Good morning, and welcome to the Conifer Holdings Inc., Second Quarter 2019 Investor Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Adam Prior. Please go ahead.

Thank you, and good morning, everyone. Conifer issued its 2019 second quarter financial results after the close of market yesterday. On the company's website, ir.cnfrh.com, you can find copies of the earnings release as well as the slide presentation that accompanies management's discussion today. If you were 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 with 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 measures was provided with the news release. Statutory accounting data is prepared in accordance with statutory accounting rules and is, therefore, not reconciled to GAAP. We will conduct a Q&A session after management's prepared remarks this morning. With that, I'll turn the call over to Mr. Jim Petcoff, Chairman and Chief Executive Officer. Please go ahead, Jim.

Thanks, Adam. Thank you, and good morning, everyone. Joining us from management today will be Nick Petcoff; Andy Petcoff; Harold Meloche; and Brian Roney. Overall, we did make significant progress in the second quarter in terms of reaching some of our short-term goals, but we still have a number of operating profitability milestones to accomplish as we execute on our entire strategy. With the planned changes in our premium mix largely in place and focusing on writing more specialty commercial business, Conifer is in a much better position to selectively deliver top line growth and achieve greater scale in 2019. We're focused solely on expanding our business into the select geographic commercial markets that have exhibited favorable conditions where we can underwrite profitably. Conversely, we are moving away from venues where we've seen challenging claims results, including select markets in Florida. To better prepare the company to execute on this long-term growth strategy, during the quarter, we announced the closing of a private placement of approximately 1.2 million shares of common stock at a price of $4.25. We intend to use these proceeds directly for growth capital in the company's specialty core commercial business segments. More specifically, we plan to grow our premium and support small, accretive agency acquisitions. Results that we are focusing on -- the reason we are focusing on small agency acquisitions is that we have analyzed long-term potential for increased ROE generation at Conifer versus our peers. We realized that we may be leaving significant non-risk revenue on the table. But by making these small and attractive agency acquisitions, we're looking to drive increased non-risk revenue to the bottom line as we place premiums with other carriers and garner increased commissions. Also, this strategy has the added benefit of increasing the premium production that we can retain on our own books that otherwise may have been placed away from us. Coupled with our overall premium and agency growth plans, we remain committed to expense management by first reducing our absolute costs, growing our earned premium base and allowing the company to achieve greater operating efficiency over time. While our top line has been relatively consistent over the past several years, this has largely been a result of our changing business mix towards commercial lines production we're committed to growing but only the right way and in the right markets so we can build a strong premium base for future profitability. We believe this will ultimately help to drive long-term, sustainable profits and deliver positive short-term shareholder returns. With that, let me turn it over to Nick and Harold, and they'll talk about the details, and I'll return for some closing remarks. Nick?

Thank you, Jim. Overall, gross written premiums were down 5% in the second quarter to $25.2 million compared to $26.6 million in the prior year period. Our commercial lines business represented 93% of total gross written premiums in the second quarter of 2019 and decreased slightly year-over-year to $23.5 million when compared to the second quarter of 2018. As a result of the lower net earned premium in the quarter, the commercial lines combined ratio was 107.7%. The commercial lines accident year combined ratio was 100.5% for the quarter and 98.5% for the 6 months ended June 30, 2019. Premiums were down in the second quarter largely stemming from a work comp account that we lost due to competitive pressures as well as our conscious effort to very selectively write business in Florida. As part of our overall growth plan, we continue to refine our business mix even within commercial lines by repositioning and further reducing our exposure to certain Florida-based commercial business. In our commercial lines, we saw particularly strong growth within our small business group and, more specifically, our RBC classes in the markets that we want to pursue most. For example, we are actively targeting more Michigan premium overall, including property, GL, liquor liability and work comp. As the year plays out, Michigan is fast becoming our number one production state. Overall, we see continued runway for new policy growth, geographic expansion and solid rate increases on most of our existing and new commercial markets. Average rate increases are in the middle- to single-digit range across most lines or larger for certain auto classes of the business. Now I'll briefly touch on personal lines. Our personal lines business represented the remaining 7% of total gross written premiums at $1.7 million in Q2 of 2019. The combined ratio for our personal lines premium was almost 200% in the quarter. We expect those results to improve significantly over time as we move further and further away from wind-exposed personal line and drive more premium through our low-value dwelling product services. As for growth prospects for our low-value dwelling products, we continue to focus on developing in the Midwest and Texas to complement our agency relationships in those states. Historically, this has helped us across several market cycles. As we continue this business mix transition and with a clear focus on the bottom line, our goal is to write more of our specialty commercial business coupled with selective expansion in our core personal lines. As we refine all of our premium production, regardless of market, we strongly believe that we are writing specialty business where we see the best potential for underwriting profitability over time. Now I'll hand the call over to Harold Meloche for a discussion of the financials.

Thank you, Nick. As always, I encourage investors to review our quarterly filings for additional information about the company. I'll provide a quick review of the results, and then we'll open it up for any questions. In the second quarter, gross written premiums were $25.2 million, down 5.2% year-over-year. Conifer's combined ratio was 113% this quarter compared to 109% for the same period in 2018, and we reported a loss of 67-point -- a loss ratio of 67.1% compared to 62.8% in the prior year period. Our net earned premiums were down by $2.6 million or 11% largely due to the personal lines, which was down $1.9 million or 61%. This quarter, the expense ratio decreased slightly to 45.9% compared to 46% in the prior year period. We expect to see this number continue to decline as we grow our net earned premiums, especially in our commercial lines. In addition, we have implemented a number of cost reduction efforts to lower the ratio over time as well. Net investment income increased 25.4% to $1.1 million this quarter compared to $838,000 in the prior year period. Our investments are conservatively managed with the majority of fixed income securities with an average credit quality of AA, an average duration of 3 years and a tax-equivalent yield of 2.9%. In the second quarter of 2019, the company reported a net loss of $2.9 million or $0.34 per share compared to a net loss of $1.1 million or $0.13 per share in the prior year period. Moving to the balance sheet, total assets were $243 million at quarter end, with cash and total investments of $160 million. Our book value at quarter end was $4.89 per share. We had a valuation allowance against the company's deferred tax assets of $1.32 per share and a deferred gain as a result of the ADC of $0.05 per share. That represents $1.37 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 and Nick. We are solely focused on profitably growing this company with the long-term benefit of our shareholders. We continue to invest in Conifer personally and corporately as we implement our business plan initiatives, including select agency acquisitions to help manage and grow our distribution over time. We believe that the initiatives we have put in place have us on the right path, and our existing premium mix and infrastructure will allow us to achieve solid profitable growth going forward. With that, I would like to go back to the operator and ask for any questions.

Thank you. [Operator Instructions] Our first question comes from Scott Preston. Please go ahead.

Can you guys hear me okay?

Yes, Scott, we can.

So can you just talk about, going forward in third and fourth quarter, maybe how the quarter has progressed. I know you lost one account this past quarter. But more particularly focused on the top line, looking at the absolute level of losses in 2Q, backing out Irma, really wasn't at bad. It seems it's -- we're more at a scale issue at this point. And with reinsurance costs coming down and expenses coming down, can you talk about how the quarter, third and fourth quarter, have progressed and where you kind of see profitability happening with the top line increasing? Where would that be, $23 million, $24 million, if you can kind of talk to where we might see that breakeven at?

I'd love to talk about that. That's a great question. I'm going to have Nick talk about it.

Yes. We've seen strong growth in Michigan, in particular. We were up in the second quarter in Michigan for a restaurant, bar, tavern business, 11% over last year. We also saw strong growth in Colorado. We're up 10% over last year as well. So we're growing in the classes and geographic areas where we want to grow. We saw some headwinds in terms of us losing premium in Florida, but a lot of that was by -- and most of it was by design. The litigation environment down there has been extremely challenging, and we've been -- and the rate environment is not where we think it needs to be so we've been reducing our exposure to Florida. So that's where we saw some of the downtick in the premium. But we are growing in the most profitable areas that we've seen over the past throughout for several years. So we feel very good about the premium mix moving forward, and we see improvement in the loss ratio based on that premium mix moving forward as well. And as you noted in the question, we are going to see an increase in our net earned premium as a result of lowering our property cat reinsurance costs with the exit of the wind-exposed business. So between the growth in the areas where we're looking to grow, we're expanding in our non-franchise auto dealers outside of the Midwest, where we've had very good experience. We're looking at additional space on the West Coast as well as the Southeast. We feel very good about the second half of this year on a top line basis and equally as importantly on the loss ratio with the improvements in business.

Thanks, Nick. The only thing I'd like to add to that, Scott, is we talked about agency acquisitions. I want to be clear that we're not trying to be a Brown & Brown or an Acrisure or whatever. We are only -- a lot of our agents are, like me, getting a little bit older and looking for exits. And we want to be able to control our distribution as best as possible. And a lot of times, it's beneficial. They come to us. We're a majority player in their type of business. They come to us to see it if there's a way for us to help them transition. So we're doing the agency acquisitions selectively in at we think is the fair value. And it's only to, like I said, control our distribution. The other thing we're doing is, on business we write, we have contracts with third-party insurance companies that we've been supplementing our lines of business. As an example, with security guards, we use employers out of Nevada as for the workers' comp nationwide. But there's a lot of those opportunities for us, and we're adding companies and growing our -- really, our wholesale distribution that almost exclusively explore the benefit of our core businesses so we can offer more products, right? So we see the average revenue growing as well.

Okay. Where do you think you guys can exit the year at as far as top line? Is there kind of a range you can provide us?

Nick?

Yes. I think when we look at the end of the year, we're probably looking -- $100 million to $105 million, I think, is a range that we're probably comfortable with. I mean, Brian, do you want to add anything to that?

Yes, I think if you look at it, I think our internal goals, the first half, obviously, a little shy. Second half, we expect to see stronger growth given some of the initiatives that Nick talked about. So I think the overall top line should be flat to up a touch, probably up single-digit kind of thing as we look at it. It depends on, obviously, how we see continued rollout in Michigan. I mean I would continue to echo the comments that where we're going to is driving our profitable business through the Midwest and across the nation. So for us, I think that's really probably more of the focus.

And I want to add some, Scott. You talked about the reinsurance changes, and we got hit with some minimum premiums from old cat and things that really reduced our net earned premium. We want to get our net earned premium up to $25 million. We get our net earned premium up to $25 million, the expense ratio falls in line as we continue to reduce our overall fixed expenses. And we're headed in that direction, and we've done the right things. We just haven't -- I mean you got -- this is a long-term play. You don't turn that around in a minute. And we've been busy putting out fires and growing and now getting -- changing our business mix and growing our core businesses, and we're kind of almost totally there. I'm not saying that the development is totally over, but the number of claims in the past for the prior years that have caused us headaches is way, way down. So we're very comfortable in saying our earned premium is going to grow. And we're hoping to get it up in the $25 million range soon, as quickly as possible.

Okay. And at that level, assuming zero improvement even in the loss ratio, you guys should be fairly profitable at that level. Is that correct?

We believe that, yes. And we believe the loss ratio should improve significantly. So that would be an added benefit, but yes.

Okay. And then...

And one thing I would add...

Go ahead, Scott.

Yes. Just my last question was just you had the development on Irma, do you kind of feel like we're done there and it's well reserved now? Or do you think there's still some risk that there's a little more development in Irma?

It's not the fact that we're not well reserved on cases. It's not just case development. We're getting new claims. And we're -- not only are we getting new claims, we're getting claims that are reopening. So I mean what we really need is another hurricane in Florida to take the attorneys from Irma to the new one. I mean that's what we really need. So I mean I don't know how to put it. Florida is a mess.

But the new legislation should help that, correct?

We're hoping. But in fairness, they did -- they were able to hang on to a conservative governor who has appointed three rational Supreme Court justices. And I expect over the long term, the changes that are being made currently and have been made in Florida will continue to be updated. I think there's a big push down there for -- toward reform is -- the litigation costs and the tax on the people with litigation is like the highest in the country. And I think it's finally coming. They're finally getting it. So I expect Florida to improve. But in the meantime, we've got to be very careful on what we write down here.

[Operator Instructions] Our next question comes from Mike Bergeron with Strength Capital.

Good morning guys. Just some -- a few clarifying questions to start. So the $2.9 million loss in the quarter, was that before or after the ADC?

After.

So that was after. And what was the size of the ADC to pick up from that, $1 million?

You mean how much did we amortize in this particular quarter?

Yes.

We amortized them about $3 million.

Okay. So without having done that, we'd be around close to $6 million loss for the quarter?

Yes, on a GAAP basis.

Okay. How -- do you guys know how much of the ADC remains? How much -- because I know we've chewed through it quite a bit. How much remains at this point?

Just under $0.5 million.

Okay. So really not much left to solve problems going forward.

Correct. I don't know that, that's -- I wouldn't say it's a solved problem. But yes, that's correct.

Why do you -- what do you mean by that, Jim, not solve problems?

The ADC was put in place to hopefully cover the last -- the development on these old claims. The -- that's been shrinking down. But also, we did have significant development in the first six months pretty much by design as we went through all of those claims. The number of claims are down significantly, and we really expect -- I'm not saying there won't be some development because I just told you about Irma, but we really expect in future quarters to not see the type of development that we have seen in the last two quarters. So we -- I'm not guaranteeing anything. But the numbers are just down so dramatically that -- and our focus on going through all those claims in the first six months, we're hopefully getting to a point where we don't see as much because you're not getting -- statute of limitations are running from those old years, and you're not getting the volume coming in it. So we feel better about the fact...

My comments here, it would be interesting to see -- we have skeptically wondered over the past few years why you keep quoting accident year just because it seems to be a part of the business. And we've heard in the past, like, hey, we think we're past that prior year development thing, but hey, we'll wait and see. The one thing that occurred to me looking at this thing, my first reaction is, since 2014, you guys have lost $50 million, which is -- it's a lot of money based on the size that this company is. But I think this might be your single-biggest quarterly loss over that period on an adjusted basis. Does that sound about right to you guys?

Whatever the numbers are, the numbers are. I'm not going to argue with what we've reported.

I think one of the biggest things to talk about here is, where are we going forward? Where do we see our business moving to? A lot of our changes -- I mean, Mike, you've known the story. You've heard about Florida with the systemic issue that involved the industry. It was not kind of Conifer specific. So I think it's kind of nitpicking...

Wait up...

No. Hey, Mike. Mike, just hang on, hang on. I think it's a mischaracterization to go out there and just say here is absolute dollars when obviously, you've seen what we've done to protect shareholders. And we're largest shareholders, period. I mean we're right in there with everybody else.

Yes.

So I think from our standpoint, I think what we're doing is trying to be direct and give you the straight scoop as we see things today. And we've done everything we can with the things that are within our control, especially as you look at our business mix shift. So I think if you see us moving into commercial lines, as Nick talked about in positive areas, things that are moving us forward, that's I think what we need to be focused on, is how can we build shareholder value today, what are the things that we can do to bring value to our shareholders not only for today but for future quarters.

Yes.

I just -- I would argue that I think it's fair and reasonable for an investor who's been in these shares to be skeptical of the projections that you guys shared because you can do it at historical over the last 5 years, and every year, the assumption is the losses are going to lower and every -- the next quarter is going to be better. And I just -- my first reaction was I think this is your biggest loss quarter. And there might be reasons for that. But at some point, it's supposed to start to look better. But let me ask this question because we can debate whether or not you guys are taking shareholder-friendly actions. How are you -- have you thought through how are you guys going to continue to service debt? I mean we are beginning to have concerns about your ability to do that. You raised the $5 million in this quarter, but you lost $5 million. S So that kind of feels like money in, money out. You got $35 million of debt, so it's a levered company or leveraged buyout guys. Usually, to service leverage, you need profit. So have you thought through that? Maybe you can talk to us about the amount of money at HoldCo. What can you do to give us confidence that you can just kind of keep the bank calm?

Well, as you already know, since we've had this discussion for several years, Mike, our ability to actually make our payments is largely a function of two different areas you could either pool dividends or you can have service contracts. The state of Michigan actually prefers the use of service contracts. We have had those contracts in place for years. They were in our predecessor companies as well. It allows us to carve up to 12.5% of gross written premium off the top that can go up to HoldCo that we can then use to service our debt. So we are very comfortable as is our bank and our relationships with our sub debt providers that we are in a position to make our payments on a comfortable basis going forward.

In addition, if you look at what the business was in 2015, '16 and the amount of Florida homeowners, which, by the way, makes up the bulk of that $50 million loss, that's all gone. So for you to say that the future is going to look like the past is very, very poorly based. So I don't think that -- I don't know that we're going to solve this...

I did not say that. I asked what you guys think. I will say, Jim, earlier in the call, you said you're -- you're still seeing some claims roll in from Irma, which was...

No, it's true. And you know the claims from Irma are reinsured. So what we're seeing is a lowering of the net earned premium by reinstatement premiums. That's where Irma is hurting us, is on the net earned premium side, because the claims themselves are reinsured. But I don't want to even see that development, but there's nothing I can do about it. That's Florida. If you look at the development in the industry, every line of business for the entire industry has had development in the last three years. The only one that hasn't is work comp. So we're not having those problems in other areas, okay? So we look at the composition of our book of business today, what the products are out there, the Michigan, liquor, the Michigan business, the Colorado business and we look at the historical loss ratios for those books of business. And we sit down and we say looks pretty good. We're very confident in where we're going. That's why we're still in it, and that's why we're investing in the company. So that's where we are. If you are in a different place, I'm really sorry. And I'm not -- if you think I'm happy with the results today, you're sorely mistaken. But I can do one of two things. I can either fix them or stop -- or sell my stock. That's it.

Say that again, Jim.

I think maybe we move on, Mike, at this point, see if there's any other questions. We appreciate your participation.

Well, let me just ask, do you guys envision having to raise more capital?

Not at this point in time, no. Not saying...

No reason we would raise more capital, and our opinion is for growth.

And let me just say one more thing because I think that there's some emotion that's come in here. And the most consistent conversation that we've had with you guys is we realize we need to make money. That's been the most consistent conversation over the past. Hey, we know we need to put numbers on the board. And it just hasn't happened. And that what I got last night, I thought, well, I think that might be the biggest quarterly loss yet. So -- and I'm worried that the ADCs run out. So we'll see.

[Operator Instructions] Our next question comes from Marcos Holanda with Raymond James.

Came in late so I was just curious, did you guys give us how many open claims you still have in the Florida book?

We have never, I think, quoted a number of claims. I think we've quoted like percentages sometimes. And I'd say on the older years from 2018 -- at the end of 2018 until now -- well, let's take it at -- yes, the end of '18, we're probably down 50% to 60%. And in 2018 was just down about 40% or 50% from 2017. So it's significantly down.

Okay. And then on your DTA, have you taken any valuation allowances on that? Or do you plan to do so in the near term?

DTA? There's 100% valuation allowance against it.

So as it relates to book value, obviously, there's $1.32 per share that's not reflected in the $4.89 book value as of June 30.

The only thing I'll say is there is emotion. We're going forward. We look back, you can get emotional, but looking back doesn't do you any good. We are looking forward. We believe we've done everything necessary or we can to try and ward off the past. Can I tell you that the industry and that the legal environment in certain areas are not going to come back and bite us a little bit? That's very much possible. But we look at our book of business and what's in our unearned premium and where we are in growing our non-risk revenue and reducing our expenses and increasing our productivity, and we feel comfortable with where we are and where we're going, and we are investing in it, and we're going to move forward. That's all I can say. So Mike, I thank you for your questions because you bring out some good points that we were able to make in the call. So thank you, and thank you, everyone, for listening, and we look forward to seeing you next quarter.

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