Protective in sale talks following strategic review

Protective Insurance Corporation is in sale talks and the company has secured the services of TigerRisk to oversee the process, The Insurance Insider understands.

American Financial Group is understood to be among those in talks with Protective, although Toronto-based Fairfax Financial is also said to be open to a transaction.

Fairfax previously held stock in Baldwin & Lyons - Protective's former operating name - but cut back its investment in 2017.

Carmel, Indiana-headquartered Protective parted ways with president, chief executive and chief operating officer Randall Birchfield on 19 October, with the business bringing in Axis Re’s former CEO Jay Nichols as chairman and interim CEO.

Nichols has served as a director on Protective’s board since 2017.

Birchfield was appointed CEO in May 2016. He replaced CEO, COO and president Joseph DeVito who stepped down at the same time as chief financial officer and executive vice president Pat Corydon and deputy chairman Gary Miller.

According to reports from the time, that trio departed owing to disagreements over the company’s strategy and leadership, namely that Steven Shapiro had been appointed executive chairman.

As highlighted in an 8-K filed in May 2016, DeVito was concerned that Shapiro did not have the necessary background or experience to serve in that capacity.

“I believe he was assigned that position, not due to any qualifications or background that would merit the appointment but rather as a result of his family's ownership of stock. Absent that, he would not have been considered to be the person primarily responsible for the strategy and operations of our great company,” said DeVito.

Shapiro’s father Nathan, known as Nate, is the largest shareholder in Protective, according to data from SNL. Nathan Shapiro now holds almost 24.6 percent of all Protective’s outstanding common shares.

Protective's long-serving director and shareholder Norton Shapiro, who had sat on the company's board since 1983, passed away on 2 February.

Steven Shapiro held the executive chairman role at Protective until June last year when he resigned his position. Stuart Bilton, a member of Protective’s board since 1987, assumed the responsibilities of lead independent director and liaised between the insurer’s management and board.

At the time of Nichols’ appointment as chairman and interim CEO, Protective also revealed that it had formed a sub-committee “to explore opportunities to continue to maximise long-term shareholder value, including evaluating potential strategic partnerships or transactions”.

This strategic review has now led to Protective entering into sales talks with a number of potential bidders with TigerRisk advising the company, this publication understands.

Those considering making a bid for the company include American Financial Group, with the Prem Watsa-led Fairfax, WR Berkley and RLI also thought to be showing interest, sources told The Insurance Insider.

One potential stumbling block in any sale completing is Protective’s asking price, with industry and banking sources suggesting there is a mismatch between the would-be acquirers and the target on valuation.

Protective declined to comment. At the time of going to press, neither American Financial Group nor Fairfax had responded to a request for comment.

Nichols’ appointment as chairman and interim CEO came shortly before Protective revealed it had fallen to a $12.3mn net loss for the third quarter of 2018, down from net profit of $7.4mn in the prior year period.

Purely on underwriting, Protective reported a combined ratio of 124.3 percent for 2018’s third quarter, an increase of 25 percentage points compared with the third quarter of 2017.

That result reflected reserve strengthening of $16.4mn, a by-product of unfavourable prior accident year loss development in commercial automobile coverages which added 16.9 percentage points to the combined ratio.

The strengthening was necessitated by increased claim severity due to a “more challenging litigation environment, as well as an increase in the time to settle claims,” Protective said.

As of 30 September, 2018, Protective’s common equity stood at $388mn.

Just days after Protective released its third quarter 2018 numbers, AM Best downgraded the insurer’s financial strength and long term issuer credit ratings from A+ to A and aa- to a respectively.

“Despite posting sub-100 percent combined ratio in most years, the group’s underwriting profitability has been declining as increased loss costs have led to a continuation of material adverse loss reserve development,” said AM Best.

“While the group’s commercial auto loss ratios have outperformed the commercial auto composite, increased severity due to increased litigation and slower claims settlements poses serious challenges over the near term,” it added.

The rating agency maintains its negative outlook on Protective which reflects the challenges facing the carrier such as rising loss cost trends.

Founded in 1930 under the brand Baldwin & Lyons, Protective is a property and casualty insurer specialising in the property, liability and workers’ compensation markets for the trucking industry and public transportation fleets.

It officially switched its name from Baldwin & Lyons to Protective in August last year.