National Interstate's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.26.14 | About: National Interstate (NATL)

National Interstate Corporation. (NASDAQ:NATL)

Q4 2013 Earnings Conference Call

February 26, 2014 10:00 a.m. ET

Executives

Julie McGraw - Vice President and Chief Financial Officer

David Michelson - President and Chief Executive Officer

Gary Monda - Vice president and Chief Investment Officer

Analysts

Vincent D'Agostino - KBW

Operator

Good day, ladies and gentlemen. Welcome to the National Interstate Corporation 2013 Fourth Quarter Conference Call. My name is Bridget, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer period following the company's prepared statements. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

Your hosts for today's call are Mr. David Michelson, President and Chief Executive Officer; Ms. Julie McGraw, Vice President and Chief Financial Officer and Mr. Gary Monda, Vice president and Chief Investment Officer.

I would now like to turn the call over to Ms. McGraw to begin the presentation.

Julie McGraw

Thank you, Bridget. Certain statements made during this call maybe forward-looking. The factors that could cause actual results to differ materially from those forward-looking statements are listed in our earnings release and SEC filings, including the annual report on Form 10-K and quarterly reports on Form 10-Q.

Certain financial measures that we use on this call which is net earnings from operations are expressed on a non-GAAP basis. Our GAAP results and reconciliations of non-GAAP to GAAP measures can be found in our earnings release available on our Investor website at invest.natl.com.

Before I turn this call over to Dave Michelson, I do want to specify that we're limiting this conference call to discussion regarding our 2013 fourth quarter and full year results. We will not make comments on the pending tender offer.

David Michelson

Thank you, Julie. Good morning, and welcome to our fourth quarter conference call. We reported net income of $0.43 per share for the 2013 fourth quarter, resulting in net income of $0.89 per share for the 2013 full year.

Fourth quarter results improved compared to the third quarter of this year, and we're also slightly better than the 2012 fourth quarter. This quarter, we generated operating earnings of $0.40 per share through continued strong investment income and improved underwriting results. While still above our historic levels, the fourth quarter combined ratio of 98.8% lowered our year-to-date combined ratio to 102.4%.

For the 2013 fourth quarter, we reported net investment income of $9.2 million, which improved our full year investment income to $33.4 million, and we also added over $6 million to our pre-tax earnings from realized gains from investments.

An improved underwriting expense ratio also contributed favorably to our operating results. We've historically maintained an underwriting expense ratio in the low to mid 20s. In 2013, we ran a couple points better with an underwriting expense ratio of 20.7%. We are leveraging our fixed cost, which is growing slower than our revenues.

In addition, a portion of our compensation expense is variable and was lower than previous years as a result of the elevated loss and loss adjustment expense ratios.

During the 2014 fourth quarter, we again experienced unfavorable development from prior year claims, which added approximately five percentage points to our loss and loss adjustment expense ratio for the quarter. For the 2013 full year, unfavorable development from prior year claims has added about four percentage points to our underwriting ratios.

This means that our 2013 accident year combined ratio was approximately 98%. The prior year development that occurred in the fourth quarter was again attributable to several prior accident years.

In addition to prior year development, the 2013 full year combined ratio was adversely impacted by claims severity, particularly in the 2013 second quarter.

Throughout 2013, we've been focused on actions to improve our underwriting results. For the full year of 2013, we've been getting the much needed rate increases in all of our businesses. We're averaging 5% to 10% on most renewals, and in some cases getting larger increases. We are also adding new business at appropriate rates, because we write primarily annual policies, the favorable impact of improved LAEs gradually falls into our bottom line results.

In addition to improved rates, our new renewable business, in 2013 we made the difficult decisions to walk away from business that is not accretive to earnings. This year, we non-renewed or priced away over $65 million of unprofitable business; while the underwriting actions have detracted from our top line, gross premiums written still grew 14% for the fourth quarter and 10% for the 2013 full year.

The alternative risk transfer, transportation and Hawaii and Alaska components, all grew for the year, while specialty personal lines were down as planned, compared to last year.

The growth has come from the combination of higher rates, increased exposures for existing customers, new customers and also from new product initiatives. The newer products and product extensions that help us grow in 2013 included excess liability product for trucking customers, waste operations, energy distribution, traditional tow truck products and home delivery and our third group captive at Vanliner, both of which are extensions of our moving and storage insurance offerings.

At this time, I'll open up the call to questions regarding our fourth quarter and full year results. Again, we ask you that you limit your questions to the 2013 fourth quarter and full year results, and we do not comment on the pending tender offer.

Question-and-Answer Session

Operator

Thank you. Our first question comes from Vincent D'Agostino with KBW. Your line is now open.

Vincent D'Agostino - KBW

Hi. Good morning, everyone.

David Michelson

Good morning, Vincent.

Vincent D'Agostino - KBW

Some of the trucking companies that taking a look at has cited the poor winter weather in the fourth quarter is having an impact on the results in fourth quarter of '13 from a top line standpoint, and then also to-date in first quarter of this year. So I am just curious there is any impact you are seeing in terms of your growth perhaps lower miles from your customers translating into lower exposures. Then also, if that would be concurrently translating into some elevated losses, perhaps this quarter, in fourth quarter and then in first quarter as well?

David Michelson

Relative to elevated losses, and again this is anecdotal. I've not heard anything from our claims department that the weather conditions have had an unusual impact on fourth quarter of '13 losses. First quarter '14 losses, I'll comment on with our next quarterly earnings release.

Relative to exposures, in our trucking business we do (stoppage) per miles traveled, but those audits of miles are done after the policy expires, and of course we have an audit premium to cover that exposure. So I don't have any of that information in yet, and haven't heard anything from our product managers or general managers regarding less miles being driven. Obviously, roads are closed. It wouldn't surprise me. If mileage is down, then we charge our premium based upon the miles traveled. So we are getting the right premium for the road exposure.

Vincent D'Agostino - KBW

Okay. So I guess another way to phrase that is, let's say in second quarter of '14, things kind of spring back a little bit as far as the audit for the full year. There should be no net exposure impact there, right?

David Michelson

Over any rolling fourth quarter period, you're going to have ups and downs, whether it's economy or whether it's weather conditions. I will tell you and I have said this before that we underwrite the financial strength of our trucking operations, that's one of the things we do. So we believe we got a financially healthy group of large trucking risks, and I'm not hearing anything that their businesses are suffering. Our exposures year-over-year are up mid single-digit on our trucking operations, and I think that's a good sign. Their businesses are healthy, and they are probably even doing a few acquisitions along the way of some of the smaller trucking companies.

Vincent D'Agostino - KBW

Okay, good. And then, the expense ratio I think was the lowest rate. At least it was one of the lowest that you have reported since going public, and so, you guys noted the impact of some of the variable commission expense matter of thing and then the scale benefit. I am just curious if there was anything else moving around in terms of cost saves that we might be thinking about contributing to the lower expense ratio in the quarter?

David Michelson

No. The two biggest contributors to our expense ratio are acquisition expense, which is the commission we pay to our agents as well as our -- what we say people to look here, and we already stated that the variable comp took ahead as a result of the underwriting results. And when our mix of business varies quarter-to-quarter, let's say towards alternative risk transfer, there was some slightly lower acquisition cost in that. Commissions are usually, typically a little lower in ART than other product lines, but those are the two prime biggest contributors to our ongoing expense ratio.

Vincent D'Agostino - KBW

Okay. And then just one last one and I will re-queue. If I go back to the second quarter transcripts or second quarter '13 for National Interstate AFG, one of the things that was mentioned with the reserve study mid-year was that it was conducted between both National Interstate and then some actuarial resources from AFG. And I'm just curious if over the course of 2013 in the level of actuarial support provided by AFG, is that changed at all this year relative to past years?

David Michelson

I'd refer you to the Qs and the Ks relative to the detail regarding the actuarial support, obviously where critical accounting policy is in the Qs and Ks. What management does is every quarter we put forth our best representation of the status of the loss reserves, and of loss reserves are estimates. And over our history, we've had modest favorable and unfavorable, reserve development by accident year. And our accident year '10 and '11 is not on a line with what happened to the insurance industry for the commercial auto liability line of business, which went from years and years of modestly favorable development to then modest unfavorable development, and we followed in pattern with that as well. But management will stand behind our reserves and I'll just refer you to the critical accounting policy in the Qs and Ks for more detail.

Vincent D'Agostino - KBW

Okay, perfect. I will hop back in the queue. Thank you.

David Michelson

Thanks, Vincent.

Operator

(Operator Instructions) I am not showing any further questions at this time.

David Michelson

Thank you. We experienced an elevated combined ratio for 2013 as a result of claims severity and prior year development. However, there were several positive actions and results during this year, including new product initiatives that are taking hold, improved rates throughout the business, significant reduction of unprofitable business and continued favorable underwriting expense and investment results.

Thank you for your interest in National Interstate and for joining our fourth quarter call. Have a good day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.

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