Conifer Holdings, Inc.
Q1 2019 Earnings Call Transcript

Published: 13 May 2019

[Operator:]

Good morning. And welcome to the Conifer Holdings Incorporated Q1 2019 Investor Conference Call. All participants will be in a listen-only mode [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions [Operator Instructions]. Please note this event is being recorded. 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 2019 first quarter 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. If you are looking at that presentation via webcast, you may find the slides are easier to read in the large slide view, which can be selected on the right-hand side of the 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. And with that let me turn the call over to Mr. Jim Petcoff, Chairman and Chief Executive Officer. Please go ahead, Jim.

[Jim Petcoff:]

Thanks Adam. Good morning, everyone. Joining us today from management is Nick Petcoff, Harold Meloche and Andy Petcoff, and Brian Roney. Overall, we’re generally pleased with our progress in the first quarter, but we still have a number of milestones to accomplish as we execute our growth strategy. We’re continuing to focus on achieving growth in our specialty commercial lines where we see the best underwriting performance potential. Throughout the past year, we shifted the majority of Conifer’s spends into these core commercial lines with favorable results as evidenced by a solid exit year ratio in the commercial space. These gains were somewhat offset by continued losses in personalized with majority stemming from the Florida homeowners business. However, the good news is that with each quarter, these elements are less and less impactful and our bottom line results should continue to improve. The process of ultimately shifting our business mix will continue to take some time, but we believe that Conifer is in the right markets where we have substantial runway for growth, and we expect to generate value for our shareholders. Conifer’s commercial business is largely divided into our hospitality segments, which includes restaurants, bars, taverns, liquor liability, quick service restaurants, et cetera. And then the remainder of our commercial lines is focused primarily on small commercial business solutions and delivering admitted E&S coverage for artisan contractors, select commercial auto, security guards among a couple of other classes. Overtime, we’ve developed an understanding of our historical loss trends, and believe that through the gradual shifting of Conifer’s first premiums into these lines, we can achieve a favorable long term result. Our core specialty commercial lines business performed well overall in the first quarter with favorable underwriting results coming largely from our small business specialty lines. With the gradual shift in premium mix behind us, our entire focus is to generate a consistent underwriting process. To do this, we need to grow our top line and continue to reduce our expense structure to achieve efficient scale. We’re committed to growing but only the right way and in the right markets. We’re pleased to grow the commercial lines by 4% during the period, and this overall growth coupled with expense reductions did improve the expense ratio by 240 basis points to 41.6%. However, there’s still significant room for improvement. While we remain disciplined in our new business writings, we are pleased to hear from our independent agent partners that demand is there in our specialty products. Further wherever possible, we are implementing consistent rate increases, which are in the mid single-digits throughout many of our markets. We believe that this market response coupled with lien infrastructure will help to bring the expense ratio down and ultimately generate favorable ROE for our shareholders. With that, let me turn over to Nick and Harold and then I’ll return for a few closing remarks.

[Nick Petcoff:]

Thank you, Jim. As Jim noted, core commercial lines grew drove premiums during the period. Overall, gross written premiums were up 2% in the first quarter to just over $24 million compared to $23.7 million in the prior year period. Our commercial lines business represented 93% of total gross written premiums in the first quarter of 2019, and grew 4% year-over-year to $22.6 million when compared to the first quarter of 2018. Our personal lines business represented the remaining 7% of total gross written premiums, and decreased 16% to a little over $1.5 million in Q1 of 2019 compared to the corresponding period. In our commercial business, we saw particularly strong growth in our small business segment. This was driven by higher premium in specialty E&S products. While we continue to write commercial premiums in all 50 states, we see strong potential for growth in a number of states, including our home state of Michigan. For the first quarter, Michigan took over the top spot in our commercial lines production. We expect that growth in our home state will continue, and we expect Michigan to be our largest state by year end. Overall, we see continued runway for new policy growth and collect rate increases geographically on our existing and new commercial markets. Now I'll briefly touch on personal lines. The personal lines business is now 7% of our overall gross written premiums. Our combined ratio has remained elevated in personal lines, largely due to many factors in these coastal markets, including greater-than-anticipated weather loss. As for growth prospect, we continue to focus on developing our low-value dwelling products in the Midwest and Texas to complement our agency relationships in these states. Historically, this has helped us over several market cycles. As we continue this business mix transition and with a clear focus on the bottom line, our goal is to write more of our specialty commercial business and expand in our core select personal lines. I'll now hand the call over to Harold Meloche to provide a discussion of financials.

[Harold Meloche:]

Thank you, Nick. As always, I encourage investors to review our filings. I'll provide a quick review of the results and then we'll open it up to any questions. In the first quarter, gross written premiums were $24.2 million, up slightly year-over-year. This growth was driven by an increase in our commercial lines, but offset by a decline in our personal lines. Conifer's combined ratio was 108% at the end of the first quarter compared to Q4 2018 combined ratio of 123%. Conifer reported a loss ratio of 66.5% compared to 55.7% in the prior year period, which was driven by adverse developments in the 2017 and prior accident years. The expense rates improved to 41.6% for the first quarter of 2019 compared to 44% in the prior year period. We expect to see this number to continue to decline as we continue to grow net earned premiums in our commercial lines. In addition, we have implemented a number of cost cutting measures to lower the ratio overtime. Net investment income increased 13.5% to $910,000, during the quarter ending March 31, 2019 compared to $802,000 in the prior year period. Our investments are conservatively managed with the majority in fixed income securities with an average credit quality of AA on average duration of three years and a tax equivalent yield of just over 2.7%. In the first quarter of 2019, the company reported a net loss of $680,000 or $0.08 per share compared to net income of $213,000 or $0.02 per share in the prior year period. Moving to the balance sheet, total assets were $238,000 at March 31, 2019, the cash and total investments of a $155,000. Our book value at quarter end was $5.14 per share. We had a valuation allowance against the company’s deferred tax assets of $1.48 per share and a deferred gain as a result of the ADC of $0.40 per share. That represents approximately $1.88 per share that was not reflected in book value. And with that, I’d like to turn it over to Jim for closing remarks.

[Jim Petcoff:]

We are still experiencing some drag from Irma development, which I think the entire Industry is. And we’re experiencing some claims development from the Florida homeowners that we have exited. We’ve had very few those claims left, so we expect this to be less and less in the future quarter. But what we have done is we have exited those books of business, reduced those personal lines by almost $25 million. And then the same time have kept our gross premiums about the same, growing in our specialty commercial areas that have been extremely profitable for us. We think that the business that’s going on the books today, especially with the markets starting to show some signs of changing and getting more adequate rate, we believe that the underwriting side of the house is going to be -- is well from this to be successful in the future. We’ve talked about expense reduction for a number of quarters in row. And if you think about it with the reduction and premium that we had staying even the fact that we have been able to continue to reduce the expenses is a positive, but it’s no way near acceptable from a profitability standpoint. We need to get in to mid 30s within a reasonable period of time on the expense ratios to really show some significant and solid performance for our shareholders. We believe that with the programs we’re instituting today and where we’re going, we believe we will achieve efficiencies this year and show continued improvement in our expense ratio throughout the year, as well as continued improvement in the accident year loss ratio. So we are positive about the future. We see some opportunities out there, especially since the market is showing signs of having some hiccups. And we feel pretty unique about our position. And we’re pleased for the support that everybody has given us over the past couple of years. And if you have any questions, I please welcome them now and if you have any questions after, funnel them all through Brian Roney. He likes to take those questions. But as of now if anybody has any questions, we can take them now.

[Operator:]

Thank you. We will now begin the question-and-answer session [Operator Instructions]. Our first question comes from Greg Peters with Raymond James. Please go ahead.

[Greg Peters:]

Without being too blunt stating the obvious, this has been a painful experience for you as employee owners and for investors. And I guess considering the first quarter results and it was another disappointment, and I'm sure you're disappointed as well. When do you think you'll get back to a reasonable return on operating equity? Is it like a 2020 possibility in 2021? How far away are we do you think?

[Jim Petcoff:]

I'll answer it and then I'm going to add Brian to answer it too, because we may have different opinions. But my opinion is by about the third quarter, second or third quarter we're hoping the numbers look significantly better. We do believe that, Greg, the business we're writing right now is extremely profitable and well reserved. And we also believe that the numbers -- we're working very hard on getting these old claims closed out and settled and getting the Florida behind us. I would say that we are probably one of the first ones to recognize the Florida issue and by addressing it we had to dump a bunch of business. We managed our entire cat exposure. So that we were -- and mitigate it as well as cross-sell and it costs us a ton of money, and a ton of time, and a ton of effort. However, while we were doing that, we've been growing our core commercialized security guards are performing well, the small businesses mix there, our liquor liability continues to perform well. We had a couple situations in Pennsylvania and Montana where we had some adverse claims activity. We just had little adverse claims activity in GL and Florida, but those are the things that you should be reserving against in all. I mean that is nothing compared to what was going on in the Florida homeowners book. That is pretty much behind us, I don't know if it's 90%, 80%, 95% but it's not -- it's up there and being behind us. And the book of business we have on the books, right now we firmly believe and not just us from the management but also the board. So what I would say is I believe, hopefully, positive numbers sometimes later this year on quarterly basis and hopefully for the year. But Brian, that's my answer. Why don't you give your answer?

[Brian Roney:]

No, I agree. I echo the sentiments that Jim was talking about. I mean for us, I'm probably more focused on the expense side of the equation. If you look at the loss ratio, I think the loss ratio works itself out. I think it's relatively industry standard when we look at it. But I think, Jim, you're right. I mean, what's really hurt us is the earned premium stream. And obviously, having to shift out of a lot of Florida homeowners' premium, yet we're still growing our commercial lines, the commercial lines has been growing at a faster rate to try to overcome what we had to come out of on the personal lines. So I think what is good for us and maybe Nick can speak to it is. But we've got top-line growth prospects that we see for commercial lines going forward. We think we see some positive things coming with our cat with the reduction in the wind exposed business. So as that earned premium stream grows, as we continue our expense reduction, you get to rational scale. Now, I think you’re there. And I echo with that, we should be ourselves with better results before the end of the year.

[Operator:]

[Operator Instructions] The next question is from Mike Bergeron with Strength Capital. Please go ahead.

[Mike Bergeron:]

So the Raymond James had my first question, and that is we’ve had five years of losses, do you expect '19 to be profitable. I guess having listened to you guys at the end of the year I thought Q1 would be profitable. Did I hear you right that maybe later in the year you’ve got some profitable quarters, but unsure about the full year?

[Jim Petcoff:]

I think that’s what we said. I would say I'm more optimistic than that. But I don’t want to put something out there and disappoint again. We’ve been disappointing long enough. We’ve trying to stay with something we feel is achievable.

[Mike Bergeron:]

So the second question really is, and I appreciate you guys filing your Q last night before the call. But Jim, you said a couple of times already that you say the commercial business is extremely profitable. If you look at 2019, the underwriting loss was $5 million. If you look at this first quarter commercial lines there’s an underwriting loss of $200,000. So everything we hear is that the commercial lines are much better than the personal lines, which by order of magnitude that seems obvious. But it doesn’t seem obvious to us that its good business and maybe specifically this might be more a Harold question. Was any of the $2.3 million of deferred gain applied to the commercial line segment in Q1?

[Harold Meloche:]

Yes. But let me address the others. There’s two side to the question, there’s underwritten loss and the expenses. Our losses so they're not out of line with the industry and actually the many areas, especially the commercial lines are better than the history. The expense ratio is out of line, because of all the things that have happened in the Florida homeowners market and are getting -- exiting all that personal lines business. So when we say its profitable, people would love to have our commercial lines loss ratio. The problem is we have to get a little bit more to scale and cut our expenses. And now that we’re out of Florida homeowners, we’re able to cut a bunch of expenses, become more efficient. We are on a significant trend in that direction. I don’t want to overpromise I want to give you some realistic views of where we think profitability will flow occurs. But when we talk about profitability, we’re not -- homeowners was running about 100% direct loss ratio of some of those years, because of Florida and then it had a significantly high cat loss. So the underwriting losses were produced by enlarge by the Florida homeowners. The commercial lines loss ratios, earlier on the commercial auto was high, and that has come down. The general liability would have spiked, because of Montana and Pennsylvania. But as I said back and you have commercial property to offset that. So the overall loss ratios on the commercial side are acceptable, we still want to bring it down. And we think that the market is changing a little bit and we’re able to get more rates so they should be able to improve upon those loss ratios. But they're not unacceptable. So when we say it’s profitable, it’s because of the loss ratio and we’re taking the hits on the underwriting losses, because our expense ratio is not as lined up.

[Mike Bergeron:]

Did you apply any of the Q3 to the commercial lines?

[Harold Meloche:]

Yes. And are you talking about the ADC?

[Mike Bergeron:]

Yes, in Q1?

[Harold Meloche:]

Yes, $2 million.

[Mike Bergeron:]

So $2 million of the Q3 went to the commercial line?

[Harold Meloche:]

Yes.

[Mike Bergeron:]

So that means it was up essentially at $2.2 million underwriting loss?

[Harold Meloche:]

I guess if you could that, yes. I don’t know that -- I don’t understand how that.

[Mike Bergeron:]

And I don’t even know. Let me ask Harold the question. Is it dollar for dollar applied based on the losses?

[Harold Meloche:]

Yes…

[Mike Bergeron:]

But they could come at different rates and at different times?

[Harold Meloche:]

It is in allocation, but that’s where -- so we'd be able to do that based on the development side.

[Mike Bergeron:]

So how is $2.2 million of underwriting loss in the commercial space assign that as good business? So I hear you on the expense ratio, I thought that was the best number in the quarter, but you guys started to show some progress there. But I just don’t…

[Harold Meloche:]

I can tell you that we had two adverse judgements in quarter. We lost two cases in the quarter, in Florida in general liability. The other thing that the only reason is when I talked about Montana, we’ve been out of Montana now for a year and a half or two years on the liquor. But we cannot make money in Montana liquor and we had some adverse cases that went to line ups. And then in Pennsylvania, they came up at the end of 2014, they changed the comparative negligence loss. So if a buyer on a -- so if a person is more than 60%, if the plant is more than 60% comparative negligent, they can’t collect unless it’s a dram shop action liquor liability and if the bar 1% liable, they are jointly in several liable for the entire judgment. That didn’t come until the end of 4Q and the beginning of '15. So we just realized it then and when we have a couple of years of underwriting where we would have probably not underwritten that and Pennsylvania's caused us a little bit of a heartburn on the development, but we’re off that too. The rest of the specialty areas, which we have the numbers and we go through them with our actuaries and with everybody internally the specialty areas are performing at a loss ratio basis. And if we continue to get the expense ratio down that will take here the loss in the quarter, I mean we will start to show profit.

[Mike Bergeron:]

So just to confirm, $2 million of the Q3 went to the commercial business?

[Harold Meloche:]

Yes.

[Mike Bergeron:]

Just one on our thought we had this morning looking at the results. Given how I’d say quickly you're chewing through the ADC. Have you thought about doing another ADC policy?

[Harold Meloche:]

Well, it's fully that you asked that. It would be if they were available when we thought about it. But the flip side of that is we’re not in the same situation as when we did the prior year increase. When we did the prior, you see we had 1,400 or 1,500 known claims. And then we knew we’re going to get more claims, because it was in September of 2017. And you know March of '19, statute of limitations has run at 2013 '14, '15 we're not going to do claims. So we know what our outstanding book of claims are and we're in the process of going through the approximate 300 claims from 2016 and prior, many of which or there's a bulk -- some of them are on the books just because we don't close them until the statute run. But we're going through each and every claim, trying to make sure we understand what the development is going to be. Not that we're going to be entirely accurate but we see within a range get a handle on '16 and prior. We feel -- so I'm not sure that we would buy an ADC even if it were available, because the pricing may not be -- is not enough there to make it worth anybody's while, I guess is what I'm saying.

[Operator:]

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Jim Petcoff for any closing remarks.

[Jim Petcoff:]

I appreciate the questions that came up because those are questions I want to answer. And I do believe and what we talked about with Greg Peters that are we going to have some development still '16 and prior? Probably. Are we going to have some liability things that surprise us maybe in '17, because we had Pennsylvania still on there and we had a little bit more South Florida liability? Maybe. Do we believe that '18 is well reserved? Yes. Do we believe that what we're putting out in '19 is well reserved? Yes. So overall, we believe that hope by the end of the year, we'll be showing positive numbers. And we also believe strongly that the actions we're taking on the expense side will be effective and will continue to bring down the expense ratio. And the one thing we didn't talk about but we are growing our non-risk revenue as well. We have some agency operations where we're developing commissions. And it hasn't been too significant of alliance but we see many opportunities to couple other people's products with ours. As an example on the security guys guards, we write work comp through employers out of Reno and we receive a commission for wholesaling that product through our distribution systems. Other companies are looking at our distribution system and seeing the possibility for us to distribute their products where we can make non-risk revenue. And that I don't want to overstate this, it's just growing area but it does provide non-risk revenue and it continues to help us on the expense side. So that's all I want to say and I really appreciate everybody for listening into that. Thanks.

[Operator:]

Thank you, sir. The conference is not included. Thank you for attending today's presentation. You may now disconnect.