KBRA Downgrades Ratings for Conifer Holdings, Inc. and Subsidiaries
30 Jan 2024 | New York
KBRA downgrades the insurance financial strength ratings (IFSR) of the insurance subsidiaries of Conifer Holdings Inc. (Conifer Holdings) (NASDAQ: CNFR): to BBB from BBB+ for Conifer Insurance Company (CIC) and to BBB- from BBB+ for White Pine Insurance Company (WPIC) (together, referred to as Conifer). Additionally, KBRA downgrades the issuer rating of Conifer Holdings to BB from BB+ and downgrades the rating of CIC's surplus notes to BB+ from BBB-. The Outlooks for all ratings are revised to Stable from Negative. The downgrades reflect the continuation of poor underwriting results in the first nine months of 2023 that have fallen short of management projections provided to KBRA as well as the declining trend in risk-adjusted capitalization. Underwriting results at WPIC have caused surplus to decline to $15.3 million, a 26% decrease from year-end 2022. CIC reported a combined ratio of 128.2% for the period, compared to 115.1% for the similar period in 2022. The downgrades also reflect the negative impact to Conifer’s earnings diversification and market position given the anticipated significant reduction in the size and scope of operations related to the sale of the security guard and alarm installation business in late 2022 and the recent decision to exit the low-value dwelling homeowners business in Oklahoma. The change in Outlook from Negative to Stable reflects KBRA’s expectation that Conifer will improve risk-adjusted capitalization and operating performance in line with it's business plan. Additionally, it is KBRA’s expectation that both companies will maintain their high credit quality investment portfolios, robust reinsurance programs with strong counterparties and disciplined approach to expense management.
Key Credit Considerations
The ratings reflect the organization's niche market expertise, pricing flexibility, adequate but declining risk adjusted capitalization, and conservative investment portfolio. Conifer underwrites specialty insurance products which include property, general liability, liquor liability, commercial automobile, and low value dwelling policies to unique and potentially underserved market segments. The organization is licensed to write insurance on both an admitted and excess and surplus basis, affording it flexibility in a variety of markets and pricing scenarios.
Offsetting these strengths are the company's unfavorable loss experience, unfavorable pricing and reserving track record, elevated expense ratio, and significant ongoing adverse loss reserve development. The company's expense ratio is elevated relative to similarly sized and specialty-focused insurers. Conifer reported unfavorable loss reserve development in each of the last five years. Management executed a Loss Portfolio Transfer in October 2022 for all of its liability lines for accident years 2019 and prior to mitigate the negative impacts from further adverse loss reserve development for these accident years on its operating results.
A rating upgrade is not expected in the near term but could occur if Conifer demonstrates long-term positive earnings supported by improved underwriting results and expense improvements, sustained increases in surplus from organic growth, and consistent and favorable loss reserve development.
Continued operating losses and any resulting surplus erosion, additional material adverse loss reserve development, an adverse change in distribution relationships, failure to achieve business plan targets provided to KBRA, or departures of key members of the management team could result in a downgrade.
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