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Protective Insurance Corporation Announces Results for the Quarter and Six Months

/EIN News/ -- CARMEL, Ind., Aug. 06, 2019 (GLOBE NEWSWIRE) -- Protective Insurance Corporation (NASDAQ: PTVCA, PTVCB) today reported results for the second quarter and first six months of 2019.  The Company produced second quarter net income of $1.5 million, or $0.11 per share, which compares to net income of $2.5 million, or $0.17 per share, for the prior year’s second quarter.  For the first six months of 2019, net income totaled $4.3 million, or $0.28 per share, which compares to net income of $2.8 million, or $0.19 per share, for the prior year period. 

Loss from core business operations, before federal income tax expense, was $0.9 million for the second quarter of 2019 compared to income from core business operations, before federal income tax expense, of $6.5 million during the second quarter of 2018.  For the first six months of 2019, loss from core business operations, before federal income tax expense, totaled $3.5 million compared to income from core business operations, before federal income tax expense, of $11.3 million during the 2018 period.

  • Book value per share increased by $0.63 per share to $25.26 during the second quarter of 2019, an increase of 2.6% in the quarter and total value creation of 3.0% including the $0.10 per share dividend paid to shareholders during the second quarter of 2019.  Shareholders’ equity increased by $1.3m during the second quarter of 2019, an increase of 0.4%.
  • Repurchased $9.1 million (526,832 shares) since January 1, 2019.  These purchases are immediately accretive to book value per share, given an average repurchase price of 68% of June 30, 2019 book value ($2.6 million of the $9.1 million in repurchases occurred after June 30, 2019).
  • Net investment income increased 12.1% for the second quarter of 2019 compared to the prior year and 22.0% during the first six months of 2019 compared to prior year.
  • Combined ratio of 106.4% for the second quarter of 2019 and 107.2% for the first six months of 2019.

Net premiums earned for the second quarter of 2019 increased to $115.6 million, up 3.3% compared to the prior year period.  Gross premiums written for the second quarter of 2019 increased 3.4% to $147.2 million compared to $142.3 million written during the prior year period.  The slightly higher net premiums earned were the result of growth in the Company’s workers’ compensation business.

Underwriting operations produced a combined ratio of 106.4% during the second quarter of 2019 compared to a combined ratio of 99.4% for the prior year period.  The second quarter 2019 increase in the combined ratio reflects a higher current accident-year loss ratio related to severe commercial automobile claims, including continued emergence of severity.  For the second quarter of 2019, prior accident year loss development was favorable at $0.6 million.  For the first six months of 2019, the combined ratio was 107.2%, which compares to a combined ratio of 99.6% for the 2018 period, with the increase reflecting similar current accident-year development related to commercial automobile claims.  The Company continues to maintain current accident-year loss ratios at a level consistent with rising severity expectations in commercial automobile.  In our agency placed commercial automobile excess and medium fleet product lines the Company attained rate increases of 19% on $28.5 million of premiums available for renewal during the first six months of 2019.  As a result, the premium retention rate achieved in these product lines was less than in recent years at 81% during the second quarter and 74% for the first half of 2019, resulting from our commitment to remain disciplined in our underwriting and create long-term value for our stakeholders.

Jeremy Johnson, Protective’s Chief Executive Officer, said: “My first seventy-seven days as CEO have been an exciting opportunity to meet with our insureds and our broker partners – many of whom I’ve had the pleasure of working with in the past, and I’m gratified by the value that they place on Protective.  My new colleagues and I have made progress in our operational initiatives: in addition to driving significant rate increases in commercial auto, we remain equally focused on risk selection and volatility; have reduced net limits and cancelled certain books of business that were falling short of our underwriting expectations.  While we have hard work ahead of us to continue to get rate, manage volatility and exercise expense discipline, I’m encouraged by the tailwinds we have supporting our book value per share, including: a hardening market in commercial auto, favorable investment leverage, the potential for further accretive share repurchases, and our historical reinsurance treaties, which effectively provide a 75% adverse development cover for subject commercial auto policies written from July-2013 through June-2019.”

Commercial automobile products covered by our reinsurance treaties from July-2013 through June-2019 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 benefit of these reinsurance treaties, as the net financial loss to the Company of a further increase in ultimate losses for each of the six most recent reinsurance treaty years (2013-2018) covering these commercial automobile products, is only about 25% of the gross loss:

  5%
Increase in
Ultimate
Loss Ratio
  10%
Increase in
Ultimate
Loss Ratio
Gross loss expense from further strengthening current reserve position $   42.6   $   85.2
Net financial loss   10.7     21.3
$/share (after tax) $   0.57   $   1.14
       

Commercial automobile products covered by the Company’s reinsurance treaty from July-2019 through June-2020 are also subject to an aggregate stop-loss provision.  Once the aggregate stop-loss level is reached, for every $100 of additional loss, the Company is responsible for its $65 retention.  This increase in the Company’s retention compared to recent years, reflects both: (1) the Company choosing to buy less reinsurance, due to a higher cost of reinsurance for the 2019 treaty-year, and (2) the Company’s confidence in profitability improvements given rate increases it’s receiving on its commercial automobile products.

Net investment income for the second quarter of 2019 increased 12.1% to $6.5 million compared to $5.8 million in the prior year period.   The increase reflects: higher average funds invested resulting from positive cash flow, as well as a reallocation from equity investments held in limited partnerships into short duration, high quality bonds.  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 fixed income portfolio, including cash, at June 30, 2019 would be expected to fall by approximately 2.2%.  Credit quality remains high with a weighted average rating of AA-, including cash.  For the first six months of 2019, net investment income increased 22.0% to $12.7 million, compared to $10.4 million in 2018, reflecting investment impacts similar to those experienced during the second quarter. 

During the second quarter of 2019, the Company reallocated approximately $3.7 million of equity securities, including distributions from limited partnerships, into short-duration, high quality bonds.  For the first six months of 2019, the Company has reallocated approximately $34.8 million of equity securities into short-duration, high quality bonds.  This reallocation was consistent with investment activity throughout 2018 where approximately $122.0 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 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.

The Company continues to focus on our operating initiative of expense discipline, reflected in the 2.2 percentage points decline in the expense ratio during the first six months of 2019 when compared to 2018.  We will continue to manage our expense base, particularly as we gain greater clarity on the impact of continuing to attain increasing premium rates, and the influence of increased rates upon the retention of renewing policies.

Book value per share as of June 30, 2019 was $25.26, an increase of $1.31 per share during the first six months of 2019, after the payment of cash dividends to shareholders totaling $0.20 per share.

The Company's net income, 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 before federal income tax expense 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
    2019       2018       2019       2018  
               
Income before federal income tax expense $   1,950     $   3,057     $   5,464     $   3,371  
Less: Net realized gains on investments   627       915       327       1,290  
Less: Net unrealized gains (losses) - equity securities and limited partnerships   2,262       (4,350 )     8,589       (9,258 )
Income (loss) from core business operations $   (939 )   $   6,492     $   (3,452 )   $   11,339  
Less: Net investment income   6,500       5,796       12,732       10,432  
Underwriting income (loss) $   (7,439 )   $   696     $   (16,184 )   $   907  
               

 


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 tax expense excluding pre-tax realized and unrealized investment gains and losses.  This financial measure is used to evaluate the Company’s operating performance because the recognition of realized investment gains and losses, and occurrence of unrealized gains, could distort analysis of trends in the core underwriting business.

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.

Conference Call Information:

Protective Insurance Corporation has scheduled its quarterly conference call for Wednesday, August 7, 2019, at 11:00 AM EST to discuss results for the second quarter ended June 30, 2019.

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 14, 2019 by calling 1-844-512-2921 or 1-412-317-6671 and referencing passcode 13691818.  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 7, 2020.  The webcast may be accessed directly at: http://public.viavid.com/index.php?id=134964.

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)        
           
    June 30   December 31  
      2019     2018    
Assets          
Investments 1:        
  Fixed income securities (2019: $726,053; 2018: $600,504) $   737,148   $   592,645    
  Equity securities   74,555     66,422    
  Limited partnerships, at equity   35,535     55,044    
  Commercial mortgage loans    8,884     6,672    
  Short-term 2   1,000     1,000    
      857,122     721,783    
Cash and cash equivalents   80,772     163,996    
Restricted cash and cash equivalents   16,333     6,815    
Accounts receivable    111,573     102,972    
Reinsurance recoverable   410,445     392,436    
Other assets   87,425     88,426    
Current federal income taxes   4,599     7,441    
Deferred federal income taxes   2,757     6,262    
    $   1,571,026   $   1,490,131    
           
Liabilities and shareholders' equity        
Reserves for losses and loss expenses $   933,463   $   865,339    
Reserves for unearned premiums   79,429     71,625    
Borrowings under line of credit   20,000     20,000    
Accounts payable and other liabilities   170,718     177,085    
      1,203,610     1,134,049    
Shareholders' equity:        
  Common stock-no par value   621     634    
  Additional paid-in capital   54,065     54,720    
  Accumulated other comprehensive income ( loss)   8,217     (7,347 )  
  Retained earnings   304,513     308,075    
      367,416     356,082    
    $   1,571,026   $   1,490,131    
           
Number of common and common        
  equivalent shares outstanding   14,545     14,869    
Book value per outstanding share $   25.26   $   23.95    
           
1 2019 & 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  
      2019       2018       2019       2018    
Revenues                  
Net premiums earned   $ 115,631     $   111,940     $ 225,644     $   217,402    
Net investment income     6,500       5,796       12,732       10,432    
Commissions and other income     1,978       2,263       4,043       4,076    
Net realized gains on investments, excluding impairment losses   713       915       673       1,290    
Other-than-temporary impairment losses on investments     (86 )     -       (346 )     -    
Net unrealized gains (losses) on equity securities and limited partnership investments     2,262       (4,350 )     8,589       (9,258 )  
Net realized and unrealized gains (losses) on investments     2,889       (3,435 )     8,916       (7,968 )  
      126,998       116,564       251,335       223,942    
Expenses                  
Losses and loss expenses incurred     90,433       77,488       177,555       149,787    
Other operating expenses     34,615       36,019       68,316       70,784    
      125,048       113,507       245,871       220,571    
Income before federal income tax expense     1,950       3,057       5,464       3,371    
Federal income tax expense     415       570       1,181       554    
Net income   $   1,535     $   2,487     $   4,283     $   2,817    
                   
Per share data - diluted:                  
Income (loss) before net gains (losses) on investments   $ (.05)     $ .35     $ (.19)     $  .61    
Net gains (losses) on investments     .16       (.18)       .47       (.42)    
Net income   $ .11     $  .17     $ .28     $  .19    
                   
Dividends   $ .10     $ .28     $ .20     $ .56    
                   
Reconciliation of shares outstanding:                  
Average shares outstanding - basic     14,616       15,014       14,731       15,012    
Dilutive effect of share equivalents       63         9         60         9    
Average shares outstanding - diluted     14,679       15,023       14,791       15,021    
                   

 

Protective Insurance Corporation and Subsidiaries          
Unaudited Condensed Consolidated Statements of Cash Flows          
           
(in thousands)          
           
    Six Months Ended  
    June 30  
      2019       2018    
           
Net cash provided by operating activities   $   38,396     $   24,674    
Investing activities:          
  Purchases of available-for-sale investments     (245,099 )     (215,226 )  
  Purchases of limited partnership interests     -       (450 )  
  Proceeds from sales or maturities          
  of available-for-sale investments     110,756       139,998    
  Net purchases of short-term investments     -       -    
  Purchase of insurance company-owned life insurance     -       (10,000 )  
  Purchase of commercial mortgage loans     (2,213 )     -    
  Distributions from limited partnerships     20,231       369    
  Other investing activities     (1,343 )     (2,683 )  
Net cash used in investing activities     (103,219 )     (435 )  
Financing activities:          
  Dividends paid to shareholders     (2,987 )     (8,456 )  
  Repurchase of common shares     (6,487 )     (1,280 )  
Net cash used in financing activities     (9,474 )     (9,736 )  
           
Effect of foreign exchange rates on cash and cash equivalents     591       (411 )  
           
Increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents     (73,706 )     14,092    
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period     170,811       68,713    
Cash, cash equivalents and restricted cash and cash equivalents at end of period   $   97,105     $   82,805    
           
           


Financial Highlights (unaudited)              
Protective Insurance Corporation and Subsidiaries              
(In thousands, except per share data) Three Months Ended   Six Months Ended
  June 30   June 30
    2019       2018       2019       2018  
               
Annualized              
Book value per share beginning of period $   24.63     $   27.38     $   23.95     $   27.83  
Book value per share end of period   25.26       27.14       25.26       27.14  
Change in book value per share $   0.63     $   (0.24 )   $   1.31     $   (0.69 )
Dividends paid   0.10       0.28       0.20       0.56  
Change in book value per share plus dividends paid $   0.73     $   0.04     $   1.51     $   (0.13 )
Total value creation 1   11.9 %     0.6 %     12.6 %     (0.9 %)
               
               
Return on average shareholders' equity:              
Average shareholders' equity   366,743       409,523       361,749       413,023  
               
Net income   1,535       2,487       4,283       2,817  
Less: Net realized gains (losses) on investments, net of tax   2,282       (2,714 )     7,044       (6,295 )
Less: Goodwill impairment charge, net of tax   0         -       0         -  
Net operating income (loss)   (747 )     5,201       (2,761 )     9,112  
               
Return on net income 2   1.7 %     2.4 %     2.4 %     1.4 %
Return on net operating income (loss) 2   (0.8 %)     5.1 %     (1.5 %)     4.4 %
               
               
Loss and LAE expenses incurred $   90,433     $   77,488     $ 177,555     $   149,787  
Net premiums earned   115,631       111,940       225,644       217,402  
  Loss and LAE ratio   78.2 %     69.2 %     78.7 %     68.9 %
               
Other operating expenses $   34,615     $   36,019     $   68,316     $   70,784  
Less: Commissions and other income   1,978       2,263       4,043       4,076  
Other operating expenses, less commissions and other income $   32,637     $   33,756     $   64,273     $   66,708  
Net premiums earned   115,631       111,940       225,644       217,402  
  Expense ratio   28.2 %     30.2 %     28.5 %     30.7 %
               
  Combined ratio 3   106.4 %     99.4 %     107.2 %     99.6 %
               
               
Gross premiums written $ 147,152     $   142,270     $ 296,045     $   291,093  
Net premiums written   115,695       114,254       231,017       227,688  
               
1 Total Value Creation equals change in book value plus dividends paid, divided by beginning book value. Quarterly amounts have been annualized.
2 Quarterly and year-to-date amounts have been annualized
3 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

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