Presurance Holdings Inc (PRHI) 2020 Q2 法說會逐字稿

Good day, and welcome to the Conifer Holdings, Inc. Q2 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 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, which is available to view via download or download via webcast from the Investor Relations portion of Conifer's website.

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 our forward-looking statements, including risks and uncertainties associated with COVID-19 and its impact on the economy and on our business as well as those risks described from time-to-time in the company's filings with the SEC, including our 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 provided through a link on the Investor Relations website.

During this call, we'll also discuss our non-GAAP financial measures as defined by SEC Regulation G. Reconciliations 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.

With that, I'll turn the call over to Mr. Jim Petcoff, Chairman and Chief Executive Officer. Please go ahead, Jim.

Thank you, Adam. Good morning, everyone. On the call with me today is Nick, Harold, Andy and Brian. I'd like to provide a brief overview. Nick will discuss our underwriting in greater detail. And then Harold will cover the financials.

Last night, Conifer issued the solid financial results for the second quarter. Despite the disruption due to the global pandemic, our gross written premiums increased by over 9% in the quarter. Due to a combination of improving underwriting results, coupled with the change in the value of equity investments, Conifer proposed an earnings per share of $0.16 for the period. Our results reflect our ongoing commitment to underwriting discipline and our tangible evidence of us turning the corner in terms of profitability.

Our business split remains largely commercial with over 90% in specialty commercial and less than 10% in personal lines. Over the past several years, we've placed increasing emphasis on specialty commercial business, especially in the niche line, where our company can be profitable and a market leader.

In addition, we have long believed in a balance in our business, commercial lines versus personal, long tail versus short and, within our underwriting, the ability to evaluate and place risk between admitted business or excess and surplus lines. That ability to pivot between both is an advantage we have over our peers. This allows us to increase not only our account penetration in markets we serve, but also our geographic spread across the country. We consistently seek out agents and insurers that specialize in our areas of expertise, which meet our specialty underwriting criteria. This strategy is starting to produce results we have anticipated. Our commercial lines premiums were up 9% during the quarter. At this point, I'd like to take a step back and comment on the impact from COVID-19.

When we last spoke to the market in May, there was a great deal of uncertainty as to the insurance markets in general, new business potential and top-line premium overall. We continue to reflect on the traumatic influences of the pandemic and the individual impacts felt by families across the globe. Our hearts go out to all affected by COVID-19, as we struggle to get through this together.

Early on, we were proactive in shifting quickly to remote operations, leveraging our early investments in technology, thereby safely and securely sending our people to work from home. The result was that our agents and our insureds saw little-to-no disruption in service. In fact, we have heard that overall our service levels are generally higher than our peers, and we are providing exceptional service during an incredibly difficult time for all. That makes me extremely proud of our employees and their ongoing commitment to meeting the needs of our insureds and the agents alike.

Although we feel good about Conifer's business plan and mix of business going forward, we believe that we are generally conservative in our estimation of the overall economy, as we evaluate the potential impact of the pandemic. To date, while premium has been impacted by COVID in certain sectors of our business, other sectors have filled a gap, such that overall we have not seen a material impact on our growth plans nor our profitability to date. In fact, overall claims volumes continue to be down significantly versus earlier in the year. Nick will talk about that more later.

As we have shifted the majority of our premiums into our core commercial lines with favorable effect, loss ratios are continuing to improve. This quarter, we saw those improvements reflected in our underwriting results, with loss ratios in the mid-50s. Those of you who have followed Conifer from the beginning, have heard us cite historical norms in our commercial and personal lines loss ratios at around this level, consistently produced over time. Those loss ratios, coupled with an improving expense ratio as we achieve operating scale, should drive our combined ratios lower as well. Coupled with reasonable investment returns, we'll ultimately deliver consistently improved ROEs for our shareholders over time.

The next phase will be to continue to drive selective growth and achieve appropriate operating scale, while continuing to streamline expenses where possible without any disruption in service. The growth we've seen to date shows that we can achieve this, but we will continue to emphasize underwriting profitability in each decision we make. Overall, this was a solid result during a very uncertain time.

With that, let me turn it over to Nick for some color on underwriting.

Thank you. Through the second quarter, several developments became clear, as we navigated the COVID-related lockdown.

First, we are seeing retention rates running at or higher than historical norms. In fact, in the month of June, retention rates were running at 91%. We saw submission growth that we attribute to both improving competitive dynamics and increased market share. Also keep in mind that we have been focusing for several quarters on our business mix shift to specialty commercial, where we have a distinct value proposition, while growing our low-value dwelling business in personal lines. The process of shifting our business mix has been a group effort admittedly, but we believe that Conifer is in the correct markets for us to consistently be profitable over time. Those markets have substantial runway for selective growth, and we expect them to generate value for our shareholders going forward.

Secondly, while the top line has been solid, our overall claims are down on a monthly basis since the lockdown began. In fact, overall frequency is down in largely severity as well. Comparing the lockdown period to monthly totals from earlier in the year, we were down in terms of total claims by 40% or more on a per month average.

Lastly, where appropriate, we are achieving rate increases in most classes, but we are definitely seeing signs that certain markets that we serve are hardening, particularly in the E&S space. On our top line, we reported quarterly increases in our overall gross written premium of 9.4%. Commercial lines grew approximately 9%, and personal lines grew 14%. Both lines are profitable on an accident-year basis, with personal lines posting an 86% combined for the quarter.

Our commercial business represents approximately 93% of gross written premiums and largely consists of small commercial business solutions, delivering admitted and E&S coverage for artisan contractors, small commercial insureds and select commercial auto clients, among other classes of business. In addition, we have a strong marketing position in the hospitality segment, which includes policies mainly for restaurants, bars and taverns, and quick-service restaurants. Overall, we saw a relatively little disruption stemming from COVID-19 during the quarter.

It's important to note that many of our restaurant customers were offering takeout options and many are quick-service restaurants with drive-thru capabilities. This helps offset other establishments more reliant on casual in-house dining. Throughout the challenges, we continued to work with our insureds in helping to understand the implications of the longer-term effect on the pandemic on their business. As always, our biggest priority is on customer service and strengthening our position across our niche underserved classes.

In our Commercial business, we saw particularly strong growth in our small business segment. This was driven by higher premiums in specialty and E&S products. While we continue to write commercial premium in all 50 states, we see strong potential for growth in a number of states, including our home state of Michigan, which is our largest premium state. Overall, we see opportunities for new policy growth and select rate increases geographically on our existing and new commercial accounts. While we were pleased to see selective growth during the period, we were equally pleased with the improvement in loss trends. Our overall loss ratio improved by 12.5 percentage points for the period. We reported an excellent underwriting result in our personal lines business as well, which represents approximately 7% of our gross written premiums overall.

For the quarter, our personal lines loss ratio improved to 40%. This was largely due to fewer claims in our low-value dwelling business, but also reflects our reduction in wind-exposed premium, mainly Florida, that we have been discussing for several quarters now. The reduction of wind-exposed premium is directly correlated to improved personal lines performance, as we focus away from cat-exposed business overall and firmly on low-value dwelling business instead.

I will now hand the call over to Harold Meloche to provide a discussion of the financials.

Thank you, Nick. I'll quickly note the financial results, and we certainly encourage investors to review our filings and presentation on the company's website for greater detail. In the second quarter, gross written premiums increased 9.4% to $27.5 million. With Jim and Nick having detailed the breakout and premiums, I'll focus on our underwriting results.

Conifer's combined ratio was 100.5% in the second quarter, a significant improvement compared to 113% in the prior year period and 112% in the first quarter of 2020. Conifer reported a loss ratio of 54.6% compared to 67.1% in the prior year period, an improvement of 12.5 percentage points.

Moving to our expense ratio, we reported a flat expense ratio of 45.9% during the second quarter, which included some reinsurance-related reinstatement premiums. We do expect to achieve expense ratio reductions, as we grow closer to appropriate scale, and have implemented initiatives to streamline costs over the past several periods that, we believe, will have a favorable impact over time. We continue to foster expense reduction initiatives today as well. Our short-term goal is to get to an expense ratio at or under 40%. Net investment income was $863,000 during the second quarter, down from $1.1 million in the prior year period. And net realized gains were $254,000 -- $245,000, excuse me, compared to $715,000 in the prior year period.

During the quarter, the company reported a gain from the change in fair value of equity investments of $1.6 million compared to a loss of $0.9 million in the prior year period and a loss of $3.1 million in the first quarter of 2020. This increase was largely related to the recovery in the equity markets, following a decline in the first quarter relating to the COVID-19 pandemic. We also saw a rebound in our unrealized gains within our bond portfolio of approximately $5 million.

Our investments are conservatively managed with the majority in fixed-income securities with an average credit quality of AA, an average duration of 3.5 years and a tax-equivalent yield of 2.4%. As a result of the above, the company reported return to profitability, reporting net income of $1.5 million or $0.16 per share compared to a net loss of $2.9 million or $0.34 per share in the prior year period.

Moving to the balance sheet, total assets were $250 million at June 30, 2020, compared to $247 million at year-end. Cash and total investments were $175 million at quarter end compared to $177 million at year-end.

We reported a nice increase in book value this quarter. Our book value at quarter end was $4.51 per share compared to $3.81 per share at March 31, up over 18% for the sequential quarter.

We had a valuation allowance against our company's deferred tax assets of $1.42 per share at quarter end, and this represents $1.42 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.

Thanks, Harold. Thanks, Nick. This was a good quarter for the company, and we feel it reflects the commitment we have to generating sustainable operating profits, as we seek to selectively grow our company for the long-term benefit of our shareholders.

In closing, I'd like to note that we have been incredibly humbled and proud of the performance of our employees during the disruption. Insurance carriers often discuss the strengths of their relationships, both with agents and partners, but it's also equally important to discuss the strength of our people here at Conifer. Our people have helped us strengthen relationships with our agents and insureds at a time when they arguably need us the most.

And now I'd like to take any questions. Operator?

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

I was hoping you could kind of update us on the expense level -- expense ratio thoughts and outlook and target, respectively. I know you've been working with that for a while.

Well, I'm going to give you the overall, and Harold might accent it with some numbers, but in general, our earned premium -- net earned premium was down a little due to the increase in our reinsurance costs. That was not just increased rates. We've lowered our retentions. And therefore, we're paying a little bit more in reinsurance, but we have less exposure.

Secondly, we had some -- we're still getting the benefit of Hurricane Irma and having those claims settle. And every time they do, we have reinstatement premiums, which drove down our net earned premium as well. So we were -- we had those headwinds going into it.

From a expense standpoint, on the core fixed expenses, we're equal to or below last year. We're continuing to go down on a quarterly basis annualized. And we have significant efforts in place to continue that movement. The commission rate basically has stayed the same. So as we see the premium growth getting rid of the -- well, having Irma dissipate, I guess, in lowering our net earned premium and the net earned premium increasing, we see positive signs going forward.

So Harold, do you want to add anything to that?

Actually, I think you covered it. I mean, the biggest thing right now is some of the additional reinsurance costs that we had, which really did add like an entire point or more to the expense ratio. We do expect to see this trending down, like, over the next few quarters. I think for us to get all the way to 40% though, we do need more net earned premiums.

Makes sense. Could you give us a little bit more color on the reserve development to sources and years? And just to give us a better sense of where it came from, in particular?

Nick, you want to do this?

Sure. One driver -- probably one of the largest drivers in the quarter was some commercial auto development, out of our repo towing business from prior year. That commercial auto liability program has gone down significantly as we raised rates really into '15, '16, and to the current day. But we did see some commercial auto development from that program in the quarter. That was one of the larger drivers. We did have some development on prior years from -- driven by the tort environment in Florida on some of the hospitality business, but we did see that diminish quarter-over-quarter. So that was a positive for us as well. Those are 2 of the larger drivers for us, but they were primarily from '17 and prior, and some in '18. But again, we do see those declining. We are -- our '17 and prior claims have gone down significantly. Our 2016 and prior claims are down to, I think, 130 claims left. So those are closing out pretty quickly, and we hope and expect to see that diminish moving forward.

And probably one other thing to add, Nick, is you might want to talk about statutes running and how you see that.

Yes, particularly in Florida, which has sort of been one of the tougher tort environments, it's a 4-year statute. So 2016, in particular, we're running up against those statutes. So we don't necessarily anticipate an influx of additional claims. It's more just a function of closing out the existing claims we have. And then COVID, in some level, has been helpful, as we see courts closed and things like that, that's put pressure on some plaintiff attorneys, and we have seen an acceleration in closing out some of those older claims.

It looks like you had really minimal impact from, like, bankruptcies and such on the -- pretty -- top line revenue impact from the recession. Do you think that will hold up as it has, where you just won't see that -- it looks like it doesn't seem like you had a lot of customers go away and like liquor liability or such, despite the difficulties of those businesses?

Our federal government does a lot of things that probably a lot of us don't agree with. But I think this PPP thing kept a lot of people in business, and kept them paying their premiums. And now that things are starting to open up, we've actually -- the people we deferred premiums on, high 90% have bought up their premiums. We were surprised at the numbers.

Do we think that the hospitality sector, specifically in the restaurant, bar, tavern is going to have a dip at some point? Yes, we're not optimistic that everybody is going to continue along the same way. We think it's going to be very challenging for that sector, but we haven't seen it yet. And I don't know; I think it's the PPP, but what do you think, Nick?

Yes. And one thing I'd add there is certainly the bars and taverns have sort of taken the brunt of the lockdowns, while our -- some of the quick-service restaurants, franchise restaurants that we write are better set up to deal with the lockdowns. They already had ordering through on apps like DoorDash, Uber Eats, things like that. So they were able to weather the storm a little bit better. They also had drive-thru service on, ready to go. So they were more resilient to this. Certainly the bar taverns have been impacted. In Michigan, liquor liability is mandatory. So those businesses risk losing their liquor license if they don't maintain their liquor coverage. So that's been very sticky for us. But yes, I think, to Jim's point, as we go into the fall and winter, as outdoor seating becomes less of an option here in some of the Northern states, certainly we're cautiously optimistic, but there's a lot of uncertainty there.

(Operator Instructions) Our next question will come from Bob Farnam with Boenning and Scattergood.

I just -- I want to continue on that hospitality question. Just -- so it sounds like you had a lot of businesses that either slimmed down or stayed open with drive-thru and whatnot. So what -- do you have an idea of what percentage of your hospitality risks actually had to shut down completely for the quarter?

This is going to be a guess, okay? And -- but I'll now give my guess, and Nick will give his. I would say 40% to 50%.

Yes. That's as good of a guess as I could throw out there. But I think in terms of shutdown, almost -- from what we've heard from our agents and our insureds is, almost everyone has had the ability to have some sort of takeout or delivery through app, apps like I mentioned before, or move to outdoor seating. So certainly, I would say April was probably the bottom of that. Certainly some of those bars, taverns had to kind of readjust operations for a couple of weeks. Sometimes, we saw businesses 2 to 3 weeks while they were readjusting, but then reopened. At this point from what we've heard, the vast majority that I've heard of are now back open.

I'm guessing other than the quick-service restaurants, there was probably a high percentage, 50% or more who had a week or 2 where they were, sort of, reorganizing their business operations, but that was pretty short-lived and they were back and up and running. Certainly, they've slimmed down their expenses; and insurance, thankfully, seems to be at the very top of the list of things that they maintained. In a lot of cases, they don't have a choice, either due to the liquor liability statutes or other financial restrictions that they have. So it's -- the retention level has been extremely high, which is great.

Certainly, new business submissions have been down -- we're down on the hospitality book, I think, 7% year-over-year in terms of new business, but our retention levels are higher than normal.

And this is anecdotal, but I think it's indicative of what's going on in the more rural areas of Michigan. I have a friend who owns a restaurant in Northern Michigan. And he has gone from 7 days a week to 5 days a week, not because he doesn't want to be open the other 2 days, but he can't hire anybody because they were getting $600 a week bonus. No one -- they can't find workers. He also has less people inside, but he has less workers. And then the outside is going, and he's doing more carryout. He said that his overall sales are probably down. But if you couple in the PPP, the bottom line hasn't changed.

And I think one of the things, too, to keep in mind as a percentage of overall business, this is the benefit of obviously being a balanced organization, especially across commercial. So it's not that there's a one-trick pony here from that perspective. And it might be worth talking about the bundling nature of what we have, too, because, obviously it's not necessarily a monoline product per se.

Yes. And we've made accommodations. We've had some businesses lower liability limits, while they were closed in order to save some money that way. We've seen some ancillary coverages removed in order to save some expense there on their insurance. But to Brian's point, having all of those products -- the liquor liability, the property and the general liability -- altogether does add another dimension for us to retain an entire account and not just drop on coverage and we're out of the policy essentially.

All right. Good. And in terms of -- retention sounds like it was pretty positive. But -- so what have you been getting? You can maybe provide more details on the rate increases?

Yes. So on the rate side -- and we've seen this, sort of, in most markets. We have seen some tightening and the E&S aspect of the business has been strong. When you look at it on a property basis, we're up mid-single digits, which isn't surprising given that we're not in heavily cat-exposed areas. So I think that's pretty reasonable and in line with the marketplace.

General liability is heavily determined by geography. Overall, it's about mid-single digits. But that can vary pretty dramatically based on the state that -- and the judicial climate where the insured is located. And then commercial auto is more high single digits. We're still seeing tightening in that marketplace. That really -- while the -- I guess, the amount of the increase is down a little bit over the past 3 to 4 years, we are seeing still rate increases achieved in that line of business. I'd say in some of the better-performing judicial climates on the GL side, it's closer to flat, maybe slightly up.

Okay, great. And the last question for me, so you're talking about getting your expense ratio down to hopefully 40% or below when you get to appropriate scale. What do you guys consider to be appropriate scale?

Mid-30s. Oh, scale?

Scale, yes, premium scale?

Like $20 million of earned premium would get us --.

Additional, yes.

Yes, an additional or premium would get us easily into those numbers. And with rate increases and our growth outside of the rate increases, we're hoping to get there in the, at least the few quarters.

Our next question will come from Greg Peters with Raymond James.

I was just curious about your commercial business and your target market, because a number of the larger carriers have introduced more automated, small- and middle-sized commercial products to try and streamline the underwriting process, make it easier and almost -- it's almost a direct-to-consumer approach. And I'm wondering if that you're seeing any of that affect in any of your markets? Or are your agents talking about that at all?

Yes, we have seen that trend in certain marketplaces, certainly in, I'd say, the small commercial BOP-type products, you do see that mentioned by agents. And we do see some of that; probably the most common area would be our quick-service restaurants where you don't necessarily have liquor liability exposure there. It's pretty much a BOP product. On the liquor liability side, we've introduced some things for -- but really geared more to the agents to streamline that process. We're obviously strong supporters of the independent agency distribution. But it's certainly something that we're seeing more of in the commercial BOP side and something that we're looking at very carefully and monitoring, and looking at options moving forward if we feel that that's a direction we want to go in.

The feedback you get from your agents, are they suggesting that they're losing market share to these direct products? Or do they give you a sense that it's just another competitor in the marketplace and they can hold their own?

Yes. I think it's more of just another competitor from their perspective. It hasn't been like an overwhelming issue that's been brought up. I can certainly think of anecdotal accounts that have been lost to more of a direct model. But for the most part, it's not something that I think is at a point where it's at a fever pitch by any means. I think it comes up occasionally. I think a lot of the agents are used to dealing with that dynamic on the personal lines side. So maybe there's a little bit more experience than there otherwise would be. So it's -- for us, it's maybe a little bit less impactful because we do have E&S, and we're more probably on the fringes in the business. So it hasn't really gotten there yet, other than the quick-service restaurants.

Got it. I know you were commenting on some of the trends in your business in the second quarter and the first quarter. And I just was hoping you could revisit the concept of lower frequency, accident frequency, whether it's in your commercial book or your personal lines book, just as a result of the reduced economic activity. I guess what ultimately I'm trying to get at is, your results improved nicely in the second quarter; trying to parse out what's sustainable versus what is abnormal and will revert back to where it was before?

Well, it's not going to revert back to where it was before because we have an entire -- we have a different mix of business, geography, lines of business. We're out of many of the judicial hell-hole-type areas. And the COVID gave us an opportunity to have lower frequency while a lot of those policies run off, like Southeast Florida and some other areas where we have changed our focus. And so we're not -- it's not going to go back to what it was before. When you look at -- when we look at our mix of business and we go back over the historical loss ratios, based on the geography and the mix of business we have today, we're pretty confident that the loss ratios are going to uptick on an accident-year basis, but they're not going to pick anywhere near where they went before. The historical loss ratios on the mix of business we have today, are good. So we have confidence in that.

COVID, obviously, when you shut all the businesses down and they have to maintain their premiums, either because they're leasing the building or they own the building and they have to maintain their liquor license, but you're not having any claims, this number of claims are going to go down. If you're not serving liquor, your not going to have a liquor claim. So that -- those will pick back up, but our liquor experience has always been good, other than Pennsylvania, which the law changed in 2015/'16. So -- I mean that's how I'd answer that. We're confident in the mix of business we have today. We have added a couple of new lines. We've lowered our reinsurance retentions to put us in a stronger position. So we're pretty confident where we are.

You lowered your reinsurance retentions. What -- just a follow-up with that. I'm just curious about how your reinsurance structure changed? And is it more expensive this year than last?

That's really why it's more expensive. Instead of -- we were retaining $0.5 million, and now we're down to $300,000 or $400,000 depending on the line of business.

Got it. I guess the last question would just be the capital position of the company. One quarter doesn't make a trend, but you did report profitability this quarter, so it's a good sign. Can you give us an update on how your capital position is positioned relative to the premium you're writing?

Well, it's positioned well. We're still left on the statutory books. We're still -- the company is still less than 2:1 gross and 1.2:1 net, right around there today. Conifer Insurance Company and White Pine have a little bit different stats, but that's basically -- they're similar. And the capital is going up. So we're confident in the near term. We're not talking about growing 25% and adding a whole new line of business or anything like that. We're just growing in the current mix of business we have, and we expect high single-digit, low double-digit growth.

Since I'm showing no further questions at this time, this will conclude our Q&A session. I would like to turn the conference back over to Jim Petcoff for any closing remarks.

I want to thank the three of you for the questions and taking the time today to listen to our story. We do believe we're in a good position. We do believe we're actively trying to close out the old claims. So can I say there won't be development, no, but we're in a pretty good timeframe to get those things done, especially when the accident-year experience has been exceptionally good. But we see the book of business, as I said, in a good position. We didn't talk much about personal lines, but the personal lines now is back to the performing book, and that's growing. That grew at 14%, and we expect that to continue to grow. So we're optimistic. I didn't even say cautiously optimistic; we're optimistic that the future is bright. So thank you.

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