Protective Insurance Corporation
Q3 2017 Earnings Call Transcript

Published: 8 Nov 2017

[Operator:]

Greetings, and welcome to the Baldwin & Lyons Third Quarter 2017 Earnings Conference. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I would now like to turn the conference over to Han Huie.

[Han Huie:]

Thank you and thank you all for joining us this morning for the Baldwin & Lyons third 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 third 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, third quarter net income was $7.4 million or $0.49 per share, which compares to net income of $4 million or $0.27 per share for the prior year’s third quarter. For the nine months ended September 30, 2017, net income was $1.8 million or $0.12 per share compared to net income of $24.1 million or $1.60 per share for the period of 2016. Gross premiums written for the current quarter increased 29% to $131.5 million compared to $101.9 million written during the third quarter of 2016. The increase was driven by continued growth in the company’s commercial auto and workers’ compensation products in both retail and program distribution channel. Our operations produced underwriting income of $0.6 million resulting in a combined ratio for the third quarter of $99.3 million. This compares to a combined ratio of $107.9 million for the third quarter 2016. The combined ratio of difference reflects the $10.1 million reserve strengthening that occurred during the third quarter of 2016. As I have discussed in previous earnings call, the commercial auto market continues to be challenging in no small part due to upward pressure on lost costs. We have been responding to these challenges across the breadth of our commercial auto products by increasing overall rate levels, adjusting rating algorithms to improve pricing accuracy and tightening underwriting requirements to refine our risk appetite. We expect these changes to continue to bake into earned premium and loss cost per exposure through the remainder of 2017 and 2018. Additionally, we have modified our claims procedures in recognition of the uniqueness of some of these lines of business and the current loss cost environment. In the face of these rate actions we continue to see strong demand for our products. Our new business submission flow is at an all time high, without showing signs of abating with our competitors raising rates, reducing exposures and in some cases exiting the market more business is available from which to select without sacrificing the need to maintain rate adequacy. This is a unique opportunity to take advantage of our transportation expertise and profitably grow our business. Workers’ compensation pricing remains soft as loss costs were improving. Even so, our claims practises, writing techniques and risk selection provide good reason for us to be bullish on our ability to write profitable workers’ compensation business. We are seeking to cross sell workers’ compensation policies for our existing auto accounts and new prospects in order to deepen our relationships with our policy holders. The goals of increasing a number of policies per account are to increase account retention, lower overall acquisition costs, rationalize marketing and account management cost and maximize the effectiveness of loss prevention services. Premium growth continues to exceed plan with new business accounting for material percentage of total premium. Even with rate increases and discipline in underwriting this growth is putting some downward pressure on profits since new policies are less seasoned and more expensive to acquire than our existing book of business. Given market conditions, we believe there is an opportunity to strike a balance between growing our business while still producing underwriting profits across our entire book. Michael will now provide you with additional details related to the execution of our business strategy. Michael?

[Michael Case:]

Thank you, Randy. Baldwin & Lyons has been providing outstanding insurance products and services to the transportation industry for over 85 years. During this time, we have worked very hard to ensure that our products and services are the best in the industry. We are proud of our overall track record. Our focus remains on profitable growth and continuous improvement as we review opportunities that fit our risk appetite and enhance value for our shareholders. At the highest level, our strategic plan is to grow premiums at an acceptable combined ratio, diversified business within our target transportation and workers compensation market segments, leverage our core competencies and harden our systems and process capabilities to enable growth and profit generation. Year-to-date, we have delivered on these strategic objectives. Our retail and program distribution channels have delivered double-digit premium growth. We continue to refine and improve our competencies in claims, underwriting and loss prevention, and we have made significant improvements to our systems and process capabilities. Last quarter, I announced the creation of a new program management department. The creation of this new service team demonstrates our commitment to the program space and give us a uniform and consistent process to assess, onboard and service program opportunities. It also ensures that we have the resources to support our program partners in delivering superior levels of service to our policyholders and gives us the ability to track performance of active programs. I’ll conclude my comments with a few updates around our continued efforts to upgrade and transform our systems environment. On the heels of implementing our guaranteed cost workers’ compensation products on our new policy admin system last year we have turned our focus to our loss sensitive workers’ compensation products this quarter. Development is underway and we plan to be in production in the first quarter of 2018, followed by quarterly releases for large deductible, access and retro workers’ compensation. We have also made a great deal of progress on getting our commercial auto products implemented into our new policy admin system and will have our small fleet trucking product implemented by the end of 2017, followed by intermediate fleet trucking in the first quarter of 2018 and finally medium fleet trucking by midyear 2018. Last, but certainly not least given our focus on growth in the program’s book of business, we implemented a standardized data integration framework to facilitate quicker program implementations with our program administrators, which not only allows for the exchange of policy and remittance data with our partners, but also seamlessly integrates all of our internal systems. 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. Third quarter net investment income increased 14.6% compared to the third quarter of 2016. For the first nine months of this year, net investment income has increased 18.4% compared to the 2016 period. We certainly expect future increases to be more modest, however, we continue to expect further 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, at an effective duration of approximately 2.0 years. Security valuation changes during the third quarter were favorable with realized gains of 5.9 million and unrealized gains of 4.0 million. Other operating expenses incurred during the third quarter of 2017 increased 8.0 million resulting in an expense ratio of 31.2%, this compares to expense ratio of 28.1% during the third quarter of 2016. For the first nine months of 2017, other operating expenses increased 17.9 million resulting in an expense ratio of 33.9%. This compares to an expense ratio of 29.1% 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. Moving to our financial position stands as of September 30, 2017 operating cash flow was once again positive during the third quarter resulting in 55.2 million of positive operating cash flow for the nine months ended September 30, 2017. Book value per share on September 30, 2017 was $26.93, an increase of $0.12 per share during the first nine months of 2017 after the payment of cash dividends to shareholders totaling $0.81 per share. This combination of the increase in book value plus dividends paid represents an annualized positive total return of 4.6% on beginning book value for the nine months ended September 30, 2017. During the third quarter of 2017, the company repurchased 84,960 shares of its Class B common stock at an average price per share of $22.12. As a reminder we posted our press release and quarterly financial statements on our [e-mail]. This concludes our formal commentary. At this time we would be delighted to answer questions. [Operator Instructions] Ladies and gentlemen, we have no questions at this time. 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. We look forward to our next communication related to the 2017 fourth quarter results.

[Operator:]

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