Q3 2022 Conifer Holdings Inc Earnings Call

Good morning, and welcome to Conifer Holdings third quarter 2022 Investor call.

All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key 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 third quarter financial results. After the close of market yesterday, you can find copies of the earnings release on the company's website.

They are dot C N F R H dot com.

The slide presentation accompanying managements discussion. This morning is available to view or download via webcast or from the Investor relations portion of the 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 subsidiaries.

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 on 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'll also discuss non-GAAP financial measures as defined by SEC regulation G. Reconciliations of 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'll turn the call over to Jim Peck off Executive Chairman and co Chief Executive Officer, Jim Thanks, Brian Good morning, everyone.

Yeah.

Also joining Brian and me on the call today, Carol and they can Harold.

As on previous calls I will briefly highlight a few updates on our overall business strategy.

And then hand, it off to Nick for a deeper discussion of our underwriting results.

Harold will then cover the financials.

I'll open it up for questions and answers.

As we announced earlier conifer recently closed two significant strip.

Strategic transactions that we believe will help position us for stronger near term results and improved and sustainable profitability going forward.

Effective October one the company completed an asset purchase agreement with White tail insurance services, a subsidiary of Acro share with that sale, we were able to monetize certain assets of our M. G. A venture agency holdings.

That completed sale is especially relevant when considering the second a completed transaction.

The purchase of a loss portfolio transfer reinsurance agreement with Fleming Reed.

The monetization of our agency asset more than helps pay for the upfront costs of the executed L. P. T agreement.

Both transactions were completed in the early fourth quarter Accordingly, they will be reflected in our fourth quarter financials.

The accident cute at L. P. T agreement will provide us with an additional $20 million of adverse development cover for accident years 292019 and prior.

This transaction should provide more than ample support for our reserve position. The L. P. T is expected to effectively minimize the impact of any ongoing legacy reserve drag that we have experienced from those.

Lickable accident years opening the door to profitability for our company.

In conjunction with executing the MGA asset sale and the L. P. T purchase profitable premium growth remains top priority over the last several years, we've experienced consistent topline growth and we expect to see similar growth for the radius year and next.

In addition to rationally growing our best performing lines. We also remain steadfastly focused on streamlining expenses through a number of ongoing initiatives.

These efforts are proving successful as we have seen the expense ratio continued to decline consistently over the past few quarters. Further we expect to see these outcomes persist through the rest of 2022 and beyond.

As a result, we have made our near term expense ratio goal of 35.

Given the considerable performance improvements.

<unk> and our business mix, coupled with the expected removal of legacy drag on our reserves, we feel even more confident that sustained profitability is eminent.

And we are now clearly on the path toward delivering profit for our shareholders.

With that I'm going to hand, it over to Nick for more color on our under.

As Jim noted we are gratified to see the continued strength of our current premium mix developing favorably over time.

We have demonstrated our ongoing commitment to underwriting discipline through a series of planned refinements to our book of business and we are confident that the expected improved outcomes will ultimately validate our ongoing underwriting efforts.

The significant majority of our gross written premium continues to come from commercial lines, where we are focused particular effort on increasing the profitable premium generated by our small business group among others.

In fact, we're enjoying growth in premium on the full year. It is extremely important to reflect the role that rate has played in that expected growth.

We continue to enjoy a strong rate environment, especially in our niche E&S products.

Roughly half of the expected increase of premium for the full year will be as a result of strong rate achieved across the book.

Overall gross written premium was roughly $33 million for the third quarter basically flat for the quarter year over year.

It is definitely worth noting that when we exclude deemphasize lines of business from the calculation quick service restaurants. For example, our total gross written premium actually increased almost 9% over the same period in 2021.

Regardless, our gross written premium for the nine months is up roughly 5% for the period and we do expected to be up for the full year as well.

New business submissions continue to roll in as commercial opportunities recover from previous Covid driven levels.

Admittedly, we remain cautious on the new business side as you continue to see high existing renewal retentions persisting around 90%.

We'd rather get another chance to re underwrite a good piece of existing business versus just adding new premium for premium's sake.

Thankfully a high retention rate remains favorable constant for some time now and allows us to further refine and underwrite our book with each renewal.

Even though we are achieving solid rate increases on our book in today's environment.

Underwriting environment geographic mix is becoming ever more important.

In jurisdictions like Florida for example have become extremely problematic in which to right.

As a result, we continue to refine our geographic business mix and overall geographic spread.

For example, we have reduced our exposure to the state of Florida by roughly 57% since 2018.

With further planned reductions in Florida for the next year as well, we expect premiums to be down almost 70% in the state.

Conversely in terms of reaching deeper into our core specialty lines and selectively expanding our premium base. We continue to increase market share in key geographies like our home state of Michigan, which since 2018 as seen in our premium base more than double.

In fact, Michigan continues to account for a sizeable proportion of our topline as well representing more than 25% of gross written premium in the third quarter of 2022.

Going forward, we are most likely to find profitable growth opportunities through continued expansion in Michigan and other demonstrably favorable and geographies.

We know that our best business outcomes results from select specialty niche markets and specific and define favorable geographies, where we can achieve sustained positive underwriting performance by maintaining a disciplined and tight focus on those markets and geographies.

Our personal lines business, which consists principally of low value dwelling products continues to represent a growing share of overall business at 16% of total gross written premium for the third quarter.

Personal lines gross written premium was up almost 42% from this time last year at $5 5 million for the third quarter.

While our personal lines business is geographic geographically well dispersed we've seen particularly strong growth in expanding markets, such as in Texas, and Oklahoma, which continue to perform well.

And in efforts to reach our profitability goals solid underwriting must be coupled with thoughtful claims adjudication.

In that light we are constantly reviewing our expected case reserving and trying to match reserves as closely as possible to ultimate.

As Jim discussed already we have remained resolutely focused on strengthening our reserve position overall and reducing future claims exposure in that light. We were pleased to see continued continuing favorable claims trends.

For example, total claims in Q3 2022 were down 6% from a year ago down 13% for the same period in 2020 and down 27% from Q3 2019.

For quick service restaurants in particular open claims are down 51% from the third quarter of 2021 down 72% for the same period in 2020 and down 78% from the third quarter of 2019.

As these favorable claims trends continue and as we see the positive impact of our strategic decision to limit future development through the purchase of the LPT were excited to see the hard work and effort play out in our financial results in the near term and over time.

That I will turn the call over to Harold to discuss the 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 third quarter gross written premiums decreased just under 2% to $33 million with Jim and Nick having detailed the premium breakout I will focus on our underwriting results.

Conifer's combined ratio was 106, 5% in the third quarter largely unchanged from 106, 9% during the same period last year.

Our loss ratio was 67% compared to 65% in the third quarter of 2021.

In commercial lines, where much of the development mitigation efforts were focused.

The loss ratio was 64%.

In the personal lines loss ratio of 79% for the quarter for.

For the third quarter of 2022.

Overall, our current accident year combined ratio was 94% in the third quarter of 2022, largely unchanged from the prior year period.

Moving to our expense ratio, we continue to see improving results from ongoing expense reduction efforts coupled with additional net earned premium growth Accordingly, our expense ratio improved to 40% this quarter down 240 basis points from 42% for the same period last.

Year.

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

Our expense ratio for the nine month period was 38, 8% compared to 42, 7% in the prior year period.

As Jim mentioned earlier, our expense ratio target remains.

Yes.

Yes.

Net investment.

<unk> income was $860000 during the third quarter compared to $514000 in the prior year period up 67% on higher reinvestment yields while net realized investment income was flat during the third quarter of 2022 compared to net realized investment losses of 101000 in the prior.

A year period.

We also recorded a $151000 decrease in fair value of equity investments in the third quarter.

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 four years and a tax equivalent yield of 2%.

Overall, the company reported a net loss of $1 5 million or <unk> 14 per share for the quarter.

Compared to a net loss of $1 2 million or <unk> 12 per share in the prior year period.

This quarter count for reported and adjusted operating loss of $1 4 million or <unk> 13 per share compared to an adjusted operating loss of $1 $7 million or <unk> 18 per share for the same period in 2021.

Moving to the balance sheet total assets were $286 million at quarter end with cash and total investments of $179 million.

Our book value at quarter end was $1 32 per share and we have $101 69 per share in 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 Thanks, Nick.

In the quarter, we took major steps towards addressing our reserve position.

And walling off prior year development and while we certainly have more work ahead I am encouraged by the significant improvements to our mix of business.

The results, we've achieved to date and ongoing expense reductions based on our achievements to date I'm confident that we're moving in the right direction I fully expect to see continued excess success for the balance of 2022 and beyond.

And now we're ready to take questions.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.

Your question. Please press Star then two.

The first question comes from Paul Newsome of Piper Sandler. Please go ahead.

Good morning.

Thanks for the call.

I was hoping you could help me just a little bit more on the.

Housing.

Still the MGA as well as the loss portfolio transfer will impact.

Income statement perspective, maybe you can start with the NGA.

Presumably there was some revenues.

Associated with that as well as potentially some.

Profits.

I was that shown in our financial statements.

Well first off obviously, a Harold question not a gym question, but.

They didn't occur until the fourth they didn't occur until the fourth quarter.

So they're going to be shown in the fourth quarter, but they did happen so harold.

Sure prepared for that question, yes, so starting with.

With the sale of the MGA assets.

That was within a company called venture Agency holdings that we only own 50% of and did not have control over so it was not consolidated in any of our numbers. So you won't see it in our revenues where expenses are just which show up as a one line item equity income from <unk>.

<unk> on the income statement at the bottom and that's the only entity that we had.

That shows up on that line item now.

That's also not all of the business that was in there, but it was a substantial portion of the business that was in.

Venture.

So thats that item.

With regards to the LPT, we do expect to incur a $5 $4 million expense in the fourth quarter.

As we're mentioning with regards to the sale of the assets, we expect over $8 million of.

Net after tax gain as a result from the sale.

And the LPT will cost us about $5 four so other gains in the fourth quarter, which is where both will fall until will net to a positive gain.

That's fantastic so it looks like the MGA, who was running the equity and affiliates is running somewhere around 800000.

Dollars a year, so that would that would go away right.

Alright, and then hopefully then.

Well.

You won't see perspective.

Hum.

<unk> development is that.

Now in effect.

The results.

In the future.

As Harold said we.

We do not sell all of the assets.

Sure.

In the short term.

As we're growing the rest of that.

Agencies.

We expect that to be profitable.

In the near term.

And expect that to continue to grow so.

It won't be as profitable right away, but we would expect.

That to be as significant.

Our return as we got on the sale of the assets that we sold long term.

Got it.

And then.

Yes.

Thoughts about the improvements.

Youre, hoping to get in the expense.

Ratio prospectively, and how that may is that more backend loaded or is it more front end loaded.

Yes.

Well.

Since it is just us and we've known each other a number of years.

I was confused.

On DAC and <unk> lost expense ratio went up in this quarter, but for the year, we expect it to be 38 and a half.

And it has something to do with the commissions in the quarter versus it must be a seasonal writing of different groups, but at 38, we expect that to go down we made significant expense reductions during the year that have not all.

We had a full year to kit Kat.

As an example, we changed our location and downsize our.

Space is I would assume a lot of companies have done.

The change in the way businesses operate and we expect to see some savings for that whether it's 25 basis points.

50 basis points on the expense ratio I don't know, but its going to be.

Something meaningful and that's just one of a bevy of things that we've done so well.

When we say, we think 35 is attainable.

We do think 35 is attainable, we continue to grow at a modest rate, we're growing and we continue to have our expense reductions.

We expect that to continue to ticked out I guess I would look at it as an annual because if you hold us to quarterly it's going to vary but on an annual basis from 38, five we expect it to tick down next year.

Great.

Always appreciate the help.

Thank you Paul good to hear from you.

This concludes our question and answer session I will now turn the conference back over to Jim Peck for any closing remarks.

Yeah.

Where we made some significant changes during this quarter, we are well positioned in 19 and prior.

Should not be hurting us a lot in the future. We do have a little bit of a corridor. So you might see something coming in the form of development, but the corridors slim right now.

We expect things to continue to improve and we're very we are very pleased with the book of business. We have right now so thank you for taking the time and look forward to talking to you next quarter.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.