Protective Insurance Corporation
Q1 2016 Earnings Call Transcript

Published: 7 May 2016

[Operator:]

Good day, ladies and gentlemen. And welcome to the Baldwin & Lyons First Quarter 2016 Earnings Conference Call. Today’s call is being recorded. At this time, I’d like to turn the conference over to Ms. Han Huie of MWW Group. Please go ahead, ma’am.

[Han Huie:]

Thank you. And thank you all for joining us this morning for the Baldwin & Lyons first quarter 2016 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, maybe 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. Please go ahead.

[Joe DeVito:]

Thanks, Han. And welcome to our conference call reporting results for the first quarter of 2016. Joining me once again is Pat Corydon, Executive Vice President and CFO. I will report on our current insurance operations, provide a snapshot review of our most recent five-year performance and also provide some information related to the Company’s strategic direction. Pat will follow regarding our investments, investment related activity and the details behind our Company’s overall excellent financial conditions. Upon completion of his remarks, we will be available to answer any questions you may have. Our operating results for the first quarter of 2016 represented the best first quarter in our Company’s history. As indicated in our press release, after tax operating income was $8.3 million, equivalent to $0.55 per share, which is more than double the $3.8 million or $0.26 per share earned in the same period of 2015. The net investment gain for the quarter after tax was $5.9 million or $0.39 per share. In total, net income was $14.1 million, $0.94 per share, again more than double last year’s first quarter of $6.2 million and $0.42 per share respectively. Underwriting operations including fee income, generated $8 million of profit via a combined ratio of 88.2%. These underwriting operations also helped produce positive cash flow of $2 million for the quarter. Book value increased $0.16 per share after the payment of the recently increased regular dividend of $0.26. Underwriting results in our core transportation lines were excellent. Our property casualty business produced a combined ratio of 87.4%, a full 9-point improvement over the first quarter of 2015. Our fleet transportation products produced an excellent 55% loss and loss adjustment expense ratio and almost 7-point improvement over the already good 61.6% reported in the first quarter of the same period in 2015. Premium written in these product lines increased $5.3 million or 6.3% over the same period in the prior year. Premium earned for fleet transportation increased 9.5% from the first quarter of 2015. The growth in these product lines has been primarily driven by an increase in new accounts due to the increased velocity of submission flow from our broker markets channel and some selective rate increases in both workers’ compensation and commercial auto. Looking back over the last five years, since January 1, 2012, these two factors have also been responsible for an average annualized increase of our enforced premium for fleet trucking of 18% or public transportation of 43% and for all of our wheels business of approximately 20%. Having completely eliminated the volatility previously experienced due to our presence in the property catastrophe reinsurance market, we have produced annual total value creation defined as the increase in book value plus dividends paid, averaging right around 9% over the last 17 quarters with the average annualized increase in shareholders’ equity plus cash dividends over the last five-year period being 10.5%. Looking ahead, we see continuing opportunities in three main areas, fleet transportation including trucking and public transportation; non-trucking workers’ compensation; and non-trucking independent contractor program. We have historically and continue to have great success in the area of fleet transportation and enhanced distribution system utilizing selected partners who are engaged in our business throughout the cycle. Along with the removal of channel conflict and the withdrawal of a few meaningful competitors, all point to premium growth in this area. The depth of our loss data in these product lines combined with the leveraging of advanced exposure information generated by our big data and telematics initiatives are and continue to produce continuously evolving rating algorithms, generating much more granular, highly segmented, proprietary and predicted models which result in improved and highly accurate loss forecasting, pricing and account selection that ultimately produces consistent profitable results. The next area of focus is to write selected classes of workers’ compensation insurance. We believe that we have developed a claim [ph] department structure in process that combined with a highly trained and centralized staff provides the foundation that allows us to build on our success in the area of transportation. In addition, we are engaged in a meaningful transformation of our customer experience, which allows the consumer or agent to communicate with us in whatever way they deem most efficient and appropriate. It is our goal to accommodate all of these options into a process driven by whatever the best service options are from the perspective of the buyer. As an example, I recently read an article which described the insurance industry’s renewal process as “feeling like waterboarding” due to the marathon of manual processing including multiple redundant requests for information already in the possession of the insurance carriers. Again, utilizing our research and advancement of big data, including the usage of unstructured data combined with tech enabled integrations of mobile devices and cloud services, we believe we can successfully open new and widen existing communication channels to provide superior buying and support services throughout the workers’ compensation insurance experience from floating through claims sample. [Ph] The third area of focus is to leverage our proven success in the transportation independent contractor space via expansion into other industries that also utilize the same class of employees. One of the primary needs for such companies is to understand the usage of contractors from the business model perspective, and we have great depth of experience in this area. There are many similar characteristics of this business model across multi-industry platforms, which allow us to expand the breadth and bandwidth of companies we serve. Utilizing the same capabilities I mentioned related to workers’ compensation, we can leverage both our underwriting and customer experience initiatives to expand our product offering. This would also naturally extend to the emerging markets in both job and drive sharing. We are in the process of product development and risk analysis and are optimistic related to expanded opportunities in this space. Before I turn the call over to Pat Corydon, let me first make a few comments regarding our investment. As I am sure stakeholders and others who follow our Company and industry are aware, the overall investment climate is very challenging. Interest rates are at historic lows. There is hazard in both duration and credit risk. The equity market is often unpredictable and frequently volatile. We are attempting to navigate this minefield with our usual caution and conservatism with the goal of generating reasonable topline support for our successful underwriting operations without getting out over our skies stretching for yield. We will grow the asset base, and our percentage increase in investment income has been good. However, on a total investment return basis, we and others in our industry who share our approach will most likely struggle to achieve anything greater than these market conditions will allow. Pat will now provide you with additional details related to our investment and overall financial condition. Pat?

[Pat Corydon:]

Thanks Joe. To follow-up on Joe’s comments, we and our industry have been compelled to come to grips with reality of permanently low interest rates. Because our bond portfolio was shorter than many of our peers in 2008, we felt the pain of declining rates earlier than most. In 2007, our annual investment income approached $20 million before tax. At the low point in mid-2014, our trailing 12-month investment income had declined to $8.6 million, more than 55% drop while at the same time average invested assets had increased 22%. By then, it was clear that this historically unprecedented rate depression was the new normal, and we began a program of measured portfolio realignment in 2014, designed to increase the generation of investment income while maintaining the conservative character of our investment program to the fullest extent possible. This program has been gradually implemented over the past eight quarters, resulting in meaningfully improved interest and dividend income. This quarter pretax investment income is 22% higher than the first quarter of 2015. While we might expect quarter-over-quarter increases to be more modest in this point forward, we do expect further increases, reflective of ongoing portfolio realignment and anticipated positive cash flow. For the trailing 12 months ended March 31, 2016, pretax investment income reached $13.1 million, the highest level since mid-2010. After tax investment income increased by a slightly lower margin of 18% quarter-over-quarter, reflecting tax rate differentials as the mix of securities held has changed. Over the past year, the average contractual lives of the maturity and the short-term investment portfolio has remained at the level at approximately 4.5 years as has the effective duration of the portfolio at approximately 2.3 years. Security valuation changes during the quarter were mixed, with another rollercoaster equity market and bond yield spreads narrowing in some cases significantly. Against this backdrop, the Company’s fixed income and equity security portfolios together produced modest overall realized and unrealized gains of $2.2 million before tax. The disposal of securities associated with portfolio realignment resulted in $11.1 million of realized gains for these investment classes, largely offset by declines in unrealized gains. Limited partnership investments produced the loss of $2.2 million before tax this quarter, equal to 2.9% of the aggregate beginning market value of this asset class and bringing the overall investment portfolio realized and unrealized gains to near zero. Operating cash flow was once again positive for the quarter at $2 million, which is below average, owing to a higher level of claim settlements and normal timing of settlements of reinsurance balances. The Company has now achieved positive operating cash flow in 25 of the past 27 quarters, averaging over $11 million per quarter. Prior year loss developments were once again favorable this quarter. Claim settlements during the first quarter produced a consolidated prior year reserve savings of approximately $1.2 million. This development is equal to about four tenths of 1% of year end 2015 net loss reserves and had the effect of reducing the 2016 calendar quarter loss ratio by just under 2 points. By comparison, in the first quarter of 2015, the overall savings totaled $2 million, reducing that quarter’s loss ratio by about 3 points. The consolidated development for 2016 is composed of a $2 million savings from our property and casualty insurance segment, which is relatively flat with a $1.9 million savings reported in the 2015 first quarter, partially offset by an $800,000 deficiency from the reinsurance segment, which compares to a small savings from reinsurance last year. I will remind listeners that we posted our press release and quarterly financial statements on our website at baldwinandlyons.com. Click on the Investor Relations page and select News from the News & Market Data dropdown menu. We’ve also updated all other quarterly financial data on our Investor Relations website under the Financial Information dropdown tab. This concludes our formal presentation. At this time, we would be happy to answer any questions listeners may have.

[Joe DeVito:]

Okay. This is Joe DeVito. And we thank you again for your interest in our Company. We look forward to our next communication related to second quarter results.

[Operator:]

Thank you. And ladies and gentlemen, that does conclude today’s conference. Thank you all again for your participation.