Conifer Holdings, Inc.
Q4 2020 Earnings Call Transcript

Published: 28 Feb 2021

[Operator:]

Good morning and welcome to Conifer Holdings Q4 2020 Investors Conference Call. . I would now like to turn the conference over to Adam Prior from The Equity Group. Please go ahead.

[Adam Prior:]

Thank you, Kate, and Good morning, everyone. Conifer issued its 2020 fourth quarter and year-end financial results after the close of market yesterday. On the company's website, ir.cnfrh.com, you can find copies of the earnings release, as well as the slide presentation that accompanies management's discussion today, which is available to view or download via webcast or from the Investor Relations portion of Conifer's website.

[James Petcoff:]

Thank you, Adam, and Good morning. On the call with me today are Nick, Harold, Andy and Brian. I'll provide a brief overview, and Nick will discuss our underwriting results in greater detail, and then Harold will cover the financials. Looking back at 2020, it's really hard to conceive of all that's transpired in a year dominated by the global pandemic. Hopefully, we are approaching a return to normalcy in the days ahead. In 2020, Conifer adapted, thanks to the resilience, hard work and collective spirit of our employees. Many thanks to all of you for the truly -- who truly embody the commitment and drive necessary to successfully tackle such adversity. After several years of fine-tuning our business mix, we are very pleased with our current portfolio. I'm pleased to see our top line close 2020 with gross written premium up over 9% for the full year. Considering the challenges faced, that was a very solid result.

[Nicholas Petcoff:]

Thank you, Jim. Last night, we reported solid growth in all of our key operating groups during the fourth quarter. Admittedly, during the early part of the year, we were adapting and planning for the new reality of servicing our agents and insureds while trying to successfully write insurance in a pandemic.

[Harold Meloche:]

Thank you, Nick. I'll provide a quick review of the results, and I also encourage investors to review our filings and presentation on the company's website for greater detail. In the fourth quarter, gross written premiums increased 14% to $28.9 million, with Jim and Nick having detailed the breakout of premiums, I will focus on our underwriting results. Conifer's combined ratio was 111% in the fourth quarter compared to 113% in the prior year period. The loss ratio of 67% was down modestly compared to 69% in the same period last year. The loss ratio in commercial lines of 67% was comparable to the prior year quarter of 68%, while the personal lines loss ratio improved considerably to 61% from 81%.

[James Petcoff:]

In short, 2020 was a year of exceptional challenges. I'm extremely proud of how everyone here at Conifer has responded. We maintained our operating excellence, and we're able to grow our premium base, despite the global pandemic. We have successfully shifted our business mix to support solid underwriting profits. And as the world emerges from this pandemic, we look forward to even better days for Conifer.

[Operator:]

. Our first question is from Paul Newsome from Piper Sandler.

[Paul Newsome:]

I wanted to ask about the impact of reinsurance on your business and how that's integrating into the business prospectively. Obviously, the prices are going up industry-wide. And does that as well change how you think about your targets for both the loss ratio and the expense ratio?

[James Petcoff:]

Yes. In general, the reinsurance rates are going up. Andy and Nick really handle it. But on a higher level, just in general, our -- we've taken our retentions down from where they were so that we won't -- hopefully have the same amount of development in the years to come. And we look at it as a way of de-levering our balance sheet. Because our experience is improving on an accident year basis, we were able to keep our reinsurance costs relatively the same. But I'll let Nick talk about it further.

[Nicholas Petcoff:]

Yes. So, our core reinsurance treaties are at 1

[James Petcoff:]

Andy, do you want to talk a little bit about the prior 6

[Andrew Petcoff:]

Yes. As you probably remember, Paul, getting out of a few of our more wind-exposed lines of business has helped drop down our cat costs substantially over the last few years. We've continued to see a trend downward. So, we're buying a much higher limit than we were in the past as compared to in terms of a return period on the total exposure base. So this year, we think it will be about stable to last year. As Nick mentioned, price -- we've seen pricing going up in those cat marketplace. But we're hopeful that it will be about stable on a cost basis for us.

[Paul Newsome:]

And my second question, you mentioned a goal of achieving a 40% expense ratio. Could you talk about sort of what the expected return would be, given your current book of business if you manage to achieve that 40%? And is that kind of your long-term aspiration as an adequate rate of return, 40% is a high expense ratio relative to most insurance companies, but your -- obviously, your business mix is a little different than others.

[James Petcoff:]

Yes. That's true. The business mix is a little different. We're still -- the expense ratio is impacted also by our A investor rating and that we have to use a fronting company for a part of the business where it requires an A-minus carrier. Once we achieve an A-minus rating, we'll have significant reduction in our expense ratio. And 40% is not our long-term goal. Our long-term goal would be 35%. But without the A minus, it's going to be very difficult to get to that because the acquisition costs are what they are. You have to pay market acquisition costs. We have been able to control our fixed expenses, and those continue to go down actually on a real basis, not just a percentage basis. So as we continue to grow, we expect the expense ratio to come down. We're still going through cost-cutting reductions. And the way the world has changed from COVID, I see -- we see opportunities to further reduce our fixed expenses on a go-forward basis. So to answer your question, 40% is not a long-term goal, 40% is short-term goal. We expect our loss ratios to continue to improve with the current mix of business. And so, I don't know, expected returns, we want exceptional returns. So that's -- our goal is exceptional returns. But long-term goal would be 35%, Paul.

[Operator:]

Our next question is from Bob Farnam, from Boenning and Scattergood.

[Bob Farnam:]

With the low-value dwelling product in Texas, I just want to confirm whether or not you're going to have much exposure there in terms of the winter weather they've had there recently.

[James Petcoff:]

We have exposure. But I'm going to let Andy answer that question.

[Andrew Petcoff:]

Yes, we absolutely do have exposure there. We do have a mix of dwelling fire policies and HO3 policies in Texas. But the majority of our policies are dwelling fire policies, and that does not cover freeze claims. However, we do offer a buyback for water damage up to $5,000 or $10,000. So, we will see a number of claims come out of this. We do have a $2 million retention on our cat. The net loss that we could possibly see is $2 million, but we do not believe the personal lines book alone will get us to a $2 million number. We do have other lines of business that are rolled into our cat, we buy as a group. So, with all of the commercial business in Texas and other states, along with the first lines business, it is possible we hit that $2 million retention. But Texas alone with the personal lines book of business would not -- we do not believe at this time would get it to a $2 million number.

[Bob Farnam:]

Okay. Approximately, ballpark, just how many of these policies do you think purchased that extra coverage for the water damage?

[Andrew Petcoff:]

Yes. So we believe about 40% have purchased some sort of water damage coverage on top of their underlying policy. And that could vary between $5,000 or $10,000 worth of coverage.

[Bob Farnam:]

And shifting gears a little bit to the commercial line side. Reserve developments continues to be -- continues to wear away the underlying profitably. Can you just give me -- maybe give us some more details on what was driving the loss reserve development in the commercial line side?

[James Petcoff:]

Nick?

[Nicholas Petcoff:]

Yes, the majority of the development on the commercial line side came from our quick service restaurant business. And that was really driven by Florida, which was obviously talked about in prior calls. That state continues to be a challenge from a social inflation and litigation standpoint. We've reduced our exposure in our quick-service restaurant book in Florida by over 90% since '18, '19. So we see 2020, 2021, that obviously being less of an issue, and we are closing out those claims from prior years. And to some extent, the pandemic has helped with that. But that was the driver for the development in the quarter.

[Bob Farnam:]

So are you saying that most of the developments from business that was -- that you wrote in '18 and '19. Is that what I heard you say?

[Nicholas Petcoff:]

Yes. So quick-service restaurant in '18 and '19, that was the largest driver of the development during the quarter.

[James Petcoff:]

Really geographically specific to Florida, mainly. But in the geographies where we've had challenges over the years, we've been getting out of those areas since 2017. QSR was last to get out of Florida. And like Nick said, we reduced our exposure in Florida and QSR by 90% in 2021 from where it was before. And the 10% that was there, probably -- very few accounts that just have been profitable in the past. So, we don't expect that to continue for the accident years, really '19 and '20 should be better and '20 should be negligible as far as development.

[Brian Roney:]

And it also has a relatively short reporting period, right, or the tail on that business is pretty short.

[Nicholas Petcoff:]

Yes. To Brian's point, quick-service restaurant is for liability line is very quick reporting. Typically, we know it's shorter at the end of the year as opposed to other casualty lines. What the count is going to be. So we have an idea of the claims. We shouldn't see a tail of reporting. It's more just getting in front of the social inflation caused by litigation. But as Jim mentioned, that exposure has been declining for a number of years. And 2020 and 2021 should not be a major part of our book in that state.

[James Petcoff:]

Very little.

[Bob Farnam:]

And when you're saying near-term expense ratio of 40%, what is considered near term.

[James Petcoff:]

2021.

[Bob Farnam:]

And last for me, I've had a couple of questions from bondholders that want to know how much cash you have at the holding company and how you intend to pay down the principal of the senior notes when they come due?

[James Petcoff:]

I'm going to let Brian answer that.

[Brian Roney:]

Well, first of all, in terms of cash, we have obviously a line of credit. We have cash at the hold co. But the biggest thing for bondholders that are looking at it, I mean, there's two ways of kind of typically making payments, either you're getting dividends out or you have a service contract in place. And for us, both of our operating subsidiaries are based here in Michigan. And we have long-standing service contracts that have been blessed by the state of Michigan. So we can carve up to 12.5% premium off the top. So we wrote $111 million in premium last year. So you can see that gives us ample runway and plenty of cover relative to the interest. So we feel actually very comfortable about that. Actually, as it stands right now in September of this year, the non-call is up after the 3 years. We still have 2 years to go. So in terms of where we are, we're going to be looking at possible refi events if they exist, but we think we'll be able to come back to the markets clearly well before our stated maturity, which is still 2 years out from September.

[Bob Farnam:]

All right. So it sounds like right now, you're looking more towards refinancing as your most likely option?

[Brian Roney:]

That would be the thought at this time.

[James Petcoff:]

We'd love to -- as interest rates are much more favorable to us now.

[Operator:]

. Our next question is from Alex Bolton from Raymond James.

[Alex Bolton:]

Maybe you could help me break down the growth into what's coming from rate and what's coming from market share expansion? And maybe how you see that going forward? And then maybe within commercial lines in 2021, if you expect the first half of the year having some higher growth due to continuing opening of the economy.

[James Petcoff:]

Nick, why don't you take the rate versus share?

[Nicholas Petcoff:]

Yes. I mean, it was a combination, as we mentioned, in the fourth quarter. We are seeing strong rate on the property line of business in particular. So we're seeing rate increases there in the mid-to-high single digits. So that was quite a lift on the property line of business on the restaurants, bars, taverns and other small commercial business that we write. On the commercial auto, which is a smaller portion of our overall book, we're also seeing rate increases in that market in the mid-to-high single digits. Our liability is a little bit more muted in terms of the rate increases, and that's really driven by the -- it's really driven by geography in terms of lockdown. So obviously, if you have restaurants that are -- have much lower sales, which is our rating basis, they're going to have lower premiums. We've also seen restaurants and bars look to lower their insurance costs during these lockdowns by reducing limits and reducing coverages as well. So that puts some downward pressure on the rate there. But beyond the rate increases, we did see expansion in some of our small commercial programs. And that -- and these were really businesses not as impacted by the pandemic, things like security guards, private investigators, used car dealers, which actually have seen a pretty strong rebound given the economic environment. So some of the investments that we made in programs last year that we had started either before the pandemic and even a couple that we initiated during the pandemic to offset some of the decline in hospitality premiums. We're starting to see the growth in that, and that really happened more in the second half of the year, which is kind of where we saw the growth. In terms of this -- the beginning half of 2021, we are starting to see some submission activity tick up in our hospitality class as we see states open up. Certainly, I think the end of the second quarter into the early third quarter, hopefully, with the vaccination rollouts as they are, we'll start to see hospitality rebound even further and hopefully, to a more normalized basis moving forward.

[Adam Prior:]

Any more, operator?

[Operator:]

No, there's no more questions. Would you -- I'll turn it back over to Jim Petcoff for any final remarks.

[James Petcoff:]

Thank you. I appreciate everybody being on the call today. We look forward to 2021 as we start to come out of this pandemic. And as you can see, as Nick just outlined, with hospitality being our biggest core business, we were still able to grow last year. And in our other sectors, which have long-term profitability for us. So we're very excited about the prospects for 2021. Thanks again. Goodbye.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.