Conifer Holdings, Inc.

Hello and welcome to the Conifer Holdings fourth quarter 2022 investor conference call. All participants will be on the Sonali mode. Should you need assistance, please signal a conference specialist for pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. I will now turn the conference over to Brian Roney. Please go ahead.

Thank you and good morning, everyone. Conifer issued its 2022 fourth 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 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, Executive Chairman and Co-Chief Executive Officer. Jim?

Thanks, Brian. Good morning, everyone. Joining me on the call today are Nick and Harold. As we look in review of the full year of 2022. Our focus remained dedicated to achieving sustainable, top line, streamlined expect structure and operating profit for Conifer. In that light, I'm pleased to report another year of top line growth in 2022. Over the past several years, we have continued to make significant strides in organically growing our business. While our top line has continued to grow and was up roughly 5% for 2022, More importantly, that growth came as we continued to write what we know best by staying in our underwriting lane and expanding further into our key underwriting verticals. Nick will discuss that more later. For years, we've heard us talk about the positive underwriting steps that we've been taking to not only grow our book, but to grow it profitably over time. In addition to the significant underwriting enhancements over the past several years, including tightened terms and conditions, lower reinsurance retentions, improved geographic spread, and increased rate across the book. We have continued to strengthen our general case reserves and ratchet up our ultimates as well. All in efforts to strengthen the book, improve our overall reserve position, and lead to an operating profit. Conjunction with top line growth and underwriting enhancements, we have executed on numerous initiatives to drive down our expense ratio. As a result, we pulled posted a 38% expense ratio for the full year, our best for yearly performance to date. We expect to continue those successful expense savings initiatives as we go forward. Keep in mind our expense ratio goal remains 35% or lower. For the fourth quarter we posted a 37% expense ratio, so we are definitely making headway. Overall, with the top line trending positively and the expense ratio coming down, Our largest impediment to consistent operating profit has been the lingering effect of legacy reserve drag. To specifically address that issue, early in the fourth quarter we announced two strategic transactions that we believe will position us for stronger near-term results with improved and sustained profitability going forward. We executed a lost portfolio transfer or LPT agreement which provides an additional $20 million of adverse loss development cover for the accident years 219 and prior. This transaction should provide ample support for our reserve position going forward. To pay the costs associated with the LPT and to allow us to further strengthen our overall reserves in Q4, we completed an asset purchase agreement to monetize certain assets of our MGA, Venture Holdings Agency. That completed MGA sale more than paid for the upfront cost of the executed LPT agreement, allowing us to further bolster our reserves and strengthen our year-end reserve position overall. We are pleased to see organic top line growth coupled with the considerable underwriting enhancements we have made over the past several years, narrowing our focus on our select lines of business that have consistently outperformed. We are encouraged by the reserve strengthening that we took throughout the year. plus the execution of the LPT to further protect against legacy reserve drag for action years 2019 and prior. Given all these factors combined, we are pleased to post net income of more than 2 million or 17 cents per share in the quarter. With each day that passes, we feel more confident that we are now clearly on a path toward delivering consistent profitability to our shareholders. Nick will give more color on our underwriting results. Nick?

As Jim noted, we have implemented numerous underwriting changes over the past several years that we believe will lead to consistent profitability over time. As a result, we remain committed to executing our underwriting strategy of narrowing our focus to several key specialty verticals. Our goal is to run deep in these select verticals, allowing for greater market penetration and better operating efficiency. also allowing us to leverage our depth of underwriting talent in these same specialty lines. Overall gross written premium was roughly $34.5 million for the fourth quarter, just under a 5% increase for both the fourth quarter and the year end. The significant majority of our total gross written premium continues to come from commercial lines, with 83% of total gross written premium for the fourth quarter. Commercial lines production was down slightly for the quarter and flat for the year as we executed our strategy to deliberately narrow our underwriting focus. Yet premium in our small business group was up nicely in the quarter and for the year. Small commercial business was roughly 80% of the commercial lines business in the quarter. In addition to premium, rate continues to positively flow through our books. Small commercial business saw solid rate increases for the quarter and the year. Even though we are achieving solid rate increases on our book, in today's underwriting environment, geographic mix remains a huge factor in delivering favorable underwriting results. Similar to last quarter, when we exclude the emphasized lines of business from the calculation, our total gross written premium jumps up in commercial lines, showing growth in the areas where we want to grow and shedding unwanted premium where warranted. For example, hospitality premium was affected by continued underwriting improvements in the year, as we continued to refine our geographic spread and exited select additional unprofitable jurisdictions. Further, we are continuing to de-emphasize Florida premium in general, but also tightening our product offerings there. We have reduced writings in Florida to only a very select book of restaurant bar tavern business, focused in the northern part of the state. All other product offerings in Florida have been largely non-renewed. While we are reducing exposure to Florida in particular, we continue to increase market share in key geographies like our home state of Michigan. Our gross written premium in the state is up 45% since 2020 alone. In fact, for all of 2022, Michigan premium accounted for roughly 25% of the gross written premium overall, with Florida making up less than 10%. We expect this trend of refined geographic selection to continue as we are relentlessly focused on writing business in the best possible geographies nationwide. As a result of social inflation, lost costs, or other factors going forward, our efforts will be focused on profitable growth in states like Michigan, the Midwest, and other demonstrably favorable geographies. Our personalized business, which consists principally of low-value dwelling products, continues to represent a growing share of overall business at 17% of total gross written premium for the fourth quarter. Personal Line's gross written premium was up almost 50% quarter over quarter to $6 million for the fourth quarter. Texas and Oklahoma continue to perform well, and we like the geographic spread that we are achieving there. In terms of rate, we recently put through a 10% rate increase in Texas, and the retention rate did not budge. More applicable rate will be coming in the days ahead. We are pleased by the direction of our Personal Line's book overall, but we did experience several large fires last year that led to atypical results for the book in general. As we discussed on previous calls, we have put our quick service restaurant business into runoff. For all of 2021, we wrote roughly $5 million of gross written premium in quick service restaurants, down 75% from the high point in 2019. For 2022, we wrote roughly $1.6 million with literally zero written premium in quick service restaurants for the fourth quarter of 2022. Looking forward as it relates to claims, like Jim mentioned earlier, Keep in mind that we are through the corridor for accident years 2019 and prior. Outside of that, we have approximately 50 remaining outstanding quick service restaurant claims for accident years 2020 through 2022. In addition, we continue to see favorable claims trends overall as to frequency per premium and general severity. We are greatly encouraged by this trend line. All in, we are pleased and gratified to see the specific underwriting plans of successive years coming into positive fruition. with improved geographic spread and enhanced claim statistics overall. Now we look forward to seeing those efforts reflected in our improved financial performance going forward. And with that, I'll 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 fourth quarter, gross written premiums increased 5% to just under $35 million. With Jim and Nick having detailed the premium breakout, I will focus on our underwriting results. Conifer's combined ratio was 142% in the fourth quarter compared to 104% during the same period last year. As mentioned earlier, the company booked through the required loss corridor of the LPT and took additional steps to significantly strengthen reserves in the quarter. This action, combined with the impact of Hurricane Ian led to the elevation of our combined ratio for the quarter and are not expected to be recurring moving forward. The accident year combined ratio for the fourth quarter excluding the impact of Hurricane Ian was 101% and was 94% for the full year 2022. Our loss ratio was 105% compared to 63% in the fourth quarter of 2021. Again, this was due to the unusual items previously detailed. Our accident year loss ratio for the quarter, excluding Hurricane Ian's impact, was 66%. In commercial lines, where much of the reserve strengthening activity was focused and where we saw the most significant impact of Hurricane Ian, the loss ratio was 111%, while the personal lines loss ratio was 80% in the fourth quarter of 2022. Moving to our expense ratio, the downward trajectory continues despite lower net earned premiums due to the success of our ongoing expense reduction efforts. The expense ratio was 37% for the fourth quarter, down 420 basis points from the same period last year, and approaching our target expense ratio of 35%. The expense ratio for the full year 2022 was 38% compared to 41% in the prior year period. As we see the net earned premiums organically grow in our key verticals, we expect the expense ratio to continue to improve throughout 2023. Net investment income was $1.1 million during the fourth quarter, up 165% from $419,000 in the prior year period, while net realized investment income was flat during the fourth quarter of 2022 compared to net realized investment losses of $1 million in the prior year period. We also recorded $43,000 decrease in the fair value of equity securities in the fourth quarter. Our investments remain conservatively managed with the majority in fixed income securities, with an average credit quality of AA+, an average duration of 3.5 years, and a tax equivalent yield of 2.3%. Overall, the company reported a net income of $2.1 million, or 17 cents per share for the fourth quarter, compared to a net loss of $801,000 or $0.08 per share in the prior year period. This quarter, Conifer reported an adjusted operating loss of $1.3 million or $0.10 per share, compared to an adjusted operating loss of $986,000 or $0.10 per share last year. Moving to the balance sheet, total assets were $312 million a quarter end, with cash and total investments of $165 million. Our book value quarter end was $1.55 per share. We have $1.77 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 and Nick. We took major steps in 2022 to further strengthen our overall reserve position, especially for accident years 2-19 and prior. with the purchase of the lost portfolio transfer. I'm encouraged by growth and the focus and underwriting on our historically profitable key verticals, as well as the results we've achieved to date from ongoing expense reductions. Based on the outcomes so far in 2023, I'm confident that we're moving in the right direction. I fully expect to see continued successes for the balance of the year and beyond. And now, hopefully, there's someone that wants to ask us a question. Operator?

Yes, thank you. At this time, we will 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 the handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble the roster. All right, we have a question from Tom Sturek, a private investor.

Good morning. Good morning. Can you hear me? I can. Hello.

Hi, can you hear us?

Yes, I got you. There are some 6.75% notes coming due in September, and I see you filed an S-1 for a new offering last year. And I was wondering what the plan was for the maturing notes towards the end of September of this year.

Well, we're either going to renew them or pay them off. And we have plans underway to do one or the other. So you'll be seeing more S1s come through, and hopefully in the next quarter or two we'll get those taken care of.

That sounds great. Thank you very much.

Thank you. And this does conclude the question of the next session. I would like to return the call to Jim Petkoff for any closing comments.

I appreciate everybody who's on the call, and thank you. It's been a very busy quarter getting the loss portfolio transfer in place, closing on the transaction. I don't usually like to compliment the accounting and finance department, but they did an excellent job of putting all this accounted for and put together for the year end. And we really are pleased to have an additional $20 million of reserves for the 2019 and prior, which puts us in a position to stop having the reserve development that we've been having. And as we look forward to the business going forward, we are confident that we're on the correct path from an underwriting and operating profit position. So thank you for being on the call.

Thank you. The conference has now concluded. Thank you for attending today's presentation. We now disconnect your lines.