Conifer Holdings, Inc.
Q1 2018 Earnings Call Transcript

Published: 12 May 2018

[Operator:]

Good morning everyone and welcome to the Conifer Holdings First Quarter 2018 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. [Operator Instructions] Please note that today's event is being recorded. And I would now like to turn the conference over to Adam Prior with The Equity Group. Please go ahead.

[Adam Prior:]

Thank you and good morning everyone. Conifer issued its 2018 first quarter financial results after the close of market yesterday. On the Company's Web-site, ir.cnfrh.com, you can find copies of the earnings release as well as the slide presentation that accompanies management's discussion today. If you are looking at that presentation via Webcast, you may find that the slides are easier to read in the large slide view, which can be selected on the right-hand side of the Webcast page. Before we get started, the Company has asked that I note that except with respect 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 from Conifer may differ materially from the results anticipated in these forward-looking statements as a result of risks and uncertainties including those described from time to time in Conifer's filings with the SEC. Conifer specifically disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise. Also, a reconciliation of non-GAAP measures was provided with the news release. 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'd now like to turn the call over to Mr Jim Petcoff, Chairman and Chief Executive Officer. Go ahead, Jim.

[James G. Petcoff:]

Thank you, Adam, and good morning everyone. Joining us from management today would be Nick Petcoff, Harold Meloche, Andy Petcoff, and Brian Roney. We are pleased to report solid performance for the first quarter of 2018. Maintaining profitability has reduced our risk and deemphasized select personal lines business that are not consistent with our long-term vision for the Company. For the first quarter, we saw a significant improvement in underwriting results, with our combined ratio decreasing by almost 10 percentage points over the prior year. This decrease was largely due to the significant improvement in our loss ratio and a slight reduction in the Company's expense ratio. To date, the continued pattern of underwriting performance mainly stems from our commercial lines and validates our shift in business mix towards stronger performing lines overall. This ability to recognize changes in our markets and being nimble enough to react is the hallmark of our Company. Our overarching goal remains generating stable underwriting returns in the select markets that we serve. Across market cycles, we do believe that a balance in premiums written between specialty, commercial and personal lines is a consistent way to generate an underwriting profit. We look to maintain and build upon momentum of the last two quarters as we strive for continued growth and underwriting profitability for all of 2018. With that, I'd like to hand the call over to Nick for a breakdown of our individual underwriting markets.

[Nicholas J. Petcoff:]

Thank you, Jim. Our commercial lines represented 92% of total gross written premium and approximately 85% of net premiums earned in the first quarter of 2018. Our commercial lines for small owner-operated businesses were the strong performer in the quarter and led the way. While gross written premiums were down for the first quarter of 2018, this reduction was planned and expected, given our shift in business mix toward our better-performing specialty lines. Specifically, we saw strong growth in our quick-service restaurant and security guard lines of business, which is a testament to Conifer's overall value proposition and focus on these niche segments. The key element is that we are focused on the markets that we know best and have performed exceptionally well over time, while lessening the amount of business in our other specialty sectors at this time. For example, we sought to reduce our exposure to higher-risk personal lines markets, such as Florida. We have also deemphasized the Company's wind-exposed homeowners business in areas like Texas and Hawaii. Cumulatively, these planned personal lines reductions impacted our top line premium results for the quarter, which should help drive positive underwriting results going forward. In the first quarter, our commercial lines net earned premium increased by just over 2%. This is partially offset by an 18% decline in personal lines net earned premium for the same period. Even given the reduction in personal lines production, Conifer's net earned premium overall quarter-over-quarter was basically flat at almost $24 million. We do expect continued growth in our specialty commercial book of business by greater penetration of our existing niche markets and by continuing our geographic expansion across all 50 states. Now, over to our personal lines business, gross written premiums for the first quarter of 2018 represented approximately 8% of our total written premiums. As previously addressed, this is roughly a 60% decrease compared to the prior year period. Even though personal lines production is down, the planned reduction at our wind-exposed personal lines should help improve profitability and reduce costs in terms of reinsurance. As Jim mentioned, the shift in business mix toward our more profitable and better performing commercial lines has led to improved underwriting performance overall. We believe that the changes we have made will drive stronger underwriting results, allow us to improve risk selection, and focus our efforts even more on our best-performing specialty lines, delivering solid shareholder returns over time. I'll now hand the call over to Harold Meloche to provide a brief discussion of the financials.

[Harold Meloche:]

Thank you, Nick. As the financial results and balance sheet information is fully detailed in our press release and quarterly filings, I will briefly go over a few highlights but welcome any specific questions during Q&A. As Nick mentioned, our net earned premiums for the first quarter decreased approximately 1% to just under $24 million compared to $24.1 million in the first quarter of 2017. This decrease was primarily due to the reduction in wind-exposed personal lines business. As Jim highlighted, Conifer's combined ratio in the first quarter improved approximately 10 percentage points to 99.5% compared to 109.1% in the same period in 2017. The Company's losses and loss adjustment expenses were $13.3 million in the first quarter compared to $15.7 million in the prior year period, and the impact of prior accident year reserves on the Company's loss ratio has been reduced due to the benefits of the adverse development cover. As of March 31, 2018, the Company had ceded $8.9 million under the ADC leaving $8.6 million of cover in the event of future development. As a result, Conifer reported a significant improvement in its loss ratio, which was 55% in the first quarter compared to 64% in the prior year period. Our expense ratio was roughly 44% in the first quarter of 2018 compared to approximately 45% in the prior year period, and the decrease was largely due to our ongoing cost containment efforts. For the first quarter, the Company reported net income of $213,000 or $0.02 per share compared to a net loss of $1.8 million or $0.24 per share in the prior year period. Regarding our balance sheet, total assets were $230 million at quarter-end, with cash and total investments of $161 million. Book value per share was $6.04 at quarter-end, and this does not include the $1.19 per share of deferred tax assets, which has a full valuation allowance against them. We maintain a conservative investment strategy with the vast majority of our portfolio currently in fixed income securities with an average credit quality of AA, an average duration of approximately three years, and a tax equivalent yield of just under 2.5%. We have conservatively managed our investments with the objective of protecting capital throughout the market cycle. And with that, I'd like to turn it back over to Jim for closing remarks.

[James G. Petcoff:]

Thanks, Harold. Profitability is the key as we drive positive results for the rest of 2018. In all our markets, our primary focus remains writing profitable premiums where we can leverage the experience of our underwriting teams, grow in our select niche markets, and generate results that will deliver strong returns for our shareholders over time. And now, we are ready to take your questions. Operator?

[Operator:]

[Operator Instructions] Our first questioner today will be Bob Farnam with Boenning & Scattergood. Please go ahead.

[Robert Farnam:]

So, I want to talk about the adverse development cover adjustments in the quarter. Looks like $0.17 per share related to the deferred losses ceded for the ADC. I just kind of want to know what to expect going forward. Is this something we're going to see each quarter as we go out?

[James G. Petcoff:]

I mean, I'd like to think that there wouldn't be any more development, but I would be remiss in saying that there wouldn't be, because I think there is a good possibility with the way Florida is with the ADC, I mean, the AOB issue, that we could see continued development. What that does is it's a timing issue before we get that money back. We get all of that back when we pay the claims. So, it's better than a deferred tax asset. You have to make money to get that back in a deferred tax asset. In this deferred asset, which doesn't show up under GAAP but does show up under state accounting, you get it back when they are paid. So that's a real book value that's not on the balance sheet. Harold, do you want to…?

[Harold Meloche:]

I think that's perfect.

[James G. Petcoff:]

That's the first time that Harold has ever said that, by the way.

[Robert Farnam:]

So, if we are adding it back into operating earnings, it seems like it would have impacted your net results somewhere in there. So where would that $0.17 impact fall or the $1.4 million?

[James G. Petcoff:]

Harold, you should answer.

[Harold Meloche:]

Yes, sure. So, that falls under net losses and LAE expenses. So, that's where – and then what's really going to happen over time is we're going to be amortizing that and using the interest method. So, it matches up with the timing of when we expect to pay the claims. So, it's along the lines of what Jim was saying. But so, we're going to see, if we have no additional development, there is going to be, I don't know, $80,000 or $90,000 of amortization each quarter that you're going to see over time of that $1.4 million.

[Robert Farnam:]

Okay, all right. And a second question regarding personal lines, so obviously you're pulling back in a lot of areas, what areas do you like in personal lines and are you growing there?

[James G. Petcoff:]

Andy?

[Andrew D. Petcoff:]

The lower-value dwelling personal lines that has performed well over the past few years is the book of business that we continue writing. We did see a decrease in that low-value dwelling book of business in Texas, and that was largely due to the sale of that book of business. But we are continuing to write that with our current agency for us. And so, we will continue writing the low-value dwelling in both Texas and in the Midwest.

[Robert Farnam:]

So, really personal lines from here is, you just want low-value dwellings?

[Andrew D. Petcoff:]

That is our focus right now, yes.

[James G. Petcoff:]

Mainly but we're not totally out of wind-exposed areas because Texas is a hurricane area. We do have commercial risks in Florida that are exposed to hurricane as well the cats and we wanted to balance the cat exposure between Texas, Florida and Hawaii so as to be efficient in our purchase of reinsurance. In order to do that with the decrease in the Florida homeowners, we had to decrease our Hawaii and Texas wind exposure. But that doesn't mean we're not going to have any cat exposure.

[Robert Farnam:]

All right, okay, great. Thanks guys.

[Operator:]

And our next questioner today will be Carl Doirin with Raymond James. Please go ahead.

[Carl Doirin:]

This is Carl Doirin in for Greg Peters. Just a question, just a follow-up on the personal lines question, can you talk about how should we think about your insurance cost and ceded premium given you are deemphasizing Florida?

[James G. Petcoff:]

Andy?

[Andrew D. Petcoff:]

We expect, the total, our TIV, will be down in all of the wind-exposed areas by about half by peak wind season. So, you'll see a large decrease in our TIV over time. Now that's just in relation to the personal lines. We still do have commercial lines that are in wind-exposed areas. But ultimately, we do expect to see a little reduction in the total reinsurance cost for the cat over the year.

[James G. Petcoff:]

This year. But next year it should be more significant.

[Andrew D. Petcoff:]

Correct.

[Carl Doirin:]

All right, thank you for that. Very helpful. And if I could also talk about just the consolidated expense ratio, still an improvement year-over-year, but it was I guess still a bit high relative to what we expected, and I noticed the operating expenses in the commercial lines was a bit high in the quarter, but corporate and other improved quite a bit. So, if you could talk about what's going on there and provide some color.

[James G. Petcoff:]

I'm going to let Harold answer with the numbers, but in essence what happened is, profit commissions through last year for our profitable agents, all got hit in the first quarter. So, I mean it's bad news, good news, but the commercial is running really well but we paid proper commissions to some of the agents and it all seemed to hit in the first quarter. I mean that's the bulk of it, but Harold?

[Harold Meloche:]

Yes, that is a large piece of it. Another piece of it is we did have reinstatement cost as there was some additional development on Hurricane Irma claims. Now, 100% of the losses were ceded to the reinsurance contracts, so we did not see any development on the loss side, but we did see about $360,000 to $370,000 of reinstatement cost relating to those reinsurance treaties and that also impacted our expense ratio. Without those two items, our expense ratio would have been lower by approximately 2 percentage points.

[Carl Doirin:]

Okay, very helpful. Thank you for that. And I guess if I could add one more, the pricing environment in the specialty lines, if you could talk about your experience there so far year-to-date?

[James G. Petcoff:]

Nick?

[Nicholas J. Petcoff:]

Sure. In the commercial, auto still has a strong pricing environment for us. We are still overall on our commercial auto book seeing rate increases on renewal in the low double-digit range, and that's a bit down slightly. The rate of increase is down slightly over the past couple of years but it is still a strong environment, and that's pretty much across the board in the commercial auto line. It's more regionally, it kind of varies by region on the hospitality business. You are seeing property rates increase, say, the mid-single-digit range. The liability side is flat to slightly up low-single digits. And then work comp is probably the one area where we're seeing rates decrease and that's a function of the various state environments and rate changes.

[Carl Doirin:]

All right, that was [indiscernible]. And then if you could provide us with an update in I guess the Florida homeowners insurance market, just how many policies do you have there and when do you expect to be completely out?

[James G. Petcoff:]

Andy?

[Andrew D. Petcoff:]

As we've mentioned on other calls, on the assumed book of business that we had, we started non-renewing all of those policies in February of this year. So, in January of 2019 we should be off of all of the assumed Florida homeowner policies in Florida.

[Carl Doirin:]

Perfect. Thank you very much.

[Operator:]

And there look to be no further questions. So this will conclude our question-and-answer session. I would like to turn the conference back over to Jim Petcoff for any closing remarks.

[James G. Petcoff:]

Thank you. We appreciate everybody who is on the call today. We do think the world looks bright and we're looking forward to the future and thank you for supporting us.

[Operator:]

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