Protective Insurance Corporation
Q1 2015 Earnings Call Transcript

Published: 8 May 2015

[Operator:]

Please standby, we are about to begin. Good day everyone and welcome to the Baldwin & Lyons Incorporated First Quarter 2015 Earnings Conference Call. Today's call is being recorded. At this time I would like to turn the call over to Ms. Han Huie of MWW Group. You may begin.

[Han Huie:]

Thank you. And thank you all for joining us this morning for the Baldwin & Lyons first quarter 2015 conference call. If you did not receive a copy of the press release, you may access it online at the company's Web site which is www.baldwinandlyons.com. I would like to remind everyone that we are hosting a live webcast for the call which may be accessed at the company's website as well. At this time, management would like me to inform you that certain statements made during this conference call and in the press release which are not historical may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Baldwin & Lyons believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that can cause the actual results to differ materially from expectations are detailed in the press release and from time-to-time with the company's filings with the SEC. And now, I would like to introduce Joe DeVito, CEO and President of Baldwin & Lyons and turn the call over to him.

[Joe DeVito:]

Thanks and welcome to the Baldwin & Lyons conference call covering our results for the first quarter of 2015. With me today is Pat Corydon, Executive Vice President & CFO of the company. I will provide an overview of the company's results with an emphasis on underwriting operations. Pat will follow with a more detailed report on the company's finances, investments and investment related activities. Following Pat's comment's as always we will be available to answer any questions you may have. Net income for the quarter was $6.2 million, $0.42 per share on par with $6.4 million for the prior year's first quarter. After tax operating income which excludes investment gains and losses was $3.8 million, $0.26 per share again just about equal to 2014's first quarter of $3.7 million. Net investment gains for the recently completed quarter which includes both realized and unrealized gains from our limited partnership investments were $2.4 million, $0.16 per share again on level with last year's first quarter of $2.6 million and $0.17 respectively. Pretax investment income increased 23% when compared to the first quarter of 2014 and 8% over the fourth quarter of 2014. The pretax realized gains for the quarter was $3.7 million, closed to the $4.1 million earned during the first quarter of 2014. Net cash flow as it has been now for many quarters remained strong as just under $10.7 million compared with approximately $9.2 million with the previous year's first quarter. After the payment of $0.25 per share in dividends, book value increased $0.18 during the first quarter of 2015 and is now $26.85. Shareholders equity stands at just over $403 million. Direct premium written for the company during the quarter was $97 million, 2.3% higher than that produced in the first quarter of 2014. As is been the case for several quarters now, the increase was primarily due to a 13% increase in our fleet transportation products, which were up almost $9.6 million, 13% from the first quarter of 2014. Net premium earned was just under $66.5 million, up $2.6 million, 4% over the previous year's same period. Underwriting results were good with the exception of personal auto. Our consolidated combined ratio for the quarter was 95.2% with [these] producing $3.2 million in underwriting income, in line with the first quarter of last year. The reinsurance segments direct assumed and written premium declined by almost $5.4 million reflecting our strategic decisions related to the property catastrophe business which is near completion of its runoff. All non U.S business has now expired. The small amount of domestic exposure that remains will be eliminated by July 1st of this year. The loss ratio for this segment was good, coming in at 48.4% for the quarter. The higher expense ratio was due to contingent commissions that were paid during this quarter and administrative expenses related to the continued wind down of the property catastrophe book. Our property in casualty segments direct premium increased by 9.2%, almost $7.6 million over the first quarter of 2014. As I stated earlier, this growth was directly attributable to our fleet transportation products, which more than offset planned declines in professional liability and personal auto. As we continue our efforts to bring those products back to profitability. The combined ratio for the property casualty segment including fees, was 95.6% a [1.3] improvement over the same period in 2014. As we’ve noted in previous calls, our problems in professional liability were mainly the results of a single relationship now terminated that produced the lawyers book of business and generated very high loss ratios. We are now back to the miscellaneous professional liability products we intent to write from the inception of this program and results have improved. The loss and LAE ratio for the first quarter was 58.1%, a dramatic improvement over the unacceptable 115.5, produced just one-year ago. While it is a bit too early to declare victory, we are obviously pleased with the turnaround. Once we are convinced that the results are permanent and it might take another quarter or two for that to occur, we will begin the process of slowly rebuilding. In the meantime, we have right sized the staff, invested in a new policy management system, streamlined and improved our sales, marketing, distribution, underwriting and administrative protocols and processes. Hopefully all of those actions will allow us to move these products to generating long-term profit. Time will tell. The outlier of this quarter for lack of a better term was private passenger automobile. During our last call, I mentioned the spiking frequency and large part due to the combination of increased economic activity and the significant decline in the price of gasoline. I also indicated that we were experiencing some difficulty in getting the immediate rate approvals necessary to bring this product back to profitability. This quarter as has generally been the case, the increase in severity and frequency also generated an increase in severity. As a result, loss ratio are still very high. Therefore, we anticipate another couple of difficult quarters. However, we anticipate returning this product back to historical levels of profit by year-end. Regarding overall market conditions not much has changed since our last call. Capital continues to be pumped into the industry, underwriting leverage remains historically low and fixed rates of return on investments are also at historically low levels. Despite those conditions, we remain active in our pursued of opportunity. Current conditions certainly favor buyers of reinsurance with a strong history of making money for their partners. We can simultaneously continue to reduce the volatility on the insurance side of our business were appropriate and also consider taking more net in those products for which we have the combination of sufficient capital and complete confidence in our ability to price, select and also change rates quickly if necessary. In addition the influx of capital from non-traditional sources maybe looking for a highly rated balance sheet partner with a great track record and deep experience in a variety of markets with whom to share risks both known and emerging. We continue to invest in technology and enhance loss prevention protocols to drive down claim cost for our company and our customers. We are patient, vigilant management team supported by a Board and investor base with the same view. We will continue our historical perspective that underwriting profitability is our first and foremost goal. We will continue to be conservative and careful with our capital providing long-term value to our shareholders including the payment of the generous dividend. And now, I’ll turn the call over to Pat Corydon, our Executive Vice President and CFO. Pat?

[Pat Corydon:]

Thanks, Joe. In our last call, we recorded the both dollars of interest earned and average of pretax yields on our bond portfolio improved during the fourth quarter, over both the comparable prior year quarter and the immediately prior quarter. I am pleased to report that this positive trend was repeated again in the first quarter of 2015. Pretax investment income for the quarter was up 8% from the fourth quarter of 2014 and nearly 23% over the first quarter of last year. While higher dividend received on equity holdings played a role in this increase the vast majority of the improvement gain from earnings on fixed maturity investments with interest income reaching its highest level since the third quarter of 2011. This result was accomplished without meaningfully extending the duration our average contractual maturity of the fixed income portfolio. A year ago, the portfolios average maturity was 4.8 years, it is now 5.1 years, while the effective duration rose only slightly from 2.0 to 2.1. We did see some reduction in average after tax yields on bonds purchased during the quarter compared to yields on maturing and sold securities following two quarters of increase. This decrease reflects a slight increase in the average credit quality of the portfolio during the quarter. We are becoming more confident that these advances and investment income are sustainable going forwards at levels meaningfully above the low points reached in late 2013 and early 2014 even without changes to the Feds interest rate policy. Limited partnership investments produced $4.5 million in investment gains for the quarter, a return of 5.6% for the three months. Direct trading activity for the first quarter was relatively light, producing a realized loss of about $800,000 and bringing the net pretax gains to 3.7 million, relatively consistent overall with the 4.1 million reported in first quarter of 2014. Unrealized gains increased by $1.7 million during the quarter with a majority of this improvement related to recovery in value on fix maturity holdings in the energy sector, which experienced declines in the fourth quarter of last year. At March 31, the market value of the company’s investment portfolio exceeds costs by $81.5 million before tax and $53 million after tax. Total investment activity for the quarter including changes in security valuations produced an $8.3 million gain before tax which equates to 1.2% pretax return for the quarter. As Joe mentioned, operating cash flow during the first quarter was $10.7 million, 16% above the first quarter last year, as loss payments were lower during the current quarter. The company has achieved positive cash flow in 21 of the past 23 quarters averaging nearly $12 million per quarter. Prior year loss developments were once again favorable and well within historical ranges. Claim settlements during the current quarter produced a consolidated prior year reserve savings of approximately $2.1 million. This overall development is equal to about [0.75 of 1%] of year-end 2014 net loss reserves and had the effect of reducing the 2014 calendar year loss ratio by three points. This result compares to a $3.1 million reserve savings reported in the first quarter of 2014, which reduce net quarter’s loss ratio by about five points. The consolidated development is composed of savings of $1.9 million from our property and casualty insurance segment and an additional $200,000 of savings from the reinsurance segment. The 2015 property and casualty in-segment savings equates to just under 1% of that segment year-end 2014 reserves, which is typical of historical development patterns in the first quarter. In terms of impact on loss ratios, the savings reduced this segments loss ratio by 3.5 points compared to a five point reduction from reserve savings recorded in the first quarter of 2014. The small development savings for the reinsurance segment which lowered that segments loss ratio by just over one point, reflects determination originally all property reinsurance business as of year-end 2014. I will remind listeners that we posted our press release and quarterly financial statements on our Web site at baldwinandlyons.com. Click on the investor relations page and select news from the news and market data dropdown menu. We’ve also updated all other quarterly financial data on our Investor Relations Web site under the financial information dropdown menu. This concludes our formal presentation. At this time we will be happy to answer any questions listeners may have.

[Joe DeVito:]

Thank you for listening. We appreciate your interest in our company and we look forward to our next call in a few months. Thank you.

[Operator:]

This does conclude today’s conference. We thank you for your participation.