Q2 2021 Conifer Holdings Inc Earnings Call
Good morning, and welcome to the Conifer Holdings second quarter 'twenty 'twenty, one Investor Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.
After todays presentation, there will be an 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 webcast at.
I would now like to turn the conference over to Adam Prior of the equity group. Please go ahead.
Thank you and good morning, everyone Conifer issued its 2021 second quarter 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 via webcast.
Or from the Investor Relations portion of Conifer's website.
Before we get started the company has asked that I note.
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 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.
<unk>, specifically disclaims any obligation to update or revise any forward looking statements whether as a result of new information future developments or otherwise. 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.
Inside filiation that these non-GAAP financial measures to the comparable GAAP financial measures are included when possible in our earnings release, and our historical SEC filings statutory accounting data is prepared in accordance with statutory accounting rules and is therefore not reconciled to GAAP.
We will conduct a Q&A session. After management's prepared remarks this morning.
With that I'd now like to turn the call over to Mr. Jim <unk>, Chairman and Chief Executive Officer. Please go ahead Jim.
Thank you Adam good morning, everybody on.
On the call today with me are Nick Harold Andy and Brian.
I'll provide a brief business overview and Nick will discuss our underwriting results in greater detail and Harold will cover the financials.
Overall, we made considerable strides in the second quarter turns on topline growth.
The expense reduction, but we understand we still have a number of operating profitability milestones to accomplish as we execute our entire strategy.
The sustainability of our topline growth has been driven by a combination of rate and increased policies written in our best performing lines.
Our commercial and personal lines segments. Each saw significant increases in gross written premium leading to an overall, 27% quarter over quarter growth rate.
Setting us up well for a solid full year results.
However, what might be equally important as the growth itself is how we are growing.
One of our strategic objectives has been to grow our book of business in specialty lines that fit our criteria for profitability.
For the quarter within commercial lines. The biggest source of growth continues to be in our small business clients and.
And we are largely we largely attribute that to the expanding our marketing efforts and lines of business, where we have been historically profitable.
As Nick will discuss a little time later, we will have we would have had certain lines of business that have not performed up to our expectations.
Lowering our premium base and those deemphasize lines its favorable trend going forward as well.
We began to lessen our exposure to these areas over the last several years, yet even with planned reductions taking place we are still seeing overall top line growth in the areas. We most want.
At present I'm very pleased with our current business mix as we continue to grow and leverage our infrastructure to achieve greater stability over time.
The core of our efforts remain submission of high level customer service and growing our top line.
I'll also equipping our agents with tools, they need to do their jobs, well and generate profitable premium for us.
We are seeing the benefits now in terms of premium production growth as a result of early dedication to leveraging technology to provide innovative solutions that allow our agents and their employees to seamlessly do business with us anywhere all while serving their customer base.
For the remainder of 2021, our focus will continue to be on generating profitable premium growth from all sources and then always.
With improvements in our top line through targeted rate increases locked me policy additions and continuing to refine our business mix, while achieving even greater scale in our core specialty markets.
With that let me turn it over to Nick for more color on our underwriting Nick.
Thank you Jim.
In reviewing our underwriting for the period. It is important to note the premium breakdown for commercial lines, largely seeing growth from small specialty business insurance, representing roughly 88% of our total written premiums and personal lines, consisting largely of low value home and dwelling business representing 12%.
Start with an overview of commercial lines provide context for the underwriting performance and explain where we are in terms of the products and product mix shifts instituted in prior years.
Commercial lines gross written premiums for the period were up roughly 21% to almost $31 million.
This came through a mix of rate and new business in both commercial and personal lines as general economic and business conditions continue to improve from pandemic lows.
Submissions continued to grow during the second quarter, and we're still benefiting from a high existing renewal retention levels at approximately 90% overall as we build on our base and expand market share in many of our key geographies, including our home state of Michigan.
In the quarter, we did see lower premiums in our hospitality business overall, which is a relatively diverse group of classes covering property and casualty business largely for restaurants bars and taverns.
For the quarter, our hospitality premiums declined by 17%, which is largely due to our planned selective non renewal in certain geographies for certain classes.
Despite all of this we did continue to see significant growth in several of our other hospitality lines largely driven by rate increases generally in the mid teens.
We believe that nationwide employee shortages have challenge the hospitality sector in particular, but we do see a light at the end of the tunnel as those lines continue to emerge from the pandemic restrictions placed on the public at large.
In the first quarter or in the quarter far outstripping the decline in hospitality premium was the increase in our small business sector, which is up over 47% quarter over quarter. This equated to an increase of over $7 million in premium for the quarter alone.
All in all it was a solid quarter in six months to the commercial lines premium growth.
In addition to commercial lines growth. We were also pleased to report an exceptional quarter in our personal lines business as well Chris.
Personal lines premium more than doubled year over year of 107% to just over $4 million and it was highly profitable as well posting a 79% combined for the quarter.
Personal lines consists largely of a focus on low value dwelling, where underwriting teams have established strong relationships with retail and wholesale specialists and select low value dwelling markets.
Geographically this is a relatively well this as well relatively well dispersed across the Midwest with solid growth, particularly in Texas, Oklahoma and Indiana.
We've been very careful in selecting certain locations to avoid excess wind exposure all of them.
And it was a solid quarter for personal lines.
Overall, though I would echo Jim's earlier comments that our current business mix in 2021 is as strong as ever.
Even with planned reductions in select lines to further enhance and refine our business mix. We are growing our top line in the areas, we like most leading to greater opportunities for profit going forward.
So what's been holding us back in terms of bottom line results from our earlier years. He is clearly seeing more development than anticipated.
And as a result, we've been tirelessly refining changing and improving our business mix over the last several years and efforts to drive greater results for our shareholders going forward.
As we review all of our lines for ongoing profitability prospects, we have continued.
Taking clear action to reduce exposure to underperforming lines as well.
For example, we have continued to take action in our U S airline and with our southeast, Florida restaurant bar and tavern business as well.
These are two specific areas that we are focused on in particular to drive more profitable results.
This was business that had historically been read and very successfully but challenging judicial environment, coupled with a higher instance of personal injuries led to higher than expected loss performance.
As a result, we began to pare back our new business writings in several of those lines over the last several years as we refined our geographic mix focusing on the best performing agents accounts and geographies.
The fact that we have been able to successfully shift our business mix and grow our topline overall. Despite this targeted pullback as a very favorable trend in the long run.
In addition to an improving business mix why do we feel that we are seeing improvement on possible future development.
There are several important factors to take into consideration, but let's look at USR in particular, which has underperformed our expectations to date.
Since the premium high watermark was achieved in 2018, we have been steadily reducing yet refining our overall U S. Our exposure.
Total to USR premium production is expected to be down roughly 75% by year end versus 2018, focusing on the best of the best in terms of the remaining premium written.
Since 2019, we have reduced premiums in our Florida specific quick service restaurants are up by over 90% by year end.
Some indicators that our efforts are leading to improved results is that our <unk> liability reported claim count is down 76% from the same period 2019 and down 57% from the same period 2020.
Across all of our liability lines reported claim counts were down 61% for the first six months ended June 30th 2021 compared to the same period in 2019 and down 27% from the same period in 2020.
More specifically.
Excuse me, we're specifically for the month of June alone liability reported claim counts were down 70% from June 2019, and down 35% from June 2020.
While this while gross earned premium is growing.
This is all while gross earned premium is growing we believe this is just one example of how we are focused on resolving difficulties reserving effectively and shifting our business mix to the best lines and geographies possible.
Overall, I am personally very pleased and proud to see our top line growing in areas that we want and helping us achieve greater efficiency and scale across our organization.
Our planned underwriting strategy of the last several years to favorably shift our business mix is coming to fruition now and as evidenced by today's top line premium results.
We believe that today's premium and that of the last several years should yield profitable results for conifer for years to come I'll now hand, the call over to Harold and lost to provide a discussion of the financials.
Thank you Nick.
I'll provide a quick review of the results and I also encourage investors to review our filings and presentation on the Companys website for greater detail.
In the second quarter gross written premiums increased 27% to $35 million with Jim and Nick having detailed the breakout of premiums I'll focus on the underwriting results.
Conifer's combined ratio was 113, 2% in the second quarter compared to 105% from the same period last year.
Loss ratio of 72% was up compared to 55%.
Primarily due to reserve strengthening in our hospitality lines.
The loss ratio in commercial lines for 76% in the quarter compared to 56% in the prior year period, while personal lines loss ratio was 37% this quarter compared to 40% last year.
Our current accident year combined ratio was 88% in the second quarter compared to 87% in the prior year period.
Moving to our expense ratio, we continue to see improvement, resulting mainly from recent planned expense reductions and growing net earned premiums.
Accordingly, our expense ratio improved to 41, 3% this quarter from 45, 9% for the same period last year.
460 basis points quarter over quarter.
This is the lowest expense ratio, we have achieved for several periods.
And we have a short term goal of reporting an expense ratio at or under 40%.
And are pleased to have the targets within our sites.
As we scale up our net earned premiums continue to implement cost cutting measures and further leverage the investments we have made in technology. We believe this goal is very achievable.
Net investment income was $503000 during the second quarter compared to $863000 in the prior year.
Net realized gains increased substantially to $1.1 million compared to $245000 last year.
Our investments remain conservatively managed with the majority in fixed income securities with an average credit quality of double a plus an average duration of three seven years and a tax equivalent yield of one 5%.
Okay.
We recorded a gain of $1.9 million for the sale of select customer accounts and other related assets from Sycamore insurance agency, our wholly owned managing General agency, which Jim will discuss in a moment.
This resulted in net income of $5.6 million or <unk> 57 per share this quarter compared to net income of $1.5 million or <unk> 16 per share in the prior year loss ratio in the prior year period.
Excluding this nonrecurring gain the company reported an adjusting operating loss of $3.9 million or <unk> 40 per share.
Compared to an adjusted operating loss of 461000 or <unk> <unk> per share for the same period in 2020.
Moving to the balance sheet total assets were $270 million at June 30, with total cash with cash and total investments of $185 million.
Our book value at June 30 was $4.53 per share.
And we have a $1.39 per share in net deferred tax assets due to the 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.
Getting to an appropriate operating scale is a top focus of our company as we continue to grow our premium base and the lines we want.
We are now exhibiting solid long term trends as Nick said, our concentration is on ensuring that we identify lines in geographies that create the best opportunity for profit.
Leading to greater efficiency and scale our operations over time.
I'd like to close with a brief discussion of the transaction announced in conjunction with our earnings relating to our wholly owned F. G H Sycamore insurance agency.
Let me take a moment to provide a little background for those of you who may be unfamiliar with Sycamore, which we created in 2012.
This is a wholly owned managing general agent and our wholesale broker that underwrites and distributes various property and casualty insurance products Caterpillar holdings and various other insurance market.
We have been very pleased with the growth in the agency is Sycamore now services over 400 retail agency clients across 48 States and also has had an ownership position of insurance agency for commercial risks.
The premiums written are not just cataphor, but for other third party companies as well.
In June Sycamore sold select customer accounts and other related assets of some of its personal and commercial lines business to vet Your holdings.
Post deal Sycamore will hold a noncontrolling, 50% interest in venture and continue to produce various personal and commercial lines that itself did not sell.
Lives, which are substantially all produced for an underwritten by kind of for insurance company subsidiaries.
We also provided employees and resources to get you to allow us to expand and seek new markets. Then it may not have been able to reach prior art.
Our goal was to provide a solid foundation and would you venture could grow further and we continue to benefit from that growth.
The transaction, we concluded with our Sycamore agency serves as a win win for all parties, especially shareholders.
We are able.
Are you able to partially monetize.
[laughter].
Uh huh.
Partially monetize the book of business that our agency has grown with for both Carrefour and other carriers without disruption to our premium base in.
In addition venture can continue to see additional opportunities to source premium in new markets and current Cooper can get benefit from the anticipated growth.
With that we're ready to take any questions operator.
We will now begin the question and answer session.
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At this time, we will pause momentarily.
To assemble our roster.
The first question comes from Paul Newsome with Piper Sandler.
Please go ahead.
Well good morning, thanks for the call.
Could you talk a little bit about how the MGA may have had an impact on the profits historically.
Presumably it made some levels annual profits.
And how does that affect.
Perspective earnings.
Yep.
Just oh that looks like perspective earnings.
Thank you Paul that's a great question and I'm going to defer that to Harold or Brian to answer.
Thanks, Paul so.
So most of the external revenue the sycamore would've gotten shows up in our financials as other income, which was $6600.66000 for the quarter and that represents about two 6% of our total revenues for the quarter.
Not all of that is going over but I would say most of it is so we're talking about a relatively small reduction in overall revenue. We don't expect to see any reduction in gross written premium as a result of this at all just some of the other revenue, but also there is an entire staff transitioning over with these operation.
So expenses are going to reduce as well know precisely what those numbers are going to be is difficult. Because there is some expense allocation going on between the various segments, but I would say overall, it's going to be a de minimis impact to net income.
Great.
Maybe some further comments on that.
Favorable reserve development it does seem to be persisting.
And I hear about the claim count.
Declining but.
It's interesting that you have declined can't count, but a pretty sizable.
Joe do them at the same time is there a way to reconcile those two.
He says that Oh.
With trends that seem to be going into right direction, but reserve development.
He loved collection.
Yes.
There is the claim counts are reported claims so the frequency of claims versus.
The premium volume has dropped significantly those are the percentages that Nick was referring to the claims that were onboard in the geographies that we have been exiting from say 2019 and prior it's really 2018, our prior 2019 at Pryor those claims continue.
Two develop negatively that's where the development is coming from the current accident years.
Really most of the 1920 now.
We're having a.
We're not seeing development on that so it's coming from those old clamps.
When we wrote the business historically in those geographies in this life and in past life. They were quite successful changes and the litigation and other things made a challenging so when we.
Initially reserved Hussein development from there but.
Claim count reductions is really.
More of a poor tender of the future.
The more current accident years.
That makes sense, but it's a frequency issue or is it also a severity issue with those historic claims.
I don't know I don't know that I'd pick one versus the other it's not really as much of a severity issue, but we still had a large number of claims that are in litigation and we're kind of getting nickeled and dimed.
But those numbers are going down that's how I would explain it Nick do you want to add any color to that.
No I think youre right, it's more of a frequency than a severity issue on in those particular areas of the hospitality book in particular, Florida, We did have some commercial auto.
Emergence in the quarter from our repo telling book, that's essentially in run off.
And that I don't think as a trend I think that was a more.
A more of an anomaly in this particular quarter.
Other thing that I'd mention to you as you've been over the last few years, reducing our retention. So on the liability side. So that will help offset any development from a severity standpoint, instead of a frequency side, but it's definitely more of a frequency like Jim said sort of litigate ongoing litigation costs in those particular areas.
Yes.
Great. Thank you for your help.
The next question comes from Bob Farnam, with Boenning and Scattergood.
Please go ahead.
Thanks, and good morning, I just wanted to continue that conversation from Paul just a little bit because it says in the in the 10-Q, you had $1.9 million of development from the 19 and 20 accident years.
So do you have the details as to what what types of claims are driving that particular development.
Nick I don't I don't have any of that with me do you have sure yes.
If there was some development in 19 and 20, just not in the order of magnitude of the ATM in prior years, but if you look at 19 and 20, we did in.
In both years it was hospitality focus so the RBC in particular not as much the Q ISR and then that repo towing book, we did still have some of that business on the books and 19. So that was the larger aspect and again I don't see a trend in that line in particular I think it was more of an.
Anomalies for the 19 year in this quarter.
Right Okay.
Several questions from from bondholders. So it sounds like the deal. The Sycamore deal is not really going to impact your ability to service. The debt obligations is that a is that accurate.
Absolutely yes.
Okay.
Brian Yeah, no. It's absolutely accurate if anything I would go the other way because as you look at our management fees, having the potential to increase as we increase our top line that means more free cash flow goes up to C. H is you've got greater interest coverage than you probably ever had.
Okay great.
And I know you've got you still have the 24 or so million of debt that's going to come due in a couple of years how are you.
Do you have any plans or what plans do you have in place to be able to pay that down.
Well, obviously, we're taking a look at the market you know cash that we have that we're developing we will have to see where we are with the top line on our overall production, but obviously, we're aware of it. It's in September of 'twenty, three but we still have a little bit of time as we pull our plan together, but we're fully aware of it and we'd like to drive DAU.
Net interest costs. So it's clearly a focus for us to do a refi.
Right. Okay. Thank you.
Again, if you have a question. Please press Star then one.
The next question comes from Alex Bolton with Raymond James. Please go ahead.
Good morning, I'm, calling in on behalf of Bob Greg Peters I appreciate you taking my questions.
You know, maybe just start out and you know you touched on the rate environment I'm seeing mid teens, you know maybe you could.
Diving, a little deeper on you know where youre seeing right more so than other and I'm. If you can comment on loss trends.
Nick.
Sure Yeah.
Our property, we're not seeing as much rate as we are on on the liability side, we were up about 5% year over year in the second quarter.
The liability side seems to be driving more of the rate environment right now and even there I would say, it's more on our especially small business side versus the hospitality. Although we are seeing right on the hospitality side as well, but given the lockdowns and other things, it's a little bit more muted than the.
The small business side, which really has not been affected as much.
And then on commercial auto we are still seeing some rate increases although not as much as we had seen in the last several years that seems to be moderating.
Moderating somewhat but all in all sort of across the board other than work comp we are seeing a very strong rate environment.
Okay and was there a follow up.
And then on.
You know I guess you touched on Lockdowns you know I guess are you seeing effects of the delta variant on business.
Yes, we are.
On the hospitality side, we it's hard to.
It's hard to really identify whether it's driven by delta variant or just the employee shortages that we mentioned in the call.
Are still seeing.
Many of our restaurant clients having.
Having reduced hours.
Used capacity and again, it's hard to really identify that as delta variant versus labor shortages. So yeah. We're certainly continuing to evaluate it I know there's been talk of additional mitigation measures and maybe even lockdowns in certain areas I haven't seen any of that come to us.
Fruition yet.
But on the flip side, we did see and we have seen increased activity really throughout the year on the hospitality book, which is really the one that's been the most affected so yeah. We are still seeing some after effects of covid.
Today, it's hard to say, whether that's through the summer that's been adult ovarian or labor shortages.
Okay, and then lastly, you know what the sale Sycamore you said that you know.
De Minimis to net income on the expense side.
Want to confirm that you know it's <unk>.
Not going to you know help you push down to the 40% target on your expense ratio.
I think it's going to help us quite a bit.
Moved over.
Quite a number of our resources.
As a people et cetera.
We didn't really sell all of the Sycamore, we just sell some assets in some.
Renewal rights. So sycamore still operates not all of its revenue is God I.
Just.
It was more of a strategic sale of certain business units. So we think it's a win win we sold it we still have an ongoing interest in health and a motivation to help them grow.
So we see it as a positive all the way around.
Okay perfect. Thanks for the answers.
This concludes our question and answer session I would like to turn the conference back over to Jim Petkoff for any closing remarks.
I just want to say I really do appreciate everyones time and interest in the company.
And I do invite you to reach out to us with any questions that you may have in the future.
Thanks, again, and I hope you guys enjoy it.
People everyone enjoys the rest of the summer. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Okay.
Okay.
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