ifer (CNFR) - 2025 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION ITEM 1 — FINANCIAL STATEMENTS This section presents the unaudited consolidated financial statements of Conifer Holdings, Inc. and its subsidiaries for the quarter ended March 31, 2025, including balance sheets, statements of operations, comprehensive income (loss), changes in shareholders' equity, and cash flows, along with accompanying notes detailing significant accounting policies, investments, fair value measurements, and other financial disclosures Consolidated Balance Sheets (Unaudited) Consolidated Balance Sheet Highlights (dollars in thousands) | Metric | March 31, 2025 | December 31, 2024 | Change ($) | Change (%) | | :-------------------------------- | :------------- | :---------------- | :--------- | :--------- | | Total Assets | $277,074 | $281,656 | $(4,582) | (1.6%) | | Total Liabilities | $251,489 | $260,131 | $(8,642) | (3.3%) | | Total Shareholders' Equity | $25,585 | $21,525 | $4,060 | 18.9% | | Unpaid Losses and LAE | $176,362 | $189,285 | $(12,923) | (6.8%) | | Total Investments | $139,500 | $128,419 | $11,081 | 8.6% | | Cash and Cash Equivalents | $10,281 | $27,654 | $(17,373) | (62.8%) | Consolidated Statements of Operations (Unaudited) Consolidated Statements of Operations Highlights (dollars in thousands, except per share data) | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change ($) | Change (%) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Net Earned Premiums | $10,315 | $16,887 | $(6,572) | (38.9%) | | Total Revenue and Other Income | $15,875 | $18,625 | $(2,750) | (14.8%) | | Total Expenses | $15,353 | $17,419 | $(2,066) | (11.9%) | | Net Income (Loss) | $522 | $231 | $291 | 126.0% | | Net Income (Loss) Allocable to Common Shareholders | $522 | $74 | $448 | 605.4% | | Basic and Diluted EPS (allocable to common shareholders) | $0.04 | $0.01 | $0.03 | 300.0% | Consolidated Statements of Comprehensive Income (Loss) (Unaudited) Consolidated Statements of Comprehensive Income (Loss) Highlights (dollars in thousands) | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change ($) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :--------- | | Net Income (Loss) | $522 | $231 | $291 | | Other Comprehensive Income (Loss) | $1,599 | $(436) | $2,035 | | Total Comprehensive Income (Loss) | $2,121 | $(205) | $2,326 | Consolidated Statements of Changes in Shareholders' Equity (Unaudited) Consolidated Statements of Changes in Shareholders' Equity Highlights (dollars in thousands) | Metric | Balance at Dec 31, 2024 | Net Income (Loss) | Issuance of Warrants | Stock-based Comp. | Other Comp. Income | Balance at Mar 31, 2025 | | :-------------------------------- | :---------------------- | :---------------- | :------------------- | :------------------ | :------------------- | :---------------------- | | Total Shareholders' Equity | $21,525 | $522 | $1,924 | $15 | $1,599 | $25,585 | * Total shareholders' equity increased by $4,060 thousand from December 31, 2024, to March 31, 2025, primarily due to net income, issuance of warrants, and other comprehensive income. Consolidated Statements of Cash Flows (Unaudited) Consolidated Statements of Cash Flows Highlights (dollars in thousands) | Activity Type | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change ($) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Net Cash Provided by (Used in) Operating Activities | $(15,260) | $8,175 | $(23,435) | | Net Cash Provided by (Used in) Investing Activities | $(9,613) | $(1,558) | $(8,055) | | Net Cash Provided by (Used in) Financing Activities | $7,500 | $(426) | $7,926 | | Net Increase (Decrease) in Cash | $(17,373) | $6,191 | $(23,564) | | Cash at End of Period | $10,281 | $17,316 | $(7,035) | Notes to Consolidated Financial Statements (Unaudited) The notes provide detailed explanations of the accounting policies, financial instruments, and operational changes impacting the consolidated financial statements, covering business transformation, insurance subsidiary health, investment portfolio, fair value measurements, and debt/equity structures - The Company's business model has shifted, no longer including the agency business after the sales of Conifer Insurance Services (CIS) and Sycamore Specialty Underwriters, LLC (SSU) in August 2024 The Company now primarily writes a small amount of commercial business and specialty homeowners business in Texas, Illinois, and Indiana[24][25] - The Company adopted ASU 2023-09, Income Taxes (Topic 740), effective for this quarterly report, which did not have a significant impact on disclosures ASU 2024-03, Disaggregation of Income Statement Expenses, is effective for fiscal years beginning after December 15, 2027, and its impact is being evaluated[28][29] - The Company's Insurance Company Subsidiaries (CIC and WPIC) face capital deficiencies due to significant losses in 2023 and 2024, particularly from commercial liability lines in run-off CIC's Risk Based Capital (RBC) ratio was 156% as of December 31, 2024, and approximately 160% as of March 31, 2025, falling within the Company Action Level and requiring a remediation plan[33][35] - The Parent Company (CHI) received no intercompany service fees from Insurance Company Subsidiaries in 2024 and expects none in 2025, relying on asset sales and capital raises CHI had $2.5 million cash as of March 31, 2025, and expects to meet obligations through cash on hand, a $10.0 million earnout payment in 2025, potential asset sales, and short-term financing[34][35][38] Investment Securities at Fair Value (dollars in thousands) Investment Securities at Fair Value (dollars in thousands): | Security Type | March 31, 2025 | December 31, 2024 | | :-------------------------------- | :------------- | :---------------- | | Debt securities | $96,023 | $105,665 | | Equity securities | $1,411 | $1,603 | | Short-term investments | $42,066 | $21,151 | | Total Investments | $139,500 | $128,419 | * Gross unrealized losses on available-for-sale debt securities were $10.7 million as of March 31, 2025, primarily due to market conditions and interest rate changes. Net Investment Income (dollars in thousands) Net Investment Income (dollars in thousands): | Source | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Debt securities | $958 | $1,225 | | Equity securities | $2 | $11 | | Cash, cash equivalents and short-term investments | $387 | $371 | | Total investment income | $1,347 | $1,607 | | Investment expenses | $(58) | $(61) | | Net investment income | $1,289 | $1,546 | - The fair value of contingent considerations from the CIS sale increased from $8.07 million at December 31, 2024, to $12.465 million at March 31, 2025, reflecting an expected $10.0 million payment in 2025 and a third $10.0 million payment not expected until 2027, if at all The fair value is determined using Level 3 inputs and Monte Carlo analysis[8][59][115] Changes in Unpaid Losses and Loss Adjustment Expenses (Net of Reinsurance, dollars in thousands) Changes in Unpaid Losses and Loss Adjustment Expenses (Net of Reinsurance, dollars in thousands): | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net reserves - beginning of period | $104,795 | $103,805 | | Total net incurred losses and LAE | $9,274 | $10,520 | | Total net loss and LAE payments | $15,579 | $12,306 | | Net reserves - end of period | $98,490 | $102,019 | * Net losses and LAE decreased by $1.2 million (11.8%) in Q1 2025 compared to Q1 2024, primarily due to a $1.9 million decrease in current accident year losses from reduced net earned premiums. - The Company issued $7.5 million of non-convertible mandatorily redeemable Series B Preferred Stock in February and March 2025, along with warrants to purchase 4,000,000 common shares at $1.50 per share The Series B Preferred Stock matures on December 31, 2026, and carries a quarterly dividend rate of 12.0% or prime rate plus 600 basis points, whichever is higher (13.5% as of March 31, 2025)[83][84][85][86] - The Company redeemed all $6.0 million of its outstanding Series A Preferred Stock on August 30, 2024, incurring a $397,000 redemption premium[90] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the Company's financial condition and operational results for the three months ended March 31, 2025, compared to the same period in 2024, highlighting strategic developments, revenue impact, and a detailed analysis of financial metrics and non-GAAP measures Recent Developments - On August 30, 2024, the Company completed the sale of Conifer Insurance Services (CIS), its managing general agency (MGA) business, for an initial purchase price of $45.0 million cash plus $1.6 million excess working capital, and eligibility for up to $25.0 million in contingent payments[111][114] - The CIS sale will significantly negatively impact future revenues, as the Company was relying on commission revenue growth to replace lost underwriting revenue Gross written premiums decreased from $24.3 million in Q1 2024 to $16.2 million in Q1 2025[112] - The Company also sold its 50% ownership interest in Sycamore Specialty Underwriters, LLC (SSU) on August 30, 2024, for $6.5 million, recognizing a gain of $6.5 million[118] - The Company's staff is reduced to nine people, relying heavily on CIS and SSU for underwriting, claims, and IT services through program and claims administration agreements This amplifies concentration risk in marketing and distribution[121] - On August 30, 2024, the Company paid off $9.3 million of Senior Secured Notes and redeemed all $6.0 million of Series A Preferred Stock, incurring a $397,000 redemption premium[122] - A.M. Best and Kroll downgraded the financial strength ratings of CIC and WPIC to C and BB-/B respectively in March 2024, leading the Company to withdraw from the rating process This non-rated status could negatively impact the ability to market to policyholders[123][124][125] Business Overview - Conifer Holdings, Inc. is an insurance holding company marketing specialty commercial and personal insurance It is authorized as an excess and surplus lines carrier in 44 states and licensed as an admitted carrier in 42 states Operations are primarily in Texas, Illinois, Indiana (homeowners), and Nevada, Michigan (other lines)[126] - Revenues are primarily from earned premiums and investment income Expenses include losses and loss adjustment expenses, agents' commissions, and underwriting/administrative costs The Company expects minimal commercial lines business going forward, focusing on specialty homeowners[127][128][129][130] Executive Overview Key Financial Highlights (dollars in thousands, except per share data) Key Financial Highlights (dollars in thousands, except per share data): | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change ($) | Change (%) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Gross Written Premiums | $16,173 | $24,313 | $(8,140) | (33.5%) | | Commercial Lines GWP | $2,047 | $12,762 | $(10,715) | (84.0%) | | Personal Lines GWP | $14,126 | $11,551 | $2,575 | 22.3% | | Net Income from Continuing Operations | $522 | $1,357 | $(835) | (61.5%) | | EPS from Continuing Operations | $0.04 | $0.11 | $(0.07) | (63.6%) | | Net Income Allocable to Common Shareholders | $522 | $74 | $448 | 605.4% | | EPS Allocable to Common Shareholders | $0.04 | $0.01 | $0.03 | 300.0% | | Adjusted Operating Loss | $(3,700) | $1,300 | $(5,000) | * | | Adjusted Operating Loss Per Share | $(0.30) | $0.11 | $(0.41) | * | | Underwriting Combined Ratio | 140.5% | 96.7% | 43.8 pp | * | * Percentage change is not meaningful for Adjusted Operating Loss/Per Share and Combined Ratio due to sign change or large magnitude. Results of Operations for the Three Months Ended March 31, 2025 and 2024 Summary of Operating Results (dollars in thousands) Summary of Operating Results (dollars in thousands): | Metric | March 31, 2025 | March 31, 2024 | $ Change | % Change | | :------------------------------------ | :------------- | :------------- | :--------- | :--------- | | Gross written premiums | $16,173 | $24,313 | $(8,140) | (33.5%) | | Net written premiums | $10,840 | $15,391 | $(4,551) | (29.6%) | | Net earned premiums | $10,315 | $16,887 | $(6,572) | (38.9%) | | Losses and loss adjustment expenses, net | $9,274 | $10,520 | $(1,246) | (11.8%) | | Policy acquisition costs | $2,677 | $3,160 | $(483) | (15.3%) | | Operating expenses | $2,861 | $2,862 | $(1) | (0.0%) | | Underwriting gain (loss) | $(4,432) | $494 | $(4,926) | * | | Net investment income | $1,289 | $1,546 | $(257) | (16.6%) | | Income (loss) from continuing operations before income taxes | $522 | $1,206 | $(684) | * | | Net income (loss) | $522 | $231 | $291 | * | | Book value per common share outstanding | $2.09 | $0.21 | $1.88 | 895.2% | | Loss ratio | 89.7% | 62.0% | 27.7 pp | * | | Expense ratio | 50.8% | 34.7% | 16.1 pp | * | | Combined ratio | 140.5% | 96.7% | 43.8 pp | * | * Percentage change is not meaningful for underwriting gain (loss), income before taxes, net income, and ratios due to sign change or large magnitude. Summary of Premium Revenue by Line (dollars in thousands) Summary of Premium Revenue by Line (dollars in thousands): | Metric | March 31, 2025 | March 31, 2024 | $ Change | % Change | | :-------------------------------- | :------------- | :------------- | :--------- | :--------- | | Gross Written Premiums: | | | | | | Commercial lines | $2,047 | $12,762 | $(10,715) | (84.0%) | | Personal lines | $14,126 | $11,551 | $2,575 | 22.3% | | Total GWP | $16,173 | $24,313 | $(8,140) | (33.5%) | | Net Written Premiums: | | | | | | Commercial lines | $(1,604) | $8,287 | $(9,891) | (119.4%) | | Personal lines | $12,444 | $7,104 | $5,340 | 75.2% | | Total NWP | $10,840 | $15,391 | $(4,551) | (29.6%) | | Net Earned Premiums: | | | | | | Commercial lines | $1,331 | $8,797 | $(7,466) | (84.9%) | | Personal lines | $8,984 | $8,090 | $894 | 11.1% | | Total NEP | $10,315 | $16,887 | $(6,572) | (38.9%) | - Commercial lines gross written premiums decreased by 84.0% due to the cessation of hospitality and small business commercial lines as of September 1, 2024, which are now in run-off[142] - Personal lines gross written premiums increased by 22.3%, driven by organic growth in the low-value dwelling business in Texas and the Midwest, offset by the exit from Oklahoma homeowners business[143] Losses and Loss Adjustment Expenses and Loss Ratios (dollars in thousands) Losses and Loss Adjustment Expenses and Loss Ratios (dollars in thousands): | Metric | Commercial Lines (2025) | Personal Lines (2025) | Total (2025) | Commercial Lines (2024) | Personal Lines (2024) | Total (2024) | | :-------------------------------- | :---------------------- | :-------------------- | :----------- | :---------------------- | :-------------------- | :----------- | | Accident year net losses and LAE | $2,125 | $7,005 | $9,130 | $6,719 | $4,262 | $10,981 | | Net (favorable) adverse development | $(620) | $764 | $144 | $47 | $(508) | $(461) | | Calendar year net losses and LAE | $1,505 | $7,769 | $9,274 | $6,766 | $3,754 | $10,520 | | Accident year loss ratio | 159.7% | 77.7% | 88.3% | 76.0% | 52.5% | 64.7% | | Net (favorable) adverse development | (46.6%) | 8.6% | 1.4% | 0.5% | (6.3%) | (2.7%) | | Calendar year loss ratio | 113.1% | 86.3% | 89.7% | 76.5% | 46.2% | 62.0% | * Net losses and LAE decreased by $1.2 million (11.8%) in Q1 2025, primarily due to a $1.9 million decrease in current accident year losses, partially offset by a $605,000 increase in adverse development on prior-year loss reserves. Expense Ratio by Line Expense Ratio by Line: | Metric | Commercial Lines (2025) | Personal Lines (2025) | Total Underwriting (2025) | Commercial Lines (2024) | Personal Lines (2024) | Total Underwriting (2024) | | :-------------------------------- | :---------------------- | :-------------------- | :------------------------ | :---------------------- | :-------------------- | :------------------------ | | Policy acquisition costs | (3.5%) | 30.2% | 25.9% | 13.0% | 24.8% | 18.7% | | Operating expenses | 28.8% | 24.4% | 24.9% | 19.7% | 12.0% | 16.0% | | Total Expense Ratio | 25.3% | 54.6% | 50.8% | 32.7% | 36.8% | 34.7% | * The total underwriting expense ratio increased by 16.1 percentage points to 50.8% in Q1 2025, primarily due to increased commission rates under new producer agreements and significantly lower net earned premiums impacting operating expense ratios. Segment Gain (Loss) (dollars in thousands) Segment Gain (Loss) (dollars in thousands): | Segment | March 31, 2025 | March 31, 2024 | $ Change | | :-------------------------------- | :------------- | :------------- | :--------- | | Commercial Lines | $(511) | $(814) | $303 | | Personal Lines | $(3,678) | $1,380 | $(5,058) | | Total Underwriting | $(4,189) | $566 | $(4,755) | | Corporate | $(243) | $(72) | $(171) | | Total segment gain (loss) | $(4,432) | $494 | $(4,926) | Liquidity and Capital Resources - As of March 31, 2025, the Company had $52.3 million in cash, cash equivalents, and short-term investments Principal funding sources are insurance premiums, investment income, and proceeds from asset maturities/sales, used for claims, commissions, operating expenses, and debt/preferred stock service[155] - The Parent Company's ability to service debt and pay administrative expenses relies primarily on intercompany service fees from Insurance Company Subsidiaries, which are restricted by state insurance laws No dividends were paid from subsidiaries in Q1 2025 or Q1 2024, and none are anticipated in the near term[156] - Due to significant losses in 2023 and 2024, the Insurance Company Subsidiaries lack sufficient capital Conifer Insurance Company (CIC) required $16.0 million in contributions in late 2024 and early 2025 to remain above the Regulatory Action Level, but still fell within the Company Action Level with an RBC ratio of 156% (approx 160% as of March 31, 2025)[157][159] - CIC is not expected to pay intercompany service fees to CHI for 2025 to help achieve an RBC ratio above 200% Potential strategies include a quota share agreement for homeowners business and additional capital contributions[159] - CHI had $2.5 million cash as of March 31, 2025, with quarterly obligations of $412,000 for public debt interest and $253,000 for preferred stock dividends Management expects to fund obligations with cash, a $10.0 million earnout payment in 2025, potential asset sales, and short-term financing[162] Cash Flow Summary (dollars in thousands) Cash Flow Summary (dollars in thousands): | Activity Type | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change ($) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Operating Activities | $(15,260) | $8,175 | $(23,435) | | Investing Activities | $(9,613) | $(1,558) | $(8,055) | | Financing Activities | $7,500 | $(426) | $7,926 | * Cash used in operating activities increased by $23.5 million, primarily due to a $20.0 million increase in net losses paid and a $3.2 million decrease in net premiums collected. - The Insurance Company Subsidiaries' aggregate statutory capital and surplus was $35.3 million at March 31, 2025, down from $41.1 million at December 31, 2024[172] Non-GAAP Financial Measures - Adjusted operating income and adjusted operating income per share are non-GAAP measures that exclude net realized investment gains/losses, changes in fair value of equity securities, and net income from discontinued operations, providing insight into ongoing performance[173][174] Reconciliation of Net Income to Adjusted Operating Income (dollars in thousands, except per share data) Reconciliation of Net Income to Adjusted Operating Income (dollars in thousands, except per share data): | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Net income (loss) | $522 | $231 | | Less: Net realized investment gains (losses) | $3 | $0 | | Less: Change in fair value of equity securities | $(192) | $43 | | Less: Change in fair value of contingent considerations | $4,395 | $0 | | Less: Net income (loss) from discontinued operations | $0 | $(1,126) | | Adjusted operating income (loss) | $(3,684) | $1,314 | | Diluted income (loss) per common share: Net income (loss) | $0.04 | $0.02 | | Adjusted operating income (loss) per share | $(0.30) | $0.11 | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This item is not applicable for smaller reporting companies, as indicated by the Company - The Company, as a smaller reporting company, is not required to provide quantitative and qualitative disclosures about market risk[176] ITEM 4. CONTROLS AND PROCEDURES Management, including the CEO and CFO, evaluated the effectiveness of the Company's disclosure controls and procedures as of March 31, 2025, concluding they are effective, with no material changes in internal control over financial reporting during the quarter - The Company's disclosure controls and procedures were deemed effective as of March 31, 2025, following evaluation by the CEO and CFO[177] - No material changes in internal control over financial reporting occurred during the three months ended March 31, 2025[178] PART II — OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Information regarding legal proceedings is incorporated by reference from Note 12, Commitments and Contingencies, of the Notes to the Consolidated Financial Statements - Legal proceedings information is referenced from Note 12, Commitments and Contingencies, in the financial statements[180] ITEM 1A. RISK FACTORS There were no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K filed on March 28, 2025 - No material changes to risk factors were reported compared to the Annual Report on Form 10-K[181] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS All unregistered sales of equity securities were previously disclosed on a Form 8-K - All unregistered sales of equity securities have been previously disclosed on a Form 8-K[182] ITEM 3. DEFAULTS UPON SENIOR SECURITIES The Company reported no defaults upon senior securities during the period - There were no defaults upon senior securities[183] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the Company - Mine safety disclosures are not applicable to the Company[184] ITEM 5. OTHER INFORMATION No directors or Section 16 officers adopted or terminated any Rule 10b5-1 trading arrangements during the three months ended March 31, 2025 - No directors or Section 16 officers adopted or terminated Rule 10b5-1 trading arrangements in Q1 2025[185] ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including certificates of designation, purchase agreements, forms of warrants, and certifications Key Exhibits Filed Key Exhibits Filed: | Exhibit Number | Exhibit Description | Form | Filing Date | | :------------- | :-------------------------------------------------------------------------------- | :--- | :---------- | | 3.1 | Certificate of Designation of Series B Preferred Stock | 8-K | March 4, 2025 | | 10.1 | Purchase Agreement, dated February 27, 2025, by and between Conifer Holdings, Inc. and Clarkston Capital, LLC | 8-K | March 4, 2025 | | 10.2 | Form of Warrant | 8-K | March 4, 2025 | | 10.3 | Additional Purchase Agreement, dated March 3, 2025, by and between Conifer Holdings, Inc. and Clarkston Capital, LLC | 8-K | March 4, 2025 | | 31.1 | Section 302 Certification — CEO | | | | 31.2 | Section 302 Certification — CFO | | | | 32.1* | Section 906 Certification — CEO | | | | 32.2* | Section 906 Certification — CFO | | | SIGNATURES The report is duly signed on behalf of Conifer Holdings, Inc. by Harold J. Meloche, Chief Financial Officer, Principal Financial Officer, and Principal Accounting Officer, dated May 14, 2025 - The report was signed by Harold J. Meloche, Chief Financial Officer, Principal Financial Officer, and Principal Accounting Officer, on May 14, 2025[192]