Q4 2020 Conifer Holdings Inc Earnings Call
Good morning, and welcome to kind of Sucks Holdings Q4, 'twenty 'twenty investors conference call all of that.
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I'd now like to turn the conference over to Adam prior of from the equity Group. Please go ahead.
Thank you Kate and good morning, everyone conifer issued its 2024th quarter and year end financial results. After the close of market yesterday on the company's website IR Dot C. N F. R. H Dot 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.
Load by webcast from the Investor Relations portion of Commerce on its website.
Before we get started the company has asked that I note debt, except with respect to historical information statements made on 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 some of the products of the company and its subsidiaries.
Actual results from kind of from May differ materially from the results anticipated in these forward looking statements as a result of various risks and uncertainties underlying our forward looking statements, including risks and uncertainties associated with COVID-19, and its impact on the economy and our business as well as those risks described from time to time in conifer's filings with the SEC, including our latest.
Form 10-K and subsequent reports.
Kind of for specifically disclaims any obligation to update or revise any forward looking statements, whether as a result of new information future developments or otherwise and.
In addition, a replay of this call will be provided through a link on the Investor Relations section of our website.
During this call. We'll also discuss non-GAAP financial measures as defined by the SEC regulation G. Reconciliations of these finance non-GAAP financial measures to comparable GAAP financial measures are included when possible in our earnings release and all of our historical of SEC filings statutory accounting data is prepared in accordance with statutory accounting rules.
And is therefore not reconciled to GAAP.
We will conduct the Q&A session. After management's prepared remarks this morning.
With that I'll turn the call over to Mr. Jim <unk>, Chairman and Chief Executive Officer. Please go ahead Sir.
Thank you Adam and good morning on the call with me today are Nick Harold Andy and Brian.
I'll provide a brief overview of 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 of that's transpired in the year dominated by the global pandemic.
Hopefully we are approaching of return to normalcy in the days ahead.
In 2020 kind of for adapted thanks to the resilience hard work and collective spirit of our employees. Many thanks to all of you for the truly debt, who truly and body of 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.
Closed 2020 with gross written premium up over 9% for the full year.
Considering the challenges faced that was a very solid result.
More notable though is the sequential growth rate experience throughout the course of the year.
Grew in the first and second quarters, but out of small range due to the shelter in place restrictions imposed in response to the pandemic.
Sales began to open back up our growth accelerated in the third and fourth quarters.
We ended the year with grocery written premiums increasing by almost 14% in the fourth quarter versus fourth quarter 2019, with just under $29 million in written premiums in Q4.
We think the sets us up to hit the ground running in 2021.
On a GAAP basis 2020 was also a profitable year for the company.
As with our top line in the fourth quarter was our most profitable of the year.
We report we reported profitable operations during the quarter largely due to increased premium volumes overall and higher realized gains from investments leading the company to post earnings per share on a GAAP basis of 34 cents. During the quarter. We also generated an increase in our book value of ending the year at $4 from 59 per share.
Looking ahead 2021 of our focus will continue to be on growing our top line flow through targeted rate increases and select new policy additions in our core specialty markets.
Kind of through 2020 was also a year of significantly reduced claims activity both in frequency and severity as businesses were closed and people generally spend more time at home.
We do accept the fact, some reversal of that trend in 2021, however, with various levels of shutdowns still in place and some states cross country. We expect the first half of this year to follow the last in terms of claims activity.
In addition to growing our top line in 2021 and beyond we remain diligently focused on reducing our operating expenses as well.
We are of near term goal of driving our expense rate of 40% of below which we expect will yield of consistent underwriting profit over time.
Continue to closely monitor our performance across our book in all areas and all of our specialty niche markets, our core markets performed quite well in 2020, including hospitality while.
The restaurants and bars have been heavily impacted throughout the pandemic, we hope and expect their operations will return to normal soon.
We also intend to maintain the momentum we are enjoying in other markets, specifically small commercial business and in our low value dwelling operations, we look forward to profitable growth for all of 2021.
With that let me turn it over the next for some color on our underwriting Nick.
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 the pandemic.
At first we like most we're not sure how our markets would react and ultimately be affected by COVID-19.
Yet as of fourth quarter results bear out I'm extremely pleased and proud of our employees' ability to be creative to adapt and adjust the changing ways of doing business on a global pandemic.
This was truly a group effort to rally together largely working from home, where we're able to not just weather the storm, but continue pursuing our strategic plan execute our goals and finish on the high note in terms of gross written premium in profitability.
We intend to continue focusing on our core specialty markets and feel we have ample opportunity to grow profitably in those niche areas for several years to come.
That ample runway coupled with the current favorable rate environment provides optimism for 2021 and beyond.
As Jim noted our top line growth improved each quarter throughout 2020, ending with our fourth quarter gross written premium improving by just under 14% compared with the same quarter in 2019.
Throughout the pandemic, we have maintained an extremely high level of operational consistency as evidenced by our overall account retention at or above 90% for the full year running.
This is largely due to our agents and the relationships. They have established and maintained with their customers. But is also thanks to our experienced underwriters and support teams finding new ways to communicate and stay in touch with our agents and Insureds.
This also speaks to our previous investments in technology, as well, which will add over 95% of our employees the transition seamlessly to remote operations.
Looking ahead, we expect technology to underpin of flexible operating model, which prioritizes customer service and agent engagement, while also enabling us to reduce our operating expenses going forward.
Our top line increase in quarterly gross written premium came through a mix of rate and new business on both commercial and personal lines.
The mission growth continued to trend higher throughout the course of 2020, and we are growing our market share in many of our key geographies and.
In fact, our home state of Michigan is still our largest premium state and we have room to grow here.
Our small business segment led our growth during 2020 with other specialty commercial lines also contributing positively.
Our hospitality segment, which includes bars and restaurants has continued to be of market that has been among the most impacted by the pandemic, yes. It was down only 20% in terms of premium on the year.
We are cautiously optimistic that of return to normalcy is just around the corner and with that bars and restaurants will see their operations turned to the positive.
As that occurs we expect our business in that market will follow suit.
In terms of claims activity of the impacts of the pandemic have resulted in significantly reduced G. L exposure as many restaurants and other quick service accounts are focusing on drive up phone app delivery or other takeout options.
This resulted in a notable improvement in overall claims activity from many of our hospitality insured and in fact across almost all segments in general.
Moving to personal lines, our low value dwelling business represented the bulk of our business during the fourth quarter and for the full year the.
This is the result of the strategic decision to reduce our wind exposed premium by transitioning away from these markets over the last few years.
That is directly correlated to improve personal lines performance as we are focused away from cat exposed business overall and firmly on low value dwelling business instead.
Or 2020, which was a difficult cat year from many in our industry with so many large and various cat events happening thankfully are reduced the overall cat exposure helped contribute to positive returns for personal lines for the year.
On that point, we are very pleased by the overall personal personal lines combined ratio in the quarter improving by 29 points.
Leading personal lines to a healthy 89% combined for the full year.
Overall, our fourth quarter was very consistent with positive trends you noted in the previous quarter.
Our top line premiums continue to grow and that growth is in line with where we expect consistent underwriting profits over time.
Our overarching goal as a management team is to ensure that the company is well positioned to generate sustainable operating profit for years to come and in today's markets. We believe we are well positioned to do so on now.
Hand, the call over to Harold and the last to provide a discussion of the financials. Thank you Nick I will provide a quick review of the results and I also.
Encourage investors to review our filings on 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% of in the same period last year.
The loss ratio on 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%.
Moving to our expense ratio our planned expense reductions had a favorable impact on the expense ratio. However, this was partially offset by higher seeded premium rates as we lowered our net commercial property retention the $300000 on a per risk basis accordingly.
Accordingly, our expense ratio improved slightly to 43, 9% this quarter from 44, 3% for the same period last year.
Overtime, we do expect the expense ratio to reduce as we scale. Our net earned premiums continue to implement cost cutting measures and further leverage the investments we have made in technology.
We are of short term goal of reporting on expense ratio at or under 40% and as premiums continue to grow we feel confident that this ratio will improve.
Net investment income was $563000 for the quarter compared to $860000 for the prior year period.
The net realized gains increased substantially to $3 6 million compared to 72000.
Our investments remain conservatively managed with the majority in fixed income securities with an average credit quality of double a plus on average duration of three six years in the tax equivalent yield of one 6%.
As a result of the above kind of remain profitable reporting net income of $3 $3 million of <unk> 34 per share compared to a net loss of $3 million of <unk> <unk> per share in the prior year period.
This quarter kind of of reported an adjusted operating loss of $2 $5 million of 26 per share compared to on an.
On an adjusted operating loss of $3 4 million or <unk> 35 per share for the same period in 2019 the.
The improvement was primarily due to reduce losses and reduced operating expenses on a fairly consistent net earned premium.
Moving to the balance sheet total assets were $262 million at December 31, 2020, compared to $247 million at the end of 2019.
Cash and total investments were $191 million at year end compared to $177 million at the end of 2019.
Finally, we reported of book value of $4 59 per share we had a valuation allowance against the company's deferred tax assets of $1 37 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.
Sure 2020 was the year of exceptional challenges I am extremely proud of how everyone. Here at kind of Korea 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 the support solid underwriting profit and as the world emerges from this pandemic, we look forward to even better days for kind of on.
And now we are ready to take your questions operator.
We will now begin the question and answer Samson who asked the question you May Press Star then one on you touched on phone.
If youre using a speakerphone please pick up your handset before pressing the key.
So all of your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question is from Paul Newsome from Piper Sandler go ahead.
Good morning, and thanks for the call everyone I hope, you're all healthy and safe.
Wanted to ask about the impact of reinsurance on your business and how that's integrating into the business prospectively on this.
Some of the prices are going up.
The industry wide and does debt as well.
<unk>, how you think about the.
The targets for both the loss ratio on the expense ratio.
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 retention is down from where they were so that we want to hopefully have the same amount of development in the years to come and we look at it as a way of Delevering our balance sheet.
Because of 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 yeah, our so our core reinsurance treaties are at one one.
We just renewed those are property cat treaties are on a six one basis. So.
Obviously, we know the results of the one one renewal, which we're actually very positive as Jim mentioned, we were able to lower our property retention from 300 the 200.
We're also able to add some additional limit on our casualty clash treaties.
And that was all done with minimal increase to our ceded rate at all so that was a positive obviously.
With the property cat at six one in the experience.
On the industry wide in 2020, it'll be interesting to see where that goes but we were very happy at least with our our one one renewal and to Jim's point, continuing to look to lower Retentions, where it makes sense and hopefully.
Move some of the volatility moving forward.
Andy do you want to talk a little bit about the prior six one renewal on what that funnel of South Florida as we look at cat exposure as you probably remember Paul of getting out of a few of our more wind exposed lines of business has helped drive down our cash cost substantially over the last few years.
The continued to see a trend downwards. So.
We're buying a much higher limit than we were in the past as compared to.
In terms of of a return period on 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 go.
And often those cap marketplace, but we're hopeful that it will be about stable on a on the cost basis for us.
Alright.
My second question.
You mentioned.
The 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%.
Is that kind of your long term aspiration is an adequate rate of return.
40 percentage of high expense ratio relative to most insurance companies, but you obviously the business makes no different from others.
Yes, that's true the business mix is a little different.
We're still the expense ratio is impacted also by our a M. Best rating that we have to use of fronting company through part of the business where requires an a minus carrier.
Once we achieve an a minus rating will have significant reduction of our expense ratio.
40% is not our long term goal our long term goal would be 35.
But without the a minus is going to be very difficult to get to that because.
The acquisition class are.
What they are you have to pay market acquisition cost, we have been able to control our fixed expenses and those continue to go down actually on a re.
Real basis, not just of <unk>.
Percentage basis, so as we continue to grow we expect the expense ratio will come down we're still going through <unk>.
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 of long term goal of 40% of short term goal.
We expect.
Our loss ratios to continue to.
Prove with the current mix of business.
<unk>.
So I don't know expected returns on.
We want to exceptional returns. So that's our goal is exceptional returns, but long term goal would be 35% of cost.
Thank you very much good luck.
With 2021 keep our fingers crossed it's better than 2000.
Yes. Thank you so much Paul.
Our next question is from Bob on the NIM from Danny skate on but go.
Go ahead.
Thanks, and good morning.
With the low value dwelling product in Texas. So I, just wanted to confirm whether or not you're going to have much exposure. There in terms of the winter weather they've had there recently.
We have exposure going on.
Andy.
The answer that question.
We absolutely do have exposure there.
We do have the mix of dwelling fire policies and HR three policies in Texas, but the majority of our policies our dwelling fire policies and that does not cover freeze claims. However, we do offer of buyback for water damage up to 5000 or $10000.
So we will see a number of claims come out of this we do have of $2 million retention on our cash the net.
The net loss that we could possibly see is $2 million, but we do not believe the personal lines book of alone will get us to of $2 million number. We do have other lines of business that are rolled into our cat we buy at the group so with all of the commercial business in Texas and other states along with the first of all lines of 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, we'd get at two of $2 million number.
Okay.
Approximately.
Ballpark just how many of these policies do you think purchase debt extra coverage for the the water damage.
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 5000 or $10000 worth of coverage.
Okay. Thanks.
And shifting gears, a little bit true the commercial line side reserve developments continues the.
Can you just have to wait.
The underlying profitability can you just give me maybe give you some more details on what was driving the.
The loss reserve development on the commercial line side.
Nick.
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 on.
On that state continues to be of challenged from a social inflation, the social inflation and litigation standpoint.
We've reduced our exposure and our quick service restaurant book in Florida by over 90% since.
18 19.
So we see 2000 22021 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.
So are you, saying that most of the the development from business that was that you wrote in 18 and 19.
Is that what I heard you say.
Yes, So quick service restaurant in 18, and 19 that was the larger largest driver of the development during the quarter really geographically specific.
Two Florida, mainly.
But the in the geographies, where we've had challenges over the years.
We've been getting out of those.
Areas since 2017.
<unk> was the last to get out of Florida.
Like Nick said, we reduced our exposure in Florida.
<unk> by 90% of 2021 from where it was before in the 10% that was there are very few accounts that just have been profitable in the past.
No.
We don't expect that to continue.
For the accident years really 19% of <unk> should be better than 2000 should be negligible as far as development.
And it also has a relatively short of reporting period right out of the tail on the business is pretty sure. Yes. So to Brian's point quick service restaurant is sort of liability line is very quick reporting typically we know.
Sure at the end of the year as opposed to other casualty lines, what the the compound is going to be so.
We have an idea of the clan, we shouldnt see a tail of reporting.
More of just getting in front of the social inflation caused by of litigation, but.
As Jim mentioned that exposure has been declining for a number of years.
2020 in 2021 should not be.
A major part of our book and that stayed very little.
Okay.
And when you are saying.
The near term.
Hence ratio of 40% what is what is considered the near term.
2021.
2021, okay.
And last for me I had a couple of questions from bondholders that wants to know how much share.
Cash you have at the holding company and how you intend to pay down on the principle of the senior notes when they come due.
I'm going to let Brian.
Hey, Bob.
Yes first of all on the firm in terms of cash.
We have obviously a line of credit we of cash at the Holdco, but the biggest thing for bondholders that are looking at it I mean, there's two ways of kind of typically making payments either youre getting dividends out or are you of a service contract in place and for US both of our operating subsidiaries are based here in Michigan.
We have long standing service contracts that had 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.
<unk> about that.
<unk> as it stands right now in September of this year. The non call is off after the three years, we still have two years to go. So in terms of where we are we're going to be looking at possible of 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 two years out from September.
Alright, so it sounds like right now you are looking more towards refinancing.
As you are most likely option.
That would be the thought at this time wed love to as interest rates of are much more favorable to us.
Sure. Okay. Thanks, guys.
Thanks, Bob.
Again, if you have a question. Please press Star then one.
Our next question is from Alex Bolton from Raymond James Go ahead.
Hey, guys I appreciate you taking the questions.
If you could help me break down the growth into what's.
What's coming from rate and whats coming from market share expansion.
And maybe how you see that going forward and then maybe within commercial lines on you know on 'twenty 'twenty, one and do you expect you know the.
The first half of the year.
Having some higher growth due to you know.
Continuing opening of the economy.
Nick.
Yes, why don't you take the rating.
Great vs share, yes, I mean, it was a combination of as we mentioned in the fourth quarter. We are seeing strong right on the property line of business in particular so.
We're seeing rate increases there in the.
The mid to high single digits, so that was quite a lift on the property.
Line of business on the restaurants bars, and taverns and others.
While commercial business that we write.
On the personal area of 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 the rate increases and Thats really driven by the it's really driven by geography in terms of lockdown. So obviously, if you have restaurants that are.
They 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 the lockdown by reducing limits.
And reducing coverages as well so that put some downward pressure on on the race there.
But beyond the the rate increases we did see expansion in some of our small commercial programs and that and these were really business is 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.
<unk> environment. So some of the investments that we've made in programs last year that we had started either before the pandemic and even a couple of that.
We initiated during the pandemic to offset some of the decline in hospitality premiums were starting to see the the growth on that and that really happened more in the second half of the year, which as of kind of where we saw the growth on.
In terms of this the beginning half of 2021, we are starting to see some submission activity ticked off in our hospitality classes, we see states open up certainly I think the <unk>.
End of the second quarter into the early in the third quarter hopefully with the vaccination rollouts as they are we will start to see hospitality rebound, even further and hopefully to a more normalized basis moving forward.
Okay I appreciate the question.
Any more operator.
No theres no more questions.
Would you I'll turn it back over to Jim Pepco for any final remarks.
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.
The 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.
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