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Protective Insurance Corporation Announces Results for the Fourth Quarter and Full Year

March 11, 2021 GMT

CARMEL, Ind., March 11, 2021 (GLOBE NEWSWIRE) -- Protective Insurance Corporation (NASDAQ: PTVCA, PTVCB) today reported fourth quarter net income of $12.0 million, or $0.84 per share, which compares to net income of $3.8 million, or $0.26 per share, for the prior year’s fourth quarter. For the full year of 2020, net income totaled $4.5 million, or $0.31 per share, which compares to net income of $7.3 million, or $0.50 per share, for the prior year period.

Highlights for the fourth quarter and full year of 2020 include:

  • Accident Year combined ratios were 99.7% for the fourth quarter of 2020 and 101.3% for the full year of 2020, an improvement of 5.0 points and 5.6 points over the comparative 2019 periods.

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  • Book value per share increased $1.25 during the fourth quarter due to valuation gains on our investment holdings, including gains recognized through comprehensive income, and positive income from core business operations. Book value per share was $25.43 at December 31, 2020.

  • Net premiums earned increased to $120.3 million in the fourth quarter of 2020 from $111.4 million in the fourth quarter of 2019, primarily as a result of rate increases achieved in most lines of business and existing business exposure growth in our independent contractor commercial automobile products. For the full year of 2020, net premiums earned were $445.5 million compared to $447.3 million for 2019. The reduction primarily reflects the impact of the COVID-19 pandemic.

  • Realized and unrealized investment gains recognized through the statement of operations and comprehensive income were $15.0 million (pre-tax) for the fourth quarter of 2020. For the full year of 2020, realized and unrealized investment gains totaled $4.5 million (pre-tax).

Jeremy Johnson, Protective’s Chief Executive Officer, said: “This quarter marks both our return to underwriting profitability and the 8th sequential quarter of underwriting improvement. Our team has executed extremely well through challenging conditions to reposition Protective for future growth and value creation. Our recent agreement to be acquired by The Progressive Corporation is a testament to the hard work and dedication of our team, and with Progressive’s scale and resources, we look forward to providing even greater value to all our policyholders.”

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Income from core business operations, before federal income tax, was $7.0 million for the fourth quarter of 2020 compared to $0.4 million during the fourth quarter of 2019. Income from core business operations, before federal income tax, was $20.0 million for the full year of 2020 compared to a loss, before federal income tax, of $4.2 million for 2019.

Net premiums earned for the fourth quarter of 2020 increased to $120.3 million, up 8.0% compared to the prior year period. Net premiums earned for the full year of 2020 decreased to $445.5 million, down 0.4% compared to the prior year period. The higher premiums in the fourth quarter of 2020 were primarily the result of increased premiums related to rate increases achieved in most lines of business and existing business exposure growth in our independent contractor commercial automobile and workers’ compensation products. The lower premiums for the full year of 2020 were primarily the result of declines in public transportation as a result of COVID-19. The decline in public transportation was mostly offset by increased premiums related to rate increases achieved in most lines of business and existing business growth primarily in our independent contractor commercial automobile and workers’ compensation products.

Underwriting operations produced an accident year combined ratio of 99.7% during the fourth quarter of 2020; an improvement when compared to an accident year combined ratio of 104.7% for the prior year period. Excluding prior period development, the fourth quarter of 2020 accident year loss ratio was 70.3% which was a 6.0 point improvement from the fourth quarter 2019 loss ratio. The reduction in the loss ratio and combined ratio reflects actions taken to improve underwriting results, including non-renewal of unprofitable business as well as significant rate increases in commercial automobile. Given ongoing profitability challenges, we have discontinued writing new public transportation business effective the fourth quarter of 2020.

Prior period loss development was $0.3 million favorable for the quarter compared to $1.1 million unfavorable for the prior year quarter. For the fourth quarter of 2020, we experienced favorable development in our occupational accident line of business, partially offset by unfavorable development in our commercial automobile products.

In our commercial automobile portfolio, we attained weighted average rate increases of 13.7% on premiums available for renewal during the fourth quarter of 2020. Including other lines of business, the rate change for the quarter totaled 8.4%, which is well above our view of loss cost trends and is contributing to our improving underwriting results.

Commercial automobile products covered by our reinsurance treaties from July 3, 2013 through July 2, 2019 are subject to an unlimited aggregate stop-loss provision. Currently each of these treaty years is reserved at or above the attachment level of these treaties. For every $100 of additional loss, we are responsible only for our $25 retention. Commercial automobile products covered by our reinsurance treaty from July 3, 2019 through July 2, 2020 are also subject to an unlimited aggregate stop-loss provision. Once the aggregate stop-loss level is reached, for every $100 of additional loss, we are responsible for our $65 retention. This increase in our retention compared to recent years reflects the combination of (1) a decreased need for stop-loss reinsurance protection resulting from a decrease in our commercial automobile subject limits profile, (2) a higher cost for this coverage and (3) our confidence in profitability improvements given the limit reductions and rate increases on our commercial automobile products. In 2020, due to continued rate achievement in commercial automobile, improvements in mix of business and reductions to our average policy loss limits, we decided to non-renew the annual aggregate deductible treaty for policies written on and after July 3, 2020.

Net investment income for the fourth quarter of 2020 decreased 7.2% to $6.3 million compared to $6.8 million in the prior year period. The decrease reflected lower interest rates earned on cash and cash equivalent balances in the current period, partially offset by an increase in average funds invested compared to the fourth quarter of 2019. Credit quality remains high with a weighted average rating of AA-, including cash. For the full year of 2020, net investment income decreased 3.2% to $25.4 million, compared to $26.2 million during 2019, reflecting similar impacts as seen for the quarter comparison of lower interest rates earned on cash and cash equivalent balances in the current period, partially offset by an increase in average funds invested resulting from positive cash flow, as well as the continued reallocation from equity investments in limited partnerships and cash and cash equivalent investments into short-duration, high-quality bonds. 

Book value per share as of December 31, 2020 was $25.43, a decrease of $0.08 per share during the year, after the payment of cash dividends to shareholders totaling $0.40 per share.

During the fourth quarter of 2020, total realized and unrealized investment gains (pre-tax) were $15.0 million. The following table provides details related to our unrealized and realized investment gains during the three and twelve months ended December 31, 2020:

  Three Months Ended
December 31, 2020
  Twelve Months Ended
December 31, 2020
Net realized gains (losses) on investments, including impairments, within statements of operations $ 234     $ (9,737 )
Net unrealized gains on equity securities and limited partnership investments within statements of operations   7,527       501  
Net unrealized gains on fixed income securities recorded within other comprehensive income (loss)   7,284       13,768  
Total realized and unrealized investment gains (pre-tax) $ 15,045     $ 4,532  

As of December 31, 2020 we had no tax valuation allowance on our net deferred tax assets, a reduction from an allowance of $1.5 million at September 30, 2020. However, the application of intra-period tax allocation rules resulted in a full year charge to continuing operations as of December 31, 2020 of $1.3 million in the consolidated statement of operations, offset by a corresponding benefit in accumulated other comprehensive income. Shareholders’ equity is not impacted by these tax allocations.

Our 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 tax expense (benefit) to underwriting loss, a non-GAAP financial measure that is a useful tool for investors and analysts in analyzing ongoing operating trends.

  Three Months Ended
December 31
  Twelve Months Ended
December 31
    2020       2019       2020       2019  
Income before federal income tax expense $ 13,968     $ 4,228     $ 6,363     $ 8,673  
Less: Net realized gains (losses) on investments   234       490       (9,737 )     1,958  
Less: Net unrealized gains - equity securities and limited partnerships   7,527       3,358       501       10,931  
Less: Corporate charges and CECL allowance adjustment included in Other operating expenses   (783 )           (4,422 )      
Income (loss) from core business operations $ 6,990     $ 380     $ 20,021     $ (4,216 )
Less: Net investment income   6,321       6,815       25,422       26,249  
Underwriting income (loss) $ 669     $ (6,435 )   $ (5,401 )   $ (30,465 )

We use the term income (loss) from core business operations, a non-GAAP financial measure, which is defined as income (loss) before federal income tax expense (benefit)excluding pre-tax realized and unrealized investment gains and losses. This financial measure is used to evaluate our operating performance. It separates out the recognition of realized investment gains and losses, and occurrence of unrealized gains and losses, that are often driven by market changes in security valuations versus operating decisions.

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

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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
  2020   2019
Assets              
Investments 1:              
Fixed income securities ($894,468, $783,047) $ 919,692     $ 795,538  
Equity securities   58,169       76,812  
Limited partnerships, at equity   7,214       23,292  
Commercial mortgage loans   10,602       11,782  
Short-term 2   1,000       1,000  
    996,677       908,424  
Cash and cash equivalents   58,301       67,851  
Restricted cash and cash equivalents   12,128       21,037  
Accounts receivable   100,921       111,762  
Reinsurance recoverable   455,564       432,067  
Other assets   90,256       86,306  
Current federal income taxes         4,878  
Deferred federal income taxes   8,980       2,035  
  $ 1,722,827     $ 1,634,360  
               
Liabilities and shareholders' equity              
Reserves for losses and loss expenses $ 1,089,669     $ 988,305  
Reserves for unearned premiums   63,731       74,810  
Borrowings under line of credit   20,000       20,000  
Accounts payable and other liabilities   185,579       186,929  
Current federal income taxes   766        
    1,359,745       1,270,044  
Shareholders' equity:              
Common stock-no par value   609       610  
Additional paid-in capital   54,571       53,349  
Accumulated other comprehensive income   21,759       9,369  
Retained earnings   286,143       300,988  
    363,082       364,316  
  $ 1,722,827     $ 1,634,360  
               
Number of common and common equivalent shares outstanding   14,278       14,279  
Book value per outstanding share $ 25.43     $ 25.51  
1   2020 & 2019 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
December 31
  Twelve Months Ended
December 31
    2020       2019       2020       2019  
Revenues                      
Net premiums earned $ 120,273     $ 111,357     $ 445,515     $ 447,288  
Net investment income   6,321       6,815       25,422       26,249  
Commissions and other income   2,028       2,410       7,048       9,171  
Net realized gains (losses) on investments, excluding impairment losses   2,049       583       (6,876 )     2,455  
Impairment losses on investments   (1,815 )     (93 )     (2,861 )     (497 )
Net unrealized gains on equity securities and limited partnership investments   7,527       3,358       501       10,931  
Net realized and unrealized gains (losses) on investments   7,761       3,848       (9,236 )     12,889  
    136,383       124,430       468,749       495,597  
Expenses                      
Losses and loss expenses incurred   84,246       86,132       318,958       348,468  
Other operating expenses   38,169       34,070       143,428       138,456  
    122,415       120,202       462,386       486,924  
Income before federal income tax expense   13,968       4,228       6,363       8,673  
Federal income tax expense   1,997       457       1,900       1,326  
Net income $ 11,971     $ 3,771     $ 4,463     $ 7,347  
                       
Net income per share:                      
Basic $ .85     $ .26     $ .32     $ .51  
Diluted $ .84     $ .26     $ .31     $ .50  
                       
Weighted average number of shares outstanding:                      
Basic   14,142       14,266       14,140       14,521  
Dilutive effect of share equivalents   106       69       130       99  
Diluted   14,248       14,335       14,270       14,620  

Protective Insurance Corporation and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)

  Twelve Months Ended
  December 31
    2020       2019  
Net cash provided by operating activities $ 74,862     $ 86,680  
Investing activities:          
Purchases of fixed income and equity securities   (392,223 )     (423,544 )
Proceeds from sales or maturities of fixed income securities   240,328       223,697  
Proceeds from sales of equity securities   51,713       21,621  
Purchase of commercial mortgage loans   (555 )     (7,082 )
Proceeds from commercial mortgage loans   1,539       1,972  
Distributions from limited partnerships   14,636       33,396  
Other investing activities   (1,470 )     (1,950 )
Net cash used in investing activities   (86,032 )     (151,890 )
Financing activities:          
Dividends paid to shareholders   (5,692 )     (5,857 )
Repurchase of common shares   (1,782 )     (11,501 )
Net cash used in financing activities   (7,474 )     (17,358 )
           
Effect of foreign exchange rates on cash and cash equivalents   185       645  
           
Decrease in cash, cash equivalents and restricted cash and cash equivalents   (18,459 )     (81,923 )
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period   88,888       170,811  
Cash, cash equivalents and restricted cash and cash equivalents at end of period $ 70,429     $ 88,888  

Financial Highlights (unaudited)
Protective Insurance Corporation and Subsidiaries
(In thousands, except share and per share data)

  Three Months Ended   Twelve Months Ended
  December 31   December 31
    2020       2019       2020       2019  
                       
Book value per share beginning of period $ 24.18     $ 25.33     $ 25.51     $ 23.95  
Book value per share end of period   25.43       25.51       25.43       25.51  
Change in book value per share $ 1.25     $ 0.18     $ (0.08 )   $ 1.56  
Dividends paid   0.10       0.10       0.40       0.40  
Change in book value per share plus dividends paid $ 1.35     $ 0.28     $ 0.32     $ 1.96  
Total value creation 1   5.6 %     1.1 %     1.3 %     8.2 %
                       
Return on average shareholders' equity:                      
Average shareholders' equity   353,873       363,873       363,699       360,199  
                       
Net income   11,971       3,771       4,463       7,347  
Less: Tax valuation allowance recognized in net income   271             (1,264 )      
Less: Net realized and unrealized gains (losses) on investments, net of tax   6,131       3,040       (7,296 )     10,182  
Less: Corporate charges and CECL allowance adjustment included in Other operating expenses, net of tax 2   (619 )           (3,493 )      
Income (loss) from core business operations, net of tax   6,188       731       16,516       (2,835 )
                       
Return on net income   3.4 %     1.0 %     1.2 %     2.0 %
Return on income (loss) from core business operations, net of tax   1.7 %     0.2 %     4.5 %     (0.8 %)
                       
                       
Loss and LAE expenses incurred $ 84,246     $ 86,132     $ 318,958     $ 348,468  
Less: Prior period loss development   (306 )     1,084       (311 )     (550 )
Loss and LAE expenses incurred, less prior period loss development $ 84,552     $ 85,048     $ 319,269     $ 349,018  
Net premiums earned   120,273       111,357       445,515       447,288  
Accident year loss and LAE ratio   70.3 %     76.3 %     71.7 %     78.0 %
                       
Other operating expenses $ 38,169     $ 34,070     $ 143,428     $ 138,456  
Less: Commissions and other income   2,028       2,410       7,048       9,171  
Less: Corporate charges and CECL allowance adjustment 2   783             4,422        
Other operating expenses, excluding corporate charges and CECL allowance adjustment, less commissions and other income $ 35,358     $ 31,660     $ 131,958     $ 129,285  
Net premiums earned   120,273       111,357       445,515       447,288  
Expense ratio   29.4 %     28.4 %     29.6 %     28.9 %
                       
Accident year combined ratio 3   99.7 %     104.7 %     101.3 %     106.9 %
                       
Gross premiums written $ 150,067     $ 141,727     $ 547,561     $ 574,918  
Net premiums written   121,275       111,934       441,000       452,242  
1   Total Value Creation equals change in book value plus dividends paid, divided by beginning book value.
2   Represents the corporate charges incurred in conjunction with the Board's review of a third party contingent sale agreement, activities of the special committee of the Board of Directors and a $1.5 million adjustment to our CECL allowance in the third quarter of 2020 related to the PSG litigation matter.
3   The accident year combined ratio is calculated as ratio of losses and loss expenses incurred, excluding prior period development, plus other operating expenses excluding corporate charges, less commission and other income to net premiums earned.

Investor Contact:
John R. Barnett
investors@protectiveinsurance.com
(317) 429-2554