Protective Insurance Corporation
Q1 2018 Earnings Call Transcript

Published: 14 May 2018

[Operator:]

Greetings, and welcome to the Baldwin & Lyons, Inc., First Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Han Huie of MWW. Thank you, you may begin.

[Han Huie:]

Thank you. And thank you all for joining us this morning for the Baldwin & Lyons first 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, 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 will 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, they can give no assurances that its expectations will be attained. Factors and risks that could cause 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. Now I would like to introduce Randy Birchfield, President, CEO and COO of Baldwin & Lyons and turn the call over to him. Please go ahead.

[Randy Birchfield:]

Thanks, Han and welcome to our conference call reporting results for the first quarter of 2018. Joining me is William Vens, our Chief Financial Officer. I’ll begin by providing an update on our current insurance operations for the first quarter of 2018, and then turn the presentation over to William for comments regarding our investments and details regarding our company’s financial position. Upon completion of those comments, we will answer questions. As indicated in our press release, first quarter net income was $0.3 million or $0.02 per share, which compares to net income of $6.8 million or $0.45 per share for the prior year’s first quarter. Gross premiums written for the current quarter increased 35.3% to $148.8 million compared to $110 million written during the first quarter of 2017. The increase was driven by continued growth in the company’s commercial auto and workers compensation products, and both our retail and program distribution channels. Our operations produced underwriting income of $0.2 million, resulting in a combined ratio for the first quarter of 99.8%, a result that’s in line with our first quarter plan. This compares to a combined ratio of 99.7% for the first quarter of 2017. For the first quarter of 2018, prior accident year loss development was favorable at $1.6 million compared to a small deficiency produced in the same period of 2017 of $0.1 million. The main driver of the higher loss ratio for the first quarter of 2018 when compared to 2017 is higher current accident year loss picks, which were increased following our adverse prior year reserve charges recognized during the second quarter of 2017. We expect that rate actions and changes in our mix of business will lower these loss ratios over time, but we are also striving to establish conservative loss positions in the current accident year. Our commercial auto market remains hard, with no signs that trends will change in the near term. We continue to see competitors raising rates and reducing their exposure to commercial auto. This represents an opportunity for us to grow the business by gaining market share in our target segments by leveraging our particular and long-standing expertise. We have also raised rates in all of our commercial auto products and will continue to do so in response to continuing upward pressure on loss costs. Technology is also transforming the commercial auto market as a whole, including insurance. Telematics, electronic logging, crash avoidance equipment, autonomous vehicle development are changing the way we think about risk selection and pricing. The emergence of transportation network companies into the movement of goods, and growing e-commerce that increases the demand for last mile delivery to, and over the threshold is creating the need for new insurance products and designs. We are actively evaluating the impact of these technologies and are working aggressively to respond to these trends. The workers’ compensation market, in contrast to commercial auto, continues to soften. Falling loss costs are justifiably driving price levels down. We are leveraging our current installed base of auto accounts to cross-sell workers compensation. We are also developing partnerships that allow us to access specific segments, while enhancing new business buying rates and minimizing renewal defections. Most importantly, we continuously seek to enhance our claims processes to lower loss costs, while delivering on our claims promises. Yesterday, our shareholders approved changing our company name to Protective Insurance Corporation. This continues the brand transition we started last year when we moved to a single market-facing brand for our company, capitalizing on our well-established trade-name of Protective Insurance. Our Protective Insurance brand is well regarded by both our customers and our distribution partners and readily brings to mind our business of insurance. Our Protective Insurance brand was established by our founders, Harry Baldwin and Voris Lyons, in 1954. Aligning our company name with the Protective Insurance brand that Harry and Boris first established for us continues o have proud legacy into our future. We plan to effectuate the name transition during the third calendar quarter of this year. William will now provide you with additional details related to our investments and our overall financial condition. William.

[William Vens:]

Thank you. Over the past few years, the company has conducted a measured portfolio realignment, designed to increase the generation of investment income, while maintaining the conservative character of our investment portfolio. This is continuing to result in improved investment income. First quarter net investment income increased 25.6% compared to the first quarter of 2017. The increase in net investment income reflects higher interest rates, leading to higher reinvestment yields for our short duration, fixed-income portfolio and an increase in average funds invested resulting from positive cash flow. We continue to expect future increases in net investment income to be more modest. However, we do expect further increases due to higher invested assets resulting from estimated positive cash flows. Our fixed income investment portfolio continues to emphasize shorter-duration instruments, as was the case at year 2017 when we noted that if interest rates were to rise by full 100 basis points, the price of our bonds would be expected to fall by approximately 2.7%. The weighted average credit quality of our fixed income portfolio, including cash, is an S&P rating of A+. During the first quarter of 2018, we reallocated approximately $54 million of equity investments into short duration treasuries of three years or less. These equity sales are characterized by further solidifying the conservative nature of our high quality, short duration investment portfolio. The sales opportunistically utilized the new lower corporate tax rate of 21%, which was beneficial given the low tax basis that many of these equity positions, and the sales were accretive to income, given the increase in yields at the shorter end of the yield curve. Premium growth is beginning to have a favorable impact on our expense ratio, consistent with our stated strategy to leverage the company’s fixed-expense base to improve the expense ratio over time. The 2.8 percentage point decline in the expense ratio during the first quarter of 2018 when compared to 2017 reflects this fixed-expense leverage. Increased writings within the workers compensation product also positively impacted the expense ratio due to increased ceding commission income during the first quarter of 2018. Moving to our financial position at March 31, 2018, operating cash flow was again positive during the first quarter, resulting in $8.0 million of positive operating cash flow for the quarter ended March 31, 2018. Book value per share on March 31, 2018, was $27.38 a decrease of $0.45 per share during the first quarter of 2018 after the payment of cash dividends to shareholders, totaling $0.28 per share. This combination of the decrease in book value, plus dividends paid represents annualized negative total value creation of 2.4% on beginning book value for the quarter ended March 31, 2018. As a reminder, we have posted our press release and quarterly financial statements on our website at baldwinandlyons.com. This concludes our formal commentary. At this time, we would be delighted to answer questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Doug Eaton with Eaton Capital Management. Please proceed with your question.

[Doug Eaton:]

Good morning Randy and William. I have a question and a follow-up for you both. First, was the increased actual paid in case loss activity in the first quarter that drove the higher current year picks? Or was it mostly IBNR?

[William Vens:]

So in the second quarter of last year when we saw a change in reporting where some claims were coming in later and settling higher than we had historically, that impacted our view on the current book. So we wanted to, that a conservative level where we didn’t have to be revisiting in future periods. So we hope we’ve accomplished that. Time, of course will tell, but no it’s nothing particularly unusual in this quarter that caused us to change anything. This quarter, it’s just a reflection of actions we took last year.

[Doug Eaton:]

Okay. So, nothing in terms of higher actual cash payout debt out in terms of the paid in case. It’s more an IBNR situation to protect yourself going forward.

[William Vens:]

That’s correct. No big change in philosophy or new activity this quarter. It’s just a continuation of actions we took last year.

[Doug Eaton:]

Okay. All right, that’s helpful. And then, secondly can you give us some color what was the rationale for using the equity sales to purchase, I think William you mentioned an additional $54 million of short term, fixed-income securities and you were repurchasing stock. I mean the stock is trading at less than 85% of book value, and I guess the question is, we wouldn’t have provided a better return to repurchase the stock, which sort of an immediately and significantly accretive rather than buying new additional short term securities.

[William Vens:]

Yes. And just because it hasn’t happened already, of course it doesn’t mean it cannot happen in the future. We have the authorization to do so. Indeed, when you look at the company’s history, we’ve really only traded at these levels a couple of times over the last 20 years, once in the early 2000s and late ‘90s as part of the Internet bubble. Again, in sort of 2008 period, as part of the financial crisis and in both instances, the company did repurchase shares. And we, of course, are not going to negotiate against ourselves. But if the past is [inaudible], it’s certainly something we have the opportunity to do so again. Again, our board has substantial shareholders on it. So we think there is good alignment between the governance of the company and broader shareholdings.

[Doug Eaton:]

Okay, thank you. And you mentioned the 33% top line growth was in terms of work comp versus commercial auto, is it pretty balanced or have you seeing that growth coming more from auto because of the increased rate? I think you mentioned that work comp has become so soft.

[Randy Birchfield:]

Yes, this is Randy. I would say that our growth is consistent with our historical mix of business. And so we are seeing growth in both major platforms of commercial auto and workers compensation, and it’s partly a function of our interest in doing some cross-selling against our current auto only accounts. And then, also continuing development of our producer plant, specifically associated with our workers compensation product.

[Doug Eaton:]

Okay, thank you.

[Operator:]

Thank you. Our next question comes from the line of Steve Spence with RBC Wealth Management. Please proceed with you question.

[Steve Spence:]

Good morning gentlemen. I wonder if you have generic sense, if you can help us a little bit to understand some of the transportation situations. With the shortages that are out there today, both are apparently of labor and of capital equipment and the invigorate activities in rail as a backdrop, how it’s affecting the market, both as to volume and pricing?

[Randy Birchfield:]

Thank you for the questions, this is Randy. What we are seeing, generally speaking and have been seeing since I think 2012 is a continuous tick up in over the road trucking shipping. Our customers are fairly often and more often than not continuing to increase the miles that they operate in response to their growing demand. I think last mile delivery they are growing e-commerce is continuing to produce a high demand for over the road shipping. Combine that with, as you suggest, driver shortages, I think that is also impacting the ability of the trucking companies or motor carriers to keep a consistent base of operators without turnover. So look, we are seeing our current customer base, our motor carriers that we’ve had historically for a long time, continuing to grow just based on pure exposure. They are driving more miles, they have more trucks, they carry more shipments and in addition to that, we are looking for, in our underwriting processes, those motor carriers that control there, or have a low driver turnover because those tend to be the better risks, and those motor carriers that have higher driver turnover as a result of the shortage in drivers are much less attractive to us.

[Steve Spence:]

As the business is growing, any new entrants, and can you characterize the pricing environment for us, how it’s changing?

[Randy Birchfield:]

Sure. Well, we haven’t really seen new entrants, at least during this time period of the market hardening of players. Instead, we’ve actually seen a contraction of the marketplace. We’ve seen competitors raising rates, we’ve seen competitors contracting their underwriting appetite, and we’ve seen wholesale exodus in the market from some competitors. So we see a lack of our shrinking capacity to serve the needs of the motor carrier world. And in addition to that, there is other transitions that are happening in the marketplace around e- commerce and last mile delivery and technology that are changing the face of the commercial auto space. And can you repeat the second half of your question? I lost track of that one.

[Steve Spence:]

That’s okay. I don’t know it was a great part of the question. But I just wondered what it’s doing to the pricing environment?

[Randy Birchfield:]

Oh, yes, that was your question. Yes, we’ve seen price increases. Our competitors are raising rates. We are also doing the same. The nature of our product, I think gives us a little bit of advantage with respect to how we achieve price increases on accounts. For those competitors that are pricing on a unit basis for their trucking companies, our motor carrier clients, they are exposed to both frequency and severity impacts on their pricing, and therefore had to adjust pricing to reflect that. Since we rate primarily on a mileage basis, and we use monthly reporting to keep track of the miles being operated by our motor carrier customers, we tend to have a lower impact of frequency changes on our pricing because as more miles are driven, we have the opportunity to increase the total policy price to reflect those extra miles. So we still have exposure to severity increases and we’ve been taking rate to reflect that exposure, and we’ve essentially been taking rate across all of our product lines that are associated with auto.

[Steve Spence:]

And then just, I’m sorry one other quick one. You recently bought a new automobile and the jump in the last six or seven years in technology and particularly in safety devices has been notable. At what point – and I know that, that’s going on in the cab as well. At what point and how would that start to show up with respect to claims?

[Randy Birchfield:]

Yes, great question, and one that we struggle with answering on a regular basis because we do believe, fundamentally, that crash avoidance technology and electronic logging devices and other equipment that’s coming off the production line especially for the newer trucks, we believe, in the long run it’s going to have an effect on frequency and possibly severity. I’m not sure on the severity side whether it’s a good or bad thing because this equipment is not inexpensive. However, we have frankly not seen it come through our loss results in such a way that we can identify the existence of crash avoidance technology and other in-cab technology and relate that to the loss experience specifically to that class of truck. We think that’s going to happen over time as the fleets’ turnover, more and more of the fleets, especially for the larger motor carriers that have a well-defined process of rolling over their fleet. We think that, that’s going to work its way into the total results, but it could be a few years before we’ll have definitive answers on it.

[Steve Spence:]

Okay. Thank you very much.

[Randy Birchfield:]

Thank you.

[Operator:]

Thank you. There are no further questions at this time. I would like to turn the call back over to Randy Birchfield for any closing remarks.

[Randy Birchfield:]

Thank you very much. I appreciate your questions and the opportunity to speak with you about our earnings results. We look forward to our next quarter earnings call. Thank you.

[Operator:]

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.