Protective Insurance Corporation
Q2 2017 Earnings Call Transcript

Published: 11 Aug 2017

[Operator:]

Greetings, and welcome to the Baldwin & Lyons Second 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 your host, Han Huie with MWW. Please go ahead.

[Han Huie:]

Thank you, and thank you all for joining us this morning for the Baldwin & Lyons second quarter 2017 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 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, CEO and President 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 second 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 continued execution of our business strategy and William will follow with comments regarding our investment and some details behind our company’s financial position. Upon completion of those comments, we will answer questions. As indicated in our press release, second quarter net loss was $12.3 million or $0.82 per share, which compares to net income of $6 million or $0.40 per share for the prior year’s second quarter. For the six months ended June 30, 2017, net loss was $5.6 million or $0.37 per share compared to net income of $20.1 million or $1.33 per share for the 2016 period. Gross premiums written for the current quarter increased 19% to $119 million compared to $100 million written during the second quarter of 2016. The increase was driven by continued growth in the company’s commercial auto and workers’ compensation products. Our operations produced an underwriting loss of $29.2 million resulting in a combined ratio for the second quarter of $142.9 million. This compares to a combined ratio of $92.6 million for the second quarter 2016. The elevated combined ratio was primarily the result of reserve strengthening predominantly for accident years 2015 and prior. Due to the challenging commercial auto market, we are not unique in strengthening reserves. The commercial auto industry has strengthened prior reserves over the past five years. As we have identified the need for reserve strengthening, we are decisively addressing it in one quarter. Our reserve strengthening in the second quarter focused on commercial auto-related products and discontinued lines such as professional liability reinsurance and Florida commercial multi-peril policy. The structure of our prior reinsurance agreements created outsized impacts for the second quarter. The adjustments we made to strengthen reserves in some of those prior reinsurance treaty years produced a requirement to adjust net premiums earned and ceding commission income. The result had a compounding effect of reducing net premiums earned, increasing the loss and loss adjustment expense ratio, increasing expenses and increasing expense ratio. Baldwin remains committed to the commercial auto sector. We are aggressively executing an action plan and have confidence that we will achieve success with our profitable growth strategy. We are maintaining underwriting discipline and controlling risk appetite. We are improving segmentation and rate accuracy through adjustments to our rating variables and through multi-company pricing. We are also elevating our overall rate level as we see that new and renewable business prices are showing signs of hardening. We intend to continue to deliver value to our policyholders, our distribution partners and our shareholders by sticking with what we know well throughout the underwriting cycles. We remain confident in the efficacy of our growth strategy and supporting initiatives. Investment in growth, which includes building a stronger base of existing policyholders while acquiring relationships with new policyholders, is laying the foundation for our future income. Our premium deconcentration efforts are bearing fruit as we continue to deepen our relationships with customers by offering complementary products and by adding new customers in our target segments. Michael will now provide you with additional details related to the execution of our business strategy. Michael?

[Michael Case:]

Thank you, Randy. Our strategic plan focusing on distribution, product, operations and brand remained on track during the second quarter. Last quarter, I mentioned that we had enhanced our retail agency-centric distribution process by allowing all of our retail agents to work directly with our underwriting team. This shift has already proven to be the right decision and has made it easier to do business with us and has improved our communication with our retail agents. During the second quarter, we continued to embrace select program opportunities and successfully added two new large programs to our portfolio. These new opportunities are already helping us expand our distribution footprint and focus on our core lines of business, which include commercial auto, independent contractor coverages and workers’ compensation, all without creating channel conflicts with our current retail agents. I’m also excited to announce the creation of a new program management department charged with onboarding and supporting new and existing programs. The creation of this new service team demonstrates our commitment to the program space and gives us a uniform and consistent process to assess, onboard and service program opportunities. It also ensures we have the resources to guarantee that our program partners are delivering appropriate levels of service to our policyholders and gives us the ability to track performance of active programs. All of these improvements are allowing us to grow while protecting returns and improving our customer service levels. William will now provide you with additional details related to our investments and our overall financial condition. William?

[William 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. Second quarter net investment income increased 32.9% compared to the second quarter of 2016. For the first six months of this year, net investment income has increased 20.3% compared to the first half of 2016. We certainly 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 duration has remained level, an effective duration of approximately 2.0 years. Security valuation changes during the second quarter were favorable with realized gains of $3.3 million and unrealized gains of $5.4 million. Other operating expenses incurred during the second quarter of 2017 increased $4.4 million, resulting in an expense ratio of 37.4%. This compares to an expense ratio of 30.5% during the second quarter of 2016. For the first six months of 2017, other operating expenses increased $9.9 million, resulting in an expense ratio of 35.7%. This compares to an expense ratio of 29.7% for the 2016 period. The company’s expense ratio is computed as the ratio of other operating expenses less commission and other income to net premiums earned. The increase in our expense ratio was related to both a decrease in ceding commission income from prior reinsurance treaty years and premium adjustment provisions in the company’s historical commercial auto reinsurance treaties. This historical reinsurance structure, which was revised in the company’s current reinsurance treaty renewal, caused us an adjustment for ceded premiums when the ultimate loss estimate changes for a reinsurance treaty year, as was the case this quarter and as part of our reserve strengthening. During our review of the June 30, 2017 reserve position, we reacted to unfavorable development from prior year claims, particularly from infrequent but severe loss events. This resulted in $16.6 million of unfavorable development from prior year claims during the quarter predominantly from accident years 2015 and prior, including $4.5 million related to products that are now in a runoff such as professional liability reinsurance and Florida commercial multi-peril policies. Moving to where our financial position stands as of June 30, 2017. Operating cash flow was once again positive during the second quarter, resulting in $23.2 million of positive operating cash flow for the six months ended June 30, 2017. Book value per share on June 30, 2017 was $26.50, a decrease of $0.31 per share during the first six months of 2017 after the payment of cash dividends to shareholders totaling $0.54 per share. This combination of the decrease in book value plus dividends paid represents an annualized positive total return of 1.7% on beginning book value for the six months ended June 30, 2017. As a reminder, we’ve posted our press release and quarterly financial statements on our website at baldwinandlyons.com. This concludes our formal commentary. At this time, we’d be delighted to answer any questions.

[Operator:]

I would like to turn the conference back over to Randy Birchfield for closing remarks.

[Randy 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 third quarter results.

[Operator:]

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.