Conifer Holdings, Inc.

Good day, and welcome to the Conifer Holdings Fourth Quarter 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 will be an opportunity to ask questions. I would now like to turn the conference over to Ryan Roney.

Please go ahead. Thank you, and good morning, everyone. Conifer issued its 2021 fourth quarter and year-end financial results after the close of market yesterday. You can find copies of the earnings release on the company's website, ir.cnfrh.com. The slide presentation accompanying management's discussion this morning 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 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 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-looking statements, whether as a result of new information, future developments, or otherwise. In addition, a replay of this call will be provided through a link on the investor relations section of our website. During this call, we'll also discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included when possible in our earnings release and our historical SEC filings. Statutory accounting data is prepared in accordance with statutory accounting rules and is therefore not reconciled to GAAP. We will conduct a Q&A session after management's prepared remarks this morning. With that, I'll turn the call over to Jim Peckhoff, Chairman and Chief Executive Officer. Jim?

Thanks, Brian. Good morning, everyone. On the call with me today are, in addition to Brian, are Nick, Harold, and Andy. On today's call, I'll provide a brief update on our business and strategic initiatives underway at the company. Nick will then discuss our underlying results in greater detail, and Harold will cover the financials. The highlight for our fourth quarter, and really for all of 2021, was the continuation of our top-line premium growth. Year over year, I was pleased to see gross written premiums increase by roughly 19% over the 2020 levels. What's more, the sustained top line has consequently led to even greater net earned premium growth, helping further rationalize and reduce our expense ratio. In addition, our ongoing expense initiatives have helped streamline our organization through even greater technological utilization. As you may be aware, over the past several years, we have continued to refine our business mix, and 2021 was no different. We focused on our book of business on the most profitable lines, whether commercial or personal. Today, we feel we have a quality book of business and are focused on expanding this book while capitalizing on opportunities. We continue to closely monitor performance throughout our book, utilizing our flexible infrastructure to respond to niche market opportunities. The fourth quarter was a positive indication of that successful book of business. coming into fruition and ensuring that our previous underwriting efforts are reflective in our results. With our business mix optimized, we continue to refine our book account by account and seek additional rate wherever needed. The fourth quarter reflected solid underwriting results, which we expect to continue throughout 2022 and beyond. Looking ahead to the rest of 2022, growth in our core specialty markets remains sustainable, with significant runway and opportunities to reach deeper into our chosen markets. We expect to see consistent long-term profitability emerge. With that, let me turn it over to Nick for more color on our underwriting results. Nick?

Thank you, Jim. As Jim noted, we were pleased to report solid top-line growth, not only in the fourth quarter, but for all of 2021, resulting from our sustained commitment to underwriting in our specialty markets. Commercial lines represented 88% of our total production for the period, where in particular, we saw substantial growth from our small business group. Our personal lines, which consists mainly of low-value dwelling business, represented 12% of written premiums for the quarter. Commercial lines gross written premiums were up 10% to $29 million in the quarter, and up almost 14% for the full year, continuing a very positive overall growth trend. During the fourth quarter, our new business submissions continued to expand, and we are still benefiting from high existing renewal retention levels at approximately 90%. As we reach deeper into our core specialty lines and expand our premium base, we continue to increase our market share in key geographies, including our home state of Michigan. Michigan gross written premium increased $6 million, or 26%, in 2021, and we see plenty of room for continued market share expansion in the state. This business has resulted in continued positive underwriting performance and remains a significant driver of our anticipated future growth. Overall, hospitality premiums have started to rebound as anticipated, reflecting the normalization of premium contributions as COVID restrictions ease nationwide. Our small business book continued its strong upward trend with exceptional premium growth of 31% over the course of 2021. This equates to an increase of more than $20 million in additional premium for the full year, a key driver of overall premium growth. Keep in mind that roughly half of that overall premium increase for the full year 2021 was driven by additional rate achieved in the period, roughly 9% across the board on average. While commercial lines had a good quarter, we reported an even better one for personal lines. For the fourth quarter, we reported a 63% increase in Personal Alliance premium to roughly $4 million for the fourth quarter and a 75% increase to $15 million for the 12 months ended December 31st. While this growth alone was encouraging, it was even better when considering the results. Personal Alliance performance was highlighted by a strong fourth quarter, posting a very profitable combined ratio of 77% and profitability for the full year as well. Our Personal Alliance consists principally of low-value dwelling products where our underwriting teams have established strong relationships in select specialty markets. Geographically, this is well dispersed with solid growth, particularly in Texas and in Indiana. Our core loss ratio for commercial lines was 67%, even as we continued to bolster reserves in the period. Our personal lines loss ratio was excellent at 34%, and when taken together, our all-in loss ratio for the quarter was a solid 62%. The positive theme to note here is that the underlying fundamentals exhibited in the fourth quarter were very strong and are cumulatively reflective of the underwriting improvements made in prior periods as we optimized our business mix. Now we are seeing the benefits of our earlier efforts, and we believe these results are indicative of future performance in the current book. What evidence supports our confidence? Emergent trends for recent accident years are clearly favorable. We are seeing significantly reduced overall claim counts, most notably in those de-emphasized lines, all coupled with higher outstanding average reserves when compared to average paid, leading us to feel assured that prior development is trending more favorably today. We're not saying that we couldn't experience any additional development going forward, but we are certainly encouraged with the performance trends we are currently seeing. On the claim count front, let me offer another example. As we have outlined in prior earnings calls, QSR has been a challenging line for us. Since 2018, we have seen significantly reduced premium in this line and have carefully refined our business and geographies to include only the best of the best. As a result, while premium is down significantly, we have also seen claim counts decrease considerably as well. New QSR claims were down 54% from 2019 to 2020 and down another 70% from 2020 to 2021. These reduced claim counts are reflected not just in the QSR line, but across all liability lines taken as a whole. New liability claims dropped 47% between 2019 and 2020 and fell another 40% from 2020 to 2021. This is consistent with our expected outcomes, resulting from the decision to focus our underwriting efforts on trying to penetrate deeper in our best performing line. Obviously, continued underwriting enhancement is a never-ending, ongoing process, but we are pleased to see the current operating results reflecting the efforts and changes previously made. With that said, I'll now turn the call over to Harold to discuss the financials.

Thank you, Nick. I'll provide a brief 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 percent to $33 million. With Jim and Nick having detailed the breakout of premiums, I will focus on our underwriting results, specifically the improvements in our loss and expense ratios. Conifer's combined ratio was 104% in the fourth quarter, down from 111% in the same period last year. Our overall loss ratio is 62%, a slight improvement from 67% in the fourth quarter of 2020. The loss ratio on commercial lines was 67% this quarter, substantially unchanged from last year's fourth quarter, while the personal lines loss ratio was 34%, down considerably from 61% in the fourth quarter of 2020. In this quarter, we were particularly pleased with the underwriting performance of our personal lines, which resulted in a combined ratio of 77%. This represents an improvement of almost 2,700 basis points over the same period last year. Our current action year combined ratio was 89% in the fourth quarter, compared to 93% 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 41% this quarter, compared to 44% in the same period last year, down 250 basis points. As we continue to scale up our net earned premiums, maintain cost management initiatives, and further leverage the investments we have made in technology, we believe a sub 40 expense ratio is very achievable in the near future. Net investment income was $419,000 during the fourth quarter compared to $563,000 in the prior year period, while the company reported a net realized investment loss of $1 million compared with a net realized gain of $3.6 million in the prior year period. We also recognized a $1.2 million increase in fair value of equity investments in the fourth quarter. Our investments remain conservatively managed with a 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 1.4%. Overall, the company reported a net loss of $801,000, or $0.08 per share, for the fourth quarter, compared to net income of $3.3 million, or $0.34 per share, in the prior year period. This quarter, Conifer reported an adjusted operating loss, of $986,000 to 10 cents per share compared to an adjusted operating loss of $2.5 million to 26 cents per share in the same period in 2020. For the full year 2021, the company reported a net loss of $1.1 million versus a net income of $595,000 last year. Moving to the balance sheet, total assets were $290 million at year end with cash and total investments of $193 million. Our book value at year end was $4.17 per share. We have $1.50 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. I'm pleased to see the successful execution of our business plan, and the growth of our top line while simultaneously reducing exposures to lines that have generated the greatest impact to our reserves. Given the results we've achieved to date and our trajectory looking forward, we are confident that our efforts will continue to bear fruit in 2022 and beyond. The primary focus of Conifer's leadership team remains to drive bottom-line profitability for our shareholders. And now we're ready to take your questions. Operator?

Thank you. We will now begin the question and answer session. To take a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Paul Newsome from Piper Sandler. Please go ahead.

Good morning. Thank you for the call. Love to hear the outlook for the expense ratio becoming sub 40. Any thoughts on sort of the timeframe of that? I don't need a quarterly prediction, but are we talking within a year or two or? you know, beyond that or anything that sort of gives us a sense of how that might emerge would be great.

I think I'll leave that up to Brian or Harold, whoever thinks wants to take it.

Sure. I can handle that, Paul. Thank you. We do see very positive movement in the expense ratio. I would expect certainly by the second quarter of next year or this year, excuse me, 2022, maybe even in the first quarter, but I don't want to be too optimistic that we should see below 40 expense ratios.

Fantastic. And then just maybe a little bit more color on the competitive environment. There's lots of news about sort of incrementally smaller price increases and i guess you know that's translating into um maybe lesser of a hard market are you seeing the same sorts of things in in your specific um targeted markets um i'm going to leave that up to nick but before i do i'm going to say in general it's really uh line specific and matt

maybe in general overall the rate increases aren't going to be as big, but certain lines are going to continue to experience rate increases. Nick, go ahead.

Sure. In the areas where we're writing, we do still see a strong environment in particular on property. We have not seen that really tail off toward the end of last year. It was a strong year on the casualty front for us outside of work comp, but as I think other carriers have noted, we did see a little bit of decrease in the increases, I guess we would say, towards the end of last year. We didn't see a strong momentum on the casualty side in the fourth quarter as we had seen earlier in the year. I wouldn't say it's a soft market or anything like that. It's still, I think, a pretty firm market, but just not as firm as it was earlier in the year. So I do think we have seen that in our casualty lines, but the property market continues to be very strong from a rate environment.

Great. Thank you. Good luck for the 2022.

Thanks, Paul. Our next question comes from Bob Farnham from Benning and Scattergood. Please go ahead.

Hi there, and good morning. I'm just maybe looking for a little bit more details on the commercial lines reserve development, kind of what lines we're driving at and what accident years.

I think either Nick or Harold, Whoever wants to take that.

Sure. This is Nick. I can take that. The QSR line was the largest area of development that we saw in the fourth quarter. Most of it was from 2018 and 19. 2020 and 2021 are still looking like very strong years for us. And, again, it's the quick service restaurant in particular in certain geographies, Florida sort of being the key one here. New Jersey has also been a tough geography for us. But those are really the two. QSR was by far the largest, and those were the years that saw the most emergence.

And if I add something there, you know, Nick's from an underwriting perspective, I think that the premium in the state of Florida, isn't that down like 95%?

Yeah, we've been since really the end of 2019 aggressively reducing our exposure in Florida on that particular class of business. And to Brian's point, we're down 95% roughly from where we were in those years.

Is the development coming, like in the QSR development, is it coming from actual cases that they're getting more severe than you expected? Or are you putting in the IBNR for potential for increased expenses? Like I'm trying to figure out whether this is severity driven, frequency driven, actual cases or just IBNR.

Yeah, it would be a combination of IBNR in the fourth quarter and just emergence on the litigation in the state of Florida. So you have ongoing mostly slip and fall type losses, and the legal expense on the drawn out litigation environment, combined with what we are seeing in certain trials, although I think we've done a good job, this you are seeing like the rest of the market higher severity based on more litigation but also jury verdicts. Thankfully like we said we haven't seen as many of those but it's more of just the overall cost involved with litigation and more frequent litigation.

Do you have concerns with perhaps courts opening it up and even having even more difficult environment? I didn't know if if during the pandemic you actually had a bit of a breather.

Yeah, I mean, I would say there was somewhat of a breather in 2020, although, you know, I think towards the end of 2020, we started to see things normalize. We are certainly seeing things move more quickly in the courts, but that hasn't, I don't think that's really been as much of an effect. I think it was, you know, an issue even through COVID where you were still spending money on litigation and Maybe the trials weren't happening, but the costs there were still involved.

I just wanted to clarify one thing. Particularly with QSR, most of the claims are reported relatively early. Certainly after a two-year period, you don't really see any additional claims coming in. So we did see a fair amount of emergence in existing case reserve developments. The good news behind that is when you start looking at some of our older accident years where we had some of the bigger challenges, our cases or claim count is way down. So it just offers much less opportunity for further development. Okay, good. Thanks for that additional color.

Harold, while you're on that, new money yields. It looks like obviously you're not getting a whole lot from your investment

investment income just kind of curious how new money yields are looking relative to the expiration of existing bonds you know i let me take that one it's brian um actually as you look at the portfolio there's a couple of things going on uh you're right we we still have a you know a relatively short duration so the kind of the role is significant but new money yields are not significant So as you look at the overall total return, it's obviously relatively low. But part of the idea there is that we're keeping it very high quality and very low duration. And on top of it, we made a conscious decision when we look at Conifer Insurance Company in particular, with the end of last year, we moved out of equities and we've stayed out of equities. So in terms of trying to have less exposure to markets, we kind of took the equity exposure for Conifer, which is the larger of our two operating subsidiaries, off the table. Now, that could create an opportunity for us going forward, depending on what happens with where markets are today. But specifically, as we look at total return We took the equity exposure off, and you're right. We're not seeing huge yield increases, but we are seeing a rolling over because of the short duration. So we do think we are going to be able to take advantage of rate increases as we see the markets move up. Okay. Thanks for that.

And last question for me is, was there a change in your reinsurance and commercial lines? It just seemed like seeded premium was up. a bit in the fourth quarter, didn't know what was driving that.

Nick? I can take that. So we entered into a new reinsurance treaty effective 1231 that has a seating commission component to it. It's not a quota share, it's a regular excess of loss treaty, but that caused us to recognize additional seated written premium versus what we've seen in the past. So I think on a go-forward basis, you're going to see more seated earned premium and seated written premium, but it's going to be offset by a seating commission. Accordingly, it doesn't really have much of an impact to the bottom line and really no impact on a GAAP basis. It does help us a little bit on a statutory basis, which is why we did it. It helps us with our risk-based capital and our surplus. So that's why we did that.

Are you planning on having a line item for the seated commissions? Or is that going to be lumped into something else like other income?

That's going to be included in acquisition costs. But on a GAAP basis, there is no difference because it's just included in acquisition costs. We will probably have a foot – as it starts – There was no impact to the income statement as of 12-31 because it was effective on the last day of 12-31 of the year. But going forward, we probably will have a disclosure that talks about it.

Okay. Great. Thanks for the answers. Thank you.

Again, if you have a question, please press star, then 1. Our next question comes from Greg Peters from Raymond James. Please go ahead.

Good morning, everyone. Most of my questions have been asked. I know you gave some color around how you think the expense ratio might improve in 22. Can you, just from a big picture perspective, give us an idea of what you think the top line result might look like, you know, in terms of a year-over-year increase, and then also the loss ratio. And obviously, there's going to be a range on the loss ratio, but just trying to put the pieces together to come up with the right numbers and, you know, any guidance you can offer on those two areas would be helpful.

Well, I'll give my comments, and then if Brian or Nick want to chime in, they're welcome to ask it. As far as top line goes, I wouldn't see, I would expect us not to achieve the same growth we had last year as there were a couple de-emphasized property lines that are going to roll off as we continue to go to our most profitable books of business. The loss ratio on an action year basis is better than the calendar year that you're seeing. So I would expect improvement in the loss ratio as we go forward. So you asked about growth and loss ratio. Yeah, so I expect the loss ratio to improve. And I expect growth to be there, but not as significant as last year. Nick or Brian, do you want to answer that? Any different questions?

No, I think you got it.

Yeah, I agree with that as well. On the accident-year loss ratio component, would you estimate the gap, the variance between where you are and where it was for 21 versus how you think? Obviously, the rate's coming through and the rate's going to give you a better, should theoretically drive the loss ratio lower, but I'm just curious what your views are. Are you going to book a lower accident year in 22 because of the changes? I guess I'm grasping at straws trying to understand how we should think about the accident year loss ratio for 22.

Well, the accident year loss ratio for 22 would probably be similar or maybe tick up a little. Most of the improvement in our loss ratios have come from the realignment of the books of business. Obviously, in 2020, with places being closed, there was some benefit to us because PPP was in place. People didn't necessarily go out of business. They still had to insure their properties. Sure, they had lower income. lower limits of liability and different things to lower their own premiums individually. But we did get a benefit from places being closed. 2021 really continued a decrease in the frequency per premium dollar in our casualty business, which tells you that the books of business we're writing are much better. So as time goes on and The world continues to open up. I expect a little increase in the asset-year loss ratio, but I don't see a dramatic one. The only wildcard there is on property, although we don't have a lot of wind-exposed property. We have seen quarter to quarter, depending on freezes and different things, we could see some volatility in our property loss ratio. But for the year, we expect that to continue to be very good. So I would expect the casualty loss ratio to pick up a little bit on an accident year basis. But Nick or Brian, do you have a comment on that?

No, I think I agree with your assessment on the accident year. And obviously, as reserve development improves and we see less of that, the calendar year and accident year should come closer in that gap. should recede and be pretty close to, you know, the same number, hopefully, here very shortly.

And we do expect that that expense ratio is going to come down. I mean, our target is still 35, and we're going to be pushing hard, obviously, on that. So we are looking for profitability in the year.

Got it. All right. Well, thanks, Jim and Nick and Brian, and good luck to the year. Thank you.

Thank you for everybody's voice, especially yours. I don't think I've talked to Greg in quite a long time. So good to hear your voice.

Again, if you have a question, please press star, then 1. There are no more questions in the queue. This concludes our question and answer session. I would like to turn the conference back over to Jim Peckhoff for closing remarks.

I just want to say again that I appreciate everybody being on the call today, and we're very pleased with where we're going from the underwriting and loss ratio and expense ratio focuses that we've had. So look forward to talking to you guys next quarter, and I hope everybody stays safe. Take care. Bye.

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