Protective Insurance Corporation
Q3 2015 Earnings Call Transcript

Published: 9 Nov 2015

[Operator:]

Good day and welcome to the Baldwin & Lyons Incorporated Third Quarter 2015 Earnings Conference Call. Today's conference is being recorded. At this time I'd like to turn the call over to Ms. Han Huie of the MWW Group. Please go ahead.

[Han Huie:]

Thank you. And thank you all for joining us this morning for the Baldwin & Lyons third quarter 2015 conference call. If you did not receive a copy of the press release, you may access it online at the company's website 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:]

Thank you. And welcome to our third quarter 2015 conference call. Joining me today is Pat Corydon, Executive Vice President & CFO of the company. As is customary for us, I will provide an overview of our company's results with an emphasis on our underwriting operations. Pat will follow with information regarding our investments and investment related activity along with some overall commentary on the company's finance. Following Pat's comments, as always, we will be available to answer any questions that you might have. Net income for the quarter was $7.8 million, $0.52 per share compared to $5.8 million or $0.39 per share for the third quarter of 2014. After-tax operating income which excludes investment gains and losses was $9.1 million, $0.61 per share. More than 70% higher than the prior year same period of $5.3 million and $0.36 per share. The difference between operating income and net income was due to net investment losses during the recently completed quarter of $1.4 million after-tax equal to a loss of $0.09 per share compared with last year's third quarter gain of $400,000 or $0.03 per share. Pre-tax investment income increased 45% when compared to the third quarter of 2014 and 4% over the second quarter of 2015 reflecting higher average yields and continued growth of cash flow. For the nine months pre-tax investment income increased 35% compared to the prior year same period. Pat will have more to say about our investments during his portion of the presentation. As I stated net cash flow continues to be strong at approximately $16.6 million for the quarter and $30.8 million year-to-date. After the payment of our regularly quarterly dividend of $0.25 per share, book value decreased $0.82 for the quarter reflecting investment valuation changes in line with the overall market decline. For the nine months, book value was down $0.51 after the payment of dividends to shareholders equal to $0.75. As of September 30, 2015, book value was $26.16 representing approximately $393 million in shareholders' equity. Direct premium written for the company during the third quarter was $96 million, a 1.4% increase compared to the $94.6 million in the same period last year. The increase was driven by continued growth in our fleet transportation products which were up 11.5% or $9.1 million. For the nine months premium written was $285.7 million producing another record despite continuing reductions in the company's non-wheels operating with the growth in fleet transportation more than offsetting the nearly $25 million and planned decreases in reinsurance, personal auto, and professional liability. Net premium earned for the third quarter was $65.4 million, about level with the same period last year. For the year earned premium was up 2.4%, also setting a new record at $197.3 million representing the highest nine months earned premium in our almost 50-year history as a public company. Underwriting results for the quarter were excellent and including fee income set up third record for this quarter generating $10.9 million in underwriting income, the highest in company history by more than 20%. The consolidated combined ratio, again including fees, was an excellent 83.4%. For nine months, the consolidated combined ratio was 89.4% with fees reducing $21.1 million in pre-tax underwriting income. The property casualty insurance segment produced an 89% combined ratio including fees, and the reinsurance segments combined ratio was 93.5%. The excellent underwriting results combined with the higher investment yields I previously mentioned generated very good and continually improving returns on shareholders' equity from operations, especially in the current low yield environment. On an annualized basis, they were 10.3% for the third quarter of 2015 and 7.4% for the year-to-date compared to 6.2% and 5.2% for the same period during 2014. As I mentioned during my remarks on the call last quarter, we continue to see rate increases in our transportation products, evolving risk selection and risk transfer mechanism. These factors plus our never-ending focus on claim department metrics and performance continue to be the primary reasons for the record underwriting result. Going forward we expect more of the same along with significantly reduced volatility attributable to the aforementioned factors and our total withdrawal from the property catastrophe business. Our stakeholders are an educated lot, so I will be brief regarding overall market conditions. They and others who follow our industry are aware that there is currently a lot of pain in the commercial auto market, specifically in terms of fire loss ratio. Much has been written about this being attributable to adverse loss development, particularly in the last three or four years. Followers of our company have heard me opine regarding the wishful thinking on realistic optimism or flat out ignorance of some of our more naive competitors, particularly related to the ultimate cost of high limit target dependent transportation companies. In addition, quite frankly, the play this far has developed its expertise and skill at a far higher rate than many in the defense counsel space, be it in-house or outsourced. For many of these naive capital companies who rush into transportation insurance lured by the perception of high premiums, these factors are now beginning to have an impact. As I've said many times before, some things never change. However, there is more at work here. In general, both frequency and severity numbers are trending in the wrong direction. The nation's driving has been steadily increased, the economy is stronger and gas prices are low, states are raising speed limit, cell phone usage has increased dramatically. In a report last spring, the National Safety Council estimated that more than a quarter of all crashes involve cell phone use. Drivers are distracted everywhere and seemingly by everything, they are talking, texting and even watching videos. Increasing vehicle complexity which for a while contributed to a decrease in loss caused has now become a significant factor in the increase in both accidents and fatalities. Adding to this specifically related to trucking, the driver shortage is worsening. The improved economy has had an impact here as well as demand for transportation services increase the realities of a tough job become even more difficult. Many who once did or would consider trucking as an occupation are opting for jobs that pay higher wages, and/or do not require long stretches away from home. Recent studies indicate that there is a shortage of at least 50,000 drivers. One driver who left the industry was quoted as follows; it's a hard life, you're living 24 hours a day, seven days a week inside a rolling closet. For years we have been discussing the uniqueness of this nice market, and how our almost 90-year history of success in it deserves the market attention. We're almost that entire time; we have proven that we are among the best, if not the best insurance company underwriting this business. The bottom line is that much of the market prices insurance for this industry holistically and we do it the old fashioned way, carefully and cautiously emphasizing individual selection criteria based upon the aforementioned record of success and our deep proprietary rating methodology. Occasionally that cautious experience has been a barrier to dramatic growth. However, overtime and time and time again we have been proven to be correct. Our current results offer that proof. Therefore, we are have been proactively prepared for this market disruption. As I said during our second quarter call, in my opinion we are in an extremely unique position to take advantages of the changes in our industry. We have a pristine balance sheet, an A plus rating from AM Best, and no reserve issues. We continue to be focused on all new business options; we are conducting a great deal of research to leverage our expertise and independent contractor products to determine if there are opportunities outside the transportation industry. We are also utilizing this experience in the development of right sharing products. We are leveraging our unique infrastructure and best-in-class claim department to review potential expansion in for the job sharing economy or economy that will likely become a more significant part of our future. We are in the forefront of research and development related to Telematics, and the future impact of truck platooning and driver less vehicles. As I stated, our company has the advantage of a very deep and very data base, richer than most, and has the potential of analytics, continues to convert pricing potential into pricing power. We have established much more robust rating formulas. These factors and our focus on the unique needs of the transportation industry and independent contractors will provide us the opportunity both, now and in the future to enhance our already substantial selection in rate making capabilities. Finally to reiterate the point I made on last quarter's call, our careful analysis of risk transfer option has allowed us to structure programs at attractive pricing with very high quality partners without experiencing a great deal of volatility, therefore using our capital both, conservatively and as efficiently as possible. And now I'll turn the call over to our Executive Vice President and CFO, Pat Corydon. Pat?

[Pat Corydon:]

Thanks, Joe. As mentioned earlier, the improvements in pre-tax investment income reported in each of the past three quarters continued in the third quarter. This quarter's pre-tax interest and dividend income increased 45% from the same quarter in 2014 and 4% above the immediately preceding quarter. For the nine months this year, pre-tax investment income has increased 35% in the same period in 2014. After-tax investment income increased by similar ratios for the quarter and nine month periods. This improvement reflects actions taken over the past year to increase both, interest and dividend yields on our invested assets while maintaining superior quality and liquidity to take maximum advantage of our continuing positive cash flows. Over the past year the average contractual life of our fixed maturity and short-term investment portfolio has remained level at 4.7 years, as has the effective duration at approximately two years. While the average credit quality has remained high and approximately A plus. During the quarter, the average after-tax shield on bonds purchased was modestly higher than the average yield on securities maturing or so in line with our experience over the past year. This result allows us to be confident that the more favorable investment income earnings will continue. It's certainly no surprise that equity markets did not fare well in the third quarter with domestic indices declining from low to high single digit percentages, global markets including India, also largely declined within this range. Against this backdrop the company's limited partnership investments produced a loss equal to 7.8% of beginning market value for the quarter, generally aligned with our benchmarks. For the nine months, limited partnerships have generated 2.6% overall loss in value, slightly better than the benchmark indices. Direct trading activity for the third quarter generated nearly $8 million in net gain, mostly from equity securities which were sold prior to the market declines in mid-quarter. For the year-to-date, direct trading has produced gains of $7.5 million resulting in a small overall net pre-tax realized gain but well below the $12.8 million gain reported in the first nine months of last year when market conditions were much more favorable and provided greater opportunities to realize trading games. Again, in line with general market conditions, unrealized games declined by $24.5 million before tax resulting in a year-to-date unrealized gain decreased of $23 million. As markets have recovered in October and early November, a significant majority of the third quarter valuation decline has been recovered since the end of the quarter. As Joe noted earlier, operating cash flow for the third quarter was a strong $16.6 million bringing the nine month total of $30.8 million consistent with the results for the first nine months of last year. The company has now achieved positive cash flow in 23 of the past 25 quarters totaling $294 million. Prior year loss developments were once again favorable and well within historical ranges. Claim settlements during the quarter produced a consolidated prior year reserve savings of approximately $3.7 million bringing the year-to-date savings to $9.2 million. This overall nine month development is equal to about 3% of year-end 2014 net loss reserves and had the effect of reducing the 2015 calendar year-to-date loss ratio by 4.7 points. This result is consistent with the $11.7 million reserve savings reported in the first nine months of 2014 which was equal to 4% of the prior year reserves and which reduced that period's loss ratio by just over six points. The consolidated development for the 2015 period is composed entirely of savings from our property and casualty insurance segment, net of a small deficiency from the reinsurance segment, reflective of the run-off of all property reinsurance business. In the 2014 period, $3.1 million of the savings was attributable to the reinsurance. I'll remind listeners that we posted our press release and quarterly financial statements on our website 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 of the quarterly financial data on our Investor Relations website under the financial information dropdown tab. This concludes our formal presentation. At this time we would be happy to answer any questions listeners may have.

[Joe DeVito:]

We thank you for joining us, and we look forward to speaking with you again to discuss our year-end result.

[Operator:]

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation.