Presurance Holdings Inc (PRHI) 2015 Q3 法說會逐字稿

Good morning and welcome to the Conifer Holdings third quarter 2015 investor conference call and webcast. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Heather Wietzel. Ms. Wietzel, please go ahead.

Thank you, Keith, and good morning, everyone. Thank you for joining us for Conifer's third quarter conference call and webcast. I am Heather Wietzel and I work with Conifer on their investor outreach.

On the company's website, ir.cnfrh.com, you can find copies of the quarterly release, the 10-Q and the presentation that management will be discussing today. If you are looking at the presentation via the webcast, you may find that the slides are easier to read in the large slide view, which can be selected on the right-hand side of the webcast page.

Before we get started, the Company has asked that I note that except with respect to historical information, statements made in this conference call 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 risks and uncertainties, including those described from time to time in Conifer's filings with the SEC. Conifer specifically disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise. Also, a reconciliation of non-GAAP measures was provided with the news release. Statutory accounting data is prepared in accordance with statutory accounting rules and therefore is not reconciled to GAAP.

We will be opening the call to questions but first management will offer some prepared remarks. Let me turn the call over to Jim Petcoff, Chairman and Chief Executive Officer, to begin.

Thank you, Heather. I'm really pleased to be speaking with our investors again and sharing our September 30 results, which came in pretty strong. We continued our growth through the first nine months with a 22% growth rate in gross written premiums and a 97.7% combined ratio.

Through 9/30, the growth came in different areas than we were anticipating. The personal lines did not grow quite as quickly due to the competitive nature of the Florida market. This led to us retrenching and not necessarily chasing the premium for premium's sake. However, the positive is that the growth continued in the commercial side. We have also had the opportunity recently to pick up a group of underwriters out of the Midwest who specialize in the hospitality area, specifically in the franchise business. We believe that the growth will continue in the commercial lines, especially with the addition of this group; however, with the addition of the group, our expenses in the fourth quarter might be a little bit larger than we anticipated.

In order to reiterate, Conifer was formed to tap key market opportunities in niche markets. We have put the platform in place and thanks to the investors we have the capital to support the plan in the near future.

With that said, it's not just about growth. We are focused in 2016 on making double-digit ROE. When investors look back at 2015 and 2016, we want them to think of Conifer as a standout for the strong growth but very smart growth.

On today's call, we have Nick Petcoff, our Executive Vice President overseeing insurance operations, and Harold Meloche, our CFO, who will both talk more about what we saw in the quarter and we expect Conifer to have for the remainder of next year.

So let me turn the call over to Nick right now for his thoughts.

Thank you. As Jim mentioned, we continued to show strong profitable growth over the last quarter. We believe these results will continue and improve, given the platform and experienced team we have in place.

At Conifer we have been focused on developing an experienced management team, including underwriters knowledgeable in both specialty commercial and personal lines. These underwriting teams have significant knowledge of these specialty products and markets, combined with strong agency relationships. Generally these specialty classes of business target smaller account sizes that experience less competition from larger national carriers. We believe our underwriting knowledge, agency relationships and product flexibility allow us to differentiate ourselves from competitors in these specialty classes of business. We have seen this business model lead to profitable growth, as exhibited in the third quarter of this year.

Conifer has shown the ability to achieve topline growth since the founding of the Company. Annual gross written premium volume has increased 500% since 2011. More recently, gross written premiums are up 23% in 2015 year over year for the first nine months. We see opportunities for profitable growth moving forward while maintaining underwriting discipline.

With that in context, we will discuss the results for our commercial and personal lines operations and what we're seeing moving forward. As we previously pointed out, commercial lines has driven the growth in 2015. Gross written premium increased almost 35% for the first nine months year over year. Commercial multi-peril grew 25% and other liability grew 68% year over year. These lines of business are comprised primarily of our hospitality and security guard/private investigator program. The hospitality business continues to grow as we reconnect with former North Pointe agents and appoint new agents to expand our geographic footprint. The security guard private/investigator program continues to grow since we added an experienced underwriting team in this area. They have been very successful establishing relationships with key agency partners that they've worked with at their prior carrier.

Additionally we have been successful cross-selling our commercial lines products with agents that we originally appointed for personal lines. That has led to growth in both the hospitality and security guard programs. The growth has been slower in the commercial auto and workers' comp lines of business. The commercial auto results tend to vary significantly from state to state and we've been very careful as we looked at where we grow this class. Similarly, given the longtail nature of workers comp, we have been very deliberate in terms of adding new states, although we do anticipate adding at least one new state in 2016.

Finally, as Jim mentioned, we have added a team of underwriters experienced in the franchise restaurant class of business. While adding this team will increase expenses in the fourth quarter we believe this program will be a strong driver of premium growth in 2016. We are pleased with the growth in the commercial lines business and see continued growth in the fourth quarter and 2016.

The personal lines business as a whole has not experienced significant growth through the first nine months. This lack of growth has been influenced by three primary factors: the runoff of the personal auto business; the competitive pressures in Florida and coastal Texas; and tightened underwriting guidelines in the Midwest have tempered growth in the personal lines book.

Somewhat offsetting these downward pressures on premium growth were the continued increased in volume in Hawaii and the introduction of our low-value dwelling business in Texas. We have adjusted our rates in coastal Texas, which has shown an uptick in both submissions and volume. We are also looking at adjustments in rates in the area of Florida where we plan to target voluntary business. In addition to Texas, we anticipate writing our low-value dwelling products in Louisiana by the end of 2015. Excluding the nonstandard auto, we believe these adjustments will drive growth moving forward.

In conjunction with the strong growth, the loss ratio for the first nine months of 2015 improved significantly from 2014 and is approaching our target for the year. The commercial lines loss ratio improvement is driven by more normal weather patterns, growth in traditionally lower loss ratio classes of business and disciplined underwriting. We have also added experienced claims personnel, specifically in the commercial auto area, that has improved our loss ratio in that class.

The personal lines loss ratio has improved dramatically in 2015 versus 2014. The improvement can be attributed to more normal weather, as well as rate increases and tightened underwriting in the Midwest low-value dwelling book. Also the growth in both Florida and Hawaii contributed to a lower loss ratio when compared to 2014. Although the loss ratio is still higher than the target, we anticipate continued progress to achieve our target with the improving Midwest homeowners business and the conclusion of the nonstandard auto runoff.

I'll now hand the call over to our CFO, Harold Meloche, to provide a financial review.

Thank you, Nick. Let me also extend my thanks to our listeners who joined us today. Let's start with the expense ratio. As our premium volume continues to grow, our nine-month expense ratio shows improvement toward our 35% target. At this point, the fixed cost infrastructure is largely in place, with scalable IT and the capacity to write substantially more premiums. Without a proportional increase in those expenses, we are pleased with our progress. That said, we are a growth company. We have and continue to make investments in people as opportunities arise, such as the franchise restaurant team Nick mentioned earlier.

You may have noticed that the third-quarter expense ratio was above the nine-month value although it did remain below last year's. The uptick was due to a combination of items. First, we continued to incur staffing and other operational costs relating to the runoff of the personal auto business, while the revenues have sharply decreased and will be near zero in Q4. Fortunately most of those operational costs will be gone by year end. Also increases in catastrophe reinsurance costs, due to the increased total insured values, were fully felt in this quarter. Our expense ratio may remain a little higher in the near term due to the addition of the franchise restaurant team, which will need a few quarters to ramp up, and a lower premium growth in the Florida homeowners due to pricing pressures. However, we do expect the expense ratio to continue its downward trend in 2016.

As Nick noted, the loss ratios are very close to our target as our mix of business continues to improve with our planned growth. The underwriting changes in the low-value dwelling in the Midwest have gained some traction and the weather-related property losses have reverted back to more historic norms. Together with the progress we have seen in the expense ratio, the improvement in the loss ratio helped us achieve a combined ratio below 98% for the quarter and the nine-month results. This year we have seen a 20.8 percentage point improvement in our combined ratio as compared to year to date 9/30/2014. One last note on this slide. The overall impact from prior-year reserve development so far this year has been minimal.

Switching over to our investments, the portfolio continues to expand as our premium volume grows. We are maintaining a conservative investment philosophy, with 96% of our investment portfolio currently in fixed income securities with an average credit quality of AA, an average duration of 3.4 years and a tax equivalent yield of 2.2%. In addition to our prudent investment philosophy, we protect capital through our reinsurance programs. Beyond the change in the quota share reinsurance, which I will talk a little more about in a moment, our reinsurance structure remains unchanged and follows a consistent and robust risk management approach.

A few items on the income statement that deserve comment. You may have noted that the net written premiums for the three months rose more rapidly than the gross written premiums. This was due to the termination of a quota share reinsurance agreement on August 1. Because of the capital raised in the IPO, we determined we no longer needed the leverage support of this reinsurance arrangement. The termination of the quota share agreement resulted in the reversal of related unearned ceded premiums, which affected the third-quarter net written premiums.

Turning to taxes, for the past several years there has been a valuation allowance against 100% of our deferred tax assets. As a result we expect little to no income tax expense in 2015 and a reduced effective rate in 2016. The amount of the allowance that can be utilized against future earnings is approximately $3.9 million at September 30, 2015 or $0.51 per share using the September 30 share count. Operating earnings per share were $0.19 for the third quarter and $0.32 for the nine months ended 9/30/2015. The reconciling items between net income allocable to common shareholders and operating income are comprised of the realized investment gains and other gains as reflected on the income statement.

To close, I would note that we are reporting our first post-IPO balance sheet. Our net written premiums to statutory surplus ratio is at 1.2:1 which leaves room for future growth and our debt to total capital is only 10.8%. With the balance sheet strengthened, we anticipate that over time we will see higher AM Best ratings which will allow us to eliminate fronting fees of 3% to 5.5% on some of our premiums, helping us achieve our longer-term objectives. Lastly, book value at September 30 was $10.49 per share.

With that, I would like to turn it back over to Jim.

Thank you, Harold. We formed Conifer with the purpose of tapping key niche market opportunities. We took our time and put the platform in place and are fortunate enough with the support of our investors to have the capital to support this plan. Our focus for 2016 is not only on growth but on double-digit ROE and make certain that when we grow we grow the right way. Our goal is to be a growth company but very smart growth.

With that, we are ready to take questions and I want to also mention that Brian Roney is sitting here, in case someone has a question for him as well. Operator?

(Operator Instructions). Greg Peters, Raymond James.

Good morning, everyone. Thanks for hosting the call. In the slide presentation I think in your comments you talked about agent appointments. Can you provide an update on how many new appointments occurred during the third quarter? Can you give us some clarity about what the total count is, if there were any agent cancellations and maybe differentiate between commercial and personal lines?

I'm going to turn it over to Nick but I can tell you in general that the agent appointments are up and if there were any agent appointment cancellations, if there were they were in the Midwest and the homeowners business. Nick, do you want to give any more specifics?

Yes, I mean on the personal lines side, as Jim mentioned, we continue to grow agency appointments especially in Texas with our low-value dwelling book of business that we introduced earlier this year. It's certainly a metric that we look at as it relates to that book because we see a lot of growth for new agency appointments. As Jim mentioned, there's some attrition in the agency count as we terminated some unprofitable agents that was part of our re-underwriting of that Midwest low-value dwelling book.

On the commercial lines side, we do continue to appoint new agents. In terms of the number or a target of new agents appointed per month or per quarter, it's not something that we really target in terms of the sheer number of appointments. Generally we are working with specialty retail agents in their class. So it's not -- if we enter a new space we are generally not looking to saturate the market with new appointments. It's more gaining a foothold with the five or six key retail agents in that specialty in the state and growing the business organically through them. So we really monitor on the commercial lines side more on a quarterly basis -- okay, what has this agent done? Are they growing their book of business with us and do we think this is a good partner to continue moving forward with? So we don't really look at the sheer number of appointments as a key metric for us.

Understood but can you provide some color whether the appointment number is just -- is there a natural growth associated with it? Is it accelerating growth? Or is it stable at this point as we think about what the number might look like for 2016?

Well, let me take that from the personal lines side. With the addition of Texas low-value dwellings [in Gregmanic] we started with one appointment in May, 10 in June, 30 or 40 in July. He now has close to 200 agencies appointed. He expects to get 500 by the end of next year. So that's just that aspect of it.

With respect to Florida, due to the competitive nature and the way that we would like to distribute our business, we have appointed most of the agents that we want already. We're not really looking for more agents. We just want to grow the business in the correct areas within that state. With respect to Hawaii, we deal with a wholesaler and there's a limited number of agents. So on the personal lines side, we are not looking to appoint new agents in the Midwest at this time.

So that's the personal lines side. I'll let Nick talk specifically to the commercial.

Yes, and on the commercial lines side it's more of a steady growth. We'll look at different space in terms of volume if we feel like we are not getting the production that we want out of a certain space we'll look to grow agency appointments and we have done that in a couple of states. We will see growth through the -- what we've mentioned on the call, the franchise restaurant business. That will result in additional appointments and that's something that we'll be starting here by the end of this year and we continue to see growth in 2016 in that class.

So the commercial is going to be strategic, not exponential. I would say that in the personal lines side, with our ramp-up of Texas, it's a much larger growth. But we have a lot of room to grow within those agencies. It's not just appointing agencies; it's getting growth within those agencies.

Right. Can you provide us just some color on how the quote to bind ratio looks? I realize it's going to be different in commercial versus personal and I realize you might not have all of the numbers in front of you but if you could just provide some sense of how you're positioned in the marketplace and how successful you are at binding that would be helpful.

Well, I can tell you on the personal lines side in Florida it's not good. That's because we are maintaining our discipline on underwriting and rates. I can tell you in Texas, though, it is good because the agents that are being appointed there are key agents that the underwriters have done business with and therefore they are motivated to do business with them. So in Florida it might be less than 10% and in Texas it might be closer to 35% or 40% as far as quote to bind.

But Nick, why don't you take the commercial?

Yes, on the commercial line side, one of the metrics that we do look at and I do have off the top of my head is the renewal retention. On the commercial lines renewal retention we are up between 85% and 90%, is where we target. So that's been a pretty good gauge of the stickiness of that business.

In terms of the new business hit ratio, I don't have that in front of me. I would say that in a space where we have a lot of history and we have very strong agency relationships, it's much higher than what was mentioned on the personal lines side. Generally if we have a chance at a piece of business and we have agency relationships, a lot of times we will get the last look at a piece of new business and that certainly increases the hit ratio versus the personal lines side.

Greg, I would tell you that today in the business we are writing because of our past relationships, our hit ratios are going to be larger or higher than they will be long term. Because we are reestablishing these relationships and the agents want to do business with us, we are getting a much better look at all of these accounts. Wouldn't you say, Nick?

Yes, in certain cases agents are rolling books of business so obviously they're looking to move that from a different carrier that skews upward the quote to bind ratio because we are essentially having that moved over to us and having the first and last crack at writing that piece of business.

Perfect. Thank you for those answers. Just one final cleanup item. I'm sorry if you mentioned this during your prepared remarks. On the franchise restaurant group -- and you I think highlighted some additional expense that might flow through the fourth quarter. Could you put a number to that and also could you sort of walk us through how long before the revenue is going to offset that expense? I mean, is this something that is going to continue for the first half of next year or how should we be thinking about that?

You should be thinking about it as not a percent of earned premium but something significant. I mean, it's going to be significant but we are going to start writing in the first quarter. So getting the revenue to cover maybe second quarter or third quarter we should turn to an efficient expense side. But the opportunity to pick up a seasoned group of underwriters with experience in this business who we have long-term relationships with that we can write profitable business, we thought it was the appropriate thing to do.

I'm sorry, did I miss the actual quarterly expense that you think is going to flow through in the fourth quarter?

I don't have the exact number. We haven't provided that so --

Okay, that's fair. That's all my questions. Thanks for the answers. Congratulations on the quarter.

Charles Sebaski, BMO Capital.

Good morning. I guess the first question is it seems like wind exposed business is a little more -- it seems like the marketplace is deteriorating a little quicker than you guys had maybe expected earlier in the year. I guess what is the expectation at this point if things keep going as you saw this quarter for the wind exposed book to look like?

Well, I think it will look like a smaller book but a very good book. Our goal is not to write wind exposed business for just the purpose of putting premium on the books to make the override so that the MGA makes money. Our idea is what we did at North Pointe as well, was to get a book of business that will be sustainable over a long period of time. To do that if we grow slower in Florida that's okay. Texas is fine, Hawaii is growing and we are offsetting that on the personal lines side with the addition of the low-value dwellings in Texas, which is outside of the wind exposed area. Also we started with an underwriter north of I-10 in Louisiana that's rolling a book of business over due to our underwriter in Texas.

So we expect the wind exposed business specifically in Florida to continue to be a slower growth area but we expect to be able to pick it up in other areas and over time we should get back to our growth plans there. But we expect the book of business in Florida to be a sustainable long-term book of business.

All right. Maybe I missed that you guys said it before and I realize it's early stages so the numbers are small but the expense side on the low-value dwelling ticked up from last year and from last quarter. I was just curious what that was.

That was actually in the personal lines side, Chuck. I think that's what you're looking at.

Yes, the low-value dwelling personal lines. I'm kind of --

It wasn't specifically the low-value dwelling. It was actually probably more related to the nonstandard auto that we're no longer writing. So specifically -- Harold talked a little bit about it in his comments but in the third quarter there wasn't any premium and you still are carrying some of the expense associated with the runoff. So I think what you saw was an artificially high expense ratio in the third quarter. I think it showed like 53%. So that was an uptick as it relates to us running off the auto business. So it wasn't necessarily that we had outsized low-value dwelling expenses. It was really more of a function of the runoff of the nonstandard auto.

I will add to that and that is substantially all of it, what Brian said. You may have seen, just in Q3 2015 compared to Q3 2014, an uptick in the expense ratio for specifically low-value dwelling.

Yes, that's what I was looking at out of the Q, yes.

What's happening there is that the Texas business really didn't exist last year and it's still ramping up. We have very little earned premium for the Texas book right now. So its expense base is very high relative to its earned premium right in this quarter.

Okay but conceptually it should be, as over time it's kind of mid to low 30s expense ratio over time?

Yes.

Okay I realize it's a small book and it's growing and so I just wanted to make sure I was understanding conceptually. Then I guess on the CMP business, obvious that the growth was really strong. I just wonder -- provide any color on what you guys are seeing on the pricing dynamic? Obviously the retentions seemed to be good but what are really the parts you see that are the best strengths for you location wise and what the pricing environment is relative to last year?

I'd say from a competitive standpoint on some of our larger accounts we are seeing increased competition. For instance, our bowling class of business which really skews to the larger end of our account size. We are seeing competition -- pretty fierce competition not only in the Midwest but also in the Northwest and west of the Mississippi and we're seeing new carriers really target the business that we haven't seen in the past. So we've definitely had to walk away from certain accounts as we've seen the pricing deteriorate in that class.

On the flip side, I'd say our core restaurant/bar/tavern business has not been nearly as -- we haven't seen nearly as much competition in that business. Specifically in Michigan we continue to see strong growth in both the liquor liability and the CMP premium growth as we continue to reconnect with agents that we've worked with in the past.

So the Michigan book has continued to grow. Florida has been a state where we've continued to grow and now with the introduction of Texas on the personal lines side, we've had some very good success cross-selling our commercial lines product with personal lines agents in that area as well. So the pricing is really on the larger accounts and we're seeing some of that on the private investigator and security guard book as well. You're seeing the larger accounts experience much more competition than smaller accounts and at times we've had to walk away from risks where we didn't feel that the pricing justified it really on the larger accounts.

Excellent. Appreciate the answers. Thanks, guys.

(Operator Instructions). Paul Newsome, Sandler O'Neill.

Good morning. I want to revisit the increased expenses related to the new team. So it sounds like, just to make sure I'm right, that it's sort of perhaps less of a percentage on the expense ratio but that it's going to probably diminish relative to expectations over time through the 2016. Is that a fair way to look at it?

Right. I would say the expenses of that office are less than $1 million a year, to give you some color.

That's fantastic. So we should be taking the combined ratio up, all things being equal, by less than a percent next year.

Then the second question I had was, was there any gain related to the quota share being eliminated? I know sometimes you get sort of a true-up of unearned premium and premium when the quota share goes away and that can cause a certain amount of profits that get reversed out of the quota sharing in the quarter.

There was no gain -- there could have been a very small true-up but our earned was pretty much dead on.

So that $0.19 is a good run rate.

Yes.

Fantastic. Thank you very much. Congratulation on the quarter.

[Jeff Schmidt], William Blair.

Hi. Good morning, everyone. I was wondering about on the M&A front, is that something you guys are actively looking at opportunities now or are you more focused on sort of growing organically at the moment?

We are internally totally focused on growing organically. Having said that, Brian and myself are the only two that are really actively looking out in the M&A market. We don't want to distract the operations from achieving our goals. On the M&A front, there has been, in my opinion, a valuation discrepancy. You know, some of these Florida companies were trading at very high multiples and if you read SNL you see that a lot of them are for sale or trying to go public or whatever, take advantage of that. I don't see anything on the immediate horizon for us on the M&A front. However, we are looking.

In that regard, what's your sort of philosophy on financing deals? I mean, are you -- is your first priority debt or are you open to common stock or what's your sort of philosophy there?

We like our stock so I'd say our first priority is trying to do it internally, either by combining companies with our current companies or through some kind of a combination with debt leverage. We value our stock and are really not interested in giving up the stock. I'm not saying at some point in time that might not change but for right now it would be probably a leverage transaction.

I think Jim's absolutely right. I mean when you look at the size that probably comes into play, if it was kind of a tuck-in acquisition we could probably do it with debt. It was something transformational, like Jim is alluding to, you might look at equity but given where equity is right now, it would be an expensive trade.

Okay. Thank you.

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

Sure. I just want to say thank you for all the investors for listening in and thank you for the opportunity you've given us with your capital to grow this company and achieve our goals. We look forward to executing on that. We are all focused on our operation -- except for Harold, who is focused on the numbers. But the rest of us are focused on our operations to make this successful and we look forward to talking with you guys in the near future. Thank you.

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