Conifer Holdings, Inc.

Good morning and welcome to Congress for Holdings first quarter 2022 investor 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. Please note this event is being recorded. I would now like to turn the conference over to Brian Roney. Please go ahead.

Thank you and good morning, everyone. Conifer issued its 2022 first quarter 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, we note that except with regard 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'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, Executive Chairman and Co-Chief Executive Officer. Jim?

Thanks, Brian. Good morning, everyone. On the call with me are also Nick, Harold, and Nick and Harold. Andy is absent today. On today's call, I'll provide a brief update of our business and our progress towards key strategic initiatives at the company. As per the norm, Nick will discuss the underwriting results in greater detail and Harold will cover the financials. Generally, we were encouraged to see continued top-line premium growth in the first quarter, particularly in the most profitable lines of business. Our premium growth was achieved through a combination of solid rate increases, high account retention, and disciplined expansion in our chosen specialty markets. For the quarter, gross rent and premiums were up 9%, largely a result of rate increases on our book of business. In addition to premium growth, we are pleased to see continued improvement in our expense ratio. We realized our short-term goal of sub-40 expense ratio for the first quarter, and we expect the improved expense trend will continue for the balance of the year. Our near-term expense ratio goal is 35%. Consistent top line growth with year-over-year gross rate and premium increases once again boosted our net earned premiums for the quarter. The net earned premium growth when combined with the results of our expense management positions us well for sustained improvement of our financial results. What was challenging for us in the quarter was the impact of continued reserve strengthening. As a result, we are committed to mitigating any future development as we shed residual burden of de-emphasized lines of business. Given the performance we've seen to date in our improved business mix, we feel more confident than ever that underwriting profitability is imminent. Our executive management and leadership teams have concentrated significant energy on a number of initiatives to combat development from all angles and ultimately to generate sustained loss ratio improvement. These initiatives are starting to bear positive results, and we see a clear path forward to achieving our ultimate goal, which is to deliver profit for the shareholders. With that, I'm turning it over to Nick.

Thank you, Jim. As Jim noted, we were pleased to see our top-line growth trend continue into the first quarter of 2022, with gross written premium up 9% to roughly $33 million. Eighty-seven percent of total gross written premium in the first quarter came from our commercial lines, which enjoyed particularly strong growth from our small business group. This was driven in part by rate increases on our specialty ENS products and in part by select geographic expansion in our chosen specialty markets. While we continue to write commercial premium in all 50 states, we believe that geographic selection is very important to long-term overall account profitability. For example, while certain jurisdictions in Florida remain problematic for us and for the industry at large, we are clearly de-emphasizing writing there. On the other hand, as we reach deeper into our core specialty lines and expand our premium base, we continue to increase market share in key geographies like our home state of Michigan. In fact, Michigan accounted for more than 28% of total gross written premium in the first quarter of 2022, and we see plenty of room for continued market share expansion in the state. This business has resulted in sustained positive underwriting performance and remains a significant driver of anticipated future growth. Commercial lines gross written premiums were up 5% to $29 million in the quarter, continuing a strong overall growth trend. New business submissions continue to expand, and we are still benefiting from high existing renewal retention levels, around 90%. While premium growth continues to be strong, development significantly impacted our commercial line's bottom line in the quarter. Admittedly, we did experience a few key losses at trial, yet we continue to focus on mitigating future development, largely through focused case reserve strengthening wherever appropriate. Generally, though, we are seeing positive trends in overall claim count reductions. For example, total claims in Q1 2022 were down 17% from a year ago, down 25% from the same period in 2020, and down 40% from Q1 2019. For quick service restaurants in particular, open claims are down 52% from Q1 2021, down 66% from the same period in 2020, and down 75% from the first quarter of 2019. As these claims trends continue, we do expect less development to emerge over time, as these improvements are largely attributed to our positive multi-year efforts to refine our business mix. Personal Lines, which represented a growing share of overall business at 13% of gross written premium for the quarter, we reported a 39% increase in Personal Lines premium to roughly $4 million. Our Personal Lines business consists principally of low-value dwelling products where our underwriting teams have established strong relationships in their select specialty markets. Geographically, this is well dispersed with solid growth and particular emphasis in Texas and Oklahoma. Notably, Personal Alliance delivered profitable results for the first quarter of 2022, reporting a combined ratio of 85% for the period. This is a solid improvement over the first quarter of 2021 and a positive contributor to underwriting profit for the period. With that, I'll now turn over the call to Harold Milash for the financials.

Thank you, Nick. I'll provide a quick review of the results, and I encourage investors to review our filings and presentation on the company's website for greater detail. In the first quarter, gross written premiums increased 9 percent to $33 million. With Jim and Nick having detailed the premium outbreak, breakout, excuse me, I will focus on our underwriting results. Conifer's combined ratio was 112 percent in the first quarter, down from 129 percent in the same period last year. Our loss ratio was 75 percent, and while still above target, was an improvement from 84 percent in the first quarter of 2021. The loss ratio in commercial lines was 81%, substantially unchanged from the same period last year, while the loss ratio for the personal lines was 41%, down considerably from 111% for the first quarter in 2021. In this quarter, we were particularly pleased with the underwriting performance of our personal lines, which resulted in a combined ratio of 85%. This represents a significant improvement of some 70 percentage points over the same period last year. Overall, our current tax-in-the-year combined ratio is 90% in the first quarter compared to 104% in the prior year period. Moving to our expense ratio, we continue to see improvement resulting from ongoing expense reduction efforts coupled with additional net earned premium growth. Accordingly, our expense ratio improved to 38 percent this quarter, down 700 basis points compared to 45 percent for the same period last year. As we continue to scale up our net earned premium, maintain cost management initiatives, and further leverage the investments we have made in technology, we believe the expense ratio improvement is sustainable moving forward. Net investment income was $507,000 during the fourth quarter, compared to $532,000 in the prior year period, while the company reported a net realized investment loss of $69,000 for the first quarter of 2022, compared to a net realized gain of $2.9 million in the prior year period. We also recorded a $280,000 increase in fair value of equity investments in the first quarter. 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 1.4 percent. Overall, the company reported a net loss of $2.9 million, or 30 cents per share, for the first quarter, compared to a net loss of 4.6 million, or 48 cents per share, in the prior year period. This quarter, Conifer reported an adjusted operating loss of 3.1 million, or 32 cents per share, compared to an adjusted operating loss of $7 million or $0.72 per share for the same period in 2021. Moving to the balance sheet, total assets were $285 million at quarter end, with cash and total investments of $181 million. Our book value at quarter end was $3.13 per share. We have $1.72 per share in net deferred tax assets, that during the full, 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.

Thank you, Harold. It was another, we're on the right direction with respect to our current accident year and our current mix of business. The development still seems to pop up and it's been a problem for us, but we're getting We're getting there, and we feel confident that we will be able to manage that in the future. Any questions?

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw from the question queue, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question is from Paul Newsom of Piper Sandler. Please go ahead.

Good morning. I was hoping you could talk a little bit more about just the update on the court, on the claim count going down. How much, and is there any pattern that could be related to the courts being closed down in various jurisdictions because of the pandemic? And have you seen any changes related to the courts perhaps opening up in various jurisdictions?

The answer is yes, and I'm going to let Nick give you more detail on that.

Yeah, absolutely. We are seeing the court system pick up. That was pretty evident in the first quarter. We did see open claim counts drop as things pick up and cases start moving and you're able to settle out or close claims that were kind of held in limbo during COVID. On the flip side, we did have a few more cases go to trial you know, probably a normal quarter because you are seeing the courts open up again. So you're seeing both the activity with cases going to trial and cases closing out at a more rapid pace than they had over the last couple of years with COVID. So that's definitely, there's definitely an impact there with the activity that we're seeing on the claims side.

Do you want more detail or is that good?

No, that's extremely helpful. I've got a related question. So the reserve development this quarter, just any patterns from an action year perspective? And I'm sort of curious about sort of linking the two questions in the sense that, you know, was there any patterns in, you know, the action years that the reserve developments were that would line up or not line up with the court cases, the courts kind of opening up or shutting down during the, you know, pandemic and more recently?

It seems like this is just anecdotal and it's my opinion. I mean, based on the information we've seen, it seems like the judges are trying to get these cases moved and get stuff off their docket. So they're being quite aggressive on trying to push settlements or demand trials, putting everybody on the spot. We're seeing a lot of activity that way. We're also seeing kind of, I would say, in certain geographies, plaintiffs' counsels being extremely difficult to deal with and forcing us to go to trial because we have really no other choice. When you go to trial, I'd say we're batting about 500 in the first quarter. A couple we thought we'd win, we lost, and a couple that were on the fence, we won. So it's really... The pattern we're seeing is that what hurt us is the quick service restaurants and the volume that we got in the jurisdictions that were unfavorable to us. When we're in Michigan or in some other geographies where we have a reasonable chance in the court systems, we're doing very well. When we're in geographies that are not as friendly, southeast Florida being one major one, we're having troubles. So we're obviously trying to address those logically and move to mitigate that issue as much as possible. So, you know, in courts that are really packed, they're trying to move things through quickly.

Interesting. So does that mean that the action years that the reserve development happened are more in the last couple of years because of that effect, or is it you know, more spread out over the actual exit years?

We believe 2020 and 2021 are good years for us. We had changed our mix of business. We had changed, worked very diligently to address the issues in 16, 17, 18, and part of 19, where we started 19, you can't turn the ship on a dime. And we believe that those exit years are going to be better. The QSR business we rode was heavy in 2018-19, and those are the years we're seeing some development from.

That makes sense. And then just maybe a couple extra words on the competitive environment, you know, from a rate and terms perspective in the businesses that you're in. If anything changed in the last quarter in a material way or anything interesting in general from a competitive perspective, it would be great.

Yeah, I think on the property side, it's still a strong rate environment. And we saw that in the first quarter, maybe not quite as strong as we saw in Q4. But I think there's evidence now that that's picking up again into Q2. So that's a positive in the rate environment. One thing we're seeing on the hospitality side is we did see some progress on rate increases in the quarter as well. And you're seeing that with economic activity and hospitality pickup. We're able to get rate on that class of business. And then I think some of what we're seeing maybe is less explicit in rate, but we're seeing in terms. So you're seeing people increase their insurance, increase deductibles. limit coverages to maybe save on rate increases, but obviously you're tightening terms, so there's some favorable momentum there. But I wouldn't say the story had changed dramatically from Q1 from prior quarters. It's still a pretty strong rate environment.

Great. Thank you very much, and thanks for the call, and I'll let somebody else ask questions. Appreciate all the help.

Thank you, Paul.

The next question is from Bob Farnham of Benning and Scattergood. Please go ahead.

Yeah, hey there, and good morning. Just a little bit more on the reserve stuff. So what's your feeling in terms of the courts? How far along are they in removing the logjam of cases? And just my question is, is this something that we should expect in the second quarter, in the third quarter, as there may still be elevated cases that are going to trial?

Things are quite active. But as time goes on, the total number of claims we have is going down. So the total number of claims in the old years continues to go down. And hopefully, the reserve strengthening that we've been doing on those cases will result in less and less development from those older years for us. Is the activity up? Yes, I would say we're moving, things are moving quickly for those older years. As I said to Paul, though, our frequency in 2020 and 2021 is down significantly. And I don't know, do you remember those numbers, Nick?

Yeah, I mean, GL frequency is down, you know, well over 50% from 2020 and 2019. So, you know, per premium dollar, we are seeing significantly less claims from the 2020 accident year compared to 2019 and the 2021 accident year compared to 2020. So you are seeing the claims volume come down, and part of that metric also takes into account rate increase, and we've been getting rate increases as well. So the frequency number per premium dollar is actually down significantly.

Yeah, and my point there is, I guess I'm not answering your question specifically, but The activity's picked up, but the total number of claims have come down. So although it may have picked up, we don't have as many to deal with. Our total number of claims, specifically related to claims received, is down 64% from Q1 19 to Q1 of 22. So, you know, and our total number of claims outstanding are done well over 50%, probably in the same number, 60%, 65%. So it's hard to imagine that we're going to continue to see the development from those older years. Having said that, who knows, right? I mean, but we're not getting new claims in from those years. The statutes have run, and we're way more confident in the years, really, 19, 20, 21.

And as Jim said, while claims are down 64%, the actual liability claims first quarter versus first quarter 2019 are down 77% in line with what Nick was saying.

And if you think about it, our premium is up. And that's why we have such a significant reduction in claim frequency.

Right. Okay. I'll move on to something besides reserves. The expense ratio improved more than I expected in this quarter. I know you've been talking about the expense ratio improvement for many quarters now. But was there anything that's one time? And that's my first question. And second question, you're talking about a 35% target in the near term. So are we looking for this year to reach down to the 35? Is that something that's reasonable?

I think that's a question for Harold.

Thank you. So, one of the reasons why our expense ratio is lower is we entered into some reinsurance agreements that included a seating commission. This had the effect of increasing our loss ratio and reducing our expense ratio. So, it increased seated earned premiums, but reduced commissions by a seating commission. So they kind of net out on a combined ratio basis, but it reflected some improvement in the expense ratio, and it made the loss ratio look a little bit worse. Overall, though, our expense ratio is down. If you were to back that out, we're still down two percentage points from the first quarter of 2021. So, you know, we're still making some very good headway on the expense ratio. 35 is probably too low for the current year, but we should still maybe pick away at what our current expense ratio is for the rest of this year.

Our fixed costs continue to go down, and our earned premium continues to go up. So we're going to continue to see improvements so that 38 headed toward 35 might not be until first quarter of next year, but we're definitely on the way.

Right. And, yeah, thanks for that, Harold, because that was actually kind of a follow-up to my next question. I saw that the seeded premium went up, so I was just curious what changes happened in the reinsurance. So is that a quarter-year treaty that you got into?

It was actually part of our excess of loss treaty. It's very similar to our older treaties, but this is the first time we used the seeding commission. It helps us with a little bit of boost in surplus on a statutory basis, but really has no impact on underwriting results on a GAAP basis. Okay.

And last question for me is new money yields, like with the changes in interest rates, trying to get a feel for what we might expect from investment income going forward.

You know, this is Brian. I'll take that one. You know, the portfolio right now is 50% is three years or less. 31% is one year or less. And we've got about 10% in cash and probably 7% or 8% in floaters. So with the duration, you know, 3.7%. New money yields are definitely improving, so we would expect to see investment income go up with the short duration and the relatively short breakout mix of the portfolio. Okay. Good.

All right. That's it for me. Thanks.

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

Well, good morning, everyone. I have two questions. The first question will be on just the geographic exposures in the commercial lines. I think it's slide nine of your investor deck. And the second question will be on CATS. So for the geographic exposure, I think, Nick, you mentioned in your comments maybe lightening up a little bit in certain areas in commercial in Florida. And so I'm looking at this business mix on slide nine of your investor deck. And as you emphasize the locations that are favorable to your underwriting restrictions or guidelines, how do you think this business mix is going to change within your top five states?

Sure. Yeah, again, on Florida, we continue to see that decline, and we'll see that continue to decline this year and into next year as well. Michigan continues to see strong growth. That's where most of the marketing focus is right now. We still see a lot of runway in really all of our product lines in the state of Michigan, probably excluding Michigan. personal line. And then Texas is another state that we're focused on, on the commercial line side. We've added some marketing personnel to the state of Texas that we think will help grow that book, the commercial book in that state. So I'd say Michigan and Texas probably are two areas of the country that we do see probably becoming a larger portion of the overall book, and with Florida being the state that we'll continue to see decline.

Got it. And then on just a simple catastrophe exposure, and I know you were commenting on your reinsurance structure in answer to the previous question, but I just, you know, we're entering wind season, and I'm just curious for the 22-year, you know, how we should be thinking about the enterprise's exposure to catastrophes in light of what you've done with reinsurance.

Sure. We do still have some Florida commercial exposure on the property side. So, you know, that still obviously is wind exposed from a hurricane standpoint. Although if you look at the book in aggregate, we're more of a straight line sort of convective storm exposed company now, especially with the personal lines growth and Texas and Oklahoma. And, you know, for that book, Q1 and Q2 are really the kind of tougher quarters. and we haven't really seen anything sort of outside the norm there. Our CAT does come up on 6-1. We don't see any significant changes to the structure. Obviously, the pricing environment is tough there, and we did have some losses from winter storm URI last year, but we don't see really significant changes to structure or, you know, I don't think pricing either.

If I could add something to that. we have a retention of $2 million. Uh, but because of our wind exposure has gone down so much over the last few years, when you, uh, look at the, the blended, uh, RMS and AIR, um, you know, uh, one in 100 year storm, we're actually, actually, I should say probable maximum loss. We're at the blended one in 600 year storm. So we have very good reinsurance coverage on that with, uh, underlying exposure, 2 million.

So, both Texas and Oklahoma, I guess, you know, the second quarter we get a lot of, you know, storm activity in those states. Should we think about this? And I think, Harold, you probably answered it, but should we think about each, like, PCS event, you have a potential $2 million retention, or am I getting too granular?

No, that's correct. Yeah, our retention on any one event for the personal lines is $2 million, and commercial for that matter. We do have a Neuring Reinsurance on the commercial side that picks up some of that before it hits the cat. But yes, on an aggregate basis, in any one event, it would be $2 million.

But our PMLs are not the same as they were last year.

Correct.

We continue to make geographic changes to... Our exposures, they've gone down, and we expect from a risk standpoint, our risk continues to get reduced. We don't know what impact that's going to have based on the expectations of reinsurers and inflation, et cetera, et cetera.

But through the second quarter, we haven't seen any type of event that would get anywhere near our retention.

And did you – And just in the first quarter, did you have – you didn't – none of the events that happened, none of the PCS events triggered any maximum retention in your results, correct?

Correct. I mean, you would have seen the loss ratios on the personal lines go up because – Yeah, it was a quiet quarter, yep. So – and our personal lines performed well. And there were some events that went through, but we were not impacted.

Not significantly. Yeah. And just to point out that other than URI that happened last year, it's only been hurricanes that really hit us pretty hard that would cause our losses to go up and touch any sort of level of retention relative to a cat. We don't have that much individual exposure to hurricanes. you know, any one storm coming through.

Here is the first cat we've ever had outside of a hurricane.

Yep, absolutely. Yeah. Okay. Well, thanks for the answers. Good luck. Thanks. Thanks, Greg.

This concludes our question and answer session. I would like to turn the conference back over to Jim Petkoff for closing remarks.

I just want to thank everybody for being on the call today, and I We're cognizant of the development. We're moving in the right direction. Claims are coming down. We feel the current action year is performing quite well, and we like our book of business. We've really moved geographically, and we've managed the CAT standpoint. So as I said in my remarks, we're optimistic that we're moving in the right direction. So thanks again.

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