Conifer Holdings, Inc.
Q3 2019 Earnings Call Transcript

Published: 12 Nov 2019

[Operator:]

Good day and welcome to the Conifer Holdings Incorporated Q3, 2019 Investor Conference Call and Webcast. [Operator Instructions] I would now like to turn the conference over to Mr. Adam Prior of The Equity Group. Please go ahead.

[Adam Prior:]

Thank you and good morning everyone. Conifer issued its 2019 third 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 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 recognized -- 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 Jim Petcoff

[Jim Petcoff:]

Thank you, Adam. Good morning everyone. Joining us today from the management team is; Nick, Harold, Andy and Brian -- Nick Petcoff, Andy Petcoff, Brian Roney and Harold Meloche. We've been pleased with the growth in our specialty commercial lines. This is consistent with our business transition over the past several quarters.We are seeing positive trends in the specialty markets we serve, opportunities for growth coupled with rising rates. Heading into 2020, we feel comfortable we have positively positioned the company for not only a return to profitability, but an acceleration of our top line premium.I believe that the third quarter results reflect this trend in part. It shows some progress that we've made. In the quarter we achieved steady favorable premium increases across almost all lines and improvement in our loss ratios, our expense ratio as well; while, still not near our long-term goals, its progress in the right direction.For the past year, we've taken a measured approach in shifting our business mix which is now over 90% commercial with a majority focused on our core niche underserved classes.In our specialty commercial lines, we achieved rate increases while still increasing market share in many of our core segments. This includes hospitality and the small business E&S products.Nick will go into greater detail on our Commercial Lines in a few minutes. On the Personal Lines side, we remain extremely focused on two fronts. First, we moved away from the markets where there is a higher degree of volatility and where competitive and legislative conditions have made it challenging to consistently report an operating profit.For those that have not followed Conifer's story for the past several quarters, we are largely referring to the wind-exposed homeowners business. Admittedly, it has taken some time to get off the certain classes of that business. Earlier this year, we completed the exit of our Florida assumption business and we were working to close the plans on an expedited basis.Instead, we've taken the approach that orchestrated a methodical means of growing select personal lines business is the best avenue for sustained profitability in that sector. Specifically low-value dwelling business is an area that historically has performed well for us and drove a small growth in premiums written during the quarter.We feel very good heading into 2020 about our personal lines writings and have largely exited the wind-exposed business, while staying focused almost exclusively on serving low-value dwelling market.As discussed last call, not only are we looking to grow our topline premiums written, thereby growing our risk revenue, we are also looking to grow our fee-based agency operations or non-risk revenue.Over our history, we've enjoyed strong agency relationships that have placed Conifer close to the end consumer and customer. We feel there is substantial upside to drive increased non-risk revenue to the bottom line as we placed premiums with other carriers and garner increased commissions as a result.For example, we've partnered recently with a large globally known carrier on a property agreement, where we retain the low-level general liability risk and placed the larger property value risk with them. This strategy is a benefit of increasing premium production that we can retain on our own books and otherwise may have been placed away from us.When it came to evaluating personal versus commercial versus fee-based business, our collective experience does not bias our judgment in any particular direction. Over market cycles, we feel the importance of a balanced book of business cannot be overstated. However, as we said in past calls, we must take advantage of Conifer's value proposition today to ensure that we are aligned where the market is going and whether risk- or non-risk-based revenue.How do we accomplish this goal? First, through nimble operations in a vast agency network. We write in all 50 states and are about 50-50 in terms of admitted versus E&S business. We focus on small business opportunities and larger lines based on in-house underwriting experience and historical trends with lower limits and historical loss ratios where we have achieved underwriting profit in the past.The good news for us in general is that these lines are seeing rate increases in a potentially hardening commercial market. We expect to benefit from this in 2020 and beyond which should turn to increase our gross written premium over time.With that let me turn it over to Nick and Harold and then I'll return for a few closing remarks. Nick?

[Nick Petcoff:]

Thank you, Jim. In 2018, we focused on shifting our business mix to concentrate more heavily on our better performing specialty commercial lines. This change in business mix was combined with the commitment to writing business at rates that we felt that were appropriate for the given exposure.In 2019 that theme has continued as remained dedicated to writing the business that we feel gives us the best opportunity for profit whether personal or commercial lines. This means maintaining the underwriting discipline to let business go if we feel rates are inadequate in the marketplace.As of the third quarter, we feel that our business mix shift is largely behind us and we remain focused on achieving the scale and size that will benefit the entire organization moving forward.Overall gross written premiums in commercial lines increased just under 1% to $25 million compared to $24.8 million in the prior year period. Commercial lines represented 92% of gross written premiums for the quarter. Commercial lines is still led by our hospitality focus where we have been underwriting the business since the 1980s. This includes property, general liability and liquor liability for restaurants, bars and taverns, wineries, bakeries et cetera.We believe that by serving the needs of the small business owner we remain closer to our insureds and better able to provide the products and services they deserve. This market knowledge leads us to -- leads to better underwriting of our accounts and steady retention over time.While we write in all 50 states, we do have a concentration in several where we have the most experience. For example, our home state of Michigan. In Michigan we still have room for favorable growth at the rates and policy terms that we are seeking. This growth includes some hardening in select specialty commercial lines and has generated from solid relationships in our home state with our eight retail agency partners.We expect by the end of the year Michigan will be our largest state in terms of premium. Overall, we see continued runway for new policy growth, geographic expansion and solid rate increases on most of our existing and new commercial markets.Now I'll briefly touch on personal lines as Jim covered it earlier. Our personal lines business represented the remaining 8% of total gross written premiums and grew 13% to $2.1 million in the third quarter with an elevated combined ratio. The growth during the period came entirely from our low-value dwelling products in Texas and the Midwest.This is business placed entirely from long-term agency relationships and has performed well over time. The low-value dwelling business will be the primary focus for growth in personal lines moving forward.I'll now hand the call over to Harold Meloche to provide a discussion of the financials.

[Harold Meloche:]

Thank you, Nick. I encourage investors to review our quarterly filings for additional information about the company. I'll provide a quick review of the results and then we'll open it up for any questions.In the third quarter, gross written premiums were $27 million, up 2% from the prior year period and up 7.5% sequentially from second quarter. Conifer's combined ratio was 109% at the end of the third quarter compared to 118% for the same period in 2018 and 113% in the prior quarter.Conifer reported a loss ratio of 64.9% compared to 70.4% in the prior year period and down from 67% in the prior quarter. The expense ratio also decreased to 44.3% from 47.8% in the prior year period and also decreased from 45.9% in the second quarter of 2019.So, as Jim noted, while certainly not where our goal is in terms of profitability, we are pleased to see the trends moving in the right direction. Net investment income increased 54% to $1.2 million for the quarter compared to $786,000 for the prior year period.Our investments are conservatively managed with the majority in fixed income securities with an average credit quality of AA and an average duration of three years and a tax equivalent yield of 2.8%. The company reported net loss of $1.2 million or $0.13 per share this quarter compared to a net loss of $3.6 million or $0.42 per share in the prior year period.Moving to the balance sheet, total assets were $238 million at quarter end with cash and total investments of $167 million. Our book value at quarter end was $4.74 per share. We had a valuation allowance against the company's deferred tax assets of $1.35 per share that was not reflected in book value.And with that I'd like to turn it back over to Jim for closing remarks.

[Jim Petcoff:]

Thanks, Harold and Nick. In 2020, our goal is to generate steady premium growth that takes advantage of the continuing improving market conditions. While we are not calling for a hard market per se, we are seeing indicators that point favorably for rate increase in select lines and we seek to grow our topline.We believe we are seeing improving trends in the overall market and we feel well-positioned to take advantage of this as they rise. We feel confident that Conifer will not only grow, but grow profitably in the coming quarters.Lastly, as a collective unit, our entire management team and Board has supported the Conifer stock through open market purchases, participations in offerings, and in block purchases. We are firmly behind our company and see value in the stock at current levels.And now, we're ready to take any questions.

[Operator:]

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

[Greg Peters:]

Good morning guys. Can you please give us sort of an update on the reserves -- more of an update I should say both case and IBNR? I guess the critical feature going forward would be that your reserve position stabilizes because you continue to have some adverse development. So, any perspective on that -- any additional perspective on that would be helpful.

[Jim Petcoff:]

Yes. Throughout the year we've seen some development from 2017 and prior, 2016 and prior as you recall we bought an ADC on that which we did end up utilizing in its entirety.We are down 90% from the number of claims that were outstanding for 2016 and prior from I believe mid-2018. So, we're getting to the end of the outstanding claims. We have been through all of them. We still have IBNR up for that period 2016 and prior and it's actually almost the same amount of IBNRs we had up at the end of 2018. So any development that occurred did not impact the IBNR position for 2016 and prior very much in -- for 2017 either.We've seen significant decrease in the development quarter-by-quarter over the past year and extremely significant decrease in any development in September and October. So we believe we're on the downhill side of this. The number of new claims coming in because of the statute of limitations running et cetera has been less or negligible. And the development on the claims has been a lot less because we've spent an enormous amount of time getting our hands around it over the last 12 months by going through each and every claim and telling them where we are relative to our net retentions et cetera.So in-all 2017 and prior, we think we're coming to the end. We believe that the books of business in 2018 and 2019 are not the same as the books of business that we're at 2013, 2014, 2015 and 2016. 2017 was a transition year. 2018 has very little Florida homeowners, which we have reserved much more conservatively than we had in the past.2018 also on the liability side and 2019 do not have the problem areas of Montana liquor, Pennsylvania liquor liability to the extent that we did in the prior years. 2019 has very little if any Pennsylvania liquidity exposure. And our exposure in Southeast Florida, a judicial hellhole as they're termed has been decreasing significantly.So when we look at what makes up our earned premium this year, we feel very comfortable with the book of business that's going to produce the loss ratios and has produced over the last five or six years loss ratios that are acceptable. So we believe that we've positioned the company well and that we're reserving adequately in the current periods. That's probably more than you want it. But…

[Greg Peters:]

Actually I thought -- I think that was really good color Jim. So I know you're talking about growth, do you anticipate at this point that 2020 will be a profitable year for Conifer?

[Jim Petcoff:]

Yes.

[Greg Peters:]

Okay. Good luck guys.

[Jim Petcoff:]

Thank you, Greg.

[Operator:]

[Operator Instructions] Seeing that there are no further questions, I'd like to turn the conference back over to Jim Petcoff for closing remarks.

[Jim Petcoff:]

Thank you. Thank you, Greg for the questions. I just want to thank everybody for their support and we believe we're positioned for a very bright future in our opinion. And the Board, the stock, the management team has stepped up and shown their sincerity in that position by continuing to value the stock. So thanks again and we'll talk to you next quarter.

[Operator:]

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