Protective Insurance Corporation Announces Results for the Quarter and Six Months

CARMEL, Ind., Aug. 08, 2018 (GLOBE NEWSWIRE) — Protective Insurance Corporation (formerly Baldwin & Lyons, Inc.) (NASDAQ:PTVCA) (NASDAQ:PTVCB) today reported results for the second quarter and first six months of 2018.  The Company produced second quarter net income of $2.5 million, or $0.17 per share, which compares to a net loss of $12.3 million, or $0.82 per share, for the prior year’s second quarter.  For the first six months of 2018, net income totaled $2.8 million, or $0.19 per share, which compares to a net loss of $5.6 million, or $0.37 per share, for the prior year period. 

  • Gross premiums written increased 19.5% for the second quarter of 2018 compared to the prior year and 27.1% during the first six months of 2018 compared to the prior year.
  • Net investment income increased 22.9% for the second quarter of 2018 compared to the prior year and 24.1% during the first six months of 2018 compared to prior year
  • Combined ratio of 99.4% for the second quarter of 2018 and 99.6% for the first six months of 2018.

Net premiums earned for the second quarter of 2018 increased 64.6% to $111.9 million compared to the prior year period. Of the 64.6% increase in net premiums earned, 23.7% is a result of continued growth in the Company’s commercial automobile and workers’ compensation products, in both our retail and program distribution channels. The remainder of the increase in net premiums earned is attributable to changes in the Company’s reinsurance structure.  For the first six months of 2018, net premiums earned increased 53.1% to $217.4 million compared to the prior year period.  Of the 53.1% increase in net premiums earned, 27.2% is a result of the Company’s continued growth as discussed above with the remainder attributable to the previously mentioned changes in the Company’s reinsurance structure. 

Gross premiums written for the second quarter of 2018 increased 19.5% to $142.3 million compared to $119.0 million written during the prior year period.  As with net premiums earned, the increases were primarily driven by continued growth in the Company’s commercial automobile and workers’ compensation products in both our retail and program distribution channels.  Gross premiums written for the first six months of 2018 increased 27.1% to $291.1 million compared to $229.0 written during the 2017 period, reflecting growth impacts similar to those experienced during the second quarter. 

Net investment income for the second quarter of 2018 increased 22.9% to $5.8 million compared to $4.7 million in the prior year period.  The increase reflects higher interest rates, leading to higher reinvestment yields for our short-duration fixed income portfolio and an increase in average funds invested resulting from positive cash flow. Our fixed income investment portfolio continues to emphasize shorter-duration instruments. If there was a hypothetical increase in interest rates of 100 basis points, the price of our bonds at June 30, 2018 would be expected to fall by approximately 2.6%.  Credit quality remains high with a weighted average rating of A+, including cash.  For the first six months of 2018, net investment income increased 24.1% to $10.4 million, compared to $8.4 million in 2017, reflecting investment impacts similar to those experienced during the second quarter.

Underwriting operations produced a combined ratio of 99.4% during the second quarter of 2018 compared to a combined ratio of 142.9% for the prior year period.  For the second quarter of 2018, prior accident year loss development was favorable at $0.1 million.  The main driver of the lower loss ratio for the second quarter of 2018 when compared to 2017 is a significant reserve strengthening, predominately for accident years 2015 and prior, which took place during the second quarter of 2017.  For the first six months of 2018, the combined ratio was 99.6%, which compares to a combined ratio of 120.4% for the 2017 period with the difference due mainly to the 2017 second quarter reserve strengthening mentioned above.  Prior year loss development was favorable at $1.7 million for the 2018 period.

Premium growth is continuing to have a favorable impact on our expense ratio, consistent with our stated strategy to leverage the Company’s fixed expense base to improve the expense ratio over time.  The 5.0% decline in the expense ratio during the first six months of 2018 when compared to 2017 reflects this fixed expense leverage as well as the reduction in net premiums earned during the second quarter 2017 from reinsurance related impacts noted above.  Favorable prior accident year loss development from the workers’ compensation product also positively impacted the expense ratio due to increased ceding commission income from prior year contingent reinsurance contracts.

Book value per share as of June 30, 2018 was $27.14, a decrease of $0.24 per share during the second quarter, after the payment of cash dividends to shareholders totaling $0.28 per share.  While book value per share was reduced by the dividend ($0.28 per share) and investment losses and other impacts ($0.40 per share), income from core business operations increased book value by $0.44 per share during the second quarter of 2018.  For the first six months of 2018, book value per share decreased $0.69 after the payment of cash dividends to shareholders totaling $0.56 per share. While book value per share was reduced by the dividend ($0.56 per share) and investment losses and other impacts ($0.89 per share), income from core business operations increased book value by $0.76 per share during the first six months of 2018.

The Company’s 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 taxes (benefits) to underwriting income (loss), a non-GAAP financial measure that is a useful tool for investors and analysts in analyzing ongoing operating trends.

 
  Three Months Ended   Six Months Ended
  June 30   June 30
    2018       2017       2018       2017  
               
Income (loss) before federal income taxes (benefits) $   3,057     $   (21,180 )   $   3,371     $   (11,002 )
Less: Net realized gains on investments   915       2,565       1,290       3,573  
Less: Net unrealized gains (losses) on equity securities and limited partnership invesments   (4,350 )     731       (9,258 )     6,017  
Income (loss) from core business operations $   6,492     $   (24,476 )   $   11,339     $   (20,592 )
Less: Net investment income   5,796       4,716       10,432       8,408  
Underwriting income (loss) $   696     $   (29,192 )   $   907     $   (29,000 )
               

  

Income from core business operations, before federal income taxes, was $6.5 million for the second quarter of 2018 compared to a loss from core business operations, before federal income tax benefits, of $24.5 million during the second quarter of 2017.  For the first six months of 2018, income from core business operations, before federal income taxes, totaled $11.3 million compared to a loss from core business operations, before federal income tax benefits, of $20.6 million during the 2017 period.

The Company’s management uses the term income (loss) from core business operations, a non-GAAP financial measure, which is defined as income before federal income taxes excluding pre-tax realized and unrealized investment gains and losses.  This financial measure is used to evaluate the Company’s performance because the recognition of investment gains and losses in any given period is largely discretionary as to timing and could distort the analysis of trends.

The combined ratios and the components, as presented herein, are commonly used in the property/casualty insurance industry and are applied to the Company’s GAAP underwriting results.

During the second quarter of 2018, the Company reallocated approximately $20 million of equity securities into short-duration treasuries. This reallocation was consistent with investment activity during the first quarter and, for the first six months of 2018, approximately $74 million of equity securities was reallocated to short duration treasuries. These equity sales further solidified the conservative nature of our high quality, short duration investment portfolio; opportunistically utilized the new lower corporate tax rate of 21%, which was beneficial given the low tax basis of many of these equity positions; and were accretive to income, given the increase in yields at the shorter end of the yield curve.

Recently Adopted Accounting Standard

Accounting guidance for recognizing the mark-to-market change in our equity investments portfolio was revised in 2018 under FASB ASU 2016-01: Recognition and Measurement of Financial Assets and Financial Liabilities. As a result of the Company adopting this accounting standard update, effective January 1, 2018, equity portfolio investments are measured at fair value (i.e. marked-to-market) and any changes in fair value are recognized in net income through the Income Statement.  Previously, the Company’s equity portfolio securities, excluding those held within limited partnerships, were classified as available-for-sale and changes in fair value were recorded in other comprehensive income on the Balance Sheet.

Upon adoption of this ASU, cumulative net unrealized gains on equity securities of $71.0 million, ($46.2 million net of tax), were reclassified within the equity section of the Balance Sheet from accumulated other comprehensive income to retained earnings.  This adjustment had no overall impact on shareholders’ equity, however since these net unrealized gains are now included within retained earnings, they will not appear as realized gains on the Income Statement when sold.  During the second quarter of 2018, we sold $27.8 million in equity securities resulting in a realized gain of $10.0 million and during the first six months of 2018, we sold $87.6 million in equity securities resulting in a realized gain of $45.1 million. Since the majority of this gain was already included in retained earnings on the Balance Sheet, that portion already included in retained earnings was not recognized within realized gains on the Income Statement.

Conference Call Information:

Protective Insurance Corporation has scheduled its quarterly conference call for Wednesday, August 8, 2018, at 11:00 AM EST to discuss results for the second quarter ended June 30, 2018.

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 August 15, 2018 by calling 1-844-512-2921 or 1-412-317-6671 and referencing passcode 13681025.  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 February 8, 2019. The webcast may be accessed directly at: http://public.viavid.com/index.php?id=130200.

Also available on the investor relations section of our web site are 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.

  

 
Protective Insurance Corporation and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
         
(in thousands, except per share data)    
         
    June 30   December 31
      2018       2017
Assets        
Investments 1:      
  Fixed maturities ($582,068) $   576,388     $   521,853
  Equity securities   125,407       201,763
  Limited partnerships, at equity   65,442       70,806
  Short-term 2   1,000       1,000
      768,237       795,422
Cash and cash equivalents   75,952       64,680
Restricted cash and cash equivalents   6,853       4,033
Accounts receivable    108,145       87,551
Reinsurance recoverable   326,346       318,331
Other assets   102,736       80,061
Current federal income taxes   1,626       6,938
    $   1,389,895     $   1,357,016
         
Liabilities and shareholders’ equity    
Reserves for losses and loss expenses $   716,281     $   680,274
Reserves for unearned premiums   65,535       53,085
Borrowings under line of credit   20,000       20,000
Accounts payable and other liabilities   178,612       170,488
Deferred federal income taxes   2,232       14,358
      982,660       938,205
Shareholders’ equity:      
  Common stock-no par value   640       642
  Additional paid-in capital   55,745       55,078
  Unrealized net gains (losses) on investments   (4,487 )     46,700
  Retained earnings   355,337       316,391
      407,235       418,811
    $   1,389,895     $   1,357,016
         
Number of common and common    
  equivalent shares outstanding   15,002       15,047
Book value per outstanding share $   27.14     $   27.83
         
1 2018 cost in parentheses 
2 Approximates cost 
 

 
Protective Insurance Corporation and Subsidiaries        
Unaudited Condensed Consolidated Statements of Operations      
                 
(in thousands, except per share data)          
                 
    Three Months Ended   Six Months Ended
    June 30   June 30
      2018       2017       2018       2017  
Revenues                
Net premiums earned   $ 111,940     $   67,996     $ 217,402     $   141,971  
Net investment income     5,796       4,716       10,432       8,408  
Commissions and other income     2,263       1,400       4,076       2,380  
Net realized gains on investments, excluding impairment losses     915       2,565       1,290       3,573  
                         
      (4,350 )     731       (9,258 )     6,017  
      (3,435 )     3,296       (7,968 )     9,590  
      116,564       77,408       223,942       162,349  
                 
Losses and loss expenses incurred     77,488       71,754       149,787       120,353  
Other operating expenses     36,019       26,834       70,784       52,998  
      113,507       98,588       220,571       173,351  
Income (loss) before federal income tax expense (benefit)     3,057       (21,180 )     3,371       (11,002 )
                                 
Federal income tax expense (benefit)     570       (8,837 )     554       (5,414 )
 Net income (loss)   $   2,487     $   (12,343 )   $   2,817     $   (5,588 )
                 
Per share data – diluted:            
Income (loss) before net gains (losses) on investments   $ .35     $ (.96 )   $ .61     $ (.78 )
Net gains (losses) on investments     (.18 )     .14       (.42 )     .41  
Net income (loss)   $ .17     $ (.82 )   $ .19     $ (.37 )
                 
    $ .28     $ .27     $ .56     $ .54  
                 
Reconciliation of shares outstanding:          
Average shares outstanding – basic     15,014       15,122       15,012       15,122  
Dilutive effect of share equivalents       9         –         9         –  
Average shares outstanding – diluted     15,023       15,122       15,021       15,122  
                 

 
Protective Insurance Corporation and Subsidiaries        
Unaudited Condensed Consolidated Statements of Cash Flows      
(in thousands)        
         
    Six Months Ended
    June 30
      2018       2017  
         
Net cash provided by operating activities   $   24,674     $   23,164  
Investing activities:        
  Purchases of available-for-sale investments     (215,226 )     (231,601 )
  Purchases of limited partnership interests     (450 )      
  Proceeds from sales or maturities        
  of available-for-sale investments     227,554       221,818  
  Purchase of insurance company-owned life insurance     (10,000 )      
  Distributions from limited partnerships     369       15,398  
  Other investing activities     (2,682 )     (2,954 )
Net cash provided by (used in) investing activities     (435 )     2,661  
Financing activities:        
  Dividends paid to shareholders     (8,456 )     (8,174 )
  Repurchase of common shares     (1,280 )       –  
Net cash used in financing activities     (9,736 )     (8,174 )
         
Effect of foreign exchange rates on cash and cash equivalents     (411 )     453  
         
Increase in cash, cash equivalents and restricted cash     14,092       18,104  
Cash, cash equivalents and restricted cash at beginning of period     68,713       62,976  
Cash, cash equivalents and restricted cash at end of period   $   82,805     $   81,080  
         

 
Financial Highlights (unaudited)            
Protective Insurance Corporation and Subsidiaries              
(In thousands, except per share data) Three Months Ended   Six Months Ended
  June 30   June 30
    2018       2017       2018       2017  
               
Annualized              
Book value per share beginning of period $   27.38     $   27.34     $   27.83     $   26.81  
Book value per share end of period   27.14       26.50       27.14       26.50  
Change in book value per share $   (0.24 )   $   (0.84 )   $   (0.69 )   $   (0.31 )
Dividends paid   0.28       0.27       0.56       0.54  
Total value creation 1   0.6 %     (8.3 %)     (0.9 %)     1.7 %
               
Return on average shareholders’ equity:          
Net operating income (loss)   4.0 %     (15.8 %)     4.1 %     (6.5 %)
Net income (loss)   2.4 %     (13.5 %)     1.4 %     (3.1 %)
               
Loss and LAE expenses incurred $   77,488     $   71,754     $ 149,787     $   120,353  
Net premiums earned   111,940       67,996       217,402       141,971  
  Loss and LAE ratio   69.2 %     105.5 %     68.9 %     84.8 %
               
Other operating expenses $   36,019     $   26,834     $   70,784     $   52,998  
Less: Commissions and other income   2,263       1,400       4,076       2,380  
Other operating expenses, less commission and other income $   33,756     $   25,434     $   66,708     $   50,618  
Net premiums earned   111,940       67,996       217,402       141,971  
  Expense ratio   30.2 %     37.4 %     30.7 %     35.7 %
               
  Combined ratio 2   99.4 %     142.9 %     99.6 %     120.4 %
               
Gross premiums written $ 142,270     $   119,007     $ 291,093     $   229,035  
Net premiums written   114,254       72,707       227,688       150,237  
               
1 Total Value Creation equals change in book value plus dividends paid, divided by beginning book value. Quarterly and year-to-date amounts have been annualized.
2 The combined ratio is calculated as ratio of losses and loss expenses incurred, plus other operating expenses, less commission and other income to net premiums earned. 

Investor Contact: William Vens
investors@protectiveinsurance.com 
(317) 429-2554