Protective Insurance Corporation
Q2 2016 Earnings Call Transcript

Published: 8 Aug 2016

[Operator:]

Good day, everyone, and welcome to the Baldwin & Lyons, Inc. Second Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. For opening remarks, I'll now turn the conference over to Han Huie of MWW Group. Han, please go ahead.

[Han Huie:]

Thank you. And thank you all for joining us this morning for the Baldwin & Lyons second 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 accepted 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. Now, I would like to introduce Randall 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 second quarter of 2016. Joining me is Douglas Collins, our Chief Financial Officer; and Michael Case, our Chief Operating Officer. I will report on our current insurance operations, review our recent leadership transition and provide some information related to the Company’s strategic direction. Doug will provide comments regarding our investments, investment related activities and the details behind our Company’s overall excellent financial condition. Upon completion of his remarks, we will be available to answer questions. As indicated in our press release, after tax operating income was $5.8 million equivalent to $0.39 per share. The net investment gain for the quarter after tax was $200,000 or $0.01 per share. In total, net income was $6 million or $0.40. The business continues to demonstrate exceptional results in line with our current plan for the year. Underwriting operations including fee income generated $5.3 million of profit via combined ratio of 92.2. Book value increased $0.39 per share after the payment of the regular dividend of $0.26. Underwriting results in our core transportation lines were excellent with our total property casualty business producing a combined ratio or 92. Our fleet transportation products continue to produce outstanding results with a loss and loss adjustment expense ratio of 60.1 and a combined ratio of 90.2. Consolidated gross premiums return for the quarter broke $100 million for the first time and set a record for the company. The growth was driven by the fleet transportation product line which increased 10.6 million or 12.5% over the same period in the prior year. Premiums earned for the fleet transportation increased 13.6% from the second quarter of 2015. The growth in these product lines has been primarily driven by an increase in new accounts, due to the increased submission flow and bind rates from our agency channel, high customer retention and rate stability. As you may know, on May 17th, we transition the leadership of the company to a new management team previously identified for succession after the former CEO, CFO and Deputy Chairman retired. The current leadership team is comprised a group of highly experienced functional and general managers who have been groomed by the former executives, board members and through previous accomplishments to assume their current responsibilities. As a result, the leadership transition has been seamless in every material respect. A, investors are from the financial strength rating A plus a Protective Insurance Company and Sagamore Insurance Company and affirm the financial strength rate of A for Protective Specialty Insurance Company. Our distribution partners and customers have more than demonstrated their wholehearted commitment to us by continuing to get us with premium and policy retention rate that we exceed our annual goals, new business submissions that continue to outpace both last year’s levels and this year’s expectation. Bind rates well above target and growing average policy premium. Our employment rail of positive with attrition rate down significantly from last year and additionally, we were recently named as a member on the Indianapolis Star Top Workplaces list. And all of our insurance and reinsurance brokers and partners continue to support us through our renewals. We continue to executive our business plans and strategies to grow our company by better serving our customers. The current leadership team was instrumental in the development of our business plan and as committed to the continued execution of our operational strategies for distribution, product, operations and brands in order to realize the full benefit. As this is my first opportunity to speak with the larger community of investors and stakeholders as the Chief Executive Officer, I’d like to take a few minutes to discuss the company’s mission and core business strategies to achieve our goals. Our company mission is to deliver the highest quality customized insurance products and services. In order to achieve the company’s mission, we are a corporate strategy for how we will conduct along the primary elements of our operation. We execute this corporate strategy to distribution, product, operations and brand strategies that are complementary and interconnected. The effect of the complementary and interconnectedness of the operational strategy result an outcome that is multiplicative rather than additive. Dragging up terms from our former army carriers, this effect is referred as a combat multiplier. Our intent is to achieve the optimal outcome resulting from this compounding effect from the excellent execution of our operational strategy. Plus briefly review each of these operational strategies. Our distribution strategy is to expand our points of distribution in order to say yes more often to customers without sacrificing underwriting discipline. We will accomplish this by offering our products and services to our target customers in the channel, geographic location and service paradigm that best fits their needs. To meet this objective we must have a distribution strategy that offers multiple points of access the core and bind business. By doing so, we improve access to the flow submission from our agency partners and from our direct customers their needs are clearly communicated preferred customer profile. A higher volume of submissions with our preferred customer profile will enable us to quote and say yes more often. Our product strategy is to offer products with the best features in the market at a competitive price. To do so, we must design, produce and deliver insurance products and services with innovative features and benefit that exceed customer’s expectation that a price that demonstrate the high value of the Baldwin relationship. Our product offering includes a wide verity of insurance policies, loss prevention and safety services and claim services. In addition to our promise to our customers, our products include the end-to-end customer sales and service experience. Our customers including our distribution partner’s interface with us on a regular basis when they purchased a policy, make a policy change or pay by installment. This means that every touch point becomes a part of our product offering. Technology plays a key role in making that experience a positive one. Our operation strategy is to improve our processes to do more and better with left. Our expectation is that our process improvement effort will yield a combination, a productivity increases, efficiency enhancements, increases in work product throughput, hard cost savings and cost avoidance. The net effect of these benefits that the company will achieve more output of higher quality with a same or fewer resources. We can achieve these process improvements through the successful implementation of systems, technologies and by approving the efficiency of existing processes. Our brand strategy is to connect with in no customers to increase the value proposition of a relationship with Baldwin. The effective increase in the value proposition goes beyond or having the ability to achieve the desired rate level for our product. Through the execution of our brand initiative, we seek to be a valued partner to our customer in the execution of their daily operations. Our goal is for our customers to be our advocate to the world. We have been executing on these long term operational strategies and will continue to do so. We are dedicated sustain the course on the many interconnected initiative associated with each of these strategies. Doug will now provide you with additional details related our investments and overall financial condition. Doug.

[Douglas Wayne Collins:]

Thanks Randy. Over the past two and a half years, the company has implemented a program of measure portfolio realignment design of increase the generation of an investment income for maintaining the conservative character of our investment portfolio. This program has been gradually implemented over the past nine quarters resulting in improved interest and dividend income. The second quarter pretax investment income increased from the second quarter of 2015 and 3% above the first quarter of this year. For the six months of this year, pretax investment income also has increased 22% from the 2015 first half. We expect quarter-over-quarter increases to be more modest in the future. However we still expect continued increases from ongoing portfolio realignment and anticipated positive cash flow. For the trailing 12 month period ended June 30, 2016, pretax investment income reached 13.8 million, a highest level since mid-2010. After tax investment income increased by slightly lower margin of 17% quarter-over-quarter reflecting tax rate differentials related to the mix of security held. Over the past year, the average contractual life of fixed maturities and short term investment portfolio has remained level at approximately 4.4 years as has the effective duration of the portfolio at approximately 2.3 years. Security valuation changes during the quarter were generally favorable with volatility in both the equity and bond market. Against this backdrop, the company’s fixed income and equity investment portfolios together produced a modest overall realized loss about $700,000 before tax. While the limited investments produced a gain of 1 million before tax this quarter. The change in unrealized gains across the entire portfolio during the quarter was a gain of 5.8 million. And at June 30, 2016 the market value of the company’s investment portfolio exceeded cost by 53 million before tax, or nearly 35 million after tax. Operating cash was once again positive this quarter at $21 million, which is well above average due to the lower claim settlements. The company has now achieved positive operating cash flow in 26 of the past 28 quarters averaging over $11 million per quarter. Prior year loss developments were once again favorable for the quarter. Claim settlements during the second quarter produced a consolidated prior year reserve savings of approximately $600,000 bringing the year-to-date savings to $1.8 million. This overall six month development is less than 1% of the year end 2015 net loss reserve and have the effect of reducing the 2016 calendar year loss ratio by about 1 point. By comparison the first half of 2015, overall savings totaled 5.5 million and reduced that period loss ratio by about 4 points. The consolidated development for 2016 for the quarter including savings of 1.2 million from our property and casualty insurance segment which is down from the 3.7 million of savings reported in the 2015 second quarter. I’ll remind listeners that we posted our press release and quarterly financial statements on our website baldwinlyons.com, you can click on the Investor Relations page and click from the News and Market Data dropdown menu. We’ve also updated all the quarterly financial data on our Investor Relations website under the Financial Information dropdown tab. This concludes our formal presentation and at this time, we would be happy to answer any questions listen may have.

[Operator:]

Thank you. [Operator Instructions]

[Randall Birchfield:]

Okay, this is Randall Birchfield. We thank you again for your interest in our company. We look forward to our next communication related to the third quarter results.

[Operator:]

Ladies and gentlemen, thank you for your participation. This does conclude today’s conference. You may now disconnect your line.