Unaudited Fourth Quarter Financial Statements
Investor Contact: William Vens
investors@protectiveinsurance.com
(317) 429-2554
PROTECTIVE INSURANCE CORPORATION ANNOUNCES FOURTH QUARTER AND FULL YEAR RESULTS
Carmel, Indiana, February
26, 2019—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.
- 1 -
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.
- 2 -
|
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.
- 3 -
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.
- 4 -
|
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
|
||||||||
- 5 -
|
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
|
||||||||||||
- 6 -
|
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
|
||||
- 7 -
|
Protective Insurance Corporation and Subsidiaries
|
||||||||||||||||
|
(In thousands, except per share data)
|
Three Months Ended
|
Twelve Months Ended
|
||||||||||||||
|
December 31
|
Decmeber 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, exluding 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.
|
||||||||||||||||
- 8 -