KBRA Comments on Conifer Holdings, Inc.’s Recent Stabilization Actions and Estimated Impact of Hurricanes Harvey and Irma

NEW YORK--(BUSINESS WIRE)-- In light of the adverse loss development in non-core lines of business continuing through Q3 and the recent storm activity – Hurricane Harvey in Texas and Hurricane Irma in Florida – Conifer Holdings, Inc. (Conifer) (NASDAQ: CNFR) recently announced it had entered into several agreements to maintain capital and support future growth. Kroll Bond Rating Agency (KBRA) comments that the BBB+ insurance financial strength ratings of Conifer’s subsidiaries – Conifer Insurance Company and White Pine Insurance Company – along with the BB+ issuer rating of Conifer remain unchanged following the announcement. All ratings have a Stable outlook.

Conifer is a specialty insurance company offering property, general liability, liquor liability, commercial automobile, and homeowners and dwelling policies to unique market segments. KBRA believes that Conifer’s actions, as detailed below, are prudent measures to support its core business strategy, contain any future accident year (2005 through 2016) loss development, and provide funds to replenish capital eroded by the hurricane losses. Conifer has refinanced its existing credit facility with a new privately placed subordinated debt issuance of $30.0 million and completed a common stock offering of $5.0 million. Coinciding with the capital raises, Conifer has purchased adverse development coverage for accident years 2005 through 2016 in the amount of $19.5 million excess of $38.0 million. KBRA identifies these as a series of beneficial actions, aligned with Conifer’s business strategy, that were necessitated by the combination of continued adverse reserve development and the catastrophe activity.

KBRA expects Conifer to use the net proceeds from the debt and equity issuances ($34.0 million after transaction costs) as follows: (1) repayment of existing debt – two term notes ($5.375 million) and full paydown of its revolving line of credit ($11 million); (2) purchase of the adverse development cover ($7.2 million); (3) reserve strengthening ($5.925 million); and (4) to offset estimated Q3 catastrophe losses. Any remaining funds would be used to support growth at the insurance subsidiaries and/or cash at the holding company. Following completion of the aforementioned capital raise, Conifer’s financial leverage will be roughly 30%, which KBRA believes is reasonable for the currently assigned issuer rating.

The subordinated notes were issued through a private offering to an affiliate of Elanus Capital Management, LLC and have a stated maturity date of September 29, 2032 (15 years). The total offering was for $30.0 million with a fixed annual interest rate of 8.0%. The notes include issuer call options at par from July 2018 through October 2018 and 105% of par after September 2020. The notes also provide for additional flexibility by way of interest payment deferral of up to four quarters. The prior senior credit facility of two term notes and the revolving line of credit was terminated upon being paid down.

Directors and officers of Conifer, along with an existing institutional shareholder, participated in a private offering of $5.0 million in common stock with a purchase price of $6.25, a 3.3% premium to the NASDAQ market price as of the date of the announcement. This offering was completed alongside the new subordinated debt raise.

The reinsurance agreement entered into with Swiss Re provides for $19.5 million in coverage in excess of the carried reserves for accident years 2005 through 2016. The reinsurance agreement includes a 10% co-participation by Conifer along with a 35% contingent commission depending on the performance of the reserves over time. The $7.2 million premium for the adverse development cover will be reflected as a one-time charge in the ceded earned premiums in Conifer’s upcoming third quarter results. In aggregate, the prior three calendar years have experienced $10.5 million in adverse development. KBRA notes that at least an additional $1.4 million in adverse development (approx. 6% impact to calendar year loss ratio) for accident years 2005 through 2016 will be recognized in the third quarter based upon the company’s commentary during the investor call.

Conifer recently reported estimated losses (net of reinsurance recoverables) of $4.5 million associated with Hurricanes Harvey (approx. $0.5 million) and Irma ($4.0 million). The majority of Conifer’s exposure to Texas was by way of low-value dwelling insurance tailored for owners of lower valued homes (irrespective of class of business, Texas accounted for 11.3% of gross written premium for calendar year 2016). The book of business in Florida is primarily coastal and catastrophe exposed personal line property coverage (irrespective of class of business, Florida accounted for 20.7% of gross written premium for calendar year 2016). KBRA notes that Conifer’s personal lines business accounts for less than 23.0% of total gross written premium in 2016.

A rating upgrade in the near future is not expected. However, consistent profitability, prudent reserving, and maintenance of sound financial flexibility could result in positive momentum. A change in Conifer’s risk profile, significant reduction in capital, continued unfavorable earnings trends, persisting soft property/casualty market, additional material reserve charges, a change in distribution relationships, or departures of key members of the management team could result in a negative rating action.

Visit www.kbra.com for updates.

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About Kroll Bond Rating Agency

KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).

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Kroll Bond Rating Agency

Analytical Contacts:

Patrick Curboy, Senior Analyst

pcurboy@kbra.com, (646) 731-2320

or

Fred DeLeon, Director

fdeleon@kbra.com, (646) 731-2352

or

Andrew Edelsberg, Managing Director

aedelsberg@kbra.com, (646) 731-2371

or

Donna Halverstadt, Managing Director

dhalverstadt@kbra.com, (646) 731-3352

Source: Kroll Bond Rating Agency