National Interstate Corp. ( NATL)

Q3 2010 Earnings Call

November 3, 2010 10:00 am ET

Executives

Julie McGraw - VP & CFO

David Michelson - President & CEO

Gary Monda - VP & CIO

Analysts

Robert Paun - Sidoti

Meyer Shields - Stifel Nicolaus

Adam Klauber - Macquarie

Alison Jacobowitz - Banc of America Merrill Lynch

Meyer Shields - Stifel Nicolaus

Presentation

Operator

Good afternoon ladies and gentlemen and welcome to the National Interstate Corporation 2010 Third Quarter Conference Call. My name is Chris and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session 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

Thanks Chris. Certain statements during this call are not historical facts and maybe 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 our 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 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 operations to net income is included in our earnings release.

I’d now like to turn the call to Mr. Dave Michelson.

David Michelson

Thank you, Julie. And good morning and thank you for joining today’s conference call. The fourth quarter numbers looked very different to all of us, since this is the first time that Vanliner was included in our quarterly results. Since the acquisition was effective July 1, we do reflect the fourth quarter of Vanliner activity. However, the 2010 third quarter is not necessarily a representation of the quarterly impact we expect to see from Vanliner in 2011.

The initial income result from purchase accounting associated with the acquisition added $0.03 per share to our net income and although the addition of the Vanliner business has affected the quarter-over-quarter underwriting ratio comparisons, the overall impact on earnings in the Vanliner underwriting results was breakeven for the 2010 third quarter and that was consistent with our expectations.

The addition of Vanliner caused unusual variances in the underwriting expense ratio and the loss in LAE ratio. Specifically, the 2010 third quarter underwriting expense ratio was favorably impacted and the loss in LAE ratio was unfavorably impacted from the initial fair value reporting of the Vanliner balance sheet.

However, even though the ratios were affected, the Vanliner impact on consolidated underwriting earnings was at breakeven. As we look ahead in 2011, we did not expect the Vanliner business to cause operating ratio variances at the same level in future quarters, but we do expect the business to be accretive to future earnings.

From top-line perspective, Vanliner added $28 million to gross premiums written for the third quarter. This Vanliner written premium was in line with our expectations and consistent with historical third quarter moving and storage volume. The moving and storage business normally has higher written premium in the first and third quarters of the year and as such we do not expect Vanliner to contribute the same level of top-line growth in the 2010 fourth quarter.

Vanliner was a significant transaction for us and because it has affected the period-over-period comparisons of our financial results, it is difficult not to mention it throughout this discussion. However as we all know we have a few other areas to talk about. Our 2010 third quarter net income of $0.46 per share included $0.40 per share of earnings from operations. Our businesses excluding Vanliner are maintaining a combined ratio of approximately 90% for the first nine months of 2010 and slightly higher in the third quarter.

Our third quarter combined ratios are normally elevated due to seasonality related to our claims. For the past three years our third quarter combined ratios have been in the mid 90s. For the 2010 third quarter and for the first nine months, our underwriting expense ratio and exclusive of Vanliner was 22.5% and 24.4% respective.

Costs related to the acquisition incurred mostly in the first two quarters and variations in the mix of business written head for us quarterly variations in the 2010 underwriting expenses. However, our expense structure is relatively unchanged and we expected that our underwriting expense ratio will continue to run in the mid 20s as it has for the past several years.

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