Presurance Holdings Inc (PRHI) 2020 Q1 法說會逐字稿

Good morning, and welcome to the Conifer Holdings, Inc. Q1 2020 Investor Conference Call. (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 2020 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 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 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 various risks and uncertainties underlying forward-looking statements, including risks and uncertainties associated with COVID-19 and its impact on the economy and our business as well as those risks described from time to time in Conifer's filings with the SEC, including our latest Form 10-K and subsequent reports. Conifer specifically disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise.

In addition, a replay of this call will be made -- will be provided through a link on the Investor Relations section of our website.

During this call, we'll also discuss non-GAAP financial measures as defined by SEC Regulation G. A reconciliation of these non-GAAP financial measures to the comparable GAAP financial measures are included when possible in our earnings release and our historical SEC filings. 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'll turn the call over to Mr. Jim Petcoff, Chairman and Chief Executive Officer. Please go ahead, Jim.

Thank you. Good morning, everyone. Joining us today from the management are Nick, Harold, Andy and Brian. I'd like to begin with a brief discussion of the COVID-19. We will reference it throughout our presentation today.

Since the pandemic started, Conifer has really worked diligently to adjust to the ever shifting conditions brought on by this outbreak. In many ways, we believe the business around the world will be forever changed. My thanks go out to all the first time responders everywhere for their life-saving efforts that they contribute each and every day as we fight this pandemic together. I'd also like to recognize and share my appreciation for our agents, our distribution partners for their continuing loyalty and support during this outbreak. All of our Conifer employees have worked tirelessly to deliver our products and services to our insurers. While this has forced us to adapt and alter the way that we transact the business, our company has done so adamantly.

Through it all, our people have shown great commitment and high level of customer service during these incredibly uncertain times. Many thanks to all of you. As we evaluate the impact of COVID-19, there are going to be many challenges in the days ahead. Yet, the fact that we managed our day-to-day operations successfully right out of the gate without disruption is a testament to our planning, people and our well-developed infrastructure. We made significant investments in technology early in our company's history, and they are clearly paying off today. Throughout the outbreak, we've worked together seamlessly to send almost our entire company home to work remotely. This would be a challenge in normal times, but the effort was extraordinary given the highly unusual circumstances when the early stages of the pandemic were approaching. Our management started planning and implementing for remote operations early on.

As a result, I believe we have clearly been successful and are resilient and well positioned to successfully manage our business in the future. While COVID-19 dramatically impacted our company, our industry and our world in so many different ways. One of the most immediate impacts felt was in the investment markets. Along the way, we, like our peers, were significantly affected. The swift drive ranging dramatic investment falloff at the end of the first quarter caused asset valuations to plummet right at the end of the marking period. Thankfully, we have consistently adhered to a strong ERM investment philosophy. We believe retaining high-quality, short-duration, largely fixed income investment portfolio better positions us to take risk in our day-to-day underwriting and not as much risk in our investment portfolio.

And admittedly, while we were giving -- have given up some current yield over the past years, we were clearly better protected for what was to come with the volatility in the investment markets. Although we were better protected, we were clearly not immune. In fact, our results in the first quarter were largely impacted by those same investment moves. Roughly 3/4 of our net loss in the period was attributable to transitory changes in fair market value. Overall, though, our financial position remains solid. Like so many other public companies, our bottom line was directly impacted by unrealized mark-to-market losses on our investment portfolio.

However, we feel very comfortable with our financial position with the short duration investment portfolio well situated for today's turbulent markets. Harold will add more on this later. Regardless of ever-changing investment markets, we at Conifer remain dedicated to fundamentally sound underwriting and fiscally sound claims management to better serve our agents, distribution partners and our insurers. These are the basic building blocks of any successful insurance company, and we remain committed to their execution at all times across all markets and even during a global pandemic.

As a result and overall for the quarter, we exhibited steady growth in our commercial lines and an increase in personal lines production as well, driven mostly by our low-value dwelling program. I was especially pleased to see our first line combined ratio showing a prop in the quarter. Nick is going to talk more about that later. The previous and consistent underwriting actions taken to transition our business towards more profitable lines appears to be working with incremental rate being added whenever possible, along with cautious new business expansion. Prior to the outbreak, we were seeing some rate traction in various lines. And while this has tapered off some at this time, overall, we feel very confident in our underwriting culture and in our pricing discipline as we seek to manage the company in these changing times.

With that overview, I'm going to turn it over to Nick for a bit more color on our underwriting.

Thank you, Jim, and good morning, everyone. We greatly appreciate the efforts of all first line responders and our thoughts and prayers with all the individuals and families impacted by COVID-19.

As we evaluate our underwriting performance and review our first quarter results, it's important to balance the impact that the pandemic may have on our lines of business and the economy in general. When the restrictions began to be implemented in March, we immediately put into place the proper procedures and began to evaluate the impact of possible economic slowdown on our books of business. We do specialize in select classes that may be impacted directly from the COVID restrictions, for example, certain hospitality risks. Our commercial lines book of business represents primarily property and liability coverages offered to owner-operated small to midsized businesses in a variety of specialty markets. These are largely comprised of commercial package policies with no real exposure to the travel industry, events cancellation risks, trade credit or professional liability lines. Also, we have limited exposure to workers' compensation in general, as it is largely a companion product to our packaged policy. Additionally, we do not offer workers' compensation coverage to first-line responders, and overall, the line remains a small but dedicated percentage of our whole book at 3% of gross written premiums.

The majority of our premiums written are in specialty commercial lines, reflecting roughly 93% of total gross written premium in the first quarter of 2020. Prior to the onset of COVID restrictions, we are achieving steady growth and reasonable rates with commercial lines gross written premium increasing approximately 4% in Q1. This increase was mix of rate and new business during the quarter. As expected, we did see a decline in new business production as uncertainties surrounding the pandemic continued through the month of March. However, through this period and following, we have continued to report high overall commercial policy retention in the high 80% range, consistent with prior quarters. As always, our biggest priority is on customer service and strengthening our position across our niche underserved cases. Our goal is to be there for our customers and help serve them at all times, but even more so now during these challenging times.

Like most carriers, we have reviewed a number of the public discussions surrounding items such as business interruption coverage and the implications that it may have on our company and our industry as a whole. It should be noted that all of our property policies required a direct physical loss to properties in order to provide for any covered peril. Additionally, the vast majority of our policies contain an exclusion of loss due to virus or bacteria. This exclusion applies to all coverage under all forms and endorsements that make up our policies, including, but not limited to, the forms of endorsements that apply to property damage to buildings or personal properties or business income, actual expense or action from civil authorities. While we investigate all claims individually on their merit, we do not expect that COVID-19-related business interruption will constitute covered events under our policies.

Briefly talking on personal lines, we have been very pleased with the results with a 97% combined ratio for the quarter and earning an underwriting profit, largely coming from our growing low-value dwelling business. This is a solid working example of continuing ERM as we made a conscious decision to largely exit wind-exposed business, started several years ago, to reduce our overall volatility. Today, we are seeing some of the results of those earlier efforts. While personal lines make up a smaller portion of our business today, we have been pleased with the much improved results versus prior quarters and look for even more profitable contributions to come in future periods.

During the quarter, we reported the first period where our underlying accident year combined ratio for both commercial and personal lines which was up 95%. While slower than we originally anticipated or hoped, we are heartened with the results reported. One element of Conifer that we feel very strongly about in today's environment is the growth and build-out of our fee-based agency business. For years, we have cultivated a strong client and carrier network with a sticky customer base and we believe that this is an area of our business that should continue to exhibit growth in the current and post-COVID economy.

Overall, Conifer maintains a versatile and diverse operating platform with the ability to write on E&S and admitted paper in commercial or personal lines and with a flexible IT infrastructure that was designed to manage changing market conditions. This has proved highly beneficial throughout this most recent period. For example, our IT systems overall, and, specifically our agency portal, have worked flawlessly during the time when agents and customers are changing their day-to-day operations in a remote sense. Admittedly, looking to the future is challenging, at best. We, like many in the industry, still -- expect top line pressure on our premiums going forward, but it's clearly too early in the process to properly gauge any future impact.

To date, we don't have a great deal of seasonal variance in our policies enforced, and all of us have been encouraged by the overall premiums generated of late and the high level of retention among our existing policyholders seen in recent weeks. We're working diligently to see those trends continue.

And with that, I'll turn it over to Harold for a brief review of the financials.

Thank you, Nick. I'll provide a quick review of the results, and then we'll open it up for any questions. And since Jim and Nick had discussed the impact of COVID-19 pandemic, I'll keep my comments limited to reported results for our first quarter.

Gross written premiums were $25 million in the first quarter, which was a 4% increase, showing steady growth in our commercial lines business. Conifer's combined ratio was 112% in the first quarter compared to 108% in the same period in 2019. Our loss ratio was 65% compared to 67% in the prior year period. We did have an impact during the quarter from prior year adverse development, which was largely related to commercial policies in older years, 2017 and prior, yet the accident year combined ratio improved considerably to 95% versus 99% a year ago, driven by improvements in both our commercial and personal lines.

The expense ratio for the quarter was 47% from 42% a year ago, a change in the expense allocation between segments and some timing differences between quarters led the 2020 first quarter expense ratio to be slightly higher than average. While we have numerous cost-cutting measures underway and continue to see more opportunity for improvement, we expect that the expense ratio will normalize and continue to lower throughout the year. We are maintaining our ongoing efforts to reduce the expense ratio and continue with expense management reductions.

Net investment income was up 5% to $954,000 during the first quarter compared to $910,000 the last year. Our net loss included $3.1 million loss and the change in fair value of equity investments compared to a gain of $1.3 million in the prior year period. This decline was largely due to the disruption in the financial markets related to the COVID-19 pandemic. We responded proactively to the unprecedented decline in the stock market by slightly increasing our exposure to equities during March, going from about 4% of our portfolio to 7%. We also recognized a $900,000 gain -- realized gain as we repositioned our bond portfolio as a means to obtain the best yields and improve our insurance company's statutory capital positions. We believe our historically conservative approach to investments has provided significant downside protection and has afforded us flexibility and opportunities in these extreme market conditions.

As Jim mentioned, our investments continue to be conservatively managed with 93% of investable assets 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 2.3%.

In the first quarter of 2020, the company reported a net loss of $4.7 million or 50 -- $0.49 per share compared to a net loss of $680,000 or $0.08 per share a year ago.

Moving to the balance sheet. Total assets were $249 million at March 31, 2020, compared to $247 million at year-end, with total cash and total investments of $182 million at the end of the quarter compared to $177 million at year-end. Our book value at quarter end was $3.81 per share. We had a valuation allowance against the company's deferred tax assets of $1.55 per share that was not reflected in book value.

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

Thank you, Harold and Nick. Much has been seen amid the mitigated impact of COVID-19 on the asset side of our industry. And I won't belabor the fact any further. Yes, there is a silver lining today, it could possibly come from the liability side of the balance sheet. With such changing times and volatile markets in general, we have worked diligently in here to provide liquidity to our insurers and claimants, if they need it, as we seek to continue closing claims wherever reasonable and possible in these difficult times.

Overall, our new claims commissions did decline throughout March and have continued to decrease in subsequent weeks compared to historical norms. We cannot say how long that trend will continue, but we are pleased with what we see in Q2 so far. It's hard to believe that we held our 2019 year-end conference call on February 27, and we are all working in our offices. Within weeks, 46 states had ordered some form of closures in business or schools across the country, and shortly thereafter, everything shut down. It is truly remarkable and the definition of unprecedented. I want to again express my deep gratitude to all of our dedicated employees and their families. We're rallying together and finding new and creative ways of serving our clients throughout these challenging times. Clearly, we will get through this together.

And now we are ready to take your questions. Operator?

(Operator Instructions) Our first question will come from Paul Newsome with Piper Sandler.

Sorry about that if I'm not -- am I coming through now?

Yes.

Sorry about that. I was wondering if you could give us a little bit of your thoughts about what might be happening from a competitive perspective with rates in terms and conditions sort of due to the pandemic itself, both what you see in the market as well as what you may be doing as well. Particularly would be interested if there's any terms and conditions that you're doing or thinking about changing.

Nick, do you want to talk about that?

Yes. I mean I think from our perspective, terms and conditions sort of directly as a result of the coronavirus. Yes, as you mentioned, most of our -- the vast majority of our policies have a virus and bacteria exclusion. And we've certainly -- we'll continue to apply that exclusion given the crisis. I think for the most part, it sounds like a lot of the companies in our markets already had similar language. So I haven't seen a noticeable change in those conditions.

Certainly, we -- as we mentioned, we were seeing some rate -- we were seeing the ability to get some rate earlier on in the quarter. We have seen a reduction, I'd say, in competition since the coronavirus started, but it's also offset somewhat from lower sales, particularly in the hospitality class.

So it's really difficult to say that the total rate momentum right now given kind of those 2 factors moving in sort of opposite directions. I think beyond that, with businesses reopening, most of our policies have a communicable disease exclusion as it relates to liability. My guess is, and I think we've seen some of this -- some movements in companies as they look moving forward as businesses reopen, what kind of liability exposures are people going to see.

But I'd say, to date, those are the largest impacts that we've seen, and most of those, I think, have been more focused on the hospitality side as that seems to be really the business that's been impacted more so than many of the other classes that we write, and where comp is such a small percentage of what we write that I don't think I have a good gauge in terms of what the overall market's doing.

Did that answer it for you, Paul? Or do you have -- do you need any follow-up?

That's fantastic. Second question, can you give us a little bit more detail on the commercial insurance reserve development. Was there any development in the -- small in '18 and '19? And just some color on what kind of is driving it.

I'm going to let Nick talk about that, too.

Yes. The '19 figure was very small with some development in hospitality, but it was offset by favorable development in some of our other small business lines and sort of a similar story in '18. Most of the development was '17 and prior on the hospitality book. That was driven by some of the tougher jurisdictions that we had written in those years, probably Florida being the most noticeable there.

We've obviously been working hard at repositioning the hospitality book toward more favorable states like Michigan and in some of the other areas in the Midwest and outside of more difficult jurisdictions like Florida and also Pennsylvania liquor. But that's really what drove sort of the '17 and prior. We continue to make significant progress on closing out those claims, and I think moving forward, the impact will be much smaller than it's been, certainly in those older years.

The only other thing I'd like to add to that is on the QSR side that had some development in '18 and '19. That was because of the geography situation as well out of -- we're out of those Southeast Florida and those areas. So we -- and QSR has a much quicker reporting pattern. So we're comfortable that the development going forward is going to be less off.

And then my final question -- and I will let somebody else ask, I wanted to ask about happened to the statutory capital and earnings during the quarter. Obviously, it would not have been affected by the mark-to-market on the bonds, but you had a realized gain but also an operating loss. So I'm not sure -- if you put all those things together and tell us which direction statutory capital went in the quarter?

Good question. Harold?

Yes. Sure. So as I'm sure you're aware, the stock valuations do affect statutory capital and surplus directly they're mark-to-market on a statutory basis.

Bonds are kept at amortized costs. So we were closely monitoring our capital position. I think we ended up for 331 in healthy position on a statutory basis. We did do some adjustments to our bond portfolio to help ensure that we had a good statutory capital and surplus position, and that's where the $900,000 of realized gains in the bond portfolio came in. We also were very comfortable with seeing the recovery of the market a bit following the end of the quarter. Even if we see it revert back and we have some problems from a market perspective, we think we're still going to be opening from a capital perspective.

Brian, do you want to add it to him?

Yes. I just want to add that there were no permanent markdowns in the portfolio as a result of the changes. So the buying portfolio remains healthy and strong.

Nice addition, Brian.

Our next question will come from Bob Farnam with Boenning and Scattergood.

I just actually wanted to just continue on Paul's theme with the statutory capital because I know A.M. Best is going to be stress testing companies for COVID-19. So I'm curious if that has occurred for you guys. Is there -- how is your stance? Would they invest at this point?

Well, actually, so far, so good. If you look at our position, we would tell you that we fared better than most. As you're aware, Bob, A.M. Best is taking -- I don't want to speak for them, but they're taking largely an asset review of this event. And given the high-quality nature of our portfolio, we actually feel very good. There were kind of 3 specific categories. They looked at kind of your business. They looked at your equity exposure, and then they were looking at things like direct mortgages and real estates. And in category 3, we don't have anything. In category 2, we had, at the time, only 3% equity exposure. And as Nick talked about, we actually feel very good about our book of business. So I think all things considered, we haven't had any specific discussions with them. But we think as we've kind of done our own internal modeling and working with our brokers out there to kind of help us on the stress test side, I think we should hopefully be in good shape.

Okay. Great. And going back to the -- for business interruption claims, I think part of the concern we've had is the language. So I was curious how much of this -- how much of your business is written on an excess in compliance basis where you can have more freedom for policy language versus a standard kind of ISO contract? So -- and how comparable are the different types of language?

Yes. So we follow primarily ISO language, and certainly, in the coverages in question, we do follow ISO language. So we're pretty consistent with that language out there and feel comfortable with the way our policies read. Most -- more than half of our business is E&S. And I'd say in the states that are admitted, they're typically pretty favorable in terms of the regulatory environment. So where we've had to make changes, we really, on an admitted basis, have not had much, if any, resistance. And on the E&S side, obviously, that provides us a lot of flexibility. So we feel good with the language, and we're glad that we've followed the ISO language like most carriers have.

Let me add to that, though. We don't have any manuscript forms for other types of property, and we don't expand coverages to write. The things we write, specifically in the hospitality, are usually smaller and it's standard ISO language almost across the board.

Right. Yes, okay. That's interesting because I thought since you had everything on the E&S basis, it pretty much can be free form for what you want to have with the policies, but it sounds like you've basically taken the ISO language and put it in that as well.

Yes. I'm too old -- we're too old to argue with people about what the language means. It's a lot easier for our people and stuff to utilize the ISO language, and we know what we've got.

Do you -- even though the language sounds like it's pretty tight, do you expect to have increased litigation expense? Do you still expect to face lawsuits trying to kind of pick at that language?

I think given the environment, I'm sure there will be lawsuits at some point. It seems like most of the lawsuits that we've seen in the media have been attacking policies that don't necessarily have a clarified virus and bacteria exclusion. The vast majority of our policies do have that exclusion. So I think that we'll make it tougher from a litigation standpoint as it reflects on our book. But given the picture of sort of the country right now that -- the litigation is certainly an ever-present part of our economy and it could definitely pop up. So far, we have not received any lawsuits challenging our claims position on that specific issue, but certainly, it's something that we're monitoring closely and we are going to continue to monitor.

And when Nick says vast majority, are -- have the exclusion, it's the vast majority. I mean there's very few of that in that.

Okay. Great. And last question for me. I was interesting about the fact about the expense ratio and you expect it might be coming down. And I know over the last couple of years, you've been kind of battling rightsizing your premium to kind of match the infrastructure. So with the fact that premium is going to be coming down or at least it sounds like it might be coming down in the near term, I was curious to see why the expense rate should be coming down as well. Like how much of that is coming from savings of initiatives or whatnot that you're doing?

There's a couple of things hitting that. We have -- as everybody in the industry is getting earnout development, we -- it continues to lower our earned premium because when you have earnout development, we have reinstatement premiums. Having said that, we only used up less than 30% of our cap limit on Irma. But every time you have a little bit of development in Irma, you're going to have a lower earned premium. Our written premium was down at the end of March due to the COVID. There were a number of factors.

And then the business mix, there was some higher commission policies where a larger portion of business, therefore, it kind of drove up our expense ratio for the first quarter. So we had a confluence with us that made the expense ratio go up. We have and are continuing to lower our fixed costs, and we see that continuing in the future and we have made some commission changes that have not come into full effect as well. So we expect this to continue to go down.

(Operator Instructions) Our next question will come from Greg Peters with Raymond James.

Real quick. First, most of my questions have been answered, but I was wondering if you could give us a sense of new business production, power flow from February to March to April, just so we can try and get a sense of how gross written premium might track for the year.

Yes. I'm going to let Nick do the specifics. But if you look at our business and our diversification, because our personal lines have grown because they're [not just growing] because we're into other lines of business, whether it be the repo, commercial, auto, that has stayed consistent [or from a little bit], the security guard, fire suppression, all those areas are continuing to grow. Hospitality is obviously the one that is more at risk. And I'm going to let Nick talk more about it. But the QSR side, those people have not necessarily been out of business because of drive-through. Nick, you want to expand on that?

Yes. So we didn't see -- we saw some impact, but not really a large impact in March. Really, April was probably more telling month from a new business perspective. Overall, new business submissions were down on the commercial line side, about 30%, which is not surprising, obviously, given the virus. But I think that's driven by a couple of things. Obviously, you don't have new restaurants or bars opening. So that impacts new business flow.

Additionally, we don't see as much shopping. So people and agents and insurers aren't really looking to shop for different coverage, remove carriers or policies, given the uncertainty. So you don't see as much new business submissions through that type of dynamic. The retention ratio still has stayed high, and actually, we saw a little bit of an uptick in March and it stayed pretty steady in April as well. So that benefits us from the renewal side.

And then to Jim's point, we do have a diversification even within the hospitality business. So bar, caverns are obviously most impacted by the various shutoffs at different states as well. Our quick service restaurant line, they're already set up for drive-through, carryout, delivery. They're typically on some of the delivery type apps that you see businesses using successfully. So we haven't seen as much of an impact on that book, and that's a pretty healthy percentage of our overall hospitality book. And then in other classes, on the commercial line side, and we really have not as much of an impact. It's really been focused on hospitality.

And on the bar tavern side, people -- the smaller accounts that we do write, they tend to own the buildings. And they want the buildings to remain insured, but we're not writing nonaligned properties. We still have the liability coverages there associated with that. Therefore, they have lowered policy limits and sales. So we're seeing pressure on the top line with respect to that, but we're not necessarily losing accounts. And the way the government has responded with the various programs, we're seeing people shut down, but we haven't seen that many shut down yet. So...

And I'd add, in certain areas of the country, we are seeing new business submissions pick up as they slowly reopen, Texas being one of those states, and we have a solid distribution network in Texas. So obviously, it's uncertain as to sort of how this all shakes out. But we're really happy with our April premiums. And I think as different states open up, that's certainly a positive in terms of top line growth for us, but it's hard to really say and put a specific gauge on it right now.

Just as a follow-up, if you could put a range on the outcome of gross written premium for '20 versus 2019, are we looking at down 15% to up 5%? Or how would you like to handicap the range of possibilities, if you want to handicap it at all?

I would be surprised if it was down. I'm not expecting it to be down. We do have some initiatives going, and the personal lines is actually growing, and we've picked up new distribution places there. We've also added some -- a little bit more expansion in our core lines, which are new agents in other geographies. I would be surprised if it was down, I mean, it could. I mean who knows what's going to happen, Greg. I'm not -- I can't tell you, are we going to have another shutdown in the fall or that kind of thing. So we would be surprised if it was down, and we're hoping for up, marginally.

(Operator Instructions)

All right. We're good, I think, unless there's more questions coming in, Grant.

None. All clear. I would like to turn it over to management for any closing remarks.

Thank you. Thank you all for being on the call today. I will -- I don't want to overemphasize, but during this period of time, we are seeing a reduction in the new claims coming in. So we expect our current accident year to continue to perform fairly well. As we discussed, we don't expect that reduction in overall premium. We don't anticipate barring some crazy events in the fall. We just hope everybody out there remains safe, and we look forward to someday seeing all of you in person again. But take care, and thank you for your time today.

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