Presurance Holdings Inc (PRHI) 2017 Q2 法說會逐字稿

Good morning, and welcome to the Conifer Holdings Second 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 of the Equity Group. Please go ahead.

Thank you, and good morning, everyone.

Conifer issued its 2017 second 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 webcast, you may find the slides that are easier to read in a 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 may 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 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. Go ahead, Jim.

Thank you, and good morning to everyone. Joining me today are Brian Roney, President; Nick Petcoff and Andy Petcoff, EVP; and Harold MeLoche, our CFO.

In this morning's call, I will provide a brief update on our business and set 2017 second quarter financials, while Nick will review our operating results in further detail. Harold will briefly go through our financials, and then I'll return to share some observations on current market conditions and our outlook for the rest of 2017 and a little bit of Q&A at the end.

I want to start by saying we are clearly not pleased with our operating results, particularly our personal lines segment, specifically Florida. Personal lines segment's too general, specifically Florida. Yet again, Florida passed on the opportunity to address its situation in their last legislative session, so the industry issues remain. We'll talk more in depth about that later, but it's important to point out that we're reviewing all possible setups to mitigate the impact on Florida. And with our ability to nonrenew these policies starting in December, the load area's light at the end of that tunnel. Even with the impacts of the Florida homeowners on our bottom line, every one of us at Conifer is dedicated to getting us back to profitability for our shareholders.

As evidence of that commitment to profitability, our business mix continues to change. That remains with one of our central themes, where our mix continues to shift towards the specialty market, where we have a distinct value proposition and a clear focus on the bottom line result.

If you look at Conifer today, we do have an underwriting platform where we can write throughout the country on an excess and surplus lines basis or an admitted basis. We have a solid core of commercial lines focused on the hospitality sector, particularly the rest on bars, taverns, quick service restaurants and security guards. All of those lines are working very well and producing the underwriting results that we expect.

We are a specialized commercial auto book as well focused on 2 main areas: one, commercial auto in companion with our package; as well as repo and sewing book, where we have taken losses over the past year or so, however, made significant changes to underwriter that are showing results. We feel we have turned the corner on this book of business, as reflected by a pretax profit in the 6-month period.

Overall, our lines of business, we are still seeing a distinct runway for growth within our core markets, while we are selectively expanding geographically.

Over the market cycles, we do believe that our personal lines is a good counter-balance to our mix of core commercial business. We see our personal lines offering as complementary over time, leveraging our reinsurance relationships and our capital to grow more effectively and generate a higher return on equity for our shareholders. Currently, we have a wind product in Hawaii and low-value dwelling business in several other states. Each have performed well. Unfortunately, more than counteracting that is the Florida homeowners, which has consistently underperformed due to the systemic industry issues, the assignment of benefits and the incentives that the Florida statutory regulation provides for fraudulent claims and litigation in the homeowners business in Florida.

For the second quarter of '17, we continued our efforts and started -- continued our efforts in deemphasizing our Florida personal lines, where the underwriting performance has clearly not been aligned with our goals.

Because of the shift, their total gross written premiums declined in the quarter. But this decline was expected and offset in large part b a growth in our core specialty niche products, such as liquor liability and security guards. While managing through this Florida homeowners wind-down, throughout this period, we have been intently focused on streamlining our expenses as well. In the second quarter, we reported our sixth consecutive quarter of declining expense ratio, and we expect this trend to continue.

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

Thank you, Jim.

Let me first begin with the discussion of our commercial lines. Commercial lines continued to be the main driver of our written premiums at just under 80% of our total production during the quarter. This represents a continuing shift in our business mix to a more profitable core commercial lines and away from underperforming personal lines, particularly Florida homeowners.

Commercial lines gross written premiums fell by 7.5% to roughly $21 million in the second quarter of 2017. Most of this decline was somewhat seasonal in nature and not expected to continue going forward. We remain particularly focused on commercial business, such as restaurants, bars and tavern and security guards, where our particular expertise in excess and surplus lines flexibility creates a value proposition that is distinct from our peers.

Aside for losses, we competitively operate in specialty markets, where larger carriers aren't as affected. For example, we service mainly small to medium-sized commercial accounts that generally see less competition from larger carriers. Yet we are large enough to offer bundled packages that smaller companies often cannot. We see ourselves as uniquely positioned to grow in specialty niches, often later in the cycle, where our competitors has difficulty competing. This is especially evident in our core commercial markets, such as Michigan, where we continue to grow and increase market share.

In general, with the commercial lines loss ratio of 58% and a combined ratio of approximately 95% for the quarter, we were pleased that our core specialty commercial lines continue to perform profitably in the quarter and for the 6-month period.

Moving to personal lines. Personal lines, which consists of wind-exposed and low-valued homeowners insurance, represented a little over 20% of total gross written premiums for the second quarter. Personal lines gross written premiums overall decreased roughly 15% to approximately $6 million in the second quarter of 2017. This reduction was led by a planned 33% decline in wind-exposed business, largely coming from continuing efforts to lessen our exposure in Florida homeowners. We continue to explore ways to reduce our exposure to Florida homeowners and shift our product mix within personal lines business to more profitable ones.

In the quarter, largely a result of the Florida homeowners impact, our personal lines combined ratio was a disappointing 152%. We have discussed the drivers of adverse performance in this line before, particularly surrounding the ongoing assignment of benefit challenges in the state of Florida. To date, we have remained focus on getting off this business by all means possible.

Starting later this month, letters for nonrenewal are expected to go out as we seek to reduce our exposure to the assumption business we took out almost 3 years ago. This has been an ongoing process. And over the last year, we've seen some improvement. But as Jim noted, we are taking very proactive measures to reduce our exposure to this line and also seek potential protection for any potential losses down the road.

I will now hand the call over to Harold MeLoche for the financial review.

Thank you, Nick.

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

Net premiums earned for the second quarter increased 13% to $24.5 million compared to $21.7 million in the prior-year period. In the second quarter, the company reported a combined ratio of 110.4% compared to 109.7% in the same period in 2016.

Our loss ratio for the quarter was 67% or roughly 5 percentage points higher compared to the prior-year period due to the continued reserve strengthening. Excluding the impacts of the development, our exiting year combined ratio was roughly 93% in the quarter.

Moving to expenses. This is where we feel you can see a counter for overall investment thesis clearly improving. As we have shifted our business mix away from Florida, and we are expanding our premiums across our existing infrastructure, we feel we can consistently generate profits over time as our expenses come in line with expectations.

Our expense ratio this quarter was 43.4%, which represents a 150 basis point improvement from last quarter and a 460 basis point improvement quarter-over-quarter.

Our expense ratio is 46.3% in the third quarter of 2016, 45.3% in the fourth quarter, 44.9% last quarter and is now 43.4%. We are pleased that even during a quarter that saw a small decline in the top line growth, there was sequential downward progression of the expense ratio. This ongoing decrease will continue to be largely dependent on our ability to manage our expenses and grow our net earned premiums over time.

As a result of the reserve activities, the company reported a net loss of $1.1 million or $0.14 per share compared to a net loss of $513,000 or $0.07 per share in the prior-year period. Our balance sheet remains solid, with total assets of $211 million at June 30, 2017 and cash and total investments of roughly $147 million.

We maintain a conservative investment strategy with 96% of our portfolio currently in fixed income securities, with an average credit quality of AA on average duration of approximately 3 years and a tax equivalent yield of 2.3%. We have conservatively managed our investments with the objective of protecting capital while we expand.

As of 6/30/2017, we have a valuation allowance against our deferred tax assets equating to $9.2 million. That represents $1.20 per share, which is not reflected in our book value of $8.64 per share at quarter-end.

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

Thanks, Harold.

For the remainder of the year, we are still reviewing and implementing any and all measures to aggressively reduce our exposure to the Florida homeowners, as well as our actions in the marketplace to contain this issue going forward.

I want to turn it over to Brian just to have him give some specifics on the Florida homeowners and its impact on our quarterly results.

Thanks, Jim.

I think it's important to put a little context around where we are with Florida and to point out that we all believe that this is an untenable situation, and we're moving to do everything possible to get out.

If you look at Florida homeowners and the pretax loss that it contributed in the second quarter versus the total pretax loss that we had as a company, it was 130%. Obviously, without Florida homeowners, we're making money in the second quarter. If you look at it for the 6-month period, it was 80% of our pretax loss. And clearly, this is something that we are doing anything and everything we possibly can to move off of and get out of. I think if you look at the calendar year loss ratio in the second quarter, it was 222%. So this is obviously not sustainable, and we're doing everything we can to move forward in a positive perspective.

Thanks. And obviously, Florida's the issue. We do feel comfortable, however, with our balance sheet, our commercial and personal lines production overall. We are solidly focused on underwriting profitability and driving results for our shareholders.

Our expense ratio continues to improve. And with the focus on our historically profitable core business, we believe with the advent of our ability to get out of Florida and containing the remaining balance of that, we believe we are positioned for profitability in the not-too-distant future.

And now I'm ready to take any question.

(Operator Instructions) Our first question comes from Paul Newsome with Sandler O'Neill.

I want to ask, given that the changes in Florida from a size perspective, growth and other businesses in the last year or so that may have been different than planned and all the efforts you've made to get your expense ratio down, has the ultimate size of the company changed, in your opinion, from where you need -- since I'm asking, when you -- what size of a company do you need today to get to scale? And has that changed since the IPO discussion?

Paul, thank you for being on the call. Thanks for that question. Yes, the size and scale of the company is much smaller for us to be efficient on an expense ratio basis. Our expense ratio is 43.4%, but the reality is we made several changes that have not kicked in, in the second quarter of this year. We have several changes in our distribution that are going to continue to lower the commission portion of that expense ratio. We've made several personnel changes, not the least of which was taxes, where we basically sold off that book of business and the group of people, and we're going to be able to replace it with other business at a much less acquisition cost. So we haven't realized many of the cost-saving efforts as we continue to go forward. We've changed some things internally, where we're utilizing our offices differently and the way we were producing the business on the underwriting side as they're coming way more efficient, and we can see additional growth without adding anybody there. The only addition of people we've had is on the claims side as we grow, and that would be the ULAE parts are going to be assumed. So we think the size of the company today, in the future, we could be -- achieve expense ratios that are acceptable. We are going to continue to grow in our core businesses. So if we wrote $115 million last year, we get to $140 million, $150 million, we're going to achieve the kind of expense ratios that we have desired. We don't have to get to a much larger company. And we continue to improve upon that through our systems and other things. We did some review of our former life at Northpoint. I think Nick did. Why don't you talk about the premium volume and the numbers achieved in there?

Yes. I mean, as Jim mentioned, we did some analysis of where we were at Northpoint in terms of premium size, number of people, expense ratio. We're actually -- in terms of people, the premium dollar's much more efficient here at Northpoint, which proves out our thesis that starting with new technology and a different approach on the IT side has yielded benefits. And as Jim mentioned, we'll continue to see those. So that's just one area that Jim mentioned, where we feel that we can be operating much more efficiently as we grow without necessarily adding to our infrastructure.

Do you have any numbers on that to kind of give them?

Yes. I mean, if you looked at where Northpoint was just before its IPO, there are roughly 220-some people doing less business than we're doing today at.

In the $80 million range?

Yes, call it $90 million. Here today, at Conifer, we probably have 60% of that number of people, but we're adequately doing much more premium than that.

And one other thing that I would add. If you look at what we've done with the reduction in our wind footprint, we obviously saw a significant pickup relative to our reinsurance costs. I mean, Nick, maybe you want to talk a little bit about that?

Yes. I mean, that's another aspect on the expense ratio side. With the changes in the wind-exposed portfolio, we do -- we are going to see the benefits of that on the property cat reinsurance, which renewed at 6/1. So obviously not a large impact on the second quarter, but will filter through to the third and fourth quarter until our next renewal.

Paul, even though we're totally not comfortable with Florida, we are totally comfortable with our ability to continue to reduce the expense ratio just through these things that we've been doing without any major growth, so that the size of the company to achieve efficiency is much less.

That's great. And obviously, I would like to talk a little bit more about Florida as well. Could you just talk about sort of the mechanics of what you can do through renewal purposes and procedures and the mechanics of what you can do for a rate in terms and conditions? What are the -- maybe a little bit more detail on what leverage you have to pull there and the timing to be able to pull those levers.

This is really a unique time because now Andy gets to say something. Andy?

Paul, on the Florida side, the nonrenewal process will actually begin apparently soon here for all of the assumption business, but the first policy won't renew until February of 2018. In the meantime, we are continuing to go through that book of business, and we are still getting off of certain policies that we are able to at this time, but the broad nonrenewal for all assumption business, first policy will nonrenew in February of 2018. And from a rate and form flexibility standpoint, we do have rate filings in with the state. That's obviously contingent upon what is granted by the state for additional premium or premium increases and for the form flexibility, but we are looking at all measures possible to help curb that in the meantime until those nonrenewals actually start falling through.

And when you talk about form flexibility, you're talking about we've taken all of the possible form changes that Citizens has allowed. We're also going to put a limit on water as well.

Correct, yes. We've implemented the changes that Citizens has made, along with we are actually pushing for some additional changes that I don't think have been approved yet, but we're certainly in there attempting to see if those will work as well.

So I guess, given -- it sounds like there's somewhat -- some things you can do in between now and February, but it's fairly limited. It'll be first quarter of next year when we start to see that book really start to shrink?

Yes.

And presumably 12 months over the next -- over 8 -- from February to February, you'd see that book shrink to whatever you can get it to?

Yes. But I want to point out. We've continued to reduce the number of policies we have. We're down to 3,800 policies. It's not like we have 100,000 policies that we're trying. If this -- when we started, we had 9,600. So I'm not now -- and it's an incredible percentage of policies we have that you get claims on. It's just an incredible situation down there that I can't even -- I can't begin to explain. And obviously, it's hurting us on a quarter-to-quarter basis. It's like dying by a thousand cuts with this stuff. But we are doing literally everything we can to get off of it.

Yes. I know you're not alone. There's lots of Florida writers that are suffering these things.

(Operator Instructions) It appears there are no more questions. This concludes our question-and-answer session. I would like to turn the conference back over to Jim Petcoff for any closing remarks.

Well, I want to thank those of you who are on the call. I realized that patience and understanding can only go so far. And the fact that Florida is a terrible situation, and you're an investor, you're not happy, but everyone at this table that were sitting here has a disproportionate amount of their wealth invested in this company, and that's hurting us as well. So you can bet one thing. We're doing everything we possibly can to mitigate the impact of that, and we will continue to do that. So thank you for being on the call today, and we look forward to next quarter.

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