Conifer Holdings, Inc. (CNFR) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning and welcome to the Conifer Holdings Q1 2021 Investors Conference Call. All participants are in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Adam Prior with The Equity Group. Please go ahead.
Adam Prior: Thank you, and good morning, everyone. Conifer issued its 2021 first quarter financial results after the close of market yesterday. On the company's Web site, ir.cnfrh.com, you can find copies of the earnings release, as well as the slide presentation that accompanies management's discussion today, which is available to view or download via webcast or from the Investor Relations portion of Conifer's Web site.
James Petcoff: Thank you, Adam. Good morning, everyone. On the call today with me are Nick, Harold, Andy, and Brian. As usual, I'll provide brief overview, and Nick will discuss the underwriting results in greater detail, and Harold will cover the financials. Our first quarter include key progress on the top line that provides us with good reason for optimism as we look ahead for the balance of this year. Conversely, the quarter also saw us incur property losses to winter storm Uri, coupled with reserves strengthening on certain select commercial lines. On the production front, both commercial and personal line saw a significant growth, and leading to an overall 21% quarter-over-quarter growth rate. We are very pleased with the trend of our top line growth in that quarter and expect that to last for the rest of this year.
Nicholas Petcoff: Thank you, Jim. Last night, we reported solid growth in our key operating groups, where gross written premiums were just over $30 million during the first quarter. Commercial lines, which still represented roughly 90% of our total written premiums, saw a significant increase in gross written premiums for the period, up over 16%. The only outlier was our hospitality business, but we are optimistic we will see growth return there in relatively short order.
Harold Meloche: Thank you, Nick. I'll provide a quick review of the results and I also encourage investors to review our filings and presentation on the company's website for greater detail. In the first quarter, gross written premiums increased 21% to $30.4 million. With Nick and Jim having detailed the breakout of premiums, I'll focus on our underwriting results. Conifer's combined ratio was 129% in the first quarter compared to 112% in the same period last year. The loss ratio of 84.4% was up compared to 64.5% primarily due to losses resulting from Winter Storm Uri, which impacted both our commercial and personal lines and reserves strengthening. The single largest area of reserve development came from the QSR line. The loss ratio in commercial lines was 81.7% in the quarter compared to 65.6% in the prior year period, while the personal lines loss ratio was 111% this quarter compared to 49.8% last year. While our current accident year loss ratio was 59% in the first quarter before the impact of the storm, the accident year loss ratio was 50%. Moving to our expense ratio, we continue to see improvement resulting mainly from recent planned expense reductions, accordingly our expense ratio improved to 44.6% this quarter from 47.1% in the same period last year. We do expect to see the expense ratio reduce over time as we scale up our net earned premiums continue to implement cost cutting measures and further leverage the investments we have made in technology. We have a short-term goal reporting an expense ratio at or under 40% and as premiums continue to grow we feel confident that this ratio will improve. Net investment income was $532,000 during the first quarter compared to $954,000 in the prior year period. While net realized gains increased substantially to $2.9 million compared to $928,000, our investments remain conservatively managed with the majority in fixed income securities with an average credit quality of AA+, an average duration of 3.9 years and the tax equivalent yield of 1.5%. Ultimately the $2.3 million of storm-related expenses contributed to a net loss of $4.6 million or $0.48 per share for this quarter, compared to a net loss of $4.7 million or $0.49 per share in the prior-year period. Moving to the balance sheet, total assets were $260 million at March 31 with cash and total investments of $184 million. Our book value at March 31 was $3.82 per share, we have $1.53 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.
James Petcoff: Thanks, Harold and Nick. The growth we achieved in the commercial and personal lines gives us optimism for the top line growth for the balance of the year. As we have noted throughout these prepared remarks, lifting of the pandemic restrictions should generate a surge of economic activity, and we expect the hospitality industry to be among the main beneficiaries. Assuming that plays out as stated, we expect our hospitality business to pick up solidly contributing to our expanding premium business. And now I'd like to take some questions, Operator?
Operator: Thank you. We'll now begin the question-and-answer session. And the first question will come from Paul Newsome with Piper Sandler. Please go ahead.
Paul Newsome: Good morning. Thanks for the call, guys. Maybe you could start off with your view on the extent at least with your particular business lines, you think price increases could be sustained over time, and it looks like your book needs around or to price increases and do you think the market will give you that maybe second round that might be required to get good prices where you need to go?
James Petcoff: I'm going to deflect that and let Nick and Andy talk about it. Nick?
Nicholas Petcoff: Yes. On the property side, we're seeing strong rate. And we were seeing that last year as well. So, I do think there is rate increases to be achieved this year in property. Our property rates were up 8% year-over-year in the first quarter. So, we're seeing strong rate environment there obviously with the storms and some of the other activity in Q1, we haven't really seen as much competitive pressure on that line of business. On the liability side, we were in the mid single-digits with rate increases. It varies quite a bit by geography. On loss, affected accounts, we're seeing more in the mid double-digits. But obviously the hospitality, given the reduction in claims activity from the lockdown, it somewhat meets the impact of the rate increases on the GL. So, absolutely where the non-sort of COVID affected lines, we're seeing a strong rate environment for the GL, as well as the property on the commercial line side. Andy, you can probably speak to the personal line side.
Andrew Petcoff: Yes. Paul, on the personal line side, we're starting to see some rate increases that we're able to push through. Obviously, the storms have kind of hurt our area from that perspective, but I think we kind of outperformed the marketplace there with some of the policy forms that we have. We've seen a little bit of a retraction from some other carriers in the marketplace. So, we see it as really an opportunity for additional growth, while also adding some rate increases on to the business.
Paul Newsome: Fantastic. Maybe I could ask a capital question, where are we from an RBC ratio perspective within the insurance subs? And can you talk a little bit about liquidity as well?
James Petcoff: Sure. I'm going to deflect that to Harold. But before I do, I wanted to also point out when you talked about the rate increases, as everybody knows your renewal book is better than the new business you put on just because you get a chance to look at it once or twice. And obviously we've made several significant underwriting adjustments on our book over the last few years. Nick, what's the retention ratio?
Nicholas Petcoff: Yes, we're still seeing retention ratios around 90%. So we're seeing the rate increases stick on a lot of those renewals.
James Petcoff: I just thought, I'd point that out, Paul. Harold?
Paul Newsome: That makes sense.
Harold Meloche: Well, Paul, first of all, we obviously look and monitor our RBC ratios even though they're on annual measure, we look at them quarterly. And currently we still have more than adequate capital to not only sustain us, but also to absorb future growth in the near-term. So, we feel fairly well-capitalized from a statutory perspective. And cash flow is also adequate for -- you know, all of our debt covenants are fine and cash flow needs with a whole color are easily being handled.
Paul Newsome: Where were you from an RBC ratio last time you checked?
James Petcoff: What do we report at year-end?
Harold Meloche: Well, at year-end, I don't remember the exact numbers. Obviously, they're in the yellow books. But we're over 500 or like 550 or something to that effect at year-end with White Pine and probably about 400, don't quote me on that, it's just a rough number at year-end. And our stress testing for the first quarter still left us with plenty of room.
Paul Newsome: Fantastic. And then the last question I had was one of the things I wasn't able to get right on the model was the tax rate. Are you at a point where you're able to incur an offsetting tax asset when you have a loss in the quarter or with the tax, whether the tax rules sometimes work is if you've got regular accounting, still think you've got the ability to have future earnings, sometimes you have to build the tax assets. Where are you from that perspective just for GAAP reporting perspective?
Harold Meloche: Yes, so we do. We're accruing deferred tax asset relating to our NOLs. So, we're carrying those forward, and we'll be able to utilize those in the future, 100% of our NOLS are still well available for use, when we start to have taxable income. And in fact, last year we had taxable income to a degree even though it didn't show up on a GAAP basis because of capital gains that we experienced. So, and we utilize NOLS at that point in time. So we do utilize our NOLs, when we have taxable income. And they're fully available and there's a full valuation allowance against all of our net deferred tax assets right now, which is about $1.53 per share, that you do not see in our balance sheet or in our book value number that will be utilizable in the future though.
Paul Newsome: Which is great, actually, the question I asked was an accounting one, if let's say, next quarters, hypothetically, you lose money, you'll be building an NOL. But would you be able to record that NOL through the income statement? Or would there be an offsetting valuation allowance? So essentially, if you lose $1, and again hypothetically next quarter, that pretax dollar will be fully recognized in net because the NOL wouldn't be -- would be offset by the valuation loss, is that right?
Harold Meloche: That's correct.
Paul Newsome: So, okay, so effectively a zero effective tax rate, even in the last few months.
Harold Meloche: Correct.
Paul Newsome: Okay, thank you, that helps. I appreciate it. Thank you very much.
James Petcoff: Thanks, Paul.
Operator: The next question comes from Bob Farnam with Boenning and Scattergood. Please go ahead.
Bob Farnam: Yes, good morning. I had a question on the personal lines growth. And obviously, 92% top line growth there was pretty significant and I just wanted to have an appeal for how much of that is new business? How much of that is rates? Actually, I noticed you also had increased premium in the Wind Exposed Area as well. So I didn't know if that was rate or if that was increased exposure as well. So, may be just to kind of tease out some of the details in the growth in the personal lines?
James Petcoff: Yes, the growth is all in the low-value dwelling business that we write, mostly Texas, a little bit in Oklahoma. We still have the Indiana and Illinois, Midwest low-value dwelling book of business as well. With a smaller base, as we grow, and we continue to build out, obviously, that percentage number looks bigger, we've got a number -- we've got a marketing effort down there. And we've got a number of new agents that are coming on board. So, we're seeing good growth there in the kind of the areas, we want to see that. And so we're going to continue to see growth in that area, it's not going to be to that magnitude, I don't think. It's going to start to the temper down over time. If we were to see a continued growth like we've seen here in the past few quarters, that would be great, but I don't expect it to continue at that rate going forward. Yes, and on the wind exposed portion, our Florida book is dwindled, it's just about nothing. We do have a Texas HO3 product that's not as much of a focus for us as the low-value, but we did see some growth during the quarter. So that's why the wind-exposes up slightly. We still include that in the wind-exposed category, even though it's more about Dallas-Fort Worth, Austin, and Houston sort of in that triangle.
Andrew Petcoff: Yes, Bob. And to add to that, I don't believe our accumulations change much on the cat side. So right, right. It's pretty much the same as it was last year.
Bob Farnam: Right. Okay. Did you did you see more policyholders reaching out to get coverage after the windstorm in Texas? Is that -- did you have a lot more growth towards the kind of the back half of the first quarter?
Andrew Petcoff: No, it was pretty stable across the quarter. I do think that we're going to see that ramp up a little bit. I do see from what I've seen, there's a couple of carriers that have pulled back. And I think additional insurance will be looking for coverage. And that's why I think we'll see some rate increases as well in the marketplace.
James Petcoff: I think also, Bob, if I could interject and have Andy talk a little bit about the cat. The low-value dwelling product the bulk of our cat losses were really commercial. And Andy do you want to explain why?
Andrew Petcoff: Yes, and I think, if anything, we learned something from our Florida homeowners play that we had a number of years ago. Luckily, that we're largely out of today. But what we did when we entered Texas is we had an exclusion for water damage. And then we allowed our insurance to buyback coverage up to $5,000 or $10,000 sub limit. And as we did that, we only saw about a 40% take up rate on our dwelling fire business. So in the deep freeze and where you had a lot of pipes bursting and water damage claims, a lot of ours were actually not covered. And that's not something that we cover, along with having a dwelling fire policy, and limited payrolls. We're not covering everything that happens. This is a very strip down policy. There are lower values, and it excluded water in a lot of cases. So I think we greatly outperformed from a loss perspective in that Texas area through that storm. And we're pretty happy with how we've developed this program are forms and the rate increases, we think we're going to be able to get here in the next couple of quarters.
Bob Farnam: Great. Thanks for the color there. And my second question is on kind of claims outstanding in Florida. Now, obviously, I don't need specific numbers, but I'm just trying to get a feel for how much in terms of quick service restaurant claims are still outstanding. Do you still have homeowners' claims outstanding in Florida? Just trying to get a feel for where potential development still might be lurking?
Andrew Petcoff: Yes, when you talk about potential development, you got to realize that we've been getting out of Florida. The only business we have left in Florida is really related to one key account that's been performed quite well as in total. And Florida has not been a problem for this one. And the QSR side is one key account. That's why we still have some premium in Florida. As far as the number of claims are, they're down to a very manageable level. And when we talk about development, that doesn't mean we paid the claim out. We've been increasing reserves on those claims, as we seeing the changes in the judiciary and the judgments and things in Florida. So on the remaining claims are more closely reserved to the ultimate, we believe and there aren't that many, and on the Florida homeowners. Just we have a for sure it's less than 100 claims. And all of those 75% 80% 90% are Irma. And so, there's very few non-Irma Florida outstanding claims that would develop and causes problem. The Irma claims has caused us a little bit of a problem on the reinstatement premium, but we're in the second and third layer and the rates are pretty small. So, we expect limited reinstatement premiums off of the Irma claims, but that's pretty much all we get.
Bob Farnam: Okay. Thanks for that.
Operator: The next question is from Alex Bolton with Raymond James. Please go ahead.
Alex Bolton: Hi, guys. How are you doing this morning?
James Petcoff: Good, Alex.
Alex Bolton: I just had some quick questions, I guess, on the expense ratio target of 40% or lower. I guess, can you provide any clarity on timeline you're looking for there?
Harold Meloche: Well, I think if you look at this last quarter and you look at the reinstatement premium and investment for that, we did buy down our reinsurance last year. So there's a little bit more reinsurance cost. So the net earned premium is a little bit lower than it otherwise would have done, but our fixed expenses have been actually coming down on a gross basis, so down more significantly on a variable basis, on the percentage basis. So, our earned premiums going up, we don't have -- continue to have reinstatement premiums dragging down the earned premium, and we continue to manage our expenses, which has been a by-product as well of COVID where you able to manage the expenses a lot better. And as we look going forward, obviously, physical presence is going to change and there is going to be opportunities to continue to reduce those expenses. So we're optimistic on the 40 being a realistic target in the not too distant future.
Alex Bolton: Okay, I appreciate that. And then just from a net income perspective, I guess, are we looking at a more normalized run rate as of now maybe declining with reinvestments a little lower?
Harold Meloche: I don't know. I'll let -- Brian is in here too, I'll let him talk about the portfolio.
Brian Roney: The overall portfolio obviously continues to grow because we're writing more premiums, but we did recognize some realized gains and I think that that came and brought a little bit of yield out. So our investment yield had been higher. It's roughly 1.5% at quarter-end. So I think you're seeing kind of net investment income come down as a result.
James Petcoff: However, we should have more assets and…
Brian Roney: Exactly. However, we don't necessarily expect it to trend in exactly that line because obviously with more assets and more growth, also keeping in mind that we keep a pretty good percentage of the portfolio and floaters and the overall duration is relatively short. So we're expecting a certain turn in the book that will allow us as rates kind of do come up to kind of see better yield over time.
James Petcoff: Does that answer your question, Alex?
Alex Bolton: Yes, I appreciate that and appreciate the answers. Thanks again.
James Petcoff: Thanks.
Operator: Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Jim Petcoff for any closing remarks.
James Petcoff: We're very pleased with several aspects of the business to grow the book of business we have today, the chances we made over the last couple of years, the past did come to haunt us and a couple of select commercial lines that are obviously no longer focused and have had significant changes. The future on the books of business we have and the historical losses as those have been very successful. So we anticipate an accident year significantly better than prior years. And we can see the growth coming and we do expect our expense ratios to go down. So we here are optimistic and I hope that that's what you get out of this call. And thank you so much for being on the call and look forward to talking to you next quarter.
Operator: And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
