Q3 2021 Conifer Holdings Inc Earnings Call
Good morning, and welcome to Conifer Holdings third quarter 2021, Investor Conference call, all participants will be in a listen only mode.
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After today's presentation there'll be an opportunity to ask questions.
Please note this event is being recorded.
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 third 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 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 law, including statements related 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 then our business as well as those risks described from time to time in countries filings with the SEC.
<unk>, our latest Form 10-K and subsequent reports.
For 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'll also discuss non-GAAP financial measures as defined by SEC regulation G.
Filiation of these non-GAAP financial measures to the comparable GAAP financial measures are included when possible in the 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, everyone.
On the call with me today is Nick Harold Andy and Brian.
On today's call I'd like to provide a brief overview, Nick will discuss the underwriting results in greater detail and Harold will cover the financials.
The third quarter.
Was pleased to see continued gross written premium growth of almost 13% quarter over quarter and up just over 20% for the nine months period.
Both commercial and personal lines reported meaningful growth in grocery and premiums leading to another quarter of double digit growth.
For the changes we have been successfully implementing for several years now our business mix is largely where we'd like them to be.
And we are solely focused on growing deeper in our established specialty lines. In addition, a major component of our topline growth in the quarter came from significant rate increases and the slack lines that we serve.
In general we continue to push rate wherever possible, Nick will have little bit more on this later.
With the general business enhancements that we continue to roll through our book, we are excited about the positive impact for the future.
The ongoing top line growth will definitely drive fundamental economics economies of scale, helping reduce our overall cost structure and increasing operating efficiency as well after several years of optimizing our business mix, we see promising science for a very favorable growth trend going forward.
For the remainder of 2021, our focus will continue to be on generating profitable premium growth and our best performing lines in our core specialty markets are growth continued remains sustainable and has significant runway.
It will greatly enhance <unk> ability to report consistent operating profit going forward with that I turn it over to Nick.
Thank you Jim.
Echoing Jim's comments on growth we are pleased to see the consistent underwriting effort made over the last several years coming to successful fruition in the form of favorable top line growth.
Commercial lines represented 88% of our total production for the period, where we saw substantial growth from our small business group or.
Our personal lines, which consists largely of low value dwelling business represented 12% of written premiums for the quarter.
Commercial lines gross written premiums were up over 9% to almost $30 million in the quarter and up over 15% for the nine months period as well continuing a very positive growth trend overall during.
During the third quarter, our new business submissions continued to grow and we are still benefiting from high existing renewal retention levels at approximately 90%.
As we expand our base premium premium base, we are further developing market share in many of our key geographies, including our home state of Michigan.
In addition to continued positive performance, Michigan business presents many other opportunities for us and remains a significant driver of our expected future growth.
Looking at our book more closely hospitality premiums were down in the quarter largely due to ongoing COVID-19 impacts combined with selective plan nonrenewals.
On the other hand, we achieved 28% growth in our small business group.
This equates to an increase of roughly $5 million, an additional premium for the quarter alone, which helped drive our topline commercial lines premium growth.
As hospitality normalizes overtime, we do expect positive premium contributions there as well.
We also reported a 52% increase in personal lines premium to roughly $4 million as well as a profitable 88% combined ratio for the period.
Our personal lines consist largely of low value dwelling products, where our underwriting teams have established strong relationships and select specialty markets.
Geographically this is well disbursed across the Midwest with solid growth, particularly in Texas and Indiana.
We remain dedicated to actively monitoring our wind exposure and we'll continue to purchase wind cover conservatively to reduce possible exposures to future wind events.
As Jim discussed earlier, we have largely shifted our business mix in a very positive direction.
This shift in business mix includes changes by geography line in class where necessary.
We are pleased to see today's growth coming from the lines that we know and serve well and that have the greatest opportunity for profit.
While we did report improvements in our loss and expense ratios quarter over quarter. We also reported additional development from prior years that impacted our current year current period profitability.
Much of that reported development stems from a few select lines that we continue to either run off or deemphasize.
Over the past several quarters, we have noted the change in business mix as we have proactively reduced our exposure to these key certain lines.
And particularly in particular, we have noted previously that select classes of our Florida restaurant Bar Tavern business as well as certain quick service restaurant exposures were not performing to our expectations due to several factors largest among these items was the ongoing impact of a challenging Florida judicial environment.
What efforts that we've taken to mitigate future reserve development.
For example, since the premium high watermark for our <unk> book was achieved in 2018, we have been steadily reducing and refining our overall Q ISR exposure.
Total U S. Our premium production is expected to be down roughly 75% by year end 2021 versus 2018, focusing on the best of the best in terms of the remaining premium written.
We've also continued to refine our underwriting methods and increased our average reserves where applicable.
The following update on select claims data demonstrates the positive result of our ongoing efforts.
For the nine months ended September 30th 2021, our U S. Our liability reported claim count is down 83% for the same period 2019 and down more than 64% from the same period in 2020.
In fact across all of our liability lines reported claim counts were down more than 66% for the nine months ended September 32021, compared to the same period in 2019 and down 37% from the same period in 2020.
The reduced claim counts, we believe reflect the many improvements we have made to our book overall. This is just one example of how we are focused on reducing exposure to underperforming classes or geographies, allowing us to shift our business mix to the best life possible.
Overall, I'm personally very pleased and proud to see our top line growing like we expect and helping us achieve greater efficiency and scale across our organization.
Our planned effective underwriting strategy to favorably shift our business mix as evidenced by today's top line premium growth and expected future results I'll now hand, the call over to Harold lost to provide a discussion of the financials thinking.
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, specifically I'll go through a more thorough discussion of our underwriting results, including an improving expense ratio.
Conifer's combined ratio was 107% in the third quarter compared to 111% in the same period last year.
Our overall loss ratio was 64, 6% and is down slightly compared to 65, 2% for the third quarter last year.
The loss ratio in commercial lines was 67% this quarter compared to 69% in the prior year period, while the personal lines loss ratio was 49% for the quarter.
In this quarter, we were particularly pleased with the underwriting performance of an 88% combined ratio in our personal lines, especially considering and otherwise difficult cap period for several of our peers.
When we began to shift away from wind exposed business several years ago. Our goal was to reduce the possible storm impact to our future results. The third quarter proved to be an excellent example of this shifted shift our planned shift away from wind exposed personal line sector.
Our current accident year combined ratio was 92% in the quarter compared to 90% in the prior year period.
Moving to our expense ratio, we continue to see improvement, resulting from planned expense reductions and premium growth occurs.
Accordingly, our expense ratio improved to 42, 3% this quarter from 45, 5% for the same period last year down 320 basis points as we scale up our net earned premiums continued to implement cost cutting measures and further leverage the investments we have made in technology, we believe.
It's up 40 expense ratio is very achievable in the near future.
Investment income was $514000 during the third quarter compared to 776000 in the same in the prior year period.
While the company reported a net realized investment loss of 101000 compared to a net realized gain of $3 3 million in the prior year period.
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%.
In the quarter, we recorded a negative change in fair value of equity investments that reduced net income by $2 $2 million and we reported $2 $8 million of other gains related to the recognition of the forgiveness of the PPP loan under the payroll protection program.
Overall this resulted in the company reporting a net loss of $1 2 million.
Or <unk> 12 per share compared to net income of 541000 or <unk> <unk> per share in the prior year period.
Excluding this nonrecurring other gain and change in fair value. The company reported an adjusted operating loss of $1 7 million or.
Or <unk> 18 per share compared to an adjusted operating loss of $2 4 million or.
<unk> 24 per share for the same period in 2020.
Year to date, the company reported a net loss of 293000 versus a loss of $2 7 million for the same period last year.
Moving to the balance sheet total assets were $269 million at quarter end with cash and total investments of $184 million.
Our book value at quarter end was $4 34 per share.
We have $1 49 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 Darryl.
I am pleased to see the execution of our business plan as we grow our top line, 13% in the quarter and 20% for the nine months period, all while reducing exposure to lines that generated the greatest impact to our reserves overall.
We continue to refine our business mix and effectively grow our top line. Our primary focus remains achieving efficient operating scale and driving bottom line profitability going forward.
With that I'd like to ask if there's any questions operator.
Thank you.
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 Bob Farnam of sending and Scattergood. Please go ahead.
Yeah, Hey, there just a couple of questions here in terms of.
The premium growth.
That you're that you're hoping for it to kind of rightsize them based on the infrastructure you have.
Looking at your your kind of your net written premium leverage.
To.
Policyholder surplus and it's you know one eight now so I'm trying to figure out how much leeway you still have to put more growth on.
To keep your.
But balancing.
Balancing that with keeping your rating intact.
Yes.
Thanks, Bob that's a great question.
We haven't used any of our.
Reinsurance or anything along those lines to deleverage the company and its been pretty.
Pretty straightforward there's plenty of.
Availability of additional capital or.
These are reinsurance wise et cetera, if we needed to raise capital through all but our growth rate is not quite 50% a quarter, it's only 10% to 15% and we think.
Hopefully as the development subsides, we will be posting earnings and that will help in that growth.
But Brian do you have any comments or.
I think actually.
As we look at the top line and where we are at gold kind of Jim's comments.
Our topline growth in our percentages off of a smaller base give us obviously, a little bit of room from where we are right now.
But obviously, if we see more anticipated growth, we'll be obviously looking for other ways to supplement that.
Yeah, but just as a question my question was almost.
Is there still.
That's a possibility you're going to have to kind of reduce that infrastructure further in order to get that expense ratio kind of where you want it to be if the if the if the top line is kind of under pressure.
Maybe you have to maybe you have to address that the expense ratio with lowering the cost of the whole infrastructure.
We've been continuing to lower the cost of new construction. If you look at our operating expenses. They go down in real dollar values, even as it right now.
So I don't I think we've spoken quite a bit on that.
We were hampered somewhat by a rating because we have running costs, which are.
Hurting our expense ratio in addition, the <unk>.
Lines of business that have caused us a problem in 15 16 17 18.
Is.
Our still reverberating.
Through our reinsurance costs, we expect that to mitigate as well so as time goes on with a little bit of growth.
Better current year operating results we anticipate.
Although growth in earned premium.
More than offset that and we expect our expense ratio to continue to decline was hurt a little bit this quarter by a catch up on some.
Minimal premiums on reinsurance lowered our earned premium otherwise the expense ratio would be better.
Which I guess is kind of cryptic to a certain extent, but we had a minimum premium wasn't significant.
Significant.
A few points.
<unk> points on our expense ratio, we really feel that's going in the right direction and as the growth continues the earned premiums is catching up and as he earned premium goes up.
We're getting that we expect to get sub 40.
And the next few quarters couple of quarters.
And we see a continuing now.
Okay Alright.
And the second question I have I know Ive asked before but I have questions from the senior note holders.
The notes mature in a little under two years now so.
$24 million outstanding just a what what are your plans to be able to pay that down when they when they mature.
Well actually.
Obviously as you point out there's two more years I think probably the most important thing for Europe people is how do they feel about the dividends, we feel confident about our ability to refi back into the market but.
But right now with the top line premium growing that gives us obviously more coverage. If you will interest coverage for the underlying payments, but we feel comfortable as to where we are with refined that we're actually out refining the sub debt right now so as far as we're concerned we see a favorable trend with.
Interest rates and an opportunity to hopefully lower our interest costs going forward.
Okay. Thanks, guys.
As a reminder, if you have a question. Please press Star then one return into the queue.
The next question comes from Greg Peters with Raymond James. Please go ahead.
Good morning.
Morning, everyone's Alex Bolton, calling in for Greg Peters.
You know maybe touching on the restaurant and bar business.
<unk>.
You know being in Florida, you don't get the best.
I understand you know.
How old restaurant and bars are doing in other states in the U S. Maybe you can touch on the Covid impact you know what.
Looking like elsewhere.
And you know the outlook and then maybe one this.
Covid impact you know it turns from a tailwind to add one I mean from a headwind to a tailwind.
Nick sure.
So it varies quite a bed or to your initial comments on geography in terms of the market out there for the restaurant bar Tavern business, Yes, we did actually see some growth in our independent restaurant Bar Tavern book.
Even though hospitality was down overall, a big portion of that of that decline was our own our re underwriting efforts on the COO ISR book in particular so.
We are starting to see I'd say things stabilize in the restaurant bar Tavern World.
We you still have an issue in especially on the <unk>.
Less so on the franchise side, but more so on the independent side of labor shortages and the issues created by that so it's not as much maybe directly tied to COVID-19, but labor shortages are impacting those businesses and reducing hours.
The hours of operation and capacity that obviously lower sales, especially in liquor driven businesses and the bar tavern side. So it's sort of a mixed bag, but I do think we're starting to see that stabilize outside of places like Florida.
You know as you mentioned, that's been a little bit more vibrant and some of the other states like Michigan and some of the other Midwestern states and we are starting to see things stabilize there and I think moving into 2022.
<unk> early in the spring I think will be pretty close to normal, especially if labor shortages and supply chains are.
Back to normal as well.
Okay, Great and then.
I guess on net investment income you know I guess, there's some subsequent rise in net investment income.
I guess going forward you know what I think.
I would think it would be coming down you know maybe you can talk about that's subsequent increase and maybe thoughts going forward.
Yes, I mean, if you look at obviously annualized book income and tax equivalent book yield as Harold talked about in his section I mean for us.
With floaters cash and short term being roughly 50% of the portfolio.
While the book yield is low we're keeping the duration short so I think as we look at it we see opportunities with interest rates rising going forward, but we're trying to take less exposure from a principal perspective. So theres, perhaps is less income. So I think as you look at it that way the income.
It's been down as we've kind of pulled their horns in a little bit, but we've been pretty conservative in that respect going forward, but like I said wed have to book well.
Three years and Wes.
We see opportunities for more investment income on an annualized book yield going forward as interest rates rise.
Okay.
Okay, great. Thanks for the answers.
Once again, if you have a question. Please press Star then one can be joined into the question queue.
Star then one.
This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
Thank you.
I really don't have much to say I think we covered everything.
Here, we are growing.
And the areas, we want our current accident year loss versus our excellence, we still have a little bit of development, probably work through and we view Levered our book from Cat risk standpoint.
And we feel pretty good about where we're going so thank you for your continued interest and we look forward to talking to you next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.