Protective Insurance Corporation
Q3 2016 Earnings Call Transcript

Published: 6 Nov 2016

[Operator:]

Good day, and welcome to the Baldwin & Lyons, Incorporated Third Quarter 2016 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. 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 third 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. 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 third quarter of 2016. Joining me is William Vens, our Chief Financial Officer; and Michael Case, our Chief Operating Officer. I will give an update on our current insurance operations for the quarter and year and then turn the presentation over to Michael and William. Michael will provide information related to the execution of our business strategy and William will follow with comments regarding our investment, reserve strengthening items 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 4 million or $0.27 per share which compares to net income of $7.8 million or $0.52 per share for the prior year's third quarter. Net income for the first nine months of 2016 totaled $24.1 million or $1.60 per share compared to $19.7 million or $0.31 per share for the prior year period. Including reserve strengthening or unallocated loss adjustment expense in the P&C Insurance operations and for losses and reinsurance operation the consolidated operating loss was $2.1 million. For the nine months ended September 30, 2016, the consolidated operating income was $19 million including the reserve strengthening items. Absent the reserve strengthening items consolidated net operating income was $8 million. For the nine months ended September 30, 2016 the consolidated net operating income was 29.1 million also excluding reserve strengthening item. The company's P&C Insurance operations are producing outstanding result as we execute our business strategy. New business production is robust as we continue to receive strong support from our distribution partners. We are also retaining our current customers at or above our target level. Underwriting loss prevention and claims processes our core competencies of our company continue to produce excellent outcome. Overall we are pleased with the position in which we find ourselves relative to market condition. Gross premiums written by the company's insurance subsidiaries, for the current quarter was a record $101.9 million, 6.2% higher than the $96 million written in the third quarter of 2015. The increase was driven by the continued strong performance of the company's core fleet transportation product. Gross premiums written for the nine months ended September 30, 2016 totaled a record $298.1 million or 4.3% higher than the previous record of $285.7 million written during the first nine months of 2015. Including the $4.1 million reserve strengthening noted previously for the unallocated loss adjustment expense, P&C insurance operations produced an underwriting gain of $2 million resulting in a combined ratio for the third quarter of $97.1. For the nine months ended September 30, 2016 a combined ratio was 92.3 including reserve strengthening producing $15.3 million in pretax underwriting income. Absent the unallocated loss adjustment expense reserve strengthening, P&C Insurance operations produced an underwriting gain of $6.1 million resulting in a combined ratio for the third quarter of 91.2. For the nine months ended September 30, 2016, the consolidated combined ratio was 90.2 also excluding reserve strengthening producing $19.1 million in pretax underwriting income. Reinsurance operations has a discontinued line of business to shrinking as a percentage of total premium. Including the reserve strengthening of 6 million previously noted, reinsurance operations produced an underwriting loss of $6.9 million for the quarter. For the nine months ended September 30, 2016 reinsurance operations produced an underwriting loss of $7.7 million. Michael will now provide you with additional details related to the execution of our business strategy. Michael?

[Michael Case:]

Thank you, Randy. Our mission is to deliver the highest quality customized insurance products and services. During the third quarter, we continued working on key operational strategies or distribution, product, operations, brand, and capital, coordinated through several initiatives across the Company. This strategy requires us to strengthen our distribution channels, enhance our product with innovative features and continually improve our processes, enhance our brand value with customers and leverage our resources. With respect to distribution and products, we continued expanding our agency centric culture by enhancing our multichannel distribution infrastructure all with an eye towards avoiding channel conflicts. Our product strategy focused on establishing new product platforms with pricing to reflect our high value proposition with innovative unique feature and rating attributes. Operations continue to implement and execute our leading-edge third-party underwriting and policy service platforms and procedures during the quarter. These improvements include continued development of our new policy admin system, billing and agency compensation platforms. We’re confident these systems will improve our processes, allow us to do more with less and create a better customer experience while lowering our expense cost. Operations also continued to strengthen our core claims handling competency during the quarter. These initiatives, including a state-of-the-art predictive analytic tool that continuously analyzes structured and unstructured claim data which in turn allows us to quickly identify and focus on complex and high severity claims, increases our subrogation recovery and utilization of our in-house nurses, attorneys, and improving claim professionals in a targeted and efficient manner. We are also building a multi-company rating structure while continuing to focus on Protective as our primary brand. This will allow us to connect and know our customers better, increase retention, and be more competitive in the marketplace with better rating flexibility. We have also launched a new customer experience department that will capture the voice of the customer and act on it, with the goal of connecting with our customers when and how they want to. I’ll conclude my comments by mentioning that our capital strategy continues to focus on broadening our product offering, widening our customer base, and expanding our underwriting appetite with a balanced risk approach that will grow the business while protecting return. William will now provide you with additional details related to our investments and overall financial condition. William?

[William Vens:]

Thank you, Michael. Over the past two and half years the Company has implemented a program of measured portfolio of realignment, designed to increase the generation of investment income while maintaining the conservative character of our investment portfolio. This program has been gradually implemented over the past 10 quarters, which is resulting in improved investment income. Third quarter net investment income increased 17% compared to the third quarter of 2015. And net investment income for the first nine months of 2016, increased 20% compared to the first nine months of 2015. We expect quarter-over-quarter increases to be more modest in the future, however we still expect continued increases from both continued portfolio realignment and increased invested assets from anticipated positive cash flow. Over the past year our fixed maturities have remained level in an effective duration of approximately 2.6 years. Security valuation changes during the quarter were quite favorable. The Company's fixed income and equity investment portfolios together produced overall realized gain of $3.3 million before tax during the third quarter. With the limited partnership investments also produced a gain of $4.4 million before tax this quarter, our total realized gains for the third quarter were $7.7 million. The change in unrealized gains across the fixed income and equity investment portfolio during the third quarter was a gain of $4.2 million. Now I’d like to address our reserve strengthening during the quarter. During our review of the September 30, 2016 reserve position we reacted the two development. First, during 2016 we have encountered adverse loss development in our discontinued assumed reinsurance business, our actuarial analysis at September 30, 2016 indicated an additional reserve need of $6 million related to prior accident years. Secondly, in connection with the significant growth in our business we strengthened our unallocated loss adjustment expense reserve by $4.1 million during the quarter. Moving to our financial position stands at December 30, 2016 operating cash flow was once again positive this quarter at 9.7 million resulting in $32.4 million of positive operating cash flow for the nine months ended September 30, 2016. Book value per share on September 30, 2016 was $26.98 an increase of $0.18 per share during the third quarter after the payment of cash dividends to shareholders totaling $0.26 per share. For the nine months ended September 30, 2016 book value per share has increased $0.73 after the payment of cash dividend to shareholders totaling $0.78 per share. This combination of an increase in book value plus dividends paid represents a 5.8% total return on beginning book value for the nine months ended September 30, 2016 which equates to an annualized return of 7.7%. As a reminder we posted our press release and quarterly financial statements on our website @baldwinandlyons.com. This concludes our formal presentation. At this time we would be delighted to answer any questions.

[Operator:]

[Operator Instructions] And we’ll take our first question from Brett Reiss of Janney Montgomery Scott. Please go ahead sir.

[Brett Reiss:]

Good morning, gentlemen. Just a word of disclosure, I am a broker in CFA with Janney but not the insurance analysts that follows effective for the company. Question one, there was a piece in the Wall Street Journal and October 14 nuclear verdict have insurers running from trucks and you talked about Zürich insurance in AIG dropping coverage. Does this impact what we do at al.?

[Randall Birchfield:]

I’ll take that question. This is Randy. We've been exposed to the fact that Zürich and AIG have been exiting the excess trucking space for quite some time now. That article has actually quite delayed in terms of this impact on the market. In terms of how we're dealing with their exiting the market it really doesn't change what we're doing. We continue to execute our business strategy of targeting certain risk types that fit within our underwriting model and to the degree that any of those companies that become available as a result of either AIG or Zurich no longer being interested in being in the market, our agents and broker's and/or our direct opportunities will present themselves to us and we will evaluate them in accordance with our current very rigorous underwriting guidelines and we may or may not be able to pick up some of that business along the way and we've actually benefited from their exit of the market. But in terms of the most recent article that’s being published that’s actually old news to us.

[Brett Reiss:]

Okay. Just for future reference what's the chain of command in terms of my being able to call the company and ask the shareholder related question and what are the bells and whistles on blackout periods where you don't feel that type of question.

[William Vens:]

Nothing complicated about it at all, this is William. Just give me a ring or shoot me an email and if there is a blackout period, we'll let you know and will get back to you right away.

[Brett Reiss:]

Right. You used to have a fairly big hedge fund commitment to something that invested in the Indian stock market, do you still have that.

[William Vens:]

Yes we do.

[Brett Reiss:]

And how is that been performing?

[William Vens:]

Well as you saw on our remarks and in the press release, our limited partnership investments did quite well in the quarter.

[Brett Reiss:]

Okay. Now one of your largest shareholder is Fairfax and Prem Watsa has sterling investment reputation and he has a special skill set with the Indian stock market. Do you ever call upon him for some advice in that hedge fund investment?

[William Vens:]

No, we have our own managers of that of those fund.

[Brett Reiss:]

Okay. Years ago the company would fairly frequently pay special dividend, would not seen that in the last few years. How come?

[William Vens:]

We want to grow the company and pay not extra dividends is not consistent with that. Thank you for mentioning that. You are actually not an equity research analyst, we didn't recognize that, we just saw your firm's name when you came up in the queue. What I mean as I said feel free to give me a call but generally we like to reserve this time for equity research community.

[Brett Reiss:]

Right.

[Operator:]

And it appears that there are no further questions at this time. Mr. Birchfield I would like to turn the conference over to you for any additional or closing remarks.

[Randall Birchfield:]

Okay. Thank you. This is Randall Birchfield. Thank you once again for your interest in our company. We look forward to our next communication related to fourth quarter results.

[Operator:]

That does conclude today's presentation. Thank you for your participation. You may now disconnect.