National Interstate's (NATL) CEO Tony Mercurio on Q2 2016 Results - Earnings Call Transcript

| About: National Interstate (NATL)

Call Start: 10:00

Call End: 10:08

National Interstate Corporation (NASDAQ:NATL)

Q2 2016 Earnings Conference Call

August 3, 2016 10:00 AM ET

Executives

Tony Mercurio - President and CEO

Julie McGraw - VP and CFO

Gary Monda - VP and Chief Investment Officer

Analysts

Operator

Good day, ladies and gentlemen. Welcome to the National Interstate Corporation 2016 Second Quarter Conference Call. My name is Andrea, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct the question-and-answer session period, following the Company's prepared statements. [Operator Instructions] As a reminder, this call is being recorded today for replay purposes.

Your hosts for today’s call are Mr. Tony Mercurio, 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'd now like to turn the call over to Ms. McGraw to begin the presentation.

Julie McGraw

Thank you, Andrea. Certain statements made during this call may be forward-looking. The factors that could cause actual results to differ materially from the forward-looking statements are [technical difficulty] in our earnings release and SEC filings, including our annual report on Form 10-K and our quarterly report on Form 10-Q.

Certain financial measures that we use on this call such as 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 relations Web site at invest.natl.com. Any forward-looking statements by us speak only as of the date on which they were made, and we assume no obligation to publicly update them.

I'll now turn the call over to Tony to review our second quarter results.

Tony Mercurio

Thank you, Julie. Good morning and thank you for joining our 2016 second quarter earnings call.

Before I discuss the results, I'd like to highlight the press release we issued on July 25, where we announced that we entered into a definitive agreement with Great American Insurance Company, a wholly-owned subsidiary of American Financial Group, in which Great American will acquire the approximately 49% of the Company's issued and outstanding common shares that Great American does not presently own.

The merger is an all-cash transaction that values the Company at approximately $660 million, including assumption of debt in connection with the merger. Under the terms of the proposed merger, National Interstate shareholders will receive $32 in cash for each share of National Interstate common stock. In addition, National Interstate will pay a special dividend of $0.50 per common share upon the closing of the merger.

Based upon the unanimous recommendation of a special committee, which was comprised of independent directors not affiliated with Great American and advised by its own financial and legal advisors, our Board, other than directors affiliated with Great American who recuse themselves, unanimously approved the proposed merger.

The special committee and the Board, each recommend that National Interstate's shareholders adopt the merger agreement. We’ve come to know AFG and Great American well over the last 26 years and we deeply value our long-standing relationship with them. We're excited about our future as a wholly-owned subsidiary within AFG's family of companies.

Now on to the results. Yesterday, we reported our results for the second quarter and first six months of 2016. Highlights for the quarter included net income of $0.45 per share, which contributed to our net income of $0.80 per share for the first half of 2016, as well as a calendar and accident year combined ratio of 96% for the quarter.

Operating earnings, which excludes realized gains and losses from investments and transaction costs related to the proposed merger, were also strong at $0.51 per share for the second quarter and $0.90 per share for the first six months of 2016.

Our net investment income for both the 2016 second quarter and year-to-date are running ahead of the same period last year, primarily due to an increase in invested assets. More significantly, improved underwriting results are also favorably impacting our operating earnings.

For the past several years, we’ve been talking about our actions to improve our underwriting results. Specifically, we’ve had an intense focus on rate adequacy and risk selection, especially for the commercial auto liability coverage, which has been under pressure for the entire industry in recent years. We’ve been obtaining rate increases on renewed business since 2012, which for the first six months of 2016 averaged approximately 5%.

In addition, continuous enhancements to claims and risk management tools and disciplines, as well as managing reserving practices, have occurred. These actions are having the impact on our underwriting results that we’ve been expecting.

For the 2016 second quarter and first six months, our combined ratio has shown improvement, and we’ve had no impact in 2016 from prior-year claims reserve development. The calendar and accident year combined ratio of 96% for the 2016 second quarter improved our year-to-date combined ratio to 97.1%.

While profitability is our primary focus, we’re also maintaining our top line. Gross premiums written for the 2016 second quarter of $185.2 million were consistent with the same period last year. For the 2016 first six months, we reported gross premiums written of $349.9 million, a 3% increase over the comparable 2015 period.

Thus far in 2016, all of our business components have shown modest growth. While the rate increases are contributing to the growth, we’ve also seen exposure growth in several of our products.

Growth in the transportation component occurred in several products including primary and excess trucking, ambulance, and crane and specialized heavy haul. In addition, growth in the alternative risk transfer component was spread among several programs, with customer retention in our ART component remaining strong.

At this time, Julie, Gary, and I'll open the call for questions.

Operator

[Operator Instructions] And I’m not showing any questions in queue at this time. I'll go ahead and turn the call back over to Tony Mercurio.

Q -

A -

Tony Mercurio

Thank you, Andrea. We remain pleased with the direction of the business. Our actions have improved the underwriting results and we recognize that we’ve more work ahead of us to achieve our targeted results. Thank you for participating on today’s call.

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 great day.

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