Presurance Holdings Inc (PRHI) 2016 Q3 法說會逐字稿

Good morning, and welcome to the Conifer Holdings Q3 2016 conference call.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Adam Prior. Please go ahead.

Thank you, and good morning, everyone. Conifer issued its 2016 third-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 later this morning that accompanies Management's discussion today. If you are looking at the presentation via webcast, you can may find that the slides are easier to read in the large view when you click them later this morning.

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 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 Mr. Jim Petcoff, Chairman and Chief Executive Officer. Please go ahead, Jim.

Thank you, and good morning to everyone. Joining me from the management team today is Brian Roney, President; and Nick Petcoff, Executive Vice President; and Harold Meloche, our CFO. I would like to begin with a quick business overview, and will turn it over to Nick for some insight regarding our underwriting results, followed by Harold's brief commentary on the financials. Then I'll return for a few closing remarks. Afterwards, we will open up the call to any of your questions.

The third quarter for Conifer consisted of strong top-line growth, particularly in our core commercial lines and improved underwriting performance. This progress has continued throughout the year with moderate decreases in our combined ratio each quarter as our expense ratio declines and reserves strengthening rationalizes. Our gross written premiums increased 18% during the period. This growth originated primarily from Conifer's core commercial lines, particularly specialty niche insurance products. We're expanding these businesses even more across our existing base of independent agents that we've had relationships with for years.

Each line has performed at or above their historical underwriting results. As we developed Conifer the thesis was that we can leverage the experience of our underwriters from diversified lines and begin to achieve progressively stronger results as we grew to scale. This included a mix of our historically strong commercial lines, which includes primarily property, GL, liquor liability and commercial auto.

As we have grown, we have added two more commercial segments in the security guard and quick service space led by seasoned underwriters with strong track records of performance. Both of these group are now beginning to gain solid geographical market share.

Most of our markets are generally fragmented. And we believe that creates an opportunity for Conifer to offer a bundled insurance products to these mainly small to medium-size owner-operators. While the early returns for security guards and quick service restaurants are positive, it will take time to achieve even greater scale.

In general, our commercial lines continued to perform well overall as we strive for our goal of producing consistently strong profits. From a bottom-line perspective our challenge has been mainly in the personal lines performance. As such, we are changing our business mix in that area and deemphasizing Florida homeowners. Our personal lines continue to consist of wind exposed and low value property businesses, but we expect low value property to become a larger component of the personal lines over time.

Presently personal lines represents about a quarter of our premium overall, but we feel that it is still important to maintain a balanced book while allowing our Company to achieve economies of scale. As we strike the right balance between commercial and personal lines, we remain committed to writing profitable business for the benefit of our shareholders over the long term. Right now we are producing favorable results for our wind-only business in Hawaii and our low-value dwelling business. Both have reported -- performed exceptionally well, particularly in Texas, despite a higher level of weather activity experienced there this year.

Our Florida line of business has continued to be a challenge and a drag to earnings, particularly due to recent weather events and the continuation of the assignment of benefits. In regards to AOB we began to see the impact on our book in the second half of 2015. At that time we decreased our exposure by not growing at the pace we initially foresaw when we entered Florida. But given recent results for the industry at large, the decision has been well justified as AOB, coupled with increased competition, has certainly weighed on our results in recent periods, in particular in the Florida market as a whole as well.

So what are we doing about it? First, it's important to note that at every turn we've taken a conservative stance when it comes to reserving. While this has impacted our financial results in the short term, our entire management team knows the value that we're building. We established firm case reserving and adjudicating processes. And have continued to see progress quarter over quarter throughout 2016 in this particular line.

Second, we began to lessen our presence in the market by utilizing a number of exposure reducing measures, all with the goal that we would not be growing at the originally anticipated elevated rate. Throughout 2016 we expected our homeowners business in Florida, excluding the weather activities of Matthew, to be less and less impactful on our financial results. Ultimately in Florida, while we are [now] looking to expand there as we once did, we do remain well positioned to further disruption in the market allowing profitable business to be written down the road. But at the same time we remain committed to reducing our Florida homeowners exposure until such time as this business can be written profitably.

With the planned reduction in Florida homeowners we would expect an increase in our business mix leaning even more toward our commercial lines for the near term. Our management is focused on being the leader in specialty markets we know, while having enough diversity among our book to consistently achieve stronger results on the bottom line throughout market cycles. We believe this will ultimately lead to higher ROEs, book value appreciation and improved value for our shareholders.

In summary, our core niche businesses are developing nicely, with growing top-line and continue sequential downward improvement in our expense ratio. As a result we expect our bottom line to continue to improve going forward. With that, I'm going to turn over to Nick for a breakdown of some of our individual markets.

Thank you, Jim. I'll take a few moments to provide some additional granularity on our business. Let me first begin with our commercial line where we reported our strongest growth and most favorable underwriting results. Commercial lines gross written premiums grew by 25% to roughly $21 million in the third quarter of 2016.

Breaking this down, the growth this year has come mainly from geographic expansion in our commercial multi-peril business, particularly hospitality and security service product line, as well as our quick service restaurant business. Commercial lines continues to be the driver of our written premiums, representing 73% our total production during the quarter.

Through continued growth and dedication last quarter, Conifer became the largest writer of liquor liability insurance in the State of Michigan. With that growing base, we continue to expand in our home state and in select markets across the nation. The Company has benefited from long-term relationships with agents who specialize in our niche product categories, such as restaurants, bars and taverns. Our value proposition is that are specific underwriting knowledge coupled with our in-house claims management yields superior results versus that of our competitors over time.

Our unique size allows us to operate in specialty markets where larger carriers aren't as effective. And yet we are large enough to provide bundled packages that smaller companies often cannot. We leverage our reservoir of data and personal underwriting experience to properly price these products, while tailoring limits, terms and conditions that can lessen Conifer's overall [risk] exposure. Additionally, we leverage hundreds of long-standing relationships with agents that have significant experience and knowledge within the markets that we operate.

Our underwriting teams for security guards and quick service restaurants are starting to gain traction as well. We launched these products in 2015 and really began ramping up production in late last year and into 2016. We knew it would take some time to reach underwriting efficiencies, but these teams have performed exceptionally well to date and we expect this to continue to accelerate throughout 2017.

In commercial lines we have been very pleased with our continued top-line growth rate, but more importantly we're growing the right way in terms of maximizing underwriting income toward a profitable combined ratio target. Our underwriting results for commercial lines were impacted, albeit to a lesser extent, by additional frequency and severity within the commercial auto segment. But as a result of the number of underwriting changes previously implemented, we are pleased to report a small underwriting gain in the third quarter for commercial auto. Reflective of our ongoing efforts to improve this line, we believe that we are turning the corner on profitability given this quarter's results. Even considering additional reserve strengthening in the quarter, our commercial lines loss ratio remains consistent and strong at 53.3%. This is better than the previous two quarters and represents continued strong underwriting results.

Moving onto personal lines. For the period personal lines, which consists of low value dwelling and wind exposed homeowners insurance, represented approximately 27% of total gross written premiums for the third quarter. We like a balanced approach to our premium production. As Jim mentioned, our goal is to continue to build a diversified book of business that can sustain favorable underwriting results over multiple market cycles.

Personal lines gross written premiums increased about by about 2% in the third quarter of 2016. This growth is coming from two main areas, low value dwelling and wind exposed homeowners products, mainly in space such as Hawaii and Texas. The growth rate is role lower than previous quarters as a result of the lessening of our exposure in Florida compared to the prior year, which we discussed earlier in the call.

Let me start with the wind exposed homeowners market, which is the largest portion of our personal line business. We achieved exceptional operating results in both our Hawaii and Texas book. Our underwriting managers and claims group have been proactive in communicating with our agency partners in those areas throughout the hurricane season. We believe this proactive approach adds value by reinforcing our experience of quickly and efficiently handling claims in the wake of catastrophic events. While this isn't a line item that will show up quarter to quarter, it's imperative towards generating long-term stability. As Jim noted earlier, it's underwriting profitably in the long term that matters to us.

We also generated favorable results in our low value dwelling line. This is a homeowners and dwelling fire insurance product tailored for owners of lower valued homes. In the coming months we will be expanding into other regions of the US beyond our current growth space of mainly Texas and Louisiana.

In the short term Florida homeowners have significantly impacted our bottom-line results. In the third quarter alone, the underwriting loss in Florida homeowners is 92% of our total underwriting loss for the period. In the quarter, largely as a result of the Florida homeowners impact, our personal lines combined ratio was 128%.

As we continue to explore ways to reduce our exposure to Florida homeowners in general, and shift their product mix of personal lines business to the more profitable low value dwelling line, our goal for 2017 remains to produce an underwriting profit in personal lines overall. We think the Company can get there based on the measures we put in place to address market conditions in 2016. I will now hand the call over to Harold Meloche to provide the financial review.

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

I will start with noting that in August of 2015 the Company terminated its quota share reinsurance treaty that had put in place effective December 31, 2014. This changed to our reinsurance program had a substantial impact on the financial statements of the Company, and as we are retaining more of the business we write and expect net earned premium growth to remain elevated. The upcoming fourth quarter will be the first clean quarter comparison in which there will not be a ceding difference as a result of this change.

Net earned premiums for the third quarter increased 31% to $23.4 million compared to $17.9 million in the prior period. The Company reported a combined ratio during the period of 107.9% compared to 96.4% in the prior-year period.

Our loss ratio for the quarter was 61.6% and was adversely impacted by 11 percentage points primarily due to reserve strengthening in our commercial auto and Florida homeowners lines that Jim and Nick detailed. Even considering the reserve strengthening in the current periods and for the year, since 2011 our reserves remained cumulatively redundant over time. Excluding development, our accident year loss ratio was roughly 51% in the quarter and 53% for the nine months.

Moving to expenses. We reported an expense ratio of 46.3% during the period. We believe that as we achieve scale, earn and retain more premium, this ratio will continue to improve and decline. Our expense ratio was 54.1% in the fourth quarter of 2015, 49.8% in the first quarter of 2016, 48% in the second quarter, and now 46.3% this quarter. We understand that there is additional work to do to rationalize expenses and achieve our long-term goal, but are pleased to see the sequential progression downward of the expense ratio. This ongoing downward progression will be largely dependent on our continued ability to manage our expenses and grow net earned premium.

In addition we topped total assets of $196 million in the quarter and have cash and total investments of $149 million. We maintain a conservative investment strategy with 97% of our portfolio currently in fixed income securities with an average credit quality of AA, an average duration of approximately three 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.

On a tax note, the year-to-date income tax benefit was primarily due to a change in the deferred tax valuation allowance. This change was driven by the tax affect of the change in unrealized investment gains, which is included in other comprehensive income. As of 9/30/16 we have a valuation allowance against our deferred taxes assets equating to $6.2 million. That represents $0.81 a share, which is not reflected in our book value of $9.76 at quarter end. And with that, I'd like to turn it back over to Jim for closing remarks.

Thank you, Harold and Nick. The third quarter was one of strong double-digit premium growth, continued progression on our underwriting performance, including terrific results from our core commercial business, including an overall improving expense structure.

We encountered some challenges in several of our markets recently, addressed them squarely head-on immediately while maintaining our continued goal of delivering favorable return on equity and book value appreciation over the long term.

Now we are ready to take any of your questions.

(Operator Instructions)

Greg Peters, Raymond James.

Good morning, everyone. Thanks for the call and taking my questions.

I wanted to just step back and have you comment on how you think the growth in the top line might look in 2017. I suspect 30% type year-over-year growth in earned and 24% year-over-year growth in gross written premium is gradually going to start normalizing at some point. So perhaps you can get some perspective on that?

Sure. The nice thing is we're diversified. We expect to continue 15% to 20% top-line growth within the foreseeable future.

We're having -- we're really just starting, as we think about it, in the quick service restaurants, we're are starting to tap into our ability to get into different geographic locations with our hospitality. We are expanding our contractors' program because we have the diversified now distribution systems in Texas and other geographical areas for our commercial products with the addition of our Texas low value dwelling program that we added. And through that distribution network we are already seeing results of being able to write specifically in the hospitality area where we think we're going to be write some of our artisan contractors and other programs through that as well.

The Texas low value dwelling is up to 500 agents. We believe that the 15% to 20% growth is going to continue, with commercial lines outpacing personal lines in the near future. So we're not so concerned about that.

Then, reconciling that with the combined ratio results, given the adverse development -- and I think you're pretty clear on where the sources were. When you look at the accident year combined ratio, is it your sense that because of this reserve development that maybe your accident year -- your loss [picks] may have been a little bit low for prior years? Going forward given the growth, can you talk to us about how you're setting your accident loss picks to making sure we don't have the reserve issues again going forward?

That's a great question. I'm happy you asked it. We believe that our loss picks are going to be -- we look at it year over year. I hate this quarter-over-quarter development type thing. We want to look at it from a year-over-year basis and we believe that by the end of year our loss picks will be in a place that we feel will be much more redundant (inaudible).

I forgot what page it's on, on the deck, but if you look at what we've been doing with the Florida homeowners as far as case reserving, I think it's on page 8, that's been -- that type of thing's been going on with every line of business as we continue to go through and try and o make sure that the case reserving is correct. If we can get the case reserving correct, then you could more accurately pick the future and obviously in the quarter, homeowners we had no idea what the average loss was going to be in these lines.

So what we've done is we went through and we increased the case reserves and to a level that hopefully we will look at historically what the average pays are and come up with an average case reserve that we feel comfortable with. On top of that we've been putting ID&R on top on that.

So when you look at prior-year loss picks, I would say our loss picks for 2014 might have been a little aggressive in that -- specifically in certain personal lines. I mean, we're getting development, and probably in the commercial auto. And we're looking at that and hopefully adjusting and we -- every quarter we're improving our claims analysis, we're improving our case reserving, and we're improving our ability to make future picks.

So you're asking me, are we going to make sure by the end of the year that we feel comfortable? Yes. We are going to feel comfortable that are picks at December 31 will be -- stand up. Will hold up to scrutiny. Yes.

But I want to give you (multiple speakers) doing over time. So when you these developments, you see what's going on, it's a double whammy in the third quarter if you increase your case reserves and increase ID&R.

Right. And just one final housekeeping item. I know you've provided some color around fourth-quarter catastrophe-related events. Maybe you can just update us there on any additional detail? And then just wrap up with a conversation around your reinsurance program as you think about 2017.

We think with respect to the Matthew claims you're talking about specifically, we put up $1.85 million, or we estimated $1.85 million. We still feel very comfortable that we would never -- we will not exceed that number. We have a high confidence level that we won't exceed that number. We have not gotten a claim for 10 days.

So really the claims have stopped coming in. I'm not saying we're not going to get another claim. But when we look at the claims we've had, they were mostly not large. They were food spoilage, business interruption, most -- probably 80% of them were also commercial lines versus personal lines. So from that perspective we feel very -- we feel comfortable that we're not going to exceed that number.

With respect to your second question which was about reinsurance. With the fact that we are not expanding the Florida market, and looking at our PMLs and our wanting 200s and everything else, we'll probably be buying a lower CAT limit and meeting our conservative objective of being much greater than the 1 in 200 risk. So we're going to have lower top line.

With the business shift to more Hawaii, we expect the rates will improve as well. And we also hope that the renewal of our core (inaudible) will be favorable this year.

All in all, we expect that the session will go down, which by the way, if that goes down the expense ratios continues to improve as well. And we expect -- you didn't ask this but I'm going to answer it anyway. We expect the continuation of the improvement in the expenses ratio. If it's 46.3% this quarter, if we can get it into the 44%s and we can have stemmed a lot of the development, now you're starting to see that our thesis is coming true. So from a management standpoint, we're very excited.

Perfect. Thanks for the answers.

(Operator Instructions)

Well, operator, is anyone -- no questions?

No, sir. There are no questions in the queue at this time.

I just want to say, I can't thank the people on the call enough for their continued interest in us. I believe we have crossed the -- or are crossing the Rubicon. We're not all the way across. Hopefully we don't get fall in the water while we're getting across.

We're not all the way across. We are getting there and we believe that the measures we've put in place will have a favorable impact on our ability in the next year. And with the continued reduction in expense ratio, as I've said all along, our loss ratio even at 61.2% is not a bad loss ratio. It's not meeting our expectations, but it's not industry bad.

The problem is the expense ratio. And if we can do 100 to 150 basis points a quarter reduction and continue that for the foreseeable next few quarters, we're going to get to a point where we are meeting our expectations, and by the way your's and we hope to get there very soon. So thank you very much.

Ladies and gentlemen, the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.