Conifer Holdings, Inc.

Good morning, everyone, and welcome to Conifer Holdings' second quarter 2023 investor conference call. All participants will be in a 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. As you also know, today's event is being recorded. At this time, I'd like to turn the floor over to Brian Roney. Please go ahead.

Thank you and good morning, everyone. Conifer issued its 2023 second quarter financial results after the close of market yesterday. You can find copies of the earnings released on the company's website, ir.cnfrh.com. The slide presentation accompanying management's remarks this morning 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?

Thank you, Brian. Good morning, everyone. Also joining me on the call today are Nick and Harold. Thank you for joining us today to discuss our second quarter financial results. Like the industry at large, the impact of wind-related events was felt by many in the quarter. In this regard, we are no different than our peers. In fact, the affected personal lines business, it has been almost 10 years since an event anywhere near this magnitude has occurred. Despite the unusual storm-related losses in the period, I'm pleased to see continued progress in several key areas of emphasis for Conifer. For example, top line growth and expense management. In the quarter, gross written premiums were up 19%. Significant rate increases coupled with organic growth within our historically profitable core specialty business allowed us to achieve this substantial top line growth. Moreover, for the six month period, gross written premium was up almost 15% on the year as well. SNCC will provide more color shortly, but that is solid growth in the quarter and for the six months. We see room for continued expansion going forward. It's important to recognize that our disciplined underwriting strategy played a pivotal role in driving this top-line growth. Over the past few years, we have diligently refined our book of business, focusing on lines where we have deep knowledge and experience in the key profitable verticals that we emphasize most. Furthermore, when we isolate the impact of storm-related losses, we posted an underlying accident year combined ratio of 95% for the second quarter. It is a testament to the strength of our core operation and reiterates our commitment to underwriting excellence and our ability to navigate challenges while remaining focused on long-term profitable growth. Additionally, our expense ratio continues to trend favorably, demonstrating consistent and sustained improvement on an overall expense reduction. We are approaching our target expense ratio of 35%, a significant near-term milestone that reflects our commitment to operational efficiency and enhancing overall profitability. These results affirm our efforts to streamline our processes, control costs, and position the company for continued improvement as we move forward. I'd like to take a moment to emphasize that these achievements are a testament to the hard work and dedication of our entire team. Their unwavering commitment to our strategic vision coupled with their marketing expertise has enabled us to navigate the complexities facing our entire industry while positioning Conifer for sustainable success. I'll now hand it off to Nick for more color on our underwriting results.

Echoing Jim's comments, I'll provide additional details regarding the operational objectives that have shaped our performance, strategic direction, and that point the way to sustainable future profitability. Over the past few years, our underwriting teams have been dedicated to a meticulous business mix enhancement, cultivating our lines where we have a distinct competitive advantage. By focusing on these core specialties, harnessing the power of our own experience and data, we've strategically aligned our underwriting efforts with lines of business where we have strong knowledge, extensive experience, and a proven track record of profitability. This approach yielded gross written premium of just under $45 million, a record high watermark for quarterly premium. As Jim noted earlier, we achieved a 19% increase in gross written premium compared to the prior year period. This increase resulted from a combination of significant sustained rate increases and organic growth in our key select operating verticals. The majority of our premium continues to come from commercial lines, which accounted for just under 80% of total gross written premium in the period. Commercial lines production was up 8% in the quarter to $35 million. Our strategic use of technology has been particularly useful in our efforts to refine our commercial lines book. Through the application of advanced data analytics, we can comprehensively examine market trends, consumer behavior, and risk patterns to identify and target prudent growth opportunities with precision. This data-driven approach has guided us in selecting lines of business where our expertise aligns best with current market factors. By leveraging these underwriting insights, we've attracted quality business and optimized our book for profitable growth, while retaining a solid overall account retention at 90%. Our personalized business, which consists principally of low-value dwelling products, continues to grow and represents a solid share of overall business at just over 20% of total gross written premium for the second quarter. Personal Line's gross rate and premium was up 86% over the same period last year to just under $10 million for the second quarter. Excluding the impact of storm-related losses, the Personal Line's accident-year combined ratio was 68% for the second quarter of 2023 and 89% for the first half of the year. As noted in previous earnings calls, we continue to see additional runway for significant growth and additional rate increases in our Personal Line's premium production as well. We focused on proactive significant rate increases in Oklahoma and in Texas in our efforts to refine our personalized performance, leveraging advanced modeling and analytics to price risk more accurately and effectively over time. Excluding the impact of storm losses, the company's accident year combined ratio was 95% for the second quarter. This marks a notable improvement over the prior year period and continues our profitability trend given the first quarter results. It also highlights our unwavering commitment to effective risk assessment, prudent pricing, and responsible claims management. As the overall profile of Conifer's book continues to improve, we expect to see a corresponding downward trend in the overall combined ratio. The company has emphasized its focus on strategic, disciplined underwriting for consistent profitability and operating efficiency. By dedicating resources to the best performing lines of business, the company will continue to drive sustainable growth and long-term profitability. With that, I will turn over the call to Harold for the financials.

Thank you, Nick. I'll provide a quick recap of the financial results, and I encourage investors to review our filings and presentation on the company's website for greater detail. As noted, gross written premiums increased 19% to just over $45 million in the second quarter, and with Nick having detailed the premium breakout, I will focus more on our overall financial results. For the quarter, the overall combined ratio is 121%, which even when considering the elevated storm activity, the combined ratio is still down 830 basis points from the same period last year. And excluding the impact of the storm activity in the second quarter, Conifer's accident year combined ratio was 95%, as noted earlier. Our loss ratio is 83% in the quarter, given the storms, but nonetheless improved 720 basis points versus the same period last year, and improved 980 basis points to 73% for the first half of 2023. The expense ratio is 38% for the quarter, down 110 basis points for the same period last year, and approaching our target expense ratio of 35%. Our expense ratio continues to trend favorably downwards, despite the lower net earn premiums due to the success of our ongoing expense reduction efforts. As net earn premiums begin to increase over time through anticipated organic growth in our key verticals, we expect the expense ratio to continue to trend downward accordingly. Net investment income was $1.4 million during the second quarter, up 140% from $564,000 in the prior year period, and was up 149% to $2.7 million for the six-month period. Our investments remain conservatively managed, with the vast majority of them in fixed income securities, with an average credit quality of AA+, an average duration of 3.1 years, and a tax-equivalent yield of 2.8%. With $5.4 million of storm losses in the second quarter, the company reported a net loss of $4.7 million, or $0.39 per share. compared to a net loss of $8.4 million or 86 cents per share in the prior year period. Moving to the balance sheet, total assets were $297 million at quarter end with cash and total investments of $167 million. Our book value at quarter end was $1.38 per share. We do have a $1.86 per share in net deferred tax assets that due to a full valuation allowance, were not reflected in book value. With that, I'd like to turn it back over to Jim for closing remarks.

Thanks, Harold. Thanks, Nick. In closing, I want to emphasize that we are resolute in our commitment to achieving sustainable growth and operational efficiency over time in order to deliver superior service to our policyholders and results to our shareholders. As we move forward, we remain confident in our ability to navigate the evolving markets that we serve, and we remain alert and nimble in recognizing and responding to industry-wide challenges, such as the storm-related activity exhibited in the second quarter. All in efforts to deliver long-term value to our shareholders. With that, I'd like to invite any questions that you may have. Operator?

Ladies and gentlemen, we'll now begin the question and answer session. To ask a question, you may press star and one on a touch tone telephone. If you are using a speakerphone, do ask that you please pick up the handset before pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. At this time, we'll pause momentarily to assemble the roster. Our first question today comes from Paul Newsome from Piper Sandler. Please go ahead with your question.

Good morning. Thanks for the call. Could you talk about the relationship between the net and the gross premium, particularly in commercial, and the gross appears to be growing faster than the net. Is that just purely a function of reinsurance or is there something else going on?

Yeah, that is a function of reinsurance. We did see increases on our property reinsurance at 1.1, given the activity last year from Ian. We also have a seating commission on our XOL treaties, so that also reduces the net compared to the gross.

Great. There was a small amount of adverse development, I believe. Can you talk about the sources of that?

Yeah, we did see some emergence on a restaurant bar tavern book in 2022, so a more recent year, mostly from Florida, which we've now put into runoff this year. So we don't see that as being a major impact moving forward. And the rest of the development was really ceded to the loss portfolio transfer that we put in place last year.

Great. How should we think about the catalog, respectively, with the growth in the property business?

Yeah, it was an unusually active quarter for our business. Texas and Oklahoma books of business. It's moved less to a coastal exposure where we're seeing cats from hurricane losses and more of a severe convective storm risk moving forward. Both of those books of business, if you look at the last couple years, have performed very well. I think we had 25 cats in the second quarter. smaller CAT events in the second quarter, which was up significantly from last year. So while it did impact us, I do think it was an anomaly for this quarter. we've implemented a 28% rate increase for our Oklahoma book, Effective 8-1, and we have a 20% rate increase being implemented, 9-1 for our Texas book. So I do think Q2 will be a more active quarter for that book as opposed to hurricane season when we add more of our Florida business.

And that also follows on several other rate increases for both of those states previously as well.

Should we think of the cat load in general rising? Obviously, everyone would agree the second quarter is pretty anomalous. Is the expansion of that business creating a little bit more of an expected cat load, respectively, or is it pretty stable based on historic patterns?

I think you could say in the first and second quarter, yes, it's reasonable to expect that we'd see more impact from CAT events moving forward because of those books of business. On the flip side, we exited most of our Florida exposure, so we don't expect to see as much in the third and fourth quarter from a hurricane perspective. So, yeah, it's It's reasonable to assume, based on that book, in the first half of the year, it's going to be more active with cat exposure in those states, but less active for the second half of the year, given the lack of business in Florida. So overall, probably pretty similar to last year, maybe just in different parts of the country and different quarters throughout the calendar.

But are you asking for the cat load perspective from a perspective of rates?

No, really from a combined ratio perspective. We obviously are going to be building in some expectation for sort of a normal year. And it looks like that piece of the losses might be going up on average, but it's kind of hard to tell.

Okay, I think Nick answered it.

And then maybe a few more thoughts on the expense ratio improvements and how much more you think you can get those improvements. And then I'm done.

This is where Harold gets to speak. Yes, this is where Harold gets to speak. And I will tell you, it's the expense... But I want to tell you that from a total management standpoint, we have been laser focused on making sure our expenses are coming into line. And the board has been very active in encouraging us to do that, and we have embraced the expense side. So, Harold?

Well, yeah, and actually this last quarter that we had, include some expenses that will not be going forward as a result of some of the expense reductions that we made in the second quarter, which won't really be seen until the third and fourth quarter. So there is ongoing efforts that will still show more benefit in the future quarters moving forward. We also in this particular quarter had a few more expenses that were estimates from year end relating to some of the expenses relating to the transactions we had last year that, you know, we had to adjust for in this quarter. So, yeah, you can actually see it's hard to put a number on it, but you should see a continued reduction in that expense ratio, you know, basically in the next quarter.

Thank you. Appreciate the help as always.

Thank you all. And ladies and gentlemen, with that, we'll be concluding today's question and answer session. I'd like to turn the floor back over to Jim Peckhoff for any closing remarks.

Thanks for being on the call. We appreciate it. We will continue to move forward on the initiatives we have started. We're confident in our core underlying business and look forward to next quarter. Thank you.

Ladies and gentlemen, with that, we appreciate your time and interest. We thank you for joining. You may now disconnect your lines.