Protective Insurance Corp - FORM 8-K - EX-99.1 - EXHIBIT 99.1 - May 6, 2021

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Protective Insurance Corporation
May 6, 2021
Unaudited First Quarter Financial Statements
Investor Contact:  John R. Barnett
 
investors@protectiveinsurance.com
 
(317) 429-2554


PROTECTIVE INSURANCE CORPORATION ANNOUNCES RESULTS FOR THE FIRST QUARTER 2021

Carmel, Indiana, May 6, 2021—Protective Insurance Corporation (NASDAQ: PTVCA, PTVCB) today reported first quarter net income of $12.9 million, or $0.90 per share, which compares to net loss of $22.2 million, or $1.56 per share, for the prior year’s first quarter.

Highlights for the first quarter of 2021 include:

•
Net premiums earned increased to $122.9 million in the first quarter of 2021 from $109.7 million in the first quarter of 2020, primarily as a result of rate increases achieved in most lines of business and existing business exposure growth in our commercial automobile products.

•
Accident Year combined ratio was 97.4% for the first quarter of 2021, an improvement of 6.8 points over the comparative 2020 period.

•
Realized and unrealized investment gains recognized through the statement of operations were $10.5 million (pre-tax) for the first quarter of 2021.

•
Book value per share increased $0.20 during the first quarter as positive net income was partially offset by fixed income losses recorded in comprehensive income.  Book value per share was $25.63 at March 31, 2021.

Jeremy Johnson, Protective’s Chief Executive Officer, said: "I’m pleased and proud of the continued improvements in our operating results. We are now well down the path to sustainable profitability and are focused on margin expansion while investing in technology and data to support our customers’ needs. We look forward to finalizing our acquisition by The Progressive Corporation and fully anticipate creating further value and opportunity for our customers, distribution partners and employees. This is an exciting new era for Protective."

Income from core business operations, before federal income tax, was $9.3 million for the first quarter of 2021 compared to income from core business operations, before federal income tax, of $2.6 million during the first quarter of 2020.

Gross premiums written for the first quarter of 2021 increased 8.2% to $145.1 million compared to $134.0 million written during the prior year period.  Net premiums earned for the first quarter of 2021 increased 12.0% to $122.9 million, compared to the prior year period.  The higher premiums are primarily the result of increased premiums related to rate increases achieved in most lines of business and existing business exposure growth in our commercial automobile line of business.

Underwriting operations produced an accident year combined ratio of 97.4% during the first quarter of 2021; an improvement when compared to an accident year combined ratio of 104.2% for the prior year period.  Excluding prior period development, the first quarter of 2021 accident year loss ratio was 67.7% which was a 6.9 point reduction from the first quarter 2020 loss ratio.  The reduction in the loss ratio and combined ratio reflects actions taken by the Company to improve underwriting results, including non-renewal of unprofitable business as well as significant rate increases in commercial automobile.  Additionally, given ongoing profitability challenges, the company discontinued writing public transportation business in the fourth quarter of 2020.

Prior period loss development was $0.8 million favorable for the quarter compared to flat development for the prior year quarter.  For the first quarter of 2021, we experienced favorable development in our commercial automobile liability line of business for more recent accident years due to better than expected reported loss development.

In our commercial automobile portfolio, the Company attained weighted average rate increases of 11.9% on premiums available for renewal during the first quarter of 2021.  Including other lines of business, rate change for the quarter totaled 5.2%, which is well above our view of loss cost trend and is contributing to our underwriting results improvement.

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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 significant 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.  Due to continued rate achievement in commercial automobile, improvements in mix of business and reductions to our limits profile we decided to non-renew this treaty for policies written after July 3, 2020.

Net investment income for the first quarter of 2021 decreased 26.7% to $5.3 million compared to $7.2 million in the prior year period.  The decrease reflected lower interest rates on cash and cash equivalent balances and lower interest rates on reinvestment partially offset by an increase in average funds invested compared to the first quarter of 2020.  Credit quality remains high with a weighted average rating of AA-, including cash.

Book value per share as of March 31, 2021 was $25.63, an increase of $0.20 per share during the first three months of 2021, after the payment of cash dividends to shareholders totaling $0.10 per share.

During the first quarter of 2021, total realized and unrealized investment losses (pre-tax) were $1.0 million.  The following table provides details related to our unrealized and realized investment gains (losses) during the three months ended March 31, 2021:

   
Three Months Ended
March 31, 2021
  
Net realized gains on investment, including impairments, within statements of operations
  
$
2,257
  
Net unrealized gains on equity securities and limited partnership investments within statements of operations
    
8,252
  
Net unrealized losses on fixed income securities recorded within other comprehensive loss
    
(11,495
)
Total realized and unrealized investment losses (pre-tax)
  
$
(986
)

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
March 31
  
   
2021
    
2020
  
Income (loss) before federal income tax expense (benefit)
  
$
16,353
    
$
(25,139
)
Less: Net realized gains (losses) on investments
    
2,257
      
(4,827
)
Less: Net unrealized gains (losses) - equity securities and limited partnerships
    
8,252
      
(22,929
)
Less: Corporate charges included in Other operating expense
    
(3,474
)
    
–
  
Income (loss) from core business operations
  
$
9,318
    
$
2,617
  
Less: Net investment income
    
5,306
      
7,236
  
Underwriting income (loss)
  
$
4,012
    
$
(4,619
)

The Company uses 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 the Company’s 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 the Company’s GAAP underwriting results.


- 2 -
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.

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Protective Insurance Corporation and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except per share data)

   
March 31
    
December 31
  
   
2021
    
2020
  
Assets
            
Investments 1:
            
Fixed income securities (2021: $901,009; 2020: $894,468)
  
$
914,949
    
$
919,692
  
Equity securities
    
67,015
      
58,169
  
Limited partnerships, at equity
    
7,476
      
7,214
  
Commercial mortgage loans
    
10,866
      
10,602
  
Short-term 2
    
1,000
      
1,000
  
     
1,001,306
      
996,677
  
Cash and cash equivalents
    
95,566
      
58,301
  
Restricted cash and cash equivalents
    
11,538
      
12,128
  
Accounts receivable
    
96,200
      
100,921
  
Reinsurance recoverable
    
455,462
      
455,564
  
Other assets
    
91,839
      
90,256
  
Deferred federal income taxes
    
10,764
      
8,980
  
   
$
1,762,675
    
$
1,722,827
  
                 
Liabilities and shareholders' equity
                
Reserves for losses and loss expenses
  
$
1,108,132
    
$
1,089,669
  
Reserves for unearned premiums
    
59,049
      
63,731
  
Borrowings under line of credit
    
20,000
      
20,000
  
Accounts payable and other liabilities
    
205,265
      
185,579
  
Current federal income taxes
    
3,551
      
766
  
     
1,395,997
      
1,359,745
  
Shareholders' equity:
                
Common stock-no par value
    
610
      
609
  
Additional paid-in capital
    
55,645
      
54,571
  
Accumulated other comprehensive income
    
12,766
      
21,759
  
Retained earnings
    
297,657
      
286,143
  
     
366,678
      
363,082
  
   
$
1,762,675
    
$
1,722,827
  
                 
Number of common and common equivalent shares outstanding
    
14,308
      
14,278
  
Book value per outstanding share
  
$
25.63
    
$
25.43
  

1
2021 & 2020 cost in parentheses
2
Approximates cost

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Protective Insurance Corporation and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per share data)

   
Three Months Ended
March 31
  
   
2021
    
2020
  
Revenues
            
Net premiums earned
  
$
122,853
    
$
109,659
  
Net investment income
    
5,306
      
7,236
  
Commissions and other income
    
1,858
      
1,663
  
Net realized gains (losses) on investments, excluding impairment losses
    
2,339
      
(4,787
)
Impairment losses on investments
    
(82
)
    
(40
)
Net unrealized gains (losses) on equity securities and limited partnership investments
    
8,252
      
(22,929
)
Net realized and unrealized gains (losses) on investments
    
10,509
      
(27,756
)
     
140,526
      
90,802
  
Expenses
                
Losses and loss expenses incurred
    
82,318
      
81,831
  
Other operating expenses
    
41,855
      
34,110
  
     
124,173
      
115,941
  
Income (loss) before federal income tax expense (benefit)
    
16,353
      
(25,139
)
Federal income tax expense (benefit)
    
3,415
      
(2,983
)
Net income (loss)
  
$
12,938
    
$
(22,156
)
                 
Net income (loss) per share:
                
Basic
  
$
.91
    
$
(1.56
)
Diluted
    
.90
      
(1.56
)
                 
Weighted average number of shares outstanding:
                
Basic
    
14,153
      
14,169
  
Dilutive effect of share equivalents
    
154
      
–
  
Diluted
    
14,307
      
14,169
  

- 5 -

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

   
Three Months Ended
  
   
March 31
  
   
2021
    
2020
  
Net cash provided by (used in) operating activities
  
$
20,911
    
$
(1,312
)
Investing activities:
                
Purchases of fixed income and equity securities
    
(92,719
)
    
(82,641
)
Proceeds from sales or maturities of fixed income securities
    
108,880
      
79,640
  
Proceeds from sales of equity securities
    
2,064
      
5,480
  
Purchase of commercial mortgage loans
    
(319
)
    
(368
)
Proceeds from commercial mortgage loans
    
54
      
72
  
Distributions from limited partnerships
    
186
      
14,636
  
Other investing activities
    
(1,046
)
    
(369
)
Net cash provided by investing activities
    
17,100
      
16,450
  
Financing activities:
                
Dividends paid to shareholders
    
(1,424
)
    
(1,426
)
Repurchase of common shares
    
–
      
(1,782
)
Net cash used in financing activities
    
(1,424
)
    
(3,208
)
                 
Effect of foreign exchange rates on cash and cash equivalents
    
88
      
(687
)
                 
Increase in cash, cash equivalents and restricted cash and cash equivalents
    
36,675
      
11,243
  
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period
    
70,429
      
88,888
  
Cash, cash equivalents and restricted cash and cash equivalents at end of period
  
$
107,104
    
$
100,131
  

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

   
Three Months Ended
  
   
March 31
  
   
2021
    
2020
  
             
Book value per share beginning of period
  
$
25.43
    
$
25.51
  
Book value per share end of period
    
25.63
      
21.53
  
Change in book value per share
  
$
0.20
    
$
(3.98
)
Dividends paid
    
0.10
      
0.10
  
Change in book value per share plus dividends paid
  
$
0.30
    
$
(3.88
)
Total value creation 1
    
1.2
%
  
NM
  
                 
Return on average shareholders' equity:
                
Average shareholders' equity
    
364,880
      
334,850
  
                 
Net income (loss)
    
12,938
      
(22,156
)
Less: Tax valuation allowance recognized in net income (loss)
    
–
      
(2,306
)
Less: Net realized and unrealized gains (losses) on investments, net of tax
    
8,302
      
(21,927
)
Less: Corporate charges included in Other operating expenses, net of tax 3
    
(2,744
)
    
–
  
Income from core business operations, net of tax
    
7,380
      
2,077
  
                 
Return on net income (loss)
    
3.5
%
  
NM
  
Return on income from core business operations, net of tax
    
2.0
%
    
0.6
%
                 
                 
Loss and LAE expenses incurred
  
$
82,318
    
$
81,831
  
Less: Prior period loss development
    
(825
)
    
(8
)
Loss and LAE expenses incurred, less prior period loss development
  
$
83,143
    
$
81,839
  
Net premiums earned
    
122,853
      
109,659
  
Accident year loss and LAE ratio
    
67.7
%
    
74.6
%
                 
Other operating expenses
  
$
41,855
    
$
34,110
  
Less: Commissions and other income
    
1,858
      
1,663
  
Less: Corporate charges 2
    
3,474
      
–
  
Other operating expenses, excluding corporate charges, less commissions and other income
  
$
36,523
    
$
32,447
  
Net premiums earned
    
122,853
      
109,659
  
Expense ratio
    
29.7
%
    
29.6
%
                 
Accident year combined ratio 3
    
97.4
%
    
104.2
%
                 
Gross premiums written
  
$
145,056
    
$
134,006
  
Net premiums written
    
118,827
      
109,234
  

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 activities of the special committee of the Board of Directors related to the merger with Progressive.
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.

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