ifer (CNFR) - 2020 Q2 - Quarterly Report

Part I — Financial Information This section presents the company's financial statements, management's analysis, market risk disclosures, and internal controls Financial Statements Total assets increased to $250.0 million, with Q2 2020 net income of $1.5 million and H1 2020 net loss narrowing Consolidated Balance Sheets Total assets increased to $250.0 million, driven by debt securities, with liabilities and shareholders' equity also rising Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 (Unaudited) | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $250,013 | $247,265 | | Total investments | $170,616 | $169,732 | | Cash and cash equivalents | $4,812 | $7,464 | | Total Liabilities | $206,733 | $204,540 | | Unpaid losses and loss adjustment expenses | $106,734 | $107,246 | | Debt | $38,842 | $35,824 | | Total Shareholders' Equity | $43,280 | $42,725 | Consolidated Statements of Operations Q2 2020 net income of $1.5 million reversed prior-year loss, with H1 2020 net loss narrowing to $3.2 million Statement of Operations Summary (in thousands, except per share data) | Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $25,300 | $22,781 | $46,886 | $47,084 | | Net Earned Premiums | $21,758 | $21,349 | $43,775 | $43,036 | | Losses and LAE, net | $11,945 | $14,382 | $26,214 | $28,838 | | Total Expenses | $23,930 | $25,657 | $50,278 | $50,735 | | Net Income (Loss) | $1,505 | ($2,884) | ($3,220) | ($3,564) | | EPS (basic and diluted) | $0.16 | ($0.34) | ($0.34) | ($0.42) | Consolidated Statements of Comprehensive Income (Loss) Total comprehensive income improved to $6.5 million in Q2 2020 and $96,000 in H1 2020, driven by investment gains Comprehensive Income (Loss) Summary (in thousands) | Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Income (Loss) | $1,505 | ($2,884) | ($3,220) | ($3,564) | | Other Comprehensive Income (Loss) | $5,015 | $1,336 | $3,316 | $3,033 | | Total Comprehensive Income (Loss) | $6,520 | ($1,548) | $96 | ($531) | Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity increased to $43.3 million, primarily due to other comprehensive income offsetting the net loss - Total shareholders' equity increased to $43,280 thousand at June 30, 2020, from $42,725 thousand at December 31, 2019[21] - The change in equity during the first six months of 2020 was primarily influenced by a net loss of $3,220 thousand, offset by other comprehensive income of $3,316 thousand[21] Consolidated Statements of Cash Flows Net cash used in operations increased to $4.6 million in H1 2020, with financing activities providing $2.8 million Cash Flow Summary (in thousands) | Activity | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | ($4,601) | ($223) | | Net cash provided by (used in) investing activities | ($861) | $4,459 | | Net cash provided by financing activities | $2,810 | $5,387 | | Net increase (decrease) in cash | ($2,652) | $9,623 | | Cash at end of period | $4,812 | $20,415 | Notes to Consolidated Financial Statements Notes detail accounting policies, investment portfolio, debt, segment performance, and COVID-19 impacts - The company is engaged in selling property and casualty insurance products through three business segments: commercial lines, personal lines, and agency business[29] - The company's investment portfolio, valued at $170.6 million, consists mainly of available-for-sale debt securities, with no other-than-temporary impairment loss recorded for the period[35][37] - For the six months ended June 30, 2020, the company experienced $6.7 million in prior-year adverse reserve development, primarily from commercial lines[50] - Total debt outstanding was $38.8 million as of June 30, 2020, including senior unsecured notes, subordinated notes, a line of credit, and a $2.7 million Paycheck Protection Program (PPP) loan received in April 2020[54][59] - The Commercial Lines segment is the largest contributor to premiums, with $49.0 million in gross written premiums for the first six months of 2020[74] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q2 2020 net income to improved business mix and lower claims, with premium growth despite adverse reserve development Executive Overview Q2 2020 net income of $1.5 million and improved 100.5% combined ratio reflect better business mix and lower commercial claims - Reported net income of $1.5 million, or $0.16 per share, for Q2 2020, compared to a net loss of $2.9 million, or ($0.34) per share, in Q2 2019[83] - The underwriting combined ratio improved to 100.5% for Q2 2020 from 113.0% in Q2 2019[83] - Commercial lines experienced low claims activity during Q2 due to COVID-19, as business shutdowns reduced the potential for liability losses[83] Results of Operations - Three Months Ended June 30, 2020 and 2019 Q2 2020 gross written premiums grew 9.4% to $27.5 million, with loss ratio improving to 54.6% despite adverse reserve development Q2 Operating Results Highlights (in thousands) | Metric | Q2 2020 | Q2 2019 | % Change | | :--- | :--- | :--- | :--- | | Gross written premiums | $27,545 | $25,169 | 9.4% | | Net earned premiums | $21,758 | $21,349 | 1.9% | | Losses and LAE, net | $11,945 | $14,382 | (16.9)% | | Underwriting gain (loss) | ($728) | ($3,002) | 75.7% | | Net income (loss) | $1,505 | ($2,884) | N/A | - The calendar year loss ratio improved to 54.6% in Q2 2020 from 67.1% in Q2 2019[97] - Incurred losses for Q2 2020 included $3.0 million of adverse prior-year reserve development, mainly from commercial auto lines in 2017 and 2018[97] Results of Operations - Six Months Ended June 30, 2020 and 2019 H1 2020 gross written premiums grew 6.6% to $52.6 million, with net loss narrowing and loss ratio improving despite adverse reserve development H1 Operating Results Highlights (in thousands) | Metric | H1 2020 | H1 2019 | % Change | | :--- | :--- | :--- | :--- | | Gross written premiums | $52,629 | $49,385 | 6.6% | | Net earned premiums | $43,775 | $43,036 | 1.7% | | Losses and LAE, net | $26,214 | $28,838 | (9.1)% | | Underwriting gain (loss) | ($3,670) | ($5,261) | 30.2% | | Net income (loss) | ($3,220) | ($3,564) | N/A | - The calendar year loss ratio improved to 59.6% in H1 2020 from 66.8% in H1 2019[112] - Incurred losses for H1 2020 included $6.8 million of adverse prior-year reserve development, with $6.7 million from Commercial lines[112] Liquidity and Capital Resources The company maintains $15.7 million in liquid assets, with H1 2020 cash used in operations at $4.6 million, offset by financing activities - At June 30, 2020, the company had $15.7 million in cash, cash equivalents and short-term investments[120] - Cash used in operating activities increased to $4.6 million in H1 2020 from $0.2 million in H1 2019, mainly due to higher cash paid on losses[121] - Cash from financing activities decreased to $2.8 million in H1 2020 from $5.4 million in H1 2019, as a $5.0 million equity issuance in 2019 was not repeated, though partially offset by new borrowings in 2020[121] Non-GAAP Financial Measures The company provides non-GAAP measures like Adjusted Operating Income to supplement GAAP results, with Q2 2020 adjusted operating loss at $461,000 - The company's insurance subsidiaries' aggregate statutory capital and surplus, a non-GAAP measure, was $59.8 million at June 30, 2020[122] Reconciliation of Net Income (Loss) to Adjusted Operating Income (Loss) (in thousands) | Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $1,505 | ($2,884) | ($3,220) | ($3,564) | | Exclusions (net of tax) | ($1,966) | ($2,713) | $83 | ($5,282) | | Adjusted operating income (loss) | ($461) | ($5,597) | ($3,143) | ($9,844) | Quantitative and Qualitative Disclosures about Market Risk Primary market risk is interest rate exposure on the $170.6 million debt securities portfolio, with credit risk from reinsurers also noted - The primary market risk is interest rate risk on the debt securities portfolio, which had a fair value of $170.6 million and an effective duration of 3.5 years as of June 30, 2020[128] Interest Rate Sensitivity of Debt Portfolio (in thousands) | Hypothetical Change in Interest Rates | Estimated Change in Fair Value | Hypothetical % Change in Fair Value | | :--- | :--- | :--- | | 200 basis point increase | ($10,223) | (6.48)% | | 100 basis point increase | ($5,096) | (3.23)% | | 100 basis point decrease | $2,287 | 1.45% | - The company is subject to credit risk from reinsurers, with a net amount due of $30.5 million as of June 30, 2020, believed to be fully recoverable[129] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[133] - No material changes were made to the company's internal control over financial reporting during the second quarter of 2020[134] Part II — Other Information This section covers legal proceedings, risk factors, equity sales, exhibits, and signatures related to the report Legal Proceedings The company faces various claims and lawsuits in the ordinary course of business, with no material loss expected beyond accrued amounts - The company is subject to various claims and lawsuits arising in the ordinary course of business, for which it establishes reserves for unpaid losses and LAE[68] - Management does not believe that any material loss exceeding accrued amounts will result from current legal proceedings[68][137] Risk Factors New risks from COVID-19 include adverse impacts on operations, financial performance, asset values, and potential regulatory actions - The COVID-19 pandemic could adversely impact business performance, leading to higher claims, reduced premiums, and negative effects on the investment portfolio[138] - There is a risk of governmental or judicial actions, such as retroactively altering insurance contracts to cover pandemic-related business interruption losses, which the company believes would be unconstitutional[139] - The shift to remote work places increased demands on IT systems and infrastructure, posing a risk to operational efficiency and productivity[140] Unregistered Sales of Equity Securities and Use of Proceeds In June 2019, the company issued $5.0 million in common stock via private placement to accredited investors for growth capital - In June 2019, the company issued $5.0 million of common stock (1,176,471 shares) at $4.25 per share in a private placement to accredited investors, mainly board members[141] - The proceeds from the private placement were used for growth capital in the company's specialty core commercial business segments[141] Exhibits This section lists exhibits filed with the Form 10-Q, including debt agreement amendments and CEO/CFO certifications - Filed exhibits include amendments to debt agreements with The Huntington National Bank, CEO/CFO certifications, and XBRL data files[144] Signatures The Form 10-Q report was signed on August 12, 2020, by Harold J. Meloche, the company's Chief Financial Officer - The report was signed on August 12, 2020, by Harold J. Meloche, the company's CFO[148]