums, net earned premiums, losses and LAE, net of reinsurance recoveries. However, the primary measure used for making decisions about resources to be allocated to an operating segment and assessing 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 other underwriting and operating expenses of the operating segments. Other underwriting and operating expenses primarily include compensation and related benefits for underwriting personnel, licensing of policy issuance and claims systems, rent and utilities. The Company markets, distributes and sells its insurance products primarily through a network of independent agents. All of the Company’s insurance activities are conducted in the United States with a concentration of
19
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
activity in Florida, Michigan, Pennsylvania and Texas. For the six months ended June 30, 2017 and 2016, gross written premiums attributable to these four states were 62% and 70% 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 finance and information technology personnel, and other corporate headquarters expenses, (ii) interest expense on the Company’s senior debt obligations; (iii) depreciation and amortization on property and equipment, and (iv) 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.
The following tables present information by reportable operating segment (dollars in thousands):
Three Months Ended June 30, 2017 | Commercial Lines | Personal Lines | Corporate & Other | Total | ||||||||||||
Gross written premiums | $ | 21,106 | $ | 5,875 | $ | — | $ | 26,981 | ||||||||
Net written premiums | $ | 18,916 | $ | 4,166 | $ | — | $ | 23,082 | ||||||||
Net earned premiums | $ | 20,094 | $ | 4,403 | $ | — | $ | 24,497 | ||||||||
Other income | 158 | 169 | 45 | 372 | ||||||||||||
Segment revenue | 20,252 | 4,572 | 45 | 24,869 | ||||||||||||
Losses and loss adjustment expenses, net | 11,761 | 4,913 | — | 16,674 | ||||||||||||
Policy acquisition costs | 4,997 | 1,431 | — | 6,428 | ||||||||||||
Operating expenses | 2,437 | 589 | 1,344 | 4,370 | ||||||||||||
Segment expenses | 19,195 | 6,933 | 1,344 | 27,472 | ||||||||||||
Segment underwriting gain (loss) | $ | 1,057 | $ | (2,361 | ) | $ | (1,299 | ) | $ | (2,603 | ) | |||||
Net investment income | 663 | 663 | ||||||||||||||
Net realized investment gains (losses) | — | — | ||||||||||||||
Other gains | 750 | 750 | ||||||||||||||
Interest expense | $ | (219 | ) | $ | (219 | ) | ||||||||||
Income (loss) before equity earnings of affiliates and income taxes | $ | (105 | ) | $ | (1,409 | ) | ||||||||||
20
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Three Months Ended June 30, 2016 | Commercial Lines | Personal Lines | Corporate & Other | Total | ||||||||||||
Gross written premiums | $ | 22,821 | $ | 6,904 | $ | — | $ | 29,725 | ||||||||
Net written premiums | $ | 20,548 | $ | 5,628 | $ | — | $ | 26,176 | ||||||||
Net earned premiums | $ | 16,484 | $ | 5,191 | $ | — | $ | 21,675 | ||||||||
Other income | 83 | 187 | 13 | 283 | ||||||||||||
Segment revenue | 16,567 | 5,378 | 13 | 21,958 | ||||||||||||
Losses and loss adjustment expenses, net | 9,344 | 4,197 | — | 13,541 | ||||||||||||
Policy acquisition costs | 4,366 | 1,648 | — | 6,014 | ||||||||||||
Operating expenses | 1,610 | 766 | 2,160 | 4,536 | ||||||||||||
Segment expenses | 15,320 | 6,611 | 2,160 | 24,091 | ||||||||||||
Segment underwriting gain (loss) | $ | 1,247 | $ | (1,233 | ) | $ | (2,147 | ) | $ | (2,133 | ) | |||||
Net investment income | 528 | 528 | ||||||||||||||
Net realized investment gains (losses) | 541 | 541 | ||||||||||||||
Interest expense | (143 | ) | (143 | ) | ||||||||||||
Income (loss) before equity earnings of affiliates and income taxes | $ | (1,221 | ) | $ | (1,207 | ) | ||||||||||
Six Months Ended June 30, 2017 | Commercial Lines | Personal Lines | Corporate & Other | Total | ||||||||||||
Gross written premiums | $ | 42,750 | $ | 10,705 | $ | — | $ | 53,455 | ||||||||
Net written premiums | $ | 38,395 | $ | 7,012 | $ | — | $ | 45,407 | ||||||||
Net earned premiums | $ | 39,782 | $ | 8,855 | $ | — | $ | 48,637 | ||||||||
Other income | 323 | 320 | 83 | 726 | ||||||||||||
Segment revenue | 40,105 | 9,175 | 83 | 49,363 | ||||||||||||
Losses and loss adjustment expenses, net | 24,229 | 8,178 | — | 32,407 | ||||||||||||
Policy acquisition costs | 10,020 | 2,880 | — | 12,900 | ||||||||||||
Operating expenses | 4,909 | 1,159 | 2,832 | 8,900 | ||||||||||||
Segment expenses | 39,158 | 12,217 | 2,832 | 54,207 | ||||||||||||
Segment underwriting gain (loss) | $ | 947 | $ | (3,042 | ) | $ | (2,749 | ) | (4,844 | ) | ||||||
Net investment income | 1,240 | 1,240 | ||||||||||||||
Net realized investment gains (losses) | (8 | ) | (8 | ) | ||||||||||||
Other Gains | 750 | 750 | ||||||||||||||
Interest Expense | $ | (443 | ) | $ | (443 | ) | ||||||||||
Income (loss) before equity earnings of affiliates and income taxes | $ | (1,210 | ) | $ | (3,305 | ) | ||||||||||
21
CONIFER HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended June 30, 2016 | Commercial Lines | Personal Lines | Corporate & Other | Total | ||||||||||||
Gross written premiums | $ | 41,965 | $ | 13,153 | $ | — | $ | 55,118 | ||||||||
Net written premiums | $ | 37,536 | $ | 10,690 | $ | — | $ | 48,226 | ||||||||
Net earned premiums | $ | 31,763 | $ | 10,021 | $ | — | $ | 41,784 | ||||||||
Other income | 182 | 318 | 28 | 528 | ||||||||||||
Segment revenue | 31,945 | 10,339 | 28 | 42,312 | ||||||||||||
Losses and loss adjustment expenses, net | 17,980 | 8,260 | — | 26,240 | ||||||||||||
Policy acquisition costs | 8,752 | 3,265 | — | 12,017 | ||||||||||||
Operating expenses | 3,344 | 1,435 | 3,896 | 8,675 | ||||||||||||
Segment expenses | 30,076 | 12,960 | 3,896 | 46,932 | ||||||||||||
Segment underwriting gain (loss) | $ | 1,869 | $ | (2,621 | ) | $ | (3,868 | ) | (4,620 | ) | ||||||
Net investment income | 1,065 | 1,065 | ||||||||||||||
Net realized investment gains (losses) | 533 | 533 | ||||||||||||||
Interest expense | (300 | ) | (300 | ) | ||||||||||||
Income (loss) before equity earnings of affiliates and income taxes | $ | (2,570 | ) | $ | (3,322 | ) | ||||||||||
22
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Periods Ended June 30, 2017 and 2016
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, 2017 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, 2017 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. We are also licensed to write insurance as an admitted carrier in 41 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. 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. Otherwise, there has been little change in our approach to managing or evaluating these lines.
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 six months ended June 30, 2017, there were no
23
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, 2017.
Executive Overview
The Company reported a net loss of $1.1 million, or $0.14 per share and $2.9 million, or $0.38 per share, for the three and six months ended June 30, 2017, respectively, compared to a net loss of $0.5 million, or $0.07 per share, and $2.5 million, or $0.33, for the same periods in 2016.
Adjusted operating loss, a non-GAAP measure, was $2.1 million, or $0.28 per share, and $3.9 million, or $0.52 per share, for the three and six months ended June 30, 2017, compared to $1.6 million, or $0.22 per share, and $3.7 million, or $0.48 per share, for the same periods in 2016.
Our combined ratio was 110.4% and 109.9% for the three and six months ended June 30, 2017, compared to 109.7% and 110.9% for the same periods in 2016, respectively.
Our net earned premium was up 16.4% for the six months ended June 30, 2017, due to expansion of our commercial lines, which was up 25.2% year over year, and repositioning of our personal lines, which was down 11.6% compared to the same period in the prior year.
24
Results of Operations For The Three Months Ended June 30, 2017 and 2016
The following table summarizes our operating results for the periods indicated (dollars in thousands):
Summary of Operating Results | ||||||||||||||
Three Months Ended June 30, | ||||||||||||||
2017 | 2016 | $ Change | % Change | |||||||||||
Gross written premiums | $ | 26,981 | $ | 29,725 | $ | (2,744 | ) | (9.2 | )% | |||||
Net written premiums | $ | 23,082 | $ | 26,176 | $ | (3,094 | ) | (11.8 | )% | |||||
Net earned premiums | $ | 24,497 | $ | 21,675 | $ | 2,822 | 13.0 | % | ||||||
Other income | 372 | 283 | 89 | 31.4 | % | |||||||||
Losses and loss adjustment expenses, net | 16,674 | 13,541 | 3,133 | 23.1 | % | |||||||||
Policy acquisition costs | 6,428 | 6,014 | 414 | 6.9 | % | |||||||||
Operating expenses | 4,370 | 4,536 | (166 | ) | (3.7 | )% | ||||||||
Underwriting gain (loss) | (2,603 | ) | (2,133 | ) | (470 | ) | 22.0 | % | ||||||
Net investment income | 663 | 528 | 135 | 25.6 | % | |||||||||
Net realized investment gains | — | 541 | (541 | ) | * | |||||||||
Other gains | 750 | — | 750 | * | ||||||||||
Interest expense | 219 | 143 | 76 | 53.1 | % | |||||||||
Income (loss) before equity earnings in affiliate and income taxes | (1,409 | ) | (1,207 | ) | (202 | ) | 16.7 | % | ||||||
Equity earnings (losses) of affiliates, net of tax | 60 | 71 | (11 | ) | (15.5 | )% | ||||||||
Income tax expense (benefit) | (282 | ) | (623 | ) | 341 | * | ||||||||
Net income (loss) | $ | (1,067 | ) | $ | (513 | ) | $ | (554 | ) | 108.0 | % | |||
Underwriting Ratios: | ||||||||||||||
Loss ratio (1) | 67.0 | % | 61.7 | % | ||||||||||
Expense ratio (2) | 43.4 | % | 48.0 | % | ||||||||||
Combined ratio (3) | 110.4 | % | 109.7 | % | ||||||||||
(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. |
(2) | The expense ratio is the ratio, expressed as a percentage, of policy acquisition costs and operating expenses to net earned premiums and other income. |
(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
Earned premiums are earned ratably over the term of the policy, whereas written premiums are reflected on the effective date of the policy. 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 June 30, 2017 and 2016 (dollars in thousands):
25
Summary of Premium Revenue | ||||||||||||||
Three Months Ended June 30, | ||||||||||||||
2017 | 2016 | $ Change | % Change | |||||||||||
Gross written premiums | ||||||||||||||
Commercial lines | $ | 21,106 | $ | 22,821 | $ | (1,715 | ) | (7.5 | )% | |||||
Personal lines | 5,875 | 6,904 | (1,029 | ) | (14.9 | )% | ||||||||
Total | $ | 26,981 | $ | 29,725 | $ | (2,744 | ) | (9.2 | )% | |||||
Net written premiums | ||||||||||||||
Commercial lines | $ | 18,916 | $ | 20,548 | $ | (1,632 | ) | (7.9 | )% | |||||
Personal lines | 4,166 | 5,628 | (1,462 | ) | (26.0 | )% | ||||||||
Total | $ | 23,082 | $ | 26,176 | $ | (3,094 | ) | (11.8 | )% | |||||
Net Earned premiums | ||||||||||||||
Commercial lines | $ | 20,094 | $ | 16,484 | $ | 3,610 | 21.9 | % | ||||||
Personal lines | 4,403 | 5,191 | (788 | ) | (15.2 | )% | ||||||||
Total | $ | 24,497 | $ | 21,675 | $ | 2,822 | 13.0 | % | ||||||
Gross written premiums decreased $2.7 million, or 9.2%, to $27.0 million for the three months ended June 30, 2017, as compared to $29.7 million for the same period in 2016.
Commercial lines gross written premiums decreased $1.7 million, or 7.5%, to $21.1 million in the second quarter of 2017, as compared to $22.8 million for the second quarter of 2016. The decreased gross written premiums were mainly due to the timing of renewals, and are not expected to continue as a trend. Commercial lines gross written premiums did increase by 1.9% for the six months ended June 30, 2017, compared to the same period in prior year.
Personal lines gross written premiums decreased $1.0 million, or 14.9%, to $5.9 million in the second quarter of 2017, as compared to $6.9 million for the same period in 2016. The decrease was the result of management's strategic decision to decrease the Florida homeowners business. Also, as of October 1, 2016, we no longer wrote Texas wind-exposed homeowners products through one agent that represented approximately $7.0 million of 2015 annual premiums. Our low-value dwelling homeowners business, however, continues to expand; it grew by 16.0% during the three months ended June 30, 2017. The Florida homeowners business decreased by 19.2% for the three months ended June 30, 2017, compared to the same period in 2016.
Net written premiums decreased $3.1 million, or 11.8%, to $23.1 million for the three months ended June 30, 2017, as compared to $26.2 million for the same period in 2016. This decrease is consistent with the decrease in gross written premiums for the same period, coupled with an increase in catastrophe reinsurance costs beginning in June 2016.
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. Commission income is also received by the Company’s insurance agencies for writing policies for third party insurance companies. Other income for the three months ended June 30, 2017 increased $89,000, or 31.4%, to $372,000 as compared to $283,000 for the same period in 2016, due to growth in certain programs for which Sycamore is the agent.
Losses and Loss Adjustment Expenses
The tables below detail our losses and loss adjustment expenses (“LAE”) and loss ratios for the three months ended June 30, 2017 and 2016 (dollars in thousands).
26
Three Months Ended June 30, 2017 | Commercial Lines | Personal Lines | Total | ||||||||
Accident year net losses and LAE | $ | 9,308 | $ | 3,089 | $ | 12,397 | |||||
Net (favorable) adverse development | 2,453 | 1,824 | 4,277 | ||||||||
Calendar year net losses and LAE | $ | 11,761 | $ | 4,913 | $ | 16,674 | |||||
Accident year loss ratio | 46.0 | % | 67.6 | % | 49.8 | % | |||||
Net (favorable) adverse development | 12.1 | % | 39.9 | % | 17.2 | % | |||||
Calendar year loss ratio | 58.1 | % | 107.5 | % | 67.0 | % | |||||
Three Months Ended June 30, 2016 | Commercial Lines | Personal Lines | Total | ||||||||
Accident year net losses and LAE | $ | 8,562 | $ | 3,473 | $ | 12,035 | |||||
Net (favorable) adverse development | 782 | 724 | 1,506 | ||||||||
Calendar year net losses and LAE | $ | 9,344 | $ | 4,197 | $ | 13,541 | |||||
Accident year loss ratio | 51.7 | % | 64.5 | % | 54.8 | % | |||||
Net (favorable) adverse development | 4.7 | % | 13.5 | % | 6.9 | % | |||||
Calendar year loss ratio | 56.4 | % | 78.0 | % | 61.7 | % | |||||
Net losses and LAE increased by $3.1 million, or 23.1%, for the three months ended June 30, 2017, as compared to the same period in 2016. The calendar year loss ratios were 67.0% and 61.7% for the three months ended June 30, 2017 and 2016, respectively.
Overall reserve development on prior accident years in the second quarter of 2017 was unfavorable by $4.3 million, or 17.2 percentage points on the loss ratio. This was primarily due to $1.6 million of adverse reserve development in the commercial liability line, $1.3 million from the Florida homeowners line of business, $613,000 from the commercial property line, and $245,000 from the commercial auto line of business.
Total reserve development on prior accident years in the second quarter of 2016 was unfavorable by $1.5 million, or 6.9 percentage points. This was primarily due to $695,000 and $613,000 of adverse reserve development in the Florida homeowners and commercial automobile lines of business, respectively.
Expense Ratio
Our expense ratio is calculated by dividing the sum of policy acquisition costs and other underwriting and operating expenses by the sum of net earned premiums and other income. We use the expense ratio to evaluate the operating efficiency of our consolidated operations and each segment. Costs that cannot be readily identifiable as a direct cost of a segment or product line remain in Corporate and Other for segment reporting purposes.
The table below provides the expense ratio by major component.
27
Three Months Ended June 30, | |||||
2017 | 2016 | ||||
Commercial Lines | |||||
Policy acquisition costs | 24.7 | % | 26.4 | % | |
Operating expenses | 12.0 | % | 9.7 | % | |
Total | 36.7 | % | 36.1 | % | |
Personal Lines | |||||
Policy acquisition costs | 31.3 | % | 30.6 | % | |
Operating expenses | 12.9 | % | 14.2 | % | |
Total | 44.2 | % | 44.8 | % | |
Corporate and Other | |||||
Operating expenses | 5.4 | % | 9.8 | % | |
Total | 5.4 | % | 9.8 | % | |
Consolidated | |||||
Policy acquisition costs | 25.8 | % | 27.4 | % | |
Operating expenses | 17.6 | % | 20.6 | % | |
Total | 43.4 | % | 48.0 | % | |
Our expense ratio decreased 4.6 percentage points in the three months ended June 30, 2017, as compared to the same period in 2016. The decrease in the ratio was mainly due to a continued Company-wide effort to reduce operating expenses and commission rates, as well as an increase in net earned premiums and other income.
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. For the three months ended June 30, 2017 and 2016, the percentage of policy acquisition costs to net earned premiums and other income was 25.8% and 27.4%, respectively. The decrease in the policy acquisition cost ratio was due to improved efficiencies of scale as well as a changing mix of business with lower commission rates.
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 income was 17.6% and 20.6% for the three months ended June 30, 2017 and 2016, respectively. The decrease in the operating expense ratio was primarily due to Company-wide efforts to reduce operating expenses, like tax and audit fees and IT costs, as well as increased net earned premiums and other income. We expect this ratio to trend lower as revenues grow.
Underwriting 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 June 30, 2017 and 2016 (dollars in thousands):
Underwriting Gain (Loss) | ||||||||||||||
Three Months Ended June 30, | ||||||||||||||
2017 | 2016 | $ Change | % Change | |||||||||||
Commercial Lines | $ | 1,057 | $ | 1,247 | $ | (190 | ) | * | ||||||
Personal Lines | (2,361 | ) | (1,233 | ) | (1,128 | ) | (91.5 | )% | ||||||
Corporate and Other | (1,299 | ) | (2,147 | ) | 848 | 39.5 | % | |||||||
Total Underwriting Loss | $ | (2,603 | ) | $ | (2,133 | ) | $ | (470 | ) | (22.0 | )% | |||
*Percentage change is not meaningful
28
Results of Operations For The Six Months Ended June 30, 2017 and 2016
The following table summarizes our operating results for the periods indicated (dollars in thousands):
Summary of Operating Results | ||||||||||||||
Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | $ Change | % Change | |||||||||||
Gross written premiums | $ | 53,455 | $ | 55,118 | $ | (1,663 | ) | (3.0 | )% | |||||
Net written premiums | $ | 45,407 | $ | 48,226 | $ | (2,819 | ) | (5.8 | )% | |||||
Net earned premiums | $ | 48,637 | $ | 41,784 | $ | 6,853 | 16.4 | % | ||||||
Other income | 726 | 528 | 198 | 37.5 | % | |||||||||
Losses and loss adjustment expenses, net | 32,407 | 26,240 | 6,167 | 23.5 | % | |||||||||
Policy acquisition costs | 12,900 | 12,017 | 883 | 7.3 | % | |||||||||
Operating expenses | 8,900 | 8,675 | 225 | 2.6 | % | |||||||||
Underwriting gain (loss) | (4,844 | ) | (4,620 | ) | (224 | ) | 4.8 | % | ||||||
Net investment income | 1,240 | 1,065 | 175 | 16.4 | % | |||||||||
Net realized investment gains (losses) | (8 | ) | 533 | (541 | ) | * | ||||||||
Other gains | 750 | — | 750 | * | ||||||||||
Interest expense | 443 | 300 | 143 | 47.7 | % | |||||||||
Income (loss) before equity earnings in affiliate and income taxes | (3,305 | ) | (3,322 | ) | 17 | (0.5 | )% | |||||||
Equity earnings (losses) of affiliates, net of tax | 164 | 158 | 6 | 3.8 | % | |||||||||
Income tax expense (benefit) | (275 | ) | (623 | ) | 348 | * | ||||||||
Net income (loss) | $ | (2,866 | ) | $ | (2,541 | ) | $ | (325 | ) | 12.8 | % | |||
Underwriting Ratios: | ||||||||||||||
Loss ratio (1) | 65.7 | % | 62.0 | % | ||||||||||
Expense ratio (2) | 44.2 | % | 48.9 | % | ||||||||||
Combined ratio (3) | 109.9 | % | 110.9 | % | ||||||||||
(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. |
(2) | The expense ratio is the ratio, expressed as a percentage, of policy acquisition costs and operating expenses to net earned premiums and other income. |
(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
Earned premiums are earned ratably over the term of the policy, whereas written premiums are reflected on the effective date of the policy. 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 six months ended June 30, 2017 and 2016 (dollars in thousands):
29
Summary of Premium Revenue | ||||||||||||||
Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | $ Change | % Change | |||||||||||
Gross written premiums | ||||||||||||||
Commercial lines | $ | 42,750 | $ | 41,965 | $ | 785 | 1.9 | % | ||||||
Personal lines | 10,705 | 13,153 | (2,448 | ) | (18.6 | )% | ||||||||
Total | $ | 53,455 | $ | 55,118 | $ | (1,663 | ) | (3.0 | )% | |||||
Net written premiums | ||||||||||||||
Commercial lines | $ | 38,395 | $ | 37,536 | $ | 859 | 2.3 | % | ||||||
Personal lines | 7,012 | 10,690 | (3,678 | ) | (34.4 | )% | ||||||||
Total | $ | 45,407 | $ | 48,226 | $ | (2,819 | ) | (5.8 | )% | |||||
Net Earned premiums | ||||||||||||||
Commercial lines | $ | 39,782 | $ | 31,763 | $ | 8,019 | 25.2 | % | ||||||
Personal lines | 8,855 | 10,021 | (1,166 | ) | (11.6 | )% | ||||||||
Total | $ | 48,637 | $ | 41,784 | $ | 6,853 | 16.4 | % | ||||||
Gross written premiums decreased $1.7 million, or 3.0%, to $53.5 million for the six months ended June 30, 2017, as compared to $55.1 million for the same period in 2016. The decrease was driven by the continued strategic reduction of certain personal lines business.
Commercial lines gross written premiums increased $785,000, or 1.9%, to $42.8 million for the six months ended June 30, 2017, as compared to $42.0 million for the same period in 2016. This increase was primarily driven by the small business programs which grew 4.5%, compared to the same period in 2016.
Personal lines gross written premiums decreased $2.4 million, or 18.6%, to $10.7 million for the six months ended June 30, 2017, as compared to $13.2 million for the same period in 2016. The decrease was driven by the reduction in wind-exposed homeowners business which decreased 42.0%, compared to the same period in 2016. The decrease was the result of management's strategic decision to decrease our Florida homeowners business. Moreover, as of October 1, 2016, we no longer wrote Texas wind-exposed homeowners products through one agent that represented approximately $7.0 million of 2015 annual premiums. Our low-value dwelling homeowners business, however, continues to expand; it grew by 21.4% for the six months ended June 30, 2017, respectively. The Florida homeowners business decreased by 17.7% for the six months ended June 30, 2017, compared to the same period in 2016.
Net written premiums decreased $2.8 million, or 5.8%, to $45.4 million for the six months ended June 30, 2017, as compared to $48.2 million for the same period in 2016. This decrease is consistent with the decrease in gross written premiums for the same period, coupled with an increase in catastrophe reinsurance costs beginning in June 2016.
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. Commission income is also received by the Company’s insurance agencies for writing policies for third party insurance companies. Other income for the six months ended June 30, 2017 increased $198,000, or 37.5%, to $726,000 as compared to $528,000 for the same period in 2016. The increase is due to growth in certain programs for which Sycamore is the agent.
Losses and Loss Adjustment Expenses
The tables below detail our losses and LAE and loss ratios for the six months ended June 30, 2017 and 2016 (dollars in thousands).
30
Six months ended June 30, 2017 | Commercial Lines | Personal Lines | Total | ||||||||
Accident year net losses and LAE | $ | 18,942 | $ | 6,109 | $ | 25,051 | |||||
Net (favorable) adverse development | 5,287 | 2,069 | 7,356 | ||||||||
Calendar year net loss and LAE | $ | 24,229 | $ | 8,178 | $ | 32,407 | |||||
Accident year loss ratio | 47.2 | % | 66.6 | % | 50.8 | % | |||||
Net (favorable) adverse development | 13.2 | % | 22.5 | % | 14.9 | % | |||||
Calendar year loss ratio | 60.4 | % | 89.1 | % | 65.7 | % | |||||
Six months ended June 30, 2016 | Commercial Lines | Personal Lines | Total | ||||||||
Accident year net losses and LAE | $ | 16,841 | $ | 6,305 | $ | 23,146 | |||||
Net (favorable) adverse development | 1,139 | 1,955 | 3,094 | ||||||||
Calendar year net loss and LAE | $ | 17,980 | $ | 8,260 | $ | 26,240 | |||||
Accident year loss ratio | 52.7 | % | 61.0 | % | 54.7 | % | |||||
Net (favorable) adverse development | 3.6 | % | 18.9 | % | 7.3 | % | |||||
Calendar year loss ratio | 56.3 | % | 79.9 | % | 62.0 | % | |||||
Net losses and LAE increased by $6.2 million, or 23.5%, for the six months ended June 30, 2017, as compared to the same period in 2016. The calendar year loss ratios were 65.7% and 62.0% for the six months ended June 30, 2017 and 2016, respectively. The 3.7 percentage point increase in our loss ratio was primarily attributable to the reserve strengthening in our commercial liability and commercial property lines of business.
Overall reserve development on prior accident years for the six months ended June 30, 2017 was $7.4 million of adverse development, or 14.9 percentage points on the loss ratio. In the first half of 2017, the commercial liability line had $2.9 million, the commercial property line had $2.3 million and the Florida homeowners line had $1.7 million of reserve development.
Total adverse reserve development on prior accident years in the first half of 2016 was $3.1 million, or 7.3 percentage points. The Florida homeowners and commercial automobile lines of business each had $1.5 million of adverse reserve development.
Expense Ratio
Our expense ratio is calculated by dividing the sum of policy acquisition costs and other underwriting and operating expenses by the sum of net earned premiums and other income. We use the expense ratio to evaluate the operating efficiency of our consolidated operations and each segment. Costs that cannot be readily identifiable as a direct cost of a segment or product line remain in Corporate and Other for segment reporting purposes.
The table below provides the expense ratio by major component.
31
Six Months Ended June 30, | |||||
2017 | 2016 | ||||
Commercial Lines | |||||
Policy acquisition costs | 25.0 | % | 27.4 | % | |
Operating expenses | 12.2 | % | 10.5 | % | |
Total | 37.2 | % | 37.9 | % | |
Personal Lines | |||||
Policy acquisition costs | 31.4 | % | 31.6 | % | |
Operating expenses | 12.6 | % | 13.9 | % | |
Total | 44.0 | % | 45.5 | % | |
Corporate and Other | |||||
Operating expenses | 5.7 | % | 9.2 | % | |
Total | 5.7 | % | 9.2 | % | |
Consolidated | |||||
Policy acquisition costs | 26.2 | % | 28.4 | % | |
Operating expenses | 18.0 | % | 20.5 | % | |
Total | 44.2 | % | 48.9 | % | |
Our expense ratio decreased 4.7% percentage points in the six months ended June 30, 2017, as compared to the same period in 2016. The decrease in the ratio was mainly due to a continued Company-wide effort to reduce operating expenses and commission rates, as well as an increase in net earned premiums and other income.
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. For the six months ended June 30, 2017 and 2016, the percentage of policy acquisition costs to net earned premiums and other income was 26.2% and 28.4%, respectively. The decrease in the policy acquisition cost ratio was due to improved efficiencies of scale as well as a changing mix of business with lower commission rates.
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 income was 18.0% and 20.5% for the six months ended June 30, 2017 and 2016, respectively. The decrease in the operating expense ratio was primarily due to Company-wide efforts to reduce operating expenses, like tax and audit fees and IT costs, as well as an increased net earned premiums and other income base. We expect this ratio to trend lower as revenues grow.
Underwriting 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 six months ended June 30, 2017 and 2016 (dollars in thousands):
Underwriting Gain (Loss) | ||||||||||||||
Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | $ Change | % Change | |||||||||||
Commercial Lines | $ | 947 | $ | 1,869 | $ | (922 | ) | (49.3 | )% | |||||
Personal Lines | (3,042 | ) | (2,621 | ) | (421 | ) | 16.1 | % | ||||||
Corporate and Other | (2,749 | ) | (3,868 | ) | 1,119 | (28.9 | )% | |||||||
Total Underwriting Loss | $ | (4,844 | ) | $ | (4,620 | ) | $ | (224 | ) | 4.8 | % | |||
* Percentage change is not meaningful
32
Investment Income
Net investment income increased by $175,000, or 16.4%, to $1.2 million for the six months ended June 30, 2017, as compared to $1.1 million for the same period in 2016. This increase was the result of growth of the investment portfolio as well as an increase in the tax equivalent book yield. Average invested assets through the second quarter of 2017 were $132.4 million as compared to $125.5 million in 2016, an increase of $6.9 million, or 5.5%. As of June 30, 2017, the average invested asset balance was comprised of 86.7% of fixed maturity securities, 3.6% of equity securities and 9.7% of short term investments, compared to the June 30, 2016 mix of 87.5% of fixed maturity securities, 3.5% of equity securities and 9.0% of short term investments.
The portfolio’s average quality was AA at June 30, 2017 and December 31, 2016. The portfolio produced a tax equivalent book yield of 2.27% and 2.12% for the six months ended June 30, 2017 and 2016, respectively. The average duration of the fixed maturity portfolio was 3.1 years and 3.2 years at June 30, 2017 and December 31, 2016, respectively.
Other Gains
Other gains were $750,000 for the six months ended June 30, 2017, compared to $0 for the same period in 2016. In June of 2017 the Company sold the renewal rights of a portion of the existing low value dwelling book of business to another carrier. The Company will continue writing this line of business in the future.
Interest Expense
Interest expense was $443,000 and $300,000 for the six months ended June 30, 2017 and 2016, respectively. Interest expense increased primarily due to a higher balance on the revolver, as well as higher interest rates due to a 50 basis point increase on the three notes in the fourth quarter of 2016.
Income Tax Expense
The Company had $275,000 and $623,000 of income tax benefit for the six months ended June 30, 2017 and 2016, respectively, which is largely the result of the tax impact of changes in the valuation allowance on its deferred taxes related to changes in unrealized gains.
Liquidity and Capital Resources
Sources and Uses of Funds
At June 30, 2017, we had $25.8 million in cash and short-term investments. Our principal sources of funds, excluding capital raises, are insurance premiums, investment income, proceeds from maturity and sale 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, short-term investments and investment securities balances and the $6.5 million available under our revolving credit line 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 holding company for management, administrative, and information technology services provided to the Insurance Company Subsidiaries by the holding company. Secondarily, the holding company may receive dividends from the Insurance Company Subsidiaries; however, this is not the primary means in which the holding company supports its funding as state insurance laws restrict the ability of our Insurance Company Subsidiaries to declare dividends to the holding company. Generally, the limitations are based on the greater of statutory net income for the preceding year or 10% of statutory surplus at the end of the preceding year. There were no dividends paid from our Insurance Company Subsidiaries during the six months ended June 30, 2017.
Cash Flows
Operating Activities. Cash provided by operating activities for the six months ended June 30, 2017, was $7.6 million as compared to $5.2 million provided by operating activities for the same period in 2016. The increase in cash provided by operations was attributable to the overall growth of the business.
Investing Activities. Cash used in investing activities for the six months ended June 30, 2017, was $7.6 million as compared to $5.3 million for the same period in 2016. The fluctuation in the funds used in routine investing activities correlates to the timing of when the portfolio investments matured and securities were repurchased.
Financing Activities. Cash used in financing activities for the six months ended June 30, 2017, was $1.4 million as compared to $1.5 million provided by financing activities for the same period in 2016. The cash provided by financing activities in 2016 was from net borrowings under debt arrangements, offset by stock repurchases. The cash used in financing activities in 2017 were related to principle repayments on the debt, offset slightly by additional borrowings on the revolver.
Outstanding Debt
33
We are party to a $30.0 million senior credit facility with Comerica Bank which currently is comprised of three parts: a $5.0 million five-year term note ("Term Note") which commenced in October 2013; a $7.5 million five-year term note which commenced in September 2014 ("2014 Term Note"); and a $17.5 million revolving line of credit ("Revolver"). Our total outstanding senior debt at June 30, 2017, was $16.4 million. Our minimum principal and interest payments on our senior debt for the remaining six months of 2017 is estimated to be $1.0 million and $16.3 million for 2018-2019. Refer to Note 7 ~ Senior Debt of the Notes to the consolidated financial statements, for additional information regarding our outstanding debt.
Non-GAAP Financial Measures
Statutory Capital and Surplus
Statutory capital and surplus is a non-GAAP measure. The Company’s insurance subsidiaries’ aggregate statutory capital and surplus was $61.7 million and $62.2 million at June 30, 2017 and December 31, 2016, respectively.
34
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 and other gains, 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 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 June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Net income (loss) | $ | (1,067 | ) | $ | (513 | ) | $ | (2,866 | ) | $ | (2,541 | ) | |||
Net realized gains (losses) and other gains, net of tax | 750 | 541 | 742 | 533 | |||||||||||
Tax effect of investment unrealized gains and losses | 281 | 585 | 281 | 585 | |||||||||||
Adjusted operating income (loss) | $ | (2,098 | ) | $ | (1,639 | ) | $ | (3,889 | ) | $ | (3,659 | ) | |||
Weighted average common shares diluted | 7,633,069 | 7,594,862 | 7,633,069 | 7,616,821 | |||||||||||
Diluted income (loss) per common share: | |||||||||||||||
Net income (loss) per share | $ | (0.14 | ) | $ | (0.07 | ) | $ | (0.38 | ) | $ | (0.33 | ) | |||
Net realized gains (losses) and other gains, net of tax, per share | 0.10 | 0.07 | 0.10 | 0.07 | |||||||||||
Tax effect of investment unrealized gains and losses, per share | 0.04 | 0.08 | 0.04 | 0.08 | |||||||||||
Adjusted operating income (loss) per share | $ | (0.28 | ) | $ | (0.22 | ) | $ | (0.52 | ) | $ | (0.48 | ) | |||
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 fixed income securities that are available for sale and not held for trading purposes. 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 loss or profitability 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.
35
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, as well as, other relevant market rates or price changes. The volatility and liquidity in the markets in which the underlying assets are traded directly influence market risk. The following is a discussion of our primary market risk exposures and how those exposures are currently managed as of June 30, 2017. Our market risk sensitive instruments are primarily related to our fixed-income securities.
Interest Rate Risk
At June 30, 2017, the fair value of our investment portfolio, excluding cash and cash equivalents, was $136.2 million. Our investment portfolio consists principally of investment-grade, fixed-income securities, all of which are classified as available for sale. Accordingly, the primary market risk exposure to our debt securities is interest rate risk. In general, the fair market value of a portfolio of fixed-income securities increases or decreases inversely with changes in market interest rates, while net investment income realized from future investments in fixed-income securities increases or decreases along with interest rates. We attempt to mitigate interest rate risks by investing in securities with varied maturity dates and by managing the duration of our investment portfolio to a defined range of three to four years. The effective duration of our portfolio as of June 30, 2017, was approximately 3.1 years and 3.2 years at December 31, 2016.
The table below illustrates the sensitivity of the fair value of our fixed-income investments, classified as fixed maturity securities and short-term investments, to selected hypothetical changes in interest rates as of June 30, 2017. The selected scenarios are not predictions of future events, but rather illustrate the effect that events may have on the fair value of the fixed-income portfolio and shareholders’ equity (dollars in thousands).
Estimated | Hypothetical Percentage Increase (Decrease) in | ||||||||||||
Hypothetical Change in Interest Rates | Estimated | Change in | Shareholders' | ||||||||||
As of March 31, 2017 | Fair Value | Fair Value | Fair Value | Equity | |||||||||
200 basis point increase | $ | 123,347 | $ | (7,873 | ) | (6.0 | )% | (11.9 | )% | ||||
100 basis point increase | 127,283 | (3,937 | ) | (3.0 | )% | (6.0 | )% | ||||||
No change | 131,220 | — | — | % | — | % | |||||||
100 basis point decrease | 134,894 | 3,674 | 2.8 | % | 5.6 | % | |||||||
200 basis point decrease | 136,994 | 5,774 | 4.4 | % | 8.8 | % | |||||||
Credit Risk
An additional exposure to our fixed-income securities portfolio is credit risk. We manage our credit risk by investing only in investment-grade securities. In addition, we comply with applicable statutory requirements which limit the portion of our total investment portfolio that we can invest in any one security.
We are subject to credit risks with respect to our reinsurers. Although a reinsurer is liable for losses to the extent of the coverage which it assumes, our reinsurance contracts do not discharge our insurance companies from primary liability to each policyholder for the full amount of the applicable policy, and consequently our insurance companies remain obligated to pay claims in accordance with the terms of the policies regardless of whether a reinsurer fulfills or defaults on its obligations under the related reinsurance agreement. To mitigate our credit risk to reinsurance companies, we attempt to select financially strong reinsurers with an A.M. Best rating of “A-” or better and continue to evaluate their financial condition throughout the duration of our agreements.
At June 30, 2017, the net amount due to the Company from reinsurers, including ceded unearned premiums, was $16.6 million. We believe all amounts recorded as due from reinsurers are recoverable.
Effects of Inflation
We do not believe that inflation has a material effect on our results of operations, except for the effect that inflation may have on interest rates and claims costs. We consider the effects of inflation in pricing and estimating reserves for unpaid losses and LAE. The actual effects of inflation on our results are not known until claims are ultimately settled. In addition to general price inflation, we are exposed to a long-term upward trend in the cost of judicial awards for damages.
36
ITEM 4. CONTROLS AND PROCEDURES
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that required information is recorded, processed, summarized and reported within the required timeframe as specified in the SEC’s rules and forms of the SEC. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed is accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Our management, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures at June 30, 2017. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of June 30, 2017.
Changes in Internal Control over Financial Reporting
For the six months ended June 30, 2017, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that have materially affected, or are reasonable likely to materially affect the Company's internal control over financial reporting.
37
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this item is included under Note 12 ~ Commitments and Contingencies of the Notes to the Consolidated Financial Statements of the Company’s Form 10-Q for the six months ended June 30, 2017, which is hereby incorporated by reference.
ITEM 1A. RISK FACTORS
There were no material changes to the risk factors disclosed in our Annual Report on Form 10-K (“Item 1A Risk Factors”) filed with the SEC on March 15, 2017.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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 over a one-year period. 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 depended on a number of factors, including the market price of the Company’s stock, general market conditions, and other factors. The program expired on February 25, 2017.
Issuer purchase of Equity Securities | ||||||||||||||
Period of purchases | Total number of shares purchased | Average price paid per share | Total shares purchased | Total dollars used for stock purchases (in thousands) | ||||||||||
March 2016 | 33,833 | $ | 6.79 | 33,833 | $ | 230 | ||||||||
May 2016 | 32,830 | 6.65 | 66,663 | 219 | ||||||||||
August 2016 | 1,201 | 7.50 | 67,864 | 9 | ||||||||||
September 2016 | 20,786 | 7.96 | 88,650 | 166 | ||||||||||
Total for 2016 | 88,650 | 7.02 | 88,650 | 624 | ||||||||||
Total for the Six Months Ended June 30, 2017 | — | $ | — | 88,650 | $ | 624 | ||||||||
38
ITEM 6. EXHIBITS
Incorporated by Reference | |||||||||
Exhibit Number | Exhibit Description | Form | Period Ending | Exhibit / Appendix Number | Filing Date | ||||
31.1 | Section 302 Certification — CEO | ||||||||
31.2 | Section 302 Certification — CFO | ||||||||
32.1* | Section 906 Certification — CEO | ||||||||
32.2* | Section 906 Certification — CFO | ||||||||
101.INS | XBRL Instance Document | ||||||||
101.SCH | XBRL Taxonomy Extension Schema Document | ||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | ||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase | ||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase | ||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase | ||||||||
* This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CONIFER HOLDINGS, INC. | ||
By: | /s/ Harold J. Meloche | |
Harold J. Meloche | ||
Chief Financial Officer, | ||
Principal Financial Officer, | ||
Principal Accounting Officer | ||
Dated: August 9, 2017
40