Q1 2020 Earnings Call
Greetings and welcome to the protective Insurance Corporation first quarter 2020 earnings Conference call.
At this time, all participants aren't I'll listen only mode.
And then answer session will follow the formal presentation.
Any once you require operator assistance during the conference. Please press star zero on the telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to Marilynn Meek. Thank you. Please begin.
Thank you. Thank you all for joining us this morning for the protective insurance Corporation's first quarter 2020 conference call. If you did not receive a copy of the press release, you may access and online at the company's website, along with the Investor presentation to accompany today's call and earnings release.
Okay, which is available at www dot protective insurance Dot com.
I wouldn't like to remind everyone that we're hosting a live webcast for the call, which may be accessed it the company's website as well.
At this time management would like me to inform you that certain statements made during this conference call.
In the press release, which are not historical may be deemed forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Although protective insurance Corporation believes the expectations for like did in any forward looking statements are based on reasonable assumption. It can give no restaurants is.
That expectations would be obtained factors and risks that could cause actual results could differ materially from expectations are detailed in a press release and are included from time to time with the company's filings with the U.S.C.C.
I would now like to introduce Germany Johnson CEO.
Protective insurance Corporation and turn the call over to him. Please go ahead.
Good morning, and thank you all for joining joining me this morning.
On many levels this is being an extraordinary coated.
We'd like to stop by recognizing both our employees who have continued to provide the highest level of client service and responsiveness in the new work from home operating environment.
And our clients themselves, who are critical to our nation success and resilience. We are truly proud to be part of the trucking community.
Clearly volatility in equity and fixed income markets played heavily into our results.
The combination of mark to market and the value allowance.
Deferred tax asset negatively impacted net income and book value per share.
We have already seen a significant reversal the mark to market on both the equity and fixed income portfolios and we have full confidence and the underlying strength of our held to maturity fixed income portfolio.
We believe that more permanent an indicative trends are reflected in the progress we continue to make an operating turnaround with underwriting actions right. You know commercial auto portfolio claims discipline and frequency trends contributing to stronger income from core operations.
Turning to the numbers.
First quarter net loss was $22.8 million or dollar 56 per share, which compares to net income of $2.7 million or 18 cents a share for the prior years first quarter.
Income from core operations being the sum of underwriting income and investment income was $2.6 million, representing an income from core operations push out of 18 cents per share.
We have steadily improved our accident year underwriting results throughout twentytwenty, excluding loss development for all periods. The current accident quarter loss ratio improved by 1.7 points compared to Q4, 2019 and improved by 4.4 points compared to Q1 2019.
Improvements a driven by rate achievement I'm mix shifts in commercial auto where we improved rates by 22%.
Moreover, we are retaining high percentages of the better price customers and attracting new well priced risks into the portfolio.
Additionally, right in our profitable workers compensation book, while still negative are improving steadily.
Excluding loss development for all periods Q1 books in accident quarter combined ratio of one to 4.2.
Improved 0.5 points from Q4, 2019, and improved 3.2 points compared to Q1 2019.
In many parts of our portfolio, we've seen claims council dropped significantly.
I'm surprising given the fuel vehicles on the roads.
Most of our commercial auto policies are adjustable based on mileage I know workers compensation policies are just based on payroll. Thus, we anticipate reductions in premium if I transportation clients business slows.
Our book is geographically diverse.
And our customer stuff so many different industries.
While we do anticipate exposure I'm premium reductions given cobot 19 relate shutdowns, we believe those reductions will be manageable.
The mileage and payroll estimates our clients have reported to us in the last week's would indicate the claims counts are dropping off mall that exposure reductions.
Melting in potential improvements the loss ratio.
In the first quarter, we recognized approximately half a point the frequency benefit to our loss ratio driven by commercial auto.
That said, we and our clients still face off against a well financed plaintiff bar pursuing outsized and sometimes artificially elevated recoveries and we need to remain focused on price discipline reserve adequacy and claims strategies for long term profitability and value creation for all constituents.
I'm very pleased with the trend line in our core operations confident in and committed to continued improvement.
Protect it is extremely well positioned it all market, we have a strong capital base, an a rating from A.M. best which we are committed to retaining and a valuable reinsurance program in a form of a 75% reinsured unless I'm limited stop loss between to use 2013 through 2018, we do not say Smith.
Ill.
Underwriting loss exposure to cope with 19 and over the last two years, we've reduced risk and volatility on both the asset side and the liability side of our business.
Our core customer base is financially secure fleets of safety focused transportation providers and we have a deep bench of talented employees, who believe in our mission of staple roads and say for people.
We continue to invest in a critical technology transformation partnering with best in class digital and analytics providers and we believe that we can continue to grow our value to all our constituents.
With that I'll now turn the call over to John and then I'll come back on for some final comments before Q1 night.
Could you go jump thank you Jeremy.
Gross premiums written for the quarter decreased 10% to 134 million versus the prior year quarter.
The decrease is mostly driven by reductions and exposure to non trucking workers' comp as we focus on profitable strategies and our core business.
Net premiums earned for the quarter were essentially flat to the prior year period.
109.7 million.
Actions to improve underwriting results and increase investment income have resulted in positive income from core operations of 2.6 million for the quarter versus a loss of 2.5 million for the prior year quarter.
Our operations produced an underwriting loss of 4.6 million for the first quarter of 2020.
Up from a loss of 8.7 million in the prior year quarter.
The cumulative impact of current and prior period underwriting actions is reflected in the 3.8 point improvement to our combined ratio of one of 4.2.
And we are confident that our underwriting actions will continue to drive improvement and underwriting profit through 2020.
First quarter net investment income increased to 7.2 million.
A growth of 16.1% versus the prior year quarter.
They asset allocation shift to fixed income over the past two years continues to increase our investment income.
And provides increased ability to income from core business operations.
Book value per share on March 30, Onest 2020 was $21.53 a decrease of $3.98 per share.
This decrease was net of a 10 cents per share and cash dividends.
The primary drivers of the decline were investment portfolio Mark to market.
Adoption of accounting guidance related to the new.
Current expected credit loss model.
And a valuation allowance on our deferred tax assets.
We're confident in the strength of our investment portfolio and that's expected to recover mark to market value as the economy recovers.
The shift an asset allocation over the last two years from equities and limited partnerships in fixed income benefited the company by limiting the downside volatility during this economic downturn.
Further we have sufficient liquidity and cash treader treasuries and high quality corporate bonds, and if warranted have the ability to hold investments and unrealized positions and tell valuations recover or securities mature.
The Cecil allowance and the deferred tax asset valuation allowance.
Our required based on accounting guidance and the current circumstances.
Mark to market and our fixed income portfolio totaled 25.2 million pretax majority of the losses were concentrated in asset backed securities and mortgage backed securities primarily commercial.
The average credit rating on our commercial mortgage backed security portfolio of approximately 60 million was a plus at March 31st.
The average credit rating on our collateralized loan obligation portfolio, approximately 50 million was a minus at 331 2020.
The decline in values was driven by widening credit spreads and liquidity in these markets.
We have conducted stress testing on individual securities and believe that we have no impairment in these portfolios.
We expect that these securities will recover in value as the economy recovers.
Mark to market and our equity and limited partnership totaled 25.6 million pretax attributed to the general decline in equity markets.
We estimate that our investment portfolio recovered approximately 16 million and value during April which equates to approximately one dollar and 13 cents per share pretax.
On January 1st 2020, we adopted accounting guidance, which introduced a new model for measuring expected credit loss, commonly referred to as seasonal.
In accordance with this adoption of the standard we recorded a 12.2 million after tax adjustment to beginning retained earnings as of January 1st 2020.
11.9 million of the allowances related to the previously disclosed outstanding receivable with personnel staffing group.
Doing business as MVP staffing.
Further discussion of this matter can be found in the litigation commitments and contingencies footnote.
The first quarter 2020 form 10-Q filing.
The allowance for MVP staffing under the Cecil standard does not change our view that we intend to fully collect all current and future amounts due from MVP related to this matter.
Finally, I want to radio reiterate some key points on the valuation allowance in the press release.
The allowance was primarily driven by decline in investment values and the corresponding tax impacts, resulting in reversal of deferred tax liabilities to deferred tax assets during the quarter.
Because the company has recorded a three year cumulative net loss, we were not able to include future projected income in our analysis.
That's a valuation allowance does not change our positive outlook on future company results.
As we returned to profitability or realize appreciation in our equity and fixed income portfolios, our valuation allowance will be reduced or eliminated.
The valuation allowance recorded this quarter does not limit our ability to use deferred tax assets in the future.
During the first quarter of 2020, we spent 1.8 million to repurchased 127000 shares.
These purchases are immediately accretive to book value per share given an average purchase price of 60, 65% of March 31st 2020 book value.
In late March we stopped repurchasing shares.
Our view is to manage capital capital as tightly as possible given the economic uncertainty and market volatility associated with the cobot 19 pandemic.
Well, our capital levels have been adversely impacted by our current market conditions, we are comfortable with the capital level in support of our am best a rating.
As a reminder, we have posted our press release quarterly financial statements and a brief presentation reviewing our first quarter results on our website.
With that I'll turn this back to Jeremy.
For some additional comments prior to Q and <unk>.
Thanks, Tom.
Before we open the call for Q in a I want to briefly address the press release the company issued yesterday announcing the formation of a special committee of the board.
The Special Committee with the assistance of independent Advisors will evaluate stockholder support and contingent sale agreement that was entered into by and among certain perspective that party purchases. So no protective shareholders and the other parties.
As we announced protective received a notice of the contingent sale agreement on April 23rd Twentytwenty. The date, the public 13 de filings related to the company's Pos a common stock what made.
I want to highlight that the special Committee is composed entirely of independent directors, who will carefully review and consider the contingent sale agreement.
The committee is committed to acting in the best interest to the company and its stake holders.
If the offering policies commenced a tender offer the special committee intends to advise shareholders of its position regarding such tender also within 10 business days when the offering policies commensurate.
It is important to note that protective shareholders did not positive the contingent sat agreement advised to take no action at this time.
Beyond that the company does not intend to comment on well disclose further developments regarding the special committees evaluation unless and until it deems further disclosure was appropriate or required.
I also wanted to quickly discuss an announcement related to the company's bylaws yesterday.
Recommendation to the special Committee.
Board made the following decision Juan.
Allow only the board to call the special meeting of the company shareholders.
To.
Protective annual meeting of shareholders may not occur less than 11 months apart and three these amendments cannot be changed without approval of two thirds of the full board.
At this time, but it's not appropriate for management to cone comment further about the special committees review or the by those amendments as those a committee and board level matters. The purpose of today's call is to discuss off first quarter financial results and operational performance. So we ask that you keep your questions focused on those topics.
We will now open the call for Q1 night.
Thank you at this time, we will be conducting a question and answer session.
She would like to ask a question. Please press star one on your telephone keypad.
A confirmation Tony will indicate your line is the question Q.
In a press star too if you would like to remove yourself from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for your questions.
Our first questions come from the line of Ron Bobman of capital returns management. Please proceed with your questions.
Hi, Thanks, a lot good morning, everybody Hooper ones will.
Jeremy in your prepared remarks, you talked about the improving fundamentals I think in particularly for the underwriting environment and the progress that the company has made and in in the few items that you mentioned you talked about frequency trends.
Proving and I just wanted to make sure that you're really talking about frequency trends separate and apart.
From those that the company's experiencing by by way of covert.
Yes, so there's two things so first of all joined the call. So this year, we would naturally expect our loss ratio to improve by several points given the underwriting actions that we're taking.
I think we had indicated on on last quarter's call that our goal and intent was to emerge at the end of Twentytwenty with an underwriting profit.
So we still certainly expect a loss ratio to improve based on the rate that's only through the portfolio and the underwriting actions that we're taking.
On top of that it is possible that we may see a.
Moderate improvement to loss ratio on a temporary basis if in to the extent that.
Claims counts the reduction in claims counts it it's greater than the reduction in premium does that make sense I.E., we do expect premium to shrink because customers are not driving as much and they pay payroll as they make today to their employees will shrink.
But we expect our claims counts to go down slightly more than exposure goes down and that could well give us a small pick up in in the loss ratio.
We don't expect that that's going to be significant.
Bear in mind that business is.
Exposure rated on mileage and payroll some of it is based on units.
And also bear in mind that we we will not know ultimately the outcome of claims for several years. So we will continue to be relatively conservative in terms of how we may call picks.
It is it I suddenly being the case in point.
Prior downturns that.
Even if frequency has improved severity has deteriorated.
And we are still we believe that we're still in an environment of.
You know, let's call it social inflation and we don't believe that the plaintiff bar is suddenly going to let up on focusing on the trucking industry.
Yes, sure, maybe they'll get distracted, but thats for sure yeah, there'll be distracted I think.
On the other matter I'm not going to ask a question so.
I want to be respectful of your question I just want to comment that.
Clearly there is an inch interested fish on the line and I would or the urge the board to do nothing to risk, losing the fish <unk> babies to questions. Thank you.
[noise] as a reminder, if you would like to ask your question. Please press star one on your telephone keypad.
Our next question comes from the line, if Brett Reiss of Janney Montgomery Scott. Please proceed with your questions.
Hi, Jeremy Hi, John.
Oh yeah.
Good Everything's well with you with you felt was I just wanted to make sure I heard correctly. So your base case scenario is by.
Calendar year end, the combined ratio could could you know.
Get back towards 100.
Did I hear that.
Yeah, I, yes, but lets call the accident year loss ratio, yeah, we'd certainly not expecting of course, but almost by definition, we're not expecting was up a reserve or adverse development and we think well covered.
So adverse development through a stop loss treaty, but I'm really referring to accident, yeah, no counter yet so we and yes, we are aiming towards.
<unk> emerging moving into 2021.
With a with loss picks I'm, putting us into a into I underwriting profit and that's specific our goal is specific to the fourth quarter, Yes, yes exactly yes.
So we should we think for the full year Twentytwenty full year, we will still be all combined ratio will still be elevated but as we get into Q4. We think that we will we will cross over that 100, Mark is that as the loss ratios incrementally improved during the course of the yeah.
Alright, great and I'm not really a question, but just a request for some empathy.
You know I in most of my clients are you know class B shareholders.
And you know at this point in time.
[music].
We're in the position of.
You know really not being invited to the Dan and we can ask any questions about it and its.
You know, it's a little frustrating okay can you comment at all.
So I, Brett I can't comment little over and above my prepared comments.
Okay fair enough stay safe and well yeah Yep. Thank you appreciate your shareholdings okay.
Our next question, it's come from the line of Jamie Wagon, So Palm Valley Capital. Please proceed with your questions.
Hi, good morning, Thanks for taking a couple of questions here are the first one can you remind us how the investment portfolio is being managed as far as internal versus external resources and how involved a new vernon might be at this point.
Yeah. So so we Havent investment committee of the board that meets regularly to review investment protocols to review our investment advisor and sub advisors, we have an outside consultants, who essentially manages the sub advisors.
And although we have a.
I.
I think we have at this point less than a million, that's essentially being run off from old and you've been in partnerships, we essentially and now I'm not a we're doing very little with wouldn't even at this point.
Okay and then my other question.
I'm, a little information about though I mean its thanks.
Got going up I'm, sorry, I just want to be okay. We have a buyouts, we have about a 6 million dollar yeah Im not sure its company portfolio with new voting and that that is all that is still performing and it's a it's a small portfolio, but new boat and still managers that are not for us, but we've essentially exited at any other.
The management with new button.
Okay on equity side.
Yeah.
The second question do you have any information about the financial strength of personnel staffing group I'm. Just wondering how you. How you came to the 11 million allowance, which I think was about one quarter of the gross receivables as of the less disclosure.
Yeah.
It's a it's actually a little more than than a than a quarter of the <unk> Oh. The gross once you talked a tax effect and we are we.
Relies on our own internal Alice analysis of somewhat dated financial statements as well as Duff and Phelps and their analysis or have a off of off PSG.
Okay. Thank you.
As a reminder, you would like to ask a question. Please press star one on your telephone keypad.
Our next question it's come from the line that's the expense of RBC wealth management. Please proceed with your question.
Steve if you're speaking we caught hey, you.
Sorry about that.
Have you on mute.
Good morning.
Morning.
Just a point of clarification, if we can with respect to the statement that you made with respect to a again the class a shareholders did I understand you to say that the first notification that you had received.
<unk> was at the time of the filing.
Yes, that's correct.
Okay.
Thank you for that.
And then Oh, just one quick question as a general statement in terms of miles driven.
By your insurance or in the course of a last quarter I don't even begin to know how you might get feedback from them.
But what are what are those trends.
Not off much because of the need for merchandise to continue moving.
What's what's going on in that space. It's it's you know it's a mixed bag, Steve so in the quarter. So as all the end of 331, our customers were extremely busy many of them have have diversified customer base is and where I.
Well to the shift units and tractors from industries that are immediately down turning into industries that that had a.
Immediate need and there was suddenly a you know some areas the economy. The that had a massive need to get you know more food to a grocery stores et cetera.
We we track mileage with a with a lag. So you know at the end of April it basically getting much mileage from our customers. So it's a little tough to say with certainty what April or may be.
Looks like yet however, Oh, we split of course, we spend a lot of time without customers and Ah <unk> and anecdotally.
Most about about trucking customers feel that April.
Hey, pulling into May a gun to be the doubt that the slowest pots and then they seem to be relatively optimistic about recoveries and the latter part of Q2 and moving into Q3.
You know out book is fairly well diversified so.
A very large part of a book is providing a workers' comp and physical damage for the units driven by last mile independent contractors.
And that book, we just not anticipating a fall off a tool.
And then we have a we have a good size public transportation book and we are anticipating a significant falloff in that public transportation book.
By the way that public transportation book, it's still a bit challenged from a loss ratio standpoint, so as that shrinks disproportionately to the rest of all book a mix of business actually improves a little bit and then in the middle is what we were kind of budget was cool, which is those a fairly large.
Seats of safety focused financially financially secure trucking companies and many of those are the odds of us those are the ones that that I was referring to where they way. They would certainly be anticipating April or may be the bottoming out and then what they tell us is they anticipate seeing.
Strengthen that customer relationships bitten by the customer relationships coming back in a in Q3, but.
No.
The massive qualification on all that is is kind of who really knows well have to SEPA FA how quickly the economy.
Opens up again and how permanent that the opening up again is and if there is a second wave then you know we could obviously see another downturn in the economy, which would impact goods being goods being moved.
So it's it's with a it's with a qualification that I would say that were relatively optimistic that that are that up premiums will be down somewhere between 10, and 20% but for the full yeah.
Great. That's very helpful. Thank you very much and thank you for the hard work you're doing on these challenging times.
Yeah, you too thank you.
As a reminder, if he would like to ask the question. Please press star one on your telephone keypad.
Our next questions come from the line of Andrew Stein of first Manhattan. Please proceed with your questions, Yeah, Hi, Jerry or I think you you said premiums down 10% to 15% or for the year.
Are we talking about gross premiums net premiums premiums earned but I mean, what are you referring through on that.
Net well.
Yeah, that's that's another.
Yes, and yes, okay.
And one other.
No question I I looked at your supplement.
And in the supplement you know you have your loss picks on the commercial auto treaties.
And I guess, the most recent a policy youre underwriting here you saw a bit of improvement over there.
I think it was a couple of loss ratio points wouldn't that speak to sub reserve you know slight reserve redundancies flowing through the financials.
No it's more premium just earning through <unk>.
Okay. So the premium that sorting through is probably earning for better.
You know better combined with the old stuff.
Yes, okay.
And that's consistent with your view that the commercial auto business is getting incrementally better.
Yes, Okay and one other thing you know you mentioned you know I guess I think it was in the press release is you have or less reinsurance protection. This year and you know what are the one of the reasons you you mentioned.
Was that you know you're writing lower <unk>, you don't have as many high limit policies.
Could you quantify the reduction in high limit policies.
Between what you're currently writing and what you're writing your or to go.
Yeah, well I would tell you the in our public transportation book with it by the ended this yeah. We will essentially have moved that book from what was.
5 million net on every policy and there's hundreds of policies in that book down to no more than 2 million that.
We've we have a a an excellent partner who is a is taking the net three X to and Ah and so that's a fairly significant shift in public transportation and then in ER in our commercial in up.
Cool trucking book.
The the shift is not as significant.
We have a number of legacy customers, where frankly, we're still comfortable offering the 5 million net and and we had a handful of new you have relationships that were put on the books in 17 18, 19 that we just didnt, we weren't as comfortable putting they the 5 million we've dropped those down to a.
Down to two but the big impact where he is on the is on the public transportation space, Okay, and and I I think John referenced that as far as the portfolio that you've recovered $60 million over the over the losses you know.
Right, Yeah, that's real life.
The amount that will realize that were.
Well realized and unrealized trued up through the through the financial first quarter.
That's a that's a gross number some thought about its own fixed income some part of that is on its own the activities. So.
Let's say most number alright, alright. Thank you.
Thanks, Andy.
Operator are there any more questions.
There are no further questions at this time I'm. So sorry, I lost my connection for a second I'll hand, the call back over to you for any closing remarks.
Okay, well thank you.
And I appreciate all that all the support from up shareholder base I. We believe protective is a is extremely well positioned.
To what the volatility and Ah and we do appreciate your support please stay healthy.
Thank you.
That does flu todays conference you may disconnect. Your lines at this time. Thank you for your participation and have a great that.