Conifer Holdings, Inc. (NASDAQ: NASDAQ:CNFR) reported its financial results for the second quarter of 2024, emphasizing a strategic shift towards a commission-based revenue model. The company's top line figures saw a significant decline as it transitioned from a traditional risk-bearing carrier revenue model to one focused on commission-based income through its managing general agency, Conifer Insurance Services.
Despite the reduction in gross written premium by 58% to $19 million, Conifer is confident that this move will enhance profitability and create a more scalable business model. The quarter was marked by a combined ratio of 124%, influenced by storm-related losses in Oklahoma, which is in run-off. The company reported a net loss allocable to common shareholders of $4 million, or $0.32 per share.
Key Takeaways
- Conifer Holdings shifts focus to a commission-based revenue model through Conifer Insurance Services.
- Gross written premium decreased by 58% to $19 million in Q2 2024.
- Commercial lines combined ratio stood at 105%, with an accident year combined ratio at 81%.
- Personal lines were significantly affected by spring storms, particularly in Oklahoma.
- Net loss allocable to common shareholders was $4 million, or $0.32 per share.
- Net investment income rose by 11% to $1.5 million.
- The company's expense ratio improved, dropping to 32% from the prior year's figure.
Company Outlook
- Conifer Holdings is optimistic about the transition to a commission-based model, expecting improved margins and operational profitability.
- The company anticipates personal lines production to come primarily from low-valued homeowner’s business in Texas and the Midwest after the Oklahoma run-off is completed.
Bearish Highlights
- The shift to a commission-based model led to a significant reduction in top line figures.
- The company experienced a combined ratio of 124% due to storm losses in its personal lines business.
- There was a decrease of $196,000 in the fair value of equity investments.
Bullish Highlights
- The transition to a commission-based model is intended to stabilize revenue and improve profitability.
- Agency commission increased to nearly $9 million in Q2, up from $211,000 in the same quarter the previous year.
- The company's expense ratio has improved, indicating successful ongoing expense reduction efforts.
Misses
- Conifer Holdings reported a net loss for common shareholders and an adjusted operating loss for Q2 2024.
Q&A Highlights
- Management addressed shareholder concerns regarding the timeline for achieving profitability, highlighting the benefits of the new commission-based model and improved weather results for personal lines.
- Liquidity and additional capital may be sourced from asset sales as part of the company's expense reduction strategy.
Conifer Holdings' strategic shift towards a commission-based revenue model marks a significant change in the company's approach to business. While the transition has resulted in a lower top line, management remains confident in the long-term benefits of this strategy.
With a focus on enhancing distribution channels and leveraging third-party A-rated capacity providers, Conifer aims to offer superior coverage while managing risk effectively. The company's performance in the second quarter reflects the initial impact of these strategic changes and sets the stage for future developments as Conifer continues to evolve its business model.
InvestingPro Insights
As Conifer Holdings, Inc. (NASDAQ: CNFR) pivots towards a commission-based revenue model, the company faces several challenges that are reflected in both its financial performance and market valuation. The InvestingPro data and tips provide a deeper understanding of the company's current financial health and stock performance.
InvestingPro Data:
- Market Cap (Adjusted): Conifer's market cap stands at a modest $8.69 million, indicating a relatively small size within the industry.
- Revenue Growth (Quarterly): The company saw a quarterly revenue growth of 7.72% in Q2 2024, suggesting some positive momentum amidst the strategic transition.
- Price Performance: The stock's price has experienced significant volatility, with a 1-month price total return of -9.99% and a 6-month total return of -42.65%.
InvestingPro Tips:
- Analysts are concerned about Conifer's ability to generate profits, with expectations of a sales decline in the current year and no profitability over the last twelve months.
- The company's stock is known for high price volatility, which could be a consideration for investors seeking stable returns.
- With short-term obligations exceeding liquid assets, there might be liquidity concerns that investors need to watch.
These insights, coupled with the strategic shift highlighted in the article, suggest that while Conifer Holdings is taking steps to potentially improve profitability, the company still has significant hurdles to overcome. Investors and analysts will likely monitor Conifer's progress closely in the upcoming quarters.
For those interested in a more comprehensive analysis, InvestingPro offers additional insights and tips on Conifer Holdings, Inc., which can be accessed at https://www.investing.com/pro/CNFR. There are a total of 11 InvestingPro Tips available, providing a deeper dive into the company's financial health and stock performance.
Full transcript - Conifer Holding Inc (CNFR) Q2 2024:
Operator: Good morning and welcome to Conifer Holdings' Second Quarter 2024 Investor Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Brian Roney. Please go ahead.
Brian J. Roney: Thank you and good morning, everyone. Conifer issued its 2024 second quarter financial results after the close of market yesterday. You can find copies of the earnings release on the company's website at ir.cnfrh.com. The slide presentation accompanying management's remarks this morning is available to view or download via webcast or from the Investor Relations section of Conifer's website. Before we get started, please note that except with regard to historical information, statements made in this conference call may constitute forward-looking statements within the meaning of the Federal Securities Laws, including statements relating to trends, the company's operations and financial results, and the business and the products of the company and its subsidiaries. Actual results may differ materially from the results anticipated in these forward-looking statements due to various risks and uncertainties underlying our forward-looking statements as described from time to time in Conifer's filings with the SEC, including our latest Form 10-K and subsequent reports. Conifer specifically disclaims any obligation to update or revise any forward-looking statements, whether due to new information, future developments or otherwise. In addition, a replay of this call will be provided through a link on the Investor Relations section of our website. During this call, we'll also discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included when possible in our earnings release and our historical SEC filings. Statutory accounting data is prepared in accordance with statutory accounting rules and is therefore not reconciled to GAAP. We will conduct a Q&A session after management's prepared remarks this morning. With that, I'll turn the call over to Nick Petcoff, our Chief Executive Officer. Nick?
Nicholas J. Petcoff: Thanks, Brian and good morning, everyone. Also on the call with us today is Harold Meloche. As you review our second quarter results, you'll notice a significant change in our top line figures. This is a deliberate and strategic decision on our part as we continue our shift towards a commission-based revenue model, channeling premium through our wholly-owned managing general agency, Conifer Insurance Services. Our focus is on ramping up the optimization of our commercial lines by running gross written premium through our MGA. This move aligns with our long-term strategy to achieve more stable and predictable revenue streams through commissions rather than the traditional risk-bearing carrier revenue model. While this has resulted in a lower top line compared to previous periods, it is a critical step in enhancing our overall profitability and creating a more scalable and sustainable business model. Under this model, we can leverage the expertise and network of our agency partners, enhancing our distribution channels, and expanding our reach in key markets. Through this approach, our business is directly written by third-party insurers with A.M. Best ratings of A minus or better. Utilizing third-party A-rated capacity providers for MGA-produced business provides a much broader reach for existing profitable programs, enabling us to offer insurers superior coverage and paper while simultaneously governing risk through a scalable and sustainable production-based revenue model. During the second quarter of 2024, we made significant strides in channeling premiums to our capacity providers across various commercial lines of business. Specifically, we have started to accelerate the transfer of cannabis premiums to our capacity partner, Palomar, enabling us to expand into new markets and solidify our position as a leading provider of cannabis-related coverage across the U.S. As planned, our commercial lines production decreased significantly in the second quarter compared to the prior year period. This is largely the result of more time required to ramp up our other complementary capacity providers in the period. For the quarter, our commercial lines combined ratio came in at 105% and the accident year combined ratio was a solid 81%. Overall, commercial lines represented roughly 36% of total production for the quarter. Switching to our personal lines, these results were significantly impacted in the quarter by spring storms. Most of the loss came from our Oklahoma business, which is currently in run-off. We expect that the run-off process will be largely completed by year-end. With Oklahoma going away, our production for this segment will primarily come from low-valued homeowner’s business in Texas and the Midwest. In general, personal lines production was retained through our traditional carrier-based revenue model and represented a larger percentage of gross written premium in the second quarter. We expect this trend to continue in the quarters ahead as we further transition our revenue model. Overall, we remain confident that this approach will yield market benefits over time, not only improving our margins but also equipping us to better serve our insurers and agency partners with a more flexible and responsive offering. As we continue this transition, we remain committed to preserving a strong and consistent top line, continuing to streamline our expense structure, and generating operational profitability over the long term to achieve favorable returns for our shareholders. With that, I'll turn the call over to Harold to discuss the numbers. Harold?
Harold Meloche: Thank you, Nick. I'll provide a brief recap of the financial results, and I encourage investors to review our filings and presentation on the company's website for further detail. In the second quarter, overall gross written premium decreased 58% to $19 million, reflecting our decision to reduce premium leverage on our operating subsidiaries and to focus instead on the commission-based revenue through our MGA, Conifer Insurance Services. The breakout for second quarter total gross written premium was 36% commercial lines and 64% personal lines. Overall, Conifer's combined ratio was 124% in the second quarter which was impacted by the Oklahoma storms. We stopped writing Oklahoma premium in May, which should reduce -- which should result in improved mix of business of homeowners going forward. Our expense ratio continues to improve despite lower net earned premiums due to the success of our ongoing expense reduction efforts. The expense ratio was 32% in the second quarter, down 580 basis points from the same period last year and well below our near-term target of 35%. Agency commission in the second quarter was nearly $9 million compared to $211,000 in the second quarter of 2023, illustrating the progress the company has made in its initiative to drive commission-based revenue and shift to a managing general agency business model. Net investment income was $1.5 million during the second quarter, up 11% from $1.4 million in the prior year period. We recorded $196,000 decrease in the fair value of equity investments in the second quarter, leading to a net realized investment loss of $118,000. Our investments remain conservatively managed with the vast majority of our investable assets and fixed income securities with an average credit quality of AA+ on average duration of 2.6 years and a tax equivalent yield of 3.4%. Our company reported net loss allocable to common shareholders of $4 million or $0.32 per share and adjusted operating loss of $3.6 million or $0.30 per share for the second quarter of 2024. Moving to the balance sheet. Total assets were $293 million at quarter end, with cash and total investments of $154 million. And with that, I'd like to turn it back over to Nick for closing remarks.
Nicholas J. Petcoff: Thanks, Harold. In summary, as we wrap up, this strategic shift is positioning us for stronger and more sustainable growth. We're excited about the future and confident that our focused approach will deliver long-term value to our shareholders. Thank you for your continued support. With that, I'd like to invite any questions. Operator?
Operator: [Operator Instructions]. Our one question comes from Robert Bairman [ph] from Retail. Please go ahead.
Unidentified Analyst: Thank you. I'm a long-standing shareholder and like management, has suffered through a string of losses here. And I'd like to get some color on when you expect to become profitable and if that is not achieved, what are your sources of liquidity and additional capital?
Nicholas J. Petcoff: Yes, I can lead that off. Appreciate the question. We do feel that with the pivot to the MGA model on the commercial lines side and the support of the A-rated paper, we do feel that the commission-based model that we're moving to does allow us to achieve profitability more quickly than we had as a carrier-based model. The personal lines obviously had a big impact on us in the second quarter with weather. We do feel good about the personal lines book that we have moving forward. Typically, the second quarter is a difficult quarter for us. So with the move to the revenue model based on commissions rather than balance sheet risk on the commercial lines side, getting A-rated paper on all of that business, allowing us to grow, and improved weather results in the personal lines, we do think that, that's a combination that will get us to profitability, and that's what we're focused on. As it relates to liquidity, I'll let Harold tackle that one and talk a little bit about that.
Harold Meloche: So we did have expense reductions over the last several years, which does help align our expense structure with our revenues. Also, we are -- we did mention in our 10-Q that to the extent that we need additional liquidity, we are considering other asset sales.
Operator: With no further questions, this will conclude the question-and-answer session. Mr. Petcoff, you may conclude the call.
Nicholas J. Petcoff: Thank you. And we appreciate the question, and we appreciate everyone's time and interest in the company and invite any of you to reach out to us at any time. And thank you, and have a good day.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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