Executives
Julie McGraw - VP & CFO
David Michelson - President & CEO
Analysts
Robert Paun - Sidoti & Company
Meyer Shields - Stifel Nicolaus
National Interstate Corporation (NATL) Q2 2010 Earnings Call August 4, 2010 10:00 AM ET
Operator
Good day ladies and gentlemen and welcome to the National Interstate Corporation 2010 Second Quarter Conference Call. My name is Kady and I’ll be your coordinator for today. At this time all participants are in a listen-only mode. We will be conducting a question-and-answer period following the Company’s prepared statements. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. You’ll host 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 this presentation. Please proceed.
Julie McGraw
Thank you, Kady. Certain statements made during this call are not historical facts and may be considered forward-looking statements and are based on estimates, assumptions and projections, which management believes are reasonable, but by their nature are subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for forward-looking statements.
The factors which could cause actual results to differ materially from those suggested by such forward-looking statements include but are not limited to those discussed or identified from time to time in National Interstate's filings with the Securities and Exchange Commission including the Annual Report on Form 10-K and quarterly reports on Form 10-Q. We do not promise to update such forward-looking statements to reflect actual results or changes in assumptions or other factors that could affect these statements.
Net earnings from operations is a non-GAAP financial measure which sets aside items that are generally not considered to be a part of ongoing operations such as realized gains or losses on investments. We believe this non-GAAP measure to be a useful tool for analysts and investors in analyzing ongoing operating trends. As such it will be discussed for various financial periods during this call. A reconciliation of net earnings from net earnings from operations from net income is included in our earnings release.
Mr. Dave Michelson will now provide comments on our financial results.
David Michelson
Good morning and thank you for joining today’s conference call. The last several months have been every exciting for our company. We experienced our first notable top-line growth in several quarters with an increase in gross premium written but 10% for the 2010 second quarter and we have had very encouraging initial month since completing Vanliner acquisition which was effect in July 1st. Our 2010 second quarter earnings were solid just slightly below expectations.
We recorded net income for 2010 second quarter of $0.39 per share bringing our year-to-date net income to $18.2 million or $0.94 per share. Both our trailing last year but only slightly behind what we thought would be at the half way point of 2010. We experienced combined ratios throughout 2009 in the 180s. We knew that this was not sustainable given the low single-digit rate decreases which occurred in our commercial businesses in each of the past several years. In our view all of you achieved in combined ratios in the mid to up 80s is a realistic and acceptable outcome.
Our combined ratio for the first half of 2010 of 89.3% is within that acceptable range. However the combined ratio of 92.1% for the 2010 second quarter was higher than we would have like to see reflecting claims cost that were several percentage points higher than we have experienced in previous years.
We often cautions that our formally loss and loss adjustment expense ratios are subject to fluctuations due to the policy loss limits on many of the commotion policies that we write. In addition there is less predictability in our quarter-to-quarter results given our nitch product focus. We closely monitor our 30 plus products and have not identified any over writing reasons to explain our elevated 2010 second quarter loss ratio. As we have done in the past we react timely if any actionable items related to our claims cost are identified.
Products in our Personal Lines component have contributed some what to the higher second quarter losses. Earlier in the year we initiate underwriting actions and taken rating release for products in this component which will take a couple of quarters to fully impact results.
Expenses and investment income the other components of net income are in acceptable rangers. We continue to keep our expense in line as indicated by the 25.4% underwriting expense ratio for the first six months of 2010. We are also pleased with Vanliner acquisition has not contributed significantly to our expenses. Excluding the Vanliner related cost our underwriting expense ratio was 24.8% for both 2010 second quarter and the first six months.
Recurring investment income was flat compared to last year. However including realized investments gains we are nearly 15% ahead of the first six months of 2009. This is an excellent result given the continued low interest rate environment and the liquidity that was required for the Vanliner acquisition. In anticipation of the Vanliner closing we schedule redemptions to occur during the 2010 second quarter and so securities which generated the proceeds for the purchase. The quality and tax equivalent yield of the portfolio was maintained and the portfolios unrealized gain position improved during the second quarter.
As I noted earlier our top-line was up 19% for the 2010 second quarter and 3% year-to-date. In a sense we feel like this is our second consecutive quarter of top-line growth because the 2010 first quarter comparisons were impacted by two non-recurring items. We continue to see very competitive pricing in the commercial markets. Our traditional commercial products have benefited this year from increased marketing efforts and stabilization in the transportation industry that has limited the erosion of exposure of our exposure base, which was a significant factor in 2009. Additionally, in our alternative risk transfer component we continue to retain nearly 100% of our customers at flat rates and continue to attract new business.
For the 2010 second quarter our four primary components Alternative Risk Transfer, Transportation, Hawaii and Alaska and Specialty Personal Lines were all ahead in the 2009 second quarter. Almost significant growth for the quarter came from ART and Traditional transportation. The growth in the ART component was attributable to our continued high customer retention rates and we continue to attract new customers to our exciting group and larger large account captive programs.
As we mentioned in the first quarter we have stopped up our marketing efforts related to transportation insurance. Some examples include additional distribution sources, agency incentives and increased focus on top tier passenger transportation and truck accounts.
We are off to a very nice start with the integration Vanliner. Our belief that the National Interstate and Vanliner businesses were similar in many regards is now being confirmed. I am especially pleased with the professionalism and collaborative approach that the employees of both companies have demonstrated. We have purchased a strong business with knowledgeable employees and a world customer base and we are confident that the combined business would be much stronger.
We have already seen an immediate benefit from the combined entities, in July AM Best upgraded Vanliner rating to A excellent. In the near future we expect to introduce group and large account captive options for our new moving and storage customers.
At this time, Julie, Gary and I would be happy to answer any questions that you may have.
Question-and-Answer Session
Operator
(Operator Instructions) The first question comes from the line of Robert Paun from Sidoti and Company. Please proceed
Robert Paun - Sidoti & Company
Good morning
David Michelson
Good morning Robert
Robert Paun - Sidoti & Company
Dave you spoke about the higher claim losses and some of the personal specialty business. I think you also mentioned rate increasing in that line. What were the rate increases in that business in the quarter?
David Michelson
We've already taken a couple rate increases. First of all what our Specialty Personal Line component consist primarily of recreation vehicle that’s been a product we've been since 1996. And then more recently the commercial vehicle product which really just started to grow in 2009 that's when we started to having some meaningful earned frame coming in with more improvement in 2010. In the RV product we have an ongoing regiment of individual state rate revision reviews, at a coverage level, at various other rating factors. And so there is an ongoing set of rate revisions for RV that happens every year. And I would characterize those generally speaking as low to high single digit increases just generally speaking. And that’s we typically see with RV, typically rate revisions to keep up with inflation. And then if there is any states loss ratio percolates that would generate a higher rate increase.
When it comes to the CV again the earned premium just started to get to a meaningful level where it really could be analyzed and any kind of detail towards the end of '09 into 2010. So a number of things happened in the CV. First of all our biggest state by far Texas we've already taken one rate increase in Texas, with two more scheduled for the second half of the year. Another state to do business in is California, rate increases schedule there. And then we've also pull our CV product into a new technology platform which really gives us the added advantage of being able to more automated underwrite submissions as they come in. So that risk characteristics that maybe in the past could have easily either got in through or got in through maybe our slightly elevated weight level.
Some of those risk characteristics are now being caught by this automated fry end and being converted into declarations versus account that maybe would have got written back in 2009. So the really nice impact on the commercial vehicle product of this and it's just begin starting to materialize in the last 60 days is we're already seeing a material shift in our business mix all from higher limits to some lower limits, from larger vehicle units to smaller vehicle units in terms of the weight and those types of shifts along with or more even geographic spread across the states to writing business.
So all those for me are very positive trends that we're seeing in just in a vary short amount of time since we've taken some rate action in CV in addition to the new business ship ratios that we monitor which were always an indicated of higher position in the marketplace. We've seen a meaningful drop-off in our new business ship ratio which was exactly what we expected and what we wanted to achieve. So in my view the front end underwriting actions and the rate changes we've taken in CV is getting us the immediate impact we're looking for. But as you know rate increases takes some time to walk through earn premium which is going to be the case going to the third and fourth quarter of 2010.
Robert Paun - Sidoti & Company
Yup, thank you that was helpful. Also, the growth in the transportation business was pretty strong in the quarter. You spoke about some marketing efforts there. Do you also think it could have been a factor of the general pick-up in the transportation activity? Maybe you could talk a little bit more on that business?
David Michelson
Sure. In terms of the pick-up in the transportation industry and I think you might be referencing just the impact of the economy on exposures?
Robert Paun - Sidoti & Company
Yes, correct.
David Michelson
Sure. Well in 2009 I kind of -- I'm evaluating the economy based up some transactions we look at and I really bucket our view into the first half of 2009 the second half of 2009 and the first half of 2010. In the first half of 2009, we lost meaningful premium in our transportation business as a result of the economy. We saw a slight improvement in the second half of 2009. I would characterize it as maybe about a 20% improvement or so in the exposure erosion but with still erosion. And then in first half of 2010 we're still seeing yet more exposure erosion but it's dropped off considerably from the first half of 2009.
So we're still there. But not to the same degree and as we monitor truck freight being moved and railroad freight being moved year-over-year comparisons on a month-by-month basis are showing improvement '09 versus 2010 which we anticipate is going to show up in our premium as well. We're also not seeing a whole heck of lot of exposure drop-off although a little bit but not nearly as much as I imagined some of our competitors are feeling. We're not seeing as much of that in our captive products because again we financially underwrite those customers' and they're typically in more stable class of customer than many of the operators that buy their insurance in the traditional marketplace.
Robert Paun - Sidoti & Company
Okay. Thanks, that’s all I have for now.
David Michelson
Thanks Robert.
Operator
(Operator Instructions) Your next question comes from the line of Meyer Shields from Stifel Nicolaus. Please proceed.
Meyer Shields - Stifel Nicolaus
Good morning.
David Michelson
Good morning Meyer.
Meyer Shields - Stifel Nicolaus
Was there a disportionate contribution to be higher than expected losses from the new CV products relative to RVs?
David Michelson
I would tell you that the CV products in terms of what I was expecting to see, that yeah, I would characterize the impact from CV to the loss ratio is being more impactful to our overall consolidated than the RV. And quite honestly with a new product where the earn frame we're just starting to roll-in if there was a product where I would have expected it to curve one over the other it would have been CV versus RV. Yes, as we've been in the RV business for obviously for much longer.
Meyer Shields - Stifel Nicolaus
Okay, that’s helpful. Two quick modeling questions if I can will include Vanliner. I was hoping if we get a sense as to I guess to the size and current yield on its investment portfolio?
David Michelson
Sure. In terms of the size we've taken out about $400 million, keep in mind that we liquidated little over a 100 million to buy the company. So combined we'll have a portfolio in the $900 million to $1 billion range. In terms with the yields on that 400 million that we took on we paid market prices for it. So we're still in the process of analyzing that portfolio. But the yield will be slightly lower than our current portfolio is running at.
Meyer Shields - Stifel Nicolaus
Okay, that’s helpful. And just one last question on the reserve, the release in this quarter was that over discount?
Julie McGraw
No. It was quite across the lines and across the accident areas.
Meyer Shields - Stifel Nicolaus
Okay, great. Thanks so much.
Operator
(Operator Instructions) And you have another follow-up question from Meyer Shields. Please proceed.
Meyer Shields - Stifel Nicolaus
And just one for my list. What's the comparable GAAP expense ratio for Vanliner?
David Michelson
Expected GAAP ratio?
Julie McGraw
I prefer not to give one now, right now to be honest with you Meyer from the standpoint we haven't had a good opportunity to take a look at all their expenses and detail until their final balance sheet is provided to us at the end of the 60 day period. But it shouldn't be very -- it shouldn't be significantly different than our.
David Michelson
I will add though that when you look at the statutory results one of the attractions for us to Vanliner was their distribution source which is the train's protections agency. And they work for -- also at a lower commission rate than non-affiliated agents. When you look at their statutory expenses ratios up against ours, they are quite comparable. So the input we're bringing in our organization that was just going blot our expenses ration once we get to a run-rate positive acquisition cost. Yeah I conclude with Julie's comment about not applying on the GAAP, but the statutory expenses ratios are kind of in line with where we've been.
Meyer Shields - Stifel Nicolaus
Okay.
Julie McGraw
We'd only anticipated elevating because of them.
Meyer Shields - Stifel Nicolaus
Right, okay, now that's helpful. And Dave am I interpreting your comments from earlier where you talked about reasonably felt that it take few quarters for the higher than expected losses in your repairs through underwriting actions. Does that mean that we should expect slightly higher command ratios for the next couple of quarters as if issue is resolved?
David Michelson
I don’t know that -- I would characterize it as expect, because again one of the things we've done on the CV product with a new platform is we've got the automated underwriting screenings that are in place. So that has an immediate effect on risk selection. Obviously rate revisions earned in over time. But also in other components of our business, our business is lumpy. I mean if you look at our earnings per share over the last five years by quarter, you'll find a pattern where in the first and fourth quarters we typically but not always, we typically have some stronger earnings than in the second and third. And that often time it's because the vehicle we insure run more in the second and third quarter. But I won't automatically conclude, I know I am not automatically concluding that the couple products that we have identified and addressed that those lose ratio issues on a year-to-date basis necessarily will co-relate into third quarter elevations also. I'm not drawing that conclusion.
Meyer Shields - Stifel Nicolaus
Okay. No difference mix rate, understood. Is the pass code was hail make any appreciate able difference in results?
David Michelson
I'm sorry what make a difference?
Meyer Shields - Stifel Nicolaus
Hail. I mean looking at sort aggregate strong data.
David Michelson
We had -- the RV, the elevation in the first half of the year to come degree got bumped up a bit by some of the flood losses in Tennessee. So there was a little bit of weather related activity that did hit the RV product in the first half of the year.
Meyer Shields - Stifel Nicolaus
Okay. You've been very patient and helpful. Thank you.
David Michelson
No problem.
Operator
(Operator Instructions) At this time I am sure we have no further questions. I'd like to now had the call back over to Md. McGraw for closer remarks.
David Michelson
And actually Ms. McGraw is handing over to me, this is Mr. Michelson. We'll vary update about our business. At National Interstate we're always doing something exciting which we will call business as usual. The growth of experience so far in 2009 and of course with the Vanliner acquisition they provided a boost for us. So we expect we'll have long-term positive implications for our company. We thank you again for your interest in National Interstate and for participating in our conference call.
Operator
Ladies and gentlemen thank you for your participation in today's conference call. You may now disconnect and have a wonderful day.
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