Baldwin & Lyons, Inc. (NASDAQ:BWINB)
Q4 2008 Earnings Call
February 04, 2009 11:00 AM ET
Leslie Loyet - Vice President, Financial Relations Board
Gary Wayne Miller - Chairman and Chief Executive Officer
Joseph James DeVito - President and Chief Operating Officer
G. Patrick Corydon - Executive Vice President and Chief Financial Officer
Good day everyone, and welcome to today's Baldwin & Lyons Incorporated Fourth Quarter 2008 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Leslie Loyet of the Financial Relations Board. Please go ahead.
Thank you. And thank you all for joining us this morning for the Baldwin & Lyons fourth quarter and full year 2008 conference call. If you did not receive a copy of the press release, you may access it online at the company's website at baldwinandlyons.com. I would like to remind everyone that we are hosting a live webcast of the call which may be accessed on the company's website as well.
At this time, management would like me to inform you that certain statements 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, 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.
And now, I would like to introduce Gary Miller, Chairman and Chief Executive Officer of Baldwin & Lyons and I'll turn the call over to him. Please go ahead.
Gary Wayne Miller
Thank you, Les. Good morning to those of you joining us for the Baldwin & Lyons conference call reporting results for the fourth quarter and the for the year 2008. We are pleased you have joined us this morning and appreciate your interest in the company. I am Gary Miller and I am the Chairman and CEO of the company, joining me on this call are Joe DeVito, President of the company and Chief Operating Officer; and Pat Corydon, Executive Vice President and Chief Financial Officer.
I will give some brief opening comments which will be followed by Joe DeVito's remarks and then by Pat Corydon going into more detail regarding our financial results. At the conclusion of Pat's remarks, we will be happy to address any questions you might have.
As you might expect, as a financial services company Baldwin & Lyons did not escape the negatives that have marked the results for such companies. We have reported a net loss for the year caused by our losses on investments and our book value declined for the same reason.
On the other hand, we had a good quarter and a good year from operations. Our fourth quarter operating results of $0.52 per share was the best we've ever had in a fourth quarter and were the fifth best ever for the company. Our annual results were influenced by catastrophe activity specifically Hurricane Ike in the third quarter, but we still reported $1.55 per share in operating income as compared to last year's record of $1.91. However, though satisfactory operating results could not offset investment losses of $1.91 per share for the year 2008, resulting in a net loss for the year of $0.36 per share.
Joe and Pat will go into more detail regarding the operating income and the investment losses. I will again point out, that the company has significant investments in limited partnerships due to accounting rules for those investments we must recognize gains and losses from those partnerships, both realized and unrealized as to the partnerships, as realized gains and losses to us. And therefore, they are recognized through our income statement.
In times of general market pressures increasing or decreasing significantly, as they have this past quarter and past year, decrease that is, those increases or decreases caused more volatility in our income statement, as shown in the rather upsize gains of last year and correspondingly large investment losses for 2008. With this year's losses also being influenced by a significant impairment charges reflecting the decline in value of certain held assets, which also go through the income statement.
However, accounting rules aside and whether the losses went through the income statement over two time of the balance sheet, it was a terrible year for investors, especially one that has historically held significant equity investments.
The company's book value declined for the quarter and for the year, cheap causes where they realize investment loss of 28.8 million after-tax, which more than offset the company's operating income of 23.3 million. Our unrealized investment losses of 19.7 million and dividends paid of 15.1 million. Book value at year end was $22.32 a decline of 266 from December 31, 2007.
The company purchased 456,000 shares of its common stock during the year 2008, with 169,000 shares being repurchased in the fourth quarter at an average price of $16.97 per share. Those purchases reduced the average price paid per share for the year to $19.52, because the purchases were made below book value, the effect was actually an increase in to the company's book value of $0.16 per share.
Approximately 2.5 million shares remained on the board's current stock repurchase authorization. The company has historically been a buyer of its stock when the purchase price is less than its book value. A situation we see today, with the present stock price being less than 80% of book value while actually this morning I guess just a tad above 80% of book value.
I'll go in more to explain, we had a good year from operations with nearly all products performing well. Premium volume was up slightly which considering market conditions we believe most favorable. We are poised to continue that increasing trend. Combined ratios remained favorable for most products, although continuing rate decreases make year-over-year favorable comparisons of combined ratios difficult.
Pricing for our property reinsurance product has hardened some, especially on January 1st renewals. We expect that trend to continue mainly because the increases were most needed as pricing had slipped too far.
Trucking lines pricing continued to decrease in 2008, although perhaps moderating at year end. With three consecutive years of price declines we are at and not beyond the two low point. However, the decrease in vehicle miles caused by the economic paying felt today may help in loss experience. We are seeing revenues in miles decrease in our customer reports directly impacting premiums paid to and earn by us. Only better business conditions will reverse that trend and while trucking is usually a leading economic indicator, we have not seen many signs of improvement yet.
Personal auto volume continues an upward trend from the low seen earlier in the year, as industry price reductions have probably abated somewhat. The effects of the recession on both premium volume and loss experience will make for an interesting observation in that line. We expect declines in both the premium and losses, where losses hopefully declining more than the premiums. We have made some news that will impact next year's operations.
Joe will also report on some of those new initiatives that should aid in volume increases while protecting profitability. Joe?
Joseph James DeVito
Thanks, Gary. Considering the current investment climate, we're pleased with our operating results for the fourth quarter. As Gary mentioned the $0.52 per share stands as the best fourth quarter in the company's history and its fifth best ever. In addition, I am proud to report that once again protective insurance company has received a rating of A plus from Street.com, the nations leading independent provider of ratings and analysis of financial services companies, mutual funds and stock.
This organization evaluates the financial strength of more than 15,000 institutions. Fewer than 1% of the nation's property and casualty insurers meet the necessary criteria for exceptional financial strength. This rating company's model uses very rigorous standards and places great emphasis on a company's future stability and its ability to withstand severe economic adversity.
The letter awarding this designation stated A company receiving our highest financial strength rating truly demonstrates itself to be among the industries elite. In these very uncertain times, it should be reassuring to our employees, customers and shareholders that our main insurance subsidiary continues to rank in the top 1% of the nation's P&C companies by this well respected group.
Related to our insurance operations, market conditions as we see them very widely from product-to-product. As we stated last quarter, the expected has occurred and we have seen some hardening in the property markets, especially in the reinsurance sector. The personal auto rating environment appears to be flattening, while all areas of fleet transportation remain highly competitive. This variance plays well with our diversification strategy, allowing us to pick our spots using the strength of our balance sheet and underwriting expertise to seize opportunities, but avoid pitfall.
Gross written premium was up 4% from the prior quarter, and from the same period in 2007. Earned premium was up 7% from the third quarter, and 3% over the fourth quarter of 2007. For the year, premium written and assumed was up almost 7%. This was primarily due to gains in the independent contractor products and property reinsurance which were up 24 and 26% respectively.
The growth in these areas more than made up for continued written premium declines in other transportation products and personal auto. However, continuing in the pattern which began in the third quarter, our personal auto premium written grew 32% from the third quarter and 28% from the fourth quarter of last year. Total earned premiums were up almost $3.2 million from 2007, with an 18% increase in independent contractor and a 23% increase in property reinsurance.
Loss ratios were good at 63% for the quarter and 63.5 for the full year. The combined ratio was 91% for the quarter and 94.4 for the year. These compared to 101 and 91 for the comparable periods in 2007.
The quarterly differences are mainly attributable to the property reinsurance loss differential improved from 79% to 64% and private passenger auto down from 76% to 64%. The year-over-year change was primarily due to a slight increase in fleet transportation from 58 to 63.6 partially offset by a three-point improvement in private passenger auto.
Expense ratios year-over-year were flat at 31%. The weak economy again contributed to lower trucking revenues, which partially contributed to its continuing decline in premiums from our transportation products which are revenue based.
Reported revenues were down 4% from the fourth quarter of 2007, and almost 6% from the third quarter of 2008. The fleet trucking market remains soft with the average premium rate down about 15%. However, we continue to retain almost all of our accounts and even added a few new ones this year.
Our independent contractor programs continue to grow due to continued market acceptance of our expanded offerings. We are seeing growing submission activity, as a result of our increased marketing efforts in both the direct and agency channels, continued refinement of our products and enhancements to our already best-in-class technology platform.
As I previously mentioned, personal auto's volume turnaround continued for the second consecutive quarter. I said last quarter, that it was much too early to light any candles but we may have taken them out of the box. Our more granular rating systems scorecard has proven to be in early winner, as loss ratios have improved to 64% for the quarter and year.
Including fees, the combined ratios for both the year and the quarter were very acceptable 96%. We are hopeful, that the increasing volume pattern will continue. Thereby, allowing for a reduction in the expense ratio, an increase in fees and therefore better margins and more profit. However, this market is becoming increasingly controlled by very large national players and only time will tell.
As I stated, our property reinsurance business continues to grow. During the third quarter call, I indicated that results in this segment are somewhat dependent upon what I described as a higher power. Whatever your belief in what that power maybe, it looked more favorably upon us in the fourth quarter than it had in the third.
The loss and combined ratios for the quarter were 64 and 76%. For the year, those numbers are 64 and 81. This is in comparison to the year 2007, which produced the loss ratio of 60 and a combined of 81%. While the combined ratio for the two years are almost identical, 2008 results contained over 5.5 million in large hurricane losses, mostly Ike, while 2007 losses were made up of numerous smaller events from one of the worst tornado and hail years in recent history.
We are very encouraged that our program selection and catastrophe modeling efforts have produced two years of low 80s results despite the varying and significant global weather events. Our strategy to grow in this space continues. We are expanding our relationships with our most worthy partners and continuing to develop new ones. As I mentioned in our call last quarter, we were anticipating and now are experiencing an increasing pricing environment and plan to carefully and judiciously analyze our best opportunities to expand.
We are currently engaged in some meaningful discussions and we'll provide details as plans are finalized and communication is appropriate. As you know, this segment of our business reports through Pat Corydon, our Executive Vice President and CFO. Pat, or any one of us will be happy to respond to any questions you have regarding this line at the conclusion of our presentation.
While not immune to the continuing and perhaps worsening macroeconomic conditions which to-date have mainly impacted our investment operations. We remain on the path of carefully monitored and measured growth with faith in our ability to plan strategically and operate efficiently. We continue to review any and all possibilities to expand into additional lines of insurance via investments, partnerships, and or acquisitions.
Our management restructuring initiated during the second quarter of 2007 continues to evolve and provides us the resources and flexibility necessary to respond to attractive opportunities. As I stated earlier, we are certainly pleased that we are able to report one of the best operating quarters in our company's history. We continue to believe that we will be able to identify opportunities and execute our plans.
At this time, I will ask Pat Corydon to report on our investments, investment related activities and add some flavor to the financial results presented by Gary and me. Pat?
G. Patrick Corydon
Thanks, Joe. Pre-tax investment income decreased 1.7% from the third quarter to $4.3 million with no unusual activity. After-tax investment income however, was almost 2% higher than the third quarter as asset redeployment in the tax exempt bonds continued. Comparing to the prior year, pre-tax investment income is down 11% for the quarter and 13% for the 12 months.
As we noted last quarter, the primary components of this decrease are significant declines in short-term interest rates and redeployment of assets in the tax exempt bonds and new investment vehicles which generated less current income with the expectation of long-term gains. After-tax investment income decreased almost 7% for the quarter and 8% for the year on essentially level average invested assets reflecting the impact of municipal bonds.
There were no significant changes to the average duration or contractual life of our bond portfolio during 2008. Yields on our bond portfolio have declined much more modestly than short-term rates and bonds purchased this quarter produced only a 23 basis point lower after-tax yield than those maturing or sold during the quarter; a much lower differential than that experienced over the past several quarters.
The continuing global equity market disruption, continue to negatively impact both realized and unrealized investment values in the fourth quarter. Income statement realized losses totaled $11.8 million for the quarter and $44.3 million for the year. Our direct equity investments are generally not a large component of this income statement category.
Losses of $3.3 million for 2008 reflect very light trading as the markets declined. However, a byproduct of the deteriorating equity markets was the need to record impairment charges of $5.5 million this year. While we along with many others believe that the accounting rules relating to changes in market value are rather harsh during periods such as this. These unrealized losses flow through our income statement mostly in the third quarter.
A larger component of investment losses relates to our participation in several limited partnerships which for the most part invest in public and private debt and equity securities on a worldwide basis.
As we reported in the past, the majority of the assets allocated to limited partnerships is invested outside of the United States with a heavy concentration in India. Most of our limited partnership investments followed a general downward market trends this year.
Limited partnerships generated total losses both realized and unrealized this quarter of $9.8 million, compared to $10 million in gains during the same period last year. For the year, limited partnership losses of $33.6 million compared to $23.1 million in gains in 2007.
Our investment in the Indian stock market has been the most volatile over the past two years declining in value by 58% during 2008, after increasing 63% during 2007. In total, investment losses for the quarter equaled $0.51 a share, essentially offsetting operating income. Year-to-date investment losses of $1.91 a share compared to gains of $1.72 during 2007. The final component of investment operations is the change in fair value of non-limited partner investment zone.
As we do not liquidate our portfolio into the dropping market, the equity security portfolio experienced an after-tax holding loss of approximately $9.4 million this quarter and $20.4 million for the year.
Our bond portfolio on the other hand, experienced a modest increase in unrealized gain for the year of $1 million reflecting the short duration and high quality of the portfolio. Even after the most difficult year in equity trading and generation, at year-end the market value of company's equity security portfolio remains more than $50 million above its original cost and $23 million above cost adjusted for impairment charges, while the value of the bond portfolio exceeds cost by $3.2 million.
Cash flow from operations this quarter was negative by $3.2 million as net loss payments increased by over $13 million from the fourth quarter of 2007. The large claim settlements which are integral to the company's business and the timing of reinsurance recoveries on those losses can vary widely from quarter-to-quarter. Year-to-date cash flow from operations was negative by $3.5 million; last year operations produced almost $28 million in positive cash flow.
The primary difference is attributable to over $24 million more in net loss settlements during 2008. The timing of reinsurance recoveries produced another $8 million of this difference.
Reinsurance recoverable on unpaid losses increased from $132 million at December 31, 2007 to $155 million at year-end 2008, reflecting changes in reinsurance treaties over the past two years. Approximately 40% of this total represents incurred but not reported loss reserves.
Reinsurance recoverable on paid losses totals only $4.5 million at quarter end... actually year end, all of which is current. The large volume of claim settlements during 2008 produced a consolidated prior year reserve saving of approximately $17 million or just under 7% of beginning reserves, which is very consistent with historical one year developments.
I'll remind listeners that we posted the quarterly financial statements on our website at baldwinandlyons.com. Click on our Investor Relations page and select presentations from the dropdown menu. From this page select the latest financial supplement which can be downloaded using Adobe Acrobat or printed for your use. All other quarterly and annual financial data presented on the website has also been updated.
This concludes our formal presentation. At this time, we would be happy to answer any questions listeners may have.
(Operator Instructions). We'll go to our first question John Gwen (ph), JVG Research.
Pat, I think you said that the development for '08 was 17 million, is that correct?
G. Patrick Corydon
Okay. What was it for the quarter?
G. Patrick Corydon
For the quarter it was close to 10 million, John.
Okay. And Pat, on your realized investment losses of the GAAP and is that amounts including OTT are basically the same?
G. Patrick Corydon
No, actually the statutory accounting is wholly different from the GAAP accounting. If -- I don't know if we've discussed this much before but on a statutory basis, while everything is benchmarked off of current fair value, not all of the unrealized losses run through the income statement, but they are balance sheet adjustments.
Okay. So it's less impact on a stat basis then?
G. Patrick Corydon
Okay. And, Pat your short-term debt was up a bit again this quarter, could you just comment briefly on that?
G. Patrick Corydon
You might know there's a correlation, we borrow the total of $9 million John, and we bought back $8.9 million of treasury stocks.
G. Patrick Corydon
So that's the reason.
Okay. And Gary, I know in your traditional transportation business, your premium revenues are function of miles driven, is that also true for the independent contractor book, or Joe whoever?
Gary Wayne Miller
Yes, to some extent it is and I'll give you a quantify just on that. Certain of the coverages are based on the earnings of the independent contractor and therefore would reflect his revenue or and that would also reflect his miles driven. But part of the coverages for the independent contractor are on either per unit or value basis and that would not be a reflection of either miles or economic activity.
Okay. Thanks, that's all I have.
(Operator Instructions). It appears there are no further questions at this time. Mr. Miller I'd like to turn the conference back over to you for any additional or closing comments.
Gary Wayne Miller
We thank you very much for joining us this morning and we look forward to another quarter hopefully with better overall economic activity in the country and we'll see you in three months.
This concludes today's conference. We thank you for your participation. You may now disconnect. Have a wonderful day.
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