Presurance Holdings Inc (PRHI) 2016 Q1 法說會逐字稿

Good morning and welcome to the Conifer Holdings first-quarter 2016 investor conference call and webcast.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Adam Prior of The Equity Group. Please go ahead.

Thank you and good morning, everyone. Conifer issued its 2016 first-quarter financial results after the close of market yesterday. On the Company's website, ir.cnfrh.com, you can find copies of the earnings release as well as the slide presentation that accompanies management's discussion today. If you are looking at that presentation via the webcast, you may find the slides 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 subsidiary. Actual results may -- from Conifer may differ materially from those 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 is therefore not reconciled to GAAP.

We will conduct a Q&A session after Management's prepared remarks this morning. With that, I'd now like to turn the call over to Mr. Jim Petcoff, Chairman and Chief Executive Officer. Jim, please go ahead.

Thank you and good morning, everyone. Joining me from the management team today is Brian Roney, President; Nick Petcoff, Executive Vice President; and Harold Meloche, our CFO.

I'd like to begin with a quick overview of our results, and then we'll turn it over to Nick for some insights into our underwriting and expansion. Harold will provide a brief summary of our financial results, and then I'd like to return for a few closing remarks on the outlook for the remainder of 2016. After that, we will open up the call to any of your questions.

Our first quarter was highlighted by strong organic growth in our core niche markets, along with our new underwriting platform that we started in 2015. The growth was in both our commercial and personal lines of business. While Nick will go into more detail on our markets in particular, all the trends are moving in the right direction in terms of growth. We saw double-digit growth in the first quarter, a total increase of 25% in our continuing lines of business. It's important to note the positive trajectory of the premiums throughout the first quarter with premiums in the month of March representing Conifer's strongest month ever.

While our efforts are accelerating the top line, we understand that our main focus is on our underwriting performance, and, ultimately, outperforming expectations in combined ratio and return on equity. During this period, our management team conducted a thorough review of our claims inventory. This included an examination of the adequacy of reserves in our personal auto business, commercial auto business, and our Florida homeowners business.

We determined that it was prudent to take a more conservative approach and strengthen our reserves during the quarter. Although this contributed to our operating loss, we still believe a 62% loss ratio in the quarter is a good result. This will not produce operating losses in the future. Although, significantly improving the main driver of loss was our expense ratio that it still needs further improvement.

With our growth in earned premiums and our general expenses leveling off, the expense ratio will continue to go down going forward. It's important to note the growing earned premium is largely a result of the underwriting investments made by the Company in the second half of 2015. We brought on several underwriting teams with proven track records of profitable underwriting in both commercial lines, such as the quick service restaurants, and in personal lines with a focus on low-value dwelling business in the west and southwest. These teams are performing at a solid pace and as expected.

With that, I'm going to turn it over to Nick for a breakdown of the individual markets.

Thank you, Jim. I'll take a few minutes to highlight our operating performance for the period and provide some additional granularity on the line. At present, Conifer's lines of business consist of about 75% of total gross written premium in our commercial lines and roughly 25% in personal lines.

We believe our value proposition to both our insureds and investors is a diversified book, both geographically and by line. The common element is that we are looking at markets in which our underwriting teams have achieved past profitable underwriting performance and where we can grow to be a market leader by applying our nationwide presence to an otherwise localized underserved market.

Let me begin first with our commercial lines. Commercial lines gross written premiums grew by 22% to just over $19 million in the first quarter of 2016. The majority of the year-to-date growth came from the commercial multi-peril and other liability lines, which together grew by 30%, largely from expansion in the hospitality and security services product lines.

We have grown into one of the market leaders in the hospitality insurance space, specifically in relation to restaurants, bars, taverns, and small businesses. Typically, we will write the commercial package and liquor liability coverages on these businesses, derived from long-standing agent relationships in the markets we serve.

Our goal in each geographic area that we write is to grow it to a market-leading position. An example of this is in Michigan, where Conifer has a leading position in the total liquor liability market that we estimate to be approximately $25 million. We currently have approximately $4 million in premium in force in Michigan, have seen that market share growing, and believe that a 35% proportional share of this particular line is appropriate. That is just one state, but we can see this replicating in other regions. We are expanding this line in new geographic markets, and while each individual state's market size may not move the needle for global multi-line insured, it certainly presents a strong runway for our Company.

In past quarters, we've spoken about the growth in our security guard book. This covers general liability for security guards and private investigators. This is another niche where we have leveraged our past experience of a strong set of relationships with agents that understand what Conifer can offer.

Lastly, we expect to see rapid growth from our quick-service restaurant line of business, which only began writing in January and saw considerable growth throughout the quarter. The quick-service restaurant class is focused on franchise restaurants that have low or no alcohol sales. This team joined us in the fourth quarter of 2015. This line is a strong complement to our current line of commercial business and the associated team has a strong reputation within the agent community. Generally, we have been reengaging agents throughout the hospitality space with whom we have worked previously with favorable results to date.

From an underwriting perspective, we were pleased with the performance of the commercial lines for the period. Our commercial multi-peril hospitality and property focused business improved its loss ratio year over year. And even with select reserve strengthening in commercial auto, we still achieved a commercial lines loss ratio of 56% in the quarter.

Moving on to personal lines. For the period, personal lines, which consists of low-value dwelling and wind-exposed homeowners insurance, represented approximately 25% of total gross written premiums for the period. Personal lines gross written premiums increased roughly 14% in the first quarter of 2016. During the period, we saw growth in each of our Hawaii, Texas, and Florida lines of business, with Texas representing the largest portion of our wind-exposed line of business overall.

We are pleased to add increased personal line premiums in the quarter, having done so according to our strict underwriting standards. Going forward, we have been taking an opportunistic but cautious viewpoint on these markets, cultivating agent relationships and incrementally taking business from competitors where it is prudent to do so. Our low-value dwelling business performed well during the period, increasing gross written premiums by 45%. We began writing this program in Louisiana in 2016 and are looking at similar geographies such as Arizona in the coming months.

The Company's personal lines grew gross written premium in the continuing lines of business by 34% during the first quarter of 2016. The Company increased its reserves in personal auto and Florida homeowners business, which contributed to a higher loss ratio for the period. The Company's personal lines accident year loss ratio, which excludes this development, improved to 57% compared to the prior-year period of 62%.

I'll now hand over the call to Harold Meloche to provide the financial review.

Thank you, Nick. As the financial results and balance sheet information is fully detailed in our press release and quarterly filings, I will only briefly go over a few highlights, but welcome any specific questions during Q&A.

In the first quarter of 2016, Conifer reported gross written premiums of $25.4 million, a 20% increase over the prior-year period. Net premiums written increased 61% to $22 million, and net premiums earned increased 39% to $20 million. This was largely the result of both gross written premiums and the termination of the quota share reinsurance treaty in August of 2015 that had been in place in 2014. These changes to our reinsurance program have a substantial impact on the financial statements of the Company, as we are retaining more of the business we rate and expect net earned premium growth to remain elevated.

The Company reported a combined ratio during the period of 112% compared to 99% in the prior-year period. Our loss ratio for the period was 62% and was largely impacted by the adverse developments in personal auto, commercial auto, and Florida homeowners lines that we referenced. We continued to closely monitor the claims activity in those lines.

Specifically in relation to the commercial auto, the impact was largely from incremental increases in severity of existing claims. We have made significant underwriting changes to that line to improve ultimate results, but are continuing to review and improve as we move forward. I will add that when we evaluated our reserves this quarter, we took a more conservative position to give us greater confidence for the remainder of 2016. Now we need to prove execution through solid underwriting performance and rational expense management.

Moving to expenses, during the quarter, we reported an expense ratio of 49.8%. We believe that as we achieve scale, earn, and retain more premium, this ratio will continue to improve. We are focused on vertical growth in our existing niche markets and do not anticipate any additional underwriting teams coming on board for the foreseeable future. We were pleased to see the sequential progression downward in the expense ratio, but understand that there is additional work to do to rationalize expenses and achieve our long-term goals. To help each of you in determining our expenses for the year, we are estimating a steady trend downward each quarter to approximately 45 points in Q4. This will be dependent on our continued premium growth; however, based on our existing infrastructure we feel comfortable with this estimate.

Moving quickly to the balance sheet, we have cash and total investments of approximately $135 million, and maintain a conservative investment strategy with 96% of our portfolio currently in fixed income securities, with an average credit quality of AA, an average duration of 3.1 years, and a tax equivalent yield of just over 2%. We have conservatively managed our investments with the objective of protecting capital while we expand. We limit our equity exposure and have no investment risks that are considered of particular concern.

And with that, I'd like to turn it back over to Jim for closing remarks.

Thank you, Harold. We believe in the long-term potential of Conifer and are managing our efforts accordingly. We are maintaining our disciplined underwriting and not chasing premium for premium's sake. As a result, the majority of our lines of business are performing to our expectations.

The investments made in the past year in expanding our underwriting team was the right decision to help diversify the Company and similar lines of business and expand our geography. We are seeing greater visibility in our core markets, and we are seeing additional expansion with opportunities nationally.

In looking at Conifer within the context of the capital markets, the Company has a book value per share of just over $10 and currently trades at approximately 65% of book value. We have been prudently buying our stock back and do not feel that the current share price is indicative of the favorable long-term fundamentals that exist within our Company. Our entire management team understands our clear goals and objectives, and we are focused on executing our business plan.

Now we are ready to take any of your questions, and I will turn it back over to the operator.

(Operator Instructions)

Charles Sebaski, BMO Capital.

Good morning.

Hey Chuck.

I was hoping you could help me with something on a general -- not on the quarter specifically, but on an overall business construct. And it is regarding the personal lines. I understand the value proposition you bring in the commercial business. I wonder on the personal lines, now that Florida Homeowners isn't really a viable product due to the pricing and competitive nature there, does being in personal lines long term make sense? How do you -- how does a low-value dwelling business make an adequate return over time?

You've gotten out of auto. I just wonder, should you just be a commercial lines business, or is there something else that I'm not seeing on why personalized piece still makes sense for you fundamentally?

Thanks, Chuck. This is Jim.

I would say that it's a very good question because Florida is not a viable market right now. However, with the addition of our team in Waco and their past track record, and also the track record of our business that we have been writing in tier two in Texas, and the hurricane-only product in Hawaii, those things are still very viable.

The Texas office in Waco, with the people that we've added there, have a potential that can go well over $50 million to $60 million to $70 million. And their track record goes back decades. With that type of expertise on board, I don't see any reason to change our focus on the personal lines.

The reason we got into it originally, Chuck, back when our prior life and now in this business is we believe in balancing our exposures on both long-tail, short-tail, geography, and lines of business. And we think over time that balance allows us the flexibility to go into different markets where we have the expertise and to get out of a market like Florida when it's not going to be efficient.

If you look at our performance, getting out of Florida was not, I'm not saying it was helpful on the lot special side. Obviously that's why we got out because the underwriting margins aren't there. But the margins that getting out caused our expense ratio to delay it coming down. We believe, ultimately, as the premiums are going up, which they are, that expense ratio will come down.

Our goal is to focus our attention on the underwriting and claims and manage the loss ratio down to where it needs to be. I realize with some development we are at 62% in the first quarter. Historically, with the lines of business we write, the first quarter has always been one of our worst quarters, if not the worst quarter every year.

So we are not upset about that loss ratio. We are focused on it and making the changes we need, but we are very encouraged because we are keeping that loss ratio in line, while growing the business, which will rationalize the expenses over the short-term. We had to make the decision in Florida, you are very right to point that out. But I think the expertise we have in those lines of business outweighs the benefits of accident.

Okay. And following up on that, if I recall, last year, when the book on the personal lines was meant to be a little bit different, is that there was some efficiencies of buying the cat reinsurance program because the Texas and Hawaii book were add-ons, right? You were already buying the limit because of Florida and the growth plan, and Texas and Hawaii were able to be added to that efficiently.

And can you still get the efficiencies on reinsurance buying? Or is the market just soft enough that you can maintain the wind-exposed book in personal lines without the Florida business?

I'm going to have Nick answer this question, because we've been working on our cat renewal as we speak.

Yes, Chuck, one of the things to keep in mind too is with our commercial book, we do have Florida exposure, as well. So one of the things we did when the Florida homeowners, we saw that that market was deteriorating pretty quickly, we actually allocated additional capacity to our commercial lines book down there. So we purchased one cat for both personal and commercial lines to leverage that spread-out portfolio that you just mentioned. So, yes, we are still seeing the benefits of having the Texas and Hawaii book. We are just allocating more of that capacity to commercial than we would have otherwise to the personal lines book.

Alright. So much commercial lines properties exposure is there?

In Florida?

Yes.

So on the Florida side, our all-in premium is about, for 2015, let's call it roughly $7 million. About half of that is property, so about 3.5% is property. And then keep in mind that commercial -- or the quick-service restaurant that came online early this year has a pretty heavy Florida component to it as well. So we're seeing the growth. That's where we're allocating a lot of capacity is the quick-service restaurant book.

Okay, that makes sense. And then just generally on the CMP business, can you give any color on what you are seeing on pricing going on currently?

Yes, the pricing environment varies quite a bit by geography. We are seeing in the Midwest, it is a similar story to the last quarter where the larger accounts are bearing the most pressure from the pricing environment, especially in the Midwest. So our bowling book has probably been the primary line of business that's been impacted.

On the smaller accounts on the liquor business, I'd say it is less competitive. That seems to be one of the lines where we don't really see the overall market cycle as soon as we do on maybe property or the larger accounts.

So it varies on geography. I'd say that the Midwest we've seen probably the most pressure on the larger accounts, especially on property. And then in the mid-Atlantic to northeast, a little bit more pressure than we've see in say the West, Western States and the Southwest.

Can you remind us what is the average premium per policy in the commercial book? Just on average or some ballpark.

Yes, it is generally about $4,000.

Excellent. Thanks a lot for the answers. I will get back in queue.

Thanks Chuck.

(Operator Instructions)

There are no additional questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Jim Petcoff for closing remarks.

Thank you. We appreciate everyone's time and interest in the Company, and please feel free to reach out to us with any questions you may have after the call. We are really excited about the future. We are really excited about where we are. The growth is coming on in areas we want it.

Dealing with history, we've tried to put that all behind us with being more conservative on our reserves. I've just got to tell you we are very pleased with the additional staff we added at the end of last year. We took the hit on the expense side, but we believe it's going to pay off. Thank you again and have a good day.

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