Protective Insurance Corporation
Q2 2015 Earnings Call Transcript

Published: 9 Aug 2015

[Operator:]

Good day, and welcome to the Baldwin & Lyons Incorporated Second Quarter 2015 Earnings Conference Call. Today's conference is being recorded. At this time I would like to turn the conference 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 second 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 could 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 Han, and welcome to our second quarter 2015 conference call. Joining me today is Pat Corydon, Executive Vice President and CFO of the company. As it’s 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 investments-related activity along with some commentary on the company’s finances. Following Pat's comment's as always, we will be available to answer any questions that you may have. Net income for the quarter was $5.7 million, $0.38 per share compared to $9.3 million or $0.62 per share for the second quarter of 2014. After-tax operating income, which excludes investment gains and losses was $6.5 million, $0.43 per share, almost 60% higher than the prior year’s same period of $4.1 million and $0.27 per share. The difference in net income was due to net investment losses during the recently completed quarter, of $800,000 after-tax, equal to a loss of $0.05 per share compared with last year’s gain of $5.3 million or $0.35 per share for the second quarter of 2014. Pretax investment income increased 39% when compared to the second quarter of 2014 and 3% over the first quarter of 2015 reflecting higher yields and continued robust cash flow. For the six months, pretax investment income increased 30% compared to the prior year’s same period. Pat will have more to say about our investments during his portion of the presentation. Net cash flow continues to be strong at approximately $14.2 million year-to-date, compared to $13.6 million for the previous year's first six months. After the payment of our regularly scheduled quarterly dividend of $0.25 per share, book value increased by $0.13 for the quarter. For the six months, book value was up $0.31 for the year after the payment of dividends to shareholders equal to $0.50. As of June 30, 2015, book value was $26.98, representing just over $405 million in shareholders equity. Direct premium written for the company during the second quarter was $92.8 million, compared to $95.1 million in the same period last year. The decrease was entirely due to the final stages of our planned reductions in property/catastrophe reinsurance. All policies of any kind associated with that business expired on or prior to July 1, 2015. Thankfully, I no longer remain blue to the worldwide weather change. Along with increases in primary professional liabilities and personal auto that were offset and substantially so by our strategic growth initiatives in all of our fleet transportation products. Premium volume in these four products grew by 7.3%, just under $6 million compared to the second quarter of 2014. For the six months, premium written was a $189.8 million, just about level with the record total produced during the same period in 2014, again, with volume from fleet transportation products increasing by 10% fully offsetting the planned reduction. Net premium earned for the second quarter of 2015 was $65.5 million, up 4% over the same period last year. For the year, earned premium was also up 4%, setting a new record at $131.9 million representing the highest six months earned premium in our almost 47 year history as a public company. Underwriting results for the quarter were also very good. The consolidated combined ratio including fees was 89.5% producing $6.9 million in underwriting the income. Again including fees, the property/casualty segment combined ratio was 89.2%. The Reinsurance segment was 92.4%. For the year-to-date, the consolidated combined ratio was 92.4% with fees, producing $10.1 million in underwriting income. At the enterprise level, the combined ratios for both the quarter and the year-to-date were a few points improvement overall when compared to the respective prior year period. So very good underwriting results combined with the higher investment yields I previously mentioned generated improved returns on shareholders equity from operation. On an annualized basis, they were 7.4% for the second quarter of 2015, and $5.9% for the year-to-date, compared to 4.8% and 4.6% for the same period during 2014. Current year exited results were excellent. As prior year reserve savings will level and had an almost identical impact as in 2014. Increased rates across the board along with evolving risk selection and risk transfer mechanism were the primary reasons behind the underwriting improvement. Going forward, we expect to produce similar, if not better results, with much less volatility attributable to our withdrawal from the property catastrophe business, refocus on our core transportation products, and improved risk transfer structure. Stakeholders who follow our company closely know that the theme of our last annual report was back to the future. In my letter to shareholders I wrote the following; in 2015, we circle back to our root via an expansion of the products that lays the foundation for the enterprise that Baldwin has become. As I said then and repeat now, the current state of our business requires dynamic decision-making, often in real-time. Many times, those decisions are necessitated by events that are out of our control. For years, we have proactively prepared for this current market disruption. In my opinion, we are in an extremely unique position to take advantage of the changes in our industry. We have a pristine balance sheet and A+ rating from A.M. Best, no legacy reserve issues, no branch offices, a flat structure and very little bureaucracy. We are able to make decisions not just quickly, but immediately. We are flexible and nimble. Perhaps more so than most others, we reach the customer in any way the customer wants to be reached. There is one concept, superior service to the transportation industry. For many years during our almost 90-year history, Baldwin has been well-known as the pioneer and leader in providing insurance solutions to large trucking companies. Throughout that time, we remained committed to the industry and focused on making an underwriting profit. We also expanded our product line to include medium-size under 250 units account, small fleet under 25 units, and public transportation operations, buses, limos, et cetera. Today as well, we see our best opportunities in these four products. Advances in technology have had two major impacts on our decision. First, is that the good companies in this space are safer than ever. We ensure many of them. The second is that we believe we have the advantage of a very deep and varied database. Richer data than most and as analytics capabilities evolve, we have established much more robust rating formula. These factors and our focus on the unique needs of the transportation industry, should provide us the opportunity both now and in the future to enhance our already substantial selection and pricing capabilities. We are not standing still. In a nutshell, our short-term strategy is based upon our long-term success, albeit with a much better track. Another significant factor is the current state of the reinsurance market and the longstanding support we have enjoyed with our partners. We have historically used this mechanism for two main reasons, namely, economics and volatility protection. Our partners have made money. For many years, those relationships have facilitated our ability to absorb risk that is generally considered to be very volatile due primarily to the combination of large limits and target defended. Our careful analysis of risk transfer options have allowed us to structure our programs at attractive pricing with very high quality partners without experiencing a great deal of volatility, therefore using our own capital both conservatively, and as efficiently as possible. We are always mindful of our A+ rating from A.M. Best. It is foundational to our strategy. While alternative capital has radically transformed to the traditional retrocessional and property catastrophe sector, hastening our already planned exit from this space, our highly rated partners have adapted to this new environment by assisting us in finding new innovative ways to offer risk solutions to transportation companies. Our customers and prospects value our extremely strong clean balance sheet, our long and successful history in transportation insurance, service capabilities, in particular claims handling, and our ability to provide true value beyond the simple price for leasing capital. Looking ahead, along with the big data analytics that I previously mentioned, telematics, predictive modeling, mobile communications, driverless vehicles, job and ride sharing and their collective present and future impact on our business are all areas for current applications and rich research for us. Change is good, change is constant and we embrace this. And now, I’ll turn the call over to our Executive Vice President and CFO, Pat Corydon. Pat?

[Pat Corydon:]

Thanks, Joe. The improvements in investment income mentioned earlier bear repeating. Second quarter pretax interest and dividend income increased 39% from the second quarter of 2014 and 3% above the first quarter of this year. For the six months of this year, pretax income has increased 30% from the 2014 first half. These results reflect a strategic reallocation of our invested assets over the past 18 months, with the goal of increasing both average bond and dividend yields, take maximum advantage of our continuing positive cash flows. After-tax investment income increased by similar ratios for the quarter and six months period. With after-tax income for the second quarter being the highest quarterly amount recorded in the past five years. As we noted in our previous conference call, this result has been accomplished without meaningfully extending the duration or average contractual maturity of the fixed income portfolio. A year ago, the portfolio’s average maturity was 4.8 years and it is now 5.1 years. While the effective duration has remained level at approximately two years. During the quarter, the average after-tax yield on bonds purchased was modestly higher than the average yields on securities maturing or sold 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 at least for the near-term. On the other hand, relatively low GDP and inflation, as well as high demand for risk-free assets is not conducive to meaningful increases in short to medium-term, high-quality interest rates any time soon. So maintaining the increased level of investment income will continue to require constant attention and it’s one of our significant strategic goals. Limited partnership investments produced roughly breakeven results for the quarter impacted by a negative return from the Indian markets. For the six months, limited partnerships have generated a 5.4% return in line with benchmark indices. Direct trading activity for the second quarter was again relatively light, producing a realized loss of about $900,000. For the year-to-date, direct trading has produced losses of $1.7 million offsetting a portion of the limited partnership gains and resulting in net pre-tax realized gains of $2.6 million well below the $12.2 million reported in the first half of last year. It’s worth noting that direct trading activity is dictated by market conditions and should not be expected to be consistent from quarter-to-quarter. Market conditions in 2014 were much more favorable and resulted in greater opportunities to realize trading gains. There was only a small change in unrealized gains across the entire investment portfolio during the quarter. And the year-to-date gain has increased by only $1.0 million reflecting the various markets in which the company invests its assets. At June 30, the market value of the company’s investment portfolio exceeded cost by $81.3 million before tax and nearly $53 million after-tax. As Joe mentioned, operating cash flow during the second quarter was $3.5 million, bringing the six month total to $14.2 million consistent with the results of the first half of last year. The company has achieved positive operating cash flow in 22 of the past 24 quarters totaling $277 million. 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 $3.5 million bringing the year-to-date savings to $5.5 million. This overall six month development is equal to about 2% of the year end 2014 net loss reserves and had the effect of reducing the 2015 calendar year loss ratio by four points. This result is nearly identical for the $5.7 million reserve savings recorded in the first half of 2014, which was also equal to 2% of the prior year end reserves and which reduced that period’s loss ratio by about 4.5 points. The consolidated development for the 2015 period is composed entirely of savings from our property and casualty insurance segment with breakeven results from the reinsurance segment reflective of the run-off of all property reinsurance business. I’ll remind listeners that we’ve posted our press release and quarterly financial statements at 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 other quarterly financial data on our Investor Relations website under the Financial Information dropdown menu. This concludes our formal presentation. At this time we would be happy to answer any questions listeners may have.

[Joe DeVito:]

Well, we thank you for listening and your concern related to our company and we look forward to talking with you again in November.

[Operator:]

And that concludes today’s conference call. Thank you for your participation.