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Edited Transcript of BWINB earnings conference call or presentation 7-Nov-18 4:00pm GMT

Q3 2018 Protective Insurance Corp Earnings Call

Indianapolis Nov 13, 2018 (Thomson StreetEvents) -- Edited Transcript of Protective Insurance Corp earnings conference call or presentation Wednesday, November 7, 2018 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Han Huie

* John Drake Nichols

Protective Insurance Corporation - Interim CEO & Chairman of the Board

* William Charles Vens

Protective Insurance Corporation - CFO

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Conference Call Participants

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* Brett Reiss

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Presentation

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Operator [1]

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

I would now like to turn the conference over to your host, Han Huie of MWW. Please proceed.

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Han Huie, [2]

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Thank you. Thank you, all, for joining us this morning for the Protective Insurance Corporation Third 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, along with an investor presentation to accompany today's call and earnings release, which is available at 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 assurances that its expectations will be obtained. 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 Jay Nichols, interim CEO of Protective Insurance Corporation, and turn the call over to him. Please go ahead.

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John Drake Nichols, Protective Insurance Corporation - Interim CEO & Chairman of the Board [3]

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Thank you, Han, and thanks to everyone for joining our conference call reporting results for the third quarter of 2018. Of course, the people I want to thank the most are the employees of Protective. During the past 19 days, I've been delighted by the openness and willingness of our people to embrace a path to profitability. This has been helpful to me personally and will be helpful to all of our shareholders.

I'll begin by providing an overview of the work we've already performed together and then turn our presentation over to William for an update on our financial performance during the third quarter of 2018. Upon completion of those comments, we'll answer questions.

Our results in the 3 months ended September 30, 2018, were disappointing. Trend in the commercial automobile industry continues to run hot, and we've been behind this accelerating trend. Relating to this issue and exacerbating it, is the length of time required to settle cases, resulting in increased time for the trend to run, further increasing loss and litigation costs.

During the past 19 days, the team has segmented our book of business into 59 subsegments by product, distribution channel and in certain cases, by class. We then rated each subsection for our rate need in that line. 14 of these 59 subsegments require a rate in excess of 10%. We are committed to pursuing that rate where required across the book.

We are applying rate on a more granular basis though, by class, by geography as well as other factors that are driving losses such as safety score and experience. While this will impact our unit and a premium growth, we are not alone in seeking rate at this point in the market as a result of the accelerating trend.

As a result, we do not see ourselves competitively disadvantaged while pursuing rate increases where necessary. We have historically been more cautious in applying rate increases, gradually blending them in over 2 or 3 renewal periods rather than all at once. This approach has not worked and will be changed.

Additionally, we have seen our limit profile shift in our commercial automobile business toward higher limits. While our pricing on these access layers appear to be holding, we will work to shift this exposure to volatility, by both exploring faculty of reinsurance and targeting more accounts with lower limit profiles, while being more discriminating with larger limits.

I believe we're taking the appropriate underwriting actions to achieve rate where needed and to reduce our volatility to the emerging trend of large litigation judgments.

On the brighter side of things, we are confident that our reserve action in the quarter produces gross and net reserves that are mid-single digits above our actuarial midpoints. Additionally, the potential for future adverse development is mitigated by our annual aggregate deductible reinsurance treaty. Under this treaty, 75% of our gross losses above the attachment point are ceded to our reinsurers. For the years 2013 through 2017, we have a cumulative total of $3.7 million of incurred losses that fall below the treaty attachment point. For 2 of those years we're above the treaty attachment point and for the other 3 years, we're very close to attaching. While we do not expect to expose the treaty in a significant way, if there is adverse development, our reinsurance partners are there to support us.

Page 4 of the slides on our website have some additional detail regarding this.

William will now provide you with additional details related to our third quarter results. William?

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

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Thank you, Jay. As discussed in our press release, our third quarter net loss was $12.3 million or $0.82 per share, which compares to net income of $7.4 million or $0.49 per share for the prior year's third quarter. For the first 9 months of 2018, net loss totaled $9.5 million or $0.63 per share, which compares to net income of $1.8 million or $0.12 per share for the prior year period.

Gross premiums written for the current quarter increased 5.5% to $138.7 million compared to $131.5 million written during the third quarter of 2017.

Gross premiums written for the first 9 months of 2018 increased 19.2% to $429.8 million compared to $360.6 million written during the 2017 period. 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. Our operations produced an underwriting loss of $23.5 million, resulting in combined ratio for the third quarter of 124.3%. This compares to a combined ratio of 99.3% for the third quarter of 2017.

For the first 9 months of 2018, the combined ratio was 107.2%, which compares to a combined ratio of 112.3% for the 2017 period. The increase in the combined ratio during both 2018 periods reflects: First, a reserve strengthening of $16.4 million related to unfavorable prior accident year loss development and commercial automobile coverages; and second, ceding an additional $13.8 million in premium related to variable premium adjustment provisions in our historical reinsurance treaties.

Jay discussed all this reserved strengthening as a result of increased claim severity due to a more challenging litigation environment as well as an increase in the time to settle claims.

Over the past few years, the company has continued 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. Third quarter net investment income increased 38.5% compared to the third quarter of 2017. The increase in net investment income reflects an increase in average funds invested resulting from positive cash flow as well as higher interest rates, leading to higher reinvestment yields for our short-duration, fixed income portfolio. For the first 9 months of 2018, net investment income increased 28.8% compared to the first 9 months of 2017.

We do continue to 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 expected future positive cash flows.

Over the past year, our fixed income portfolio duration, including cash, has remained relatively level at an effective duration of approximately 2.5 years. Our high-quality, fixed income portfolio has a weighted average rating, including cash, of AA-.

During the third quarter of 2018, we reallocated approximately $24 million of the equity investments into short-duration, fixed income securities. This is consistent with our actions in the first 2 quarters of 2018. During the first 9 months of the year, we reallocated approximately $98 million of equity investments into short-duration, fixed income securities. These equity sales, and predominantly, low tax basis stocks were opportunistic as the company benefited from the new lower corporate tax rate of 21%.

Proceeds from these sales were reinvested into high-quality, short-duration, fixed income securities, further shifting our investment portfolio to a still more conservative posture. In addition, these sales were accretive to income given the increase in yields at the shorter end of the yield curve.

Premium growth is continuing 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.

Favorable prior accident year loss development from our workers' compensation products also favorably impacted the expense ratio due to increased ceding commission income from prior year contingent reinsurance contracts, which has the effect of reducing expenses.

Moving to our financial position at September 30, 2018, operating cash flow was, once again, positive during the third quarter, resulting in $60.4 million of positive operating cash flow for the 9 months ended September 30, 2018.

Book value per share on September 30, 2018, was $25.96, a decrease of $1.87 per share during the first 9 months of 2018 after the payment of cash dividends to shareholders totaling $0.84 per share.

As a reminder, we posted our press release, quarterly financial statements and a brief presentation reviewing our third quarter results on our website at protectiveinsurance.com.

This concludes our formal commentary. At this time, we'd be delighted to answer any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Brett Reiss from Janney Montgomery Scott.

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Brett Reiss, [2]

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Mr. Nichols, the -- why is the tort bar taking longer time -- time frame to settle cases? And is that going to continue into the future?

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John Drake Nichols, Protective Insurance Corporation - Interim CEO & Chairman of the Board [3]

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If I had a crystal ball, that would be helpful. That -- what we're observing, and it's a trend that we're seeing, that these cases are taking longer to settle because they're seeking higher damages, they're spending more time on accident reconstruction, they're spending a lot more money pursuing these higher limits and these have judgments. So I just think there's a structural issue going on in the industry where lawyers are spending more time and getting -- they're achieving some good outcomes. And so they're willing to continue to spend more time on the next case and the case after that. And secondarily, I think, there's also an influence from the litigation finance world that's -- so there's cash flow coming in, so they're not cash flow constrained. So those are 2 elements, but I'm sure that they're all sorts of contributing factors, but it's what we're seeing and that's how we're attributing some of the trend. And we don't expect it to abate anytime soon.

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Brett Reiss, [4]

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Right, right. When Mr. Birchfield -- the press release came out about Mr. Birchfield leaving, there was also mention that a subcommittee of the board was going to be formed to look into all -- everything was on the table with strategic initiatives. Has that committee been formed?

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John Drake Nichols, Protective Insurance Corporation - Interim CEO & Chairman of the Board [5]

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That committee has been formed. And it consists of myself, 2 independent board members and 2 members of the Shapiro family.

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Brett Reiss, [6]

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Okay. Is there anything you can share with us in terms of -- have there been offers made to the committee? Is there -- any color on interest from outside parties?

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John Drake Nichols, Protective Insurance Corporation - Interim CEO & Chairman of the Board [7]

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I have nothing to share in that area. So we've established the committee, we're evaluating alternatives, and we're going to evaluate how they apply to the business.

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Operator [8]

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Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Jay Nichols for closing remarks.

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John Drake Nichols, Protective Insurance Corporation - Interim CEO & Chairman of the Board [9]

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Okay, just on a personal note, I want to repeat my heartfelt thanks to the folks here at Protective, the ongoing support we receive from our producers, our customers and other stakeholders. And we look forward to executing our plan to achieve rate, managed volatility and create results that are consistent with our and your expectations, and thank you very much for your time.