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Edited Transcript of BWINB earnings conference call or presentation 8-Aug-18 3:00pm GMT

Q2 2018 Baldwin & Lyons Inc Earnings Call

Indianapolis Aug 22, 2018 (Thomson StreetEvents) -- Edited Transcript of Protective Insurance Corp earnings conference call or presentation Wednesday, August 8, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Han Huie

* William Charles Vens

Protective Insurance Corporation - CFO

* William Randall Birchfield

Protective Insurance Corporation - President, CEO, COO & Director

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Conference Call Participants

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* Jayme C. Wiggins

Intrepid Capital Management Inc. - CIO, VP and Portfolio Manager

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Presentation

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Operator [1]

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Greetings, and welcome to the Protective Insurance Corporation Second Quarter 2018 Earnings Conference. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Han Huie. Please begin.

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Han Huie, [2]

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Thank you, and thank you all for joining us this morning for the Protective Insurance Corporation Second Quarter 2018 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.protectiveinsurance.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 Protective Insurance Corporation 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 are included from time to time with the company's filings with the SEC.

Now I would like to introduce Randy Birchfield, President, CEO and COO of Protective Insurance Corporation, and turn the call over to him. Please go ahead.

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William Randall Birchfield, Protective Insurance Corporation - President, CEO, COO & Director [3]

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Thanks, Han, and welcome to our conference call reporting results for the second quarter of 2018. Joining me is William Vens, our Chief Financial Officer. I'll begin by providing an update on our current insurance operations for the second quarter of 2018, 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, second quarter net income was $2.5 million or $0.17 per share, which compares to a net loss of $12.3 million or $0.82 per share for the prior year's second quarter. For the first 6 months of 2018, net income totaled $2.8 million or $0.19 per share, which compares to a net loss of $5.6 million or $0.37 per share for the prior year period.

Gross premiums written for the current quarter increased 19.6% to $142.3 million compared to $119 million written during the second quarter of 2017. The increase was driven by continued growth in the company's commercial auto and workers' compensation products in both our retail and program distribution channels. Gross premiums written for the first 6 months of 2018 increased 27.1% to $291.1 million compared to $229 million written during the 2017 period. Product group increases and decreases were similar to those experienced in the second quarter.

Our operations produced underwriting income of $0.7 million, resulting in a combined ratio for the second quarter of 99.4%, a result that is in line with our second quarter 2018 plan. This compares to a combined ratio of 142.9% for the second quarter of 2017. For the second quarter of 2018, prior accident year loss development was favorable at $0.1 million. The main driver of the lower loss ratio for the second quarter 2018, when compared to 2017, is significant reserve strengthening, predominately for accident years 2015 and prior, which took place during the second quarter of 2017.

For the first 6 months of 2018, the combined ratio was 99.6%, which compares to a combined ratio of 120.4% for the 2017 period, with the difference due mainly to the second quarter 2017 reserve strengthening mentioned previously. The year-to-date combined ratio is also in line with the 2018 plan. Prior year loss development was favorable at $1.7 million for the 2018 period. We expect that our continued rate increases and underwriting actions, combined with changes in our mix of business, will lower these loss ratios over time. We are also striving to maintain conservative loss positions in the current accident year.

We've had a busy quarter in a number of dimensions that are a reflection of the progress we are making building shareholder value. Some of this progress was made known via press releases during the second quarter and more recently. As noted in our previous earnings call, our shareholders approved changing our company name. On August 1, we began operating under our new name, Protective Insurance Corporation. We retired the BWINA and BWINB ticker symbols and are now trading under new NASDAQ ticker symbols PTVC. A and PTCV. B.

This continues the brand transition we started last year when we moved to a single market-facing brand to our company, capitalizing on our well-established tradename of Protective Insurance. Our Protective Insurance brand is well regarded by both our policyholders and our distribution partners and readily brings to mind our business of insurance. Harry Baldwin and Voris Lyons will forever be an integral part of our legacy and key component in our story history. The word protective was used in the name of our first subsidiary that Harry and Voris founded in 1954. By renaming the company, Protective Insurance Corporation, we believe it is a wonderful reminder of the past that still paves the way for incredibly promising future.

Last month, A.M. Best affirmed our financial strength rating of A+ (Superior), with a change in outlook from stable to negative. This is unsurprising, given our very strong balance sheet, our well executed and productive growth plans and our reserve strengthening in 2017 and 2016. We will continue to pursue our business plans and work closely with A.M. Best on any evolving attributes of our operations or the business environment.

In the second quarter, we announced changes in our corporate governance that provided for the creation of a Lead Independent Director role and a Chairman of the board role, while retiring the Executive Chairman role. We are grateful that Stuart Bilton, a long-serving 30-year veteran of the board assumed the responsibilities of a Lead Independent Director to act as a liaison between management and the board and to assist in facilitating the activities of the board. Steve Shapiro resigned his position as Executive Chairman and is the member of the Board of Directors. The board established the role of Executive Chairman in late 2015 during a period of management transition to help us develop a long-term strategic plan for the company.

Over the last 2 years, we have successfully created and are executing the plan to grow the business and increase shareholder value. Consequently, the board decided to retire the Executive Chairman position and establish a more traditional corporate governance structure. The board and I wish -- thank Steve for providing his time, effort and guidance to the company during this transition. We wish him the best as he resumes pursuit to his other interests and are pleased that he remains an interested shareholder and has invested in the company's success.

In July, we announced the partnership with AmWINS Transportation Underwriters to offer a program to support for-hire commercial trucking fleets with up to 24 trucks beginning in the fourth quarter of this year. AmWINS Transportation Underwriters will serve as the program administrator, while we underwrite the coverage through our Protective Advantage product. The partnership will enable us to offer our high-quality trucking insurance products for small and intermediate-sized trucking fleets across the country. As part of the launch of this partnership, our Protective Advantage product will also provide the platform for the existing AmWINS Environmental Transportation Program.

In April, we announced that we have entered into an underwriting partnership with Navigators Group to offer our workers' compensation products to Navigators policyholders. Our workers' compensation product is now available as a coverage option in Navigators' portfolio of industry-specific multiline products, which provides tailored protection for the specific nuanced risks faced by the industries in which Navigators has deep expertise.

Navigators' multiline policies are currently available for the media, arts and entertainment, life sciences, allied healthcare, technology and manufacturing industries. Both Protective and Navigators are leaders in our respective markets, strategically developing and honing extensive knowledge and capabilities within our core areas of expertise. I am confident that our workers' compensation know-how will add value for Navigators policyholders by meeting their key coverage needs. We continue to actively build the business according to our strategic and operational plans that are designed to create long-term value for shareholders. The trends I discussed in the last earnings call continue along the same trajectory. We continuously evaluate those trends, contemplate the impacts on the business and incorporate responses in our plans and activities.

William will now provide you with additional details related to our investments and our overall financial condition. William?

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William Charles Vens, Protective Insurance Corporation - CFO [4]

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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.

Second quarter net investment income increased 22.9% compared to the second quarter of 2017. The increase in net investment income reflects higher interest rates, leading to higher reinvestment yields for our short-duration fixed income portfolio and an increase in average funds invested resulting from positive cash flow. For the first 6 months of 2018, net investment income increased 24.1% compared to the first half of 2017. We do continue to expect future increases in net investment income to be more modest. However, we continue to expect future increases due to higher invested assets resulting from the estimated positive cash flows.

Over the past year, our fixed income portfolio duration, including cash, has remained relatively level at an effective duration of approximately 2.6 years. The weighted average credit quality of our fixed income portfolio, including cash, has an S&P rating of A+. During the second quarter of 2018, we reallocated approximately $20 million of equity investments into intermediate treasuries, consistent with our actions in the first quarter, when we reallocated approximately $54 million of equity investments into short duration treasuries. These equity sales are characterized by further solidifying the conservative nature of our high-quality, short-duration investment portfolio. The sales opportunistically utilized the new lower corporate tax rate of 21%, which was beneficial given the low tax basis of many of these equity positions. And these sales were accretive to income, given the increase in yields at the shorter end of the yield curve.

Premium growth is beginning to have a favorable impact on our expense ratio, consistent with our stated strategy to leverage the company's fixed expense base to improve the expense ratio over time. The 5% decline in the expense ratio during the first 6 months of 2018 when compared to 2017 reflects this fixed expense leverage. Favorable prior accident year loss development from our workers' compensation products also positively impacted the expense ratio due to increased ceding commission income from prior year contingent reinsurance contracts.

Moving to our financial position at June 30, 2018. Operating cash flow was once again positive during the second quarter, resulting in $24.7 million of positive operating cash flow for the 6 months ended June 30, 2018. Book value per share on June 30, 2018, was $27.14, a decrease of $0.69 per share during the first 6 months of 2018 after the payment of cash dividends to shareholders totaling $0.56 per share. While book value per share was reduced by the $0.56 per share dividend and investment losses and other impacts of $0.89 per share, income from core business operations increased book value by $0.76 per share during the first 6 months of 2018. As a reminder, we posted our press release and quarterly financial statements on our website at protectiveinsurance.com. This concludes our formal commentary.

At this time, we'd be delighted to answer questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is coming from Jayme Wiggins of Intrepid Capital.

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Jayme C. Wiggins, Intrepid Capital Management Inc. - CIO, VP and Portfolio Manager [2]

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First one I had, this morning one of your commercial auto competitors also reported earnings and they mentioned they were seeing, and I'm quoting, "Irresponsible new competitors buying their way into the market by underpricing business." Are you seeing this as well?

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William Randall Birchfield, Protective Insurance Corporation - President, CEO, COO & Director [3]

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Thank you for the question, it's Randy Birchfield. There always are going to be those folks that act irresponsibly because they have a different respective on the nature of the risks. The -- quite frankly, what we're seeing most often is the retraction -- the contraction rate increases, even wholesale market exits of some of our competitors. So it's not a common thing to see those attempting to buy their way into the market, but it's not unexpected. We have seen a couple of competitors that appear to be doing that, but it's not broad.

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Jayme C. Wiggins, Intrepid Capital Management Inc. - CIO, VP and Portfolio Manager [4]

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All right. Can you also provide additional color on the $4.3 million unrealized loss on equity in LPs in the investment portfolio? It was a strong quarter for the stock market in general. And I think your equities in LPs might have been down about 2% in Q2?

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William Charles Vens, Protective Insurance Corporation - CFO [5]

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Yes. Thanks for the question. So a lot of our investment managers have a very long-term value orientation and have done well over time. When you're going to do well over time, you have to be doing something different over a long period of time. Sometimes that's going to result in not matching up with the market, particularly over a 90-day period. But nothing systemic to report to you on, gee, there was 1 specific problem that went down by 90% or there's an entire asset class or particular manager that's done something we'd prefer not to do just seems to be a matter of timing.

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William Randall Birchfield, Protective Insurance Corporation - President, CEO, COO & Director [6]

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May I interrupt, briefly. Additional response to your first question. In terms of our action in that space of buying business, we've actually been aggressively taking rate increases across the board in all of our commercial auto products. And quite frankly, those rate increases are being well received. So to the degree that others are buying business, it may be in the face of rate increases from companies like mine and others.

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Jayme C. Wiggins, Intrepid Capital Management Inc. - CIO, VP and Portfolio Manager [7]

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All right. Good to hear. In the first quarter, the firm bought $10 million of company-owned life insurance. Can you tell us why?

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William Charles Vens, Protective Insurance Corporation - CFO [8]

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Yes. There is attractive tax benefit. That money is going to grow tax deferred and will come to us without – it'll grow tax deferred and not to be – it'll grow tax deferred for a long time. Take Mr. Birchfield for instance, I believe he is about 54. He's going to -- he has some of that life insurance on him. We're hoping for not only long service for him as CEO, but a long life. So it's decades of tax-deferred growth. So that was one of the motivations. Also it's attractive CCAR charge for that wrapper that goes around the assets.

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Jayme C. Wiggins, Intrepid Capital Management Inc. - CIO, VP and Portfolio Manager [9]

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All right. And can you confirm that it was a firm ran by a board member that earned a commission on that policy? And also, just maybe talk a little bit to investors about the nature of the consulting contract with that same entity. Vanbridge, I think is the name.

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William Randall Birchfield, Protective Insurance Corporation - President, CEO, COO & Director [10]

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Yes. So Director Moyles is no longer on the board. But yes, his firm, after we received a number of market quotes, and both management and the board confirmed that he was offering market pricing, yes, it was a related party, which was disclosed.

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Jayme C. Wiggins, Intrepid Capital Management Inc. - CIO, VP and Portfolio Manager [11]

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And the consulting contract?

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William Randall Birchfield, Protective Insurance Corporation - President, CEO, COO & Director [12]

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Yes. With respect to the contract, over the last

(technical difficulty)

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Jayme C. Wiggins, Intrepid Capital Management Inc. - CIO, VP and Portfolio Manager [13]

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the nature of the consulting contract with that same entity.

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William Randall Birchfield, Protective Insurance Corporation - President, CEO, COO & Director [14]

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My apologies. This is Randy Birchfield, again. I don't know what you heard or did not hear. We have had a relationship with the company called Vanbridge over the last couple of years. They have provided consulting contract services on a number of fronts, not related to production of business. The nature of those arrangements were primarily oriented around how do we continuously and effectively address changing market conditions and opportunities to take advantage of some interesting aspects of the business market today. So the contract has been very fruitful for us, and it remains with Vanbridge as we speak.

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Jayme C. Wiggins, Intrepid Capital Management Inc. - CIO, VP and Portfolio Manager [15]

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Okay. And not to monopolize the call here, I do appreciate the time. I've got one easy one and then one a little bit tougher. So let's start with the easy one. Can you just talk a little bit about the change in reinsurance structure that's affecting your net premium growth?

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William Charles Vens, Protective Insurance Corporation - CFO [16]

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Yes. So I can't recall if we've talked about this directly in the past. But in the past, we've had sort of different sliding scale mechanisms in our reinsurance contracts. And those have been replaced with fixed cedes. So over time as we get -- as the past moves further into the past, there's going to be less of a disconnect between gross and net. But while we go through this transition period, you're sort of seeing, gee, the gross looks smaller, the net looks much larger. And it's really just largely attributable to the change in structure. There's some other nuances to it, but that's the biggest impact as the transition from sliding scales to fixed premium cedes.

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Jayme C. Wiggins, Intrepid Capital Management Inc. - CIO, VP and Portfolio Manager [17]

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Okay. And then last one for me. We have all been stuck here at about 0.8x book value for a while now, which as you all know is close to the bottom end of the industry. And I can't imagine you guys or your other major shareholders are super pleased with that price. So I'd love to hear your take on why you think we're at this level. But just before you answer, a few potential issues that I've heard from other investors are the dual-class share structure, the historical business concentration, the rough underwriting results for the past couple of years, today's ROE, which isn't very high. And lastly, you've had some turnover in management in the board. So with me getting that mouthful out there, can you please share with us your vision on how we get a better multiple on the stock?

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William Randall Birchfield, Protective Insurance Corporation - President, CEO, COO & Director [18]

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Yes. Great question. Indeed, those items that you laid out could very well be contributors to the current multiple that we're experiencing today. We are actively addressing each of those items in turn. It's a combination of continuing to grow the business in order to deconcentrate away from any single segment or customer or class of business, while also staying within our areas of core competency of transportation and workers' compensation. Additionally, we're on a growth path at this stage in our strategic plan. That growth path comes with near-term penalties with regard to loss ratio. That long-term plan associated with the growth will result in downward pressure on expense ratio and loss ratio, but that's in future periods to come. So we have in the short time -- or the short period experiencing those results of trying to grow the business in the face of challenges in the industry. The other areas that are -- that you had mentioned we are individually working on solutions through each of those challenges. We're happy to go through them one by one, but I think it's important to stress that we understand the trading multiple we're at today is not to our liking. And we are doing everything under our control, including pooling underwriting leverage and investment leverage in order to improve that situation.

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Operator [19]

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At this time, I would like to turn the floor back over to Mr. Birchfield for closing comments.

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William Randall Birchfield, Protective Insurance Corporation - President, CEO, COO & Director [20]

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Okay. Thank you. This is Randy. Thanks again for your interest in our company. We look forward to our next communication related to the 2018 third quarter results.

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Operator [21]

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Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.