ifer (CNFR) - 2019 Q4 - Annual Report

PART I ITEM 1. BUSINESS Conifer Holdings, Inc. is an insurance holding company providing property and casualty products across 50 states, focusing on specialty lines and under-served markets - Conifer Holdings, Inc. operates through wholly-owned subsidiaries including Conifer Insurance Company (CIC), Red Cedar Insurance Company (RCIC), White Pine Insurance Company (WPIC), American Colonial Insurance Services, and Sycamore Insurance Agency, Inc. (SIA)[7] - The Company sells property and casualty insurance products across commercial lines, personal lines, and wholesale agency businesses[9] - The Company is authorized as an E&S carrier in 45 states and an admitted carrier in 42 states, offering products in all 50 states[9] - Revenues are primarily from earned premiums, supplemented by investment income, installment fees, policy issuance fees, and wholesale agency commissions[9] - The Company targets under-served markets such as hospitality, artisan contractors, security services, and owners of lower-valued homes[9][10][15] Gross Written Premium by Segment (2017-2019, in thousands) | Segment | 2019 ($) | 2019 (%) | 2018 ($) | 2018 (%) | 2017 ($) | 2017 (%) | |:-----------|:---------|:---------|:---------|:---------|:---------|:---------| | Commercial | 94,391 | 93% | 97,694 | 94% | 92,112 | 81% | | Personal | 7,462 | 7% | 6,674 | 6% | 22,172 | 19% | | Total | 101,853 | 100% | 104,368 | 100% | 114,284 | 100% | Gross Written Premiums by State (2017-2019, in thousands) | State | 2019 ($) | 2019 (%) | 2018 ($) | 2018 (%) | 2017 ($) | 2017 (%) | |:-------------------|:---------|:---------|:---------|:---------|:---------|:---------| | Michigan | 19,346 | 19.0% | 19,822 | 19.0% | 21,099 | 18.5% | | Florida | 16,993 | 16.7% | 23,389 | 22.4% | 26,562 | 23.1% | | Texas | 8,236 | 8.1% | 6,509 | 6.2% | 12,910 | 11.3% | | New York | 7,955 | 7.8% | 3,845 | 3.7% | 3,095 | 2.7% | | California | 7,037 | 6.9% | 5,691 | 5.5% | 2,218 | 1.9% | | Pennsylvania | 6,015 | 5.9% | 6,503 | 6.2% | 8,859 | 7.8% | | Ohio | 4,129 | 4.1% | 4,025 | 3.9% | 3,850 | 3.4% | | Indiana | 3,937 | 3.9% | 3,914 | 3.8% | 4,356 | 3.8% | | Colorado | 3,044 | 3.0% | 2,835 | 2.7% | 2,998 | 2.6% | | New Jersey | 2,051 | 2.0% | 4,884 | 4.7% | 3,960 | 3.5% | | Montana | 1,945 | 1.9% | 2,433 | 2.3% | 2,409 | 2.1% | | All Other States | 21,165 | 20.7% | 20,518 | 19.6% | 21,968 | 19.3% | | Total | 101,853 | 100.0% | 104,368 | 100.0% | 114,284 | 100.0% | - The Company increased focus on core commercial lines while deemphasizing wind-exposed personal lines in Florida, Texas, and Hawaii to rebalance its portfolio[11] - As of December 31, 2019, investments were primarily fixed income with an average credit rating of 'AA' and a duration-to-worst average of 3.0 years[15] - The Company employed 147 full-time employees as of December 31, 2019, with no collective bargaining agreements[39] ITEM 1A. RISK FACTORS The Company faces risks from reserve adequacy, underwriting accuracy, market competition, holding company structure, investment volatility, rating downgrades, IT security, catastrophes, agent reliance, and regulatory changes - Actual incurred losses may exceed loss and loss adjustment expense (LAE) reserves, potentially reducing net income and shareholders' equity[45][47] - Inaccurate underwriting and pricing, influenced by data reliability and regulatory constraints, could adversely affect profitability and competitiveness[47] - The Company operates in a highly competitive environment, risking market share loss to larger, more diversified rivals during intense price competition[47][49] - As a holding company, debt obligations and dividend payments depend on distributions from Insurance Company Subsidiaries, which are restricted by state insurance laws[49] - The investment portfolio is subject to market and credit risks, including defaults and impairments, which could adversely impact financial condition and ratings[51] - A decline in financial strength ratings, such as A.M. Best B++ for CIC and WPIC or Kroll BBB+, could reduce new business and increase reinsurance costs[53][55] - Increased IT security threats and computer crimes pose risks to systems, data confidentiality, and operations, potentially leading to reputational damage and substantial costs[55][57] - Severe weather and catastrophes are unpredictable, causing significant losses, especially given geographic concentration in certain states[57][72] - The Company relies heavily on a select group of independent agents, with top agencies accounting for 33% of commercial and 27% of personal gross written premiums in 2019, posing credit and continuity risks[57] - Extensive state and federal regulations, including capital and surplus requirements (RBC), can restrict business objectives and lead to non-compliance penalties[59][61] - The Notes are structurally subordinated to subsidiary indebtedness, giving subsidiary creditors priority over Note holders regarding subsidiary assets[83] ITEM 1B. UNRESOLVED STAFF COMMENTS There are no unresolved staff comments to report - No unresolved staff comments[90] ITEM 2. PROPERTIES The Company leases office spaces in Michigan, Florida, and Pennsylvania, which are considered adequate for current operational needs - The Company leases office space in Birmingham and Southfield, Michigan; Jacksonville, Orlando, and Miami, Florida; and Somerset, Pennsylvania[91] - Current facilities are considered adequate, with additional or substitute space expected to be available as needed[91] ITEM 3. LEGAL PROCEEDINGS The Company is involved in ordinary course legal proceedings, with management expecting no material adverse effect on financial position, operating results, or liquidity - The Company is party to legal proceedings arising in the ordinary course of business[92] - Management believes the outcome of these matters will not materially adversely affect consolidated financial position, operating results, or liquidity[92] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the Company - Mine Safety Disclosures are not applicable[93] PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Conifer Holdings' common stock trades on Nasdaq, with no anticipated cash dividends; the Company conducted stock repurchases and private placements in recent years - Conifer Holdings, Inc.'s common stock is traded on the Nasdaq under the symbol 'CNFR'[98] Common Stock High and Low Sale Prices (2018-2019, in US dollars) | Period | High ($) | Low ($) | |:-----------------|:---------|:--------| | 2019 | | | | First Quarter | 4.86 | 3.70 | | Second Quarter | 4.80 | 3.42 | | Third Quarter | 4.00 | 3.20 | | Fourth Quarter | 4.50 | 3.50 | | 2018 | | | | First Quarter | 6.85 | 5.15 | | Second Quarter | 6.40 | 5.60 | | Third Quarter | 7.20 | 5.60 | | Fourth Quarter | 5.90 | 3.06 | - The Parent Company has not historically paid and does not anticipate paying cash dividends on its common stock for the foreseeable future[99] - As of March 12, 2020, there were 29 shareholders of record for the common stock[102] - The Board authorized a stock repurchase program in December 2018; in 2019, 154,208 shares were repurchased for approximately $638,000, and in 2018, 8,053 shares for $52,000[103] - In June 2019, $5.0 million of common equity (1,176,471 shares at $4.25/share) was issued via private placement for growth capital; in September 2017, $5.0 million (800,000 shares at $6.25/share) was issued to strengthen the balance sheet and cover ADC costs[104] ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA This section presents selected consolidated historical financial data for 2015-2019, including operating results, balance sheet data, and underwriting ratios, derived from audited statements Selected Consolidated Operating Results (2015-2019, in thousands) | Operating Results | 2019 ($) | 2018 ($) | 2017 ($) | 2016 ($) | 2015 ($) | |:-----------------------------------|:---------|:---------|:---------|:---------|:---------| | Gross written premiums | 101,853 | 104,368 | 114,284 | 114,923 | 93,750 | | Ceded written premiums | (14,129) | (15,282) | (23,044) | (14,994) | (14,076) | | Net written premiums | 87,724 | 89,086 | 91,240 | 99,929 | 79,674 | | Net earned premiums | 89,089 | 93,811 | 91,729 | 89,627 | 66,765 | | Net investment income | 4,031 | 3,336 | 2,728 | 2,173 | 1,902 | | Net realized investment gains | 1,196 | 61 | 70 | 1,365 | 285 | | Change in fair value of equity securities | (427) | 121 | — | — | — | | Other gains (losses) | — | — | 750 | (400) | 104 | | Other income | 2,109 | 1,582 | 1,560 | 1,118 | 1,667 | | Total revenue | 95,998 | 98,911 | 96,837 | 93,883 | 70,723 | | Losses and loss adjustment expenses, net | 59,744 | 62,515 | 73,917 | 59,003 | 38,882 | | Policy acquisition costs | 24,911 | 25,534 | 26,245 | 25,280 | 16,183 | | Operating expenses | 17,582 | 17,683 | 17,367 | 17,596 | 14,806 | | Interest expense | 2,882 | 2,644 | 1,362 | 647 | 769 | | Total expenses | 105,119 | 108,376 | 118,891 | 102,526 | 70,640 | | Income (loss) before income taxes | (9,121) | (9,465) | (22,054) | (8,643) | 83 | | Equity earnings (losses) in affiliates, net of tax | 386 | 290 | 65 | 129 | (52) | | Income tax expense (benefit) | (913) | 52 | (447) | (77) | 48 | | Net income (loss) | (7,822) | (9,227) | (21,542) | (8,437) | (17) | | Net income (loss) for Conifer | (7,822) | (9,227) | (21,542) | (8,437) | 64 | | Net income (loss) allocable to common shareholders | (7,822) | (9,227) | (21,542) | (8,437) | (476) | | Net income (loss) per share, basic and diluted | (0.88) | (1.08) | (2.74) | (1.11) | (0.09) | | Weighted average common shares outstanding, basic and diluted | 8,880,107| 8,543,876| 7,867,344| 7,618,588| 5,369,960| Selected Consolidated Balance Sheet Data (2015-2019, in thousands) | Balance Sheet Data | 2019 ($) | 2018 ($) | 2017 ($) | 2016 ($) | 2015 ($) | |:-------------------------------------------|:---------|:---------|:---------|:---------|:---------| | Cash and invested assets | 177,196 | 150,894 | 169,518 | 141,023 | 130,427 | | Reinsurance recoverables | 27,734 | 34,745 | 24,539 | 7,498 | 7,044 | | Total assets | 247,265 | 232,752 | 239,032 | 203,701 | 177,927 | | Unpaid losses and loss adjustment expenses | 107,246 | 92,807 | 87,896 | 54,651 | 35,422 | | Unearned premiums | 51,503 | 52,852 | 57,672 | 58,126 | 47,916 | | Debt | 35,824 | 33,502 | 29,027 | 17,750 | 12,750 | | Total liabilities | 204,540 | 190,589 | 186,206 | 135,907 | 100,665 | | Total shareholders' equity attributable to Conifer | 42,725 | 42,163 | 52,826 | 67,794 | 77,262 | Selected Consolidated Other Data and Underwriting Ratios (2015-2019) | Other Data / Underwriting Ratios | 2019 | 2018 | 2017 | 2016 | 2015 | |:---------------------------------|:---------|:---------|:---------|:---------|:---------| | Shareholders' equity per common share outstanding | $4.45 | $4.97 | $6.20 | $8.88 | $10.11 | | Regulatory capital and surplus | 59,561 | 63,993 | 62,451 | 62,189 | 71,153 | | Loss ratio | 66.8% | 66.4% | 79.9% | 65.0% | 56.8% | | Expense ratio | 44.0% | 45.9% | 44.8% | 47.2% | 45.3% | | Combined ratio | 110.8% | 112.3% | 124.7% | 112.2% | 102.1% | ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section analyzes the Company's financial condition and operations for 2017-2019, covering premium trends, income, expenses, underwriting, investments, debt, liquidity, and regulatory compliance - The Company reported a net loss of $7.8 million ($0.88 per share) in 2019, compared to $9.2 million ($1.08 per share) in 2018, and $21.5 million ($2.74 per share) in 2017[107][132] - Adjusted operating loss (non-GAAP) was $15.1 million ($1.69 per share) in 2019, compared to $3.7 million ($0.44 per share) in 2018, and $22.8 million ($2.90 per share) in 2017[130][132] - The 2019 results were significantly impacted by $10.6 million of adverse development, primarily from commercial lines ($7.6 million) and personal lines ($3.0 million), mostly related to 2017 and 2016 accident years[132][144] - The $5.7 million deferred gain from the Adverse Development Cover (ADC) as of December 31, 2018, was fully utilized in 2019[132][133] - Gross written premiums decreased by 2.4% to $101.9 million in 2019, while personal lines gross written premiums increased by 11.8% to $7.5 million due to low-value dwelling business[140] - Net investment income increased by 20.8% to $4.0 million in 2019, primarily due to an increase in average invested assets[152] - Interest expense increased by 9.0% to $2.9 million in 2019, following 2018 debt restructuring that included issuing $25.3 million in senior unsecured notes[153] - Cash provided by operating activities increased by $32.4 million to $15.4 million in 2019, a significant increase from $17.0 million cash used in 2018, mainly due to increased cash from reinsurers for ceded losses, including $12.5 million from the ADC[181] - As of December 31, 2019, outstanding debt totaled $35.8 million, comprising $25.3 million in senior unsecured notes, $10.5 million in subordinated notes, and $2.0 million drawn on a $10.0 million line of credit, all in compliance with covenants[185][300] Forward-Looking Statements This section discusses forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially - The report contains forward-looking statements based on management's judgment, subject to factors, risks, and uncertainties that could cause actual results to differ materially[111] - The Company undertakes no obligation to publicly update any forward-looking statement, except as required by law[111] Business Overview Conifer Holdings is an insurance holding company offering specialty commercial and personal products across 50 states, with revenues from premiums and investments - Conifer Holdings is an insurance holding company marketing specialty commercial and personal products, authorized as E&S in 45 states and admitted in 42 states, offering products in all 50 states[112] - Revenues are primarily from earned premiums, investment income, and other income, while expenses include losses, LAE, agent commissions, and underwriting/administrative costs[112] - Operations are organized into commercial lines (property, liability, auto, workers' comp), personal lines (homeowners, dwelling fire, de-emphasizing wind-exposed areas), and wholesale agency business[112] Critical Accounting Policies and Estimates This section details critical accounting estimates, including loss and LAE reserves, investment valuation, and income taxes, which require significant judgment - Critical accounting estimates, including loss and LAE reserves, investment valuation, and income taxes, require significant judgment and are crucial for financial reporting[114] - Loss and LAE reserves represent management's best estimate of unpaid amounts, comprising case reserves and IBNR reserves, not discounted for time value[115] - IBNR reserves are determined using various actuarial methods and diagnostic measures, with weights applied based on data maturity and judgment[117] Ratio of IBNR Reserves to Total Reserves (Net of Reinsurance Recoverables) as of December 31, 2019 (in thousands) | Line of Business | Case Reserves ($) | IBNR Reserves ($) | Total Reserves ($) | Ratio of IBNR to Total Reserves | |:-----------------|:------------------|:------------------|:-------------------|:--------------------------------| | Commercial Lines | 43,299 | 38,501 | 81,800 | 47.1% | | Personal Lines | 1,802 | 1,065 | 2,867 | 37.1% | | Total Lines | 45,101 | 39,566 | 84,667 | 46.7% | - A 2019 sensitivity analysis on net reserves showed potential changes in pre-tax income and shareholders' equity based on varying loss development factors, but no material impact on operating results or liquidity is expected[121][122] - Debt securities are classified as available-for-sale and reported at fair value, equity securities at fair value with changes in net income, and other equity investments at cost less impairment[123][125] - Income tax expense, deferred tax assets/liabilities, and unrecognized tax benefits are based on management's assessment, with the Tax Cuts and Jobs Act of 2017 reducing the corporate tax rate from 34% to 21%[126] - As of December 31, 2019, the Company had federal and state NOL carryforwards of $60.0 million and $17.7 million, respectively, with a $13.6 million valuation allowance against gross deferred tax assets[128] Non-GAAP Financial Measures This section defines non-GAAP adjusted operating income (loss) and per share amounts, which exclude specific non-recurring or non-cash items - Adjusted operating income (loss) and per share are non-GAAP measures excluding net realized investment gains/losses, tax effects of reform and unrealized gains, and ADC deferred gain capitalization/amortization[130] Reconciliation of Net Income to Adjusted Operating Income (2017-2019, in thousands) | Item | 2019 ($) | 2018 ($) | 2017 ($) | |:------------------------------------------------------------------|:---------|:---------|:---------| | Net income (loss) | (7,822) | (9,227) | (21,542) | | Less: Net realized investment and other gains, net of tax | 1,196 | 61 | 820 | | Less: Effect of tax law change | — | — | 63 | | Less: Tax effect of unrealized gains and losses on investments | 824 | — | 356 | | Less: Change in fair value of equity securities, net of tax | (427) | 121 | — | | Less: Net (increase) decrease in deferred gain on losses ceded to ADC, net of tax | 5,677 | (5,677) | — | | Adjusted operating income (loss) | (15,092) | (3,732) | (22,781) | | Weighted average common shares, diluted | 8,880,107| 8,543,876| 7,867,344| | Diluted (loss) per common share: | | | | | Net income (loss) | (0.88) | (1.08) | (2.74) | | Net realized investment and other gains, net of tax | 0.13 | 0.01 | 0.10 | | Effect of tax law change | 0.09 | — | 0.01 | | Tax effect of unrealized gains and losses on investments | — | — | 0.05 | | Change in fair value of equity securities, net of tax | (0.05) | 0.01 | — | | Net (increase) decrease in deferred gain on losses ceded to ADC, net of tax | 0.64 | (0.66) | — | | Adjusted operating (loss) per share | (1.69) | (0.44) | (2.90) | Executive Overview This overview highlights key strategic actions and financial outcomes for 2019 and prior years, including commercial lines expansion and net losses - In 2019, the Company expanded commercial lines in successful areas, reduced exposure in challenging areas, and repositioned personal lines[132] - Commercial lines gross written premiums decreased by 3.4% to $94.4 million in 2019, while personal lines gross written premiums increased by 11.8% to $7.5 million[132] - The 2019 net loss of $7.8 million was mainly driven by $10.6 million of adverse development and the full utilization of the $5.7 million deferred gain from the ADC[132] - Debt was restructured in 2018 by issuing $25.3 million in public senior unsecured notes and paying down $19.5 million of subordinated notes[132] - The 2017 results were primarily affected by adverse development on prior-year reserves, the cost of the ADC, and losses from Hurricanes Irma and Harvey[132] Adverse Development Cover This section details the Adverse Development Cover (ADC) purchased in 2017 to mitigate prior-year adverse development, fully utilized by 2019 - The Company purchased an Adverse Development Cover (ADC) in 2017, covering up to $17.5 million in excess of stated reserves for accident years 2005-2016[133] - In 2018, $10.3 million of adverse development was ceded to the ADC, with $4.6 million amortized in 2018 and the remaining $5.7 million recognized in 2019[133] - As of December 31, 2019, the deferred gain from the ADC was fully utilized[133] Results of Operations - 2019 Compared to 2018 This section compares 2019 and 2018 operating results, detailing changes in premiums, income, expenses, underwriting, investments, and interest expense Summary Operating Results (2018 vs. 2019, in thousands) | Item | 2019 ($) | 2018 ($) | Change ($) | % Change | |:-----------------------------------|:---------|:---------|:-----------|:---------| | Gross written premiums | 101,853 | 104,368 | (2,515) | (2.4%) | | Net written premiums | 87,724 | 89,086 | (1,362) | (1.5%) | | Net earned premiums | 89,089 | 93,811 | (4,722) | (5.0%) | | Other income | 2,109 | 1,582 | 527 | 33.3% | | Losses and loss adjustment expenses, net | 59,744 | 62,515 | (2,771) | (4.4%) | | Policy acquisition costs | 24,911 | 25,534 | (623) | (2.4%) | | Operating expenses | 17,582 | 17,683 | (101) | (0.6%) | | Underwriting gain (loss) | (11,039) | (10,339) | (700) | * | | Net investment income | 4,031 | 3,336 | 695 | 20.8% | | Net realized investment gains | 1,196 | 61 | 1,135 | * | | Change in fair value of equity securities | (427) | 121 | (548) | * | | Interest expense | 2,882 | 2,644 | 238 | 9.0% | | Income (loss) before income taxes | (9,121) | (9,465) | 344 | * | | Equity earnings (losses) in affiliates, net of tax | 386 | 290 | 96 | 33.1% | | Income tax expense (benefit) | (913) | 52 | (965) | * | | Net income (loss) | (7,822) | (9,227) | 1,405 | * | | Underwriting Ratios: | | | | | | Loss ratio | 66.8% | 66.4% | | | | Expense ratio | 44.0% | 45.9% | | | | Combined ratio | 110.8% | 112.3% | | | Summary of Premium Revenue (2018 vs. 2019, in thousands) | Premium Type | 2019 ($) | 2018 ($) | Change ($) | % Change | |:-------------------|:---------|:---------|:-----------|:---------| | Gross written premiums | | | | | | Commercial lines | 94,391 | 97,694 | (3,303) | (3.4%) | | Personal lines | 7,462 | 6,674 | 788 | 11.8% | | Total | 101,853 | 104,368 | (2,515) | (2.4%) | | Net written premiums | | | | | | Commercial lines | 81,966 | 87,038 | (5,072) | (5.8%) | | Personal lines | 5,758 | 2,048 | 3,710 | 181.2% | | Total | 87,724 | 89,086 | (1,362) | (1.5%) | | Net Earned premiums | | | | | | Commercial lines | 83,858 | 83,352 | 506 | 0.6% | | Personal lines | 5,231 | 10,459 | (5,228) | (50.0%) | | Total | 89,089 | 93,811 | (4,722) | (5.0%) | - Other income increased by $527,000 (33.3%) to $2.1 million in 2019, primarily due to additional commission income and increased fees[141] Losses and Loss Adjustment Expenses & Ratios (2018 vs. 2019, in thousands) | Item | 2019 ($) | Commercial Lines (%) | Personal Lines ($) | Personal Lines (%) | Total ($) | Total (%) | |:-----------------------------------|:---------|:---------------------|:-------------------|:-------------------|:----------|:----------| | Accident year net losses and LAE | 45,690 | 54.3% | 3,502 | 65.2% | 49,192 | 55.0% | | Net (favorable) adverse development | 7,566 | 9.0% | 2,986 | 55.5% | 10,552 | 11.8% | | Calendar year net loss and LAE | 53,256 | 63.3% | 6,488 | 120.7% | 59,744 | 66.8% | | 2018 | | | | | | | | Accident year net losses and LAE | 46,816 | 56.1% | 6,665 | 62.3% | 53,481 | 56.8% | | Net (favorable) adverse development | 6,249 | 7.5% | 2,785 | 26.1% | 9,034 | 9.6% | | Calendar year net loss and LAE | 53,065 | 63.6% | 9,450 | 88.4% | 62,515 | 66.4% | - The expense ratio decreased by 1.9 percentage points to 44.0% in 2019, primarily due to lower operating and reinsurance costs[148] Underwriting Gain (Loss) by Segment (2018 vs. 2019, in thousands) | Segment | 2019 ($) | 2018 ($) | Change ($) | |:---------------------------|:---------|:---------|:-----------| | Commercial Lines | (5,574) | (7,858) | 2,284 | | Personal Lines | (4,091) | (3,700) | (391) | | Total Underwriting | (9,665) | (11,558) | 1,893 | | Wholesale Agency | 830 | 1,432 | (602) | | Corporate | (1,064) | (213) | (851) | | Eliminations | (1,140) | — | (1,140) | | Total underwriting income (loss) | (11,039) | (10,339) | (700) | - Net investment income increased by $695,000 (20.8%) to $4.0 million in 2019, driven by a $6.0 million increase in average invested assets to $154.9 million[152] - Interest expense was $2.9 million in 2019, up from $2.6 million in 2018, reflecting the issuance of $25.3 million in public senior unsecured notes in late 2018[153] - The Company reported a deferred tax benefit of $940,000 in 2019, compared to $0 in 2018, with a $13.6 million valuation allowance recorded against net deferred tax assets as of December 31, 2019[154] Results of Operations - 2018 Compared to 2017 This section compares 2018 and 2017 operating results, detailing changes in premiums, income, expenses, underwriting, investments, and interest expense Summary Operating Results (2017 vs. 2018, in thousands) | Item | 2018 ($) | 2017 ($) | Change ($) | % Change | |:-----------------------------------|:---------|:---------|:-----------|:---------| | Gross written premiums | 104,368 | 114,284 | (9,916) | (8.7%) | | Net written premiums | 89,086 | 91,240 | (2,154) | (2.4%) | | Net earned premiums | 93,811 | 91,729 | 2,082 | 2.3% | | Other income | 1,582 | 1,560 | 22 | 1.4% | | Losses and loss adjustment expenses, net | 62,515 | 73,917 | (11,402) | (15.4%) | | Policy acquisition costs | 25,534 | 26,245 | (711) | (2.7%) | | Operating expenses | 17,683 | 17,367 | 316 | 1.8% | | Underwriting gain (loss) | (10,339) | (24,240) | 13,901 | * |\ | Net investment income | 3,336 | 2,728 | 608 | 22.3% | | Net realized investment gains | 61 | 70 | (9) | (12.86%) |\ | Change in fair value of equity securities | 121 | — | 121 | * |\ | Other gains (losses) | — | 750 | (750) | * |\ | Interest expense | 2,644 | 1,362 | 1,282 | 94.1% | | Income (loss) before income taxes | (9,465) | (22,054) | 12,589 | * |\ | Income tax expense (benefit) | 52 | (447) | 499 | * |\ | Equity earnings (losses) in affiliates, net of tax | 290 | 65 | 225 | * |\ | Net income (loss) | (9,227) | (21,542) | 12,315 | * |\ | Underwriting Ratios: | | | | | | Loss ratio | 66.4% | 79.9% | | | | Expense ratio | 45.9% | 44.8% | | | | Combined ratio | 112.3% | 124.7% | | | Summary of Premium Revenue (2017 vs. 2018, in thousands) | Premium Type | 2018 ($) | 2017 ($) | Change ($) | % Change | |:-------------------|:---------|:---------|:-----------|:---------| | Gross written premiums | | | | | | Commercial lines | 97,694 | 92,112 | 5,582 | 6.1% | | Personal lines | 6,674 | 22,172 | (15,498) | (69.9%) | | Total | 104,368 | 114,284 | (9,916) | (8.7%) | | Net written premiums | | | | | | Commercial lines | 87,038 | 78,217 | 8,821 | 11.3% | | Personal lines | 2,048 | 13,023 | (10,975) | (84.3%) | | Total | 89,086 | 91,240 | (2,154) | (2.4%) | | Net Earned premiums | | | | | | Commercial lines | 83,352 | 76,786 | 6,566 | 8.6% | | Personal lines | 10,459 | 14,943 | (4,484) | (30.0%) | | Total | 93,811 | 91,729 | 2,082 | 2.3% | - Other income remained flat at $1.6 million for both 2018 and 2017[163] Losses and Loss Adjustment Expenses & Ratios (2017 vs. 2018, in thousands) | Item | 2018 ($) | Commercial Lines (%) | Personal Lines ($) | Personal Lines (%) | Total ($) | Total (%) | |:-----------------------------------|:---------|:---------------------|:-------------------|:-------------------|:----------|:----------| | Accident year net losses and LAE | 46,816 | 56.1% | 6,665 | 62.4% | 53,481 | 56.8% | | Net (favorable) adverse development | 6,249 | 7.5% | 2,785 | 26.1% | 9,034 | 9.6% | | Calendar year net loss and LAE | 53,065 | 63.6% | 9,450 | 88.5% | 62,515 | 66.4% | | 2017 | | | | | | | | Accident year net losses and LAE | 48,520 | 63.0% | 15,937 | 102.7% | 64,457 | 69.7% | | Net (favorable) adverse development | 7,181 | 9.3% | 2,279 | 14.7% | 9,460 | 10.2% | | Calendar year net loss and LAE | 55,701 | 72.3% | 18,216 | 117.4% | 73,917 | 79.9% | - The expense ratio increased by 1.1 percentage points to 45.9% in 2018, primarily due to lower net earned premium in personal lines[169] Underwriting Gain (Loss) by Segment (2017 vs. 2018, in thousands) | Segment | 2018 ($) | 2017 ($) | Change ($) | |:---------------------------|:---------|:---------|:-----------| | Commercial Lines | (7,858) | (11,645) | 3,787 | | Personal Lines | (3,700) | (11,176) | 7,476 | | Total Underwriting | (11,558) | (22,821) | 11,263 | | Wholesale Agency | 1,432 | 1,046 | 386 | | Corporate | (213) | (2,465) | 2,252 | | Eliminations | — | — | — | | Total underwriting income (loss) | (10,339) | (24,240) | 13,901 | - Net investment income increased by $608,000 (22.3%) to $3.3 million in 2018, due to higher interest rates and a 4.1% increase in average invested assets to $148.9 million[174] - Interest expense increased by 94.1% to $2.6 million in 2018, from $1.4 million in 2017, due to increased outstanding debt from the issuance of $25.3 million in public senior unsecured notes[176] - The Tax Cuts and Jobs Act of 2017 reduced the corporate tax rate from 34% to 21%; 2018 measurement period adjustments had no effect on the effective tax rate[177] Liquidity and Capital Resources This section discusses the Company's liquidity and capital resources, including cash, investments, fund sources/uses, cash flow, and debt compliance - As of December 31, 2019, the Company had $38.9 million in cash, cash equivalents, and short-term investments, with funds primarily from premiums and investments used for claims and expenses[180] - The Parent Company's ability to service debt and pay expenses relies primarily on intercompany service fees from Insurance Company Subsidiaries, with dividends as a secondary, restricted source[180] - Cash provided by operating activities increased by $32.4 million to $15.4 million in 2019, mainly due to a $28.4 million increase in cash from reinsurers, including $12.5 million from ADC[181] - Cash used in investing activities was $25.0 million in 2019, compared to $12.2 million provided in 2018, reflecting increased portfolio investment[184] - Cash provided by financing activities was $6.3 million in 2019, up from $3.7 million in 2018, largely due to a $5.0 million common stock issuance in 2019[184] - As of December 31, 2019, outstanding debt included $25.3 million in senior unsecured notes (6.75% interest, maturing Sept 2023), $10.5 million in subordinated notes, and $2.0 million drawn on a $10.0 million line of credit, with all debt covenants in compliance[185] Contractual Obligations and Commitments as of December 31, 2019 (in thousands) | Obligation | Total ($) | Less than one year ($) | One to three years ($) | Three to five years ($) | More than five years ($) | |:---------------------------------|:----------|:-----------------------|:-----------------------|:------------------------|:-------------------------| | Senior unsecured notes | 25,300 | — | — | 25,300 | — | | Interest on senior unsecured notes | 6,404 | 1,708 | 3,415 | 1,281 | — | | Subordinated notes | 10,500 | — | — | — | 10,500 | | Interest on subordinated notes | 22,969 | 788 | 1,575 | 2,231 | 18,375 | | Lease obligations | 3,498 | 864 | 1,598 | 1,036 | — | | Line of credit | 2,000 | 2,000 | — | — | — | | Loss and loss adjustment expense | 107,246 | 40,495 | 47,132 | 14,791 | 4,828 | | Purchase Obligations | 990 | 360 | 630 | — | — | | Total | 178,907 | 46,215 | 54,350 | 44,639 | 33,703 | Regulatory and Rating Issues This section addresses the Company's compliance with regulatory capital requirements and performance relative to NAIC IRIS ratios, indicating no regulatory actions - All Insurance Company Subsidiaries exceeded minimum Risk-Based Capital (RBC) thresholds at December 31, 2019, complying with NAIC requirements[188] - As of December 31, 2019, trailing twelve-month statutory combined gross written and net written premium leverage ratios were 1.7 to 1.0 and 1.5 to 1.0, respectively[188] - The Company's Insurance Company Subsidiaries have not experienced any regulatory actions due to NAIC's Insurance Regulatory Information System (IRIS) ratio results[188] Recently Issued Accounting Pronouncements This section outlines recently issued accounting pronouncements, including ASU No. 2016-13 on credit losses and ASU No. 2018-13 on fair value measurement - ASU No. 2016-13, effective after December 15, 2022, will replace the 'incurred loss' methodology with one based on expected credit losses[253] - ASU No. 2018-13, effective after December 15, 2019, modifies fair value disclosure requirements but is not expected to have a material impact[253] ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary market risks are interest rate and credit risk from investments and reinsurance, managed through portfolio diversification, credit quality, and reinsurer selection - The Company's primary market risk is interest rate risk, mainly from its investment-grade, fixed-income securities portfolio, which is sensitive to market interest rate changes[192] - Interest rate risk is mitigated by investing in securities with varied maturities and managing the portfolio's duration to a defined range of three to four years (3.0 years at December 31, 2019)[192] Sensitivity of Fair Value of Investments to Hypothetical Interest Rate Changes (as of December 31, 2019, in thousands) | Hypothetical Change in Interest Rates | Estimated Fair Value ($) | Estimated Change in Fair Value ($) | Hypothetical Increase/Decrease in Fair Value (%) | Percentage (Decrease) in Shareholders' Equity (%) | |:--------------------------------------|:-------------------------|:-----------------------------------|:-------------------------------------------------|:--------------------------------------------------| | 200 basis point increase | 152,599 | (9,827) | (6.05)% | (23.0)% | | 100 basis point increase | 157,569 | (4,857) | (2.99)% | (11.4)% | | No change | 162,426 | — | — | —% | | 100 basis point decrease | 166,698 | 4,272 | 2.63% | 10.0% | | 200 basis point decrease | 170,028 | 7,602 | 4.68% | 17.8% | - Credit risk in the debt securities portfolio is managed by investing only in investment-grade securities and complying with statutory limits[193] - Credit risk with reinsurers is mitigated by selecting financially strong reinsurers (A.M. Best rating of 'A-' or better) and monitoring their financial condition; reinsurance recoverables were $29.0 million at December 31, 2019[193] - Inflation's effects on interest rates and claims costs are considered in pricing and reserve estimation, though actual effects are unknown until claims are settled[196] ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This section refers to the financial statements and supplementary data, including auditor's report, consolidated statements, and notes, detailed in Item 15 of this Form 10-K - Financial statements and supplementary data are referenced in Item 15 of this Annual Report on Form 10-K[197] ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There are no changes in or disagreements with accountants on accounting and financial disclosure to report - No changes in or disagreements with accountants on accounting and financial disclosure[197] ITEM 9A. CONTROLS AND PROCEDURES Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019; the Company is exempt from auditor attestation - Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of December 31, 2019[198] - Management concluded that the Company's internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework[199] - As an emerging growth company, the Company is not required to include an attestation report from its registered public accounting firm regarding internal control over financial reporting[200] ITEM 9B. OTHER INFORMATION There is no other information to report under this item - No other information to report[201] PART III ITEMS 10 to 14 Information for Items 10-14 is omitted and incorporated by reference from the definitive Proxy Statement, to be filed within 120 days after fiscal year-end - Information for Items 10 through 14 is omitted and incorporated by reference from the definitive Proxy Statement, to be filed within 120 days after fiscal year-end[204] - This includes information on directors, executive officers, corporate governance, compensation, security ownership, and related party transactions[204] PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES This section lists financial statements, schedules, and exhibits filed as part of the Form 10-K, including the auditor's report, consolidated statements, and notes - The report includes the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Operations, Comprehensive Income (Loss), Changes in Shareholders' Equity, and Cash Flows for 2017-2019[207][211] - Financial Statement Schedules I, III, and VI are omitted as their information is included elsewhere, while Schedule II and Schedule V are included[207] - A comprehensive Exhibit Index lists various documents filed or incorporated by reference into this Form 10-K, including corporate governance, incentive plans, and debt agreements[209][352][353][354] SIGNATURES The report is signed by the Chairman and CEO, CFO and Treasurer, and other directors of Conifer Holdings, Inc. as of March 12, 2020 - The report is signed by James G. Petcoff, Chairman and CEO, and Harold J. Meloche, CFO and Treasurer, as of March 12, 2020[359][361] - Additional signatures include those of other directors, confirming the report's submission pursuant to the Securities Exchange Act of 1934[360][361]