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Edited Transcript of CNFR earnings conference call or presentation 9-May-19 12:30pm GMT

Q1 2019 Conifer Holdings Inc Earnings Call

Birmingham May 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Conifer Holdings Inc earnings conference call or presentation Thursday, May 9, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Joseph Roney

Conifer Holdings, Inc. - President

* Harold James Meloche

Conifer Holdings, Inc. - Treasurer & CFO

* James George Petcoff

Conifer Holdings, Inc. - Chairman & CEO

* Nicholas James Petcoff

Conifer Holdings, Inc. - Executive VP, Secretary & Director

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Conference Call Participants

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* Charles Gregory Peters

Raymond James & Associates, Inc., Research Division - Equity Analyst

* Michael R. Bergeron

Strength Capital - Co-Managing Partner & Senior Partner

* Adam Prior

The Equity Group, Inc. - SVP

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Presentation

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Operator [1]

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Good morning, and welcome to the Conifer Holdings, Inc. Q1 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 with The Equity Group. Please go ahead.

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Adam Prior, The Equity Group, Inc. - SVP [2]

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Thank you, and good morning, everyone. Conifer issued its 2019 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 the slides are easier to read in the large slide view which can be selected on the right-hand side of the 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 law 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.

And with that, let me turn the call over to Mr. Jim Petcoff, Chairman and Chief Executive Officer. Please go ahead, Jim.

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James George Petcoff, Conifer Holdings, Inc. - Chairman & CEO [3]

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Thanks, Adam. Good morning, everyone. Joining us today from the management team is Nick Petcoff, Harold Meloche, Andy Petcoff and Brian Roney.

Overall, we're generally pleased with our progress in the first quarter, but we still have a number of milestones to accomplish as we execute our full strategy. We're continuing to focus on achieving growth in our specialty commercial lines where we see the best underwriting performance potential. Throughout the past year, we shifted the majority of Conifer's premiums into these core commercial lines with favorable results, as evidenced by a solid accident year ratio in the commercial space. These gains were somewhat offset by continued losses in personal lines with majority stemming from the Florida homeowners business. However, the good news is that with each quarter, these elements are less and less impactful and our bottom line results should continue to improve. The process of ultimately shifting our business mix will continue to take some time, but we believe that Conifer is in the right markets where we have substantial runway for growth and we expect to generate value for our shareholders.

Conifer's commercial is business largely divided into our hospitality segments, which includes restaurants, bars, taverns, liquor liability, quick service restaurants, et cetera and the remainder of our commercial lines is focused primarily on small commercial business solutions and delivering admitted E&S coverage for artisan contractors, select commercial auto, security guards, among a couple of other classes. Over time, we have developed an understanding of our historical loss trends and believe that through the gradual shifting of Conifer's premiums into these lines, we can achieve a favorable long-term result.

Our core specialty commercial lines business performed well overall in the first quarter with favorable underwriting results coming largely from our small business specialty lines. With the gradual shift in premium mix behind us, our entire focus is to generate a consistent underwriting profit. To do this, we need to grow our top line and continue to reduce our expense structure to achieve efficient scale.

We're committed to growing but only the right way and in the right markets. We are pleased to grow commercial lines by 4% during the period and this overall growth coupled with expense reduction did improve the expense ratio by 240 basis points to 41.6%. However, there's still significant room for improvement.

While we remain disciplined in our new business writings, we are pleased to hear from our independent agent partners that demand is there in our specialty products. Further, wherever possible, we are implementing consistent rate increases which are in the mid-single digits throughout many of our markets. We believe that this market response coupled with lean infrastructure will help to bring the expense ratios down and ultimately generate favorable ROE for our shareholders.

With that, let me turn it over to Nick and Harold and then I'll return for a few closing remarks.

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Nicholas James Petcoff, Conifer Holdings, Inc. - Executive VP, Secretary & Director [4]

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Thank you, Jim. As Jim noted, core commercial lines growth drove premiums during the period. Overall gross written premiums were up 2% in the first quarter to just over $24 million compared to $23.7 million in the prior year period. Our commercial lines business represented 93% of total gross written premiums in the first quarter of 2019 and grew 4% year-over-year to $22.6 million when compared to the first quarter of 2018.

Our personal lines business represented the remaining 7% of total gross written premiums and decreased 16% to a little over $1.5 million in Q1 of 2019 compared to the corresponding period.

In our commercial business, we saw particularly strong growth in our small business segment. This was driven by higher premiums in specialty E&S products. While we continue to write commercial premium in all 50 states, we see strong potential for growth in a number of states including our home state of Michigan. For the first quarter, Michigan took over the top spot in our commercial lines production. We expect that growth in our home state will continue and we expect Michigan to be our largest state by year-end. Overall, we see continued runway for new policy growth and select rate increases geographically on our existing and new commercial markets.

Now I'll briefly touch on personal lines. The personal lines business is now 7% of our overall gross written premiums. Our combined ratio has remained elevated in personal lines largely due to many factors in these coastal markets including greater-than-anticipated weather loss. As for growth prospects, we continue to focus on developing our low-value dwelling products in the Midwest and Texas to complement our agency relationships in these states. Historically, this has helped us over 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 and expand in our core select personal lines.

I will now hand the call over to Harold Meloche to provide a discussion of the financials.

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Harold James Meloche, Conifer Holdings, Inc. - Treasurer & CFO [5]

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Thank you, Nick. As always, I encourage investors to review our filings. I'll provide a quick review of the results, and then we'll open it up to any questions. In the first quarter, gross written premiums were $24.2 million, up slightly year-over-year. This growth was driven by an increase in our commercial lines but offset by a decline in our personal lines. Conifer's combined ratio was 108% at the end of the first quarter compared to Q4 2018 combined ratio of 123%.

Conifer reported a loss ratio of 66.5% compared to 55.7% in the prior year period, which was driven by adverse development in the 2017 and prior accident years. The expense ratio improved to 41.6% for the first quarter of 2019 compared to 44% in the prior year period. We expect to see this number to continue to decline as we continue to grow our net earned premium in our commercial lines. In addition, we have implemented a number of cost-cutting measures to lower the ratio over time.

Net investment income increased 13.5% to $910 million -- $910,000, excuse me, during the quarter ending March 31, 2019 compared to $802,000 in the prior year period. Our investments are conservatively managed with the majority 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 2.7%.

In the first quarter of 2019, the company reported a net loss of $680,000 or $0.08 per share compared to net income of $213, 000, $0.02 per share in the prior year period.

Moving to the balance sheet. Total assets were $238 million at March 31, 2019, with cash and total investments of $155 million. Our book value at quarter end was $5.14 per share, we had a valuation allowance against the company's deferred tax asset of $1.48 per share and a deferred gain as a result of the ADC of $0.40 per share. That represents approximately $1.88 per share that was not reflected in book value.

And with that, I'd like to turn it over to Jim for closing remarks.

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James George Petcoff, Conifer Holdings, Inc. - Chairman & CEO [6]

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We are still experiencing some drag from the Irma development, which I think the entire industry is. And we're experiencing some claims development from the Florida homeowners that we have exited. And we have very few of those claims left, so we expect this to be less and less in future quarters. But what we have done is we have exited those books of business, reduced those personal lines by almost $25 million. And at the same time, have kept our gross premiums about the same, growing in our specialty commercial areas that have been extremely profitable. We think that the business that's going on the books today, especially with the market starting to show some signs of changing and getting more adequate rate, we believe that the underwriting side of the house is going to be -- is well positioned to be successful in the future.

We've talked about expense reductions for a number of quarters in a row. And if you think about it with the reduction in premium that we've had kind of staying, even the fact that we have been able to continue to reduce the expenses, is a positive, but it's nowhere near acceptable from a profitability standpoint. We need to get to the mid-30s within a reasonable period of time on the expense ratio to really show some significant and solid performance for our shareholders.

We believe that with the programs we're instituting today and where we're going, we believe we will achieve efficiencies this year and show continued improvement in our expense ratio throughout the year as well as continued improvement in the accident year loss ratios.

So we are positive about the future. We see some opportunities out there especially since the market is showing signs of having some hiccups and we feel pretty good about our position. And we're pleased for the support that everybody has given us over the past couple years and if you have any questions, I please welcome them now. And if you have any questions after, funnel them all through Brian Roney. He likes to take those questions. But as of now, if anybody has any questions, we can take them now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Greg Peters with Raymond James.

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Charles Gregory Peters, Raymond James & Associates, Inc., Research Division - Equity Analyst [2]

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Without being too blunt stating the obvious, this has been a painful experience for you as employee owners and for investors. And I guess considering the first quarter results and it was another disappointment, and I'm sure you're disappointed as well, what -- when do you think you'll get back to a reasonable return on operating equity? Is it sort of like a 2020 sort of possibility? Is it 2021? How far away are we do you think?

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James George Petcoff, Conifer Holdings, Inc. - Chairman & CEO [3]

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Well, I'll answer it and then I'm going to want Brian to answer it too so -- because we may have different opinions. But my opinion is by about the third quarter, second or third quarter, we're hoping the numbers look significantly better. We do believe that -- Greg, that the business we're writing right now is extremely profitable and well reserved. And we also believe that the numbers -- we are working very hard on getting these old claims closed out and settled and getting the Florida behind us. I would say that we are probably one of the first ones to recognize the Florida issue and address it. And by addressing it, we had to dump a bunch of business. We managed our entire cat exposure so that we were -- and mitigate it as well as [possible], and it cost us a ton of money, and a ton of time and a ton of effort. However, while we were doing that, we've been growing our core commercial lines, security guards are performing well, the small businesses mix there -- our liquor liability continues to perform well. We've had a couple situations in Pennsylvania and Montana where we had some adverse claims activity. We just had a little adverse claims activity in a GL in Florida, but those are the things that you should be reserving against in full. I mean that is not nothing compared to what was going on in the Florida homeowners book. That is pretty much behind us. I don't know if it's 90%, 80%, 95%, but it's up there in being behind us. And the book of business we have on our books, right now we firmly believe that. And not just us, the management, but also the Board. So what I would say is I believe hopefully, positive numbers sometime later this year on a quarterly basis and hopefully for the year. But Brian, that's my answer, why don't you give your answer?

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Brian Joseph Roney, Conifer Holdings, Inc. - President [4]

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Yes. No. I agree, I echo the sentiments that Jim is talking about. I mean for us, I'd probably be more focused on the expense side of the equation. If you look at the loss ratio, I think the loss ratio kind of works itself out. I think it's kind of relatively in your standard when you kind of look at it. But I think, Jim, you're right. I mean what's really hurt us is the earned premium stream. And obviously, having to shift out of a lot of Florida homeowners premium, yet we're still growing our commercial lines -- the commercial lines has been growing at a faster rate to try to overcome what we had to come out of on the personal lines. So I think what is good for us, and maybe Nick can speak to it is, that we've got top line growth prospects that we see for commercial lines going forward. We think we see some positive things coming with our cat with the reduction in the wind-exposed business. So as that earned premium stream grows as we continue our expense reduction, you get to rational scale, now I think you're kind of there. And I echo with that we should see ourselves with better results before the end of the year.

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Operator [5]

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(Operator Instructions) The next question is from Mike Bergeron with Strength Capital.

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Michael R. Bergeron, Strength Capital - Co-Managing Partner & Senior Partner [6]

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So Raymond James sort of had my first question and that is, we've had 5 years of losses. Do you expect '19 to be profitable? I guess having listened to you guys at the end of the year, I sort of thought Q1 would be profitable. Did I hear you right that maybe later in the year, you've got some profitable quarters, but unsure about the full year?

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James George Petcoff, Conifer Holdings, Inc. - Chairman & CEO [7]

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I think that's what we said. I would say I'm more optimistic than that, but I wouldn't want to put something out there and disappoint again. We've been disappointing long enough. We're trying to stay with something we feel is achievable.

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Michael R. Bergeron, Strength Capital - Co-Managing Partner & Senior Partner [8]

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Okay. So the second question really is -- and we appreciate you guys filing your Q last night before the call. But Jim, you said a couple times already that you say the commercial business is extremely profitable. If you look at 2018, the underwriting loss was $5 million. If you look at this first quarter, commercial lines, there is an underwriting loss of $200,000. So everything we hear is that the commercial lines are much better than the personal lines, which sort of by order of magnitude that seems obvious. But it doesn't seem obvious to us that it's good business. And maybe specifically, and this might be more of a Harold question, was any of the $2.3 million of deferred gain applied to the commercial line segment in Q1?

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James George Petcoff, Conifer Holdings, Inc. - Chairman & CEO [9]

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Yes. But let me address the other issue. There's 2 sides to the equation, right? There's the loss ratio and the expense ratio. Our loss ratios are not out of line with the industry. And actually there are many areas, and especially the commercial lines are better than the industry. The expense ratio is out of line because of all the things that had happened in Florida homeowners market and are getting -- exiting all of that personal lines business. So when we say it's profitable, people would love to have our commercial lines loss ratio. The problem is we have to get a little bit more to scale and cut our expenses. And now that we're out of Florida homeowners, we're able to cut a bunch of expenses, become more efficient. We are on a significant trend in that direction. I don't want to overpromise, I want to give you some realistic views of when we think profitability will occur. But when we talk about profitability, we're not -- the homeowners was running about 100% direct loss ratio some of those years because of Florida. And then it had a significantly high cat cost, so the underwriting losses were produced by and large by the Florida homeowners. The commercial lines' loss ratios, early on the commercial auto was high; and that has come down. The general liability would spiked because of Montana and Pennsylvania. But as I said, you have commercial property to offset that. So the overall losses on the commercial side are acceptable, we still want to bring them down and we think that the market is changing a little bit and we're able to get more rates so that we should be able to improve upon those loss ratios. But they're not unacceptable. So when we think -- when we say it's profitable, it's because of the loss ratio and we're taking the hits on the underwriting losses because our expense ratio is not in line yet.

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Michael R. Bergeron, Strength Capital - Co-Managing Partner & Senior Partner [10]

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Did you apply any of the $2.3 million to the commercial lines?

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James George Petcoff, Conifer Holdings, Inc. - Chairman & CEO [11]

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Yes -- are you talking about the ADC?

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Michael R. Bergeron, Strength Capital - Co-Managing Partner & Senior Partner [12]

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Yes, in Q1.

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James George Petcoff, Conifer Holdings, Inc. - Chairman & CEO [13]

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Yes, yes. $2 million.

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Michael R. Bergeron, Strength Capital - Co-Managing Partner & Senior Partner [14]

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So $2 million of the $2.3 million went to the commercial lines?

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James George Petcoff, Conifer Holdings, Inc. - Chairman & CEO [15]

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Yes.

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Michael R. Bergeron, Strength Capital - Co-Managing Partner & Senior Partner [16]

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So that means it was essentially a $2.2 million underwriting loss?

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James George Petcoff, Conifer Holdings, Inc. - Chairman & CEO [17]

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I guess, if you can do that, yes. I don't know that...

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Michael R. Bergeron, Strength Capital - Co-Managing Partner & Senior Partner [18]

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I don't understand how that...

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James George Petcoff, Conifer Holdings, Inc. - Chairman & CEO [19]

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I don't even know. Let me ask Harold this question. Is it dollar-for-dollar applied based on the losses?

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Harold James Meloche, Conifer Holdings, Inc. - Treasurer & CFO [20]

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Yes.

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James George Petcoff, Conifer Holdings, Inc. - Chairman & CEO [21]

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But they could come at different rates and at different times?

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Harold James Meloche, Conifer Holdings, Inc. - Treasurer & CFO [22]

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It is an allocation but that's where...

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James George Petcoff, Conifer Holdings, Inc. - Chairman & CEO [23]

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That's just how you allocated it?

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Harold James Meloche, Conifer Holdings, Inc. - Treasurer & CFO [24]

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So we allocated based on development, so...

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Michael R. Bergeron, Strength Capital - Co-Managing Partner & Senior Partner [25]

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How is $2.2 million of underwriting loss in the commercial space a sign that it's good business? So I hear you on the expense ratio, I thought that was the best number in the quarter that you guys started to show some progress there. But I just don't...

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James George Petcoff, Conifer Holdings, Inc. - Chairman & CEO [26]

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I can tell you that we had 2 adverse judgments in court. We lost 2 cases in the quarter in Florida in general liability. The other thing that -- the only reason -- when I talked about Montana, we've been out of Montana now for 1.5 to 2 years on the liquor, but we found that you cannot make money on Montana liquor and we had some adverse cases that went to [litigants]. And then in Pennsylvania, they came up at the end of 2014, they changed the comparative negligence loss so that if the bar owner -- if a person's more than 60% -- if the plaintiff is more than 60% comparative negligent, they can't collect. Unless it's is a dram shop action liquor liability and if the bar is 1% liable, they're jointly and severally liable for the entire judgment. That didn't come in until the end of '14, the beginning of '15. So we didn't realize it then and when we have a couple years of underwriting where we would've probably not underwritten that, and Pennsylvania has caused us a little bit of a heartburn on the development, okay, but we're off that too. The rest of the specialty areas, which we have the numbers and we go through them with our actuaries and with everybody internally, the specialty areas are performing on a loss ratio basis. And if we continue to get the expense ratio down, that will take care of the loss in the quarter. I mean we will start to show profit.

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Michael R. Bergeron, Strength Capital - Co-Managing Partner & Senior Partner [27]

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Okay. So just to confirm, $2 million of the $2.3 million went to the commercial business?

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James George Petcoff, Conifer Holdings, Inc. - Chairman & CEO [28]

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Yes.

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Michael R. Bergeron, Strength Capital - Co-Managing Partner & Senior Partner [29]

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Okay. Just one other thought we had this morning looking at the results. Given how I'd say quickly you're chewing through the ADC. Have you thought about doing another ADC policy?

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James George Petcoff, Conifer Holdings, Inc. - Chairman & CEO [30]

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Well, it's funny that you ask that, it would be -- if they were available, we've thought about it. But the flip side of that is we're not in the same situation as when we did the prior ADC. When we did the prior ADC, we had 1,400 or 1,500 known claims, okay? And then we knew we were going to get more claims because it was in September of 2017. And you now it's March of '19, statute of limitations has run on 2013, '14, '15. We're not going to get new claims. So we know what our outstanding book of claims are and we're in the process of going through the approximate 300 claims from 2016 and prior, many of which -- or there's a bulk -- some of them, they're on the books just because we don't close them until the statute run. But we're going through each and every claim trying to make sure we understand what the development is going to be. Not that we're going to be entirely accurate, but we can kind of, within a range, get a handle on '16 and prior. We feel -- so I'm not sure that we would buy an ADC even if it were available because the pricing may not be -- is that enough there to make it worth anybody's while, I guess, is what I'm saying.

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Operator [31]

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Ladies and gentlemen, this concludes our question-answer-session, I would like to turn the conference back over to Jim Petcoff for any closing remarks.

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James George Petcoff, Conifer Holdings, Inc. - Chairman & CEO [32]

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I appreciate the questions that came up because those are questions I want to answer. And I do believe in what we talked about with Greg Peters. Are we going to have some development still from '16 and prior? Probably. Are we going to have some liability things that surprise us maybe in '17 because we had Pennsylvania still on there and we had a little bit more South Florida liability? Maybe. Do we believe that '18 is well reserved? Yes. Do we believe that what we're putting up in '19 is well reserved? Yes.

So overall, we believe and hope by the end of the year, we'll be showing positive numbers. And we also believe strongly that the actions we're taking on the expense side will be effective and will continue to bring down the expense ratio. And the one thing we didn't talk about but we are growing our non-risk revenue as well. We've had some agency operations where we're developing commissions. And hasn't been too significant of an alliance but we see many opportunities to couple other people's products with ours. As an example, on the security guards, we write work comp through employers out of Reno and we receive a commission for wholesaling that product through our distribution systems. Other companies are looking at our distribution system and seeing the possibility for us to distribute their products where we can make non-risk revenue. And that -- I don't want to overstate this, it's just a growing area but it does provide non-risk revenue and it continues to help us on the expense side. So that's all I want to say and I really appreciate everybody for listening in today. Thanks.

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Operator [33]

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