Conifer Holdings, Inc. (CNFR) on Q1 2022 Results - Earnings Call Transcript
Operator: Good morning, and welcome to Conifer Holdings First Quarter 2022 Investor Conference Call. All participants will be in listen-only mode. . 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.
Brian Roney: 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 Web site, 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 Web site. 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 Web site. During this call, we'll also discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliation 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 Petcoff, Executive Chairman and Co-Chief Executive Officer. Jim?
Jim Petcoff: Thanks, Brian. Good morning, everyone. On the call with me today are also 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 written 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 written 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 deemphasized lines of business. Given the performance we've seen to date and 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 on 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 to the shareholders. With that, I'm turning it over to Nick.
Nick Petcoff: Thank you, Jim. As Jim noted, we were pleased to see our top line growth trends continue into the first quarter of 2022 with gross written premium of 9% to roughly $33 million. 87% 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 E&S 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 deemphasizing 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 this state. This business has resulted in sustained positive underwriting performance and remains a significant driver of anticipated future growth. Commercialized 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're still benefiting from high existing renewal retention levels around 90%. While premium growth continues to be strong, development significantly impacted our commercial lines 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 claim trends continue, we do expect less development to emerge over time as these improvements are largely attributed to our positive multiyear 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 lines 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 Meloche for the financials.
Harold Meloche: 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 Web site for greater detail. In the first quarter, gross written premiums increased 9% to $33 million. With Jim and Nick having detailed the premium breakout, I will focus on our underwriting results. Conifer's combined ratio was 112% in the first quarter, down from 129% in the same period last year. Our loss ratio was 75%. And while still above target, was an improvement from 84% 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 accident year combined ratio was 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 38% this quarter, down 700 basis points compared to 45% 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%. Overall, the company reported a net loss of $2.9 million or $0.30 per share for the first quarter compared to a net loss of 4.6 million or $0.48 per share in the prior year period. This quarter, Conifer reported an adjusted operating loss of 3.1 million or $0.32 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 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.
Jim Petcoff: 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 there and we feel confident that we will be able to manage that in the future. Any questions?
Operator: We will now begin the question-and-answer session. . The first question is from Paul Newsome of Piper Sandler. Please go ahead.
Paul Newsome: Good morning. I was hoping you could talk a little bit more about just an update on the claim cost going down. How much -- is there any pattern that could be related to the courts been 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?
Jim Petcoff: The answer is yes. And I'm going to let Nick give you more detail on that.
Nick Petcoff: Yes, 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 picked up and cases started moving and you're able to settle out or close claims that were kind of held in limbo during COVID. On the flipside, we did have a few more cases go to trial than 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 there's definitely an impact there with the activity that we're seeing on the claims side.
Jim Petcoff: Do you want more detail or is that good?
Paul Newsome: No, that's extremely helpful. I've got a related question. So the reserve development this quarter, just any patterns from an accident year perspective? And I might -- I'm sort of curious about sort of linking the two questions in the sense that, was there any patterns in the accident years that the reserve developments would line up or not line up with the court cases -- the courts kind of opening up or shutting down during the pandemic more recently?
Jim Petcoff: It seems like this is just anecdotal, and it's my opinion, 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 and 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 the plaintiffs are being extremely -- plaintiff's counsel is being extremely difficult to deal with and forcing us to go to trial because we have really no other choice. And 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 into jurisdictions that were unfavorable to us. When we're in Michigan or in some other various 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 in courts that are really packed, they're trying to move things through quickly.
Paul Newsome: That makes sense. So does that mean that the accident years that the reserve development happened are more in the last couple of years, because of that effect or is it more spread out over the accident years?
Jim Petcoff: We believe 2020 and 2021 are good years for us. We had change in 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 accident years are going to be better. The QSR business we wrote was heavy in 2018, '19, and those are the years we're seeing some development for.
Paul Newsome: That makes sense. And then just maybe a couple extra words on the competitive environment from a rate and terms perspective in the businesses here, and if anything changed in the last quarter in a material way or anything interesting in general from a competitive perspective would be great?
Nick Petcoff: Yes, 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 in hospitality pick up. You'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.
Paul Newsome: Great. Thank you very much and thanks for the call. And I'll let somebody else ask questions. I appreciate all the help.
Jim Petcoff: Thank you, Paul.
Operator: The next question is from Bob Farnam of Boenning & Scattergood. Please go ahead.
Bob Farnam: Yes. Hi, there. 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 the gist of my question is, is this something that we should expect in the second quarter and the third quarter as there may still be elevated cases that are going to trial?
Jim Petcoff: Things are quite active. But as time goes on, the total number of claims we have is going down, okay? So then 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 loss and loss 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?
Nick Petcoff: Yes. GL frequency is down well over 50% from 2020 and 2019. So 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.
Jim Petcoff: Yes. And my point there is I guess I'm not answering your question specifically, but the activities 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. And our total number of claims outstanding are done well over 50%, probably in the same number as 60%. 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? 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.
Harold Meloche: And as Jim said, claims are down 64%. The actual liability claims first quarter versus first quarter 2019 are down 77%, in line with what Nick was saying.
Jim Petcoff: And if you think about our premium, our premium is up and that's why we have such a significant reduction in claim frequency.
Bob Farnam: Right. Okay. I'll move on to something besides reserves. So 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? That's my first question. And second question, you're talking about a 35% target in the near term. Is that -- are we looking for this year to reach that 35%? Is that something that's reasonable?
Jim Petcoff: I think that's a question for Harold.
Harold Meloche: Thank you. So one of the reasons why our expense ratio is lower is we entered into some reinsurance agreements that included a ceding commission. This had the effect of increasing our loss ratio and reducing our expense ratio. So it increased ceded earned premiums, but reduced commissions by a ceding 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 2 percentage points from the first quarter of 2021. So 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.
Jim Petcoff: Our fixed cost continues 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 to our first quarter of next year, but we're definitely on the way.
Bob Farnam: Right. Thanks for that, Harold. That was actually kind of a follow up to my next question because I saw that the ceded premium went up. So I was just curious what change has happened in the reinsurance? So is that Q3 that you're guiding to?
Nick Petcoff: It was actually part of our excess of loss treaties very similar to our older treaties, but this is the first time we used the ceding commission for them. It helps us with a little bit of boost and surplus on a statutory basis, but really has no impact on underwriting results on a GAAP basis.
Bob Farnam: Okay. And last question for me is new money yields, like with the changes in interest rates, what kind of -- I'm trying to get a feel for what we might expect from investment income going forward?
Brian Roney: This is Brian. I'll take that one. 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 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.
Bob Farnam: Okay, good. All right, that's it for me. Thanks.
Operator: . The next question is from Greg Peters of Raymond James. Please go ahead.
Greg Peters: 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 9 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 9 of your investor deck and as you emphasized 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?
Nick Petcoff: Sure. 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 underwriting -- excuse me, 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 personal lines. 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 will continue to see a decline.
Greg Peters: Got it. And then on just simple catastrophe exposure, and I know you were commenting on your reinsurance structure in answer to the previous question, but just -- we're entering wind season and I'm just curious for the '22 year, how we should be thinking about the enterprise's exposure to catastrophes in light of what you've done with reinsurance?
Nick Petcoff: Sure. We do still have some Florida commercial exposure on the property side. So that's 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 in Texas and Oklahoma. And for that book, Q1 and Q2 are really kind of tougher quarters and we haven't really seen anything sort of outside the norm there. Our cat does come up on this one. We don't see any significant changes to the structure. Obviously, the pricing environment is top there and we did have some losses from Winter Storm URI last year, but we don't see really significant changes to the structure or I don't think pricing either.
Jim Petcoff: If I could add something to that, we have a retention of $2 million. But because of our wind exposure has gone down so much over the last few years. When you look at the blended RMS and AIR, one in 100-year storm, we're 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 underlying exposure 2 million.
Greg Peters: So both Texas and Oklahoma, I guess, the second quarter we get a lot of 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?
Nick Petcoff: No, that's correct. Our retention on any one event for the personal lines is 2 million and commercial for that matter. We do have a nearing 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.
Jim Petcoff: But our PMLs have come -- are not the same as they were last year. We continue to make geographic changes to our exposures, and they're gone down in our -- 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.
Nick Petcoff: But through the second quarter, we haven't seen any type of event that would get anywhere near our retention.
Greg Peters: And just in the first quarter, did you have -- none of the events that happened -- none of the PCS events triggered any maximum retention in your results, correct?
Nick Petcoff: Correct.
Jim Petcoff: You would have seen the loss ratios on the personal line go up, because --
Nick Petcoff: Yes, it was a quiet quarter.
Jim Petcoff: And our personal lines performed well. And there were some events that went through, but we were not impacted.
Nick Petcoff: Not significantly. 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 our cat. We don't have that much individual exposure to any one storm coming through.
Jim Petcoff: Uri is the first cat we've ever had outside of a hurricane.
Nick Petcoff: Yes, absolutely.
Greg Peters: Okay. Well, thanks for the answers. Good luck.
Nick Petcoff: Thanks.
Jim Petcoff: Thanks, Greg.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Jim Petcoff for closing remarks.
Jim Petcoff: I just want to thank everybody for being on the call today. And we're cognizant of the development. We're moving in the right direction. Claims are coming out. We feel the current accident years 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.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
