Protective Insurance Corporation (formerly Baldwin & Lyons,
Inc.) (NASDAQ: PTVCA, PTVCB) today reported results for the third
quarter and first nine months of 2018. The Company produced a
third quarter net loss of $12.3 million, or $0.82 per share, which
compares to net income of $7.4 million, or $0.49 per share, for the
prior year’s third quarter. For the first nine months of
2018, net loss totaled $9.5 million, or $0.63 per share, which
compares to net income of $1.8 million, or $0.12 per share, for the
prior year period.
- Gross premiums written increased 5.5% for the third quarter of
2018 compared to the prior year and 19.2% during the first nine
months of 2018 compared to the prior year.
- Net investment income increased 38.5% for the third quarter of
2018 compared to the prior year and 28.8% during the first nine
months of 2018 compared to prior year
- Combined ratio of 124.3% for the third quarter of 2018 and
107.2% for the first nine months of 2018.
Net premiums earned for the third quarter of
2018 increased 8.6% to $96.8 million compared to the prior year
period. For the first nine months of 2018, net premiums
earned increased 36.0% to $314.2 million compared to the prior year
period, which is a result of 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 third quarter of
2018 increased 5.5% to $138.7 million compared to $131.5 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 nine months of
2018 increased 19.2% to $429.8 million compared to $360.6 written
during the 2017 period, reflecting growth impacts similar to those
experienced during the third quarter.
Underwriting operations produced a combined
ratio of 124.3% during the third quarter of 2018 compared to a
combined ratio of 99.3% for the prior year period. For the first
nine months of 2018, the combined ratio was 107.2%, which compares
to a combined ratio of 112.3% for the 2017 period. The
increase in the combined ratio during both 2018 periods reflects:
(1) a reserve strengthening of $16.4 million, related to
unfavorable prior accident year loss development in commercial
automobile coverages, and (2) ceding an additional $13.8 million in
premium, related to variable premium adjustment provisions in our
historical reinsurance treaties. This reserve strengthening
was the result of increased claim severity due to a more
challenging litigation environment, as well as an increase in the
time to settle claims.
Commercial auto products covered by our
reinsurance treaties are subject to an aggregate stop-loss
provision. Once this aggregate stop-loss level is reached, for
every $100 of additional loss, the Company is responsible for
$25. The following table illustrates the financial impact of
a further 5% or 10% increase in ultimate losses for the five most
recent reinsurance treaty years (2013-2017) covering these
commercial auto products:
|
|
|
|
|
5% Increase in Ultimate Loss
Ratio |
|
10% Increase in Ultimate Loss
Ratio |
Gross loss
expense |
$ |
32.1 |
|
$ |
64.2 |
Net financial loss |
|
10.1 |
|
|
18.2 |
$/share (after
tax) |
$ |
0.54 |
|
$ |
0.96 |
|
|
|
|
|
|
Net investment income for the third quarter of
2018 increased 38.5% to $5.6 million compared to $4.0 million in
the prior year period. The increase reflected an increase in
average funds invested resulting from positive cash flow, as well
as higher interest rates, which led to higher reinvestment yields
for our short-duration fixed income portfolio. 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 September 30, 2018
would be expected to fall by approximately 2.9%. Credit
quality remains high with a weighted average rating of AA-,
including cash. For the first nine months of 2018, net
investment income increased 28.8% to $16.0 million, compared to
$12.4 million in 2017, reflecting investment dynamics similar to
those noted above.
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 4.5% decline in the expense ratio during
the first nine months of 2018 when compared to 2017 reflects this
fixed expense leverage. Favorable prior accident year loss
development from our workers’ compensation products also positively
impacted the expense ratio, due to increased ceding commission
income from prior year contingent reinsurance contracts, which
reduces expenses.
Book value per share as of September 30, 2018
was $25.96, a decrease of $1.18 per share during the third quarter,
after the payment of cash dividends to shareholders totaling $0.28
per share. For the first nine months of 2018, book value per
share decreased $1.87 after the payment of cash dividends to
shareholders totaling $0.84 per share.
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 |
|
Nine Months Ended |
|
September 30 |
|
September 30 |
|
|
2018 |
|
|
|
2017 |
|
|
2018 |
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
Income (loss) before federal income taxes (benefits) |
$ |
(15,569 |
) |
|
$ |
10,618 |
|
$ |
(12,199 |
) |
|
$ |
(384 |
) |
Less: Net realized gains on investments |
|
449 |
|
|
|
3,446 |
|
|
1,740 |
|
|
|
7,019 |
|
Less: Net
unrealized gains (losses) - equity securities and limited
partnerships |
|
1,924 |
|
|
|
2,498 |
|
|
(7,335 |
) |
|
|
8,515 |
|
Income (loss) from core business operations |
$ |
(17,942 |
) |
|
$ |
4,674 |
|
$ |
(6,604 |
) |
|
$ |
(15,918 |
) |
Less: Net
investment income |
|
5,578 |
|
|
|
4,027 |
|
|
16,010 |
|
|
|
12,434 |
|
Underwriting income
(loss) |
$ |
(23,520 |
) |
|
$ |
647 |
|
$ |
(22,614 |
) |
|
$ |
(28,352 |
) |
|
Loss from core business operations, before
federal income tax benefits, was $17.9 million for the third
quarter of 2018 compared to income from core business operations,
before federal income taxes, of $4.7 million during the third
quarter of 2017. For the first nine months of 2018, loss from
core business operations, before federal income tax benefits,
totaled $6.6 million compared to a loss from core business
operations, before federal income tax benefits, of $15.9 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 third quarter of 2018, the Company
reallocated approximately $24 million of equity securities into
short-duration treasuries. This reallocation was consistent with
investment activity during the first and second quarters and, for
the first nine months of 2018, approximately $98 million of equity
securities were 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
third quarter of 2018, we sold $30.1 million in equity securities
resulting in a realized gain of $5.7 million and during the first
nine months of 2018, we sold $117.7 million in equity securities
resulting in a realized gain of $50.8 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, November 7, 2018, at
11:00 AM EST to discuss results for the third quarter ended
September 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 November
14, 2018 by calling 1-844-512-2921 or 1-412-317-6671 and
referencing passcode 13683310. 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 7,
2019. The webcast may be accessed directly at:
http://public.viavid.com/index.php?id=131365.
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.
|
|
|
|
|
Protective Insurance Corporation and
Subsidiaries |
|
|
|
|
Unaudited
Condensed Consolidated Balance Sheets |
|
|
|
|
|
(in
thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
December 31 |
|
|
|
|
2018 |
|
|
|
2017 |
|
Assets |
|
|
|
|
|
Investments 1: |
|
|
|
|
|
Fixed maturities (2018: $598,098; 2017: $521,017) |
|
$ |
590,961 |
|
|
$ |
521,853 |
|
Equity securities |
|
|
109,099 |
|
|
|
201,763 |
|
Limited partnerships, at equity |
|
|
64,369 |
|
|
|
70,806 |
|
Short-term 2 |
|
|
1,000 |
|
|
|
1,000 |
|
|
|
|
765,429 |
|
|
|
795,422 |
|
Cash and cash equivalents |
|
|
108,993 |
|
|
|
64,680 |
|
Restricted cash and cash equivalents |
|
|
6,138 |
|
|
|
4,033 |
|
Accounts receivable |
|
|
113,386 |
|
|
|
87,551 |
|
Reinsurance recoverable |
|
|
350,647 |
|
|
|
318,331 |
|
Other assets |
|
|
94,906 |
|
|
|
80,061 |
|
Current
federal income taxes |
|
|
7,531 |
|
|
|
6,938 |
|
|
|
$ |
1,447,030 |
|
|
$ |
1,357,016 |
|
|
|
|
|
|
|
Liabilities and
shareholders' equity |
|
|
|
|
|
Reserves
for losses and loss expenses |
|
$ |
777,837 |
|
|
$ |
680,274 |
|
Reserves for unearned premiums |
|
|
68,108 |
|
|
|
53,085 |
|
Borrowings under line of credit |
|
|
20,000 |
|
|
|
20,000 |
|
Accounts payable and other liabilities |
|
|
191,953 |
|
|
|
170,488 |
|
Deferred
federal income taxes |
|
|
1,087 |
|
|
|
14,358 |
|
|
|
|
1,058,985 |
|
|
|
938,205 |
|
Shareholders' equity: |
|
|
|
|
|
Common stock-no par value |
|
|
638 |
|
|
|
642 |
|
Additional paid-in capital |
|
|
55,115 |
|
|
|
55,078 |
|
Unrealized net gains (losses) on investments |
|
|
(5,638 |
) |
|
|
46,700 |
|
Retained
earnings |
|
|
337,930 |
|
|
|
316,391 |
|
|
|
|
388,045 |
|
|
|
418,811 |
|
|
|
$ |
1,447,030 |
|
|
$ |
1,357,016 |
|
|
|
|
|
|
|
Number
of common and common |
|
|
|
|
|
equivalent shares outstanding |
|
|
14,947 |
|
|
|
15,047 |
|
Book
value per outstanding share |
|
$ |
25.96 |
|
|
$ |
27.83 |
|
|
|
|
|
|
|
1 2018
& 2017 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 |
|
Nine Months Ended |
|
|
September 30 |
|
September 30 |
|
|
|
2018 |
|
|
|
2017 |
|
|
|
2018 |
|
|
|
2017 |
|
Revenues |
|
|
|
|
|
|
|
|
Net premiums
earned |
|
$ |
96,807 |
|
|
$ |
89,100 |
|
|
$ |
314,209 |
|
|
$ |
231,070 |
|
Net investment income |
|
|
5,578 |
|
|
|
4,027 |
|
|
|
16,010 |
|
|
|
12,434 |
|
Commissions and other income |
|
|
3,413 |
|
|
|
1,407 |
|
|
|
7,488 |
|
|
|
3,789 |
|
Net realized gains on investments, excluding impairment losses |
|
|
449 |
|
|
|
3,484 |
|
|
|
1,740 |
|
|
|
7,088 |
|
Other-than-temporary impairment losses on investments |
|
|
- |
|
|
|
(38 |
) |
|
|
- |
|
|
|
(69 |
) |
Net unrealized gains (losses) on equity securities
and limited partnership investments |
|
|
1,924 |
|
|
|
2,498 |
|
|
|
(7,335 |
) |
|
|
8,515 |
|
Net realized and unrealized gains (losses) on
investments |
|
|
2,373 |
|
|
|
5,944 |
|
|
|
(5,595 |
) |
|
|
15,534 |
|
|
|
|
108,171 |
|
|
|
100,478 |
|
|
|
332,112 |
|
|
|
262,827 |
|
Expenses |
|
|
|
|
|
|
|
|
Losses and loss expenses incurred |
|
|
94,540 |
|
|
|
60,673 |
|
|
|
244,327 |
|
|
|
181,026 |
|
Other operating
expenses |
|
|
29,200 |
|
|
|
29,187 |
|
|
|
99,984 |
|
|
|
82,185 |
|
|
|
|
123,740 |
|
|
|
89,860 |
|
|
|
344,311 |
|
|
|
263,211 |
|
Income (loss) before federal income tax expense
(benefit) |
|
|
(15,569 |
) |
|
|
10,618 |
|
|
|
(12,199 |
) |
|
|
(384 |
) |
Federal income tax
expense (benefit) |
|
|
(3,244 |
) |
|
|
3,184 |
|
|
|
(2,691 |
) |
|
|
(2,231 |
) |
Net income (loss) |
|
$ |
(12,325 |
) |
|
$ |
7,434 |
|
|
$ |
(9,508 |
) |
|
$ |
1,847 |
|
|
|
|
|
|
|
|
|
|
Per share data - diluted: |
|
|
|
|
|
|
|
|
Income (loss) before net gains (losses) on investments |
|
$
(.95) |
|
$ .24 |
|
$
(.34) |
|
$ (.55) |
Net
gains (losses) on investments |
|
.13 |
|
.25 |
|
(.29) |
|
.67 |
Net income (loss) |
|
$
(.82) |
|
$ .49 |
|
$
(.63) |
|
$ .12 |
|
|
|
|
|
|
|
|
|
Dividends |
|
$
.28 |
|
$ .27 |
|
$
.84 |
|
$ .81 |
|
|
|
|
|
|
|
|
|
Reconciliation of shares outstanding: |
|
|
|
|
|
|
|
|
Average
shares outstanding - basic |
|
|
14,969 |
|
|
|
15,089 |
|
|
|
14,998 |
|
|
|
15,084 |
|
Dilutive effect of
share equivalents |
|
|
- |
|
|
|
29 |
|
|
|
- |
|
|
|
40 |
|
Average shares
outstanding - diluted |
|
|
14,969 |
|
|
|
15,118 |
|
|
|
14,998 |
|
|
|
15,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Protective Insurance Corporation and
Subsidiaries |
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows |
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
|
|
2018 |
|
|
|
2017 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
60,370 |
|
|
$ |
55,235 |
|
|
Investing
activities: |
|
|
|
|
|
Purchases of available-for-sale investments |
|
|
(330,217 |
) |
|
|
(305,130 |
) |
|
Purchases of limited partnership interests |
|
|
(450 |
) |
|
|
(897 |
) |
|
Proceeds from
sales or maturities |
|
|
|
|
|
of
available-for-sale investments |
|
|
346,179 |
|
|
|
257,977 |
|
|
Net purchases of short-term investments |
|
|
- |
|
|
|
500 |
|
|
Purchase of insurance company-owned life insurance |
|
|
(10,000 |
) |
|
|
- |
|
|
Distributions from limited partnerships |
|
|
369 |
|
|
|
16,313 |
|
|
Other investing
activities |
|
|
(4,352 |
) |
|
|
(4,825 |
) |
|
Net
cash provided by (used in) investing activities |
|
|
1,529 |
|
|
|
(36,062 |
) |
|
Financing
activities: |
|
|
|
|
|
Dividends paid to shareholders |
|
|
(12,652 |
) |
|
|
(12,250 |
) |
|
Repurchase of
common shares |
|
|
(2,620 |
) |
|
|
(1,880 |
) |
|
Net
cash used in financing activities |
|
|
(15,272 |
) |
|
|
(14,130 |
) |
|
|
|
|
|
|
|
Effect
of foreign exchange rates on cash and cash equivalents |
|
|
(209 |
) |
|
|
510 |
|
|
|
|
|
|
|
|
Increase in cash, cash equivalents and restricted cash |
|
|
46,418 |
|
|
|
5,553 |
|
|
Cash, cash equivalents
and restricted cash at beginning of period |
|
|
68,713 |
|
|
|
62,976 |
|
|
Cash, cash equivalents
and restricted cash at end of period |
|
$ |
115,131 |
|
|
$ |
68,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Highlights (unaudited) |
|
|
|
|
|
|
|
|
Protective Insurance
Corporation and Subsidiaries |
|
|
|
|
|
|
|
|
(In thousands, except
per share data) |
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30 |
|
September 30 |
|
|
|
2018 |
|
|
|
2017 |
|
|
|
2018 |
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
|
Annualized |
|
|
|
|
|
|
|
|
Book
value per share beginning of period |
|
$ |
27.14 |
|
|
$ |
26.50 |
|
|
$ |
27.83 |
|
|
$ |
26.81 |
|
Book value per share
end of period |
|
|
25.96 |
|
|
|
26.93 |
|
|
|
25.96 |
|
|
|
26.93 |
|
Change in
book value per share |
|
$ |
(1.18) |
|
|
$ |
0.43 |
|
|
$ |
(1.87) |
|
|
$ |
0.12 |
|
Dividends paid |
|
|
0.28 |
|
|
|
0.27 |
|
|
|
0.84 |
|
|
|
0.81 |
|
Total value creation 1 |
|
|
(13.3%) |
|
|
|
10.6% |
|
|
|
(4.9%) |
|
|
|
4.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average shareholders' equity: |
|
|
|
|
|
|
|
|
Net operating income (loss) |
|
|
(14.1%) |
|
|
|
4.0% |
|
|
|
(1.8%) |
|
|
|
(3.0%) |
|
Net
income (loss) |
|
|
(12.2%) |
|
|
|
8.3% |
|
|
|
(3.3%) |
|
|
|
0.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and
LAE expenses incurred |
|
$ |
94,540 |
|
|
$ |
60,673 |
|
|
$ |
244,327 |
|
|
$ |
181,026 |
|
Net premiums
earned |
|
|
96,807 |
|
|
|
89,100 |
|
|
|
314,209 |
|
|
|
231,070 |
|
Loss and LAE ratio |
|
|
97.7% |
|
|
|
68.1% |
|
|
|
77.8% |
|
|
|
78.3% |
|
|
|
|
|
|
|
|
|
|
Other
operating expenses |
|
$ |
29,200 |
|
|
$ |
29,187 |
|
|
$ |
99,984 |
|
|
$ |
82,185 |
|
Less: Commissions and
other income |
|
|
3,413 |
|
|
|
1,407 |
|
|
|
7,488 |
|
|
|
3,789 |
|
Other
operating expenses, less commission and other income |
|
$ |
25,787 |
|
|
$ |
27,780 |
|
|
$ |
92,496 |
|
|
$ |
78,396 |
|
Net premiums earned |
|
|
96,807 |
|
|
|
89,100 |
|
|
|
314,209 |
|
|
|
231,070 |
|
Expense ratio |
|
|
26.6% |
|
|
|
31.2% |
|
|
|
29.4% |
|
|
|
33.9% |
|
|
|
|
|
|
|
|
|
|
Combined ratio
2 |
|
|
124.3% |
|
|
|
99.3% |
|
|
|
107.2% |
|
|
|
112.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written |
|
$ |
138,699 |
|
|
$ |
131,523 |
|
|
$ |
429,792 |
|
|
$ |
360,558 |
|
Net
premiums written |
|
|
97,014 |
|
|
|
96,222 |
|
|
|
324,702 |
|
|
|
246,459 |
|
|
|
|
|
|
|
|
|
|
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
Vensinvestors@protectiveinsurance.com(317) 429-2554
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