Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2024

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

1. Summary of Significant Accounting Policies

Basis of Presentation and Management Representation

The consolidated financial statements include accounts, after elimination of intercompany accounts and transactions, of Conifer Holdings, Inc. (the “Company” or “Conifer”), its wholly owned subsidiaries, Conifer Insurance Company ("CIC"), White Pine Insurance Company ("WPIC"), Red Cedar Insurance Company ("RCIC"), Conifer Insurance Services ("CIS"), which is our managing general agency ("MGA"), formerly known as Sycamore Insurance Agency, Inc. ("Sycamore"), and VSRM, Inc. ("VSRM"). CIC, WPIC, and RCIC are collectively referred to as the "Insurance Company Subsidiaries." On a stand-alone basis, Conifer Holdings, Inc. is referred to as the "Parent Company." VSRM owns a 50% non-controlling interest in Sycamore Specialty Underwriters, LLC ("SSU" or "Affiliate").

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which differ from statutory accounting practices prescribed or permitted for insurance companies by regulatory authorities. The Company has applied the rules and regulations of the United States Securities and Exchange Commission (“SEC”) regarding interim financial reporting and therefore the consolidated financial statements do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of management, all adjustments, consisting of items of a normal recurring nature, necessary for a fair presentation of the consolidated interim financial statements, have been included.

These consolidated financial statements and the notes thereto should be read in conjunction with the Company's audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC.

The results of operations for the six months ended June 30, 2024, are not necessarily indicative of the results expected for the year ended December 31, 2024.

Business

The Company is engaged in the sale of property and casualty insurance products and has organized its principal operations into three types of insurance businesses: commercial lines, personal lines, and agency business. The Company underwrites a variety of specialty insurance products, including property, general liability, liquor liability, automobile, and homeowners and dwelling policies. The Company markets and sells its insurance products through a network of independent agents, including managing general agents, whereby policies are written in almost all 50 states in the United States of America (“U.S.”). The Company has been in the process of strategically shifting from mostly underwriting insurance products (generating revenues through premiums) to mostly producing, or selling, insurance products through its MGA. Utilizing its existing relationships with retail agencies and other agencies, in the first quarter of 2024, the Company began producing business that was directly underwritten by a third-party insurer. By the end of the second quarter, this shift was mostly complete with the expansion of having two third-party insurers to underwrite substantially all of the commercial lines business previously underwritten by the Insurance Company Subsidiaries. The Company is currently actively considering the sale of assets and of business operations in order to raise capital with which to repay debt and improve its financial position. The Company’s corporate headquarters are located in Troy, Michigan with additional office facilities in Florida and Michigan.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes the amounts included in the consolidated financial statements reflect management's best estimates and assumptions, actual results may differ from these estimates.

Cash, Cash Equivalents, and Short-term Investments

Cash consists of cash deposits in banks, generally in operating accounts. Cash equivalents consist of money-market funds that are specifically used as overnight investments tied to cash deposit accounts. Short-term investments, consisting of money market funds, are classified as investments in the consolidated balance sheets as they relate to the Company’s investment activities.

Accounting Guidance Not Yet Adopted

In January 2021, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848). This guidance provides optional expedients and exceptions that are intended to ease the burden of updating contracts to contain a new reference rate due to the discontinuation of the London Inter-Bank Offered Rate (LIBOR). This guidance is available immediately and may be implemented in any period prior to the guidance expiration on December 31, 2024. Management does not expect the new guidance to have a material impact on the Company’s consolidated financial statements.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280). This guidance is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses, allowing financial statement users to better understand the components of a segment's profit or loss to assess potential future cash flows for each reportable segment and the entity as a whole. The amendments expand a public entity's segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker ("CODM"), clarifying when an entity may report one or more additional measures to assess segment performance, requiring enhanced interim disclosures, providing new disclosure requirements for entities with a single reportable segment, and requiring other new disclosures. ASU 2023-07 is effective for fiscal years beginning after December 31, 2024. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740). ASU 2023-09 requires public business entities to disclose additional information with respect to the reconciliation of the effective tax rate to the statutory rate. Additionally, public business entities will need to disaggregate federal, state and foreign taxes paid in their financial statements. ASU 2023-09 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2024. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.

Company Liquidity

We conduct our business operations primarily through our Insurance Company Subsidiaries and MGA. Our ability to service debt, and pay administrative expenses has been primarily reliant upon our intercompany service fees paid by the Insurance Company Subsidiaries and MGA to the holding company for management, administrative, and information technology services provided to the Insurance Company Subsidiaries and MGA by the Parent Company. The Parent Company may receive dividends from the Insurance Company Subsidiaries; however, this is not the primary means in which the holding company supports its funding as state insurance laws restrict the ability of our Insurance Company Subsidiaries to declare dividends to the Parent Company, and we do not anticipate any dividends being paid to us from our Insurance Company Subsidiaries during 2024 and 2025. The Parent Company may receive dividends from our MGA without regulatory restrictions.

Due to significant losses in 2023, much of which was attributable to strengthening reserves and severe storm activity affecting the Oklahoma homeowners business, both Insurance Company Subsidiaries lack sufficient capital to continue to underwrite the volume of business they have historically written. Accordingly, in the first quarter of 2024, management implemented a strategic shift in which the Company began utilizing third-party insurers to mostly rely on commission revenues generated by our MGA to fund operations and service debt. Substantially all of our commercial lines business is no longer being written by our Insurance Company Subsidiaries as of June 30, 2024. However, we do plan to continue to write a limited amount of the personal lines on CIC. As of June 30, 2024, the Company no longer expects to write any additional business in WPIC. It is likely that the Company will need to contribute $3.0 million to $5.0 million of more capital into WPIC before the end of the year in order to maintain its licenses. The Company is currently actively considering the sale of assets and of business operations in order to raise capital with which to repay debt and improve its financial position. We expect to fund any needed contributions with existing cash and investments at the Parent Company or through additional cash obtained through the sale of assets or business operations or additional capital raised.

The Company has executed multiple producer agreements that will underwrite a majority of the Company’s commercial lines business. We expect to continue to underwrite the existing personal lines business within our Insurance Company Subsidiaries. We believe that our existing cash, cash equivalents, short-term investments and investment securities balances in addition to any proceeds from the sale of any assets or business operations will be adequate to meet our capital and liquidity needs and the needs of our subsidiaries over the next twelve months.