Presurance Holdings Inc (PRHI) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Conifer Holdings, Inc. Third Quarter 2017 Investor Conference Call and Webcast. (Operator Instructions) Please also note that this event is being recorded.

I would now like to turn the conference to Adam Prior from the Equity Group. Please go ahead, sir.

Thank you, and good morning, everyone. Conifer issued its 2017 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 that accompanies management's discussion. If you are looking at that presentation via webcast, you may find the slides are easier to read in a large 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 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 measure 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 now like to turn the call over to Mr. Jim Petcoff, Chairman and Chief Executive Officer. Go ahead, Jim.

Thank you. Good morning, everyone. Joining me from the management team to the call today is, Nick Petcoff; Harold MeLoche; and Brian Roney. I'll provide a brief update on our business, Nick will review our operating results in greater detail, Harold will go through our financials. Then we'll open it up for Q&A.

As previously announced in early October, we made the strategic decision to strengthen our reserve position through an agreement with Swiss Re to cover a loss development up to $17.5 million in excess of our stated reserves. This reinsurance agreement and the subsequent financial offerings have combined to position us to grow shareholder value going forward. We believe that [rolling of] the 12/31/16 in prior claims will allow us to generate positive returns for our shareholders. In the quarter, we strengthened our reserve position from past periods in a manner that reduces volatility in our earnings, while also increasing financial flexibility to pursue growth opportunities in the lines where we are performing as desired.

We continue to write our focused commercial business mainly within the hospitality sector, specifically focused on restaurants, bars, taverns, quick-service restaurant, et cetera. Along with our security guard business, these lines continue to produce solid underwriting results and we still see considerable runway for growth in the future.

As a result from the continued efforts, there was a 13% increase in gross written premiums overall for our commercial business in the third quarter. The hospitality sector had led the way. Because our business may shift to more commercial business and away from volatile areas, our total gross written premiums for personal lines declined in the quarter. This decline was expected and we will continue to grow in the profitable areas going forward.

In conjunction with growing our premiums, we have been intently focused on streamlining our expenses. Without the effects of the financial arrangements in the quarter, our expense ratio run continued to tick downward. We expect that trend to continue in the fourth quarter as well. As you will hear, we have reserved for the catastrophes. We expect to see minimal development going forward from that.

With that, I would like to hand the call over to Nick for a breakdown of our individual markets, and I'll return later with some thoughts and questions and answers.

Thank you, Jim. I'd like to begin by discussing our commercial lines. Commercial lines continue to be the main driver of our written premiums at approximately 80% of our total production during the quarter. We are continuing our growth in our hospitality lines of business, as this has been our most profitable premium lines historically.

As Jim said, commercial lines gross written premiums grew by 13% to roughly $23.5 million in the third quarter of 2017. This growth was largely due to a 25% increase in gross written premiums in our hospitality lines when compared to the prior-year period. We remain focused on expanding our commercial business, especially in the hospitality area where excess and surplus lines flexibility creates value proposition that is distinct from our peers.

Now 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 third quarter of 2017. Personal lines gross written premiums decreased roughly 22% from $7.7 million in the prior-year period to $6.1 million in the third quarter of 2017. This reduction was led by a planned 31% decline in wind-exposed lines, largely coming from our ongoing efforts to reduce our cat exposure and our corresponding cat reinsurance costs. While the personal lines premium reductions have made our top line growth slow, we believe that the improved business mix with [lot of] cat exposure will lead to better underwriting result in the upcoming quarters. Largely as a result of the catastrophe events, our personal lines combined ratio climbed significantly in the quarter. [With] updated information now available, we have increased our reported losses as a result of both Harvey and Irma. In our previous release, given the available information at the time, we stated that our losses for Harvey and Irma combined would be approximately $4.5 million net to Conifer. Including some reinstatement premiums for Irma, our reported net losses for both storms have increased to $5.6 million. The additional $1.1 million was recorded in the third quarter and is reflected in our financial results.

Even when considering the decrease in personal lines, our overall premiums written were up in the quarter by almost 4% at just under $30 million in total.

I'll now hand the call over to Harold MeLoche to provide a brief discussion of the financials.

Thank you, Nick. As 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, but welcome any specific questions during Q&A.

The net premiums earned for the third quarter decreased 25% to $17.7 million compared to $23.4 million in the prior-year period. This decrease is due to the one-time charge of $7.2 million in ceded premiums from the Swiss Re adverse development cover or ADC, and $600,000 of reinstatement premiums from our catastrophe reinsurance treaty relating to Hurricane Irma. Before the impact of these 2 items, net earned premiums was up 9% for the quarter.

In the third quarter, Conifer's combined ratio was significantly impacted by the ADC, as well as storm losses. Before the impact of both items, our year-to-date accident year loss ratio was 59.1%. Our expense ratio is 61.4% in the third quarter of 2017, but again was impacted by the ADC and storm losses. Before the impact of both items, our expense ratio continued to decrease to 42.9% for the third quarter.

As was already discussed in the conference call in early October, we've strengthened our reserve position through an agreement with Swiss Re to cover a loss development of up to $17.5 million in excess of stated reserves as of June 30, 2017. The agreement covers accident years 2005 through 2016, and attaches when net losses exceed $1.4 million over the $36.6 million in net carried reserves as of June 30, 2017. We booked the full $1.4 million to bring reserves into the ADC later in the third quarter.

To help pay for the development cover, we issued $30 million in subordinated notes. The subordinated notes mature on September 29, 2032. They are interest payable quarterly at a fixed annual rate of 8% for the first 5 years, and also for up -- and also allows up to 4 quarterly interest deferrals. The notes include an issuer call option at par from July 31, 2018 through October 31, 2018, and at a 105% of par any time after September 29, 2020.

The company utilized some of the proceeds to fully pay off the $16.4 million of outstanding senior debt. In conjunction with the ADC and the debt refinancing, the company also issued $5 million of common equity through the private placement at a price of $6.25 per share.

As a result of the events in the third quarter, the company reported a net loss of $19 million, or $2.46 per share compared to a net loss of $1.5 million, or $0.19 per share in the prior-year period.

Regarding our balance sheet, total assets were $236 million at September 30, 2017, with cash and total investments of $177 million. We maintain a conservative investment strategy with 96% of our portfolio currently in fixed income securities, with an average credit quality of AA and average duration of 3 years, and a tax equivalent yield of 2.3%. We have conservatively managed our investments with the objective of protecting capital while we return to profitability.

At September 30, 2017, there was a $15.4 million valuation allowance against the company's deferred tax assets. That represents approximately $1.80 per share that is not reflected in book value at quarter end.

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

Thanks, Harold, and Nick. For the remainder of the year in 2017, we feel the reserve agreement with Swiss Re, as well as our continued efforts to reduce our expense positions Conifer properly to achieve operating results in the upcoming quarters. Not only do we feel that the strategic choices we are making come at the right time for us, but we feel that we are now in a much better position to return to our historical growth trends in the upcoming quarters. We are still solidly focused on underwriting profitability and driving positive results for the shareholders.

And now we're ready to take any questions.

(Operator Instructions) Our first question is from Carl Doirin of Raymond James.

And also thank you for the sort of the guidance around the pre-announcement. I really had one question around the personal lines, specifically the homeowners business in Florida. Any impact in terms of -- from the hurricanes, in terms of how sooner can you reduce your exposure there? Is there some sort of a delay that you expected? Or when can we expect you to be [just complete] out of it maybe in 2Q sometime next year?

Well, even though we didn't announce it -- Andy Petcoff is in here and he's running the personal lines. So I'll let him answer the question.

Well, we did start sending out our first round of non-renewals for business that would have renewed in February. So the first round of non-renewals goes -- has gone out. February those policies will start non-renewing. By the end of December of 2018, all policies will be -- all assumed policies in Florida will be off of our books.

Okay. You said December of next year?

Correct.

And I just want to add that we've been reducing our exposure there and the [policy comp] has gotten down every quarter. So the amount that's going to be running off will -- it's far less than it otherwise would have been at the beginning of the last year. The other thing is, we had a significant amount of claims from Irma. And with our policy comp down, we kind of expect that we won't see the same volume of claims in Florida that we've seen with regard to the ADC next year, but that's speculation.

And that makes sense. And just curious, did you see any uptick in the AOB claims in your Florida business, following the Irma?

We have not seen an uptick in the percentage or the volume, but with Irma around, how busy can they be? They have got lots of uncertainties, how much work can they do? So we haven't seen an uptick though, no.

(Operator Instructions)

Well, I guess, since there appear to be no questions and maybe we did a good job with pre-announcements. Maybe everybody reads our press release, I don't know. But I appreciate everybody who's on the call today. And we are extremely excited to have the third quarter over. We're extremely pleased with the accomplishments of getting the balance sheet solidified and we do look forward to grow and profitability in the future. So thank you for being on the call.

Thank you very much, sir. Ladies and gentlemen, that concludes this conference call. And you may now disconnect your lines.