Q1 2021 Conifer Holdings Inc Earnings Call
Good morning, and welcome to the Conifer Holdings Q1, 2021 Investor Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be and opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
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.
Thank you and good morning, everyone Conifer issued its 2021 first quarter financial results after the close of market yesterday on.
From the Companys website, IR Dot C and S. R. H Dot com you can find copies of the earnings release, as well and slide presentation that accompanies management's discussion today, which is available to view or download via webcast from the investor relations portion of kind of free web site.
Before we get started the company has asked and I know 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.
Any statements relating to trends the company's operations and financial results.
And the business and the products and the company and and subsidiaries.
Actual results from conifer and may differ materially from the results anticipated and these forward looking statements as a result of various risks and uncertainties underlying and forward looking statements, including risks and uncertainties associated with COVID-19, and its impact on the economy and our businesses as well as those risks described from time to time and conifer's filings with the SEC, including our latest form 10-K and subsequent.
And reports.
<unk>, 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 will also discuss non-GAAP financial measures as defined by SEC regulation G.
G.
Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included when possible and our earnings release, and our historical and SEC filings.
Natural re 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 <unk>, Chairman and Chief Executive Officer and please go ahead.
Thank you Adam good morning, everyone.
And the call today with me are Nick Harold Andy and Brian.
As usual I will provide a brief overview and Nick will discuss the underwriting results in greater detail and Harold will cover the financials.
Our first quarter included key progress on our top line.
That provides us with good reason for optimism as we look ahead for the balance of this year. Conversely, the quarter also saw us incur property losses related to winter storm, Yuri coupled with reserve strength strengthening on certain select commercial lines.
And the production from both commercial and personal lines saw a significant growth.
And leading to an overall 21 per cent quarter over quarter growth rate.
We are very pleased with that trend of our topline growth in that quarter and expect that to last for the rest of this year.
Also in the quarter, we added to our reserves further strengthening our overall reserve position as we address particular commercial lines, including the quick service restaurants, and Florida hospitality business.
For the quarter within commercial lines and the biggest sort the source of growth was and our small business segment.
We are largely attribute that to our expanding marketing efforts and the line of business, where we have historically been profitable.
So we expect the summer of 2020, one to reflect the resurgence and economic activity is the impact of the pandemic lessens and more states open up.
We'll provide more details on that shortly.
Over the past few quarters, we've talked about the adjustments we made to our operations at Pandemics outset.
Core afterwards.
And there's been a mission to maintain our high level of customer service, while also equipping our agents with the tools they need to do their jobs well.
A large part of that effort ties to our ongoing development of technological solutions that allow our agents and employees to seamlessly do business anywhere.
The premium growth exhibited in the first quarter continued the solid trend from the second half of last year and serves as proof that we have been successful in meeting our agents' needs and helping them grow their business and partnership with us.
Looking ahead, while we do believe there are distinct benefits to having people and the office. We also intend to maintain a flexible operating model.
Ultimately what matters is that our agents and insureds feel our support of them and their businesses.
For the remainder of 2021, our focus will continue to be on generating profitable premium growth with improvements and our topline through targeted rate increases and select new policy additions and our core specialty markets. We also intend to maintain the momentum and we are joining and other markets, specifically small commercial business and and our low value.
Low value dwelling operations.
We look forward to profitable growth for the rest of 2020 one.
With that let me turn it over to Nick for more color on our underwriting Nick.
Thank you Jim.
Last night, we reported solid growth and our key operating groups, where gross written premiums were just over $30 million during the first quarter.
Commercial lines, which still represented roughly 90% of our total written premiums saw significant increase in gross written premiums for the period up over 16%.
The only outlier was our hospitality business, but we are optimistic we will see growth return there and relatively short order.
And while restaurants and bars have been among the economic sectors hardest hit by the pandemic restrictions and we remain cautiously optimistic that our hospitality business will begin to turn as COVID-19 restrictions are scaled back.
For the quarter, our topline increase and gross written premium came through a mix of rate and new business and both commercial and personal lines.
Submissions continued to grow during the first quarter and we are still benefiting from high existing renewal retention levels at approximately 90% overall as we continue to build on our base and expand market share and many of our key geographies, including our home state of Michigan.
While the majority of our core lines performed as expected and the quarter. The period was definitely overshadowed by a strengthening of reserves and cat losses experienced which we pre announced last month.
As Jim mentioned the reserve changes were largely due to negative performance exhibited by our quick service restaurant line, coupled with our Florida restaurant bar and tavern business as well.
For <unk> and particular, the last several periods, we've been right sizing the P. O S. R program.
Our ongoing analysis indicates that the underperformance to date appears tied to specific locations and select accounts as we have seen generally favorable results from our <unk> business and other geographies.
Florida remains the main target and focus of our premium reductions as a result since 2019, we have reduced premiums and our Florida specific quick service restaurant book by over 90% to less than 500000 and premium expect expected for all of 2021.
In addition, since the premium high watermark was achieved in 2018, we have been steadily reducing our overall Q ISR exposure as well and.
In fact, our total USR premium production is expected to be down roughly 75% by year end versus 2018.
As we think about these planned reductions in the <unk> business. We are extremely proud to have reported the overall commercial lines growth achieved in the quarter.
While we did strengthen reserves and select commercial lines and the period. We also experienced increased losses from winter storm, Yuri resulting in an increase in both commercial and personal lines claims.
As the deep freeze impacted business and homeowners alike for.
For the quarter, we recognized a $2 million cat limit for Uri plus an additional 318000 and reinstatement premiums.
Moving to personal lines, our low value dwelling class continued to account for the bulk of our business and the personal lines during the first quarter.
This is the result of a multiyear transition that we expect to continue which will offer better risk reward dynamics over the long term.
For the quarter personal lines was just over 10% of total production and I'm pleased to report that personal lines premium was up over 90% and Q1 to $3 $2 million.
Although the storm claims and reserve changes resulted in a loss for the quarter. We remain convinced that the company is well positioned to grow our top line in order to more quickly reduce our expense ratio, allowing us to achieve necessary scale and generate sustainable operating profits over time over time and now here.
And it over to Harold to provide a discussion of the financials.
I'll provide a quick review of the results and I also encourage investors to review our filings and presentation and the company's website for greater detail.
And the first quarter gross written premiums increased 21% to $34 million with Nick and Jim having detailed the breakout of premiums I will focus on our underwriting results.
<unk> combined ratio was 129% and in the first quarter compared to 112% and the same period last year.
The loss ratio of 84, 4% was up compared to 64, 5%, primarily due to losses, resulting from winter storm here, which impacted both our commercial and personal lines and reserve strengthening.
The single largest area of reserve development came from the <unk> line.
The loss ratio and commercial lines was 81, 7% and the quarter compared to 65, 6% and the prior year period, while the personal lines loss ratio was 111% this quarter.
Share to 49, 8% last year.
While our current accident year loss ratio was 59% and the first quarter before the impact of the storm the accident year loss ratio was 50%.
Moving to our expense ratio.
We continue to see improvement, resulting mainly from recent planned expense reductions.
Accordingly, our expense ratio improved to 44, 6% this quarter from 47, 1% and the same period last year.
We do expect to see the expense ratio reduce over time as we scale up our net earned premiums continue to implement cost cutting measures and further leverage the investments we have made and technology.
We have a short term goal of reporting and expense ratio at or under 40% and as premiums continue to grow and we feel confident that this ratio will improve.
Net investment income was $532000 during the first quarter compared to 954000 and at the same and the prior year period.
Net realized gains increased substantially to $2 9 million compared to $928.
Our investments remain conservatively managed with the majority and fixed income securities with an average credit quality and double a plus and average duration of three nine years and and tax equivalent yield of one 5%.
Ultimately the $2 $3 million of storm related expenses contributed to a net loss of $4 6 million or <unk> 48 per share for this quarter compared to a net loss of $4 7 million from 49 per share and the prior year period.
Moving to the balance sheet total assets for $260 million at March 31.
With cash and total investments of $184 million.
Our book value at March 31 was $3 $3 82 per share.
We have a $1 53 per share and net deferred tax assets that due to a full valuation allowance were not reflected in book value.
And with that I'd like to turn it back over to Jim for closing remarks.
Thanks, Harold and Nick.
The growth, we achieved and the commercial and personal lines gives us optimism for the topline growth through the balance of the year.
As we have noted throughout these prepared remarks lifting of the pandemic restrictions should generate a surge of economic activity and we expect the hospitality industry to be among the main beneficiaries.
Assuming and that plays out as stated we expect our hospitality business to pick up solidly contributing to our expanding premium base.
And now I'd like to take some questions operator.
Thank you and we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad and.
If you were using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press star and then too.
At this time, we will pause momentarily to assemble our roster.
And the first question.
We will come from Paul Newsome with Piper Sandler. Please go ahead.
Good morning, Thanks for the call and guys.
Maybe you could start off with your view.
The extent at least with your particular and business lines.
And you think price increases could be sustained over time, it looks like your book needs around or to price.
Price increases and do you think the market will do.
I'll give you that maybe second round might be required to get.
If prices where you needed to go.
Yeah.
I'm going to deflect that and let Nick and Andy talked about it from me.
And from there.
Yes on the property side, we are seeing strong rate and we are seeing that last year as well. So I do think there is a rate increases to be achieved this year and property and we were our property rates were up.
8% year over year and the first quarter. So we are seeing strong.
Our strong rate environment, there, obviously with the storms and some of the other activity in Q1, we.
And we haven't really seen as much competitive pressure on that line of business on the liability side, we were and the mid single digits with rate increases it varies quite a bit by geography and.
Loss affected accounts, we're seeing more and the mid double digits, but obviously the hospitality given the reduction in claims activity from the Lockdowns and somewhat mute the impact of that.
Rate increases on the GL so.
Absolutely, whereas the non sort of COVID-19 affected lines, we are seeing a strong rate environment for the GL as well as the property on the commercial line side and he can probably speak to the personal lines side, yes.
Yes, Paul and on the personal line side.
We're starting to see some rate increases that we're able to push through obviously.
Obviously, the storms have kind of hurt our area from from that perspective, but I think we are kind of outperformed the marketplace there.
And with some of the policy forms that we have we've seen a little bit of a retraction from some other carriers and the marketplace. So we see it as really an opportunity for additional growth while also adding some rate increases onto the business.
Fantastic.
Maybe we could ask the capital question, where are we from an RBC ratio perspective within the insurance subs and <unk>.
And then you can talk a little bit about.
Liquidity as well.
Sure I'm going to deflect that Harold but before I do I wanted to also point out when you talked about the rate increases as everybody knows the renewable book is better than the new business, you've put out and just because you get a chance to look at it once or twice and obviously, we've made several significant underwriting adjustments on our book over the last few years.
Nick what's the retention ratio.
Yes, we're still seeing retention ratios.
Round, 90% so.
We are seeing the rate increases stack on a lot of those renewals I just thought I'd point that alcohol Harold that makes sense.
So Paul first of all you know, we obviously look and monitor our RBC ratios, even though theyre an annual measure we look at them quarterly and and currently we're still have more than adequate capital to not only sustain us, but also to absorb future growth and the near term so we feel fairly well.
And capitalized from a statutory perspective and.
And cash flow is also adequate for all of our debt covenants are fine and.
And cash flow needs at the holdco or easily being handled.
Yes.
Where are you from an RBC ratio last one each day.
What do we reported at year end.
Well at year end and I don't remember the exact numbers, obviously, there and the yellow books, but we're over 500 were like $5 50 or something to that effect at year end.
With white pine and.
Probably about 400, I don't quote me on that and it's just a rough number at year end and our stress testing for the first quarter still left us with plenty of room.
Fantastic and then the last question I had was one of the things.
And it wasn't able to get it right and more on.
And the model was the tax rate.
Are you.
We are.
Your.
<unk>.
And per offsetting tax asset and you have a loss in the quarter or.
With the tax.
Yes.
Tax rules, sometimes work is if you've got.
It's a range.
The account and still think <unk> got the ability to have future earnings sometimes you have to.
And you can see.
Bill and tax yes.
Yes.
Where are you from that perspective.
Okay.
GAAP reported.
Yes, so we do.
We are accruing deferred tax asset relating to our Nols.
We are carrying those forward and we will be able to utilize those and the future and 100% of our Nols are are still well available for for us when we start to have taxable income and in fact last year, we had taxable income to a degree even though it didn't show up on a GAAP basis.
Yeah.
Capital gains that we experienced so and we utilize Nols at that point in time.
And we do use utilize our Nols and when we have.
When we have taxable income.
And they are fully available and there is a full valuation allowance against all of our net deferred tax assets right now, which is about $1 53 per share that you do not see and our balance sheet, our and our book value number.
And that will be utilized <unk> and the future though.
I guess, Joe which is great and actually a question I asked was asking us and counting.
Tom.
And if let's say next quarter just hypothetically.
You lose money.
You would be building and NOL.
But.
Would you be able to record that NOL through the income statement would there be and offsetting valuation allowance.
And there will be and offsetting it.
So Sylvia and outstanding value.
So essentially if you lose a dollar and that again hypothetically index next quarter.
That pre tax dollar will be fully recognized in net because.
And the NOL wouldn't be it would be offset by the value ratio was is that right.
That's correct.
So okay, so effectively zero effective tax rate even in the loss.
Correct, Okay, and Andrew correct.
Alright.
For months.
And then just held true model.
Appreciate it thank you very much.
Thanks, Paul.
Again, if you have a question. Please press Star then one and then.
Next question comes from Bob Farnam, with spending and Scattergood. Please go ahead.
Hi, there and good morning, I had a question on the personal lines growth now, obviously and 92%.
Top line growth there was pretty significant and I just wanted to have and appeal for.
How much of that is new business, how much of that is rates.
And I actually I noticed you also had increased premium in the wind exposed area as well. So I didn't know if that was right or if that was increased exposure as well. So maybe just kind of tease out some of the <unk>.
Details and the growth and the personal lines.
Yes, the growth is all in our low value dwelling business that we write mostly Texas, a little bit and Oklahoma, We still have the Indiana, and Illinois, Midwest low value dwelling book of business as well.
And with a smaller base as we grow and we continue to build out obviously that percentage number looks bigger we've got a number we've got a marketing effort down there and.
And we've got a number of new agents that are coming on board. So we're seeing good growth there and then kind of the areas, we want to see that and so we're going to continue to see growth in that area, it's not going to be to that magnitude I don't think it's going to start to temper down over time.
If we were to see a.
Continued growth like we've seen here in the past few quarters that would be great, but I don't expect it to continue at that rate going forward.
And then on the wind exposed portion bad debt.
Florida book has dwindled to just about nothing we do have a taxes HOA III product.
Not as much of a focus for us is the low value, but we did see some growth during the quarter. So that's why the wind exposed is up slightly we still include that and the wind exposed.
Category, even though it's more of a Dallas Fort worth.
Austin.
Houston and sort of in that triangle, yes, and to add to that I don't believe our accumulations changed much on the cat side. So that's.
That's pretty much the same as it was last year right.
Alright, Okay did you did you see more policyholders and reaching out to get coverage after the windstorm and Texas is that.
Did you have a lot more growth towards the kind of the back half of the first quarter.
No it was pretty stable across the quarter I do think that we're going to see that ramp up a little bit I do see.
From what I've seen and Theres a couple of carriers that have pulled back and I think additional insurance will be looking for coverage and that's where I think we will see some rate increases as well and the marketplace. I think also Bob if I could and inject and have Andy talk a little bit about the cat.
The low value dwelling product and bulk of our cat losses were really commercial and Andy do you want to explain why.
And I think.
If anything we learned something from our Florida homeowners play that we had a number of years ago, Luckily that we're largely out of today.
What we did when we entered taxes, we had and exclusion for water damage and then we allowed our insurance to buy back coverage up to 5000 or $10000 sub limit and.
As we did that we only saw about a 40% take up rate on our dwelling fire business. So in the deep freeze and where you had a lot of pipes bursting and water damage claims a lot of ours, we're actually not covered and that's not something that we cover along with having a dwelling fire policy and limited perils.
We're not covering everything that happens this is a very stripped down policy theyre lower values and it excluded water and a lot of cases, so I think we greatly outperformed from a loss perspective in that Texas area.
And through that storm.
And we're pretty happy with how we've developed this program our forms and the rate increases we think we're going to be able to get here and the next couple of quarters.
Great. Thanks for the color there.
And my second question is on.
And kind of claims outstanding and Florida, obviously, I don't need specific numbers, but I'm just trying to get a feel for how much in terms of.
Quick service restaurant claims are still outstanding do you still have homeowners claims outstanding and Florida, just trying to get a feel for where potential development still might be lurking.
Yes.
When you talk about potential development, you got to realize that we've been getting out of Florida. The only business. We have left and Florida is really related to one key accounts that have performed quite well and total and Florida has not been a problem for this one and the Q&A and the <unk> side and this one key accounts. That's why we still have some premium and Florida as far as the <unk>.
<unk> of claims or Theyre down to a very manageable level and when we talk about development that doesn't mean, we paid the claim out we've been increasing reserves on those claims as we've seen.
And the changes in.
The judiciary, and the judgments and things and Florida, So and the remaining claims or more.
Closely reserved to the ultimate we believe and there arent that many and on the Florida homeowners.
Just.
We have for sure it's less and 100 claims.
And.
Of those $75 80, and 90% there Irma.
And so there's very few non earn a Florida outstanding claims.
That would develop and causes problems and the Irma claims just caused us a little bit of a problem montney reinstatement premium, but we're in the second and third layer and the rates are pretty small so we expect limited reinstatement premiums.
After the Irma claims, but that's pretty much all we got.
Okay.
Thanks for that.
Once again, if you have a question. Please press Star then one.
The next question is from Alex Bolton with Raymond James. Please go ahead.
Hey, guys. How are you doing this one good day.
Alex.
And just had some quick questions I guess on the expense ratio target of 40% or lower I guess.
Can you provide any clarity on timeline, you're looking for there.
Well I think if you look at this last quarter and you look at the reinstatement premium and endorsement for that we did buy down our reinsurance last year. So there's a little bit more reinsurance. So the net earned premiums a little bit lower than it otherwise would have been but our fixed.
Expenses have been actually coming down on a gross basis, so down more significantly.
Variable.
And based on the.
Percentage basis so.
Our earned premiums going up.
Don't have continue to have reinstatement premiums dragging down the earned premium.
And we continue to manage our expenses, which.
Has been a byproduct as well of COVID-19, where you're able to manage expenses and a lot better and as we look going forward.
Obviously.
Physical presence is going to change and there's going to be opportunities to continue to reduce those expenses. So we're optimistic on the 40 odd being a realistic target and the not too distant future.
Okay I appreciate that and then just from a net income perspective, no and I guess.
And looking.
And a more.
Normalized run rate as of now and maybe couponing with reinvestment.
And investment linked a little lower.
I don't know.
Brian and here too I'll, let him talk about.
Portfolio.
Overall portfolio, obviously continues to grow because we're writing more premium, but we did recognize some realized gains and I think that that came in and brought a little bit of yield out.
So our investment yield had been higher it's roughly 1.5% at quarter and so I think youre seeing kind of net investment income come down as a result.
However, we should have more assets and exactly however, we don't necessarily expect it to trend and exactly that line, because obviously with more assets and more growth also keeping in mind that we keep a pretty good percentage of the portfolio and floaters and the overall duration is relatively short so.
And we're expecting a certain turn and the book that will allow us as rates kind of do come up to kind of see better yield overtime.
And in answering your question now.
Yeah, I appreciate that and I appreciate the answers.
Thanks.
And again, if you have a question. Please press Star then one.
Ladies and gentlemen, this concludes our question and answer session and I would like to turn the conference back over to Jim Petkoff for any closing remarks.
Yeah.
And we're very pleased with several aspects of the business the growth the book of business, we have today and the changes we've made over the last couple of years, the past did come to hottest and a couple of.
Select commercial lines that are.
Obviously, no longer focus and have had significant changes the future on the books of business, we have and the historical losses and those have been very successful. So we anticipate.
And accident year.
Significantly better than prior years, and we can see the growth coming and we do expect our expense ratio to go down.
So we here are optimistic and I hope that.
That's what you get out of this call and thank you so much for being on the call and look forward to talking to you next quarter.
And thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
And.
And.
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Yeah.
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