Conifer Holdings, Inc.

Good morning and welcome to Conifer Holdings' third quarter 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. Please note, this event is being recorded. I would now like to turn the conference over to Adam Pryor of the Equity Group. Please go ahead.

Thank you, and good morning, everyone. Conifer issued its 2021 third quarter financial results after the close of market yesterday. On the company's website, ir.cnsrh.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 law, including statements related to trends, the company's operations and financial results, and the business and the product 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 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. Conifer specifically disclaims any obligation to update or revise any forward business 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. Reconciliation of these non-GAAP financial measures to the comparable GAAP financial measures are included. They're impossible 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 Peptoff, Chairman and Chief Executive Officer. Please go ahead, Jim.

Thank you, Adam. Good morning, everyone. On the call with me today is Nick, Harold, Andy, and Brian. On today's call, I'd like to provide a brief overview. Nick will discuss the underwriting results in greater detail, and Harold will cover the financials. The third quarter, I was pleased to see continued gross-ridden premium growth, up almost 13% quarter-over-quarter, and up just over 20% for the nine-month period. Both commercial and personal lines reported meaningful growth in gross-ridden premiums, leading to another quarter of double-digit growth for California. For the changes we have been successfully implementing for several years now, our business mix is largely where we'd like it to be, and we are solely focused on growing deeper in our established specialty lines. In addition, a major component of our top line growth in the quarter came from significant rate increases in the select lines that we serve. In general, we continue to push rate wherever possible. Nick will have a little bit more on this later. With the general business enhancements that we continue to roll through our book, we are excited about the positive impact for the future. The ongoing top line growth will definitely drive fundamental economies of scale. helping reduce our overall cost structure and increasing operating efficiency as well. After several years of optimizing our business mix, we see promising signs for a very favorable growth trend going forward. For the remainder of 2021, our focus will continue to be on generating profitable premium growth in our best-performing lines. In our core specialty markets, our growth remains sustainable and has significant runway. We will greatly enhance Convr's ability to report consistent operating profit going forward. With that, I turn it over to Nick.

Thank you, Jim. Echoing Jim's comments on growth, we are pleased to see the consistent underwriting effort made over the last several years coming to successful fruition in the form of favorable top-line growth. Commercial lines represented 88% of our total production for the period, where we saw substantial growth from our small business group. Our personal lines, which consist largely of low-value dwelling business, represented 12% of written premiums for the quarter. Commercial Line's gross written premiums were up over 9% to almost $30 million in the quarter, and up over 15% for the nine-month period as well, continuing a very positive growth trend overall. During the third quarter, our new business submissions continued to grow, and we are still benefiting from high existing renewal retention levels at approximately 90%. As we expand our base premium, premium-based, we are further developing market share in many of our key geographies, including our home state of Michigan. In addition to continued positive performance, Michigan business presents many other opportunities for us and remains a significant driver of our expected future growth. Looking at our book more closely, hospitality premiums were down in the quarter, largely due to ongoing COVID impacts combined with selective planned non-renewals. On the other hand, we achieved 28% growth in our small business group. This equates to an increase of roughly $5 million in additional premium for the quarter alone, which helped drive our top line commercial lines premium growth. As hospitality normalizes over time, we do expect positive premium contributions there as well. We also reported a 52% increase in personal lines premium to roughly $4 million, as well as a profitable 88% combined ratio for the period. Our personal alliance consists largely of low-value dwelling products where our underwriting teams have established strong relationships and select specialty markets. Geographically, this is well dispersed across the Midwest with solid growth, particularly in Texas and Indiana. Yet we remain dedicated to actively monitoring our wind exposure and will continue to purchase wind cover conservatively to reduce possible exposures to future wind events. As Jim discussed earlier, we have largely shifted our business mix in a very positive direction. This shift in business mix includes changes by geography, line, and class where necessary. We are pleased to see today's growth coming from the lines that we know and serve well and that have the greatest opportunity for profit. While we did report improvements in our loss and expense ratios quarter over quarter, we also reported additional development from prior years that impacted our current period profitability. Much of that reported development stems from a few select lines that we continue to either run off or de-emphasize. Over the past several quarters, we have noted the change in business mix as we have proactively reduced our exposure to these key certain lines. In particular, we have noted previously that select classes of our Florida restaurant bar tavern business, as well as certain quick service restaurant exposures, were not performing to our expectations due to several factors. Largest among these items was the ongoing impact of a challenging Florida judicial environment. What efforts have we taken to mitigate future reserve development? For example, since the premium high watermark for our QSR book was achieved in 2018, we've been steadily reducing and refining our overall QSR exposure. Our total QSR premium production is expected to be down roughly 75% by year end 2021 versus 2018, focusing on the best of the best in terms of the remaining premium written. We've also continued to refine our underwriting methods and increased our average reserves where applicable. The following update on select claims data demonstrates the positive result of our ongoing efforts. For the nine months ended September 30th, 2021, our QSR liability reported claim count is down 83% for the same period, 2019, and down more than 64% from the same period in 2020. In fact, across all of our liability lines, reported claim counts were down more than 66% for the nine months ended September 30th, 2021, compared to the same period in 2019, and down 37% from the same period in 2020. The reduced claim counts, we believe, reflect the many improvements we have made to our book overall. This is just one example of how we have focused on reducing exposure to underperforming classes or geographies, allowing us to shift our business mix to the best lines possible. Overall, I'm personally very pleased and proud to see our top line growing like we expect and helping us achieve greater efficiency and scale across our organization. Our planned effective underwriting strategy to favorably shift our business mix is evidenced by today's top line premium growth and expected future results. 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. Specifically, I'll go through a more thorough discussion of our underwriting results, including an improving expense ratio. Conifer's combined ratio is 107% in the third quarter compared to 111% in the same period last year. Our overall loss ratio is 64.6% and is down slightly compared to 65.2% for the third quarter last year. The loss ratio in commercial lines was 67 percent this quarter, compared to 69 percent in the prior year period, while the personal lines loss ratio is 49 percent for the quarter. In this quarter, we were particularly pleased with the underwriting performance of an 88 percent combined ratio in our personal lines, especially considering an otherwise difficult cap period for several of our peers. When we began to shift away from wind-exposed business several years ago, Our goal was to reduce the possible storm impact to our future results. The third quarter proved to be an excellent example of this planned shift away from wind-exposed personal line sector. Our current accident year combined ratio was 92% in the quarter, compared to 90% in the prior year period. Moving to our expense ratio, we continued to see improvement resulting from planned expense reductions and premium growth. Accordingly, our expense ratio improved to 42.3 percent this quarter from 45.5 percent for the same period last year, down 320 basis points. As we scale up our net earned premiums, continue to implement cost-cutting measures, and further leverage the investments that we have made in technology, we believe a sub-40 expense ratio is very achievable in the near future. Investment income was $514,000 during the third quarter, compared to $776,000 in the prior year period, while the company reported a net realized investment loss of $101,000 compared to a net realized gain of $3.3 million in the prior year period. 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%. In the quarter, we recorded a negative change in fair value of equity investments that reduced net income by $2.2 million, and we reported $2.8 million of other gains related to the recognition of the forgiveness of the PPP loan under the Payroll Protection Program. Overall, this resulted in the company reporting a net loss of $1.2 million, or 12 cents per share, compared to net income of $541,000, or six cents per share, in the prior year period. Excluding this non-recurring other gain and change in fair value, the company reported an adjusted operating loss of $1.7 million, or 18 cents per share, compared to an adjusted operating loss of $2.4 million, or 24 cents per share, for the same period in 2020. Year to date, the company reported a net loss of $293,000 versus a loss of $2.7 million for the same period last year. Moving to the balance sheet, total assets were $269 million at quarter end, with cash and total investments of $184 million. Our book value at quarter end was $4.34 per share. We have $1.49 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, Darrell and Nick. I am pleased to see the execution of our business plan as we grow our top line 13% of the quarter and 20% for the nine-month period, all while reducing exposure to lines that have generated the greatest impact to our reserves overall. We continue to refine our business mix and effectively grow our top line. Our primary focus remains achieving efficient operating scale and driving bottom line profitability going forward. With that, I'd like to ask if there's any questions. Operator?

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. 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 would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Bob Harnon of Spending and Scattered Goods. Please go ahead.

Yeah, Heather, just a couple questions here. In terms of the premium growth that you're hoping for to kind of right-size based on the infrastructure you have. I'm looking at your kind of your net written premium leverage to policyholders surplus, and it's 1.8 now. So I'm trying to figure out how much leeway you still have to put more growth on to keep your, but balancing that with keeping your rating intact.

Yeah. Thanks, Bob. That's a great question. We haven't used any of our reinsurance or anything along those lines to deleverage the company. It's been pretty straightforward. But there's plenty of availability of additional capital or either reinsurance-wise, et cetera, if we needed to raise capital to grow. But our growth rate is not like 50% a quarter. It's only 10% to 15%. And we think... hopefully as the development subsides, we'll be posting earnings and that will help in that growth. But, Brian, do you have any comments?

I think actually as we look at the top line and where we are, I echo kind of Jim's comments that, you know, our top line growth and our percentages off of a smaller base, you know, give us obviously a little bit of room from where we are right now. But obviously, if we see more anticipated growth, we'll be obviously looking for other ways to supplement that.

Yeah, just to the question, my question was almost, you know, is there still a possibility you're going to have to kind of reduce that infrastructure further in order to get that expense ratio kind of where you want it to be if the top line is kind of under pressure? Maybe you have to address the expense ratio with lowering the cost of the whole infrastructure.

We've been continuing to lower the cost of the infrastructure. If you look at our operating expenses, they go down in real dollar values even as our writings are going up. So I think we've focused quite a bit on that. We're hampered somewhat by our rating because we have fronting costs which are hurting our expense ratio. In addition, the lines of business that have caused us a problem in 15, 16, 17, 18 are still reverberating to our reinsurance costs. We expect that to mitigate as well. So as time goes on, With a little bit of growth, better current year operating results, we anticipate a little growth in our premium will more than offset that. And we expect our expense ratio to continue to decline. It was hurt a little bit this quarter by a catch-up on some minimum premiums on reinsurance that lowered our earned premium. Otherwise, the expense ratio would be even better. which I guess is kind of cryptic to a certain extent, but we had a minimum premium. It wasn't significant, but it's a few points, you know, basis points on our expense ratio. We really feel that's going in the right direction, and as the growth continues, you know, the year-end premium is catching up, and as the year-end premium goes up, we're getting down. We expect to get sub-40 in the next few quarters, couple quarters, and we see it continuing that way.

All right. And the second question I have, I know I've asked before, but I have questions from the senior note holders. The notes mature in a little under two years now. So you have $24 million outstanding. Just what are your plans to be able to pay that down when they mature?

Well, actually, obviously, as you point out, there's two more years. I think probably the most important thing for your people is How do they feel about the dividends? We feel confident about our ability to refi back into the market. But right now, with the top line premium growing, that gives obviously more coverage, if you will, interest coverage for the underlying payments. But, you know, we feel comfortable as to where we are, you know, with refiing that. We're actually out refiing the sub debt right now. So as far as we're concerned, we see a favorable trend with interest rates and an opportunity to hopefully lower our interest costs going forward. Okay.

Thanks, guys.

As a reminder, if you have a question, please press star then 1 to rejoin into the queue. The next question comes from Greg Peters with Raymond James. Please go ahead.

Good morning, everyone. This is Alex Bolton calling in for Greg Peters. You know, maybe touching on the restaurant and bar business, you know, being in Florida, you don't get the best, you know, understanding of, you know, how restaurant and bars are doing in other states in the U.S. You know, maybe you can touch on, you know, the COVID impact, you know, what's that looking like elsewhere and, you know, the outlook, maybe when this COVID impact, you know, turns from a tailwind to a headwind. I mean, from a headwind to a tailwind.

Nick?

Sure. So, you know, it varies quite a bit sort of to your initial comments on geography in terms of the market out there for the restaurant bar tavern business. You know, we did actually see some growth in our independent restaurant bar tavern book. even though hospitality was down overall. A big portion of that decline was our own re-underwriting efforts on the QSR book in particular. So we are starting to see, I'd say, things stabilize in the restaurant bar tavern world. You still have an issue, especially less so on the franchise side, but more so on the independent side of labor shortages and the issues created So it's not as much maybe directly tied to COVID, but labor shortages are impacting those businesses and reducing hours of operation and capacity. That obviously lowers sales, especially in liquor-driven businesses and the bar tavern side. So it's sort of a mixed bag, but I do think we're starting to see that stabilize outside of places like Florida where, as you mentioned, it's been a little bit more vibrant. In some of the other states, like Michigan and some of the other Midwestern states, we are starting to see things stabilize there. And, you know, I think moving into 2022, particularly in the spring, I think we'll be pretty close to normal, especially if labor, you know, shortages and supply chains are, you know, back to normal as well.

Okay, great. And then I guess on net investment income, you know, I guess there's some subsequent rise in net investment income, you know, I guess going forward, you know, I think I would think it would be coming down, you know, maybe you can talk about that subsequent increase and maybe thoughts going forward.

Yeah. I mean, if you look at obviously, you know, annualized book income and tax equivalent book yield, as Harold talked about in his section, I mean, for us with, floaters, cash, and short-term being roughly 50% of the portfolio. While the book yield is low, we're keeping the duration short. So I think as we look at it, we see opportunities with interest rates rising going forward, but we're trying to take less exposure from a principal perspective. So there perhaps is less income. So I think as you look at it that way, the income's been down as we've kind of pulled our horns in a little bit, but we've been pretty conservative in that respect going forward. But like I said, with half the book, three years and less, we see opportunities for more investment income on an annualized book yield going forward as interest rates rise.

Okay, great. Thanks for the answers.

Once again, if you have a question, please press star then one to be joining to the question queue. Press star then one. This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you. I really don't have much to say. I think we covered everything here. We're growing. We're growing in the areas we want. Our current accident years, loss ratios are excellent. We still have a little bit of development to probably work through. And we've levered our book from a cat risk standpoint. And we feel pretty good about where we're going. So thank you for your continued interest, and we look forward to talking to you next quarter.

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