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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to the Conifer Holdings Third Quarter 2023 Investor Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brian Roney. Please go ahead.
Thank you, and good morning, everyone. Conifer issued its 2023 third 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.
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-K and subsequent reports. Conifer specifically disclaims any obligation to update or revise any forward-looking statements whether as a result of new information, future developments or otherwise.
In addition, a replay of this call will be provided through a link on the Investor Relations section of our website.
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. 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 Jim Petcoff, Executive Chairman and Co-Chief Executive Officer. Jim?
Thanks, Brian, and good morning, everyone. Also on the call with me today are Nick and Harold. Thank you for joining us today to discuss our third quarter financial results. Like the industry at large, where personal lines has had a tough go, our quarter was mostly impacted by recent storm activity. After several years of systemic wind exposure reduction, for example, exiting Florida altogether or hurricane risk is now almost negligible. Yet in the quarter, we were significantly impacted by wind in the form of convective storm. More specifically, our personal lines book of business was hit the hardest in Oklahoma. But before the storm activity in the period, we were generally pleased with the improving results. For example, despite the unusual related losses in the period, we saw continued growth in our select key verticals. In total, gross written premiums were up roughly 17% in the third quarter and up nicely for the year as well. Overall, we continue to focus our underwriting efforts on organic growth in our historically profitable core business, which continues to generate substantial top line growth and our emphasized key specialty verticals. We remember -- we remain focused on executing in our historically profitable lines, which I believe speaks to the strength of our underwriting team and their deep expertise in our select markets. While the top line has been moving, we are also pleased to see the expense ratio coming into line with our ongoing expense management efforts. We posted a 34% expense ratio for the third quarter. This continuous improvement demonstrates our persistent drive toward overall expense reduction. Before I hand the call over to Nick for more color on our underwriting results, I'd like to take a moment to note the transition that will take place at the end of this year where Nick will be taking over the role of CEO for Conifer. I'm proud to hand the reins over to Nick, and I'm confident that the company is in good hands and on sound footing moving into a great future. Nick?
Thank you, Jim. I am genuinely excited to take on the role as well as the opportunities and challenges that lie ahead for Conifer. As Jim noted, Conifer's long-term prospects appear bright and improving in [ no ] small part due to the strategic direction and operational commitment of continuously refining our overall business mix over the last several years. You've heard us talk about this before, but we are in an even better position today than days gone by, and I'm pleased to see the collective team effort coming to ultimate fruition. Over the past few years, our underwriting teams have been keenly concentrating on refining our business mix narrowly focusing on those select specialty lines where we have a distinct competitive advantage and where we see logical growth and historical profitability. By focusing these key select verticals and maximizing the advantage of our team's underwriting experience, our efforts are optimized toward lines of business where we have deep knowledge, coupled with a proven track record. Gross written premiums for the third quarter were over $38 million, a 17% increase compared to the prior year period. This increase resulted from organic growth in our select operating verticals, combined with ongoing rate increases.
The primary driver for our top line continues to be commercial lines business, which accounted for roughly 75% of total gross written premium in the period. In spite of planned premium reductions like in the state of Florida, our commercial lines production was still up 3% in the quarter to $28 million. Within commercial lines, our small business segment shows great potential for continued strong performance and comprised the majority of gross written premium for the quarter. Our personal lines business stands at just over 25% of total gross written premium for the third quarter. Low-value home and dwelling insurance products are the main driver of the personal lines gross written premium, which in total was $10 million for the third quarter. While our business in Oklahoma has performed generally well over the last several years, it did severely impact our financials over the last couple of quarters, leading us to decide to not renew that book of business. In contrast, our low-value dwelling book has continued to perform very well, including storms, posting a 53% loss ratio through 9 months this year. Before the impact of storm-related losses, the personal lines accident year combined ratio was 91% for the third quarter of 2023 and 90% for the first 9 months of the year. Overall, when looking at our combined ratio before the impact of storm losses, the company's accident year combined ratio was 95% for the third quarter. This highlights the fundamental strength of our book and demonstrates our commitment to attentive pricing practices and responsible claims management. As the effect of this quarter's storm-related losses clears the way to reveal the strong foundation below, we expect the financial results to reflect improved combined ratios going forward. By devoting our efforts to the best performing lines of business, especially in our key select verticals, the company will continue to drive towards long-term profitability. With that, I'll turn the call over to Harold to discuss the financials.
Thank you, Nick. I'll provide a quick recap of the financial results, and I encourage investors to review our filings and presentation on the company's website for greater detail. As noted, gross written premiums increased 17% to just under $39 million in the third quarter. For the quarter, our overall combined ratio was 121% due, in large part, to the elevated storm activity Nick and Jim noted in their remarks. Before the impact of the additional loss emergence from the second quarter storm activity, Conifer's accident year combined ratio was 95% in the third quarter. The loss ratio was 87% for the quarter, again, largely resulting from the convective storms that impacted much of the industry. This quarter's expense ratio was 34%, down 600 basis points from the same period last year and beating our target expense ratio of 35%. Despite lower net earned premiums, we continue to see the expense ratio improve as a result of our ongoing expense reduction efforts. Net investment income was $1.5 million during the quarter, up 69% from $860,000 in the prior year period. For the first 9 months of 2023, net investment income was up 113% over last year to $4.1 million. Our investments remain conservatively managed with the vast majority of our investable assets in fixed income securities with an average credit quality of AA+, an average duration of 2.8 years and a growing tax equivalent yield of 2.9%. Also, we have a sizable portion of our investable assets in T-bills and adjustable floaters. Largely as a result of the $2.5 million in storm losses in the third quarter, the company reported a net loss of $2.7 million or $0.22 per share compared to a net loss of $1.5 million or $0.14 per share in the prior year period. Moving to the balance sheet. Total assets were $293 million at quarter end, with cash and total investments of $159 million. Our book value at quarter end was $0.96 per share. We have $1.96 per share in net deferred tax assets that due to a full valuation allowance were 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. In closing, I want to emphasize that we -- as we move forward, I remain confident in Conifer's ability to deliver long-term value to our shareholders. I look forward to helping Nick in his new role in any way I can. With that, I'd like to invite any questions. Operator? .
[Operator Instructions] Our first question comes from Paul Newsome from Piper Sandler.
Congratulations to Nick for the position. I was hoping you could start with the transaction that you did with core specialty and how you think that will affect the results prospectively.
Well, I'll start. We did -- in order to consolidate the writings a little bit and delever the company, we looked at what the cost was of the business that we had and the acquisition cost of that business was high for us due to the front fee, and it was our higher loss ratio business that we had left on the books. So with that being gone, it enhances the statutory strength of the insurance companies. So we look to that transaction to put us in a position to write the other business more efficiently and with less acquisition costs. But that's my view of it. Nick?
No, I agree. Primarily, it bolsters the surplus level. The book was growing pretty substantially. As Jim mentioned, the acquisition costs were the highest throughout the company. And we thought that the limits profiles were also very high. So from a reinsurance perspective, it was also costly, and we thought it made the most sense to move away from that book for all of those factors.
So it looks like it was roughly 1/3 of your gross premiums. So I assume that, that -- there's no replacement for that. So prospectively, we should basically assume your gross premiums are [ set ] by 1/3. And the impact on earned revenue should be what earned in? Or I think they bought the premium business so...
The UPR.
The UPR. So I would guess that next quarter, you're basically looking for what 1/3 less revenues, insurance revenues. Is that fairly right roughly?
In the near term.
Yes. In the near term, we will see a dip as a result of the transaction. Obviously, we see growth in those other areas. So that will offset the decline out of that book of business. So yes, in the near term, we will see a decline in the premiums.
I would guess, but I don't know this is certain because it happened at the end of the quarter. There was a difference between what you were from a gross premium's perspective and a net written that was fairly unusual. Is that the transaction happening that affected that very low written -- net written premium number in the third quarter?
Yes, absolutely. This is Harold. It's -- when we ceded the unearned premium that was about $30 million of unearned premium. So that shows up as ceded written. Now that does not affect any net earned premium for the third quarter but does affect ceded written and net written.
[Operator Instructions] There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Jim Petcoff for any closing remarks.
Thank you, everyone. We appreciate your interest in the company, and we look forward to seeing you in the future. If you have any questions, please feel free to reach out to us.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.