Protective Insurance Corporation
Q1 2017 Earnings Call Transcript

Published: 13 May 2017

[Operator:]

Greetings and welcome to Baldwin & Lyons' First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Han Huie of MWW Group. Thank you, Ms. Huie. You may now begin.

[Han Huie:]

Thank you, and thank you all for joining us this morning for the Baldwin & Lyons First Quarter 2017 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 Web-site 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 actual results to differ materially from expectations are detailed in the press release and from time to time in the Company's filings with the SEC. Now I would like to introduce Randy Birchfield, CEO and President of Baldwin & Lyons, and turn the call over to him. Please go ahead.

[Randall Birchfield:]

Thanks, Han, and welcome to our conference call reporting results for the first quarter of 2017. Joining me is William Vens, our Chief Financial Officer, and Michael Case, our Chief Operating Officer. I will begin by providing an update on our current insurance operations for the quarter, and then turn the presentation over to Michael and William. Michael will give information related to the execution of our business strategy and William will follow with comments regarding our investments and some details behind 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 $6.8 million, or $0.45 per share, which compares to net income of $14.1 million or $0.94 per share for the prior year's first quarter. Gross premiums written for the current quarter was a record $110 million, 14.4% higher than the $96.2 million written during the first quarter of 2016. The increase was driven by the continued strong performance of the Company's commercial auto and workers' compensation products. Our operations produced an underwriting gain of $0.2 million, resulting in a combined ratio for the first quarter of 99.7%. This compares to a combined ratio of 86.5% for the first quarter of 2016. The combined ratio difference was mainly the result of unusually favorable loss experience during the first quarter of 2016 and unfavorable loss experience during the first quarter of 2017 due in part to a severe charter bus loss. As an active writer of commercial auto, we understand the current challenges facing any company attempting to do business in this line. However, we believe that the market exits, market contractions and rate increases executed by other commercial auto insurers presents an opportunity for us, an opportunity to demonstrate our commercial auto expertise to potential new customers. Our focus on the transportation and independent contractor segments allows us to apply our resources and attention to markets we know well. Continued execution of our core competencies in the area of claims, underwriting, loss prevention and product development, provide us with an advantage in our efforts to grow profitably in this particularly challenging time. Yesterday, our shareholders reinforced our focus on profitable growth by approving a new incentive structure which better aligns our associates' interests with our operational and financial goals. One such goal is to de-concentrate our premiums, and to accomplish this goal we need to grow our net premiums earned. However, our growth goals need to co-exist with overall profitability, for only profitable growth will allow us to continue to enjoy the financial stability necessary to fulfill the promises we make to our customers, including our promises to pay claims and provide outstanding customer service. Our new compensation structure provides our associates with an incentive to grow as fast as we can at any given combined ratio that generates incremental returns to our equity, preferably at or below a 98% combined ratio. This incentive structure balances our desire to grow, but grow profitably in this challenging commercial auto market. We have highly talented associates who are dedicated to aggressively executing our core operational strategies, strategies focused on producing profitable growth. Every associate is now participating in this incentive structure, allowing all of us to share the same focus on profitable growth. Michael will now provide you with additional details related to the execution of our business strategy. Michael?

[Michael J. Case:]

Thank you, Randy. During the first quarter, the Baldwin & Lyons management team continued to execute on its strategic plan that focuses on distribution, product, operations and brand. On the distribution side, we continued to enhance our retail agency-centric distribution model by allowing certain agents to work directly with our underwriting team. This shift has made it easier to do business with us and has improved our speed to market. This enhancement will be available to all of our retail agents by the end of the second quarter. We also continued to build and look for new program business opportunities during the first quarter. Our focus here remains selective, but we believe select programs allow us to leverage our core competencies and our proven ability to handle large opportunities. Whether it's a retail or program opportunity, we are successfully expanding the sources of our new business production. This strategy is allowing us to say yes more often and to grow premiums while maintaining pricing discipline. With respect to product, operations and brand, it's worth mentioning that our growth plans continue to be driven by our core lines in transportation and the contractor segments of the economy. Our core lines include commercial auto, independent contractor coverages and workers' compensation. This allows us to leverage our core competencies, such as our proven claims handling ability, our consistent and exceptional underwriting practices, and our proactive and industry-leading loss prevention services. By focusing our growth in areas that benefit from our core competencies, we are strengthening our long-term earnings power and sustainability while leveraging our fixed expenses. I'll conclude my comments with a few updates around our continued efforts to upgrade and transform our systems environment. While we recognize that our products need strong distribution channels through our retail agents and select program administrators, we also recognize the need for a state-of-the-art policy admin system that will allow our underwriters to easily and rapidly communicate with our partners. Not surprisingly, our ongoing efforts to implement our state-of-the-art policy admin and billing systems and deploy an even more enhanced business intelligence and data warehouse capabilities are our top IT projects. These investments will provide better customer service, lower our expenses, reduce our time to market, and help drive our sustainable business plan well into the future. Along these lines, we recently implemented our ISO refer to company commercial rating system and are currently implementing several proprietary rating and policy lifecycle management features. We also recently expanded our workers' compensation policy admin system capabilities from 19 to 47 jurisdictions. This upgrade included multi-company tiered rating, utilizing our Protective and Sagamore underwriting companies for our guaranteed cost business. Finally, we recently implemented our workers' compensation pay-as-you-go program, which reduces the burden of premium audit by calculating premium based on actual payroll to account for seasonality and fluctuation in the business owner's operations. All of these improvements will allow us to be more competitive in the marketplace with better rating flexibility and expanded underwriting appetite with a balanced risk approach that will grow our business while protecting returns. William will now provide you with additional details related to our investments and overall financial condition. William?

[William C. Vens:]

Thank you, Michael. Over the past few years, the Company has implemented a program of 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 7.3% compared to the first quarter of 2016. We expect future increases to be more modest. However, we still expect continued increases from both continued portfolio realignment and increased invested assets from anticipated positive cash flows. Over the past year, our fixed maturities have remained level at an effective duration of approximately 2.0 years. Security valuation changes during the first quarter were favorable, with realized gains of $6.3 million and unrealized gains of $8.2 million. Other operating expenses incurred during the first quarter of 2017 increased $5.5 million, resulting in an expense ratio of 34.0%. This compares to an expense ratio of 28.8% during the first quarter of 2016. The Company's expense ratio is calculated as the ratio of other operating expenses, less commission and other income to net premiums earned. The increase in our expense ratio is related to a decrease in ceding commission income from prior treaty years and the changes in the mix of business sold during the first quarter of 2017. The Company has also invested in the talent necessary to grow premiums and support the Company's strategies. Moving to where our financial position stands as of March 31, 2017, operating cash flow was positive during the first quarter, resulting in $6.4 million of positive operating cash flow for the three months ended March 31, 2017. Book value per share on March 31, 2017 was $27.34, an increase of $0.53 per share during the first quarter after the payment of cash dividends to shareholders totaling $0.27 per share. This combination of an increase in book value plus dividends paid represent an 11.9% total return on beginning book value for the three months ended March 31, 2017. As a reminder, we've posted our press release and quarterly financial statements on our Web-site at baldwinandlyons.com. This concludes our formal presentation. At this time, we'd be delighted to answer any questions.

[Randall Birchfield:]

Okay, thank you. This is Randy Birchfield. Thank you once again for your interest in our Company and we look forward to our next communication related to the 2017 second quarter results.

[Operator:]

Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.