Business Overview and History
Conifer Holdings, Inc. (CNFR) is an insurance holding company that has undergone a significant transformation in recent years, pivoting its business model to focus on commission-based revenue rather than traditional risk-bearing operations. The company’s strategic shift has aimed to enhance its profitability and create a more sustainable, scalable business structure.
Conifer Holdings was incorporated in 2009 and is headquartered in Troy, Michigan. The company markets and services specialty commercial and specialty personal insurance products. As of September 30, 2024, Conifer was authorized to write insurance as an excess and surplus lines carrier in 44 states, including the District of Columbia, and was licensed to write insurance as an admitted carrier in 42 states, including the District of Columbia.
Historically, Conifer organized its operations into three insurance businesses: commercial insurance lines, personal lines, and an agency business. The commercial and personal lines referred to underwriting operations that took insurance risk, while the agency business referred to non-risk insurance business. Through its commercial insurance lines, Conifer offered coverage for commercial property, commercial liability, commercial automobiles, and workers’ compensation. Its personal insurance lines offered homeowners insurance and dwelling fire insurance products.
In 2022, Conifer experienced a string of losses, particularly in its commercial liability lines of business. This led to adverse reserve development and a weakening of the company’s capital position. As a result, in 2023 Conifer’s insurance company subsidiaries fell below minimum regulatory capital requirements in their respective states of domicile. The company was required to submit action plans to its regulators to remediate the capital deficiencies.
In 2023, Conifer made a strategic decision to transition its business model away from the traditional insurance underwriting approach. The company began to shift its commercial lines operations to a managing general agency (MGA) structure, where it would utilize the underwriting capacity of third-party insurers with higher financial strength ratings. This move allowed Conifer to focus on generating commission-based revenue rather than bearing the direct risk on its balance sheet.
The company’s personal lines business, which mainly consisted of specialty homeowners insurance, continued to be written through Conifer’s own insurance subsidiaries. However, in 2024, the company faced significant challenges in its Oklahoma homeowners book of business, which was heavily impacted by severe weather events. As a result, Conifer made the decision to exit the Oklahoma market and concentrate its personal lines efforts on the Midwest and Texas regions.
Financials and Operational Metrics
Conifer’s financial performance has been volatile in recent years, reflecting the challenges associated with its strategic transition. In 2023, the company reported a net loss of $25.9 million, with a net loss allocable to common shareholders of $25.9 million, or $2.12 per diluted share. This was largely driven by adverse reserve developments, particularly in the commercial liability lines of business, as well as the weather-related losses in the Oklahoma homeowners segment.
The company’s gross written premiums decreased by 51.1% in 2023 compared to the previous year, declining from $119.4 million to $58.4 million. This significant drop was a direct result of Conifer’s strategic shift away from its traditional underwriting model, with commercial lines gross written premiums decreasing by 74.5% and personal lines gross written premiums increasing by 27.9%.
Conifer’s expense ratio improved during this period, declining from 36.3% in 2022 to 35.2% in 2023, as the company implemented cost-cutting measures and streamlined its operations. However, the company’s combined ratio remained elevated at 120.0% in 2023, reflecting the challenges it faced in managing its loss experience.
For the most recent fiscal year (2023), Conifer reported revenue of $96.42 million, a net loss of $25.90 million, and negative operating cash flow and free cash flow of $13.39 million. In the most recent quarter (Q3 2024), the company reported revenue of $16.02 million and a net income of $53.29 million. However, this net income figure was primarily driven by a $61.23 million gain on the sale of the company’s insurance agency operations, Conifer Insurance Services (CIS), in August 2024. Excluding this gain, the company reported an adjusted operating loss of $7.35 million in Q3 2024.
The company’s operating cash flow and free cash flow improved to $6.72 million in Q3 2024, reflecting the positive impact of the CIS sale and the company’s ongoing strategic transition.
Liquidity and Capital
As of September 30, 2024, Conifer had $32.39 million in cash and cash equivalents, providing a solid liquidity position. The company’s debt-to-equity ratio stood at 0.33, indicating a relatively manageable level of leverage. Conifer’s statutory capital and surplus for its insurance subsidiaries was $32.8 million as of December 31, 2023, which fell below regulatory requirements, prompting the company to submit action plans to remediate the capital deficiencies.
In August 2024, Conifer completed the sale of its insurance agency operations, Conifer Insurance Services, to Bishop Street Underwriters for $46.6 million in cash, plus up to $25 million in contingent consideration. This transaction allowed Conifer to pay off all of its outstanding senior secured debt and redeem its preferred stock, while also providing additional capital to support its insurance subsidiaries.
Business Segments and Strategic Shift
Conifer operates in two main business segments: Commercial Lines and Personal Lines. The company has undergone a significant strategic shift in recent years, particularly in its Commercial Lines segment.
Commercial Lines: Historically, Conifer offered a variety of specialty commercial insurance products, including commercial property, general liability, liquor liability, and commercial automobile coverage, targeted towards small to mid-sized businesses. However, the company has significantly reduced its commercial lines writings and now expects minimal commercial lines business going forward. This strategic shift was driven by Conifer’s decision to utilize third-party insurers for its commercial lines underwriting capacity rather than underwriting the business through its own Insurance Company Subsidiaries.
In the third quarter of 2024, Conifer’s commercial lines gross written premiums decreased by 85.9% to $4.02 million, down from $28.49 million in the same period of 2023. This significant decline was due to Conifer’s MGA shifting business away from the company’s Insurance Company Subsidiaries to the third-party insurers. Substantially all of Conifer’s commercial lines business has moved or is in the process of moving to other insurance carriers, and the company does not expect to continue writing a significant amount of commercial lines in the near future.
Personal Lines: Conifer’s personal lines segment primarily offers homeowners insurance and dwelling fire insurance products, with a focus on providing specialty homeowners coverage tailored for owners of lower-valued homes. This specialty homeowners insurance is offered in Illinois, Indiana, and Texas.
In the third quarter of 2024, Conifer’s personal lines gross written premiums increased by 10.1% to $11.07 million, up from $10.06 million in the same period of 2023. This growth was driven by organic expansion of the low-value dwelling book of business in Texas and the Midwest region, which offset the company’s exit from the Oklahoma homeowners market. Going forward, Conifer plans to continue writing the Midwest and Texas homeowners programs, though it does not expect significant additional growth in this segment.
Risks and Challenges
Conifer’s transition to a commission-based revenue model is not without its risks and challenges. The company’s reliance on third-party insurers for its commercial lines business exposes it to potential changes in underwriting appetite or capacity, which could impact its ability to maintain or grow its premium volumes. Additionally, the company’s personal lines business, particularly in the Midwest and Texas regions, remains vulnerable to the impact of severe weather events, which could lead to further reserve strengthening and underwriting losses.
The company’s withdrawal from the A.M. Best and Kroll rating processes has also raised concerns about its ability to effectively compete for business, as many insurance customers and distribution partners place significant emphasis on financial strength ratings when evaluating potential partners. On March 25, 2024, rating agencies Kroll and A.M. Best downgraded the financial strength ratings of the company’s insurance subsidiaries, Conifer Insurance Company (CIC) and White Pine Insurance Company (WPIC), citing concerns over the companies’ financial condition. In response, the company withdrew its participation from the rating process and is now non-rated.
Conifer’s smaller scale and reduced operational footprint following the sale of its agency business may also present challenges in terms of maintaining a competitive expense structure and leveraging its resources effectively. The company’s ability to execute on its strategic plan and achieve profitability in the long term will be closely watched by investors and industry observers.
Management Changes and Strategic Direction
In August 2024, as part of the completion of the CIS sale, Conifer’s CEO Nicholas Petcoff resigned. Brian Roney, the company’s former President, was appointed as the new CEO. This management change coincided with the company’s significant strategic shift towards a commission-based revenue model through its MGA operations.
Conifer’s strategic priorities going forward include:
Focusing on ramping up the optimization of its commercial lines business by running gross written premium through the MGA.
For personal lines, Conifer expects production to primarily come from low-valued homeowner’s business in Texas and the Midwest, as it completes the run-off of its Oklahoma business by the end of 2024.
Improving margins and profitability over the long term through this strategic shift, although the company has not provided specific financial targets or timelines.
Conclusion
Conifer Holdings has undergone a significant transformation, shifting its business model to a commission-based approach and divesting its insurance agency operations. While this strategic pivot aims to enhance the company’s profitability and create a more sustainable operating structure, Conifer faces a range of risks and challenges, including the need to maintain its competitive position, manage its loss experience, and address regulatory capital concerns.
The company’s financial performance in the coming quarters will be critical in determining the success of its strategic shift. With the sale of its agency operations providing a short-term boost to its financials, Conifer must now focus on building a sustainable, profitable business model based on its remaining personal lines operations and MGA-driven commercial lines business.
As Conifer navigates this transition, investors will be closely monitoring the company’s ability to execute on its strategic plan, manage its risks, and deliver improved financial performance. The success of Conifer’s transformation will be a key factor in determining the company’s long-term viability and potential value for shareholders.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.