Conifer Holdings, Inc.

Good morning and welcome to the Conifer Holdings Q1 2021 Investor Conference Call. All participants will be in a 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 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 recorded. I would now like to turn the conference over to Adam Pryor with the Equity Group. Please go ahead.

Thank you, and good morning, everyone. Conifer issued its 2021 first quarter 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 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 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 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 C. Excuse me, C. 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 filing. Statutory accounting data is prepared in accordance with statutory accounting rules and is therefore not reconciled to JAP. 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 Petkoff, Chairman and Chief Executive Officer. Jim, please go ahead.

Thank you, Adam. Good morning, everyone. On the call today with me are Nick, Harold, Andy, and Brian. As usual, I will provide a brief overview. Nick will discuss the underwriting results in greater detail, and Harold will cover the financials. Our first quarter included key progress on our top line. That provides us with good reason for optimism as we look ahead for the balance of this year. Conversely, the quarter also saw us incur property losses related to winter storm Uri, coupled with reserve strengthening on certain select commercial lines. On the production front, both commercial and personal lines saw significant growth, leading to an overall 21 percent quarter-over-quarter growth rate. We are very pleased with that trend of our top-line growth in that quarter and expect that to last for the rest of this year. Also in the quarter, we added to our reserves, further strengthening our overall reserve position as we address particular commercial lines, including the quick-service restaurants and Florida hospitality business. For the quarter within commercial lines, the biggest source of growth was in our small business segment. We largely attribute that to our expanding marketing efforts in the line of business where we have historically been profitable. Also, we expect the summer of 2021 to reflect a resurgence in economic activity as the impact of the pandemic lessens and more states open up. Nick will provide more details on that shortly. Over the past few quarters, we've talked about the adjustments we made to our operations at the pandemic's outset. The core efforts has been a mission to maintain our high level of customer service while also equipping our agents with the tools they need to do their jobs well. A large part of that effort ties to our ongoing development of technological solutions that allow our agents and employees to seamlessly do business anywhere. The premium growth exhibited in the first quarter continued the solid trend from the second half of last year and serves as proof that we have been successful in meeting our agents' needs and helping them grow their business in partnership with us. Looking ahead, while we do believe there are distinct benefits to having people in the office, we also intend to maintain a flexible operating model. Ultimately, what matters is that our agents and insureds feel our support of them and their businesses. For the remainder of 2021, our focus will continue to be on generating profitable premium growth with improvements in our top line through targeted rate increases and select new policy additions in our core specialty markets. 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 the rest of 2021. With that, let me turn it over to Nick for more color on our underwriting. Nick.

Thank you, Jim. Last night, we reported solid growth in our key operating groups, where gross written premiums were just over $30 million during the first quarter. Commercial lines, which still represented roughly 90% of our total written premiums, saw a significant increase in gross written premiums for the period, up over 16%. The only outlier was our hospitality business, but we are optimistic we'll see growth return there in relatively short order. While restaurants and bars have been among the economic sectors hardest hit by the pandemic restrictions, we remain cautiously optimistic that our hospitality business will begin to turn as COVID restrictions are scaled back. For the quarter, our top line increase in gross written premium came through a mix of rate and new business in both commercial and personal lines. Submissions continued to grow during the first quarter, and we are still benefiting from high existing renewal retention levels at approximately 90% overall. as we continue to build on our base and expand market share in many of our key geographies, including our home state of Michigan. While the majority of our core lines performed as expected in the quarter, the period was definitely overshadowed by a strengthening of reserves and cat losses experienced, which we preannounced last month. As Jim mentioned, the reserve changes were largely due to negative performance exhibited by our quick service restaurant line, coupled with our Florida restaurant, bar, and tavern business as well. For QSR in particular, the last several periods, we have been right-sizing the QSR program. Our ongoing analysis indicates that the underperformance to date appears tied to specific locations and select accounts, as we have seen generally favorable results from our QSR business and other geographies. Florida remains the main target and focus of our premium reductions. As a result, since 2019, we have reduced premiums in our Florida-specific quick service restaurant book by over 90% to less than $500,000 in premium expected for all of 2021. In addition, since the premium high watermark was achieved in 2018, we have been steadily reducing our overall QSR exposure as well. In fact, our total QSR premium production is expected to be down roughly 75% by year-end versus 2018. As we think about these planned reductions in the QSR business, We are extremely proud to have reported the overall commercial lines growth achieved in the quarter. While we did strengthen reserves and select commercial lines in the period, we also experienced increased losses from winter storm URI, resulting in an increase in both commercial and personal lines claims as the deep freeze impacted business and homeowners alike. For the quarter, we recognized our $2 million CAT limit for URI, plus an additional $318,000 in reinstatement premiums. Moving to personal lines, our low-value dwelling class continued to account for the bulk of our business in the personal lines during the first quarter. This is the result of a multi-year transition that we expect to continue, which will offer better risk-reward dynamics over the long term. For the quarter, personal lines was just over 10% of total production, and I'm pleased to report that personal lines premium was up over 90% in Q1 to $3.2 million. Although the storm claims and reserve changes resulted in a loss for the quarter, we remain convinced that the company is well positioned to grow our top line in order to more quickly reduce our expense ratio, allowing us to achieve necessary scale and generate sustainable operating profits over time. I'll now hand it over to Harold to provide a discussion of the financials.

Thank you, Nate. 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 details. In the first quarter, gross written premiums increased 21% to $30.4 million. With Nick and Jim having detailed the breakout of premiums, I'll focus on our underwriting results. Conifer's combined ratio was 129% in the first quarter compared to 112% in the same period last year. The loss ratio of 84.4% was up compared to 64.5%, primarily due to losses resulting from winter storm URIs which impacted both our commercial and personal lines and reserve strengthening. The single largest area of reserve development came from the QSR line. The loss ratio on commercial lines was 81.7% in the quarter compared to 65.6% in the prior year period, while the personal lines loss ratio was 111% this quarter compared to 49.8% last year. While our current accident year loss ratio was 59% in the first quarter, Before the impact of the storm, the accident-year loss ratio was 50 percent. Moving to our expense ratio, we continue to see improvement resulting mainly from recent planned expense reductions. Accordingly, our expense ratio improved to 44.6 percent this quarter from 47.1 percent in the same period last year. We do expect to see the expense ratio reduce over time 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 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 $532,000 during the first quarter, compared to $954,000 in the prior year period. While net realized gains increased substantially to $2.9 million compared to $928,000, Our investments remain conservatively managed, with the majority in fixed income securities, with an average credit quality of AA+, an average duration of 3.9 years, and a tax equivalent yield of 1.5%. Ultimately, the $2.3 million of storm-related expenses contributed to a net loss of $4.6 million, or $0.48 per share, for this quarter, compared to a net loss of $4.7 million, or $0.49 per share, in the prior period. Moving to the balance sheet, total assets were $260 million at March 31st, with cash and total investments of $184 million. Our book value at March 31st was $3.82 per share. We have $1.53 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 and Nick. The growth we achieved in the commercial and personal lines gives us optimism for the top line growth for the balance of the year. As we have noted throughout these prepared remarks, lifting of the pandemic restrictions should generate a surge of economic activity, and we expect the hospitality industry to be among the main beneficiaries. Assuming that plays out as stated, we expect our hospitality business to pick up solidly, contributing to our expanding premium base. And now I'd like to take some questions. Operator?

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our author. And the first question will come from Paul Newsome with Piper Sandler. Please go ahead.

Good morning. Thanks for the call, guys. Maybe you could start off with your view on the extent, at least with your particular business lines, that you think price increases could be sustained over time. It looks like your book needs a round or two of price increases And do you think the market will, you know, give you that maybe second round that might be required to get prices where we need it to go?

I'm going to deflect that and let Nick and Andy talk about it.

Yeah, on the property side, we are seeing strong rate, and we were seeing that last year as well. So I do think there is rate increases to be achieved this year in property. We were Our property rates were up 8% year over year in the first quarter, so we are seeing a strong rate environment there. Obviously, with the storms and some of the other activity in Q1, we haven't really seen as much competitive pressure on that line of business. On the liability side, we were in the mid-single digits with rate increases. It varies quite a bit by geography. On loss, Affected accounts, we're seeing more in the mid-double digits, but obviously the hospitality, given the reduction in claims activity from the lockdowns, somewhat mutes the impact of the rate increases on the GL. So absolutely where the non-COVID-affected lines, we are seeing a strong rate environment for the GL as well as the property on the commercial line side. Andy, you can probably speak to the personal line side.

Yeah, Paul, and on the personal line side, we're starting to see some rate increases that we're able to push through. Obviously, the storms have kind of hurt our area from that perspective, but I think we kind of outperformed the marketplace there with some of the policy forms that we have. We've seen a little bit of a retraction from some other carriers in the marketplace. So we see it as really an opportunity for additional growth while also adding some rate increases onto the business.

Fantastic. Maybe we could ask a capital question. Where are we from an RBC ratio perspective within the insurance subs? And maybe you can talk a little bit about liquidity as well.

Sure. I'm going to deflect that to Harold. But before I do, I wanted to also point out When you talked about the rate increases, as everybody knows, your renewal book is better than the new business you put on just because you get a chance to look at it once or twice, and obviously we've made several significant underwriting adjustments on our book over the last few years. Nick, what's the retention ratio?

Yeah, we're still seeing retention ratios around 90%, so we are seeing the rate increases stick on a lot of those renewals. Yeah, I just thought I'd point that out, Paul.

Harold? That makes sense.

So, Paul, first of all, we obviously look and monitor our RBC ratios. Even though they're an annual measure, we look at them quarterly. And currently, we still have more than adequate capital to not only sustain us, but also to absorb future growth in the near term. So we feel fairly well capitalized from a statutory perspective. And cash flow is also adequate for, you know, all of our debt covenants are fine and cash flow needs as a whole are easily being handled.

What were you from an RBC ratio last time you checked?

What do we report at year end?

Well, at year end, I don't remember the exact numbers. Obviously, they're in the yellow books. But, you know, we're over 500. We're like 550 or something to that effect at year end. with White Pine and, you know, probably about 400. Don't quote me on that. It's just a rough number here. And our stress testing for the first quarter still left us with plenty of room.

Fantastic. And then the last question I had was one of the things I wasn't able to get right on the model was the tax rate. Are you at a point where – you're able to incur an offsetting tax asset when you have a loss in a quarter or, you know, with the tax, you know, where the tax rules sometimes work is if you've got, if the accountants don't think you've got the ability to have future earnings, sometimes you have to, you can't build the tax asset. Where are you from that perspective? Just from a gap reporting perspective.

Yeah, so we are accruing deferred tax asset relating to our NOLs. We are carrying those forward and we will be able to utilize those in the future. 100% of our NOLs are still well available for use when we start to you know, have taxable income. And, in fact, last year we had taxable income to a degree, even though it didn't show up on a GAAP basis, because of capital gains that we experienced. And we utilized NOLs at that point in time. So, you know, we do utilize our NOLs when we have taxable income, and they're fully available. And there's a full valuation allowance against all of our net deferred tax assets right now, which is, you know, about $1.53 per share that you do not see in our balance sheet or in our book value number that will be utilizable in the future, though.

Well, I guess, which is great. Actually, the question I was asking was an accounting one. If, let's say, next quarter, just hypothetically, you lose money, you would be building an NOL, right? But would you be able to record that NOL through the income statement, or would there be an offsetting valuation allowance? There will be an offsetting valuation. So essentially, if you lose a dollar, and again, hypothetically, next quarter, that pre-tax dollar will be fully recognized in net because the the NOL would be offset by the valuation allowance. Is that right?

That's correct.

Okay, so effectively kind of a zero effective tax rate, even in the loss. Correct. That just helps remind me. Appreciate it. Thank you very much. Thanks, Paul.

Again, if you have a question, please press star then 1. The next question comes from Bob Farnham with Benning and Scattergood. Please go ahead.

Yep. Hey there, and good morning. I had a question on the personal lines growth. Now, obviously, 92% top line growth there was pretty significant, and I just wanted to have a feel for how much of that is new business, how much of that is rate. Actually, I noticed you also had an increased premium in the wind-exposed area as well, so I didn't know if that was rate or if that was increased exposure as well, so Maybe just kind of tease out some of the details in the growth in the personal lines.

Yeah, the growth is all in the low-value dwelling business that we write, mostly Texas, a little bit in Oklahoma. We still have the Indiana and Illinois Midwest low-value dwelling book of business as well, you know, with a smaller base. as we grow and we continue to build out, obviously that percentage number looks bigger. We've got a number, we've got a marketing effort down there, and we've got a number of new agents that are coming on board. So we're seeing good growth there in kind of the areas we want to see that in. So we're going to continue to see growth in that area. It's not going to be to that magnitude, I don't think. It's going to start to temper down over time. You know, if we were to see a continued growth like we've seen here in the past few quarters, that would be great, but I don't expect it to continue at that rate going forward.

Yeah, and on the wind exposed portion, Bob, our Florida book is dwindled to just about nothing. We do have a Texas HO3 product It's not as much of a focus for us as the low value, but we did see some growth during the quarter, so that's why the wind exposes up slightly. We still include that in the wind exposed category, even though it's more of a Dallas, Fort Worth, Austin, Houston, sort of in that triangle.

Yeah, and to add to that, I don't believe our accumulations changed much on the CAT side. Correct. It's pretty much the same as it was last year.

Right. Okay. Did you see more policyholders reaching out to get coverage after the windstorm in Texas? Did you have a lot more growth towards kind of the back half of the first quarter?

No, it was pretty stable across the quarter. I do think that we're going to see that ramp up a little bit. I do see, from what I've seen, there's a couple of carriers that have pulled back And I think additional insurance will be looking for coverage. And that's where I think we'll see some rate increases as well in the marketplace.

I think also, Bob, if I could interject and have Andy talk a little bit about the cat. You know, the low-value dwelling product, the bulk of our cat losses were really commercial. And, Andy, do you want to explain why?

Yeah, and I think... If anything, we learned something from our Florida homeowners play that we had a number of years ago, luckily, that we're largely out of today. But what we did when we entered Texas is we had an exclusion for water damage, and then we allowed our insurance to buy back coverage up to $5,000 or a $10,000 sublimit. And as we did that, we only saw about a 40% take-up rate on our dwelling fire business. In the deep freeze and where you had a lot of pipes bursting and water damage claims, a lot of ours were actually not covered, and that's not something that we cover. Along with having a dwelling fire policy and limited perils, you know, we're not covering everything that happens. This is a very stripped-down policy. There are lower values, and it excluded water in a lot of cases. So I think we greatly outperformed from a loss perspective. in that Texas area through that storm. And we're pretty happy with how we've developed this program, our forms, and, you know, with the rate increases we think we're going to be able to get here in the next couple of quarters.

Great. Thanks for the color there. And my second question is on kind of claims outstanding in Florida. Now, obviously, I don't need specific numbers, but I'm just trying to get a feel for how much in terms of Quick service restaurant claims are still outstanding. Do you still have homeowners claims outstanding in Florida? Just trying to get a feel for where potential development still might be lurking.

Yeah, you know, when you talk about potential development, you've got to realize that we've been getting out of Florida. The only business we have left in Florida is really related to one key account that's performed quite well in total. And Florida has not been a problem on the QSR side in this one key account. That's why we still have some premium in Florida. As far as the number of claims, they're down to a very manageable level. And when we talk about development, that doesn't mean we paid the claim out. We've been increasing reserves on those claims as we've seen the changes in the judiciary and the judgments and things in Florida. So on the remaining claims, they're more closely reserved to the ultimate, we believe, and there aren't that many. And on the Florida homeowners just, we have, for sure it's less than 100 claims. And of those, 75, 80, 90% are IRMA. And so there's very few non-IRMA Florida outstanding claims that would develop and cause this problem. The IRMA claims just cause us a little bit of a problem on the reinstatement premium, but we're in the second and third layer and the rates are pretty small. So We expect limited reinstatement premiums off of the IRMA claims, but that's pretty much all we got.

Okay. Thanks for that.

Once again, if you have a question, please press star then 1. The next question is from Alex Bolton with Raymond James. Please go ahead.

Hey, guys. How you doing this morning? Good, Alex. I just had some quick questions, I guess, on the expense ratio target of 40% or lower. I guess, you know, can you provide any clarity on, you know, timeline you're looking for there?

Well, I think if you look at this last quarter and you look at the reinstatement premium and your investment for that, we did buy down our reinsurance Last year, so there's a little bit more reinsurance. So the net earn premium is a little bit lower than it Otherwise would have done but our fixed Expenses have been actually coming down on a gross basis. So down more significantly on a on a variable behind a basis on the percentage basis, so Our premiums going up If we don't continue to have reinstatement premiums dragging down the earned premium, and we continue to manage our expenses, which has been a byproduct as well of COVID, we're able to manage the expenses a lot better. And as we look going forward, obviously... physical presence is going to change and there's going to be opportunities to continue to reduce those expenses. So we're optimistic on the 40 being a realistic target in the not too distant future.

Okay, I appreciate that. And then just from a net income perspective, you know, I guess are we looking at a more normal run rate as of now? Maybe, you know, declining with reinvestment rates a little lower.

I don't know. I'll let Brian's in here, too. I'll let him talk about the portfolio.

You know, the overall portfolio obviously continues to grow because we're writing more premium, but we did recognize some realized gains, and I think that that came and brought a little bit of yield out. So our investment yield had been higher. It's roughly 1.5% at quarter end. So I think you're seeing kind of net investment income come down as a result.

However, we should have more assets.

Exactly. However, we don't necessarily expect it to trend in exactly that line because obviously with more assets and more growth, also keeping in mind that we keep a pretty good percentage of the portfolio in floaters, and the overall duration is relatively short. So we're expecting a certain turn in the book that will allow us, as rates kind of do come up, to try to see better yield over time.

Does that answer your question, Alex?

Yeah, I appreciate that, and I appreciate the answers. Thanks.

Again, if you have a question, please press star then one. Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Jim Petkoff for any closing remarks.

We're very pleased with several aspects of the business, the growth, the book of business we have today, the changes we made over the last couple of years. The past did come to haunt us in a couple of SELECT COMMERCIAL LINES THAT ARE OBVIOUSLY NO LONGER FOCUSED AND HAVE HAD SIGNIFICANT CHANGES. THE FUTURE ON THE BOOKS OF BUSINESS WE HAVE AND THE HISTORICAL LOSS RATES OF THOSE HAVE BEEN VERY SUCCESSFUL, SO WE ANTICIPATE AN ACCIDENT YEAR SIGNIFICANTLY BETTER THAN PRIOR YEARS. AND WE CAN SEE THE GROWTH COMING, AND WE DO EXPECT OUR EXPENSE RATES TO GO DOWN. So we here are optimistic, and I hope that that's what you get out of this call. And thank you so much for being on the call, and I look forward to talking to you next quarter.

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