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Protective Insurance Corporation (NASDAQ:PTVCA)
Q2 2020 Earnings Call
Aug 5, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to Protective Insurance Corporation's Second Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to Marilynn Meek to begin. Thank you.

Marilynn Meek -- Investor Relations, MWW Group

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

Thank you. Good morning and thank you all for joining John and me this morning. Let me start by thanking my colleagues for their rapid adjustment to a new remote way of working. We continue to run the company, service our clients and pay our 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. Furthermore, fewer vehicles on the road has reduced our claims frequency.

Although our premiums are reduced on both an earned and a written basis, adjusting for the lines of business we no longer write. Our premiums are up slightly over Q1 2020 and down slightly over the same quarter last year.

We are a specialist in writing transportation fleets, but our book is diversified by fleet size, vehicle type, industry-served, geography and distribution channel. And that diversification has supported our premium base through a challenging economic period.

On the asset side, our portfolio has responded well to the improvement in the equity and fixed income markets. And although it is still down for the year, we are encouraged by the recovery and remain fully confident in the underlying strength of our hold-to-maturity fixed income portfolio.

Turning to the numbers. Second quarter net income was $11.4 million or $0.80 per share, which compares to net income of $1.5 million or $0.11 per share for the prior year second quarter. For the first six months of 2020, net loss totaled $10.8 million or $0.76 per share compared to net income of $4.3 million or $0.28 per share for the 2019 period.

Income from core operations being the sum of underwriting income sand investment income was $5.3 million, representing an income from core operations per share of $0.37. For the first six months of 2020, income from core operations was $7.9 million or $0.56 per share.

We have steadily improved our accident year underwriting results throughout 2020. Excluding loss development for all period, the current accident year loss ratio was 70.1, which is an 8.6-point improvement from Q2 2019 and a 4.5-point improvement from Q1 2020.

We had a nominal amount of favorable development in the quarter and our accident year combined ratio at 101.4 improved by 5.6 points from Q2 2019 and 2.8 points from Q1 2020.

Improvements are driven by rate achievement and mix shift in commercial auto, where we improved rate by 21% in the quarter. As you've heard me say in past calls, we are retaining higher percentages of the better priced customers and attracting new well priced risks into the portfolio.

Rates in our workers' compensation book were flat for the quarter. In general, we are pleased with the performance of our workers' compensation book. However, we do not believe there is any more rate to give up and will remain disciplined with pricing and risk selection, notwithstanding competitive pressures.

In the quarter, we made the decision to exit our public transportation book, effective October 31, 2020. That book has been historically challenged and we do not see a path to our profitability targets in a reasonable timeframe. In that book, this quarter, we have seen significant reductions in insured units and premium, given COVID-19.

In many parts of our portfolio, we have seen claims counts dropped significantly, unsurprising given the fewer vehicles on the road. Most of our commercial auto policies are adjustable based on mileage. Our workers' compensation policies are adjustable based on payroll, and our physical damage and public transportation policies are adjustable based on unit. Thus, when our client business drops our premiums drop. And if claims count dropped more than premiums dropped, we see an improvement in frequency and loss ratio. In general, we have seen frequency improvements across the book.

Additionally, our most profitable customer segments have either grown or shrunk less than our least profitable lines of business. Thus, in addition to a frequency improvement, our loss ratio has also been positively impacted by mix of business. We estimate the total impact of this COVID-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 a larger frequency benefit in future quarters. Moreover, 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 for long-term profitability and value creation for all our constituents.

We continue to make strong progress in our technology transformation. Our data lake is now live, our servers are moving to the cloud, development work on our commercial auto analytics and underwriting platform is progressing well toward the Q4 2020 launch. And we've announced a partnership with an industry-leading software provider to build our billing and claims system, cloud native, API-enabled and on a micro services infrastructure. We believe that our technology transformation will unlock significant additional value over time.

I remain very pleased with our progress and momentum and believe that we are extremely well positioned in our market. 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 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.

John R. Barnett -- Chief Financial Officer

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 a 70.1% accident year ratio in the second quarter versus a 78.7% accident year ratio in the prior year quarter.

As seen in our Investor Presentation on our website, we have 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 in 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 2020 to $6.4 million in the second quarter. We do not expect this level of decline 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 2020 to $5.3 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 $600,000 loss from limited partnerships. What's not seen in the income statement is another $22 million and pre-tax fixed income gains that were recognized through comprehensive income.

Total pre-tax investment gains for the quarter were approximately $33 million. During the quarter, we recovered most of the fixed income portfolio losses experienced in the prior quarter. Fixed income gains in the quarter were driven by high-quality corporate and treasuries.

Our CMBS investments have yet to recover value. However, we review portfolio and securities regularly and remain confident in their overall performance. We estimate that our investment portfolio gained approximately $7.5 million in value during July, which equates to approximately $0.53 per share pre-tax.

Given the pandemic-driven market volatility and economic uncertainty, we further risked our investments by reducing 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 taxes tax assets of $4.9 million. Due to the gains on our investment portfolio during the second quarter of 2020, the valuation allowance was reduced by $2.5 million to $2.4 million.

Finally, due to our strong investment gains and income from core business operations, book value per share increased by $2.11 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 Q&A.

Questions and Answers:

Operator

Thank you. [Operator Instructions] There are no questions at this time. Actually, just got a question come in, and that is from Jayme Wiggins with Palm Valley Capital. Please proceed.

Jayme Wiggins -- Palm Valley Capital -- Analyst

Thank you very much. Good morning. Good to see what's happening on the underwriting side. My question was about the investment portfolio. I appreciate the comments giving a little bit of color about what you're doing with fixed income, but specifically on the CMBS. It sort of sounded like you haven't made any move to de-risk that part of the portfolio, because the prices haven't really recovered. I assume the underlying performance of the properties is still pretty ugly. And even if the prices haven't recovered, it can always get worse, especially if -- if Fed's not involved in the market at some point, if that ever happens. So, is your plan just to ride it out and hope those prices come back for better or worse? Thanks.

Jeremy d. Edgecliffe-Johnson -- Chief Executive Officer

Yes, great question. And obviously, one that we spend a lot of time asking ourselves. And I think you're kind of just spot on with your analysis. I certainly wouldn't use the word hope. We are planning on writing out those assets until they mature. And the way that we participate in the structures of those CMBS, we feel that we are in an excellent position in those structures and we do not view them as being anything other than ultimately money good.

Jayme Wiggins -- Palm Valley Capital -- Analyst

Okay, thank you.

Operator

[Operator Instructions] Our next question is from Brett Reiss with Janney. Please proceed.

Brett Reiss -- Janney Montgomery Scott -- Analyst

Yes. Hi, gentlemen. The progress on the reduction in the combined ratio, which was encouraging to see. But if driver traffic returns to pre-COVID level, will that -- we'll we see that kind of like spike back up, can you talk about that a little bit?

Jeremy d. Edgecliffe-Johnson -- Chief Executive Officer

Yes. First of all, nice to hear from you, Brett. Yes, in theory, I'm going to think about as to how I answer that question, because as I said to you in the last two earnings calls, we believe that we will hit that 99.9 combined ratio in Q4 of this year, and we believe we will hit that irrespective of any frequency benefit caused by COVID. We did get a -- and I hate to call it a benefit -- the mathematical advantage in this quarter because of frequency, because there's fewer vehicles on the roads. However, our loss ratio also came down significantly because of the work that we've done on underwriting, with rate earning with a shift in the mix of business. And that loss ratio, our plan, our forecast, and our conviction, is that the loss ratio will continue to come down given earnings patterns on the premium that was written over the last 12 months.

Next quarter and the following quarter and into 2021, we anticipate a small frequency benefit in the next quarter and possibly even in the fourth quarter, but that's really -- guess, we're going to have to look at that in the rearview mirror with how many vehicles are on the roads. But we certainly anticipate that our run rate loss ratio and combined ratio would continue to come down irrespective of the frequency benefit and we still feel very good about the 99.9 target that we've put out there for Q4, and then obviously moving into an underwriting profit for full year in 2021.

Brett Reiss -- Janney Montgomery Scott -- Analyst

Great. All right. Thanks for taking my question. Stay safe.

Jeremy d. Edgecliffe-Johnson -- Chief Executive Officer

Yes, you too.

Operator

[Operator Instructions] There are no more questions at this time. I would like to turn the conference back over to management for closing remarks.

Jeremy d. Edgecliffe-Johnson -- Chief Executive Officer

Okay, well, thank you all very much. Thank you for listening. As I said in my opening comments, we feel really good about our progress. We feel really good about where we are and what our opportunities are in our market, and we appreciate your continued support. Thank you and stay safe.

Operator

[Operator Closing Remarks]

Duration: 18 minutes

Call participants:

Marilynn Meek -- Investor Relations, MWW Group

Jeremy d. Edgecliffe-Johnson -- Chief Executive Officer

John R. Barnett -- Chief Financial Officer

Jayme Wiggins -- Palm Valley Capital -- Analyst

Brett Reiss -- Janney Montgomery Scott -- Analyst

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