Protective Insurance Corporation (formerly Baldwin & Lyons,
Inc.) (NASDAQ: PTVCA, PTVCB) today reported results for the fourth
quarter and twelve months of 2018. The Company produced a
fourth quarter net loss of $24.6 million, or $1.65 per share, which
compares to net income of $16.5 million, or $1.10 per share, for
the prior year’s fourth quarter. For the full year of 2018,
net loss totaled $34.1 million, or $2.28 per share, which compares
to net income of $18.3 million, or $1.21 per share, for the prior
year period.
- Gross premiums written increased 5.9% for the fourth quarter of
2018 compared to the prior year and 15.4% during the full year of
2018 compared to the prior year.
- Net investment income increased 6.7% for the fourth quarter of
2018 compared to the prior year and 21.8% during the full year of
2018 compared to the prior year.
- Combined ratio of 112.2% for the fourth quarter of 2018 and
108.6% for the full year of 2018.
Net premiums earned for the fourth quarter of
2018 increased 22.2% to $118.7 million compared to the prior year
period. For the full year of 2018, net premiums earned
increased 31.9% to $432.9 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 fourth quarter of
2018 increased 5.9% to $152.7 million compared to $144.2 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 full year of 2018
increased 15.4% to $582.5 million compared to $504.7 million
written during the 2017 period, reflecting growth impacts similar
to those experienced during the fourth quarter.
Underwriting operations produced a combined
ratio of 112.2% during the fourth quarter of 2018 compared to a
combined ratio of 99.3% for the prior year period. For the
full year of 2018, the combined ratio was 108.6%, which compares to
a combined ratio of 108.4% for 2017. The fourth quarter 2018
increase in the combined ratio reflects an increase in the current
accident year loss ratio related to severe commercial automobile
losses. The elevated combined ratio for the full year 2018
reflects: (1) unfavorable prior accident year loss development of
$16.8 million related to commercial automobile coverages, (2)
ceding an additional $17.3 million in premium, related to variable
premium adjustment provisions in our historical reinsurance
treaties, and (3) an increase in current accident year loss
estimates as noted above. 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 only for
its $25 retention. 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
from further strengthening current reserve position |
$ |
34.4 |
|
$ |
68.7 |
Net financial loss |
9.0 |
|
17.6 |
$/share (after
tax) |
$ |
0.60 |
|
$ |
1.18 |
|
|
|
|
Net investment income for the fourth quarter of
2018 increased 6.7% to $6.0 million compared to $5.7 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 December 31, 2018
would be expected to fall by approximately 2.8%. Credit
quality remains high with a weighted average rating of AA-,
including cash. For the full year of 2018, net investment
income increased 21.8% to $22.0 million, compared to $18.1 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 4.3% decline in the expense ratio during
the full year 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 as a result of increased ceding
commission income from prior year contingent reinsurance contracts,
which reduces expenses.
Book value per share as of December 31, 2018 was
$23.95, a decrease of $2.01 per share during the fourth quarter,
after the payment of cash dividends to shareholders totaling $0.28
per share. For the full year of 2018, book value per share
decreased $3.88 after the payment of cash dividends to shareholders
totaling $1.12 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 |
|
Twelve Months Ended |
|
December 31 |
|
December 31 |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
|
|
|
|
|
|
|
|
Income (loss)
before federal income taxes (benefits) |
$ |
(31,674) |
|
$ |
10,506 |
|
$ |
(43,872) |
|
$ |
10,122 |
Less: Net realized gains (losses) on investments |
(8,391) |
|
198 |
|
(6,651) |
|
7,217 |
Less: Net unrealized gains (losses) - equity securities and limited
partnerships |
(11,705) |
|
3,954 |
|
(19,040) |
|
12,469 |
Less:
Goodwill impairment charge included in Other operating
expenses |
(3,152) |
|
- |
|
(3,152) |
|
- |
Income (loss) from core business operations |
$ |
(8,426) |
|
$ |
6,354 |
|
$ |
(15,029) |
|
$ |
(9,564) |
Less: Net
investment income |
6,038 |
|
5,661 |
|
22,048 |
|
18,095 |
Underwriting income
(loss) |
$ |
(14,464) |
|
$ |
693 |
|
$ |
(37,077) |
|
$ |
(27,659) |
|
|
|
|
|
|
|
|
Loss from core business operations, before
federal income tax benefits, was $8.4 million for the fourth
quarter of 2018 compared to income from core business operations,
before federal income taxes, of $6.4 million during the fourth
quarter of 2017. For the full year of 2018, loss from core
business operations, before federal income tax benefits, totaled
$15.0 million compared to a loss from core business operations,
before federal income tax benefits, of $9.6 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 and
impairments. This financial measure is used to evaluate the
Company’s performance because the recognition of investment gains
and losses and impairments 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 fourth 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, second and third
quarters and, for the full year of 2018, approximately $122 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
fourth quarter of 2018, we sold $31.5 million in equity securities
resulting in a gain on sale of $1.1 million and during the full
year of 2018, we sold $149.2 million in equity securities resulting
in a gain on sale of $51.9 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, February 27, 2019, at
11:00 AM EST to discuss results for the fourth quarter ended
December 31, 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 March 6,
2019 by calling 1-844-512-2921 or 1-412-317-6671 and referencing
passcode 13686155. 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 August 27, 2019. The webcast
may be accessed directly at:
http://public.viavid.com/index.php?id=132660.
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-K 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) |
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
December 31 |
|
|
2018 |
|
2017 |
Assets |
|
|
|
|
Investments 1: |
|
|
|
|
Fixed
maturities (2018: $600,504; 2017: $521,017) |
|
$ |
592,645 |
|
$ |
521,853 |
Equity securities |
|
66,422 |
|
201,763 |
Limited partnerships, at equity |
|
55,044 |
|
70,806 |
Commercial mortgage loans |
|
6,672 |
|
- |
Short-term 2 |
|
1,000 |
|
1,000 |
|
|
721,783 |
|
795,422 |
Cash and cash equivalents |
|
163,996 |
|
64,680 |
Restricted cash and cash equivalents |
|
6,815 |
|
4,033 |
Accounts receivable |
|
102,972 |
|
87,551 |
Reinsurance recoverable |
|
392,436 |
|
318,331 |
Other assets |
|
88,426 |
|
80,061 |
Current federal income taxes |
|
7,441 |
|
6,938 |
Deferred
federal income taxes |
|
6,262 |
|
- |
|
|
$ |
1,490,131 |
|
$ |
1,357,016 |
|
|
|
|
|
Liabilities and
shareholders' equity |
|
|
|
|
Reserves
for losses and loss expenses |
|
$ |
865,339 |
|
$ |
680,274 |
Reserves for unearned premiums |
|
71,625 |
|
53,085 |
Borrowings under line of credit |
|
20,000 |
|
20,000 |
Accounts payable and other liabilities |
|
177,085 |
|
170,488 |
Deferred
federal income taxes |
|
- |
|
14,358 |
|
|
1,134,049 |
|
938,205 |
Shareholders' equity: |
|
|
|
|
Common stock-no par value |
|
634 |
|
642 |
Additional paid-in capital |
|
54,720 |
|
55,078 |
Accumulated other comprehensive income ( loss) |
|
(7,347) |
|
46,391 |
Retained
earnings |
|
308,075 |
|
316,700 |
|
|
356,082 |
|
418,811 |
|
|
$ |
1,490,131 |
|
$ |
1,357,016 |
|
|
|
|
|
Number of common and common equivalent shares outstanding |
|
14,869 |
|
15,047 |
Book
value per outstanding share |
|
$ |
23.95 |
|
$ |
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 |
|
Twelve Months Ended |
|
|
December 31 |
|
December 31 |
|
|
2018 |
|
2017 |
|
2018 |
|
2017 |
Revenues |
|
|
|
|
|
|
|
|
Net premiums
earned |
|
$ |
118,671 |
|
$ |
97,075 |
|
$ |
432,880 |
|
$ |
328,145 |
Net investment income |
|
6,038 |
|
5,661 |
|
22,048 |
|
18,095 |
Commissions and other income |
|
2,443 |
|
1,520 |
|
9,932 |
|
5,308 |
Net realized gains (losses) on investments, excluding impairment
losses |
|
(8,372) |
|
278 |
|
(6,632) |
|
7,366 |
Other-than-temporary impairment losses on investments |
|
(19) |
|
(80) |
|
(19) |
|
(149) |
Net
unrealized gains (losses) on equity securities and limited
partnership investments |
|
(11,705) |
|
3,954 |
|
(19,040) |
|
12,469 |
Net
realized and unrealized gains (losses) on investments |
|
(20,096) |
|
4,152 |
|
(25,691) |
|
19,686 |
|
|
107,056 |
|
108,408 |
|
439,169 |
|
371,234 |
Expenses |
|
|
|
|
|
|
|
|
Losses and loss expenses incurred |
|
101,537 |
|
66,492 |
|
345,864 |
|
247,518 |
Other operating
expenses |
|
37,193 |
|
31,410 |
|
137,177 |
|
113,594 |
|
|
138,730 |
|
97,902 |
|
483,041 |
|
361,112 |
Income (loss) before federal income tax expense
(benefit) |
|
(31,674) |
|
10,506 |
|
(43,872) |
|
10,122 |
Federal income tax
benefit |
|
(7,107) |
|
(5,970) |
|
(9,797) |
|
(8,201) |
Net income (loss) |
|
$ |
(24,567) |
|
$ |
16,476 |
|
$ |
(34,075) |
|
$ |
18,323 |
|
|
|
|
|
|
|
|
|
Per share data - diluted: |
|
|
|
|
|
|
|
|
Income (loss) before net gains (losses) on investments |
|
$ |
(.58) |
|
$ |
.92 |
|
$ |
(.92) |
|
$ |
.37 |
Net
gains (losses) on investments |
|
(1.07) |
|
.18 |
|
(1.36) |
|
.84 |
Net income (loss) |
|
$ |
(1.65) |
|
$ |
1.10 |
|
$ |
(2.28) |
|
$ |
1.21 |
|
|
|
|
|
|
|
|
|
Dividends |
|
$ |
.28 |
|
$ |
.27 |
|
$ |
1.12 |
|
$ |
1.08 |
|
|
|
|
|
|
|
|
|
Reconciliation of shares outstanding: |
|
|
|
|
|
|
|
|
Average
shares outstanding - basic |
|
14,867 |
|
15,010 |
|
14,965 |
|
15,065 |
Dilutive effect of
share equivalents |
|
- |
|
35 |
|
- |
|
42 |
Average shares
outstanding - diluted |
|
14,867 |
|
15,045 |
|
14,965 |
|
15,107 |
|
|
|
|
|
|
|
|
|
Protective
Insurance Corporation and Subsidiaries |
|
|
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows |
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended |
|
|
December 31 |
|
|
2018 |
|
2017 |
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
100,708 |
|
$ |
97,744 |
|
|
|
|
|
|
|
Investing
activities: |
|
|
|
|
Purchases of available-for-sale investments |
|
(415,326) |
|
(436,932) |
Purchases of limited partnership interests |
|
(450) |
|
(1,097) |
Proceeds from sales or maturities of available-for-sale
investments |
|
454,659 |
|
350,031 |
Net purchases of short-term investments |
|
- |
|
500 |
Purchase of insurance company-owned life insurance |
|
(10,000) |
|
- |
Purchase of commercial mortgage loans |
|
(6,672) |
|
- |
Distributions from limited partnerships |
|
6,869 |
|
19,230 |
Other investing
activities |
|
(5,429) |
|
(6,079) |
Net
cash provided by (used in) investing activities |
|
23,651 |
|
(74,347) |
Financing
activities: |
|
|
|
|
Dividends paid to shareholders |
|
(16,835) |
|
(16,302) |
Repurchase of
common shares |
|
(4,596) |
|
(1,880) |
Net
cash used in financing activities |
|
(21,431) |
|
(18,182) |
|
|
|
|
|
Effect
of foreign exchange rates on cash and cash equivalents |
|
(830) |
|
522 |
|
|
|
|
|
Increase in cash, cash equivalents and restricted cash |
|
102,098 |
|
5,737 |
Cash, cash equivalents
and restricted cash at beginning of period |
|
68,713 |
|
62,976 |
Cash, cash equivalents
and restricted cash at end of period |
|
$ |
170,811 |
|
$ |
68,713 |
|
|
|
|
|
Financial
Highlights (unaudited) |
|
|
|
|
|
|
|
|
Protective Insurance
Corporation and Subsidiaries |
|
|
|
|
|
|
|
|
(In thousands, except
per share data) |
|
Three Months Ended |
|
Twelve Months Ended |
|
|
December 31 |
|
December 31 |
|
|
2018 |
|
2017 |
|
2018 |
|
2017 |
|
|
|
|
|
|
|
|
|
Annualized |
|
|
|
|
|
|
|
|
Book
value per share beginning of period |
|
$ |
25.96 |
|
$ |
26.93 |
|
$ |
27.83 |
|
$ |
26.81 |
Book value per share
end of period |
|
23.95 |
|
27.83 |
|
23.95 |
|
27.83 |
Change in
book value per share |
|
$ |
(2.01) |
|
$ |
0.90 |
|
$ |
(3.88) |
|
$ |
1.02 |
Dividends paid |
|
0.28 |
|
0.27 |
|
1.12 |
|
1.08 |
Change in
book value per share plus dividends paid |
|
$ |
(1.73) |
|
$ |
1.17 |
|
$ |
(2.76) |
|
$ |
2.10 |
Total value creation 1 |
|
(26.7%) |
|
17.4% |
|
(9.9%) |
|
7.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average shareholders' equity: |
|
|
|
|
|
|
|
|
Average
shareholders' equity |
|
372,064 |
|
411,871 |
|
387,447 |
|
411,578 |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
(24,567) |
|
16,476 |
|
(34,075) |
|
18,323 |
Less: Net realized gains (losses) on investments, net of tax |
|
(15,876) |
|
2,699 |
|
(20,296) |
|
12,796 |
Less:
Goodwill impairment charge, net of tax |
|
(2,490) |
|
- |
|
(2,490) |
|
- |
Net
operating income (loss) |
|
(6,201) |
|
13,777 |
|
(11,289) |
|
5,527 |
|
|
|
|
|
|
|
|
|
Return on net income (loss) 2 |
|
(26.4%) |
|
16.0% |
|
(8.8%) |
|
4.5% |
Return on
net operating income (loss) 2 |
|
(6.7%) |
|
13.4% |
|
(2.9%) |
|
1.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and
LAE expenses incurred |
|
$ |
101,537 |
|
$ |
66,492 |
|
$ |
345,864 |
|
$ |
247,518 |
Net premiums
earned |
|
118,671 |
|
97,075 |
|
432,880 |
|
328,145 |
Loss and LAE ratio |
|
85.6% |
|
68.5% |
|
79.9% |
|
75.4% |
|
|
|
|
|
|
|
|
|
Other
operating expenses, excluding goodwill impairment charge |
|
$ |
34,041 |
|
$ |
31,410 |
|
$ |
134,025 |
|
$ |
113,594 |
Less: Commissions and
other income |
|
2,443 |
|
1,520 |
|
9,932 |
|
5,308 |
Other
operating expenses, excluding goodwill impairment charge, less
commissions and other income |
|
$ |
31,598 |
|
$ |
29,890 |
|
$ |
124,093 |
|
$ |
108,286 |
Net premiums earned |
|
118,671 |
|
97,075 |
|
432,880 |
|
328,145 |
Expense ratio |
|
26.6% |
|
30.8% |
|
28.7% |
|
33.0% |
|
|
|
|
|
|
|
|
|
Combined ratio 3 |
|
112.2% |
|
99.3% |
|
108.6% |
|
108.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written |
|
$ |
152,709 |
|
$ |
144,179 |
|
$ |
582,500 |
|
$ |
504,737 |
Net
premiums written |
|
119,696 |
|
106,930 |
|
444,398 |
|
353,389 |
|
1 Total Value Creation equals change in book value plus
dividends paid, divided by beginning book value. Quarterly amounts
have been annualized. |
2 Quarterly amounts have been
annualized |
3 The combined ratio is calculated as ratio of losses and loss
expenses incurred, plus other operating expenses excluding goodwill
impairment charge, less commission and other income to net premiums
earned. |
|
Investor Contact: William
Vensinvestors@protectiveinsurance.com(317) 429-2554
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