Conifer Q2 2023 Earnings Call Transcript

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August 10, 2023

There are 6 speakers on the call.

Operator

Morning, everyone, and welcome to Conifer Holdings Second Quarter 2023 Investor Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. As also note, today's event is being recorded. At this time, I'd like to turn the floor over to Brian Rohney.

Operator

Please go ahead.

Speaker 1

Thank you, and good morning, everyone. Conifer issued its 2023 second quarter financial results after the close of market yesterday. You can find copies of the earnings release on the company's website, ir. Cnfrh.com. The slide presentation accompanying management's remarks this morning is available to view or download via webcast or from the Investor Relations section of Conifer's website.

Speaker 1

Before we get started, please note that except with regard 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 may differ materially from the results anticipated in these forward looking statements due to various risks and uncertainties underlying our forward looking statements as described from time to time in Conifer's filings with the SEC, including our latest Form 10 ks 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 During this call, we'll also discuss 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.

Speaker 1

Call. We will conduct a Q and A session after management's prepared remarks this morning. With that, I'll turn the call over to Jim Petcoff, Executive Chairman and Co Chief Executive Officer. Jim?

Speaker 2

Thank you, Brian. Good morning, everyone. Also joining me on the call today are Nick and Harold. Thank you for joining us today to discuss our Q2 financial results. Like the industry at large, the impact of wind related events was felt by many in the quarter.

Speaker 2

In this regard, we are no different than our peers. In fact, the affected personal lines Business, it has been almost 10 years since the event anywhere near this magnitude has occurred. Despite the unusual storm related losses in the period, I'm pleased to see continued progress in several key areas of emphasis for Conifer. For example, top line growth and expense management. In the quarter, gross written premiums were up 19%.

Speaker 2

Significant rate increases coupled with organic growth within our historically profitable core specialty business allowed us to achieve the Substantial top line growth. Moreover, for the 6 month period, gross written premium was up almost 15% on the year as well. Nick will provide more color shortly, but that is solid growth in the quarter and for the 6 months. We see room for continued expansion going forward. It's important to recognize that our disciplined underwriting strategy played a pivotal role in driving this top line growth.

Speaker 2

Over the past few years, we have diligently book of business focusing on lines where we have deep knowledge and experience in the key profitable verticals that we emphasize most. Furthermore, when we isolate the impact of storm related losses, we posted an underlying accident year combined ratio of 95% for the Q2. It is a testament to the strength of our core operation and reiterates our commitment to underwriting excellence and our ability to navigate challenges while remaining focused on long term profitable growth. Additionally, our ratio continues to trend favorably, demonstrating consistent and sustained improvement on an overall expense reduction. We are approaching our target expense ratio of 35%, a significant near term milestone that reflects our commitment to operational efficiency and enhancing overall profitability.

Speaker 2

These results affirm our efforts to streamline our processes, control costs and position the a testament to the hard work and dedication of our entire team. Their unwavering commitment to our strategic vision coupled with their marketing expertise has enabled us to navigate the complexities facing our entire industry, while positioning Conifer for sustainable success. I'll now hand it off to Nick for more color on our underwriting results.

Speaker 3

Echoing Jim's comments, I'll provide additional details regarding the operational objectives that have shaped our performance, strategic direction and that point the way to sustainable future profitability. Over the past few years, Our underwriting teams have been dedicated to meticulous business mix enhancement, cultivating our lines where we have a distinct competitive advantage. By focusing on these core specialties, harnessing the power of our own experience and data, we've strategically aligned our underwriting efforts with lines of business where we have strong knowledge, extensive experience and a proven track record of profitability. This approach yielded gross written premium of just under $45,000,000 a record high watermark for quarterly premium. As Jim noted earlier, we achieved a 19% increase in gross written premium compared to the prior year period.

Speaker 3

This increase resulted from a combination of significant sustained rate increases and organic growth in our key select operating verticals. The majority of our premium continues to come from commercial lines, which accounted for just under 80% of total gross written premium in the period. Commercial lines production was up 8% in the quarter to $35,000,000 Our strategic use of technology has been particularly in our efforts to refine our commercial lines book. Through the application of advanced data analytics, we can comprehensively examine market trends, consumer behavior and risk patterns to identify and target prudent growth opportunities with precision. This data driven approach has guided us in while retaining a solid overall account retention at 90%.

Speaker 3

Our personal lines business, which consists principally of low value dwelling products, Continues to grow and represents a solid share of overall business at just over 20% of total gross written premium for the 2nd quarter. Personal Lines gross written premium was up 86% over the same period last year to just under $10,000,000 for the 2nd quarter. Excluding the impact of storm related losses, the personal lines accident year combined ratio was 68% for the Q2 of 2023 and 89% for the first half of the year. As noted in previous earnings calls, we continue to see additional runway for significant growth and additional rate increases in our personal lines premium production as well. We focused on proactive significant rate increases in Oklahoma and in Texas And our efforts to refine our personal lines performance, leveraging advanced modeling and analytics to price risks more accurately and effectively over time.

Speaker 3

Excluding the impact of storm losses, the company's accident year combined ratio was 95% for the Q2. This marks a notable improvement over the prior year period and continues our profitability trend given the Q1 results. It also highlights our unwavering commitment to effective risk assessment, prudent pricing and responsible claims management. As the overall profile of Conifer's book continues to improve, we expect to see a corresponding downward trend in the overall combined ratio. The company has emphasized its focus on strategic disciplined underwriting for consistent profitability and operating efficiency.

Speaker 3

By dedicating resources to the best performing lines of business, the company will continue to drive sustainable growth and long term profitability. With that, I will turn over the call to Harold for the financials.

Speaker 4

Thank you, Nick. I'll provide a quick recap of the financial results, and I encourage Review our filings and presentation on the company's website for greater detail. As noted, gross written premiums increased 19% to just over $45,000,000 in the Q2. And with Nick having detailed the premium breakout, I will focus more on our overall financial results. For the quarter, the overall combined ratio was 121%, which even when considering the elevated storm activity, The combined ratio is still down 8 30 basis points from the same period last year.

Speaker 4

And excluding the impact of the storm activity in the 2nd quarter, Conifer's accident year combined ratio was 95%, as noted earlier. Our loss ratio was 83% in the quarter given the storms, but nonetheless improved 7 20 basis points versus the same period last year and improved 980 basis points to 73% for the first half of twenty twenty three. The expense ratio was 38% for the quarter, down 110 basis points for the same period last year and approaching our target expense ratio of 35%. Our expense ratio continues to trend favorably downwards despite the lower net earned premiums due to the success of our ongoing expense reduction efforts. As net earned premiums Net investment income was $1,400,000 during the 2nd quarter, up 140% from $564,000 in the prior year period and was up 149 percent to $2,700,000 for the 6 month period.

Speaker 4

Our investments remain conservatively managed with the vast majority of them in fixed income securities with an average credit quality of AA plus an average duration of 3.1 years and a tax equivalent yield of 2.8%. With $5,400,000 of storm losses in the 2nd quarter, the company reported a net loss of $4,700,000 or $0.39 per share compared to a net loss of $8,400,000 or $0.86 per share in the prior year period. Moving to the balance sheet. Total assets were $297,000,000 atquarterend, with cash and total investments of 167,000,000 Our book value at quarter end was $1.38 per share. We do have a $1.8 or $1.86 per share And net deferred tax assets that due to a full valuation allowance were not reflected in book value.

Speaker 4

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

Speaker 2

Thanks, Sheryl. Thanks, Nick. In closing, I want to emphasize that we are resolute in our commitment to achieving sustainable growth and operational efficiency over time in order to deliver superior service to our policyholders and results to our shareholders. As we move forward, we remain confident in our ability to navigate the evolving markets that we serve, and we remain alert and nimble in recognizing and responding to industry wide challenges, such as the storm related activity exhibited in the 2nd quarter. All in, efforts to deliver long term value to our shareholders.

Speaker 2

With that, I'd like to invite any questions that you may have. Operator?

Operator

Ladies and gentlemen, we'll now begin the question and answer session. Our first question today comes from Paul Newsome from Piper Sandler. Please go ahead with your question.

Speaker 5

Good morning. Thanks for the call. Could you talk about the relationship between the net And then gross premium, particularly in commercial and the gross appears to be growing faster than the net. Is that just purely a function of reinsurance or is there something else going on?

Speaker 3

Yes, that is a function of reinsurance. We did see increases on our property reinsurance at oneone given the activity last year from Ian. We also have a ceding commission on our XOL Treaties, so that also reduces the net compared to the gross.

Speaker 5

Right. There was a small amount of adverse development, I believe. Can we talk about the sources of that?

Speaker 3

Yes, we did see some Emergent Center restaurant Bart Tavern book in 2022, So a more recent year, mostly from Florida, which we've now put into runoff this year. So we don't see that as Being a major impact moving forward. And the rest of the development was really ceded to the loss portfolio transfer That we put in place last year.

Speaker 5

Great. How should we think about the cat load prospectively with the growth in property business?

Speaker 3

Yes, it was an unusually active quarter for our Texas and Oklahoma books of business, it's moved less to a coastal exposure where we're seeing cats from hurricane losses and more Of a severe convective storm risk moving forward. We've both of those books of business, if you look at the last couple of years, They performed very well. I think we had 25 cats in the second smaller cat events in the 2nd quarter, which was up Significantly from last year. So while it did impact us, I do think it was an anomaly for this quarter. We We're actually filed a or we've implemented a 28% rate increase for our Oklahoma book Effective 8.1% and we have a 20% rate increase being implemented 9.1% for our Texas book.

Speaker 3

So I do think Q2 will be a more active quarter for that book as opposed to hurricane season

Speaker 2

and we

Speaker 3

had more of our Florida business.

Speaker 1

And that also follows on several other rate increases for both of those states previously as well.

Speaker 5

Should we think of the cat load in general rising, not really obviously, I think everyone would agree the 2nd quarter is pretty anomalous. Is the expansion of that business creating a little bit more of an expected cat load prospectively or is it pretty stable based on historic patterns?

Speaker 3

I think you could say in the second the first and second quarter, yes, it's reasonable to expect that we'd see more Impact from cat events moving forward because of those books of business. On the flip side, we exited most of our Florida exposure. So, we don't I'd like to see as much in the 3rd Q4 from a hurricane perspective. So yes, it's reasonable to assume based on that book in the first half It's going to be more active with cat exposure in those states, but less active for the second half of the year given the lack of Business in Florida. So overall, probably pretty similar to last year, maybe just in different parts of the country and different parts of the or different quarters throughout the calendar.

Speaker 2

But are you asking for the cat load perspective from perspective of rate?

Speaker 5

No, from really from a combined ratio perspective. We obviously are going to be building in some expectation for sort of a normal year. And it looks like it's that piece of the losses might be going up on average, but it's kind of hard to tell.

Speaker 2

Okay. I think Nick answered it.

Speaker 5

And then maybe a few more thoughts on the Expense ratio improvements and how much more you think you can get those improvements? And then on top of

Speaker 2

the This is where Harold gets to speak. Yes. This is where he'll get to speak.

Speaker 5

And I

Speaker 2

will tell you, it's The expense

Speaker 5

I want to

Speaker 2

I want to tell you that from a total management standpoint, we have been laser focused on making sure our expenses are coming into line. And the Board has been very active in encouraging us to do that and we have embraced the expense side. So Harold?

Speaker 4

Well, yes, and actually this last quarter that we had includes some expenses that will not be going forward as a result of Some of the expense reductions that we made in the second quarter, which won't really be seen until the 3rd Q4. So there is ongoing efforts that will still show more benefit in the future quarters moving forward. We also, in this particular quarter, had a few more expenses that were estimates from year end relating to some of the Expenses relating to the transactions we had last year that we had to adjust for in this quarter. So, yes, you can actually see it's hard to put a number on it, but you should see a continued reduction in that Expense ratio, basically in the next quarter.

Speaker 5

Thank you. Appreciate the help as always.

Speaker 2

Thank you, Rahul.

Operator

And ladies and gentlemen, with that, we'll be concluding today's question and answer session. I'd like to turn the floor back over to Jim Peckoff for any closing remarks.

Speaker 2

Thanks for being on the call. We appreciate it. We will continue to move forward on the initiatives we have started. We're confident in our core underlying business and look forward to next quarter. Thank you.

Operator

Ladies and gentlemen, with that, we appreciate your time and interest. We thank you for joining. You may now disconnect your lines.

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Earnings Conference Call
Conifer Q2 2023
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