Presurance Holdings Inc (PRHI) 2017 Q1 法說會逐字稿

Good day, and welcome to the Conifer Holdings First Quarter 2017 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. Sir, please go ahead.

Thank you, and good morning, everyone. Conifer issued its 2017 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 and the company's management's discussion today. If you are looking at that presentation via webcast, you may find 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, the 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. And with that, I'd like to 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; Nick Petcoff, Executive Vice President; and Harold MeLoche, our CFO. In this morning's call, I will provide a brief update on our business operations and 2017 first quarter financial results. Nick will review our operating results in further detail and Harold will briefly go through the financials.

Then I will return to share a few observations on current market conditions, and the outlook for the rest of 2017. After that, we will follow up with any Q&A. The first quarter 2017 was a transitional period for our company. As we refined our overall business mix, with greater emphasis on our core commercial lines. We made progress through the quarter and feel well positioned as a strategic lean operating business focused on emphasizing our commercial specialty markets and returning to profitability in the upcoming quarters. This included increasing our mix of historically strong commercial lines business, which includes primarily general liability, property, liquid liability and commercial auto. We have seen organic growth in this area and are now in the process of expanding these businesses even more across our existing base of long-term independent agents.

As background, Conifer's main business operations are undertaken by holding on insurance subsidiaries with the lined infrastructure around specialty commercial lines, which represents roughly 82% of our business for the first quarter of 2017. Approximately 18% of our business consists of personal lines such as low-value dwelling or wind-exposed homeowners products which we feel is complementary to our overall business. We were encouraged with the progress made during the first quarter, particularly in reporting very strong organic premium growth, particularly in the commercial lines business with specific focus on the hospitality sector. Gross written premiums increased a little over 4% for the quarter, which was largely the result of the business shift towards more profitable commercial lines. We fully expect to see accelerating growth as we continue to increase our exposure in markets in which our underwriters are most profitable. Nick will go into greater detail in discussing this breakout, but our goal is to continue to focus our efforts in the markets where our underwriters have achieved the most success. While simultaneously deemphasizing the lines where underwriting performance is not aligned with our long-term goals, for example, the Florida homeowners.

As I have noted in prior quarters, an important element of the Conifer story is achieving the appropriate scale. We have leveraged our past experience to build a first-rate infrastructure capable of handling sufficient growth over multiple cycles. That includes the integration of modern underwriting claims and billing point sales systems that are increasing efficiency. We have now had 5 consecutive quarters of a declining expense ratio and expect this trend to continue. In the first quarter, we reported a expense ratio of 44.9%, coupled with the growing premium base in an accident year loss ratio of 51.7%. We feel good about our ability to return to an underwriting profit.

With that, I'm going to turn it over to Nick for a breakdown of our individual markets, and I will return later with some thoughts on the rest of 2017.

Thank you, Jim. Let me first begin with a discussion of our commercial lines where we recorded our strongest growth in most favorable underwriting results. Commercial lines gross written premiums grew by 13% to roughly $22 million in the first quarter of 2017. Breaking this down, the growth this year has come mainly from the expansion and our commercial property and liability business particularly in our hospitality products. Our size allows us to operate in specialty markets where larger carriers aren't as effective and that we are large enough to offer bundled packages that smaller companies often cannot. Commercial lines continue to be the driver of our written premiums at 82% of our total production during the quarter. This has increased in the first quarter largely due to our emphasize in growing these lines of business. This is offset by lower gross written premiums and personal lines compared to the prior year quarter. Our largest lines of business continue to serve the hospitality sector. We continue to report consistent growth throughout the quarter namely due to our expansion in both the hospitality and security guard product lines. There were a number of moving parts in the first quarter of 2017 that impacted the operating performance in our commercial lines, similar to the end of share larger expect -- we experienced higher-than-expected weather losses on our property (inaudible). In general, we are pleased with the loss ratio on our core specialty lines performed admirably with the commercial lines loss ratio of 52.8% for the quarter. This included adverse development of 14.3% mainly from some property losses and liabilities from older claims from the hospitality lines. Overall, on an accident year basis, we reported a healthy 48.5% loss ratio. From an underwriting performance perspective, we feel there is still considerable room from operating margin expansion. Part of our (inaudible) this quarter is [we] conducted a thorough review of our lines to establish more conservative reserves. For example, in commercial auto, this is particularly evident in the first quarter.

Moving to personal lines. Personal lines which consists of low-value dwelling and wind-exposed homeowners insurance represented approximately 18% of total gross written premiums for the first quarter. Personal lines gross written premium decreased by about 23% to $4.8 million in the first quarter of 2017, largely due to a lessening of our exposure in Florida and the exiting of our Tier 2 Texas program. [Corrections] for these 2 lines is down (inaudible) 70% in the first quarter alone, which was consistent with our plan. On the other hand, our low-value dwelling production was up almost 27% in the first quarter. As we continue to explore ways to reduce our exposure to Florida homeowners in general, and shift our product mix to personal lines business, the more profitable low-value dwelling line, our goal for 2017 remains to producing underwriting profit in personal lines (inaudible). In the quarter, largely as a result of the Florida homeowners impact, our personal lines combined ratio was 115%, which is an improvement of over 13% points quarter-over-quarter. As we continue to refine our business mix here, we expect to see continued improvement in our personal lines combined ratio going forward. I'll now hand the call over to Harold MeLoche to provide the financial review.

Thank you, Nick. As the the financial results and balance sheet information is fully detailed in our press release and quarterly filings, I will briefly go over a few highlights to welcome any specific questions during Q&A. Net earned premiums for the first quarter increased 20% to $24 million compared to $20 million in the prior year period. In the first quarter, the company reported a combined ratio of 109% compared to 112% for the same period in 2016. Our loss ratio for the quarter was 64% and it was adversely impacted by 12.5% points due to reserves strengthening that Jim and Nick discussed. Excluding development, our accident year combined ratio was roughly 97% in the quarter.

Moving to expenses. For the quarter, we reported an expense ratio of 44.9%, a 40-basis point improvement from the fourth quarter of 2016 and roughly a 500-basis point improvement year-over-year. This improvement was the result of the company's ability to leverage its current infrastructure on a growing revenue base. Our expense ratio ticked down from 48% in the second quarter of 2016 to 46.3% in the third quarter then 45.3% in the fourth quarter and is now 44.9%. We understand that there is additional work to do to rationalize expenses and achieve our long-term goals, but are pleased to see the sequential progression downward for the expense ratio. This ongoing improvement will be largely dependent upon our continued ability to manage our expenses and grow and earn premiums.

Moving to the balance sheet. Total assets were $208 million at March 31, 2017. And we have cash and total investments of $144 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 3 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. As a result of the reserve development we noted earlier, the company reported a net loss of $1.8 million or $0.24 per share based on 7.6 million shares outstanding, compared to a net loss of $2 million or $0.27 per share in the prior year period. At quarter end, we have a valuation allowance against our deferred tax assets equating to $9.1 million. That represents a $1.19 a share which is not reflected in our book value of $8.72 a share at quarter end.

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

Thank you, Harold, Nick, as we look to the upcoming quarters, our primary objective is returning to profitability. We made progress in numerous areas in the quarter alone. The impact of Florida homeowners continues to lessen with each passing quarter. And we remained singularly focused on ensuring that our business shifts to those lines in which Conifer is generating the most underwriting profit. Looking forward to the rest of 2017, we feel comfortable with the balance sheet, the balance between commercial and personal lines, but we are still focused on our underwriting profitability and favorable results. With continuing strong accident year loss ratios, and an overall declining expense ratio, we feel that we're in a much better position to return to profit in the upcoming quarters of 2017.

With that, I'm going to return the call to the operator, and take any questions that you may have.

(Operator Instructions) And our first question comes from Greg Peters with Raymond James.

Well, first of all, we recognized that your management team are large shareholders of the company. So I'm sure the results of the last several quarters have been painful for everyone there. As we sit here and listen to your comments on your calls, I'm sure you understand it's hard for us to appreciate quarterly comments about profitable growth when your consolidated results reflect losses. So I guess the crux of the matter is, with adverse reserve development, are you setting the right accident -- your loss pick on the new business you're writing in. And why write new business, if it's not -- I guess it's hard for us to see where the profitability is at this point. So I know you guys are frustrated and challenged by it. Maybe you could provide us some additional color about the sense of urgency your management is to get this going in the right direction. And talk about how you deal with the reserves on an accident year basis? And why there's confidence that it's going to be at the right levels this time?

I guess you've stated the situation accurately. We are frustrated. However, if you look back at the expense ratio and then you take whatever the development was and allocate it back, those loss ratios in the lines of business we're growing in are still very good. The development this quarter on the property side came from 3 players that occurred late in the fourth quarter that got up -- the reserves were up in the first quarter. That by the way is an anomaly that is going to happen. The development on the general liability came from a reassessment of many of our oldest cases, and an uptick in the case reserves of those. If you look at our weighing through our issues, the commercial auto was obviously a huge problem. We addressed it underwriting wise. We addressed it on the claim side and we fixed it. The Florida homeowners is a complete difficult situation across the industry. I think we were proactive on addressing that. Got on top of the case reserves and feel we're not seeing the excessive development on that while decreasing the volume. A 70% decrease in the personal lines which -- Nick, will you -- what is the spread between?

Yes, that figure is comprised of Florida homeowners and the (inaudible) taxes.

Well, how much on the Florida homeowners?

I don't know 70%. I can say probably [10%].

Okay. We're losing business and we're reducing the homeowners exposure while putting up the reserves when the claims come in accurately. So we've taken those 2 and addressed it. The last thing we got to is looking at the old general liability claims and we made some adjustments to the case reserves. If you take a look at the loss ratios, 4 of those lines over the years they're more than acceptable. So your question about loss picks for this year. The only thing that will make our loss picks in that correct -- in our opinion, is if we have a bad property year. Because we've looked at those lines of business and they are profitable. If you look at the mix of the business, 82% came from the commercial lines this quarter. You cannot -- we've turned the shift -- I know it's been a few quarters, but we've turned the shift in basically 5 or 6 quarters to a point where we're comfortable. We believe that with the expense ratio coming down, even with all the noise in the lines we've written and the expense or the loss ratios we produced for prior years, if we were at a normalized expense ratio, we would have been profitable. We just got to get there. And we have 44.9%, which we're disappointed in this quarter -- in the first quarter, but it's going to continue to go at a little bit more rapid rate due to some changes in our catastrophe reinsurance program as our exposure has gone down. The amount of (inaudible) premiums going to go down, so the earned premiums going to jump up a little bit. But that doesn't renew until June 1. So (inaudible) [benefit] is going to occur after June 1. So as we look to future quarters, we can see why the profitability is there. As far as you guys being frustrated and us being frustrated, yes we are frustrated. But we also see the light at the end of the tunnel as we continue to work. We're not just working on the expense ratio with respect to expecting earned premiums to grow our way out of it. We're taking a very hard look at the expenses -- on the fixed expenses that we have as a company. And we are hoping that 2016 might be the high watermark for those fixed expenses. So we're going to get the benefit of potentially loss fixed expenses. We're working on the commissions side of it as well. And our commission rate is dropping. So if we work on those 2 sides with the increase in the earned premium. We believe that we are there on the cost of it. And we have taken the aggressive, painful decisions to look at the old claims and make the adjustments that are high demand. And instead of trying to fool ourselves for future quarters. So that's my answer. And I understand why people would be skeptical because it been quarter-over-quarter, but we are not. And we do have a lot of our own capital into this. And we believe in it. And we believe what we have done is correct.

I'm sure you are frustrated. Sometimes when you're going through your prepared comments, it doesn't necessarily truly reflect a sense of urgency that I think you all have about getting things right there. So I'm glad you had an opportunity to respond. Can you just switch gears, and this will be the last question. Just talk a little bit about what's going on in your distribution channel? And small premium business, commercial business gets a lot of attention from different areas of the marketplace. There's entities out there that are trying to streamline distribution of small premium, make it more seamless, reduce the role of intermediaries, et cetera. And I'm just curious about your perspective because this is the sweet spot of your business.

We agree. I'm going to let Nick speak to that in a minute because we do have some initiatives going on that do add additional direct distribution channels. However, as an example, which we are trying to get as close to the client as we can. The decrease in our Tier 2 and taxes, that business is not something we necessarily wanted to get out of. But the MGA who had it bought his own insurance company and decided that, that book of business was one that what he wanted to move to himself. And I'm not upset with the MGA because we've had a mutually good relationship. And actually, in the long run, it works to our advantage. With our office and the way we're going Greg (inaudible) writing the low-value dwellings, he had the work of Tier 2, taxes that we never went after because of our relationship with that MGA and our loyalty to him. We are now able to go to that book of business on the Tier 2 at a much less commission rate. And that should provide additional profitability on that book of business. So we're focused on that. That's just one. But I'm going to let Nick talk to you about the commercial side.

Yes, the independent agents, the distribution model is important to us. And I don't -- even with the account sizes that were great, it's not a distribution network that's going to go away in our opinion and it's something that we're committed to. At the same time, we recognized in certain classes of business that in order to grow and certainly with the way people are being to purchase coverage, probably more so on the personal lines, but it certainly continue on the commercial lines side. We do have a couple of initiatives and classes where we don't think that it would compete with our independent agency network. And we do think that we can sell on a more direct bases using technology with commercial insured. I'd say it's in its early stages. But it's something that we anticipate rolling out this year. But again, it would be an area where we don't already -- an area where we wouldn't complete with our core retail and wholesale agents.

And another point, Greg, too would be -- if you look at our markets in general, the size of those markets aren't necessarily the first battleground, if you will, for the folks who are trying to do it specifically over the Internet because of the nature of our business. I think writing as much business as we do on an EMS basis. And the size of those non-commoditized markets probably makes it a little further out for those. But as Nick mentioned, we're obviously looking at all distribution channels.

(Operator Instructions) And there are no further questions at this time. So with that, I would like to turn the conference back over to Jim Petcoff for any closing remarks.

Thank you. And I agree with Greg. When you have prepared remarks, you may not come across with a sense of urgency that you would be expecting. But I can tell you that we have a sense of urgency. And we intend to show it in the upcoming quarters. And I believe we are on the right track. And I appreciate Greg's comments and bringing that part out into the conversation. And I appreciate everybody who's on the call. And thank you very much for being interested. And we hope 90 days from now this is a much better call. Take care.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.