Conifer Holdings Inc

Previous wording

In the first quarter of 2024, the Company began a strategic shift that will reduce premiums revenues from underwriting operations and increase commission revenues from policy production within the MGA. The Company began utilizing one third-party insurer for the underwriting capacity in one program, but is expected to see significant expansion of the use of two third-party insurers during the second quarter of 2024. By the third quarter of 2024, we expect that almost all commercial lines business previously underwritten by the Company’s Insurance Company Subsidiaries will be written by third-party insurers. The Company expects to continue to directly write the Midwest and Texas homeowners business.

Current wording

In the first and second quarter of 2024, the Company began a strategic shift has reduced premiums revenues from underwriting operations and increased commission revenues from policy production within the MGA. The Company began utilizing two third-party insurers for the underwriting capacity in the first two quarters of 2024. By the third quarter of 2024, we expect that almost all commercial lines business previously underwritten by the Company’s Insurance Company Subsidiaries will be written by third-party insurers. The Company expects to continue to directly write the Midwest and Texas homeowners business.

Previous wording

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.

Current wording

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 revenues also include commission income from the Company's MGA, CIS.

Previous wording

Through our MGA, CIS operates through our wholesale agency business segment. Through CIS, we offer commercial and personal lines insurance products for our Insurance Company Subsidiaries as well as third-party insurers. The wholesale agency business segment provides our agents with more insurance product options. We expect the wholesale agency segment to become more prominent going forward as substantially all of our commercial lines business will be produced by our MGA and underwritten by third-party insurers.

Current wording

Through our MGA, CIS operates through our wholesale agency business segment. Through CIS, we offer commercial and personal lines insurance products for our Insurance Company Subsidiaries as well as third-party insurers. The wholesale agency business segment provides our agents with more insurance product options. In recent periods, the wholesale agency business has become more prominent as substantially all of our commercial lines business is now produced by our MGA and underwritten by third-party insurers.

Previous wording

An advantage of using these third-party insurers is they will both have a minimum of an A- A.M. Best rating, which greatly improves our competitive edge in the marketplace.

Current wording

An advantage of using these third-party insurers is they both have a minimum of an A- A.M. Best rating, which greatly improves our competitive edge in the marketplace.

Previous wording

As we transition to more of a MGA operation, more revenues will be derived from commissions while insurance premiums and investment income will diminish over time. Cash flows from written premiums will decline quickly over the next two quarters and will be almost entirely comprised of the homeowners business by the third quarter of 2024. Concurrently, cash flows from commissions revenues will increase. As claims are settled, claim payments will be funded from the sale of investments within the Insurance Company Subsidiaries. Such claims payments will reduce cash flows provided by operating activities and will be offset by an increase in cash flows from investing activities as the investment portfolio is liquidated over time to fund the claim payments. Management may consider the sale of other assets to generate additional cash resources available to the Company.

Current wording

As we transition to more of a MGA operation, more revenues will be derived from commissions while insurance premiums and investment income will diminish over time. Cash flows from written premiums will decline quickly over the next two quarters and will be almost entirely comprised of the homeowners business by the third quarter of 2024. Concurrently, cash flows from commissions revenues will increase. As claims are settled, claim payments will be funded from the sale of investments within the Insurance Company Subsidiaries. Such claims payments will reduce cash flows provided by operating activities and will be offset by an increase in cash flows from investing activities as the investment portfolio is liquidated over time to fund the claim payments. See the Liquidity and Capital Resources section below for additional details of the impact of the Company's MGA shift.

Previous wording

There will be fewer claim payments as loss reserves run off. Other operating costs and commissions to retail agencies will fluctuate relatively similarly to the premiums produced by the MGA as they did when the premiums were written by the insurance companies. However, certain insurance company specific costs will decrease as the premium volume in the insurance company subsidiaries decreases. We expect that the net revenues generated in the MGA will provide the majority of the cash flows needed to cover operating and debt service costs going forward.

Current wording

There will be fewer claim payments as loss reserves run off. Other operating costs and commissions to retail agencies will fluctuate relatively similarly to the premiums produced by the MGA as they did when the premiums were written by the insurance companies. However, certain insurance company specific costs will decrease as the premium volume in the insurance company subsidiaries decreases. As premium volumes decrease, there will be more reliance on MGA revenues to provide the majority of the cash flows needed to cover operating and debt service costs.

Previous wording

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 operations will not be affected by accounting adjustments needed to reflect changes in these estimates and assumptions. During the three months ended March 31, 2024, there were no material changes to our critical accounting policies and estimating methodologies, 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 April 1, 2024.

Current wording

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 operations will not be affected by accounting adjustments needed to reflect changes in these estimates and assumptions. During the six months ended June 30, 2024, there were no material changes to our critical accounting policies and estimating methodologies, 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 April 1, 2024.

Previous wording

The Company reported $24.3 million of gross written premiums in the first quarter of 2024, representing a 32.9% decrease as compared to the same period in 2023. Our commercial lines gross written premiums decreased by $16.2 million, or 56.0%, to $12.8 million in the first quarter of 2024, compared to $29.0 million for the same period in 2023. Personal lines gross written premiums increased by $4.3 million, or 59.6%, to $11.6 million in the first quarter of 2024, compared to $7.2 million for the same period in 2023.

Current wording

The Company reported $19.0 million of gross written premiums in the second quarter of 2024, representing a 57.5% decrease as compared to the same period in 2023. Our commercial lines gross written premiums decreased by $28.0 million, or 80.5%, to $6.8 million in the second quarter of 2024, compared to $34.8 million for the same period in 2023. Personal lines gross written premiums increased by $2.3 million, or 23.0%, to $12.2 million in the second quarter of 2024, compared to $9.9 million for the same period in 2023.

Previous wording

Adjusted operating income per share is a non-GAAP measure that represents net income allocable to common shareholders excluding net realized investment gains or losses, change in fair value of equity securities, and other gains or losses. Adjusted operating income was $188,000, or $0.02 per share, for the three months ended March 31, 2024. Adjusted operating income was $307,000, or $0.03 per share, for the three months ended March 31, 2023.

Current wording

Adjusted operating income per share is a non-GAAP measure that represents net income allocable to common shareholders excluding net realized investment gains or losses and change in fair value of equity securities. Adjusted operating loss was $3.6 million, or $0.30 per share for the three months ended June 30, 2024, compared to $4.7 million or $0.39 for the same period in 2023.

Previous wording

Commercial lines gross written premiums decreased $16.2 million, or 56.0%, to $12.8 million in the first quarter of 2024, as compared to $29.0 million for the first quarter of 2023. There was a $13.5 million decrease in premiums due to the sale of the Security Program in September 2023, as well as continued reductions in certain hospitality lines as we exited less profitable states. To a lesser degree, some of the premium reduction was due to our MGA beginning to shift business from our Insurance Company Subsidiaries to the third-party insurers. This impact will be significantly greater in the second and third quarters of 2024.

Current wording

Commercial lines gross written premiums decreased $28.0 million, or 80.5%, to $6.8 million in the second quarter of 2024, as compared to $34.8 million for the second quarter of 2023. There was an $18.6 million decrease in premiums due to the sale of the Security Program in September 2023, as well as continued reductions in certain hospitality lines as we exited less profitable states. The remaining decrease was primarily due to the MGA shifting business from our Insurance Company Subsidiaries to the third-party insurers during the quarter.

Previous wording

Personal lines gross written premiums increased $4.3 million, or 59.6%, to $11.6 million in the first quarter of 2024, as compared to $7.2 million for the same period in 2023. The increase was due to the organic growth in the low-value dwelling book of business in Texas and Oklahoma. The Company is expected to discontinue writing in Oklahoma in the second quarter of 2024, while Texas homeowners is expected to continue to grow.

Current wording

Personal lines gross written premiums increased $2.3 million, or 23.0%, to $12.2 million in the second quarter of 2024, as compared to $9.9 million for the same period in 2023. The increase was due to the organic growth in the low-value dwelling book of business in Texas.

Previous wording

Net written premiums decreased $3.0 million, or 16.1%, to $15.4 million for the three months ended March 31, 2024, as compared to $18.3 million for the same period in 2023. Net written premiums declined as a result of the Company's reduction in gross written premiums during the first quarter of 2024.

Current wording

Net written premiums decreased $16.1 million, or 54.8%, to $13.2 million for the three months ended June 30, 2024, as compared to $29.3 million for the same period in 2023. Net written premiums declined during the second quarter of 2024 as a result of the Company's reduction in gross written premiums due to its MGA shift, and also due to the sale of the Security Program in September 2023.

Previous wording

Commission income is received by the Company’s insurance agency for writing policies for third-party insurance companies. Agency commission income increased by $3.9 million to $4.3 million during the first quarter of 2024, compared to $430,000 for the same period in 2023. The increase was due to the Company's Security Program transaction in September of 2023. As part of the arrangement with the buyer, our MGA was appointed as the producer for this business, for approximately a two-year transition period. During this time our MGA will receive a commission from the buyer, and pay a sub-producer substantially the same commission. This will result in higher consolidated Agency Commission Income for the Company. Policy acquisition costs will remain substantially the same amount for the period of this agreement. In the first quarter of 2024, the Company recorded $3.6 million of commission revenue and $3.6 million of commission expense as a result of this arrangement. Going forward, as our MGA produces more business for third-party insurers, we expect that commission revenue, net of expense, is to grow significantly.

Current wording

Commission income is received by the Company’s insurance agency for writing policies for third-party insurance companies. Agency commission income increased by $8.6 million to $8.8 million during the second quarter of 2024, compared to $211,000 for the same period in 2023. The increase was due to the MGA shift the Company implemented in the beginning of 2024. Additionally, the increase was attributable to the Company's Security Program transaction in September of 2023. As part of the arrangement with the buyer, our MGA was appointed as the producer for this business, for approximately a two-year transition period. During this time our MGA will receive a commission from the buyer, and pay a sub-producer substantially the same commission. This results in higher consolidated Agency Commission Income for the Company. Policy acquisition costs will remain substantially the same amount for the period of this agreement. In the second quarter of 2024, the Company recorded $5.8 million of commission revenue and $5.8 million of commission expense as a result of this arrangement.

Previous wording

Net losses and LAE decreased by $3.2 million, or 23.3%, to $10.5 million during the first quarter of 2024, compared to $13.7 million for the same period in 2023. The decrease was attributable to a $3.9 million decrease in current accident year losses during the first quarter of 2024, compared to the same period in 2023.

Current wording

Net losses and LAE decreased by $4.0 million, or 20.9%, to $15.3 million during the second quarter of 2024, compared to $19.3 million for the same period in 2023. The $6.3 million decrease in current accident year losses during the first quarter of 2024, compared to the same period in 2023, was mostly due to a significant reduction in net earned premiums described above.

Previous wording

The Company’s incurred losses during the three months ended March 31, 2024 included prior-year favorable development of $461,000. Of the $461,000 of favorable development experience during the first quarter of 2024, $508,000 of favorable development was experienced in the Company's personal lines of business, mostly related to accident year 2023. The $508,000 of favorable development in the Company's personal lines was offset by $47,000 of adverse development in the Company's commercial lines of business, mostly related to accident year 2022.

Current wording

The Company’s incurred losses during the three months ended June 30, 2024 included prior-year adverse development of $2.8 million. Of the $2.8 million of adverse development experience during the second quarter of 2024, $2.1 million of adverse development was experienced in the Company's commercial lines of business, mostly related to emergence in the commercial liability lines in the Security Program in the 2021 and 2022 accident years. The remainder was attributed to $747,000 of adverse development occurring in the Company's personal lines of business, mostly related to a few high severity claims in the 2023 accident year.

Previous wording

Our expense ratio decreased by 2.6% during the first quarter of 2024, compared to the same period in 2023.

Current wording

Our expense ratio decreased by 5.8% during the second quarter of 2024, compared to the same period in 2023.

Previous wording

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 ceding commissions from reinsurers. The percentage of policy acquisition costs to net earned premiums and other income decreased by 2.1% during the first quarter of 2024 to 18.7%, compared to 20.8% during the same period in 2023. The decrease was primarily related to the impact from the ceding commissions received from the unearned premium transfer of the Security Program effective September 30, 2023.

Current wording

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 ceding commissions from reinsurers. The percentage of policy acquisition costs to net earned premiums decreased by 3.7% in the Company's commercial lines mainly due to the added ceding commissions received from the unearned premium portfolio transaction that occurred on September 30, 2023, as part of the Security Program transaction. The personal lines acquisition costs increased by 2.5% percentage points due to increased commission rates to agents on the homeowners books of business.

Previous wording

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 underwriting income decreased by 0.5% during the first quarter of 2024 to 16.0%, compared to 16.5% for the same period in 2023. The decrease was primarily due to cost-reducing measures taken by management throughout the year.

Current wording

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 underwriting income decreased by 7.1% during the second quarter of 2024 to 11.8%, compared to 18.9% for the same period in 2023. The decrease was attributed to the Company shifting its business through its MGA. As a result, operating expenses have increased in the Company's MGA and have decreased in its Insurance Company Subsidiaries.

Previous wording

At March 31, 2024, the Company had $41.0 million in cash, cash equivalents and short-term investments. Our principal sources of funds are insurance premiums, investment income, proceeds from maturities and sales 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.

Current wording

At June 30, 2024, the Company had $33.0 million in cash, cash equivalents and short-term investments. Our principal sources of funds are insurance premiums, investment income, commission income from the Company's MGA, proceeds from maturities and sales 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.

Previous wording

We conduct our business operations primarily through our Insurance Company Subsidiaries and our MGA. Our ability to service debt, and pay administrative expenses is primarily reliant upon our intercompany service fees paid by the Insurance Company Subsidiaries and MGA to the holding company for management, administrative, and information technology services provided to the Insurance Company Subsidiaries and MGA by the Parent Company. Secondarily, the Parent 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 Parent 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 for the three months ended March 31, 2024 and 2023, respectively. We do not anticipate any dividends being paid to us from our insurance subsidiaries in the near term. The MGA may pay dividends to the Parent without regulatory restrictions, and we believe is will be utilized as the MGA begins to produce more business for third-party insurers.

Current wording

We conduct our business operations primarily through our Insurance Company Subsidiaries and our MGA. Our ability to service debt, and pay administrative expenses is primarily reliant upon our intercompany service fees paid by the Insurance Company Subsidiaries and MGA to the holding company for management, administrative, and information technology services provided to the Insurance Company Subsidiaries and MGA by the Parent Company. Secondarily, the Parent 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 Parent 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 for the six months ended June 30, 2024 and 2023. We do not anticipate any dividends being paid to us from our insurance subsidiaries in the near term. The MGA may pay dividends to the Parent without regulatory restrictions.

Previous wording

Due to significant losses in 2023, much of which was attributable to strengthening reserves and severe storm activity affecting the Oklahoma homeowners business, both Insurance Company Subsidiaries lack sufficient capital to continue to underwrite the volume of business they have historically written. Also, both CIC and WPIC fell below critical statutory capital and surplus minimum requirements including the Risk Based Capital (“RBC”) ratio. CIC’s and WPIC’s RBC ratios at December 31, 2023, were 169% and 142%, respectively. The Insurance Company Subsidiaries submitted an action plan with the state of domicile insurance regulator on April 1, 2024, to remediate certain statutory capital and surplus regulatory deficiencies. As part of the plan, WPIC will no longer write any business after June 30, 2024, and CIC will only write a small amount of commercial business as well as the homeowners business after June 30, 2024. These actions were part of a strategic shift implemented by management to utilize third-party insurers and to mostly rely on commission revenues generated by our MGA to fund operations and service debt, going forward.

Current wording

Due to significant losses in 2023, much of which was attributable to strengthening reserves and severe storm activity affecting the Oklahoma homeowners business, both Insurance Company Subsidiaries lack sufficient capital to continue to underwrite the volume of business they have historically written. Also, both CIC and WPIC fell below critical statutory capital and surplus minimum requirements including the Risk Based Capital (“RBC”) ratio. CIC’s and WPIC’s RBC ratios at December 31, 2023, were 169% and 142%, respectively. The Insurance Company Subsidiaries submitted action plans with the state of domicile insurance regulator on April 1, 2024, to remediate certain statutory capital and surplus regulatory deficiencies. As part of the plan, WPIC will no longer write any business after June 30, 2024, and CIC will only write a small amount of commercial business as well as the homeowners business after June 30, 2024. It is likely that the Company will need to contribute $3.0 million to $5.0 million of more capital into WPIC before the end of the year in order to maintain its licenses. These actions were part of a strategic shift implemented by management to utilize third-party insurers and to mostly rely on commission revenues generated by our MGA to fund operations and service debt.

Previous wording

With the producer agreements currently executed, the Company expects to be able to generate the needed revenues to meet our obligations as they become due over the next twelve months. Management believes the actions that were executed to implement the planned strategic shift coupled with additional available sources of available liquidity, will be sufficient to enable the Company to meet its obligations for the foreseeable future.

Current wording

With the producer agreements currently executed and anticipated proceeds from the potential sale of assets and business operations, the Company expects to be able to generate the needed revenues to meet our obligations as they become due over the next twelve months. Management believes the actions that were executed to implement the planned strategic shift coupled with additional available sources of available liquidity and planned sales of assets and business operations, will be sufficient to enable the Company to meet its obligations for the foreseeable future. In addition, the Company is currently actively considering the sale of assets and of business operations in order to raise capital with which to repay debt and improve its financial position. Such sale transactions could generate funds with which to meet current obligations and could also significantly impact the Company’s sources of revenue going forward.

Previous wording

We believe that our existing cash, cash equivalents, short-term investments and investment securities balances will be adequate to meet our capital and liquidity needs and the needs of our subsidiaries on a short-term and long-term basis.

Current wording

We believe that, through our existing cash and investment securities balances, operating cash flows, potential asset or operations sales or capital raises, we will be able to meet our capital and liquidity needs and the needs of our subsidiaries over the next twelve months.

Previous wording

Operating Activities. Cash provided by operating activities for the three months ended March 31, 2024 was $8.2 million compared to cash used in operating activities of $6.0 million for the same period in 2023. The $14.2 million increase in cash provided by operating activities was primarily due a $12.4 million decrease in total net losses paid and a $4.0 million increase in other income received during the period. These amounts were offset by a $2.4 million increase in acquisition costs paid during the first three months of 2024, compared to the same period in 2023.

Current wording

Operating Activities. Cash used in operating activities for the six months ended June 30, 2024 was $2.0 million compared to cash used in operating activities of $1.4 million for the same period in 2023. The $505,000 increase in cash from used in operating activities was primarily due to a $15.6 million decrease in net premiums collected as the Company continued to reduce premiums written. This was offset by $12.5 million increase in other income received substantially from the Company's agency commission revenue. There was a net decrease in cash paid on losses and acquisition costs of $1.6 million and a net decrease of $1.0 million on cash paid for administrative expenses.

Previous wording

Investing Activities. Cash used in investing activities for the three months ended March 31, 2024 was $1.6 million, compared to $468,000 for the same period in 2023. The $1.1 million increase in cash used by investing activities was driven by a $9.3 million decrease in proceeds from sales of investment during the period. This amount was offset by a $7.7 million decrease in purchases of investments during the period.

Current wording

Investing Activities. Cash provided by investing activities for the six months ended June 30, 2024 was $1.4 million, compared to cash used in investing activities of $7.8 million for the same period in 2023. The $9.2 million increase in cash provided by investing activities was driven by a $22.6 million decrease in cash used for the purchases of investments during the period. This amount was offset by a $13.3 million decrease in proceeds from sales of investments during the period.

Previous wording

Financing Activities. Cash used in financing activities for the three months ended March 31, 2024 was $426,000 compared to $0 for the same period in 2023. The $426,000 increase in cash used for financing activities was attributable to $176,000 of preferred stock dividends paid during the first quarter of 2024, and a $250,000 principal payment towards the Company's senior secured notes during the first quarter of 2024. The Company did not have the Senior Secured Notes or the preferred stock in the first quarter of 2023.

Current wording

Financing Activities. Cash used in financing activities for the six months ended June 30, 2024 was $834,000 compared to $3,000 for the same period in 2023. The $831,000 increase in cash used for financing activities was attributable to $334,000 of preferred stock dividends paid during the first six months of 2024. The remaining increase was due to the Company paying $500,000 of principal payments towards the Company's senior secured notes during the first six months of 2024. The Company did not have the Senior Secured Notes or preferred stock dividends during the first six months of 2023.

Previous wording

Our Insurance Company Subsidiaries are required to file quarterly and annual financial reports with state insurance regulators. These financial reports are prepared using statutory accounting practices promulgated by the Insurance Company Subsidiaries’ state of domiciliary, rather than GAAP. The Insurance Company Subsidiaries’ aggregate statutory capital and surplus (which is a statutory measure of equity) was $34.0 million and $32.8 million at March 31, 2024 and December 31, 2023, respectively.

Current wording

Our Insurance Company Subsidiaries are required to file quarterly and annual financial reports with state insurance regulators. These financial reports are prepared using statutory accounting practices promulgated by the Insurance Company Subsidiaries’ state of domiciliary, rather than GAAP. The Insurance Company Subsidiaries’ aggregate statutory capital and surplus (which is a statutory measure of equity) was $32.6 million and $32.8 million at June 30, 2024 and December 31, 2023, respectively.