This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk07: Good morning and welcome to the Conifer Holdings Second Quarter 2021 Investor Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. 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 webcasted. I would now like to turn the conference over to Adam Pryor of the Equity Group. Please go ahead.
spk05: Thank you, and good morning, everyone. Conifer issued its 2021 second 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 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 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 G. Reconcilations 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 GAAP. We will conduct a Q&A session after management's prepared remarks this morning. With that, I'd now like to turn the call over to Mr. Jim Petkoff, Chairman and Chief Executive Officer. Please go ahead, Jim.
spk08: Thank you, Adam. Good morning, everybody. On the call today with me are Nick, Harold, Andy, and Brian. I'll provide a brief business overview. Nick will discuss our underwriting results in greater detail, and Harold will cover the financials. Overall, we made considerable strides in the second quarter in terms of top line growth, expense reduction, but we understand we still have a number of operating profitability milestones to accomplish as we execute our entire strategy. The sustainability of our top line growth has been driven by a combination of rate and increased policies written in our best performing lines. Our commercial and personal line segments each saw significant increases in gross written premium, leading to an overall 27% quarter-over-quarter growth rate, setting us up well for a solid full-year result. However, what might be equally important as the growth itself is how we are growing. One of our strategic objectives has been to grow our book of business and specialty lines that fit our criteria for profitability. For the quarter within commercial lines, the biggest source of growth continues to be in our small business lines, and we are largely we largely attribute that to the expanding our marketing efforts and lines of business where we have been historically profitable. As Nick will discuss a little time later, we have had certain lines of business that have not performed up to our expectations. Lowering our premium base in those de-emphasized lines is a favorable trend going forward as well. We began to lessen our exposure to these areas over the last several years, yet even with planned reductions taking place, we are still seeing overall top line growth in the areas we most want. At present, I'm very pleased with our current business mix as we continue to grow and leverage our infrastructure to achieve greater stability over time. The core of our efforts remains the mission of high-level customer service and growing our top line, while also equipping our agents with tools they need to do their jobs well and generate profitable premium products. We are seeing the benefits now in terms of premium production growth as a result of early dedication to leveraging technology to provide innovative solutions that allow our agents and their employees to seamlessly do business with us anywhere, all while serving their customer base. For the remainder of 2021, our focus will continue to be on generating profitable premium growth from all sources and in all ways. With improvements in our top line through targeted rate increases, select new policy additions, and continuing to refine our business mix while achieving even greater scale in our core specialty markets. With that, let me turn it over to Nick for more color on our underwriting. Nick.
spk04: Thank you, Jim. In reviewing our underwriting for the period, it is important to note the premium breakout with commercial lines largely seeing growth from small specialty business insurance, representing roughly 88% of our total written premiums. and personal lines consisting largely of low-value home and dwelling business representing 12%. I'll start with an overview of commercial lines, provide context for the underwriting performance, and explain where we are in terms of the product mix shifts instituted in prior years. Commercial lines gross written premiums for the period were up roughly 21% to almost $31 million. This came through a mix of rate and new business in both commercial and personal lines, as general economic and business conditions continue to improve from pandemic lows. Submissions continued to grow during the second quarter, and we are still benefiting from a high existing renewal retention levels at approximately 90% overall as we build on our base and expand market share in many of our key geographies, including our home state of Michigan. In the quarter, we did see lower premiums in our hospitality business overall, which is a relatively diverse group of classes covering property and casualty business, largely for restaurants, bars, and taverns. For the quarter, our hospitality premiums declined by 17%, which is largely due to our planned selective non-renewal in certain geographies for certain classes. Despite all of this, we did continue to see significant growth in several of our other hospitality lines, largely driven by rate increases generally in the mid-teens. We believe that nationwide employee shortages have challenged the hospitality sector in particular, but we do see a light at the end of the tunnel as those lines continue to emerge from the pandemic restrictions placed on the public at large. In the quarter, far outstripping the decline in hospitality premium was the increase in our small business sector, which is up over 47% quarter over quarter. This equated to an increase of over $7 million in premium for the quarter alone. All in all, it was a solid quarter and six months for the Commercial Alliance premium growth. In addition to Commercial Alliance growth, we're also pleased to report an exceptional quarter in our Personal Alliance business as well. Personal Alliance premium more than doubled year over year, up 107% to just over $4 million, and was highly profitable as well, posting a 79% combined for the quarter. Personal Alliance consists largely of a focus on low-value dwellings, where underwriting teams have established strong relationships with retail and wholesale specialists and select low-value dwelling markets. Geographically, this is relatively well dispersed across the Midwest, with solid growth particularly in Texas, Oklahoma, and Indiana. We've been very careful in selecting certain locations to avoid excess wind exposure. All in, it was a solid quarter for personal lines. Overall, though, I would echo Jim's earlier comments. that our current business mix in 2021 is as strong as ever. Even with planned reductions in select lines to further enhance and refine our business mix, we are growing our top line in the areas we like most, leading to greater opportunities for profit going forward. So what's been holding us back in terms of bottom line results? From our earlier years, we have clearly seen more development than anticipated. And as a result, we have been tirelessly refining, changing, and improving our business mix over the last several years in efforts to drive greater results for our shareholders going forward. As we review all of our lines for ongoing profitability prospects, we have taken clear action to reduce exposure to underperforming lines as well. For example, we have continued to take action in our QSR line and with our Southeast Florida restaurant, bar, and tavern business as well. These are two specific areas that we have focused on in particular to drive more profitable results. This was business that had historically been written very successfully, but challenging judicial environments coupled with a higher instance of personal injuries led to higher than expected loss performance. As a result, we began to pare back our new business writing from several of those lines over the last several years as we refined our geographic mix, focusing on the best performing agents, accounts, and geographies. The fact that we have been able to successfully shift our business mix and grow our top line overall, despite this targeted pullback, is a very favorable trend in the long run. In addition to an improving business mix, why do we feel that we're seeing improvement on possible future development? There are several important factors to take into consideration, but let's look at QSR in particular, which has underperformed our expectations to date. Since the premium high watermark was achieved in 2018, we have been steadily reducing yet refining our overall QSR exposure. Total QSR premium production is expected to be down roughly 75% by year-end versus 2018, focusing on the best of the best in terms of the remaining premium written. Since 2019, we have reduced premiums in our Florida-specific quick service restaurant book by over 90% by year-end. Some indicators that our efforts are leading to improved results is that our QSR liability reported claim count is down 76% from the same period, 2019, and down 57% from the same period, 2020. Across all of our liability lines, reported claim counts were down 61% for the first six months ended June 30, 2021, compared to the same period in 2019, and down 27% from the same period in 2020. More specifically, for the month of June alone, liability reported claim counts were down 70% from June 2019 and down 35% from June 2020. While gross earned premium is growing, this is all while gross earned premium is growing. We believe this is just one example of how we have focused on resolving difficulties, preserving effectively, and shifting our business mix to the best lines and geographies possible. Overall, I am personally very pleased and proud to see our top line growing in areas that we want and helping us achieve greater efficiency and scale across our organization. Our planned underwriting strategy of the last several years to favorably shift our business mix is coming to fruition now and is evidenced by today's top line premium results. We believe that today's premium and that of the last several years should yield profitable results for Conifer for years to come. I'll now hand the call over to Harold Mlosch to provide a discussion of the financials.
spk01: 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 second quarter, gross written premiums increased 27% to $35 million. With Jim and Nick having detailed the breakout of premiums, I'll focus on the underwriting results. Conifer's combined ratio was 113.2% in the second quarter, compared to 100.5% in the same period last year. The loss ratio of 72% was up compared to 55%, primarily due to reserve strengthening in the hospitality lines. The loss ratio in commercial lines was 76% in the quarter, compared to 56% in the prior year period, while personal lines loss ratio was 37% this quarter, compared to 40% last year. Our current accident year combined ratio was 88% in the second quarter, compared to 87% in the prior year period. Moving to our expense ratio, we continue to see improvement, resulting mainly from recent planned expense reductions and growing net earned premiums. Accordingly, our expense ratio improved to 41.3% this quarter from 45.9% for the same period last year, down 460 basis points quarter over quarter. This is the lowest expense ratio we have achieved for several periods, and we have a short-term goal of reporting an expense ratio at or under 40 percent and are pleased to have the target within our sights. 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 believe this goal is very achievable. Net investment income was $503,000 during the second quarter, compared to $863,000 in the prior year, while net realized gains increased substantially to $1.1 million compared to $245,000 last year. Our investments remain conservatively managed with the majority in fixed income securities, with an average credit quality of AA+, an average duration of 3.7 years, and a tax equivalent yield of 1.5%. We recorded a gain of $1.9 million for the sale of select customer accounts and other related assets from Sycamore Insurance Agency, our wholly owned managing general agency, which Jim will discuss in a moment. This resulted in net income of $5.6 million, or 57 cents per share this quarter, compared to net income of $1.5 million, or 16 cents per share, in the prior year loss ratio, or in the prior year period. Excluding this non-recurring gain, the company reported an adjusting operating loss of $3.9 million, or 40 cents per share, compared to an adjusted operating loss of $461,000, or 4 cents per share, for the same period in 2020. Moving to the balance sheet, total assets were $270 million at June 30th, with cash and total investments of $185 million. Our book value at June 30th was $4.53 per share. And we have $1.39 per share in net deferred tax assets that, due to the 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.
spk08: Thanks, Errol. And Nick, getting to an appropriate operating scale is a top focus for our company as we continue to grow our premium base in the lines we want. We are now exhibiting solid long-term trends. As Nick said, our concentration is on ensuring that we identify lines and geographies that create the best opportunity for profit, leading to greater efficiency and scale for our operations over time. I'd like to close with a brief discussion of the transaction announcing conjunction with our earnings relating to our wholly owned FGA Sycamore Insurance Agency. Let me take a moment to provide a little background to those of you who may be unfamiliar with Sycamore, which we created in 2012. This is a wholly owned managing general agent and wholesale broker that underwrites and distributes various property and casualty insurance products for holding and various other insurance markets. We have been very pleased with the growth of the agency as Sycamore now services over 400 retail agency clients across 48 states and also has had an ownership position of insurance agency for commercial risks. The premiums written are not just Conifer, but for other third-party companies as well. In June, Sycamore sold select customer accounts and other related assets of some of its personal and commercial lines business to Venture Holdings. Post-deal, Sycamore will hold a non-controlling 50% interest in venture and continue to produce various personal and commercial lines that it did not sell, lines which are substantially all produced for and underwritten by Conifer Insurance Company subsidiaries. We also provided employees and resources to venture to allow it to expand and seek new markets that it may not have been able to reach prior. Our goal was to provide a solid foundation in which venture could grow further and we continue to benefit from that growth. The transaction we concluded with our Sycamore agency serves as a win-win for all parties, especially shareholders. We are able to partially monetize the book of business that our agency has grown with for both Conifer and other carriers without disruption to our premium base. In addition, venture can continue to see additional opportunities to source premium in new markets, and carnivore can benefit from the anticipated growth. With that, we're ready to take any questions. Operator?
spk07: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star then 2. Again, it is star then 1 to ask a question. At this time, we will pause momentarily to assemble our roster. The first question comes from Paul Newsome with Piper Sandler. Please go ahead.
spk06: Good morning. Thanks for the call. Could you talk a little bit about how the MGA may have had an impact on the profits historically? presumably it made some level of annual profits. And how does that affect the prospective earnings? How would that affect the prospective earnings?
spk08: Thank you, Paul. That's a great question. And I'm going to defer that to Harold or Brian to answer.
spk01: Thanks, Paul. So most of the external revenue that Sycamore would have gotten shows up in our financials as other income, which was $666,000 for the quarter. And that represents about 2.6% of our total revenues for the quarter. Not all of that is going over, but I would say most of it is. So we're talking about a relatively small reduction in overall revenue. We don't expect to see any reduction in gross rent and premium as a result of this at all, just some of the other revenue. But also there's an entire staff transitioning over with these operations, so expenses are going to reduce as well. Now, precisely what those numbers are going to be is difficult because there is some expense allocation going on between the various segments. But I would say overall it's going to be a de minimis impact to net income.
spk06: Great. Maybe some further comments on the unfavorable reserve development. It does seem to be persisting. And I hear about the claim count declining, but it's interesting that you have, you know, declining claim counts, but a pretty sizable unfavorable reserve development at the same time. Is there a way to reconcile those two pieces that? with trends that seem to be going in the right direction, but reserve development that is in the wrong direction?
spk08: Yes, there is. The claim counts are reported claims. So the frequency of claims versus the premium volume has dropped significantly. Those are the percentages that Nick was referring to. The claims that were on board in the geographies that we have been exiting are from say 2019 and prior, it's really 2018 and prior and 2019 and prior, those claims continue to develop negatively. That's where the development's coming from. The current accident years, really most of 1920 and now, we're not seeing development on that. So it's coming from those old claims. And when we wrote the business, historically in those geographies in this life and in past life, they were quite successful. Changes in the litigation and other things made it challenging. So when we initially reserved, we're seeing development from there. But the claim count reductions is really more of a portender of the future of the more current accident years.
spk06: That makes sense, but it's a frequency issue, or is it also a severity issue with those historic claims?
spk08: I don't know that I'd pick one versus the other. It's not really as much of a severity issue, but we still had a large number of claims that are in litigation, and we're kind of getting nickel and dimed, but those numbers are going down. That's how I would explain it. Nick, do you want to add any color to that?
spk04: No, I think you're right. It's more of a frequency than a severity issue, you know, in those particular areas of the hospitality book, in particular Florida. We did have some commercial auto emergence in the quarter from our repo towing book that's essentially in runoff. And that I don't think is a trend. I think that was a, you know, more of an anomaly in this particular quarter. You know, the other thing that I'd mention too is we've been over the last few years, reducing our retention. So on the liability side, so that will help, you know, offset any development from a severity standpoint, you know, instead of a frequency side. But it's definitely more of a frequency, like Jim said, sort of ongoing litigation costs in those particular areas.
spk06: Great. Thank you for the help.
spk07: The next question comes from Bob Farnham with Benning and Scattergood. Please go ahead.
spk08: Thanks, and good morning. I just want to continue that conversation from Paul just a little bit because it says in the 10Q you had 1.9 million of development from the 19 and 20 accident years. So do you have the details as to what types of claims are driving that particular development? Nick, I don't. I don't have any of that with me. Do you have? Sure.
spk04: Yeah. There was some development in 19 and 20, just not in the order of magnitude of the 18 and prior years. But if you look at 19 and 20, we did in both years it was hospitality focused, so the RBT in particular, not as much the QSR. And then that repo towing book, we did still have some of that business on the books in 19. So that was the larger aspect. And, again, I don't see a trend in that line in particular. I think it was more of an anomaly for the 19 year in this quarter.
spk08: Right.
spk05: Okay.
spk08: And I get several questions from bondholders. So it sounds like the deal, the Sycamore deal, is not really going to impact your ability to service the debt obligations. Is that accurate? Yeah, that is absolutely correct. Brian?
spk02: Yeah, no, it's absolutely accurate. If anything, I would go the other way. Because as you look at our management fees, having the potential to increase as we increase our top line, that means more free cash flow goes up to CHI. So you've got greater interest coverage than you probably ever had.
spk08: Okay, great. And and I know you've got you still have a 24 million of debt that's going to come due in a couple of years. How are you Do you have any plans or what plans you have in place to be able to pay that down?
spk02: Well, obviously, we're taking a look at the markets, you know, cash that we have that we're developing. You know, we'll have to see where we are with the top line in our overall production. But obviously, we're aware of it. It's in September of 23. But we still have a little bit of time as we pull our plan together. But we're fully aware of it. And we'd like to drive down that interest cost. So it's clearly a focus for us to do a refi. Right. Okay. Thank you.
spk07: Again, if you have a question, please press star then one. The next question comes from Alex Bolton with Raymond James. Please go ahead.
spk03: Good morning. I'm calling in on behalf of Greg Peters. Appreciate you taking my questions. You know, maybe just start out, you know, you touched on the rate environment, seeing mid-teens, you know, maybe you could dive a little deeper on where you're seeing rate more so than other, and if you can comment on loss trends.
spk08: Nick?
spk04: Sure. Yeah, our property, we're not seeing as much rate as we are on the liability side. We were up about 5% year over year in the second quarter. The liability side seems to be driving more of the rate environment right now. And even there, I'd say it's more on our especially small business side versus the hospitality, although we are seeing rate on the hospitality side as well. But, you know, given the lockdowns and other things, it's a little bit more muted than the small business side, which really has not been affected as much. And then on commercial auto, we are still seeing some rate increases, although You know, not as much as we had seen the last several years. That seems to be moderating somewhat. But all in all, sort of across the board, other than work comp, we're seeing a very strong rate environment.
spk07: Okay.
spk03: And then on... I guess you touched on lockdowns. I guess are you seeing effects of the Delta variant on business? Yeah, we are.
spk04: I think on the hospitality side, it's hard to really identify whether it's driven by Delta variant or just the employee shortages that we mentioned in the call. We are still seeing many of our restaurant clients having reduced hours, reduced capacity. And again, it's hard to really identify that as Delta variant versus labor shortages. So, you know, we're certainly continuing to evaluate it. I know there's been talk of additional mitigation measures and maybe even lockdowns in certain areas. I haven't seen any of that come to fruition yet. But on the flip side, we've seen increased activity really throughout the year on the hospitality book, which is really the one that's been the most affected. So we are still seeing some after effects of COVID. Today, it's hard to say whether that's through the summer that's been Delta variant or labor shortages.
spk03: Okay. And then lastly, you know, with the sale of Sycamore, you said that, you know, it's to net income on the expense side. I just want to confirm that, you know, it's not going to, you know, help you push down to the 40% target on your expense ratio.
spk08: I think it's going to help us quite a bit. We moved over quite a number of resources. or ask people, et cetera. Uh, we didn't really sell all of Sycamore. We just sold some assets and some, um, renewal rights. So Sycamore still operates. Not all of its revenue is gone. Uh, just, it was more of a strategic sale of certain business, uh, units. So, um, we think it's a win-win. We sold it. We still have an ongoing interest in how, and a motivation to help them grow. And, uh,
spk03: So we see it as a positive all the way around. Okay, perfect. Thanks for the answers.
spk07: This concludes our question and answer session. I would like to turn the conference back over to Jim Petkoff for any closing remarks.
spk08: I just want to say I really do appreciate everyone's time and interest in the company. And I do invite you to reach out to us with any questions. that you may have in the future. Thanks again, and I hope you guys enjoy, or you people, everyone enjoys the rest of the summer. Thank you.
spk07: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer