Conifer Holdings, Inc.

Good morning, and welcome to Conifer Holdings' second 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 second 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, please 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 may differ materially from the results anticipated in these forward-looking statements, due to 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. Also with me today are Nick, Harold, and Brian. Like on previous calls, I'll provide a brief update of our business strategy, then Nick will discuss our underwriting results with greater detail, and Harold will cover our financials. We were encouraged to see continued top-line premium growth in the second quarter, particularly coming from our most profitable lines of business. Our premium growth remains a combination of solid rate increases, high account retention in the specialty markets that we are excelling. Generally, we see a significant additional runway for premium growth in our core specialty lines. In addition to premium growth, we are also pleased to see our expense management initiatives come to fruition as the expense ratio continues to improve. In the first quarter, we achieved our short-term goal of sub-40 expense ratio and improved the expense trend continued for the second quarter. We expect these efforts to further drive down expense ratio for the balance of the year, and we revised our near-term expense ratio goal to 35%. While the top line growth is growing profitably and the expense ratio continues to rationalize, we also took significant measures to bolster our overall reserve position in the second quarter. In efforts to mitigate future reserve development, we dramatically strengthened reserves by considerably increasing our view of ultimates in the quarter. We realized that in addition to placing profitable premium within a reasonable expense structure, we need to stem the tide of the development we've been experiencing. As a result, we remain firmly committed to mitigating any future development as we continue to refine and tighten our business mix. and shed the residual burden of the emphasized lines of business. Given the performance we've seen today from our improved business mix, we feel more confident than ever in our go-forward book of business. In fact, the underwriting profitability is right around the corner. Our expense management and leadership teams, our executive management and leadership teams, have concentrated tremendous energy on a number of mitigating initiatives. to combat development from all angles and ultimately to generate sustained loss ratio improvement. These initiatives are bearing positive daily results and we see a clear path toward achieving profit. With that, let me turn it over to Nick for more color on the other end.

Jim noted, we were pleased to see our top line growth trend continue with gross written premium up 7% to over $37 million in the second quarter. continues a very strong premium trend focused solely on our core profitable lines of business. In fact, 86% of total gross rate and premium in the second quarter came from commercial lines, which demonstrated sustained growth largely from our small business group. This was driven in part by rate across much of the book in general, but specifically in our specialty ENS products. Commercial lines gross rate and premiums were up 4%, to $32 million in the quarter, continuing the solid upward trend. New business submissions continue to expand as commercial opportunities increase from previous COVID-driven levels. In addition to new business, we are still benefiting from high existing renewal retention levels around 90%, which has been a favorable constant for some time now and allows us to further refine and underwrite our book with each renewal. As we reach deeper into our core specialty lines, and selectively expand our premium base, we continue to increase market share in key geographies like our home state of Michigan. In fact, Michigan continues to account for a sizable percentage of our total premiums at 26% of gross return premium in the second quarter of 2022. While we are pleased with our presence in Michigan, we see plenty of room for continued market share expansion in this space. We believe the focus on Michigan and other favorable geographies represent the best growth opportunities that we see going forward. The focus on niche markets and favorable geographies has generated consistently better business outcomes for us and will result in sustained positive commercial lines underwriting performance. Personal lines, which represented a growing share of overall business at 14% of gross written premium, we reported a 32% increase in personal lines production to roughly $5 million for the quarter. Personalized business consists principally of low-value dwelling products geographically well dispersed, yet with solid growth characteristics in expanding markets such as in Texas and Oklahoma. While the top line continues to grow and selectively expand, much of our collective effort remains singularly focused on strengthening our reserve position and reducing future claims exposure. We continue to focus on mitigating future development through focused case reserve strengthening wherever appropriate, and through targeted initiatives to limit potential future developments. In that light, we are pleased to see continuing favorable claims trends. For example, total claims in Q2 2022 were down 12% from a year ago, down 15% from the same period in 2020, and down 31% from Q2 2019. For quick service restaurants in particular, open claims are down 53% from Q2 2021, down 69% from the same period in 2020, and down 75% from the second quarter of 2019. As these claims trends continue and our reserve strengthening efforts bear out, we anticipate less applicable development to emerge over time. With that, I will now turn the call over to Harold to discuss 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 second quarter, gross rate and premiums increased 7 percent to $37 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 129 percent in the second quarter, compared to 113 percent in the same period last year. largely impacted by reserve strengthening in the quarter, as we significantly moved up our estimates for ultimates for 2020 and prior accident years by $9.5 million. Our loss ratio was 90% compared to 72% in the second quarter of 2021. The loss ratio on commercial lines was 95%, where much of the reserve strengthening efforts were focused, compared to 76% in the same period last year. while the personal lines loss ratio was 61% for the second quarter of 2022. Overall, our current action year combined ratio was 91% in the second quarter, largely unchanged from the prior year period. Moving to our expense ratio, we continued to see improvement resulting from ongoing expense reduction efforts, coupled with additional net earn premium growth. Accordingly, our expense ratio improved 39% this quarter, down 230 basis points compared to just over 41% for the same period last year. As we continue to drive efficient cost management initiatives, we believe the expense ratio improvement is sustainable through the year and moving forward as well. Net investment income was $564,000 during the second quarter, compared to $503,000 in the prior year period, while the company reported a net realized investment loss of $1.4 million for the second quarter, compared with a net realized gain of $1.1 million in the prior year period. We also recorded a $317,000 increase in fair value of equity securities in the second quarter. Our investments remain conservatively managed with the vast 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 about 1.4%. Overall, the company reported a net loss of $8.4 million, or 86 cents per share, for the second quarter, largely impacted by our efforts to strengthen reserves in the period. compared to net income of $5.6 million or $0.57 per share in the prior year period. This quarter, Conifer reported an adjusted operating loss of $7.3 million or $0.75 per share, compared to an adjusted operating loss of $3.9 million or $0.40 per share for the same period in 2021. Moving to the balance sheet, total assets were $275 million at quarter end with cash and total investments of $161 million. Inclusive of the board-raised equity subsequent to quarter end, our book value was $1.80 per share, and we have $1.60 per share in net deferred tax assets that, due to a full valuation allowance, was not reflected in book value. And with that, I'd like to turn it back over to Jim for closing remarks.

In the quarter, we took some hard steps towards addressing the reserve position. And while we certainly have more work ahead, I am encouraged by the sustained top line growth in most of our profitable lines of business. And in the results we've achieved today from ongoing expense reductions. Based on these strategies to strengthen our reserve position, I'm confident we're moving in the right direction. And I fully expect to see continued positive achievements for the balance of 22. Now, if anybody has any questions, we'll be willing to take them.

Thank you. 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'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 will pause momentarily to assemble our roster. And the first question will come from Paul Newsome from Piper Sandler. Please go ahead.

Paul Newsome Good morning. Thanks for the call. I was hoping you could kind of talk about the process for setting the current accident year combined ratio or loss ratio for the company. You know, typically when we see, you know, fairly substantial reserve increases, we'll also see an accident year increase because essentially the history suggests that the current loss trend is higher than what was previously expected. But I think you kept it fairly steady. So obviously there are other offsetting things, and I was wondering if you kind of talked through some of those offsetting factors that allows you to keep the accident year combined ratio basically flat.

Thanks, Paul. That's a good question. What we do is we take a look at our book of business, the earned premium that is going through and where it's coming from and the historical trends of the mix of business that we have. The mix of business in 2022 is markedly different than even 2020 and 2019, 2018 and all those years. 2019, 2018, we had quick service restaurants, which, quite frankly, the QSR business was extremely unpleasant, okay? And that is down to basically zero in 2022. The books of business we have, specifically Michigan, has been outperforming our expectations every year. And that has grown from insignificant to 26%, 27% of the book. So when you take a look at the earned premium, where it's coming from, it is the books of business that were giving us the most pain are gone. And the loss ratios and the picks we're having are consistent with historical results. And that's how we're picking them.

Thank you. And maybe just as a follow-on to that, if you're just looking at the book of business you're writing today, do you have a view on how we should look at loss trend for the book today? And any contrast you can make it with, you know, either the CPI or other data that we could kind of square it with would be really helpful.

Well, Yeah, our loss goals of 55 or better in total seem quite achievable with the book of business we have today. And it's been performing on that level. And do you want to take it going forward instead of me just talking there?

Sure. Yeah, I mean, in terms of loss trends that we're seeing in the book, I mean, we are certainly seeing inflationary impacts on property in particular. We We are getting rate on property, and if you look at the last three months, we actually had an acceleration of rate in July. So I believe we are keeping up with, if not getting ahead of, the CPI numbers that we're seeing in property. It's a little bit less clear in casualty, and there's a lot of noise, as Jim mentioned, with some of the pretty significant changes to the book of business. But certainly in the property, some of the auto physical damage that we see, we're definitely seeing that inflationary impact. And even on the personal line side, we had a rate increase in one of our books of business earlier this year. We'll have two more throughout the rest of this year. So it's something we're certainly cognizant of. We're monitoring it on the property side and adjusting rates to stay ahead of that. from that perspective.

I'd also like to add the headwinds for, I think, companies in general, but for us in specific, are where reinsurance costs are going. And reinsurance costs are obviously taking a bigger bite out of premium, so you have to make that up with rate increases in addition to the CPI. If you look at the renewal of our CAD books, without going too granular, our CAT pricing was markedly similar to last year's with a very small single-digit increase. I would tell you that that's outperforming the world on CAT pricing. Also, with the change in the book of business coming after, say, 2018-2019, our reinsurers obviously look historically at what their losses were for the prior years. And I would tell you that we've probably been overpaying in 21, 20, and 22. And we're hoping that the trend of those losses that we're ceding to our reinsurance continues, and we're expecting to hopefully improve upon our reinsurance rates, even in this difficult cycle. So that's a way we can help to drive down the expense ratio as we get more in premium. So as Nick said, we're looking at rate and not just for CPI, but also the increased costs that are coming to us from the reinsurance.

Great. Thank you for the answers and the help. Appreciate it. Thanks, Paul.

And once again, if you'd like to ask a question, please press star then one. This concludes our question and answer session. I would like to turn the conference back over to Jim Petkoff for any closing remarks.

Well, the only closing remarks I have, it was a tough quarter and we had to take some significant steps so that we are conservatively positioned for future growth. We do expect underwriting profits by the end of the year. So thanks for everybody, and I appreciate everybody's patience.

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