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Protective Insurance Corporation (PTVCA)
Q1Â 2020 Earnings Call
May 6, 2020, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings and welcome to the Protective Insurance Corporation First Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to Marilynn Meek. Thank you. Please begin.
Marilynn Meek -- Investor Relations, MWW Group
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 it online at the company's website along with the Investor Presentation to accompany today's call and earnings release, which is available at www.protectiveinsurance.com. I would like to remind everyone that we are 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 that certain statements made during this conference call and 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 reflected in any forward-looking statements are based on reasonable assumptions it can give no assurances that expectations will be obtained. Factors and risks that could cause actual results to differ materially from expectations are detailed in the press release and are included from time-to-time with the company's filings with the SEC.
I would now like to introduce Jeremy Johnson, CEO of Protective Insurance Corporation and turn the call over to him. Please go ahead.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Good morning, and thank you all for joining John and me this morning. On many levels, this has been an extraordinary quarter. I would like to start 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's success and resilience and we are truly proud to be part of the trucking community. Clearly, volatility in equity and fixed income market played heavily into our results. The combination of mark-to-market and the value allowance of a deferred tax asset negatively impacted net income and book value per share We have already seen a significant reversal in mark-to-market on both the equity and fixed-income portfolios.
And we have full confidence in the underlying strength of our hold-to-maturity fixed income portfolio. We believe that more permanent than indicative trends are reflected in the progress we continue to make in our operating turnaround with underwriting actions rate in our commercial auto portfolio, claims discipline and frequency trends contributing to stronger income from core operations. So turning to the numbers, first quarter net loss was $22.2 million or $1.56 per share, which compares to net income of $2.7 million or $0.18 a share for the prior year's 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 per share of $0.18 per share.
We have steadily improved our accident year underwriting results throughout 2020. 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 are driven by rate achievement and mix shift in commercial auto where we improved rates by 22%. Moreover we are retaining higher percentages of the better priced customers and attracting new well-priced risks into the portfolio. Additionally, rates in our profitable workers' compensation book while still negative are improving steadily. Excluding loss development for all periods, Q1 books and accident quarter combined ratio of 104.2% 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 counts dropped significantly unsurprising given the fewer vehicles on the road. Now most of our commercial auto policies are adjustable based on mileage and our workers' compensation policies are adjustable based on payroll thus we anticipate reductions in premium if our transportation client business slows. Our book is geographically diverse and our customers serve many different industries. While we do anticipate exposure and premium reductions given COVID-19 related shutdowns, we believe those reductions will be manageable. The mileage and payroll estimates our clients have reported to us in the last weeks would indicate that claims counts are dropping off more than exposure reductions resulting in potential improvement to loss ratio. In the first quarter, we recognized approximately 0.5 point to 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 claim strategies for long-term profitability and value creation for all our constituents. I'm very pleased with the trend line in our core operations, confident in and committed to continued improvement. Protective is extremely well positioned in our market. We have a strong capital base, an A rating from AM Best, which we are committed to retaining and a valuable reinsurance program in the form of a 75% reinsured unlimited stop loss for treaty years 2013 to 2018.
We do not face material underwriting loss exposure to COVID-19 and over the last two years we have 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 safer roads and safer people. We continue to invest in the 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 Q&A. Here you go, John.
John R. Barnett -- Chief Financial Officer
Thank you, Jeremy. Gross premiums written for the quarter decreased 10% to $134 million versus the prior year quarter. The decrease was mostly driven by reduction in exposure to non-trucking workers' comp as we focus on profitable strategies in our core business. Net premiums earned for the quarter were essentially flat to the prior year period at $109.7 million. Actions to improve underwriting results and increased 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 104.2%. And we are confident that our underwriting actions will continue to drive improvement in underwriting profit through 2020. First quarter net investment income increased to $7.2 million, a growth of 16.1% versus the prior year quarter. The asset allocation shift to fixed income over the past two years continues to increase our investment income and provide increased stability income from core business operations. Book value per share on March 31, 2020 was $21.53, a decrease of $3.98 per share. This decrease was net of a $0.10 per share in cash dividends. The primary drivers of the decline were investment portfolio mark-to-market, the adoption of accounting guidance related to the new current expected credit-loss model and the valuation allowance on our deferred tax asset.
We are confident in the strength of our investment portfolio and that's expected to recover mark-to-market value as the economy recovers. The shift in asset allocation over the last two years from equities and limited partnership to fixed income benefited the company by limiting the downside volatility during this economic downturn. Further, we have sufficient liquidity and cash treasuries and high quality corporate bonds. And if warranted have the ability to hold investment in unrealized positions until valuations recover or securities mature. The seasonal allowance and the deferred tax asset valuation allowance are required based on accounting guidance and the current circumstances. Mark-to-market and our fixed income portfolio totaled $25.2 million pre-tax.
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 31. The average credit rating on our collateralized loan obligation portfolio approximately $50 million was A minus at 3/31/2020.The decline in values was driven by widening credit spreads and illiquidity 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 in our equity and limited partnership totaled $25.6 million pre-tax attributed to the general decline in equity markets.
We estimate that our investment portfolio recovered approximately $16 million in value during April, which equates to approximately $1.13 per share pre-tax. On January 1, 2020, we adopted accounting guidance which introduced the new model for measuring expected credit loss commonly referred to as CECL. In accordance with this adoption of this standard we recorded a $12.2 million after-tax adjustment to beginning retained earnings as of January 1, 2020. $11.9 million of the allowance is 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 of the first quarter 2020 Form 10-Q filing. The allowance for MVP Staffing under the CECL 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 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 of the company has recorded a three-year cumulative net loss we were not able to include future projected income in our analysis. This valuation allowance does not change our positive outlook on future company results. As we return to profitability or realized 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 repurchase 127,000 shares.
These purchases are immediately accretive to book value per share given an average purchase price of 65% of March 31, 2020 book value. In late March, we stopped repurchasing shares. Our view is to manage capital as tightly as possible given the economic uncertainty and market volatility associated with the COVID-19 pandemic. While 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&A.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Thanks, John. Before we open the call for Q&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 the stockholders' support and contingent sale agreement that was entered into by and among certain perspective third-party purchases certain of Protective shareholders and the other party. As we announced, Protective received a notice of the contingent sale agreement on April 23, 2020, the date the public 13D filings related to the company's Class A common stock were 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 of the company and its stakeholders. If the offering parties commence a tender offer, the Special Committee intends to advise shareholders of its position regarding such tender offer within 10 business days of when the offering parties commence it. It is important to note that Protective shareholders that are not party to the contingent sale agreement are advised to take no action at this time. Beyond that, the company does not intend to comment on or disclose further developments regarding the Special Committee's evaluation unless and until it deems further disclosure is appropriate or required. I also want to quickly discuss an announcement related to the company's bylaws yesterday.
At the recommendation of the Special Committee the Board made the following decisions: One, allow only the Board to call a special meeting of the company's shareholders; two, Protective's 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, it is not appropriate for management to comment further about the Special Committee's review or the bylaws amendment as those are Committee and Board level matters. The purpose of today's call is to discuss our 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 Q&A.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from the line of Ron Bobman of Capital Returns Management. Please proceed with your question.
Ron Bobman -- Capital Returns Management -- Analyst
Hi, thanks a lot. Good morning everybody. Hope everyone's well.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Hi Ron.
Ron Bobman -- Capital Returns Management
Jeremy, in your prepared remarks you talked about the improving fundamentals. I think in particular, sort of the underwriting environment and the progress that the company has made and in the few items that you mentioned, you talked about frequency trends improving. And I just wanted to make sure that you were really talking about frequency trend separate and apart from those that the company is experiencing by way of COVID-19.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Yes. So there's two things, Ron. So first of all during the course of this year we would naturally expect our loss ratio to improve by several points given the underwriting actions that we're taking. And I think we had indicated on the last quarter's call that our goal and intent was to emerge at the end of 2020 with an underwriting profit. So we still certainly expect our loss ratio to improve based on the rate that's earning 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 and to the extent that claims counts -- the reduction in claims counts is greater than the reduction in premium. Does that make sense, i.e., we do expect premium to shrink because our customers are driving as much and their payroll they make for their -- 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 pickup in the loss ratio. We don't expect that that's going to be significant. Bear in mind that our business is exposure-rated on mileage and payroll, some of it is based on unit and also bear in mind that 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 make our picks. It has certainly been the case in prior downturns that even if frequency has improved, severity has deteriorated and we are still, we believe that we are still in an environment of, 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.
Ron Bobman -- Capital Returns Management -- Analyst
Yeah, I'm sure. Maybe they'll get distracted but that's for sure.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Yeah, they'll be distracted I think.
Ron Bobman -- Capital Returns Management -- Analyst
On the other matter, I'm not going to ask a question because I want to be respectful of your request. I just want to comment that clearly there is an interested fish on the line. And I would urge the Board to do nothing to risk losing the fish.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Thank you Ron, [Indecipherable] the question. Thank you.
Operator
[Operator Instructions] Our next question comes from the line of Brett Reiss of Janney Montgomery Scott. Please proceed with your question.
Brett Reiss -- Janney Montgomery Scott -- Analyst
Hi, Jeremy. Hi, John. Good everything is well with you fellows. I just wanted to make sure I heard it correctly. So your base case scenario is by calendar year end, is the combined ratio could get back toward a 100%. Did I hear that?
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Yes. But let's call it accident year loss ratio. We're certainly not expecting of course but almost by definition, we're not expecting reserve -- adverse development and we think we're well covered for adverse development through our stop loss treaty. But I'm really referring to accident year, not calendar year. So we, and yes, we are aiming toward emerging moving into 2021 with loss picks, putting us into a underwriting profit.
John R. Barnett -- Chief Financial Officer
And that's specific. Our goal is specific to the fourth quarter.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Yes, exactly. Yes. So we think for the full year 2020, full year, we will still be -- our combined ratio will still be elevated but as we get into Q4 we think that we will cross over that 100% mark as the loss ratios incrementally improve during the course of the year.
Brett Reiss -- Janney Montgomery Scott -- Analyst
All right, great. And not really a question, but just a request for some empathy. I and most of my clients are Class B shareholders and at this point in time we're in the position of really not being invited to the dance and we can't ask any questions about it. And it's a little frustrating. Can you comment at all?
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
I'm sorry, Brett, I can't comment at all over and above my prepared comments.
Brett Reiss -- Janney Montgomery Scott -- Analyst
Okay, fair enough. Stay safe and well.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Yeah, yeah. Thank you. Appreciate your shareholding.
Brett Reiss -- Janney Montgomery Scott -- Analyst
Okay.
Operator
Our next question comes from the line of Jayme Wiggins of Palm Valley Capital. Please proceed with your question.
Jayme Wiggins -- Palm Valley Capital -- Analyst
Hey, good morning. Thanks for taking a couple of easy questions here. The first one, can you remind us how the investment portfolio is being managed as far as internal versus external resources? And how involved New Vernon might be at this point?
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Yeah. So we have an investment committee of the Board that meets regularly to review investment protocols to review our investment advisor and sub advisors. We have an outside consultant who essentially manages the sub advisors and although we have a -- I think we have at this point less than a $1 million that's essentially being run off from old New Vernon partnerships. We essentially are not -- we're doing very little with New Vernon at this point.
Jayme Wiggins -- Palm Valley Capital -- Analyst
Okay. And then my other question, do you have any information about.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Sorry, let me just back a little one up. I'm sorry, just want to be -- we have about a $6 million Insurance Company portfolio with New Vernon that is still performing and it's a small portfolio but New Vernon still manages that for us, but we've essentially exited any other arrangement with New Vernon.
Jayme Wiggins -- Palm Valley Capital -- Analyst
Okay, on the equity side. The second question, do you have any information about the financial strength of Personnel Staffing Group? Just wondering how you came to the $11 million allowance, which I think was about one quarter of the gross receivable as of the last disclosure?
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Yeah, it's actually a little more than a quarter of a gross once you tax effect and we relied on our own internal analysis of somewhat dated financial statements as well as Duff & Phelps and their analysis of PSG.
Jayme Wiggins -- Palm Valley Capital -- Analyst
Okay, thank you.
Operator
[Operator Instructions] Our next question comes from the line of Steve Spence [Phonetic] with RBC Wealth Management. Please proceed with your question.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Steve, if you're speaking, we can't hear you.
Steve Spence -- RBC Wealth Management -- Analyst
Sorry about that. Had you on mute. Good morning.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Good morning.
Steve Spence -- RBC Wealth Management -- Analyst
Just a point of clarification, if we can, with respect to the statement that you made with respect to, again, the Class A shareholders. Did I understand you to say that the first notification that you had received was at the time of the filing?
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Yes, that's correct.
Steve Spence -- RBC Wealth Management -- Analyst
Okay, thank you for that. And then just wanted a quick question. As a general statement in terms of miles driven by your insured in the course of the last quarter and I don't even begin to know how you might get feedback from them. But what are those trends? Are they not off much because of the need for merchandise to continue moving or what's going on in that space?
John R. Barnett -- Chief Financial Officer
It's a mixed bag, Steve. So in the quarter so as of the end of 3/31 our customers were extremely busy. Many of them have diversified customer bases and were able to shift units and tractors from industries that were immediately down-turning and to industries that had a immediate need and there was certainly some areas the economy that had a massive need to get more food to grocery stores, etc. We track mileage with a lag so at the end of April we're basically getting March mileage from our customers. So it's a little tough to say with certainty what April or May looks like yet. However we spent, of course, we spend a lot of time with our customers and anecdotally most of our trucking customers feel that April and into May are going to be the slowest parts and then they seem to be relatively optimistic about recoveries in the latter part of Q2 and moving into Q3. Our book is fairly well diversified. So a very large part of our book is providing workers' comp and physical damage for the units driven by last mile independent contractors. And that book, we're just not anticipating a fall off at all.
And then we have a good sized public transportation book and we are anticipating a significant fall off in that public transportation book and 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 our book, our mix of business actually improved a little bit. And then in the middle is what we would kind of revert to is our core which is those fairly large fleets of safety focused financially secure trucking companies and many of those are diverse. Those are the ones that I was referring to where they would suddenly be anticipating April and May to be the bottoming out and then what they tell us is they anticipate seeing strengthen their customer relationships driven by their customer relationships coming back in Q3 but the massive qualification on all that is kind of who really knows. We'll have to see for how quickly the economy opens up again and how permanent that opening up again is and if there is a second wave, then we can obviously see another downturn in the economy, which would impact goods being moved so it's with a qualification that I would say that we are relatively optimistic that our premiums will be down somewhere between 10% and 20% for the full year.
Steve Spence -- RBC Wealth Management -- Analyst
Great, that's very helpful. Thank you very much and thank you for the hard work you're doing in these challenging times.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Yeah, you too. Thank you.
Operator
[Operator Instructions] Our next question comes from the line of Andrew Stein of First Manhattan. Please proceed with your question.
Andrew Stein -- First Manhattan -- Analyst
Yeah, hi, Jeremy. You said premiums down 10% to 15% for the year. Are we talking about gross premiums, net premiums, premiums earned? I mean what are you referring to on that?
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Net.
Andrew Stein -- First Manhattan -- Analyst
Net, and that's net earned?
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Yeah, net earned. Yeah.
Andrew Stein -- First Manhattan -- Analyst
Okay. And one other question, I looked at your supplement and in the supplement you have your loss picks on the commercial auto treaties. And I guess the most recent policy your underwriting year, you saw a bit of improvement building over there. I think it was a couple of loss ratio points. Wouldn't that speak to some reserve -- slight reserve redundancies flowing through the financials?
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
No, it's more -- premiums is earning through.
Andrew Stein -- First Manhattan -- Analyst
Okay. So the premium that's earning through is probably earnings with better combined with the old stuff?
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Yes.
Andrew Stein -- First Manhattan -- Analyst
Okay. And that's consistent with your view that the commercial auto business is getting incrementally better.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Yes.
Andrew Stein -- First Manhattan -- Analyst
Okay. And one other thing you mentioned, I guess I think it was in the press release. If you have less reinsurance protection this year and one of the reasons you mentioned was that you're writing low -- 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 a year or two ago?
John R. Barnett -- Chief Financial Officer
Yeah, well, I would tell you that in our public transportation book by the end of this year 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 net. We have an excellent partner who is taking the net 3 times $2 million and so that's a fairly significant shift in public transportation. And then in our commercial -- in our core trucking book the shift is not as significant. We have a number of legacy customers who we're frankly, we're still comfortable offering the $5 million net and we had a handful of newer relationships that were put on the books in '17, '18, '19 that we just didn't, we weren't as comfortable putting the $5 million and we've dropped those down to $2 million. But the big impact really is on the public transportation space.
Andrew Stein -- First Manhattan -- Analyst
Okay and I think John referenced that as far as the portfolio that you've recovered $16 million of the losses to-date. That's realized -- the amounts that were realized and unrealized through the financials for the first quarter.
John R. Barnett -- Chief Financial Officer
That's a gross number. Some part of that is on fixed income, some part of that is on the equities. So that's a gross number.
Andrew Stein -- First Manhattan -- Analyst
Okay. All right. All right, thank you.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Thanks, Andy. Operator, are there any more questions?
Operator
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.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Okay. Well, thank you. And I appreciate all that all the support from the shareholder base. We believe Protective is extremely well-positioned to weather the volatility and we do appreciate your support. Please stay healthy. Thank you.
Operator
[Operator Closing Remarks]
Duration: 37 minutes
Call participants:
Marilynn Meek -- Investor Relations, MWW Group
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
John R. Barnett -- Chief Financial Officer
Ron Bobman -- Capital Returns Management -- Analyst
Brett Reiss -- Janney Montgomery Scott -- Analyst
Jayme Wiggins -- Palm Valley Capital -- Analyst
Steve Spence -- RBC Wealth Management -- Analyst
Andrew Stein -- First Manhattan -- Analyst
