Protective Insurance Corporation
Q4 2017 Earnings Call Transcript

Published: 15 Feb 2018

[Operator:]

Greetings, and welcome to the Baldwin & Lyons Fourth Quarter 2017 Earnings Conference Call. At this time all participants are in a listen-only mode and a brief 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 Han Huie. Thank you. Please go ahead.

[Han Huie:]

Thank you, and thank you all for joining us this morning for the Baldwin & Lyons, fourth 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 might 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 could cause actual results to differ materially from expectations that maybe detailed in the Press Release and our included 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 fourth quarter of 2017. Joining me is William Vens, our Chief Financial Officer. I will begin by providing an update on our current insurance operations for the quarter and 2017 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, fourth quarter net income was $16.5 million or $1.10 per share, which compares to net income of $4.9 million or $0.32 per share for the prior year’s fourth quarter. For the year ending December 31, 2017, net income was $18.3 million or $1.21 per share compared to net income of $28.9 million or $1.92 per share for the 2016 year. Gross premiums written for the current quarter increased 37.5% to $144.2 million compared to $104.9 million in written during the fourth quarter of 2016. The increase was driven by continued growth in the company’s commercial auto and workers compensation product in both retail and program distribution channel. Our operations produced underwriting income of $0.7 million resulting in a combined ratio for the fourth quarter of $99.3 million. This compares to a combined ratio of $104.5 million for the fourth quarter of 2016. The fourth 2017 combined ratio includes $2.7 million of unfavorable prior year reserve development, predominantly related to legacy business lines which are now in runoff. This compares to $3.4 million of unfavorable prior year development in the fourth quarter of 2016 which was negatively impacted by a limited number of infrequent but severe public transportation bus claims. For the full year 2017 unfavorable prior year development totaled $19.2 million which was impacted by both commercial auto and legacy runoff business reserve strengthening. This compares to $13.8 million of unfavorable prior year development in 2016. 2017 marked a year of both challenges and progress for our company. Our progress included growing gross premiums written by $102 million, an increase of 25% for the year, significantly surpassing both our historical premium revenue and growth rate. Our 2017 premium growth reflects our strategy of diversifying our customer base within our core businesses, transportation and workers compensation insurance. Our growth strategy however will never deviate from our commitment to deliver the highest quality customized products and services, while maintaining the underwriting standards that ensures sound financial strength for our policy holders. We continue to build our platform to execute this growth strategy. During the past year we defined and rebranded our go-to-market brand as protective insurance and entered into several new transportation and workers compensation markets through programmed business opportunities. We're also making the necessary investments and technology and analytics to enhance our underwriting claims processing and policy support. With regard to underwriting operations, in addition to investments and people and systems, our growth also requires continued investment in our underwriting capability. While we are experiencing a great influx of new business, new business by its nature puts pressure on our loss ratio as we work with new customers to manage risk. Given our extensive experience in underwriting transportation risk, we are skilled at reducing loss ratios as our customer tenure increases. We are confident in the profitability of the business we wrote in 2017. It is also imperative that as a company we continue to cultivate strong relationship and provide topnotch service to our existing policy holders, enabling us to maintain our historically high renewal rate that will aid in building the foundation for our future income. Our challenges during 2017, including recognizing the need to strengthen our reserves, in part due to difficult conditions and the commercial auto market. We chose to address this head on during the second quarter, leading to an elevated combined ratio. This reserve strengthening focused on commercial auto related products primarily from accident years 2015 and prior and discontinued line such as professional liability reinsurance and Florida Commercial Multi-peril Policies. Additionally, we faced the impact of the structure of our prior reinsurance agreement during the same quarter. Due to the adjustments we made to strengthen reserves and some of those prior reinsurance tree years, we had to adjust both net premiums earned and seating commission income downward. The ensuing compounding effect increased both our loss ratio and our expense ratio. Our reserve strengthening for the prior accident years in commercial auto lines is not unique. Adverse reserve development is placing a strain on commercial auto insurers as a whole. While I was disappointed with our overall 2017 underwriting result, I have full confidence that our experience and commitment to the commercial auto sector will help us achieve a high level of success with our new growth strategy. With regard to our distribution strategy, as we grow our distribution strategy is focused on continuing to support profitable growth while diversifying our customer base. After I joined the company in 2013 we changed the distribution strategy from a direct centric module where we maintained our own internal agency and sales force to an agency centric distribution model. This was a major change for our company and creates avenues of growth that we were just beginning to develop. Under this new model our two primarily distribution channels include our retail business and program business. Our retail business partners are agents and brokers. Our development strategy ensures our partners are truly trained and understand our products in business resulting in quality submission and relationships with our company. Products available through our retail channel include primary commercial auto, first dollar deductible and excess workers compensation and independent contractor products. It is through our program channel that we have the opportunity to leverage our transportation and workers compensation expertise to explore new segment than our target market. For program we will control claims handling, product segmentation and set rate level. We require program administrators to execute our rigorous underwriting guideline and take income risk in the results. Products available through our program channel include primary commercial auto versus dollar workers compensation and independent contractor products. A clear benefit of our expanded distribution strategy is the ability to reduce our dependent on any single source of premium. With regard to our product strategy, we continue to offer commercial auto products, including guaranteed costs and deductable coverage for our mid-market trucking fleet of 25 to 250 units, along with our flagship product of self insured retention generally for fleet of over 250 units. We also offer coverages for public transportation fleet, including charter businesses, limousines and school buses. Workers compensation continues to be a major area of growth in both transportation and non-transportation segment. A major highlight for 2017 was our further expansion into non-transportation segments such as light manufacturing, restaurants, retail and professional services. With regard to our operation strategy, we are continuing to invest in our underwriting team and technology. Our proprietary database of fleet transportation data continues to grow resulting in ever more granular underwriting capability. Our distribution strategy and positioning in the industry as high quality provider is generating a historically high number of new business submissions. This allows us to continue to be highly selective and insures that we are only working with brokers and insured who truly are a fit and have demonstrated the capability and willingness to be a long term partner. With regard to our claim strategy, we will maintain our proven strategy as settling claims promptly and fairly. We remain committed to providing best in class personalized claim service even as our customer base expands. However we will not become complacent. We are investing in analytical capabilities to continue improving all aspects of claims handling from customer experience to settlement and segregation. With regard to our information technology strategy, as I mentioned earlier, we have not been without our challenges stemming from our growth. Our challenges have been the level of capital, both human and financial, required to advance infrastructure within our organization. This has been top of mind for us, so much so that we were investing significantly in information technology and infrastructure improvements at the highest rate in company history. Unfortunately this does not generate in the short term the lower expense ratio. Long term I am confident that the return on these investments will manifest itself in operating efficiencies, underwriting performance and maintaining our high levels of customer service. Looking forward our claims and underwriting expertise and distribution strategy has us well positioned to achieve profitable growth greater than our historical average as we build our retail channel and expand our program offering to meet strong demand. In 2017 we also took the exciting leap of changing the market facing brand of our company. As we evolve our product and services to meet the needs of today’s customer, we knew it was time to bid a fond farewell to our quill logo and welcome a new look. Protective shield symbolizes our ongoing commitment to protecting our customers and serving as their partner in risk management. We also introduced a new incentive compensation structure where all associates are rewarded based directly on the company’s performance. The employees are realizing the significant impact they have on our profit, growth and equity, spurring a renewed sense of alignments within the organization. I strongly believe that our people and the strength of our evolving culture is pivotal in helping us successfully execute our strategy. Every single day I see our people come into work with an entrepreneurial spirit, commitment to innovation and a desire to forge a strong sense of comradery, both across our organization and with our external partners. As the transportation and insurance industry continue undergoing change, we are at the forefront, adaptable to change and ensuring that our products and services continue to meet the needs of our customers. I am proud of what we accomplished during 2017 and I am very excited to be part of what is to come. William will now provide you with 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. Fourth quarter net investment income increased 42% compared to the fourth quarter of 2016. For the 12 months ended December 31, 2017 net investment income has increased 25% compared to the 2016 period. The increased net investment income reflects higher interest rate, higher reinvestment yields for core fixed income securities, increased dividends from equity securities and an increase in average funds invested resulting from positive cash flow. We expect future increases in net investment income to be more modest; however, we continue to expect further increases due to higher invested assets resulting from estimated positive cash flow. Over the past year our fixed income portfolio duration, including cash has remained level, an effective duration of approximately 2.1 years. The weighted average credit quality of our fixed income portfolio including cash is an S&P rating of A+. Security valuation changes during the fourth quarter were favorable with realized gains of $4.2 million and unrealized gains of $1.9 million. Other operating expenses during the fourth quarter of 2017 increased $6.3 million, resulting in an expense ratio of 30.8%. This compares to an expense ratio of 34.6% during the fourth quarter of 2016. For the full year of 2017 other operating expenses increased $24.1 million resulting in an expense ratio of 33%. This compares to an expense ratio of 30.5% 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 at December 31, 2017, operating cash flow was once again positive during the fourth quarter resulting in $92 million of positive operating cash flow for the year ended December 31, 2017. Book value per share on December 31, 2017 was $27.83, an increase of $1.02 per share during the full year of 2017 after the payment of cash dividends to shareholders totaling $1.08 per share. This combination of the increase in book value plus dividends paid represents total value creation of 7.8% on beginning book value for the year ended December 31, 2017. 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.

[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 2018 first quarter results.

[Operator:]

Okay, thank you ladies and gentleman. This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.