Conifer Holdings, Inc. (Nasdaq: CNFR) — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; filed April 1, 2024. The filing identifies the registrant as Conifer Holdings, Inc., not Presurance Holdings, Inc.
Business context
Conifer is a property-and-casualty insurance holding company focused on specialty commercial and personal lines, distributed mainly through independent agents. Its 2024 plan is to shift substantially toward a managing general agency (MGA) model, placing most commercial business with third-party insurers and earning commissions rather than bearing underwriting risk.
Financial results and position
| Metric | FY2023 | FY2022 |
|---|---|---|
| Gross written premiums | $143.8 million | $138.0 million |
| Net written premiums | $68.7 million | $91.2 million |
| Net earned premiums | $83.9 million | $96.7 million |
| Total revenue and other income | $98.8 million | $104.9 million |
| Net loss | $25.9 million; $2.12 per share | $10.7 million; $1.00 per share |
| Adjusted operating loss, non-GAAP | $28.8 million; $2.36 per share | $13.0 million; $1.22 per share |
| Net cash used in operating activities | $13.4 million | $40.5 million |
| Net investment income | $5.5 million | $3.0 million |
The combined ratio increased to 134.9% from 122.3%; above 100% indicates underwriting losses. The loss ratio rose to 97.8% from 83.9%, while the expense ratio improved to 37.1% from 38.4%. Prior-year reserve development was adverse by $17.8 million, versus $24.3 million in 2022, primarily in commercial liability lines.
At year-end, total assets were $311.8 million, total liabilities $308.9 million, and shareholders’ equity just $2.9 million, down from $19.0 million. Cash and cash equivalents were $11.1 million; cash, cash equivalents and short-term investments totaled about $32.0 million, of which management reported $16.8 million unrestricted. Gross unpaid losses and loss-adjustment expenses were $174.6 million, with $70.8 million of reinsurance recoverables on unpaid losses.
Debt had a $27.6 million gross principal balance and $25.1 million net carrying value. It included $17.9 million of 9.75% senior unsecured notes and $9.75 million of 12.5% senior secured notes, both due in 2028. The senior secured notes require quarterly principal payments. Debt interest expense was $3.2 million.
Material changes versus FY2022
- Gross written premiums rose 4.2%, but net written premiums fell 24.7% and net earned premiums fell 13.2%, reflecting increased reinsurance cessions and the transfer of the Security Program’s unearned premiums.
- Personal-lines gross written premiums increased 73.8% to $36.8 million; commercial-lines premiums declined 8.4% to $107.1 million.
- Net loss widened by $15.2 million. FY2023 included a $2.3 million gain from selling Security Program renewal rights. FY2022 included an $8.8 million VSRM transaction gain and a $9.4 million tax benefit, as well as the $5.4 million LPT risk fee.
- Net investment income increased 81.6%, largely because of higher interest rates. Debt securities had $13.3 million of net unrealized losses at year-end, attributed to market and interest-rate conditions.
- Operating cash outflow improved from $40.5 million to $13.4 million, but year-end cash and cash equivalents fell to $11.1 million from $28.0 million.
Outlook, risks and unusual items
- Strategic transition: Management expects substantially all commercial lines to be placed with third-party insurers by the end of Q2 2024; it expects to cease WPIC writings by then and stop renewing Oklahoma homeowners business during 2024. It expects premium and investment income to decline as commissions become the main revenue source. One producer agreement covered about 25% of the existing commercial book at filing; another agreement was expected but not yet completed.
- Liquidity and going concern: Management said the insurers lack sufficient capital to continue historical underwriting volumes and that execution delays could impair the company’s ability to meet obligations. It expects the MGA transition and alternative liquidity sources to support obligations for the foreseeable future. The auditor identified management’s going-concern analysis as a critical audit matter; the filing does not state that the audit opinion was qualified.
- Regulatory capital and debt covenants: At year-end CIC was at the Company Action Level and WPIC at the Regulatory Action Level under risk-based capital requirements; WPIC also fell below two other regulatory thresholds. The company was out of compliance with several senior secured debt covenants. On March 27, 2024, noteholders waived the year-end breaches and specified future non-compliance through May 31, 2025; management expects future compliance.
- Ratings: In March 2024, A.M. Best downgraded CIC and WPIC to C, and Kroll downgraded them to BB- and B, respectively, both with negative outlooks. The company then withdrew from both rating processes, leaving the insurers unrated by those agencies.
- Debt and preferred financing: In December 2023, the company issued $6.0 million of Series A Preferred Stock to an entity affiliated with two directors. It pays quarterly dividends at a variable rate (10.5% annualized at year-end), matures June 30, 2026, and is convertible then into 4.0 million common shares if not redeemed. The company also has scheduled 2024 debt principal payments of $1.0 million, estimated interest payments of about $3.3 million, and preferred dividends of about $630,000.
- Other key risks: Reserve estimates are uncertain; commercial liability lines have experienced repeated adverse development. The company also cites reinsurance collectability and capacity, catastrophe and inflation-driven claims, agent concentration, investment and interest-rate risk, and the possibility of regulatory limits on insurers’ operations. A Nasdaq minimum-public-float deficiency was disclosed; the common stock transferred to the Nasdaq Capital Market in March 2024.
Important facts for investors to verify
- Whether the planned third-party producer agreements are completed, cover the intended business, and generate sufficient commission revenue and cash flow.
- Progress on CIC and WPIC regulatory capital plans, including WPIC’s required recovery and the impact of reduced underwriting.
- Cash availability after accounting for restricted trust assets, run-off claims, funds withheld, and debt-service needs.
- Subsequent reserve development, reinsurance recoverables and the remaining protection under the loss portfolio transfer.
- The precise covenant waiver terms and ongoing compliance, as well as the cost and potential dilution from the preferred stock’s conversion and redemption provisions.
- Whether the company regains Nasdaq listing compliance and how its unrated status affects policyholder, agent, reinsurer and financing relationships.