Presurance Holdings, Inc. Q3 FY2022 earnings call

• Conifer recently closed two crucial strategic transactions: an asset purchase agreement with Whitetail Insurance Services (monetizing certain assets of MGA Venture Agency Holdings) and the acquisition of a Loss Portfolio Transfer reinsurance agreement with Fleming Re. Both transactions were completed in the early fourth quarter and will be reflected in the fourth quarter financials. The LPT agreement offers $20 million of adverse development cover for accident years 2019 and prior, likely to reduce the impact of legacy reserve drag. - Profitable premium growth is a top priority, with consistent growth over the past several years expected to continue. Efforts to streamline expenses are yielding results, with the expense ratio consistently declining and a goal to reach 35%. - In underwriting, there is a continued focus on underwriting discipline, refining the book of business through renewals with a high retention rate (around 90%). Geographic mix is important; exposure to Florida has been reduced by approximately 57% since 2018, with further reductions planned, while Michigan's premium base has more than doubled since 2018 and remains a key market. - The personal lines business is expanding, with strong growth in expanding markets such as Texas and Oklahoma. Thoughtful claims adjudication is integrated with solid underwriting, and favorable claims trends have been observed (total claims decreased by 6% in Q3 2022 compared to the year-ago period, and quick service restaurants' open claims saw significant decreases).

In the third quarter, gross written premiums totaled $33 million, a decrease of just under 2%. Commercial lines form the majority of gross written premium. Personal lines, which are mainly low-value dwelling products, accounted for 16% of total gross written premium in the third quarter, with personal lines gross written premium surging by almost 42% from the same period last year to $5.5 million. Michigan contributed more than 25% to the gross written premium in the third quarter of 2022. The combined ratio stood at 106.5% in the third quarter, with a loss ratio of 67% (64% in commercial lines and 79% in personal lines). The expense ratio improved to 40% in the current quarter, down from 42% in the corresponding period of the previous year. Net investment income in the third quarter was $860,000, an increase of 67% from the prior year period due to higher reinvestment yields. The company reported a net loss of $1.5 million or $0.14 per share for the quarter.

• The company anticipates the transactions (MGA asset sale and LPT purchase) to be reflected in the fourth quarter financials. - Profitability is on the horizon with the reduction of legacy reserve drag and expected continued profitable premium growth. - The expense ratio target remains 35%, and the improvement in the expense ratio is expected to be sustainable through year-end and beyond. - Confidence in continued success for the remainder of 2022 and into the future.

• Risks related to COVID-19 and its impact on the economy and business. - Risks outlined in Conifer’s filings with the SEC, including those associated with underwriting and geographic mix issues (e.g., certain jurisdictions like Florida becoming difficult to write in).

Q: How will the sale of the MGA and the loss portfolio transfer affect the income statement in the future?

A: The sale of the MGA assets was in a company where Conifer held only a 50% stake and had no control, so it wasn't consolidated in the numbers, appearing as equity income from sub on the income statement. The LPT will cost approximately $5.4 million in the fourth quarter, and the sale of assets is expected to result in a net after-tax gain of over $8 million, leading to a positive gain in the fourth quarter.

Q: Thoughts on the prospective improvement in the expense ratio?

A: Substantial expense reductions were made during the year, such as changing the location and downsizing space, expecting savings that will contribute to the expense ratio decreasing. The expense ratio is expected to move towards the 35% target as expense reductions take effect and growth continues.