Presurance Holdings, Inc. 9.75% Senior Unsecured Notes due 2028 (PRHIZ) Q4 2017 Earnings Report, Transcript and Summary

Good morning and welcome to the Conifer Holdings Fourth Quarter 2017 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 2017 fourth 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 here today. If you are looking at that presentation via webcast, you may find the slides are easier to read in the large slide view, which can be selected on the right hand side of the webcast page. Before we get started, the company has asked that I note that except with respect to historical information, statements made in this conference call may constitute forward-looking statements within the meaning of the federal securities laws, including statements relating to trends, the company’s operations and financial results and the business and the products of the company and its subsidiaries. Actual results from Conifer may differ materially from those 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 the 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 would now like to turn the call over to Mr. Jim Petcoff, Chairman and Chief Executive Officer. Go ahead, Jim.

Thank you, Adam and good morning everyone. Joining me today from the management team on the call is Nick and Andy Petcoff, Harold Meloche and Brian Roney. Our fourth quarter results were generally solid and they validate our performance initiatives that we implemented during the second half of 2017. At Conifer, we returned to profitability and reported a significantly improved combined ratio. I am proud to say an improvement of 19 points on the overall combined. We also posted a 15 percentage point improvement in the loss ratio alone for the quarter. These improvements were driven by our continued strong underwriting performance, mainly from our commercial hospitality and security guards lines of business. Going forward, we will continue to focus on our better performing lines. We remain committed to generating an operating profit overall. With our improving business mix, we expect our growth rate to remain conservative in the near-term. We feel confident that our underwriting capabilities and we believe we will be profitable in 2018. With that, I would like to hand the call over to Nick for a breakdown of our individual underwriting markets. Nick?

Thank you, Jim. I would like to begin by discussing the continued proactive measures we have taken to lay the groundwork for Conifer’s long-term financial success. In the fourth quarter, we continued to shift our business mix to our more profitable commercial lines while focusing on our specialty niche market. We continue to emphasize lines where we can achieve increasing market share, but more importantly, where we can add value through prudent tailored underwriting, coupled with strong claims management. We believe that non-commoditized business is more attractive and generates better returns over time as we can bring more of our collective underwriting experience to bear versus our competition and the industry at large. Years of experience writing these select lines allows us to positively impact risk selection and help drive shareholder returns across market cycles. With that in mind, our commercial lines net earned premium increased by just over 10% in the fourth quarter partially offsetting net commercial growth was an almost 20% decline in personal lines net earned premium for the same period. Overall, net earned premium increased 4% to $25 million in the quarter. Commercial lines represented 83% of total gross written premiums and 84% of net premiums earned in the fourth quarter of 2017. This is consistent with our planned shift in business mix over the last couple of years to our more profitable commercial lines business, while selectively deemphasizing certain more unprofitable personal lines. Our commercial hospitality lines of business remain our most profitable premium and we are pleased with the underwriting performance in the quarter, especially for restaurants, bars and taverns. Our security guard business and our quick-service restaurant book have also continued to perform well for us. We have been underwriting these markets for years, and with our excess and surplus line flexibility, we believe we can create a value proposition that is distinct from our peers. As we move through 2018, we expect continued growth in our specialty commercial book of business, not necessarily from entering new markets, but by greater penetration of our existing markets and by continuing our geographic expansion commercially in all 50 states. Now to personal lines, in the third quarter of 2017, we executed an adverse development cover, which was secured mainly due to the underperformance of the Florida homeowners line of business. The unfavorable loss trend primarily due to inflated assignment of benefits claims experienced by the industry as a whole continued without a political solution on the horizon. The adverse development corporate contract we executed will protect against losses, not only from Florida homeowners, but includes all lines of business for the accident years 2005 through 2016. In addition to the adverse development cover, we began actively non-renewing our assumption Florida homeowners book in February of 2018. We expect this will significantly improve our long-term profitability as a whole. But as a result of this non-renewal process, we expect gross written premiums in our personal lines to decline in the near term. At just over 17% of total gross written premiums for the fourth quarter of 2017, personal lines premium decreased 7% to roughly $5 million compared to the prior year period. At the same time, we are reducing our wind exposed personal lines exposure in Florida, we are generally reducing the overall wind footprint for Conifer as a whole so as to create a more efficient catastrophe reinsurance buy going forward. Reduction in personal lines exposure should reduce the overall wind risk for Conifer and help reduce our cash spend in terms of reinsurance as well. By way of recap with a significant majority of top line premiums coming from commercial lines, we believe that continued growth in our commercial production can help offset the planned decrease production we expect from our personal lines book. The planned reduction in personal lines creates the added benefit of de-risking Conifer’s wind-exposed book while providing them opportunity to reduce our overall reinsurance spend. This should allow us to retain and earn more of the profitable premium we write going forward. Now, I will hand the call over to Harold Meloche for a brief discussion of the financials.

Thank you, Nick. As the financial results and balance sheet information is fully detailed in our press release, I will briefly go over a few highlights, but welcome any specific questions during Q&A. As Nick mentioned, our net earned premiums for the fourth quarter increased 4% to $25.4 million compared to $24.5 million in the prior year period. We saw both an increase in gross earned premiums and at the same time lower ceded premiums for the quarter. As Jim highlighted, Conifer’s combined ratio for the fourth quarter was 99.7% compared to 118.7% for the fourth quarter of 2016. The impact of prior accident year reserves on the company’s loss ratio has been significantly reduced due to the benefits of the adverse development coverage. In 2017, the company ceded $7.2 million of losses under the ADC, leaving $10.3 million of cover in the event of future development. The company’s losses and loss adjustment expenses were $15 million in the fourth quarter of 2017 compared to $18 million in the same period in 2016. As a result, Conifer reported a considerably improved loss ratio of 58% compared to 73% in the prior year period. Our expense ratio was 41% in the fourth quarter of 2017 compared to 45% in the prior year period, a solid improvement of 400 basis points. The decrease was largely due to the continued cost containment efforts, lower policy acquisition costs and higher earned premiums. For the fourth quarter, the company reported a net income of $221,000 or $0.03 per share compared to a net loss of $4.4 million or $0.58 per share in the fourth quarter of 2016. Regarding our balance sheet, total assets were $239 million at year end, with total cash and investments of $170 million. We maintained a conservative investment strategy with the vast majority of our portfolio currently in fixed income securities, with an average credit quality of AA, an average duration of approximately 3 years, and a tax equivalent yield of 2.3%. We have conservatively managed our investments with the objective of protecting capital throughout the market cycle. Because our deferred tax assets had a full valuation allowance against them already, the tax changes that took place in 2017 did not materially impact our book value or net income. At December 31, 2017, there was a $9.9 million valuation allowance against the company’s deferred tax asset and that represents $1.16 per share that was not reflected in book value at year end. And with that, I would like to turn it back over to Jim for closing remarks.

Thank you, Harold. While we were pleased with the return to profitability in the fourth quarter, we know there is a lot of room for improvement and we are prepared to meet those challenges going forward. As Nick discussed, we continue to focus on our business mix towards our niche markets where we have historically outperformed our peers within the industry. Our focus will remain largely upon continuing our growth in our specialty markets, both commercial and personal, where we have generated acceptable underwriting results. We expect this to generate improved underwriting income in the coming periods and profitability over the long-term. And now, we are ready to take your questions. Operator?

[Operator Instructions] The first question comes from Carl Doirin of Raymond James. Please go ahead.

Hi, good morning everybody. Thank you for taking the questions. Just to start off, I guess I wanted to talk about the personal lines. I believe last quarter you mentioned I guess given the hurricanes and the order from the Florida regulators that sort of slowed down your planned reduction in the Florida homeowner space. And if you could possibly give us an update on that and when can we expect that pretty much to be over with?

Sure. I am going to let Andy handle it, but I don’t think that the order changed our reduction in exposure. But Andy, you want to take the question?

Yes, you are correct. There was a possibility that it could. It did not. And so as we projected, the non-renewal process started for the Florida homeowners and it was on February 9 and will continue throughout the year until all that assumption business has gone.

Okay. And I guess my second question would be as we look beyond 2018 and past – assuming no more carry loss just what would a normalized tax rate be for – I guess for modeling purposes?

Andy?

Tax rate? I can find...

Was the question, was there a normalized tax rate going forward?

Yes. Well, I guess, beyond 2018?

Yes. So, we do have quite a few net operating loss carry-forwards. So for a few years, we are going to see basically no real tax effect to our bottom line until we are actually able to recognize the DTAs that we have. So, I would say through 2018, we will basically have no tax effect to any pre-tax income and that will probably carry into 2019 as well and then after that it will be a 21% tax rate once we use those up.

Okay, it sounds good. That was all for me. Thank you very much.

The next question comes from Bob Farnam of Boenning & Scattergood. Please go ahead.

Yes, hi, there. Good morning. I had more of a – maybe a market question for you in the commercial lines. Just wanted to know what kind of penetration you are looking to get into the states that you are in and maybe some of the pricing and loss trends in the segments, the hospitality versus security guards?

Nick should handle that. Nick?

Sure. Yes, I think the penetrations in the markets where we operate will vary pretty distinctly in each marketplace. Michigan, being our home state and the long history we have in this state, we would expect much higher market share than other states. We are on a trajectory to get to a historical high point for market share and I think that’s achievable for us here in Michigan. We have been focused on certain geographic expansions like Texas and Colorado. I think we still have a lot of run-rate. I don’t know that we will ever get to the market share that we have here in Michigan in those states, but there are also – Texas, in particular, is a much larger market and there is some unique aspects to geography and things like that, that we don’t have here in Michigan. So, yes, I’d say on the high end, in Michigan and some Midwestern states, we could expect pretty high penetration in other states, Texas, in particular, Florida with the unique aspects and some wind risk there maybe not quite as high, but those are very large states and ripe for growth. And I guess in terms of the historical or the loss trends on the security guard RBT, restaurant, bar, tavern book, both lines have performed very well within our historical and targeted loss ratios. There is certain space within more of the hospitality, the restaurant, bar, tavern book that maybe haven’t performed as well as others. But we have seen the ability really in the last 12 to 18 months to create rates in those states and we have been able to achieve rates, while maintaining acceptable retention for us on renewals. And we are seeing some disruption in the marketplace in certain areas of the country. So, we feel very good about the loss ratios for both classes of business. And in particular in the hospitality class, we are seeing the ability to take rate in states and markets that maybe has underperformed relative to the overall book.

So do you think that the pricing trend is in excess of the loss trend or is it keeping pace and likewise, how would you characterize that?

Yes. I’d say it’s in excess of the loss trend in the states that hasn’t performed as well. In other states that have performed within kind of our expectation, you are seeing pricing increase that are much more muted and more around inflations and maybe slightly higher than that.

Right, okay. And last question from me is as you guys get up to scale – the scale you want, you have maybe an expense ratio that you are trying to achieve?

Well, this is Jim. Yes, we would like to be in the mid-30s, but we think we are still a little ways away from that. Our expense initiatives both on the acquisition costs and on our core expenses, continues. Our growth has slowed in the near-term as we reallocate resources around reducing our personal lines exposure and increasing the commercial. We still expect growth. And with the growth and our initiatives, we still expect to get to 40 or sub 40 by the end of the year. But our long-term, we want to be in the mid-30s.

Right, great. Okay, thanks.

[Operator Instructions] There are no other questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Jim Petcoff for closing remarks.

I just want to thank everybody for taking the time to listen to us today and take the call. I think that we have made a strategic change in our direction and I think we are headed in a great direction going forward. As I said in the near-term, the next couple of quarters, growth will be somewhat lower than we have experienced in recent years, but we expect with the markets that we are entering and our focus on the profitability of business, we expect our profitability to continue to improve. So, thank you for taking the time and we look forward to talking to you next quarter.

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