|
Protective Insurance Corporation
|
November 3, 2020
|
|
Unaudited Third Quarter Financial Statements
|
Investor Contact: John R. Barnett
|
|
investors@protectiveinsurance.com
|
|
|
(317) 429-2554
|
PROTECTIVE INSURANCE CORPORATION ANNOUNCES RESULTS FOR THE THIRD QUARTER AND NINE MONTHS
Carmel, Indiana, November 3, 2020—Protective Insurance Corporation (NASDAQ: PTVCA, PTVCB) today reported third quarter
net income of $3.3 million, or $0.23 per share, which compares to net loss of $0.7 million, or $0.05 per share, for the prior year’s third quarter. For the first nine months of 2020, net loss totaled $7.5 million, or $0.53 per share, which compares to
net income of $3.6 million, or $0.24 per share, for the prior year period.
Highlights for the third quarter and first nine months
of 2020 include:
| • |
Accident Year combined ratios were 100.0% for the third quarter of 2020 and 101.9% for the first nine months of 2020, an improvement of 7.0 points and 5.8 points over the
comparative 2019 periods.
|
| • |
Book value per share increased $0.54 during the third quarter due to valuation gains on our
investment holdings, including gains recognized through comprehensive income, and positive income from core business operations. Book value per share was $24.18 at September 30, 2020.
|
| • |
Net premiums earned increased to $117.9 million in the third quarter of 2020 from $110.3 million in the third quarter of 2019, primarily as a result of rate increases, existing business exposure growth and new business policies sold in our independent contractor commercial automobile products.
For the first nine months of 2020, net premiums earned were $325.2 million
compared to $335.9 million for the 2019 period. The reduction reflects actions to improve underwriting profitability and the impact of the COVID-19 pandemic.
|
| • |
Realized and unrealized investment gains recognized through the
statement of operations and comprehensive income were $7.6 million (pre-tax) for the third quarter of 2020. For the first nine months of 2020, realized and unrealized investment losses totaled $10.5 million (pre-tax).
|
Jeremy Johnson, Protective’s Chief Executive Officer, said: “I am pleased
with the sustained year over year improvement in our core business. Our trucking clients continue to see strong demand, driving our top line premium growth, and the team at Protective has executed well to balance necessary margin improvement with
client retention and acquisition. We are well positioned to create value for all our stakeholders.”
Income from core business operations, before federal income tax, was $5.1 million for the third quarter of 2020 compared to a loss, before federal income tax, of $1.1 million during the third quarter of 2019. Income from core business operations, before federal income tax, was $13.0 million for
the first nine months of 2020 compared to a loss, before federal income tax, of $4.6
million for the 2019 period.
- 1 -
Net premiums earned for the third quarter of 2020 increased to $117.9 million, up 6.9% compared to the prior year period. Net premiums earned for the first nine
months of 2020 decreased to $325.2 million, down 3.2% compared to the prior year period. The higher premiums in the third quarter of 2020 were primarily the result of
increased premiums related to rate increases, existing business exposure growth and new business policies sold primarily in our independent contractor commercial automobile products. The lower premiums for the first nine months of 2020 were
primarily the result of declines in premiums within our commercial automobile products, specifically public transportation, as a result of COVID-19 due to a reduction in miles driven, which are the basis for premiums we receive, as well as an overall
reduction in public transportation units insured. The decline in public transportation was partially offset by increased premiums related to rate increases, existing business growth and new business policies sold primarily in our independent
contractor commercial automobile products.
Underwriting operations produced an accident year combined ratio of 100.0% during the third quarter of 2020; an improvement when compared to an accident year combined ratio of 107.0% for the prior year period. Excluding
prior period development, the third quarter of 2020 accident year loss ratio was
71.6% which was a 5.2 point reduction from the third quarter 2019 loss ratio. The
reduction in the loss ratio and combined ratio reflects actions taken to improve underwriting results, including non-renewal of unprofitable business as well as significant rate increases in commercial automobile. Given ongoing profitability
challenges, we have discontinued writing new public transportation business effective the fourth quarter of 2020.
Prior period loss development was $0.3 million unfavorable for the quarter compared to $0.1 million unfavorable for the prior year quarter. For the third quarter of 2020, we experienced unfavorable development in excess automobile
liability and public transportation primarily for accident year 2018, partially offset by favorable loss development in our occupational accident line of business for accident years 2018 and 2019.
In our commercial automobile portfolio, we attained weighted average rate increases of 17.9% on premiums available for renewal during the third quarter of 2020. Including other lines of business, the rate change for the quarter
totaled 8.0%, which is well above our view of loss cost trends and is contributing to our underwriting results improvement.
Commercial automobile products covered by our reinsurance treaties from July 3, 2013 through July 2, 2019 are subject to an unlimited aggregate stop-loss
provision. Currently each of these treaty years is reserved at or above the attachment level of these treaties. For every $100 of additional loss, we are responsible only for our $25 retention. Commercial automobile products covered by our
reinsurance treaty from July 3, 2019 through July 2, 2020 are also subject to an unlimited aggregate stop-loss provision. Once the aggregate stop-loss level is reached, for every $100 of additional loss, we are responsible for our $65 retention.
This increase in our retention compared to recent years reflects the combination of (1) a decreased need for stop-loss reinsurance protection resulting from a significant decrease in our commercial automobile subject limits profile, (2) a higher cost
for this coverage and (3) our confidence in profitability improvements given the limit reductions and rate increases on our commercial automobile products. Due to continued rate achievement in commercial automobile, significant improvements in mix
of business and reductions to our limits profile, we have decided to non-renew this treaty for policies written on and after July 3, 2020.
Net investment income for the third quarter of 2020 decreased 18.2% to $5.5 million compared to $6.7 million in the prior year period. The decrease reflected lower interest rates earned on cash and cash equivalent balances in the current period,
partially offset by an increase in average funds invested compared to the third quarter of 2019. Credit quality remains high with a weighted average
rating of AA-, including cash. For the first nine months of 2020, net investment income decreased 1.7% to $19.1 million, compared to $19.4 million during the
2019 period, reflecting similar impacts as seen for the quarter comparison of lower
interest rates earned on cash and cash equivalent balances in the current period, partially offset by an increase in average funds invested resulting from positive cash flow, as well as the continued reallocation from equity investments
into fixed income investments.
Book value per share as of September 30, 2020 was $24.18, a decrease of $1.33 per share during the first nine months of 2020, after the payment of cash dividends to shareholders totaling $0.30 per share. Book value per share was adversely impacted by total investment losses of $10.5 million ($8.3 million after tax,
or $0.58/share), the impacts of the updated current expected credit loss (CECL) estimate of $17.0 million ($13.4 million after tax, or $0.95/share) and a deferred tax asset valuation allowance of $1.5 million ($0.11/share).
- 2 -
During the third quarter of 2020, total realized and unrealized investment gains (pre-tax) were $7.6 million. The following table provides details related to our unrealized and realized investment gains (losses) during the three and nine months ended September 30, 2020:
|
Three Months Ended
September 30, 2020
|
Nine Months Ended
September 30, 2020
|
|||||||
|
Net realized losses on investment, including impairments, within statements of operations
|
$
|
(627
|
)
|
$
|
(9,970
|
)
|
||
|
Net unrealized gains (losses) on equity securities and limited partnership investments
within statements of operations
|
771
|
(7,026
|
)
|
|||||
|
Net unrealized gains (losses) on fixed income securities recorded within other
comprehensive income (loss)
|
7,494
|
6,484
|
||||||
|
Total realized and unrealized investment gains (losses) (pre-tax)
|
$
|
7,638
|
$
|
(10,512
|
)
|
|||
We recorded a $1.5 million valuation allowance on net deferred tax assets as of September
30, 2020, a reduction from an allowance of $2.4 million at June 30, 2020. This reduction is a result of improvements in our investment portfolio as well as
operational improvements during the quarter. We considered several factors in assessing the realizability of our net deferred tax assets. The allowance was primarily driven by the decline in investment values and corresponding tax impacts resulting
in the reversal of deferred tax liabilities to deferred tax assets during the first nine months of 2020. We have concluded that a valuation allowance is appropriate for our deferred tax assets not supported by either carryback availability or future reversals of existing taxable temporary differences. Because we have
recorded a three-year cumulative net loss, we were not able to include future projected income in our analysis. This valuation allowance does not change our positive outlook on future company results. As we return to profitability or realize
appreciation in our equity and fixed income portfolios, our valuation allowance will be reduced or eliminated. The valuation allowance does not limit our ability to use deferred tax assets in the future.
Our net income (loss), determined in accordance with U.S. generally accepted accounting principles (GAAP), includes items that may not be indicative of
ongoing operations. The following table reconciles income (loss) before federal income tax expense (benefit) to underwriting loss, a non-GAAP financial measure that is a useful tool for investors and analysts in analyzing ongoing operating trends.
|
Three Months Ended
September 30
|
Nine Months Ended
September 30
|
|||||||||||||||
|
2020
|
2019
|
2020
|
2019
|
|||||||||||||
|
Income (loss) before federal income tax expense (benefit)
|
$
|
3,327
|
$
|
(1,019
|
)
|
$
|
(7,604
|
)
|
$
|
4,445
|
||||||
|
Less: Net realized gains (losses) on investments
|
(627
|
)
|
1,141
|
(9,970
|
)
|
1,468
|
||||||||||
|
Less: Net unrealized gains (losses) - equity securities and limited partnerships
|
771
|
(1,016
|
)
|
(7,026
|
)
|
7,573
|
||||||||||
|
Less: Corporate charges and CECL allowance adjustment included in Other operating expenses
|
(1,939
|
)
|
–
|
(3,639
|
)
|
–
|
||||||||||
|
Income (loss) from core business operations
|
$
|
5,122
|
$
|
(1,144
|
)
|
$
|
13,031
|
$
|
(4,596
|
)
|
||||||
|
Less: Net investment income
|
5,486
|
6,703
|
19,102
|
19,434
|
||||||||||||
|
Underwriting loss
|
$
|
(364
|
)
|
$
|
(7,847
|
)
|
$
|
(6,071
|
)
|
$
|
(24,030
|
)
|
||||
We use the term income (loss) from core business
operations, a non-GAAP financial measure, which is defined as income (loss) before federal income tax expense (benefit) excluding pre-tax realized and unrealized investment gains and losses. This financial measure is used to evaluate our operating performance. It
separates out the recognition of realized investment gains and losses, and occurrence of unrealized gains and losses, that are often driven by market changes in security valuations versus operating decisions.
The combined ratios and the components, as presented herein, are commonly used in the property/casualty insurance industry and are applied to our GAAP
underwriting results.
- 3 -
Conference Call Information:
Protective Insurance Corporation has scheduled its quarterly conference call for Wednesday,
November 04, 2020, at 11:00 AM EST to discuss results for the third quarter ended September
30, 2020.
To participate via teleconference, investors may dial 1-877-705-6003 (U.S./Canada) or 1-201-493-6725 (International or local) at least five minutes prior to
the beginning of the call. A replay of the call will be available through November 11, 2020 by calling 1-844-512-2921 or 1-412-317-6671 and referencing passcode
13710813. Investors and interested parties may also listen to the call via a live webcast, accessible on the company’s web site via a link at the top of the main Investor Relations page. To participate in the webcast, please register at least
fifteen minutes prior to the start of the call. The webcast will be archived on this site until May 4, 2021. The webcast may be accessed directly at:
http://public.viavid.com/index.php?id=141607.
Also available on the investor relations section of our web site is an investor presentation providing additional information to be reviewed in conjunction
with our earnings call. We have also made available complete interim financial statements and copies of our filings with the Securities and Exchange Commission.
The accompanying unaudited condensed financial statements have been prepared in accordance with the instructions to Form 10-Q but do not
include all of the information and footnotes as disclosed in the Company’s annual audited financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have
been included.
Forward-looking statements in this report are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. Investors are cautioned that such forward-looking statements involve inherent risks and uncertainties. Readers are encouraged to review the Company's annual report for its full statement regarding forward-looking information.
- 4 -
Protective Insurance Corporation and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except per share data)
|
September 30
|
December 31
|
|||||||
|
2020
|
2019
|
|||||||
|
Assets
|
||||||||
|
Investments 1:
|
||||||||
|
Fixed income securities (2020:
$800,519; 2019: $783,047)
|
$
|
851,937
|
$
|
795,538
|
||||
|
Equity securities
|
48,417
|
76,812
|
||||||
|
Limited partnerships, at equity
|
7,455
|
23,292
|
||||||
|
Commercial mortgage loans
|
11,087
|
11,782
|
||||||
|
Short-term 2
|
1,000
|
1,000
|
||||||
|
919,896
|
908,424
|
|||||||
|
Cash and cash equivalents
|
90,425
|
67,851
|
||||||
|
Restricted cash and cash equivalents
|
10,117
|
21,037
|
||||||
|
Accounts receivable
|
94,820
|
111,762
|
||||||
|
Reinsurance recoverable
|
429,544
|
432,067
|
||||||
|
Other assets
|
91,109
|
86,306
|
||||||
|
Current federal income taxes
|
3,102
|
4,878
|
||||||
|
Deferred federal income taxes
|
5,810
|
2,035
|
||||||
|
$
|
1,644,823
|
$
|
1,634,360
|
|||||
|
Liabilities and shareholders' equity
|
||||||||
|
Reserves for losses and loss expenses
|
$
|
1,054,457
|
$
|
988,305
|
||||
|
Reserves for unearned premiums
|
63,553
|
74,810
|
||||||
|
Borrowings under line of credit
|
20,000
|
20,000
|
||||||
|
Accounts payable and other liabilities
|
162,149
|
186,929
|
||||||
|
1,300,159
|
1,270,044
|
|||||||
|
Shareholders' equity:
|
||||||||
|
Common stock-no par value
|
609
|
610
|
||||||
|
Additional paid-in capital
|
54,160
|
53,349
|
||||||
|
Accumulated other comprehensive income
|
14,185
|
9,369
|
||||||
|
Retained earnings
|
275,710
|
300,988
|
||||||
|
344,664
|
364,316
|
|||||||
|
$
|
1,644,823
|
$
|
1,634,360
|
|||||
|
Number of common and common equivalent shares outstanding
|
14,253
|
14,279
|
||||||
|
Book value per outstanding share
|
$
|
24.18
|
$
|
25.51
|
||||
| 1 |
2020 & 2019 cost in parentheses
|
| 2 |
Approximates cost
|
- 5 -
Protective Insurance Corporation and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per share data)
|
Three Months Ended
September 30
|
Nine Months Ended
September 30
|
|||||||||||||||
|
2020
|
2019
|
2020
|
2019
|
|||||||||||||
|
Revenues
|
||||||||||||||||
|
Net premiums earned
|
$
|
117,853
|
$
|
110,288
|
$
|
325,242
|
$
|
335,931
|
||||||||
|
Net investment income
|
5,486
|
6,703
|
19,102
|
19,434
|
||||||||||||
|
Commissions and other income
|
1,469
|
2,716
|
5,020
|
6,761
|
||||||||||||
|
Net realized gains (losses) on investments, excluding impairment losses
|
(39
|
)
|
1,199
|
(8,924
|
)
|
1,872
|
||||||||||
|
Impairment losses on investments
|
(588
|
)
|
(58
|
)
|
(1,046
|
)
|
(404
|
)
|
||||||||
|
Net unrealized gains (losses) on equity securities and limited partnership investments
|
771
|
(1,016
|
)
|
(7,026
|
)
|
7,573
|
||||||||||
|
Net realized and unrealized gains (losses) on investments
|
144
|
125
|
(16,996
|
)
|
9,041
|
|||||||||||
|
124,952
|
119,832
|
332,368
|
371,167
|
|||||||||||||
|
Expenses
|
||||||||||||||||
|
Losses and loss expenses incurred
|
84,673
|
84,781
|
234,713
|
262,336
|
||||||||||||
|
Other operating expenses
|
36,952
|
36,070
|
105,259
|
104,386
|
||||||||||||
|
121,625
|
120,851
|
339,972
|
366,722
|
|||||||||||||
|
Income (loss) before federal income tax expense (benefit)
|
3,327
|
(1,019
|
)
|
(7,604
|
)
|
4,445
|
||||||||||
|
Federal income tax expense (benefit)
|
46
|
(312
|
)
|
(96
|
)
|
869
|
||||||||||
|
Net income (loss)
|
$
|
3,281
|
$
|
(707
|
)
|
$
|
(7,508
|
)
|
$
|
3,576
|
||||||
|
Net income (loss) per share:
|
||||||||||||||||
|
Basic
|
$
|
.23
|
$
|
(.05
|
)
|
$
|
(.53
|
)
|
$
|
.24
|
||||||
|
Diluted
|
$
|
.23
|
$
|
(.05
|
)
|
$
|
(.53
|
)
|
$
|
.24
|
||||||
|
Weighted average number of shares outstanding:
|
||||||||||||||||
|
Basic
|
14,132
|
14,361
|
14,139
|
14,607
|
||||||||||||
|
Dilutive effect of share equivalents
|
169
|
n/a
|
n/a
|
77
|
||||||||||||
|
Diluted
|
14,301
|
14,361
|
14,139
|
14,684
|
||||||||||||
- 6 -
Protective Insurance Corporation and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
|
Nine Months Ended
|
||||||||
|
September 30
|
||||||||
|
2020
|
2019
|
|||||||
|
Net cash provided by operating activities
|
$
|
43,091
|
$
|
62,322
|
||||
|
Investing activities:
|
||||||||
|
Purchases of available-for-sale investments
|
(271,741
|
)
|
(342,299
|
)
|
||||
|
Proceeds from sales or maturities of available-for-sale investments
|
185,200
|
183,261
|
||||||
|
Proceeds from sales of equity securities
|
47,171
|
19,408
|
||||||
|
Purchase of commercial mortgage loans
|
(410
|
)
|
(2,746
|
)
|
||||
|
Proceeds from commercial mortgage loans
|
909
|
–
|
||||||
|
Distributions from limited partnerships
|
14,636
|
33,395
|
||||||
|
Other investing activities
|
(838
|
)
|
(1,655
|
)
|
||||
|
Net cash used in investing activities
|
(25,073
|
)
|
(110,636
|
)
|
||||
|
Financing activities:
|
||||||||
|
Dividends paid to shareholders
|
(4,275
|
)
|
(4,429
|
)
|
||||
|
Repurchase of common shares
|
(1,782
|
)
|
(10,283
|
)
|
||||
|
Net cash used in financing activities
|
(6,057
|
)
|
(14,712
|
)
|
||||
|
Effect of foreign exchange rates on cash and cash equivalents
|
(307
|
)
|
402
|
|||||
|
Increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents
|
11,654
|
(62,624
|
)
|
|||||
|
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period
|
88,888
|
170,811
|
||||||
|
Cash, cash equivalents and restricted cash and cash equivalents at end of period
|
$
|
100,542
|
$
|
108,187
|
||||
- 7 -
Financial Highlights (unaudited)
Protective Insurance Corporation and Subsidiaries
(In thousands, except share and per share data)
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
September 30
|
September 30
|
|||||||||||||||
|
2020
|
2019
|
2020
|
2019
|
|||||||||||||
|
Book value per share beginning of period
|
$
|
23.64
|
$
|
25.26
|
$
|
25.51
|
$
|
23.95
|
||||||||
|
Book value per share end of period
|
24.18
|
25.33
|
24.18
|
25.33
|
||||||||||||
|
Change in book value per share
|
$
|
0.54
|
$
|
0.07
|
$
|
(1.33
|
)
|
$
|
1.38
|
|||||||
|
Dividends paid
|
0.10
|
0.10
|
0.30
|
0.30
|
||||||||||||
|
Change in book value per share plus dividends paid
|
$
|
0.64
|
$
|
0.17
|
$
|
(1.03
|
)
|
$
|
1.68
|
|||||||
|
Total value creation 1
|
2.7
|
%
|
0.7
|
%
|
(4.0
|
%)
|
7.0
|
%
|
||||||||
|
Return on average shareholders' equity:
|
||||||||||||||||
|
Average shareholders' equity
|
340,351
|
365,423
|
354,490
|
359,771
|
||||||||||||
|
Net income (loss)
|
3,281
|
(707
|
)
|
(7,508
|
)
|
3,576
|
||||||||||
|
Less: Tax valuation allowance recognized in net income (loss)
|
641
|
–
|
(1,535
|
)
|
–
|
|||||||||||
|
Less: Net realized and unrealized gains (losses) on investments, net of tax
|
114
|
99
|
(13,427
|
)
|
7,142
|
|||||||||||
|
Less: Corporate charges and CECL allowance adjustment included in Other operating expenses, net of tax 2
|
(1,532
|
)
|
–
|
(2,875
|
)
|
–
|
||||||||||
|
Income (loss) from core business operations, net of tax
|
4,058
|
(806
|
)
|
10,329
|
(3,566
|
)
|
||||||||||
|
Return on net income (loss)
|
1.0
|
%
|
(0.2
|
%)
|
(2.1
|
%)
|
1.0
|
%
|
||||||||
|
Return on income (loss) from core business operations, net of tax
|
1.2
|
%
|
(0.2
|
%)
|
2.9
|
%
|
(1.0
|
%)
|
||||||||
|
Loss and LAE expenses incurred
|
$
|
84,673
|
$
|
84,781
|
$
|
234,713
|
$
|
262,336
|
||||||||
|
Less: Prior period loss development
|
321
|
67
|
(5
|
)
|
(1,589
|
)
|
||||||||||
|
Loss and LAE expenses incurred, less prior period loss development
|
$
|
84,352
|
$
|
84,714
|
$
|
234,718
|
$
|
263,925
|
||||||||
|
Net premiums earned
|
117,853
|
110,288
|
325,242
|
335,931
|
||||||||||||
|
Accident year loss and LAE ratio
|
71.6
|
%
|
76.8
|
%
|
72.2
|
%
|
78.6
|
%
|
||||||||
|
Other operating expenses
|
$
|
36,952
|
$
|
36,070
|
$
|
105,259
|
$
|
104,386
|
||||||||
|
Less: Commissions and other income
|
1,469
|
2,716
|
5,020
|
6,761
|
||||||||||||
|
Less: Corporate charges and CECL allowance adjustment 2
|
1,939
|
–
|
3,639
|
–
|
||||||||||||
|
Other operating expenses, excluding corporate charges and CECL allowance adjustment, less commissions and
other income
|
$
|
33,544
|
$
|
33,354
|
$
|
96,600
|
$
|
97,625
|
||||||||
|
Net premiums earned
|
117,853
|
110,288
|
325,242
|
335,931
|
||||||||||||
|
Expense ratio
|
28.4
|
%
|
30.2
|
%
|
29.7
|
%
|
29.1
|
%
|
||||||||
|
Accident year combined ratio 3
|
100.0
|
%
|
107.0
|
%
|
101.9
|
%
|
107.7
|
%
|
||||||||
|
Gross premiums written
|
$
|
148,039
|
$
|
137,145
|
$
|
397,494
|
$
|
433,191
|
||||||||
|
Net premiums written
|
121,212
|
109,292
|
319,725
|
340,309
|
||||||||||||
| 1 |
Total Value Creation equals change in book value plus dividends paid, divided by beginning book value.
|
| 2 |
Represents the corporate charges incurred in conjunction with the Board's review of a third party contingent sale agreement, activities of the
special committee of the Board of Directors and a $1.5 million adjustment to our CECL allowance related to the PSG litigation matter.
|
| 3 |
The accident year combined ratio is calculated as ratio of losses and loss expenses incurred, excluding prior period development, plus other
operating expenses excluding corporate charges, less commission and other income to net premiums earned.
|
- 8 -