Conifer Holdings, Inc.

Good morning and welcome to the Conifer Holdings first quarter 2023 earnings 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. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. 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 2023 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 is available to view or download via webcast or from the investor relations section 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 as 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 today on the call are Nick and Harold as well. I'm pleased to report that the first quarter financial results bear out the key strategic decisions management has been implementing over the past several years. In particular, the actions we took to improve our business mix by focusing on select profitable verticals as well as strengthening our overall reserves. Together, these actions have positioned us for profitable future growth. One of the major initiatives undertaken in 2022 was the execution of our lost portfolio transfer reinsurance agreement, specific to liability lines for accident years 2019 and prior. As we will report in further detail later in the call, we have begun to recognize the benefits resulting from that decision already in the first quarter of 2023, and we are confident that these favorable results will continue. As always, we remain dedicated to preserving the sustainable top line, continuing to streamline our expense structure, and maintain our operational profitability to generate favorable return to account for shareholders. In that light, I'm pleased to report significant improvement across a broad spectrum of metrics for the first quarter. These and other underwriting improvements have been instrumental in our ability to achieve profitability this quarter. And we will continue to evaluate and refine our underwriting practices to drive sustainable growth. We are proud of the hard work and dedication of our entire team, and we remain committed to delivering exceptional value to our insureds and our shareholders. We will continue to build on this quarter's success in the months and years to come. I'm now going to hand it off to Nick for more color on our underwriting.

As Jim noted, we have implemented numerous underwriting changes over the past several years that are beginning to bear results and that point the way to continued and sustainable future profitability. Significant underwriting enhancements over the past several years include implementing a variety of underwriting tools that enable us to more accurately predict the likelihood of claims and losses based on a variety of factors such as demographics, location, and previous claims history. This has allowed us to make more informed underwriting decisions, including tightened terms and conditions, improved geographic distribution, and increased rate where appropriate to reflect the level of risk for each policy. In addition, by diligently maintaining our focus on several key specialty verticals, we've enabled our underwriting team to deepen and utilize their area of expertise to develop unique products and provide superior customer service to our agents and insureds. Narrowing the breadth of our underwriting focus has generated improved operating efficiency as well, resulting in faster policy turnaround times and more streamlined processes to reduce expenses and provide an improved overall customer experience. Moreover, greater refined risk selection leads to reduced frequency and severity of claims, where our agency partners can be frontline underwriters and help us deliver not only better product selection overall, but drive better underwriting results. Years in the making, all of these efforts combined to build strong relationships with our agency partners, as evidenced by our continuing account retention of 90% overall. Gross written premium was just over $36 million for the first quarter, a 10% increase over the same period last year. The majority of our premium continues to come from Commercial Alliance, which accounted for 80% of total gross written premium in the period. Commercial Alliance production was up slightly to $29 million, as we continue to focus on our specialty markets where we are generating successful underwriting results. In the quarter, we reported a profitable combined ratio of 97.6% for commercial lines. Our small business group continued to be the major contributor to increased commercial lines premium production, as we saw top line growth in this group of more than 10% in the quarter. Generally, rate continues to be a strong positive contributing factor across all lines of business for Conifer. Our Personal Lines business, which consists principally of low-value dwelling products, continues to represent a solid share of overall business at 20% of total gross written premium for the first quarter. Personal Lines gross written premium was up more than 65% over the same period last year to just over $7 million for the first quarter. Texas and Oklahoma continue to perform well overall despite CAT losses that led to an elevated loss ratio for the first quarter, and we are pleased with the geographic spread we are achieving there. As noted in previous earnings calls, we continue to see additional runway for logical growth and continued rate increases in our personal lines premium production. In addition to positive underwriting results overall, our claims continue to trend favorably across our book as well with respect to frequency per premium and general claim severity. For example, as of March 31st, all open liability claims are down 42% since the first quarter of 2019. All of these positive factors combine to provide ongoing evidence that the strategic decisions implemented in 2022 and prior were well-founded, and we are confident that they point to continued improvement in our underwriting results going forward. And with that, I'll turn it over to Harold to discuss the financials.

Thank you, Nick. Excuse me. 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. As Nick noted, in the first quarter, gross written premiums increased 10% to over $36 million. With Nick having detailed the premium breakout, I'll focus more on our overall financial results. Conifer's combined ratio is 99.5% in the first quarter, down 13 percentage points from the same period last year. Our loss ratio is 62% compared to 75% for the first quarter of 2020. Two. As we see the results of prior year's strategic initiatives coming to fruition, we anticipate continued positive improvement in our results going forward. The loss ratio in commercial lines was 61% for the first quarter, down 20 percentage points compared to the first quarter of last year, clearly reflecting the underwriting improvements made over the past several years. Our expense ratio continues to improve despite lower net earned premiums due to the success of our ongoing expense reduction efforts. The expense ratio is 37% for the first quarter, down slightly from the same period last year, and approaching our target expense ratio of 35%. As net earned premiums begin to climb through anticipated organic growth in our key verticals over time, the expense ratio is expected to continue to improve. Net investment income was $1.3 million during the first quarter, up $150 from $507,000 in the prior year. We recorded $694,000 increase in the fair value of equity investments in the first quarter, while net realized investment income was insignificant. Our investments remain conservatively managed with the vast majority of our investable assets in fixed income securities, with an average credit quality of AA, an average duration of 3.4 years, and a tax-equivalent yield of 2.4%. The company reported net income of $1 million or $0.08 per share for the first quarter compared to a net loss of $2.9 million or $0.30 per share in the prior year period. This quarter, Conifer reported an adjusted operating income of $307,000 or $0.03 per share compared to an adjusted operating loss of $3.1 million or $0.32 per share for the first quarter of last year. Moving to the balance sheet, total assets were $293 million at quarter end, with cash and total investments of $163 million. Our book value at quarter end was $1.82 per share, representing a 17% increase from book value of $1.55 per share at year end. We have $1.68 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. In conclusion, I'm very pleased with our performance this quarter. Though we have a significant runway ahead of us to do things better, we think that we're on our path. Our results speak to the commitment to generate profitable operating income through underwriting discipline and strategic decision-making across the organization. Over the last several years, our consistent underwriting improvements were the key to our success this quarter, and I'm confident that our continued focus will drive sustainable growth and profitability in the future. Looking ahead, we will continue to invest in our business and explore opportunities for logical growth. We remain focused on delivering exceptional value to our customers and shareholders, and we are excited about the future. We'll now take any questions.

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 are 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 the roster. And our first question will come from Paul Newsome of Piper Sandler. Please go ahead.

Good morning. Thanks for the call. I was hoping you could kind of look at or talk to both the commercial lines and the personal lines separately about the amount of premium growth that's generated by rate increases versus exposure growth over time.

Good morning, Paul. Glad you're on the call. That's obviously a question for Nick.

Sure. Yeah, on the Personal Alliance side, we had filed a or we'd implemented a 10% rate increase on our Texas homeowners book, effective 1-1-2023. And then on our Oklahoma book, there was a 12% rate increase, effective 3-1. So on our Personal Alliance book, there was both growth on exposure but also rate as well that led to the growth that we saw in the quarter. Obviously, the percentage growth is large because we were working off of a relatively small number, but it's a combination of both organic growth and rate. Similar story on the commercial line side. Our property renewal rates were up 7% year over year, and our GL rates on our hospitality were up 4% year-over-year, while our small business is closer to 13% year-over-year. So it's a combination of both rate and exposure, certainly on the personal line side. On the commercial line side, we're seeing a little bit more rate because as we've grown in the commercial line side, we've also been exiting some key geographies like Florida. So we're seeing a little bit more growth via rate on the commercial line side.

Great. Another topic for almost every insurer this quarter has been reinsurance and the hard market reinsurance and the impact on on your business, can you remind us of where you serve your reinsurance usage and what might happen prospectively if the reinsurance market continues?

Well, the reinsurance market at the end of the year was one of the most difficult that I've ever seen. Fortunately, on our casualty, there was not much change at all. We've been pretty consistent. I think it should have gone down, but it didn't. So I guess that's the negative. But we didn't really get much of a rate change there. The property was very significant. Due to Ian, we had several large claims. We really didn't hit the cat very hard at all. They came in specifically excess or loss policies on the commercial side. So the reality is we don't expect our CAD, which comes up 6-1, to have much change. We're right in the middle there now. But we did get hit quite hard on our access to loss contracts at the beginning of the year, which property capacity was at a premium. We expect this to improve in the near future because our experience is, other than Ian, is still great. So we're hoping for relief on the property side for sure at the end of the year, but in the near term. That's probably more detail than you needed, but the reality was it's one of the worst reinsurance markets I've ever seen. Nick, do you want to add anything?

No, I think you covered it. We did see increases on our property per risk. we don't expect major changes on our property cap that comes up at 6-1.

Great. And then last more of a broad question. There has been a lot of mixed commentary in the earnings call so far this quarter about the competitive environment for especially commercial in particular. I was wondering if, you know, obviously you are a a relatively small slice of the total, if you're seeing any changes in the competitive environment for your parts of the specialty commercial business?

I'm going to let Nick answer it. Sure. I think it varies quite a bit by geography for us and by, I guess, focus. I'd say less so in our hospitality. We don't see as much competition. in that market as we have seen in the past. And some of our other small commercial lines, especially on the E&S side, we are seeing some new entrants more focused on the casualty lines of business. Property, due to the reinsurance that you mentioned, is still a very tight and I'd say hard market that we're seeing. We have seen a few new entrants in some of the casualty E&S markets that we're in. And, you know, we haven't seen a dramatic impact on pricing yet in those markets. But, you know, we are seeing more competitors in the marketplace. And, yeah, we'll have to see how that develops over the rest of the year.

Great. Thank you very much. Appreciate the help as always.

Thanks, Paul. Thanks.

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

I just want to thank Paul for the question and for the people who are listening in, and I appreciate your continued interest. We feel we're on the right path and look forward to the future. Thanks.

The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.