Baldwin & Lyons Incorporated (NASDAQ:BWINA)
Q4 2015 Earnings Conference Call
January 28, 2016 11:00 AM ET
Han Huie - MWW Group
Joe DeVito - President, CEO and COO
Pat Corydon - EVP and CFO
Good day and welcome to the Baldwin & Lyons Inc. Fourth Quarter 2015 Earnings Conference Call. Today's conference is being recorded.
At this time, I'd like to turn the conference over to Ms. Han Huie of MWW Group. Please go ahead.
Thank you. And thank you all for joining us this morning for the Baldwin & Lyons fourth quarter and yearend 2015 conference call. If you did not receive a copy of the press release, you may access it online at the Company's Web site which is www.baldwinandlyons.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 Web site 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 Baldwin & Lyons believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, but 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 Joe DeVito, CEO and President of Baldwin & Lyons and turn the call over to him.
Thank you. And welcome to our conference call covering results for the fourth quarter and full year of 2015. Joining me today is Pat Corydon, Executive Vice President & CFO of the Company. As usual I will provide an overview of the Company's insurance operations with an emphasis on what we achieved during the full year of 2015. I will also give you my assessment of the changes that we have made over the last few years related to our product mix and how we believe that strategy has and will continue to have a positive impact on our results. Pat will follow information related to investment and investment related activity along with some additional commentary regarding the Company's overall finances. Following Pat's comments, we will both be available to answer any questions that you might have.
As indicated in our Press Release, net income for the quarter was $3.5 million equal to $0.24 per share. After tax operating income which excludes investment gains or losses was $4.7 million or $0.31 per share. For the year, net income was 23.3 million and after-tax operating income was 24.1 million, $1.60 per share, a 20% increase over 2014. Cash flow was strong once again a positive 7.4 million for the quarter and 38.2 million for the year.
After the payment of our regular quarterly dividend of $0.25 a share for the quarter and totaling a $1 for the year, book value on 12/31/15 stood at $26.25 representing just under 395 million in shareholders' equity. As I said, Pat will provide more granular investment and detailed financial information during his segment of our presentation.
Direct premium written in all of our insurance subsidiaries was $97.8 million for the quarter about level with the fourth quarter last year. For the full year, it totaled a record $383.6 million the highest in our history. This record came despite an over $31 million reduction from discounted products more on that topic later.
Net earned premium for the quarter was $66 million. For the year, earned premium also set a new record coming in at $263.3 million and offsetting a 43% reduction year-over-year in the reinsurance segment’s earned premium.
Underwriting results for the quarter were good with the combined ratio of 94.8% including fees generating $3.5 million in underwriting income. For the year, the underwriting results were excellent producing a combined ratio of 90.8% with fees thereby generating 24.5 million in pre-tax underwriting income, an increase of 23% over last year.
As followers of our company know, we have undergone a significant transition during the last four years beginning with the decision to terminate all of our property reinsurance programs with actions designed to do so initiated during the second half of 2011 and continuing through 2015.
During 2015 as well, we also decided to withdraw from the personal auto market, a decision based upon deteriorating results, the continuing advertising and technology arms race, the commoditization of all products within that space, priced emphasized in virtually every ad and the coming significant disruptions that will be created by driverless vehicle. These decisions along with others including more strategic usage of reinsurance structures were designed to significantly reduce the inherent volatility of these products most particularly property catastrophe reinsurance.
As a result, since December 31, 2011, discontinued products have reduced our in-force premium by overall $111 million despite that we have attained record written and earned premium levels by increasing the in-force premium in our historical core lines of business as follows; independent contractor has increased by 36.3 million or 66%; transportation workers’ compensation by 60.3 million, 79%; fleet trucking by 36.6 million, 56%; public transportation by 15.6 million, 170%. Overall, wheels or commercial transportation has increased by 148.8 million equal to in-force premium growth of 72.2% in the last four years.
From a gross premium written standpoint during that same period despite the planned reductions, we increased premium every single year. The result was even including the terminated program, which eliminated over $74 million in premium volume, an increase of 12.4%, representing a gain of approximately $42.3 million since 2012. From an underwriting income perspective, we have accomplished much as well, replacing essentially all of the income that came from the discontinued products while as I said, at the same time eliminating the significant year-to-year volatility, especially related to the now terminated property catastrophe reinsurance product.
To illustrate my point and validate our decision, I will, hopefully for the last time, reflect back on the worst catastrophe year in history, 2011, and compare it to 2012, the starting point for all of my prior comparisons. In that historical worst year of 2011, our Company sustained underwriting losses of almost $45 million. The very next year, even as we were reducing our exposure to property losses our underwriting profit was just under 26 million, a swing of over $71 million. However, on a going forward basis, the property reinsurance products have diminished from a higher 75% of our underwriting profit in 2012 to virtually nothing in 2015. I’d say good rhythm.
Therefore, adjusting for the impact of those discontinued products and looking at the four outlined in my previous comments related to our continuing core wheels business, the underwriting profit excluding fees has gone from 5.8 million in 2012 to 24.3 million in 2015, an increase of 320%. I mentioned all of this to emphasize that we have completed this four year transition of reducing volatility, while increasing premium, achieving very good combined ratios, maintaining underwriting profit, and improving our potential for predictable, steadily improving operating results. All of this has been accomplished while maintaining our posture of extremely conservative reserving.
As always, our A plus rating and pristine balance sheet are both our root and focus going forward. Pat will touch upon this in more in his comments to follow. Pat?
Thanks Joe. Investment income for the fourth quarter continues to progress as expected, reflecting portfolio changes initiated during the past 18 months and consistent with the improvements reported for the first three quarters of this year. This quarter’s pretax net investment income at nearly $3.8 million is the highest quarterly level since the fourth quarter of 2009 and represents an improvement of 45% over the same quarter in 2014. For the year, pretax investment income has increased 38% over that reported in 2014.
After-tax investment income increased by slightly lower percentages, 40% quarter-on-quarter and 32% year-over-year, reflecting the tax rate differentials as the mix of securities held has changed. This improvement reflects actions initiated to increase both interest and dividend yields on our invested assets, while maintaining superior quality and liquidity and to take maximum advantage of our continuing positive cash flows. Over the past year, the average contractual life of the fixed maturity and short-term investment portfolio has remained level at 4.7 years or less, as has the affective duration of the portfolio at approximately 2.2 years. While the average credit quality has remained high, at approximately A plus.
During the quarter, the average after-tax yield on bonds purchased was level with the average yield on securities maturing or sold, in line with our experience over the past year. While we continue to evaluate the composition of our investment portfolio that will undoubtedly make adjustments as market conditions evolve, we expect that the more favorable investment income results will continue. Of course, total investment returns include more than just interest and dividends received. During the fourth quarter, equity markets were mixed overall but slightly positive. As everyone is aware, a number of national and international factors resulted in generally higher short-term interest rates during the fourth quarter, although longer dated rates rose by lesser amounts.
With the resulting negative impact on the valuation of bonds held, particularly for below investment grade corporate bonds, asset backed securities and commercial mortgage backed securities. Against this backdrop, the Company’s limited partnership investments produced a small profit equal to about 0.5% of the aggregate beginning market value for the quarter. For the year, limited partnerships have generated a 2.1% overall loss in value well below the nearly 10% increase in value reported in 2014. Direct security trading activity for the fourth quarter generated $1.6 million in net losses mostly from bond disposals as portfolio allocations were adjusted. For the year-to-date, direct trading has produced gains of $3.7 million which is far less than the $10.5 million gain reported in 2014 when market conditions were more favorable and provided greater opportunity to realize trading days.
Again, in line with general market conditions, unrealized gains increased by $3.1 million before tax this quarter with equity security valuation gains of 6.9 million coming off of a particularly low September 30 valuation, partially offset by bond valuation declines totaling $3.1 million. For the year, overall unrealized gains decreased by a total of $19.9 million with 18 million of this attributable to equity securities. As Joe noted earlier, operating cash flow for the fourth quarter was a strong $7.4 million bringing the 2018 annual total to over $38 million well ahead of the 30 million generated in 2014. The Company has now achieved positive operating cash flow in 24 of the past 26 quarters totaling over $300 million.
Prior year loss developments were once again favorable this quarter and well within historical ranges. Claim settlements during the fourth quarter produced a consolidated prior year reserve savings of approximately $1.3 million bringing the year-to-date savings to 10.5 million. This annual development is equal to about 3.6% of year-end 2014 net loss reserves and had the effect of reducing 2015 calendar year loss ratio by 4 points. The 2015 total development in terms of dollars, percent of prior year reserves and impact on current year loss ratio are virtually identical with 2014 results. Although the components of the development savings vary in line with changes in our product mix, the consolidated development for 2015 is composed entirely of savings from our Property & Casualty Insurance segment, net of a small deficiency from the reinsurance segment which reflects the run-off of all property reinsurance business. In the 2014 period, $3.7 million of the savings was attributable to reinsurance assumed.
I'll remind listeners that we posted our Press Release and quarterly financial statements on our Web site at baldwinandlyons.com. Click on the Investor Relations page and select News from the News & Market Data dropdown menu. We've also updated all of the quarterly financial data on our Investor Relations Web site under the Financial Information dropdown tab.
This concludes our formal presentation. At this time we would be happy to answer any questions listeners may have.
Well thank you for listening and for your interest in our company and we look forward to reporting results with the opening quarter of 2016.
That does conclude today's conference. Thank you for your participation.