Conifer Holdings, Inc.

Good morning and welcome to Conifer Holdings Q4 2020 Investors Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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 Pryor from The Equity Group. Please go ahead.

Thank you, Kate, and good morning, everyone. Conifer issued its 2020 fourth quarter and year-end financial results after the close of market yesterday. On the company's website, ir.cnfrh.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 industrial 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 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. Conifer specifically disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments, or other laws. 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 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. And with that, I'll turn the call over to Mr. Jim Petcock, Chairman and Chief Executive Officer. Please go ahead, Jim.

Thank you, Adam, and good morning. On the call with me today are Nick, Harold, Andy, and Brian. I'll provide a brief overview. Nick will discuss our underwriting results in greater detail, and then Harold will cover the financials. Looking back at 2020, it's really hard to conceive of all that's transpired in a year dominated by the global pandemic. Hopefully, we are approaching a return to normalcy in the days ahead. In 2020, Conifer adapted thanks to the resilience, hard work, and collective spirit of our employees. many thanks to all of you who truly embody the commitment and drive necessary to successfully tackle such adversity. After several years of fine-tuning our business mix, we are very pleased with our current portfolio. I'm pleased to see our top line close 2020 with gross rate and premium up over 9% for the full year. Considering the challenges faced, that was a very solid result. More notable, though, is the sequential growth rate experienced throughout the course of the year. It grew in the first and second quarters, but at a smaller rate due to the shelter-in-place restrictions imposed in response to the pandemic. As the states began to open back up, our growth accelerated in the third and fourth quarters. We ended the year with gross written premiums increasing by almost 14% in the fourth quarter versus fourth quarter 2019, with just under $29 million in written premiums in Q4. We think this sets us up to hit the ground running in 2021. On a GAAP basis, 2020 was also a profitable year for the company. As with our top line, the fourth quarter was our most profitable of the year. We reported profitable operations during the quarter largely due to increased premium volumes overall and higher realized gains from investments, leading the company to post earnings per share on a GAAP basis of 34 cents during the quarter. We also generated an increase in our book value ending the year at $4.59 per share. Looking ahead to 2021, our focus will continue to be on growing our top line, both through targeted rate increases and select new policy additions in our core specialty markets. Accounted for 2020 was also a year of significantly reduced claims activity, both in frequency and severity, as businesses were closed and people generally spent more time at home. We do expect some reversal of that trend in 2021. However, with various levels of shutdown still in place in some states across the country, we expect the first half of this year to follow the last in terms of claims activity. In addition to growing our top line in 2021 and beyond, we remain diligently focused on reducing our operating expenses as well. We have a near-term goal of driving our expense rate of 40% or below, which we expect will yield a consistent underwriting profit over time. We continue to closely monitor our performance across our book in all our specialty niche markets. Our core markets performed quite well in 2020, including hospitality. While restaurants and bars have been heavily impacted throughout the pandemic, we hope and expect their operations will return to normal soon. We also intend to maintain the momentum we are enjoying in other markets, specifically small commercial business and in our low-value dwelling operations. We look forward to profitable growth for all of 2021. With that, let me turn it over to Nick for some color in our underwriting. Nick.

Thank you, Jim. Last night, we reported solid growth in all of our key operating groups during the fourth quarter. Admittedly, during the early part of the year, we were adapting and planning for the new reality of servicing our agents and insureds while trying to successfully write insurance in a pandemic. At first, we, like most, were not sure how our markets would react and ultimately be affected by COVID-19. Yet as our fourth quarter results bear out, I'm extremely pleased and proud of our employees' ability to be creative, to adapt, and adjust to changing ways of doing business in a global pandemic. This was truly a group effort to rally together, largely working from home, where we were able to not just weather the storm, but continue pursuing our strategic plan, execute our goals and finish on a high note in terms of gross written premium and profitability. We intend to continue focusing on our core specialty markets and feel we have ample opportunity to grow profitably in those niche areas for several years to come. That ample runway coupled with the current favorable rate environment provides optimism for 2021 and beyond. As Jim noted, our top line growth improved each quarter throughout 2020, ending with our fourth quarter gross written premium improving by just under 14% compared with the same quarter in 2019. Throughout the pandemic, we have maintained an extremely high level of operational consistency as evidenced by our overall account retention at or above 90% for the full year running. This is largely due to our agents and the relationships they have established and maintained with their customers. It is also thanks to our experienced underwriters and support teams finding new ways to communicate and stay in touch with our agents and insureds. This also speaks to our previous investments in technology as well, which allowed over 95% of our employees to transition seamlessly to remote operations. Looking ahead, we expect technology to underpin a flexible operating model, which prioritizes customer service and agent engagement, while also enabling us to reduce our operating expenses going forward. Our top line increase in quarterly gross written premium came through a mix of rate and new business in both commercial and personal lines. Submission growth continued to trend higher throughout the course of 2020, and we are growing our market share in many of our key geographies. In fact, our home state of Michigan is still our largest premium state, and we have room to grow here. Our small business segment led our growth during 2020, with other specialty commercial lines also contributing positively. Our hospitality segment, which includes bars and restaurants, has continued to be a market that has been among the most impacted by the pandemic, yet was down only 20% in terms of premium on the year. We are cautiously optimistic that a return to normalcy is just around the corner, and with that, bars and restaurants will see their operations turn to the positive. As that occurs, we expect our business in that market will follow suit. In terms of claims activity, the impacts of the pandemic have resulted in significantly reduced GL exposure as many restaurants and other quick service accounts are focusing on drive up, phone app delivery, or other takeout options. This resulted in a notable improvement in overall claims activity for many of our hospitality insureds, and in fact, across almost all segments in general. Moving to personal lines, our low value dwelling business represented the bulk of our business during the fourth quarter and for the full year. This is the result of a strategic decision to reduce our wind-exposed premium by transitioning away from these markets over the last few years. That has directly correlated to improved personal lines performance, as we have focused away from cat-exposed business overall and firmly on low-value dwelling business instead. For 2020, which was a difficult cat year for many in our industry, with so many large and various cat events happening, thankfully our reduced overall cat exposure helped contribute to positive returns for personal lines for the year. On that point, we are very pleased by the overall personal lines combined ratio in the quarter, improving by 29 points, leading personal lines to a healthy 89% combined for the full year. Overall, our fourth quarter was very consistent with positive trends we noted in the previous quarter. Our top line premiums continue to grow, and that growth is in line with where we expect consistent underwriting profits over time. Our overarching goal as a management team is to ensure that the company is well-positioned to generate sustainable operating profits for years to come, and in today's markets, we believe we are well-positioned to do so. I'll now hand the call over to Harold Milosz 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 company's website for greater detail. In the fourth quarter, gross written premiums increased 14% to $28.9 million. With Jim and Nick having detailed the breakout of premiums, I will focus on our underwriting results. Conifer's combined ratio was 111% in the fourth quarter compared to 113% in the prior year period. The loss ratio of 67% was down modestly compared to 69% in the same period last year. The loss ratio in commercial lines of 67% was comparable to the prior year quarter of 68%, while the personal lines loss ratio improved considerably to 61% from 81%. Moving to our expense ratio, our planned expense reductions had a favorable impact on the expense ratio. However, this was partially offset by higher seeded premium rates as we lowered our net commercial property retention to $300,000 on a per-risk basis. Accordingly, our expense ratio improved slightly to 43.9% this quarter from 44.3% for the same period last year. Over time, we do expect the expense ratio to reduce as we scale our net earn premiums, continue to implement cost-cutting measures, and further leverage the investments we have made in technology. We have a short-term goal of reporting an expense ratio at or under 40%, and as premiums continue to grow, we feel confident that this ratio will improve. Net investment income was $563,000 for the quarter compared to $860,000 for the prior year period, while net realized gains increased substantially to $3.6 million compared to $72,000. Our investments remain conservatively managed with the majority in fixed income securities with an average credit quality of AA+, an average duration of 3.6 years and a tax equivalent yield of 1.6%. As a result of the above, Conifer remained profitable, reporting net income of $3.3 million, or $0.34 per share, compared to a net loss of $3 million, or $0.32 per share, in the prior year period. This quarter, Conifer reported an adjusted operating loss of $2.5 million, or $0.26 per share, compared to an operating an adjusted operating loss of $3.4 million, or 35 cents per share, for the same period in 2019. The improvement was primarily due to reduced losses and reduced operating expenses on a fairly consistent net earned premium. Moving to the balance sheet, total assets were $262 million at December 31, 2020, compared to $247 million at the end of 2019. Cash and total investments were $191 million at year end compared to $177 million at the end of 2019. Finally, we reported a book value of $4.59 per share. We had a valuation allowance against the company's deferred tax assets of $1.37 per share that was not reflected in book value. And with that, I'd like to turn it back over to Jim for closing remarks.

In short, 2020 was a year of exceptional challenges. I am extremely proud of how everyone here at Conifer has responded. We maintained our operating excellence and were able to grow our premium base despite the global pandemic. We have successfully shifted our business mix to support solid underwriting profits. And as the world emerges from this pandemic, we look forward to even better days for Conifer. And now we are ready to take your questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star then one on your touchstone phone. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Paul Newsome from Piper Sandler. Go ahead.

Good morning, and thanks for the call, everyone. I hope you're all healthy and safe. I wanted to ask about the impact of reinsurance on your business and how that's integrating into the business prospectively. Obviously, the prices are going up industry-wide, and does that as well change how you think about your targets for both the loss ratio and the expense ratio?

Yes, in general, the reinsurance rates are going up. Andy and Nick really handle it. But on a higher level, just in general, we've taken our retentions down from where they were so that we won't hopefully have the same amount of development in the years to come. And we look at it as a way of de-levering our balance sheet. Because our experience is improving on an accident year basis, we were able to keep our reinsurance costs relatively the same. But I'll let Nick talk about it further.

Yeah, so our core reinsurance treaties are at 1-1. So we just renewed those. Our property CAT treaties are on a 6-1 basis. So obviously, we know the results of the 1-1 renewal, which we're actually very positive As Jim mentioned, we were able to lower our property retention from 300 to 200. We were also able to add some additional limit on our casualty clash treaties, and that was all done with minimal increase to our seeded rate at all. So that was a positive. Obviously, with the property cat at 6.1 and the experience industry-wide in 2020, it'll be interesting to see, you know, where that goes. But we were very happy, at least, with our 1.1 renewal. And to Jim's point, you know, continuing to look to lower retentions where it makes sense and hopefully remove some of the volatility moving forward.

Andy, do you want to talk a little bit about the prior 6.1 renewal and what that set us up for as we look at CAD exposure?

Yeah, as you probably remember, Paul, you know, getting out of a few of our more wind-exposed lines of business has helped drop down our CAT costs substantially over the last few years. We've continued to see a trend downward, so we're buying a much higher limit than we were in the past as compared to in terms of a return period on the total exposure base. This year, we think it will be about stable to last year. As Nick mentioned, we've seen pricing going up in those cap marketplace, but we're hopeful that it will be about stable on a cost basis for us.

Great. And my second question, you mentioned the goal of achieving a 40% expense ratio. Could you talk about sort of what the expected return would be given your current book of business if you manage to achieve that 40%? And is that kind of your long-term aspiration is an adequate rate of return? 40% is a high expense ratio relative to most insurance companies, but obviously your business mix is a little different than others.

Yes, that's true. The business mix is a little different. We're still, the expense ratio is impacted also by our AMVAS rating and that we have to use a fronting company for part of the business where it requires an A-minus carrier. Once we achieve an A-minus rating, we'll have significant reduction in our expense ratio. And 40% is not our long-term goal. Our long-term goal would be 35%. But without the A-, it's going to be very difficult to get to that because the acquisition costs are what they are. You have to pay market acquisition costs. We have been able to control our fixed expenses, and those continue to go down, actually, on a real basis, not just a percentage basis. So as we continue to grow, we expect the expense ratio to come down. We're still going through cost-cutting reductions. And the way the world has changed... from COVID, we see opportunities to further reduce our fixed expenses on a go-forward basis. So to answer your question, 40% is not a long-term goal. 40% is a short-term goal. We expect our loss ratios to continue to improve with the current mix of business. And so I don't know expected returns. We want exceptional returns. That's our goal is exceptional returns. But long-term goal would be 35%, Paul.

Thank you very much. Good luck with 2021. Keep our fingers crossed it's better than 2000.

Yes, thank you so much, Paul.

Our next question is from Bob Farnam from Benny and Skater Good. Thank you. Go ahead.

Thanks, and good morning. With the low-value dwelling product in Texas, I just want to confirm whether or not you're going to have much exposure there in terms of the winter weather they've had there recently.

We have exposure, but I'm going to let Andy answer that question.

We absolutely do have exposure there. We do have a mix of dwelling fire policies and HO3 policies in Texas, but the majority of our policies are dwelling fire policies. And that does not cover freeze claims. However, we do offer a buyback for water damage up to $5,000 or $10,000. So we will see a number of claims come out of this. We do have a $2 million retention on our CAT. the net loss that we could possibly see is $2 million, but we do not believe the personal lines book alone will get us to a $2 million number. We do have other lines of business that are rolled into our cap we buy as a group. So with all of the commercial business in Texas and other states, along with the personal lines business, it is possible we hit that $2 million retention, but Texas alone with the personal lines book of business would not We do not believe at this time we'd get it to a $2 million number.

Okay. You know, at approximately ballpark, just how many of these policies do you think purchased that extra coverage for the water damage?

Yeah, so we believe about 40% have purchased some sort of water damage coverage on top of their underlying policy. And that could vary between $5,000 or $10,000 worth of coverage. Okay, thanks.

And shifting gears a little bit to the commercial line side, reserve development continues to wear away at the underlying profitability. Can you just maybe give us some more details on what was driving the loss reserve development in the commercial line side?

Nick? Yeah, the majority of the development on the commercial line side came from our quick service restaurant business. And that was really driven by Florida, which was obviously talked about in prior calls. That state continues to be a challenge from a social inflation and litigation standpoint. You know, we've reduced our exposure in our quick service restaurant book in Florida by over 90% since 18, 19 years. So we see 2020, 2021, that obviously being less of an issue, and we are closing out those claims from prior years. And to some extent, the pandemic has helped with that. But that was the driver for the development in the quarter.

So are you saying that most of the developments from business that you wrote in 18 and 19, is that what I heard you say?

Yeah, so quick service restaurant in 18 and 19, that was the largest driver of the development during the quarter.

Really geographically specific to Florida mainly. But in the geographies where we've had challenges over the years, we've been getting out of those areas since 2017. QSR was the last to get out of Florida. And like Nick said, we reduced our exposure in Florida on QSR by 90% in 2021 from where it was before, and the 10% that was there are very few accounts that just have been profitable in the past. So we don't expect that to continue for the accident years. Really, 19 and 20 should be better, and 20 should be negligible as far as development.

And it also has a relatively short reporting period, right? Or the tail on the business is pretty short.

Yeah, to Brian's point, quick service restaurant for a liability line is very quick reporting. Typically, we know it's shorter at the end of the year as opposed to other casualty lines, what the claim count is going to be. So we have an idea of the claim. We shouldn't see a tail of reporting. It's more just getting in front of the social inflation caused by litigation. But as Jim mentioned, that exposure has been declining for a number of years, and 2020 and 2021 should not be, you know, a major part of our book in that state. Very little. Okay.

And when you're saying, you know, near-term expense ratio of 40%, what is considered near-term? 2021. 2021. Okay. And last for me, I've had a couple of questions from bondholders that want to know how much cash you have to hold a company and how you intend to pay down the principal of the senior notes when they come due.

I'm going to let Brian answer that.

Hey, Bob.

Well, first of all, in terms of cash, you know, we have obviously a line of credit. We have cash at the holdco. But the biggest thing for bondholders that are looking at it, I mean, there's two ways of kind of typically making payments. Either you're getting dividends out or you have a service contract in place. And for us, both of our operating subsidiaries are based here in Michigan. We have longstanding service contracts that have been blessed by the state of Michigan. So we can carve up to 12.5% premium off the top. So we wrote $111 million in premium last year, so you can see that gives us ample runway and plenty of cover relative to the interest. So we feel actually very comfortable about that. Actually, as it stands right now in September of this year, the non-call is up after the three years. We still have two years to go. So in terms of where we are, we're going to be looking at possible refi events if they exist, but we think we'll be able to come back to the markets clearly well before our stated maturity, which is still two years out from September.

All right. So it sounds like right now you're looking more towards refinancing as your most likely option.

That would be the thought at this time.

We'd love to, as interest rates have are much more favorable to us now.

Sure. Okay.

Thanks, guys.

Thanks, Bob.

Again, if you have a question, please press star, then 1. Our next question is from Alex Bolton from Raymond James. Go ahead.

Hey guys, appreciate you taking the questions. You know, maybe you could help me break down the growth into, you know, what's coming from rate and what's coming from market share expansion and maybe how you see that going forward. And then maybe within commercial lines, you know, in 2021, if you expect, you know, the first half of the year having, you know, some higher growth due to, you know, continuing opening of the economy.

Nick, why don't you take the rate versus?

Sure. Yeah, I mean, it was a combination, as we mentioned, in the fourth quarter. We are seeing strong rate on the property line of business in particular. So we're seeing rate increases there in the mid to high single digits. So that was quite a lift on the property line. line of business on the restaurants, bar taverns, and other small commercial business that we write. On the commercial auto, which is a smaller portion of our overall book, we're also seeing rate increases in that market in the mid to high single digits. Our liability is a little bit more muted in terms of the rate increases, and that's really driven by It's really driven by geography in terms of lockdown. So obviously, if you have restaurants that have much lower sales, which is our rating basis, they're going to have lower premiums. We've also seen restaurants and bars look to lower their insurance costs during these lockdowns by reducing limits and reducing coverages as well. So that puts some downward pressure on the rate there. But beyond the rate increases, we did see expansion in some of our small commercial programs, and these were really businesses not as impacted by the pandemic, things like security guards, private investigators, used car dealers, which actually have seen a pretty strong rebound given the economic environment. So some of the investments that we made in programs last year that we had started either before the pandemic and even a couple that we initiated during the pandemic to offset some of the decline in hospitality premiums. We're starting to see the growth in that, and that really happened more in the second half of the year, which is kind of where we saw the growth. In terms of the beginning half of 2021, we are starting to see some submission activity tick off in our hospitality class as we see states open up Certainly, I think, you know, the end of the second quarter into the early third quarter, hopefully with the vaccination rollouts as they are, we'll start to see hospitality rebound even further and hopefully to a more normalized basis moving forward.

Okay, I appreciate the question. Any more operators?

No, there's no more questions. I'll turn it back over to Jim Petko for any final remarks.

Thank you. I appreciate everybody being on the call today. We look forward to 2021 as we start to come out of this pandemic. And as you can see, as Nick just outlined, with hospitality being our biggest core business, we were still able to grow last year. And I think in our other sectors, which have long-term profitability for us. So we're very excited about the prospects for 2021. Thanks again. Goodbye.

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