Q2 2022 Conifer Holdings Inc Earnings Call

Good morning, and welcome to Conifer Holdings second quarter 2022, Investor Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by Christian Starkey followed by zero.

After todays presentation, there will be an opportunity to ask questions.

Please note this event is being recorded.

I would now like to turn the conference over to Brian Roney. Please go ahead.

Thank you and good morning, everyone Conifer issued its 2022 second quarter financial results. After the close of market yesterday, you can find copies of the earnings release on the Companys website, IR Dot C N F. Our age dotcom.

Slide presentation accompanying managements discussion. This morning is available to view or download via webcast or from the Investor relations portion of kind of first website.

Before we get started please note that except with regard 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.

Obsidian areas.

Actual results may differ materially from the results anticipated in these forward looking statements due to 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.

Conifer, 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 reckon.

Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included when possible and 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'll turn the call over to Jim Peck off Executive Chairman and co Chief Executive Officer, Jim.

Thanks, Brian Good morning.

Everyone.

Also with me today are Nick Harold and Brian .

Like on previous calls I'll provide a brief update of our business strategy that Nick will discuss our underwriting results with greater detail and Harold.

Will cover our financials.

We were encouraged to see a continued topline premium growth in the second quarter.

Particularly coming from our most profitable lines of business, our premium growth remains a combination of solid rate increases high tech account retention and the specialty markets that we are.

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Generally we see a significant additional runway for premium growth in our core specialty lines.

In addition to premium growth. We were also pleased to see our expense management initiatives come to fruition.

Is the expense ratio continues to improve.

In the first quarter, we achieved our short term goal of sub 40 expense ratio and improve the expense trend continued for the second quarter we.

We expect these efforts to further drive down expense ratio for the balance of the year and we revised our near term expense ratio goal to 35 or so.

While the top line growth.

Is growing profitably and the expense ratio continues to rationalize.

We also took significant measures to bolster our overall reserve position in the second quarter.

And efforts to mitigate future reserve development, we dramatically strengthened reserves by considerably increasing our view of ultimate in the quarter.

We realized that in addition to placing profitable premium within a reasonable expense structure, we need to stem the tide of the development. We've been experiencing as a result, we remain firmly committed to mitigating any future development.

As we continue to refine and tighten our business mix and shed the residual burden of deemphasize line systems.

Given the performance we've seen to date from our improved business mix, we feel more confident than ever in our goal go forward book of business in fact, the underwriting profitability is right around the corner.

Our expense management and leadership teams, our executive management and leadership teams have concentrated tremendous energy on a number of mitigating initiatives to combat development from all angles, and ultimately to generate sustained loss ratio improvement.

These initiatives are bearing positive daily results and we see a clear path toward achieving profit.

With that let me turn it over to Nick for more color on the <unk>.

Jim noted we were pleased to see our topline growth trend continue with gross written premium up 7% to over $37 million in the second quarter.

Continues a very strong premium trend focused solely on our core profitable lines of business.

In fact, 86% of total gross written premium in the second quarter came from commercial lines, which demonstrated sustained growth largely from our small business group.

This was driven in part by rate across much of the book in general, but specifically in our specialty E&S products.

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Commercial lines gross written premiums were up 4% to $32 million in the quarter, continuing a solid upward trend.

New business submissions continued to expand as commercial opportunities increase from previous Covid driven levels.

In addition to new business, we are still benefiting from high existing renewal retention levels around 90%, which has been a favorable constant for some time now and allows us to further refine and underwrite our book with each renewal.

As we reach deeper into our core specialty lines and selectively expand our premium base, we continue to increase market share in key geographies like our home state of Michigan.

Vas, Michigan continues to account for a sizeable percentage of our total premiums at 26% of gross written premium in the second quarter of 2022.

Oh, we are pleased with our presence in Michigan, we see plenty of room for continued market share expansion in the state.

We believe the focus on Michigan and other favorable geographies represent the best growth opportunities that we see going forward.

The focus on niche markets and favorable geographies has generated consistently better business outcomes for us and will result in sustained positive commercial lines underwriting performance.

Personal lines, which represented a growing share of overall business at 14% of gross written premium we reported a 32% increase in personal lines production, its roughly $5 million for the quarter.

Personalized bed, that's consists principally of low value dwelling products geographically well dispersed yeah with solid growth characteristics and expanding markets such as in Texas and Oklahoma.

While the top line continues to grow and selectively expand much of our collective effort remains singularly focused on strengthening our reserve position and reducing future claims exposure.

We continue to focus on mitigating future development through focused case reserve strengthening wherever appropriate and through targeted initiatives to limit potential future development.

In that light, we were pleased to see continuing favorable claims trends.

For example, total claims in Q2 2022 we're down 12% from a year ago down 15% from the same period in 2020 and down 31% from Q2 2019.

For quick service restaurants in particular open claims are down 53% from Q2, 2021 down 69% from the same period in 2020 and down 75% from the second quarter of 2019.

As these claims trends continue in our reserve strengthening efforts bear out we anticipate less applicable development to emerge over time with that I will now turn the call over to Harold to discuss our financials.

Thank you Nick I will provide a quick review of the results and I encourage investors to review our filings and presentation on the Companys website for greater detail.

In the second quarter gross written premiums increased 7% to $37 million with Jim and Nick having detailed the premium outbreak breakout excuse me I will focus on our underwriting results.

Conifer's combined ratio was 129% in the second quarter compared to 113% in the same period last year.

Impacted by reserve strengthening in the quarter as we significantly moved up our estimates for ultimate for 2020 and prior accident years by $9 $5 million.

Our loss ratio was 90% compared to 72% in the second quarter of 2021.

The loss ratio in commercial lines was 95% where much of the reserve strengthening efforts were focused compared to 76% in the same period last year.

Well the personal lines loss ratio was 61% for the second quarter of 2022.

Overall, our current accident year combined ratio was 91% in the second quarter largely unchanged from the prior year period.

Moving to our expense ratio, we continue to see improvement, resulting from ongoing expense reduction efforts coupled with additional net earned premium growth.

Accordingly, our expense ratio improved to 39% this quarter down 230 basis points compared to just over 41% for the same period last year.

As we continue to drive efficient cost management initiatives. We believe the expense ratio improvement is sustainable through the year and moving forward as well.

Net investment income was $564000 during the second quarter compared to $503000 in the prior year period.

While the company reported a net realized investment loss of $1 $4 million for the second quarter compared with a net realized gain of $1 $1 million in the prior year period.

We also recorded $317000 increase in fair value of equity securities in the second quarter.

Our investments remain conservatively managed with the vast majority in fixed income securities with an average credit quality of double a and average duration of three seven years and a tax equivalent yield of about one 4%.

Overall, the company reported a net loss of $8 $4 million or <unk> 86 per share for the second quarter.

Largely impacted by our efforts to strengthen reserves in the period.

Compared to net income of $5 $6 million for 57 cents per share in the prior year period.

This quarter conifer reported an adjusted operating loss of $7.3 million or 75 cents per share compared to an adjusted operating loss of $3 9 million or <unk> 40 per share for the same period in 2021.

Moving to the balance sheet total assets were $275 million at quarter end with cash and total investments of $161 million.

Inclusive of the board raised equity.

Subsequent to quarter end.

Our book value was $1 80 per share.

And we have $1 60 per share and net deferred tax assets that due to a full valuation allowance was not reflected in book value.

And with that I'd like to turn it back over to Jim for closing remarks.

In the quarter, you took some hard steps towards addressing the reserve position.

And while we certainly have more work ahead I am encouraged by the sustained top line growth in most of our profitable lines of business.

And in the results we've achieved to date some ongoing expense reductions.

Based on these strategies to strengthen our reserve position.

I'm confident we're moving in the right direction and I fully expect to see continued positive achievements for the balance of 'twenty two.

Now if anybody has any questions we'll be willing to take.

Thank you.

I'll begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

Using a speakerphone please pick up your handset before pressing the kids too.

To withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

And the first question will come from Paul Newsome from Piper Sandler. Please go ahead.

Good morning, Thanks for the call.

Was hoping you could kind of talk about the process you're sitting in the current accident year combined.

Combined ratio or loss ratio for the <unk>.

Company, you know typically when we see fairly substantial reserve increases.

We will also see an accident year increase because the essentially the.

History suggests that the current.

Loss trend is higher than previously expected.

I think you've kept it fairly steady so others. There are other offsetting things and I was wondering if you can talk through some of those offsetting fact.

Factors that allows you to keep the.

Accident, your combined ratio basis.

Thanks, Paul.

That's a good question what we do is we take a look at our book of business.

The earned premium that.

It is going through and where it's coming from and the historical trends of the mix of business that we have the mix of business in 2022 is markedly different.

N.

Even 2020 in 2019 2018 on all those years 2019, 2018, we had quick service restaurants.

Quite frankly, the <unk> business was <unk>.

Extremely unpleasant.

And that that is down to basically zero in 2022.

The books of business, we have specifically, Michigan has been outperforming.

Our expectations and every year.

And that has grown from insignificant to 'twenty six 'twenty, 7% of the book. So when you take a look at the earned premium where it's coming from it is.

The books of business that were giving us the most pain are gone.

And the loss ratios and the picks were having are consistent with historical.

Resolved and that's how we're picking up.

Okay.

Thank you.

And maybe just as a follow on to that.

If you're just looking at the book of business, you're writing today.

You have a view on how we should look at loss trends.

Today.

And any contracts you can make it with.

Either the CPI or other.

Data that we could.

I'm trying to square it was really helpful.

Well.

Yeah, our loss our loss goals of 55 or better in total seem quite achievable with the book of business, we have today and it's been performing on that level.

And.

Do you want to take it going forward instead of me just talking there sure yeah, I mean in terms of loss trends that we're seeing in the but I mean, we are certainly seeing inflationary impacts on property in particular.

We we are getting rate on property and if you look at the last three months, we actually had an acceleration of rate in July . So I believe we are keeping up with if not I'm getting ahead of the CPI numbers that we're seeing in property. It is a little bit less clear in casualty.

And Theres a lot of noise as Jim mentioned with some of the pretty significant changes to the book of business, but certainly in the property some of the auto physical damage that we see but.

But we're definitely seeing that inflationary impact and you know you've been on the personal line side, we had a rate increase and one of our books of business earlier. This year will have a two more throughout the rest of this year. So it's something we're certainly cognizant of where we're monitoring it on the on the property side and <unk>.

Sting rates too.

Stay at excuse me ahead of that from from that perspective, I'd also like to add.

The headwinds for I think companies in general.

But for us in specific.

We're a reinsurance costs are going.

In reinsurance costs are obviously, taking a bigger bite out of premium. So you have to make that up with rate increases.

Additional to the CPI, if you look at the renewal of our COO.

Cat book.

Our cat pricing was.

Markedly similar to last years with a very small single digit.

Increase.

I would tell you that that's outperforming the world.

Gas prices are.

Also with the change in the book of business coming after the say 2018 2019.

Our reinsurers, obviously look historically at what their losses were for the prior years and I would tell you that we've probably been overpaying in 'twenty, one 2020, two and we're hoping that the trend of those losses on the that we're ceding to our reinsurance continues.

And we're expecting to hopefully improve upon our reinsurance rates even in this difficult cycle. So if that's the way we can have helped to drive down the expense ratio as we get more earned for our expense ratio the loss ratio as we get more on premium.

As Nick said, we're looking at rate and not just for CPI, but also the increased costs that are coming to us.

From the reinsurance.

Great. Thank you for the interest in the help I appreciate it.

Thanks, Paul.

And once again, if you'd like to ask a question. Please press Star then one.

Yeah.

Yeah.

Okay.

This concludes our question and answer session I would like to turn the conference back over to Jim Petkoff for any closing remarks.

Well the only closing remarks I have it was a tough quarter and we had to take some significant steps. So that we are conservatively positioned for future growth, we do expect underwriting profits.

By the end of the year so.

Thanks for everybody and I appreciate everybody's patience.

And thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Yeah.

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