Q2 2020 Protective Insurance Corp Earnings Call

Greetings and welcome to protective Insurance Corporation second quarter 2020 earnings Conference call.

At this time all lines.

Participants.

Could only mode a question and answers that she will follow the formal presentation. If any what's your acquire up radar systems. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to Maryland make because again thank you.

Thank you. Thank you all for joining us this morning.

Captive Insurance Corporation second quarter 2020 conference call. If you did not receive a copy of the press release you may access it online at the company's website, along with an investor presentation to accompany todays call and earnings release, which is available at www dot print.

Dr Insurance Dot com.

I'd like to remind everyone that we're hosting a live webcast for the call, which may be accessed at the company's website as well.

At this time management would like me to inform you got certain statements made during this conference call and then the press release, which are not historical may be deemed forward looking statements, but then the meaning of the private Securities Litigation Reform Act of 1995, Although protective insurance Corporation believes seeks.

Patients, reflecting in any forward looking statements are based on reasonable assumptions. It can give no assurance set expectations will be obtained.

Factors and risks that could cause actual results could differ materially from expectations are detailed in the press release and are excluded from time to time with the company's filings with the FCC.

I would like introduce Germany, Johnson CEO Perked up your insurance Corporation and turn the call over to him. Please go ahead.

Thank you good morning and.

Thank you all for joining joining me this morning.

Let me start by thanking my colleagues off with a rapid adjustment to a new remote web working.

We continue to run the company service all clients on pay all claims with the highest level of commitment and professionalism.

This is a dedicated experienced and resilient team and I'm proud to be part of it.

I'm really pleased with this quarter's financial performance our commitment to rate increases in commercial auto risk selection and mix of business can be seen clearly in the significant reduction in our accident year loss ratio.

The more pure vehicles on the road has reduced our claims frequency.

Although our premiums are reduced on both an island and a written basis adjusting for the lines of business, we no longer right a premium it's a up slightly above Q1, twentytwenty and down slightly over the same quarter last year.

We were specialist in writing transportation fleets, but I'll book is diversified by fleet size vehicle type industry, So geography and distribution channel.

Diversification has supported our premium base through a challenging economic period.

On the asset side, a portfolio has responded well to the improvement in the equity and fixed income markets and although it is still down for the yeah. We are encouraged by the recovery and remain fully confident in the underlying strength football held to maturity fixed income portfolio.

Turning to the numbers.

Second quarter net income was $11.4 million or 80 cents per share, which compares to net income of $1.5 million or 11 cents per share for the prior year second quarter.

For the first six months of Twentytwenty net loss totaled 10.8 million, Oh 76 cents per share compared to net income of 4.3 million or 28 cents per share for the 2019 period.

Income from core operations being the sum of underwriting income and investment income was 5.3 million representing an income from core operations per share all 37 cents.

The first six months of Twentytwenty income from core operations was 7.9 billion or 56 cents Pasha.

We have steadily improved our accident year underwriting results throughout twentytwenty.

Excluding loss development for all periods. The current accident year loss ratio was 70.1.

This is an 8.6 point improvement from Q2, 2019, and a 4.5 point improvement from Q1 Twentytwenty.

We had a nominal amount of favorable development in the quarter and our accident year combined ratio at one 1.4 improved by 5.6 points from Q2, 2019, and 2.8 points from Q1 Twentytwenty.

Improvements driven by right achievement and mix shift in commercial auto well be improved rates by 21% in the quota.

As you've heard me say in past calls, we all retaining high percentages of the better price customers and attracting new well priced risks into the portfolio.

Right No workers compensation book were flat for the quarter [laughter].

In general we're pleased with the performance of our workers compensation book. However, we do not believe those anymore right to give up and we'll remain disciplined with pricing and risk selection notwithstanding competitive pressures.

In the quota we made the decision to exit all public transportation book effective October 31st Twentytwenty.

Book has been historically challenged and we do not see a path to profitability targets in a reasonable timeframe.

In that book this quarter, we have seen significant reductions in insured units and premium given cobot 19.

In many parts of our portfolio, we have seen claims counts dropped significantly.

Unsurprising, given the fuel vehicles and the roads.

Most of all commercial auto policies or adjustable based on mileage.

Workers compensation policies are adjustable based on payroll and physical damage and public transportation policies or just to go based on units.

Stuff when our clients business drops our premiums Rob and the claims counts dropped more than premiums drop we see an improvement in frequency and loss ratio.

In general we have seen frequency improvements across the book.

Additionally, our most profitable customer segment, so by the grown well shrunk less than our lease profitable lines of business.

In addition to a frequency improvement a loss ratio has also been positively positively impacted by mix of business.

We estimate the total impact of this cobot 19 related shift at 3.5 points improvement to our loss ratio in the quarter.

Claims counts are starting to normalize and we do not anticipate logic frequency benefit in future quarters.

But we do not anticipate that severity will increase and it is clear that the plaintiff bar continues to aggressively target the trucking industry.

We will remain focused on price discipline reserve adequacy and claims strategies, but long term profitability and value creation for all constituents.

We continue to make strong progress in all technology transformation, how data Lake is now live I will serve as a moving to the cloud development work on all commercial auto analytics and underwriting platform is progressing well towards the Q4, Twentytwenty launch and we've announced a partnership with an industry, leading software provider to build up billing and claim system cloud native.

<unk> enabled and on the Microservices infrastructure.

We believe that all technology transformation will unlock significant additional value over time.

I remain very pleased about progress and momentum I believed that we are extremely well positioned in all market.

We do not face material underwriting loss exposure to cope with 19 and over the last two years, we have reduced risk and volatility on both the asset side on the liability side of our business.

Our core customer base is financially secure fleets of safety focus transportation providers and we have a deep bench of talented employees, who believe in our mission of safer 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 constituents.

With that I'll now turn the call over to John.

Thanks, Jeremy I also want to acknowledge the resiliency and focus of our team during these challenging times.

We've made significant progress on our mission to achieve underwriting profitability.

We reported 70.1% accident year ratio in the second quarter.

First as a 78.7% accident year ratio and the prior year quarter.

As seen in our Investor presentation on our website, we've made steady consistent progress reducing our loss ratio.

Since the beginning of the pandemic, we began to focus on expense management, placing a temporary hiring freeze on most open positions and challenging discretionary spending.

Our efforts limited the increase to the second quarter expense ratio that was primarily driven by the decline in premiums earned.

Investment income from the quarter was impacted by the significant drop and money market rates and to a much lesser extent lower yields on reinvestment.

Investment income decreased from 7.2 million in the first quarter of 20 26.4 million and the second quarter.

We do not expect this level of declined to continue on a quarter over quarter basis.

But we will be exposed to reinvestment risk as long as the low rate environment persists.

Income from core business operations was positive for the second quarter, increasing 2.7 million from 2.6 million in the first quarter of 20 25.3 million in the second quarter.

Income statement investment gains were 10.6 million.

2 million of the gain related to fixed income 9.2 million gain related to equities.

And we did have a 600000 lost from limited partnerships.

And what's not seen in the income statement is another 22 million in pre tax fixed income gains that were recognized through comprehensive income.

Total pretax investment gains for the quarter, where approximately 33 million.

During the quarter, we recovered and most of the fixed income portfolio losses experienced in the prior quarter.

Fixed income gains in the quarter were driven by high quality corporates and treasuries.

Our C.M.B.S.M. best sense have yet to recover value.

However, we review portfolio and securities regularly remain confident in their performance.

We estimate that our investment portfolio gained approximately seven and a half million.

In value during July, which equates to approximately 53 cents per share pretax.

Given the pandemic driven market volatility and economic uncertainty, we further de risk our investments by reducing ex equity exposure by 34 million during the quarter.

At the end of the first quarter of 2020, we recorded a valuation allowance on our deferred tax F tax assets up 4.9 million.

Due to the gains on our investment portfolio during the second quarter of 2020, the value what valuation allowance reason was reduced by 2.5 million to 2.4 million.

Finally, due to our strong investment gains and then come from core business operations book value per share increase.

By $2, an 11 cents during the quarter to $23.64 per share.

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 we will now open up for Tonight.

Thank you know if he would like to ask a question. Please press star one I know your telephone keypad.

Affirmation till the indicate your line is in the question can you maybe press star to if he would like to remove your question from the Q.

All participants you think speaker equipment and they'd be necessary to pick up your handset before pressing the star he's.

Once again it is star one on your telephone keypad, we've all ties Fairbreeze Momenta poll for questions.

There are no questions at this time.

Actually we just got a question come in and that is from.

Gee, we Wiggins with pain Valley capital. Please proceed.

Hey, Thank you very much good morning, no. Good it's good to see what's happening on the underwriting side. My question was it was about the investment portfolio. I. Appreciate the comments are getting a little bit of color about what you're doing a fixed income, but specifically on the CMS.

Sort of sounded like you had a meeting.

These risks that part of the portfolio because the prices.

I haven't really recovered I assume the underlying performance of those properties is still pretty ugly.

And even if the prices haven't recovered Mark you can always get worse, especially if you're in a sense not is involved in the markets at some point aside ever happens so or is your plans just a to ride it out and how it goes prices come back for better or worse.

Thanks.

Yeah, Great question, obviously, one that we spend a lot of time I'm.

Asking ourselves and I think you know you're kinda spot on with your analysis I <unk> I certainly wouldn't use the word hope you know we we are planning on.

On writing out those assets until they get until they mature and the way, though we participate in the structures are those CMBS, we feel that we are in an excellent position in those structures.

And we we do not view them as being anything other than ultimately money good.

Okay.

As a reminder, just star one I knew telephone keypad, if he would like to ask a question anyway, well just sized appropriately not meant to poll for questions.

Our next question is from Brett Reece with Janney. Please proceed.

Yeah, Hi, gentlemen.

The.

Progress on the reduction in the combined ratio.

Encouraging to see.

But if a driver traffic you know returns to you know pre kobin level.

Well, that's you know.

What we see that kind of like Spike back up you know can you talk about that a little bit.

Yeah, <unk> first of all night nice to have me Brett.

Yes, and in <unk> theory, I'm I'm going to think about was how I asked that question because I as I said to you a in the last two earnings calls we believe we'll hit that 99.9 combined ratio in Q4. This year and we believe it will hit that irrespective of any frequency benefit caused by kogut.

We did get a.

And I hate to call a benefit a mathematical advantage and keep this quarter or because of frequency because its fuel vehicles and the roads. However, our loss ratio also came down significantly because of the work that we've done an underwriting with rate, earning through with the shifted the mix of business.

And that loss ratio.

Our plan our full cost on our conviction is that the loss ratio will continue to come down given earnings patents on the premium written over the last 12 months next quarter and the following quarter and into 2000, and a and 21, we we anticipate a small frequency but.

In a fit in the next quarter or possibly even in the fourth quarter up but you know that's that's pretty good. That's we're gonna have to look at that and the rear view mirror a with how many vehicles are on the roads, but weve, but we certainly anticipate that our run rate loss ratio and combined ratio would would continue to come down a everest.

Active all the frequency benefit and we still feel very good about 99.9 target that we put out there for a full for Q4, and then obviously or moving into an underwriting profit for full year in 2021.

Great all right. Thanks for taking my question they say.

Yeah, you too.

I once again, we'll just wait a brief momenta poll for questions.

Yeah, no more questions at this time I like to turn the conference back over to management for closing remarks.

Okay.

Thank you for all very much thank you for listening.

As I said in my opening comments, so we feel really good about our progress we feel really good about where we where where we all and what opportunities are in a you know market and we appreciate your your continued support thank you and a and stay safe.

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

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