Protective Insurance Company. (NASDAQ:PTVCA) Q4 2018 Q4 earnings conference call held February 27, 2019 at 11:00 am ET
Han Huie – Investor Relations
Jay Nichols – Acting Director General
William Vens – Chief Financial Officer
Participants in the teleconference
Brett Reiss – Janney Montgomery Scott
Steve Spence – RBC Wealth Management
Greetings and welcome to the Protective Insurance Corporation fourth quarter earnings conference call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, MWW's Han Huie. Thank you, Han Huie, go ahead please.
Thank you. Thank you all for coming this morning for the fourth quarter teleconference of 2018 from the Protective Insurance Corporation. If you have not received a copy of the press release, you can access it online on the company's website, as well as a presentation to the investor that will accompany today's call and results. available at www.protectiveinsurance.com. I would like to remind everyone that we are hosting a live webcast of the call, which can also be found on the company's website.
At this point, management would like me to inform you that certain statements made during the teleconference and in the press release, which are not historical, may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act. 1995. Insurance Corporation believes that the expectations reflected in the forward-looking statements are based on reasonable assumptions. She can give no assurance that her expectations will be obtained. Factors and risks that could cause actual results to differ materially from expectations are detailed in the press release and included from time to time in the Company's filings with the SEC.
I would now like to introduce Jay Nichols, Interim Executive Director of Protective Insurance Corporation, and remind him. Please go ahead.
Thank you, Han and hello to all and thank you for participating in our call. I just want to start by saying that I am very proud of the contributions of our team, which has paved the way for profitability, service to our customers and focus. We have completed much of the diagnostic work in our portfolio and are well on the way to implementing solutions in segments and operations that require work. Although there is still a lot to do, we have accomplished a lot in a very short time.
During this call, I will focus on four points. I will give an overview of our income. I will report on our progress in operating initiatives, specifically rate initiatives and managing the volatility of our portfolio. I will review the decision to reduce our dividend and comment on our strategic review.
During the quarter, our carrying value decreased by $ 2.01 from $ 25.96 to $ 22.95. This decline was attributed to the following factors: we recorded $ 0.75 of underwriting losses, mainly due to the increased severity of our auto business, $ 0.82 related to lower investment markets in December. Write off goodwill of $ 0.16 and pay a dividend of $ 0.28.
On a brighter note, after the end of the quarter, our investment portfolio rebounded by approximately $ 0.60 per share as a result of the appreciation in the market value of our portfolio.
The technical results for the quarter were affected by the severity of our commercial vehicle portfolio related to significant liability claims. Historically, severity is very unpredictable on a quarterly basis, although this quarter's experience lies in the upper end of the range.
The severity of fiscal 2018 was more in line with the growth of our premiums. This severity is almost entirely related to the 2013 accident year, with the prior year's development having only had a 1.8-point impact on the claims ratio. during the quarter.
Work injury compensation results continued to meet expectations or, in many cases, exceeded expectations. In addition, during the year and up to January 1, we took steps to reduce the level of risky assets in our investment portfolio. This in fact reduces the volatility of our investment portfolio and our investment results increase the capital available to support our insurance business and our clients.
And our initiatives have made significant progress against our primary initiative to improve our pricing rates or improve our pricing methodology across the enterprise. Unfortunately, much remains to be done, as the need for improvement is important in a few segments.
Although we were referring to the parade of rates, Protective's public opinion has evolved considerably in recent months. We are approaching rates in a very thoughtful, analytical and focused way, but with a commitment to speed. The growing trend of lost cost inflation is an accepted fact in the passenger car sector.
Last quarter, we identified 14 of our 59 segments requiring a rate greater than 10%. In recent months, we have continued to analyze the results drivers in the identified segments. This exercise has been very encouraging because we are analyzing it. We analyzed more than 25 factors that contribute to the results we know.
We have identified areas where we need to change our rates, and we act on those signals to increase rates or not to renew, as appropriate. We believe that specialization provides us with better information, better capabilities and a solid customer base from which we can create value.
Although the need for rates creates uncertainty, we are comforted by the fact that the need for rates on the entire branch of commercial auto insurance for 2019 exceeds 15%. Our second initiative to reduce volatility is also moving forward. We have found partners in the faculty of reinsurance and we are putting the upper layers of our excess commercial vehicle line business into the agency sector in the optional market. This gives us the dual benefit of reducing our exposure to gravity and providing relevant pricing information on these layers.
We will continue to work towards a more integrated process to bring significant capacity to our customers and distributions as much as possible. We are also moving forward with digital partnerships to better deliver value to our customers, streamline our processes and improve our data and analytics capabilities.
Strengthening our infrastructure for the 21st century and creating a more value-based digital platform is critical to our success. As we announced yesterday afternoon, the Board of Directors declared a dividend of $ 0.10 per share this quarter, a reduction from our previous quarterly dividend of $ 0.28 per share. action. This action was taken to align our dividend with that of our peer group, preserving capital, as we are committed to maintaining our rating and providing increased resources and the ability to redeem shares as appropriate. We consider stock repurchases as a valuable and effective tool for capital management.
Our Strategic Review Committee of the Board of Directors continues to explore opportunities to maximize long-term shareholder value. Unfortunately, I will not develop our activities in this area nor can I comment on the many articles about this activity.
The board remains committed to maximizing long-term shareholder value. I will now give the floor to our chief financial officer, William Vance.
Thanks Jay. As reported in our press release, our net loss in the fourth quarter was $ 24.6 million, or $ 1.65 per share, compared to $ 16.5 million or $ 1.10 in net income. per share for the fourth quarter last year. For the full year of 2018, the net loss amounted to $ 34.1 million, or $ 2.28 per share, compared to net income of $ 18.3 million or $ 1.21 per share. action for the same period of the previous financial year.
Gross premiums written for the current quarter increased 5.9% to $ 152.7 million from $ 144.2 million in the fourth quarter of 2017. Gross written premiums for fiscal 2018 increased by 15.9%. , 4% to reach $ 582.5 million, compared to $ 504.7 million in 2017. The increase Continued growth of the Company's products in the industrial, automotive and automobile accident sectors. both in the distribution sector and in the programs sector.
Our operations generated a technical loss of $ 14.5 million, giving a combined ratio for the fourth quarter of 112.2%. This compares to a combined ratio of 99.3% for the fourth quarter of 2017. For the full year of 2018, the combined ratio stands at 108.6%, compared to a combined ratio of 108.4%. for 2017. The increase in the combined ratio in the fourth quarter of 2018 reflects an increase in the loss ratio of the current accident year related to heavy automobile losses.
The high combined ratio for the year 2018 corresponds to an unfavorable development of $ 16.8 million related to previous automobile hedges, from a previous accident year, yielding an additional premium of $ 17.3 million, related to variable premium adjustment provisions of our historical reinsurance treaties, and an increase in estimates of losses in the current year of the accident, as noted above.
During the last year – during the announcement of last quarter's results, Jay explained how the unfavorable evolution of claims during a year of accident is the result of an increase in the severity claims due to a more difficult legal environment and an increase in the time to settle claims.
Fourth quarter net investment income was up 6.7% from the fourth quarter of 2017. The increase in net investment income reflects an increase in the average invested funds, resulting from positive cash flow as well higher interest rates, resulting in higher reinvestment returns in the short term. fixed income portfolio.
For the full year 2018, net investment income increased 21.8% from 2017. We 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 positive future cash flows.
Over the past year, the duration of our fixed income portfolio, including cash, has remained relatively stable with an effective duration of approximately 2.3. Our portfolio of high quality fixed income securities has a weighted average rating, including cash, of AA less.
During the fourth quarter of 2018, we reallocated approximately 24 million equity securities to short-term fixed income securities. This corresponds to our shares in the first three quarters of 2018. Throughout 2018, we redeployed approximately 122 million equity securities into short-term fixed income securities. These stock sales and tax-mainly-low tax-based shares were opportunistic, with the company benefiting from the new corporate tax rate of 21%.
Proceeds from these sales were reinvested in high quality short duration fixed income securities. In addition, our investment portfolio adopts an even more conservative attitude. In addition, these sales were accretive for income, given higher yields at the lower end of the curve.
Premium growth continues to have a positive impact on our expense ratio, consistent with our stated strategy of disciplining spending. The favorable prior year claims experience from our Workers' Compensation products also positively impacted the expense ratio due to higher income from the Seed Commissions of the Company's potential reinsurance contracts. the previous year, which resulted in reduced expenses.
As at December 31, 2018, cash flow from operations was again positive in the fourth quarter, generating $ 107 million in operating cash flow for the year ended December 31, 2018.
The book value per share as at December 31, 2018 was $ 23.95, a decrease of $ 3.88 per share in 2018 after the payment of cash dividends to shareholders, totaling $ 1.12 per share. We do not lose sight of the fact that 2017 and 2018 have been tough consecutive years for Protective.
In reviewing the book value over this two-year period, the change in book value per share plus dividends paid represents a decrease of $ 0.66 per share. Jay mentioned earlier that the investment portfolio had increased by about $ 0.60 per share this year due to the appreciation in the market value of our portfolio.
We believe we are starting 2019 with a solid balance sheet, well supported by our reinsurance treaties. And Jay has focused on our business initiatives to achieve better results for our shareholders and the future.
As a reminder, we have issued our press release, quarterly financial statements and a brief presentation of our fourth quarter results on our website at protectinsurance.com.
This concludes our formal comment. At this point, we will be happy to answer your questions.
Question and answer session
Thank you. We will now begin the question and answer session. [Operator Instructions]. Thank you. Our first question comes from Brett Reiss from Janney Montgomery Scott. Please go ahead.
Hello gentlemen. How much is left under your share buyback authorization?
Brett Reiss, we have a fairly robust authorization. I think it may be in the order of 2 million shares. So, frankly, it's more than we would do after each quarter. And so, there is a lot of room under the authorization. It is not necessary for the board to adopt another resolution to relaunch it.
D & # 39; agreement. And are there any parameters on which you would like to buy back shares? I mean, like Buffett with Berkshire, we will buy stock if they dive to 120% of the book. Your stock is about 85% to 90% of the book. Would it make you want to become a buyer? Or should it be exchanged at a cheaper price to book? Any color on this would be appreciated?
Regarding the discount to be booked, we believe that the return at these levels for our shareholders is a creation and we – we are at a discount to these numbers. We would do it in a timely manner and we would be in the market.
And would you like to buy both B and A shares or simply B shares?
I think more than that depends on volume and availability then [Indiscernible] or the other.
D & # 39; agreement. Is there any kind of targeted internal combined ratio that you would like to leave in 2019?
Reiss, we have not given any historical guidance and therefore we do not break with this call with respect to the forward-looking statements.
D & # 39; agreement. And just one last question. The combined ratio was negatively affected by the increased severity resulting from more difficult litigation and the longer time required to settle claims. This seems to be a kind of new normality for the future. Are you convinced that the rate increases you can institute will more than make up for this new normalization?
This is a very good point that – and you understood it. This is a new standard in the industry. And we do some things. With respect to the adjustment of claims, we are trying to address some of the elements that determine these broader limits or judgments, but we are also setting our rates with this new normal and we are also trying to find reinsurance or optional reinsurance on the market. excess of layers in recognition of this new standard to reduce our volatility to wider judgments. So, the answer to your question regarding the rates is yes, we are looking at the new normality of the trend of gravity and the integration of these rates.
That's true. Could you talk a bit more about what you control to reduce litigation costs and perhaps reduce the time it takes to settle? I mean, are these just things happening and you just smile and endure them? Or do you think you suggest some things that you can do proactively to reduce your exposure there? Can you give me some examples?
Well, we can also do some things on the side of adjusting claims. And I would not say that reducing our exposures simply to get better results on what we are under is much faster. We are engaged much more deeply and we make decisions much more quickly regarding our course of action for a case, reducing our expenses and, second, reducing the [Indiscernible] trying to settle sooner.
We also take other steps to try to determine where – where – if and where litigation financing is involved in the loss. And so we do it – our claims specialists are, I think, the best in the industry and I think they do a fantastic job of getting good results in these cases. But they are embedded in the new normality, which takes years to establish itself in a new normal, and they are embedded in the new normality of the slightly different process is needed to get a good result in these cases.
Right. If there is contentious funding, can you do something to stop it or is it a permitted practice these days?
We can not do anything to stop it, but we can take some steps just to understand it and – and the industry is also taking some steps, which is very encouraging in a very useful process. well. And I – we are supporters of that.
Right. Thank you for answering my many questions.
Our next question is from Steve Spence from RBC Wealth Management. Please go ahead.
Hello gentlemen. I wonder if you can enlighten us a little bit about leadership succession and if there has been an interim announcement in recent months that I had missed, I apologize. But I would like to know at this point if the council has taken position.
On the succession of the direction, you make more allusion to me.
So, I'm the acting CEO.
Try to find – apply the appropriate and politically correct way to ask the question. Excuse yourself, it was sloppy.
Not necessary with me. I was therefore a member of the board of directors of April 2017. I was appointed interim CEO as well as president on October 19th, and I have been here since [Indiscernible] of my life. And the board has engaged a search for a permanent CEO and it is underway. And there is a very thoughtful process, both in search of a permanent CEO, which is an excellent opportunity, and to transition with me. So if you look at my question – whether it's my subcontractor or my company – or the disclosures we've made during my term, it's that I'll stay as chair for a period of time. long period. And not as executive chairman, but as a partner of the new CEO for a longer period and my pay is greater than this period.
So, I am not paid for my time as acting. I am paid for the time I spend on an interim and transitional basis to maintain the consistency of our mission and approach to our staff and clients over this long period. I think it is a very thoughtful process and I am very confident that it will work well.
Thank you. I appreciate that. In this role, and say that you have joined the board, there seems to be a trend here, a serious consequence of combined ratio problems and poor coverage pricing. And I recognize that statistically, there are times when you can correctly encrypt your product, it does not mean that you do not have an adverse customer ratio. But it is common for many neighborhoods to go back and rephrase. Can you give us some color to define this problem? And I think there would be some if you could enlighten us on how you approach this issue?
Sure. Sure. Let's be clear. This quarter, we did not need to go back and rephrase. The prior year's performance for this quarter was only one point out of eight in the loss ratio and we are much more confident about the level of our reserves. and in terms of unfavorable development because of the level of reserves and the reinsurance program we talked about in those calls and which is posted on our website. As far as equities are concerned – so you're right, there have been interest rate issues and there is one – so we are actively addressing the rates and volatility of the overall auto portfolio, while other employees' portfolio behaves well or better than expected. throughout the portfolio.
But the commercial automobile portfolio, where the losses have evolved significantly on the liability side as well as the property damage side. We were – I would say late to the rate parade as I said in my prepared comments. And we are now determined to act in this direction. So we've done a lot of hard work, and we're continuing to do that, not with a broad approach to portfolio valuation, but in a very granular way with tens of thousands of possible sales to try to figure out exactly where we're going. we find. We need to apply the rate to the industries where we are observing – where it appears that the rate is inadequate and we are making significant progress in terms of rates, retention and limits. So I think we are – as I have already said through diagnoses, we have identified the problems and we have identified the type of causes of these problems or the factors that contribute to them. And we are, and I'm really happy with the way we act on these accounts. And in January, our rates went up much less than in previous periods.
Thank you. And one last question. Can you comment broadly on volume growth, that's the addressable market? Part of our investment thesis was that – to the extent that people do not go to department stores to buy products, they have to be transported, which in theory would be related to a greater number of kilometers traveled with various types of products. types of vehicles. Is this an imperfect scenario? How do you see the growth of the addressable market?
Absolutely, I agree with you. When I arrived, I said that the winners of the Amazon economy were cardboard and trucks – truckers and many more miles traveled. And there is – not only is there more miles traveled and the winners are the – the trucking industry is well organized and so we are as an insurance company allowing trade in this space and we seek to play a role in this area. We have a small market share. So, our opportunity is significant. I think the trucking market is also experiencing significant disruption. With regard to what is happening with the numerical distribution as well as a whole series of other types of digital activities on the market and mandatory data on LDCs for interstate commerce as well as the newest technology in trucks. It's a very dynamic market and we share your enthusiasm for the fact that there is an opportunity in this space. And as a facilitator of trade in this space, we believe that there is a significant opportunity for us. So, the thesis is correct.
Is there an indicator available for you regarding accidents per kilometer traveled in the industry with the combined data? Or is it a little more like clicking on your finger and putting it in the wind?
No no. There is so much data, there is so much data. The trend of deaths by one hundred million miles, the trend of accidents per mile, is mandatory data. So you – and that's in pretty good shape. The question is that there are so many dimensions. They try to use it, convert it into pricing has always been a challenge for the industry, but I think we are moving more towards probabilistic pricing and moving away from factor-based pricing. because you can superimpose a whole series of factors, and then the probability is that those of occurrences and we are not – we do not stick our finger in the wind anymore. There is a lot of data and to analyze in the quest, the real challenge you get signals and that's what we spend our time doing.
Right. Good thanks alot. I appreciate you taking my questions.
There are no more questions right now. I would like to give Jay Nichols the floor again for the last comments.
D & # 39; agreement. I want to thank everyone for the time they have spent calling today. Our main goal is to put the company on the path of improvement. We are engaged in this business and we are making tangible progress. I would like to express our gratitude to our staff here for their tenacity and commitment to improving our operations and profitability. I would also like to thank our customers and producers for their ongoing partnership. And finally, I want to recognize and remember Norton Shapiro, shareholder, board member for more than three decades, who passed away on February 2nd. He was a very special man and we all miss a lot. Thank you for your time.
This concludes the teleconference today. You can disconnect your lines at this time. Thank you for your participation.