Protective Insurance Corporation
Q3 2018 Earnings Call Transcript

Published: 13 Nov 2018

[Operator:]

Greetings and welcome to the Protective Insurance Corporation’s Third Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Han Huie of MWW. Please proceed.

[Han Huie:]

Thank you. Thank you all for joining us this morning for the Protective Insurance Corporation third quarter 2018 conference call. If you did not receive a copy of the press release, you may access it online at the company’s website, along with an investor presentation to accompany today’s call and earnings release, which is available at www.protectiveinsurance.com. I would like to remind everyone that we are hosting a live webcast for the call, which maybe 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 maybe deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Protective Insurance Corporation believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurances that its expectations will be obtained. Factors and risks that could cause actual results to differ materially from expectations are detailed in the press release and are included from time-to-time with the company’s filings with the SEC. Now, I would like to introduce Jay Nichols, Interim CEO of Protective Insurance Corporation and turn the call over to him. Please go ahead.

[Jay Nichols:]

Thank you, Han and thanks to everyone for joining our conference call reporting results for the third quarter of 2018. Of course, the people I want to thank the most are the employees of Protective. During the past 19 days, I have been delighted by the openness and willingness of our people to embrace a path to profitability. This has been helpful to me personally and will be helpful to all of our shareholders. I will begin by providing an overview of the work we have already performed together and then turn our presentation over to William for an update on our financial performance during the third quarter of 2018. Upon completion of those comments, we will answer questions. Our results in the 3 months ended September 30, 2018 were disappointing. Trend in the commercial automobile industry continues to run hot and we’ve been behind this accelerating trend. Relating to this issue and exacerbating it, is the length of time required to settle cases, resulting in increased time for the trend to run, further increasing loss and litigation costs. During the past 19 days, the team has segmented our book of business into 59 sub-segments by product, distribution channel and in certain cases, by class. We then rated each subsection for our rate need in that line. 14 of these 59 sub-segments require a rate in excess of 10%. We are committed to pursuing that rate where required across the book. We are applying rate on a more granular basis though, by class, by geography as well as other factors that are driving losses such as safety score and experience. While this will impact our unit and a premium growth, we are not alone in seeking rate at this point in the market as a result of the accelerating trend. As a result, we do not see ourselves competitively disadvantaged while pursuing rate increases where necessary. We have historically been more cautious in applying rate increases, gradually blending them in over two or three renewal periods rather than all at once. This approach has not worked and will be changed. Additionally, we have seen our limit profile shift in our commercial automobile business toward higher limits. While our pricing on these access layers appear to be holding, we will work to shift this exposure to volatility, by both exploring faculty of reinsurance and targeting more accounts with lower limit profiles, while being more discriminating with larger limits. I believe we are taking the appropriate underwriting actions to achieve rate where needed and to reduce our volatility to the emerging trend of large litigation judgments. On the brighter side of things, we are confident that our reserve action in the quarter produces gross and net reserves that are mid-single digits above our actuarial midpoints. Additionally, the potential for future adverse development is mitigated by our annual aggregate deductible reinsurance treaty. Under this treaty, 75% of our gross losses above the attachment point are ceded to our re-insurers. For the years 2013 through 2017, we have a cumulative total of $3.7 million of incurred losses that fall below the treaty attachment point. For 2 of those years we’re above the treaty attachment point and for the other 3 years, we’re very close to attaching. While we do not expect to expose the treaty in a significant way, if there is adverse development, our reinsurance partners are there to support us. Page 4 of the slides on our website, have some additional detail regarding this. William will now provide you with additional details related to our third quarter results. William?

[William Vens:]

Thank you, Jay. As discussed in our press release, our third quarter net loss was $12.3 million or $0.82 per share, which compares to net income of $7.4 million or $0.49 per share for the prior year’s third quarter. For the first 9 months of 2018, net loss totaled $9.5 million or $0.63 per share, which compares to net income of $1.8 million or $0.12 per share for the prior year period. Gross premiums written for the current quarter increased 5.5% to $138.7 million compared to $131.5 million written during the third quarter of 2017. Gross premiums written for the first 9 months of 2018 increased 19.2% to $429.8 million compared to $360.6 million written during the 2017 period. The increase was driven by continued growth in the company’s commercial, auto and workers’ compensation products in both our retail and program distribution channels. Our operations produced an underwriting loss of $23.5 million, resulting in combined ratio for the third quarter of 124.3%. This compares to a combined ratio of 99.3% for the third quarter of 2017. For the first 9 months of 2018, the combined ratio was 107.2%, which compares to a combined ratio of 112.3% for the 2017 period. The increase in the combined ratio during both 2018 periods reflects

[Operator:]

[Operator Instructions] Our first question comes from the line of Brett Reiss from Janney Montgomery Scott. Please proceed with your question.

[Brett Reiss:]

Good morning. Thanks for the opportunity to ask the question or two. Mr. Nichols, why is the tort bar taking longer timeframe to settle cases and is that going to continue into the future?

[Jay Nichols:]

If I had a crystal ball, that would be helpful. What we are observing and it’s a trend that we are seeing that these cases are taking longer to settle, because they are seeking higher damages, they are spending more time on accident reconstruction. They are spending a lot more money pursuing these higher limits and these higher judgments. So I just think there is a structural issue going on in the industry where lawyers are spending more time and getting – they are achieving some good outcomes. And so they are willing to continue to spend more time on the next case and the case after that. And secondarily, I think there is also an influence from the litigation finance world – so there is cash flow coming in, so they are not cash flow constrained. So, those are two elements, but I am sure that they are all sorts of contributing factors, but it’s what we are seeing and that’s how we are attributing some of the trend and we don’t expect it to abate anytime soon.

[Brett Reiss:]

Right, right. When Mr. Birchfield, the press release came out about Mr. Birchfield leaving, there was also mention that a subcommittee of the board was going to be formed to look into all – everything was on the table with strategic initiatives. Has that committee been formed?

[Jay Nichols:]

That committee has been formed and it consists of myself two independent board members and two members of the Shapiro family.

[Brett Reiss:]

Okay. Is there anything you can share with us in terms of – have there been offers made to the committee? Is there – any color on interest from outside parties?

[Jay Nichols:]

I have nothing to share in that area. So we have established the committee. We are evaluating alternatives and we are going to evaluate how they apply to the business.

[Brett Reiss:]

Great. Thank you for answering my questions.

[Jay Nichols:]

Thank you.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Jay Nichols for closing remarks.

[Jay Nichols:]

Okay. Just on a personal note, I want to repeat my heartfelt thanks to the folks here at Protective, the ongoing support we received from our producers, our customers and other stakeholders and we look forward to executing our plan to achieve rate, managed volatility and create results that are consistent with our and your expectations and thank you very much for your time.