Business Overview Conifer Holdings, Inc. (NASDAQ:CNFR) is an insurance holding company that has undergone a significant strategic shift in its business model over the past year. Once primarily focused on underwriting insurance policies across commercial and personal lines, the company has now pivoted to a capital-light managing general agency (MGA) structure, shedding its direct insurance operations to generate liquidity and focus on a commission-based revenue stream.
Conifer was founded in 2009 and initially operated as a specialty commercial and personal lines insurance provider, offering coverage for areas such as commercial property, general liability, liquor liability, commercial auto, and homeowners policies. The company grew steadily over the years, leveraging a network of independent agents to distribute its products across 44 states.
Historically, Conifer organized its operations into three insurance businesses - commercial lines, personal lines, and an agency business. The commercial lines and personal lines focused on underwriting insurance risk, while the agency business provided non-risk bearing revenue through commissions and policy fees.
In 2022, the company faced significant challenges, experiencing substantial losses attributed to strengthening reserves and severe storm activity affecting its Oklahoma homeowners business. As a result, Conifer's insurance subsidiaries fell below minimum capital and surplus requirements, necessitating the submission of action plans to state regulators. These plans included exiting the Oklahoma homeowners business and reducing overall premium volumes.
Despite these challenges, Conifer managed to grow its gross written premiums by 4.2% in 2023 compared to the prior year. The company also saw an 81.6% increase in net investment income, which helped offset some of the underwriting losses. However, Conifer continued to face headwinds, with its combined ratio reaching 135% for the full year 2023, resulting in a net loss of $25.9 million.
In response to these ongoing difficulties, Conifer began implementing a strategic shift away from the capital-intensive insurance underwriting business towards a less risky, fee-based MGA model in 2023. This transition involved the company ceding the majority of its commercial lines book of business to third-party insurers, while retaining only a small portion of its specialty homeowners policies in Texas, Illinois, and Indiana.
The culmination of this strategic pivot came in August 2024, when Conifer completed the $45 million sale of its wholly-owned insurance agency subsidiary, Conifer Insurance Services (CIS), to Bishop Street Underwriters. This divestiture marked Conifer's exit from the direct insurance underwriting operations that had historically been the core of its business model.
On August 30, 2024, Nicholas Petcoff resigned from his role as Chief Executive Officer and director. Brian Roney, previously the Company's President, was appointed as the new Chief Executive Officer at that time.
Financial Performance Conifer's financial results in recent years have been impacted by the challenges inherent in the insurance underwriting business, including reserve strengthening, elevated catastrophe losses, and difficult market conditions. In 2023, the company reported a net loss of $25.9 million, driven by a combined ratio of 135% for the full year.
However, the company's shift towards the MGA model has begun to yield positive results. In the first nine months of 2024, Conifer reported an adjusted operating loss of $9.6 million, a significant improvement from the $8.5 million adjusted operating loss in the same period of 2023. The company's expense ratio also improved, declining from 36.3% in the first nine months of 2023 to 35.2% in the corresponding period of 2024.
In the third quarter of 2024, Conifer reported revenue of $16 million and a net income of $53.3 million. The significant increase in net income was primarily due to a $61 million gain on the sale of its insurance agency operations, which was completed in August 2024. This gain offset an adjusted operating loss of $7.4 million or $0.60 per share for the quarter.
Conifer's total gross written premiums for the third quarter of 2024 were $15.1 million, representing a 60.9% decrease compared to the $38.6 million recorded in the same period of 2023. This significant decline was largely attributable to an 85.9% drop in commercial lines gross written premiums, from $28.5 million in Q3 2023 to just $4.0 million in Q3 2024, as the company shifted its commercial business to third-party insurers.
Net earned premiums also decreased 39.1% year-over-year, from $24.0 million in Q3 2023 to $14.6 million in Q3 2024, driven by the reduction in commercial lines business. The company's underwriting combined ratio was 143.1% in Q3 2024, compared to 120.8% in the prior-year period, primarily due to adverse loss development in the commercial liability lines of business, particularly the Security Guard program that the company ceased writing in September 2023.
Liquidity The sale of CIS in August 2024 provided Conifer with $46.6 million in cash proceeds, which the company used to pay off all of its $9.3 million in outstanding senior secured debt and redeem its $6.0 million in preferred stock. This deleveraging has strengthened Conifer's balance sheet and liquidity position, with the company reporting $53.6 million in cash, cash equivalents, and short-term investments as of September 30, 2024.
As of September 30, 2024, Conifer had $32.39 million in cash and cash equivalents. The company's debt/equity ratio stood at 0.3358 as of the same date, reflecting its improved financial position following the debt repayment and preferred stock redemption.
Product Segments Conifer operates in two main product segments: commercial lines and personal lines.
The commercial lines segment historically offered coverage for commercial property, commercial liability, commercial automobiles, and workers' compensation. These insurance policies were sold to targeted small and mid-sized businesses. However, the company has significantly reduced its commercial lines business going forward, with minimal commercial lines premium volume expected in the near future.
The personal lines segment offers homeowners insurance and dwelling fire insurance products, primarily comprised of low-value dwelling insurance tailored for owners of lower valued homes. This specialty homeowners insurance product line is primarily offered in Illinois, Indiana, and Texas. The company's personal lines gross written premiums increased 10.1% year-over-year in the third quarter of 2024, reaching $11.1 million, up from $10.1 million in the same period of 2023. This growth was driven by organic expansion in the Texas and Midwest homeowners business, which offset the company's exit from the Oklahoma homeowners market.
Geographic Markets While Conifer does not provide a detailed breakdown of revenue or performance by geographic market, it is noted that the company's revenues are primarily derived from premiums earned from its insurance operations in the U.S., with a concentration of activity in Texas, Michigan, Oklahoma, and Indiana. In mid-2024, the company exited the Oklahoma business, further focusing its operations on its core markets.
Risks and Challenges While Conifer's strategic shift to the MGA model has shown early signs of progress, the company faces several key risks and challenges going forward:
1. Reliance on Third-Party Relationships: Conifer now relies entirely on its relationships with CIS and Sycamore Specialty Underwriters (SSU) to distribute its insurance products. The loss of either of these key partners could have a significant impact on the company's premium volume and revenue.
2. Regulatory Capital Requirements: Conifer's insurance subsidiaries have struggled to maintain adequate regulatory capital levels in recent years, falling below critical thresholds. The company will need to carefully manage its capital position to ensure compliance with state insurance regulations.
3. Adverse Reserve Development: Conifer has experienced significant adverse reserve development in its commercial lines business, particularly in the discontinued Security Guard program. The company may face ongoing challenges in accurately estimating its loss reserves.
4. Concentration Risk: With the sale of CIS, Conifer's business is now heavily concentrated in the Texas and Midwest homeowners markets, making it vulnerable to regional catastrophe events and economic conditions in those areas.
5. Delisting Concerns: Conifer's stock has faced potential delisting risks due to its declining stockholders' equity, which fell below the minimum $2.5 million requirement for continued listing on the Nasdaq Capital Market. The company will need to maintain compliance with Nasdaq's listing rules to avoid potential delisting.
Outlook Conifer's transition to the MGA model is still in its early stages, and the company's success will depend on its ability to effectively manage the risks and challenges outlined above. The sale of CIS has provided the company with much-needed liquidity to shore up its balance sheet and focus on its core homeowners business.
Going forward, Conifer's financial performance will be heavily influenced by the sustainability of its relationships with CIS and SSU, its ability to maintain adequate regulatory capital, and its success in managing adverse reserve development and concentration risks. Investors will also closely monitor the company's efforts to remain in compliance with Nasdaq's listing requirements.
Despite the significant changes to its business model, Conifer remains committed to its specialty insurance focus and is positioning itself as a capital-light, commission-driven MGA player in the markets it serves. The company's ability to effectively execute this strategic transformation will be a key determinant of its long-term success.
The recent leadership change, with Brian Roney taking over as CEO, may bring new perspectives and strategies to the company as it navigates this transitional period. Conifer's future performance will likely depend on its ability to grow its personal lines business, particularly in its core markets of Texas, Illinois, and Indiana, while successfully managing the wind-down of its commercial lines operations.