Presurance Holdings, Inc. (PRHI) Q1 2020 Earnings Report, Transcript and Summary

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 Mr. 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 that 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 will also discuss non-GAAP financial measures as defined by SEC Regulation G. 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 will 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 would 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 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 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 insurer. While this has forced us to adapt and altered the way that we transact our business, our company has done so adamantly. Through it all, our people have shown great commitment at high level of customer service during these incredibly uncertain times, many thanks to all of them. 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 had clearly been paying off today. Throughout the outbreak, we have 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 on 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 companies, our industries 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 marketing 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 are 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 the same investment moves. Roughly three-quarters of our net loss in the period was attributable to transitory changes in the 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 have more on this later. Regardless of ever changing investments, 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 the global pandemic. As a result and overall for the quarter, we exhibited steady growth in our commercial lines and an increase in our personal lines production as well driven mostly by our low value dwelling program. I was especially pleased to see our personal lines combined ratio showing a profit in the quarter and 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 over to you, I am going to turn 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 are 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 procedure and began to evaluate the impact of possible economic slowdown on our books of business. We do specialize in select classes that maybe impacted directly from the COVID restrictions, for example, certain hospitality revenues. 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 risk, 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 rate premiums. The majority of our premiums written are in specialty commercial lines requesting roughly 93% of total gross return 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 increases the mix of rate and new business during the quarter. As expected, we did see a decline in new business production as uncertainty 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 or niche underserved classes. Our goal is to be there for our customers and help to serve 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 they 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. Additionally the vast majority of our polices contain and an exclusion of loss due to virus or bacteria this exclusion applies to all coverage under all forms and endorsements that make us our policies including but not limited to the forms and endorsements that apply to property damage to buildings or personal property or business income actual expense or action from civil authority. 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 values on business. This is a solid working example of continuing ERM as we made a conscious decision to largely exit wind exposed business starting several years ago to reduce our overall volatility. Today, we are seeing some of the results of those earlier efforts. Our personal lines make up a smaller portion of our business today we've been pleased with the much improved results versus prior quarters and look for even more profitable contributions to commence future periods. During the quarter we reported the first period where underlying accident year combined ratio for both commercial and personal lines with sub 95% are lower than we originally anticipated or hoped we are heartened with the results recorded one element of Conifer's that we feel very strongly about today’s environment is the growth and build-out of our key data agency business. For years, we have cultivated a strong client and carrier network with a sticky customer base we believe that this is an area where our business that should continued 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 both agents and customers are changing their day to day operations in a remote setting admittedly looking to the future is challenging with that we like many in the industry feels fair to expect top line pressure on premiums going forward but it is fairly too early in the process to properly gauge any future impact today we don’t have a great deal of seasonal variants and our policies in force and all of this has encouraged by the overall premiums generated of late in a high level of retention among our existing policy holders seen in recently we are working diligently to see those trends continue. And with that, I will turn it over to Harold for a brief review of the financials.

Thank you, Nick. I will provide a quick review of the results and then we will open it up for any questions and since Jim and Nick had discussed the impact of COVID-19 pandemic I will keep my comments limited to reporting results for our first quarter. Gross written premiums were $25 million in the first quarter which was 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 over years 2017 and prior yet the accident years 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 to some timing differences between quarters that 2020 first quarter expense ratio to be slightly higher than average. While we have numerous cost-cutting measures underway, we 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 last year. Our net loss included $3.1 million loss in 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 the $900,000 gain – realized gain as we repositioned our bond portfolio as a means to obtain the best yield 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 continued 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 $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 would like to turn it back over to Jim for closing remarks.

Thank you, Harold and Nick. Much has been seen and made of the immediate impact of COVID-19 on the asset side of our industry. I won’t belabor the fact any further, yet 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 plants 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 the 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 in the definition of unprecedented. I want to again express my deep gratitude to all of our dedicated employees and their families who are 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?

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Paul Newsome with Piper Sandler. Please go ahead. Paul, the floor is yours. Your line maybe muted.

Sorry about that, if I am not – am I coming through now?

Yes.

Good morning, everyone. 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, what you see in the market as well as what you maybe do as well, particularly would be interested if there is any terms and conditions that you are doing or thinking about changing?

Nick, you want to talk about that?

Yes, I mean, I think from our perspective, terms and conditions sort of directly as a result the coronavirus. As we mentioned, most of our – the vast majority of our policies have a virus and bacteria exclusion. And we have certainly will continue to apply that excluding given the crisis. I think for the most part, it sounds like a lot of the companies in our market already had similar language side. So I haven’t seen a noticeable change in those conditions. Certainly, 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 think 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 two factors moving in sort of opposite direction. I think beyond that with businesses reopening, most of our policies have communicable disease exclusion as it relates to liabilities. My guess is – and I think we have seen some of that – some movement from companies as they look moving forward is where 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 have 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 any of the other classes that we write and we are confident 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 is doing.

Did that answer for you, Paul, or do you have – you need any follow-up?

No, that’s fantastic. Second question just could 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 that?

I will let Nick talk about that too.

Yes. Just the ‘19 figure was very small with some development in hospitality that 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 have obviously been working hard at repositioning the hospitality book toward more favorable states like Michigan and 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 that impact will be much smaller than it’s been, certainly in those older years.

The only other thing I would like to add to that, which is on the QSR side that had some development in ‘18 and ‘19 that was because of the geography situation as well, out of one more out of those Southeast Florida and those areas. So we – and QSR has much quicker reporting. And so we are comfortable that the development going forward is going to be less off.

And my final question, I will let somebody else ask I want to ask about what 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 am not sure you put all those things together and tell us which direction statutory capital went in the quarter?

Good question. Harold?

Yes sure so. Yes I'm sure you are aware of the stock evaluations do effect statutory capital and surplus directly they are mark to market on a statutory basis bonds are kept at amortized thoughts so we were closely monitoring our capital position I think we ended up 331 in a 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 are 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 okay from a capital perspective Brian do you want to add some

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

Nice addition Brian.

Thanks guys. I appreciate the help.

Thanks Paul.

Our next question will come from Bob Farnam with Boenning & Scattergood. Please go ahead.

Yes thanks and good morning. 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 how was your stance with A.M. Best 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 speak for them but they are taking largely asset review of this event and given the high quality nature of our portfolio we actually feel very good there were kind of three specific categories they look to kind of your business they look at your equity exposure and then they were looking at things like direct mortgages and real estate and category three, 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 kind of done our own internal modeling and working with our brokers out there to kind of help us on the stress test I think we should hopefully be in good shape.

Okay great. And going back to the issue for a business interruption claims. I think part of the concern we’ve had is that the language so I was curious how much of this how much your business is written on an excess in compliance basis recap I 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 in certainly in the coverage and question we do follow ISO language so we are 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 it’s in the safe set are admitted their typically pretty favorable in terms of the regulatory environment so where we had to make changes we really on an admitted basis have not had much resistant and on the E&S side obviously that rises a lot of flexibility so we feel good of the language and we were glad that we follow the ISO language like that most carriers have.

Let me add to that though we don’t have any manual script forms for others types of property and we don’t expand coverage’s to write the things we write specifically in the hospitality are usually smaller and standard ISO language almost across the board.

Right okay. That's interesting because I thought since you had everything E&S basis it pretty much could be pre-form for what you want to have at the policies but it sounds like you basically taken the ISO language and put it in that as well?

Yes, I am too old – we are too old to argue with people about what the language means it's a lot easier for our people to utilize the ISO language and we know where we get.

Do you – even though the language sounds like it’s pretty tight 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 am sure there will be lawsuits at some point. It seems like most of the lawsuits that we have seen in the media have been attacking policies that don’t necessarily has a clarified virus and bacteria exclusion. The vast majority of our policies do have that exclusion. So I think that we will make it tougher from a litigation standpoint as it reflects on our book, but given the nature 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 are 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 is very few in that.

Okay, great. And last question for me, it 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 have been kind of battling right sizing your premium to kind of match the infrastructure. So, with the fact that premiums going to 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 ratio be coming down as well, like how much of that is coming from savings of initiatives or whatnot that you are doing?

There is a couple of things hitting that. We have as everybody in the industry is getting Irma development it continues to lower our earned premium, because when you have Irma development, we have reinstatement premiums. Having said that, we only used up less than 30% of our capital on Irma, but every time, you have a little bit of development in Irma, you are going to have a lower earned premium. Our written premium was down at the end of the 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 cost 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 continue to go down.

Okay, thanks for that.

[Operator Instructions] Our next question will come from Greg Peters with Raymond James. Please go ahead.

Good morning. Real quick first, most of my question have been answered, but I was wondering if you could give us a sense of new business production how it flowed 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? Thanks.

Yes, I am going to let Nick do specifics, but if you look at our business and our diversification, because our personal lines have grown, because they are [indiscernible] because we are into other lines of business whether it be the repo commercial auto that has stayed consistent [indiscernible] a little bit. The security guard, fire suppression, all those areas are continuing to grow. The hospitality is obviously the one that is more a risk. And I am going to let Nick talk more about it, but the QSR side, those people have not necessarily been out of business, because we 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 months from a new business perspective. Overall, new business submissions were down on the commercial lines side about 30%, which 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 or move carriers or policies given the uncertainty. So, you don’t see as much new business submission 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 shutdowns at different states, while our quick-service restaurant line, they are already setup for drive-through, carry-out, delivery, they are typically on some of the delivery type ask than you see businesses using successfully. So, we haven’t seen as much of an impact on that book and that’s pretty healthy percentage of our overall hospitality book. And then in other classes, on the virtual line side and we really have not as much of an impact, it’s really been focused on hospitality.

And on the bar caverns side, people – the smaller accounts that we do right, they tend to own the buildings and they want the buildings to remain insured, but we are not writing non-aligned properties. We still have the liability coverages there associated with that. Therefore, they have lowered policy limits and sales. So, we are seeing pressure on the top line with respect to that, but we are not necessarily losing accounts. And the way the government has responded with various programs, we are seeing people shutdown, but we haven’t seen that much shutdown yet, so…

And I’d add in certain areas of the country, we are seeing new business submissions pickup as they slowly reopen, Texas being one of those states and we had a solid distribution network impact in Texas. So, obviously it’s uncertain as to sort of how this all shakes out, but we were 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 at it all?

I would be surprised if we were down. I am not expecting it to be down. We do have some initiatives going and the personal lines, is actually growing. And we picked up new distribution places there. We have also added some little bit more expansion in our core lines with some new agents and other geographies. I would be surprised if it was down, I mean, it could. I mean who knows what’s going to happen, right. I am not – I can’t tell you, are we going to have another shutdown in the fall or that kind of thing, but we would be surprised if it was down and we are hoping for us marginally.

Got it. Thank you for your answers.

[Operator Instructions]

Alright. We are good. I think unless there is more questions coming, Grant.

Yes, 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 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 have discussed, we don’t expect a 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 yet. But take care and thank you for your time.

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