Q4 2019 Earnings Call
[music].
Greetings and welcome to the protective Insurance Corporation fourth quarter 2019 earnings call.
This time, all participants are and I'll listen only mode.
Question and answer session will follow the formal presentation.
Any once you require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
I'll now turn the conference over to your host Marilynn Meek.
Thank you Darryl. Thank you all for joining US this morning for the protected from charge Corporation's fourth quarter 2019 conference call.
He 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 todays call and earnings release, which is available at www Dot protective insurance Dot 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.
This time management wasn't 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.
Well protected rent charts Corporation believes the expectations reflected in any forward looking statements are based on reasonable assumptions. It can give no assurances that expectations well be uptight factors and risks that could cause actual results to differ materially from expectations argued that detailed.
In the press release and are included from time to time with the company's filings with the FCC I would now like to introduce Jeremy Johnson CEO, a protective insurance Corporation and turn the call over to help. Please go ahead.
Good morning. Thank you all for joining joining me this morning.
Fourth quarter net income was $3.8 million.26 per share, which compares to net loss of $24.6 million or dollarssixty five push.
For the prior years fourth quarter.
For the full year 2019, net income totaled $7.3 million all 50 cents.
Which compares to a net loss of 34.1 billion or $2.28 per share for the prior year period.
On an annualized basis return on equity was 4.1% for the quota and 2% for the year.
Our quarterly results show continued progress in our turnaround strategy. Our underwriting actions have resulted in significant rate increases in our commercial auto portfolio enhanced risk selection and a high quality mix of business focused on fleet transportation.
We have steadily improved our accident year underwriting results throughout 2019.
Excluding loss development for all periods. The current accident quarter loss ratio improved by 0.5 points compared to Q3, 2019 and improved by 7.4 points compared to Q4 2018.
Improvements were driven by rate achievement and mix shift in commercial auto.
Overall on the $48.7 million, a commercial order liability premium renewed during the quarter rates improved by 13.2%.
Removing two yet policies whereby contract we could not improved pricing rates were up by 16.3%.
Right.
We're retaining high percentages of the better price to customers.
Attracting new well priced risks into the portfolio.
Excluding loss development for all periods Q4 booked an accident quarter combined ratio of one of the 4.8.
Improved 2.2 points from Q3, 2019, and improved 5.5 points compared to Q4 2018 was not an acceptable absolute outcome I am pleased with a positive trend line competent in and committed to continued improvement.
Furthermore, we have laid a strong foundation for continued financial progressing twentytwenty.
The results of our recent underwriting actions fully a name.
We look to the next 12 months I anticipated market environment of continued price discipline.
Right increase and highly differentiated risk selection.
Our target market will continue to be the best of the best safety focused and financially secure fleet transportation risks.
As we build for all future profit on growth.
We have been focused on talent and digital transformation, attracting highly experienced employees into our organization across various functions and building partnerships with leading technology in cloud service providers.
Through 2020, and 2021, we will be significantly enhancing our digital capabilities, enabling us to reduce cost and add additional value to our clients and I'll distribution channels through conductivity and analytics.
We are long term specialists in ensuring large fleets of trucks.
With a deep bench of experience expertise and a recognized leadership position in all market.
The trucking industry continues to be a favorite talk it all the plaintiff spa.
Across the country, our clients face the potential for outsized and sometimes devastating verdicts and settlement two months.
Oh claims team continues to provide valuable litigation defense and advice to our customers and our underwriters manage our risk to outsize volatility three moderating limits of liability in reinsurance.
We are focused on establishing accurate reserves on new claims quickly.
I'm committed to continuously reviewing older claims, making adjustments when necessary why we do not anticipate substantial adverse reserve development in prior accident years and experienced limited material development in the quarter, we believe that our commercial auto reinsurance protection in the form of a 75% reinsured I'm limit.
It's stop loss for Treaty is 2013 through 2018 largely into like <unk> financial results from potential deterioration in our reserve position.
I'm pleased with our progress towards underwriting profitability.
Our clients value OS and reward us with that business, we have an exceptional team of employees and a well positioned moving into twentytwenty.
With that I'll now turn the call over to John and I look forward to your questions. Following John's comments.
Thank you Jeremy.
And Jeremy disgust fourth quarter net income was 3.8 million and full year 2019, net income was 7.3 million.
Gross premiums written for 2019 increased 1.3% and 575 million.
The slight decrease reflects actions taken to improve profitability the impact of retention lower retention driven by rate actions and risk selection was greater than the impact of rate increases and new business.
Net premiums earned for the quarter decreased to 111 million down 6.2% compared to the prior year quarter.
2018 fourth quarter premiums earned with a high point for the company in a tough comparison.
Compared to the third quarter of 2019 premiums earned for the quarter was relatively flat.
Reported net premiums earned for 2019 increased to 447 million up 3.3% compared to 2018.
However for better comparison is helpful to add back 17.3 million in ceded premiums related to 2018 prior period reserve strengthening.
For comparison only 2018 adjusted net premiums earned was 450 million.
Starting from the 2018 adjusted amount 2019 was a slight decrease similar to the gross written premium decline.
Our operation operations produced an underwriting loss of 6.4 million for the fourth quarter.
The reported combined ratio of 105.8 was an improvement of 6.4 points over the prior year quarter.
Excluding I'm favorable prior period loss development at 2.2 million in the prior year quarter, and 1 million in the quarter. The combined ratio improved 5.5 points from 110.321 O 4.8.
For full year 2019, our operations produced an underwriting loss of 30.5 million, resulting in a combined ratio of one of 6.8.
This compares to a combined ratio was 8.6 for 2018.
For the full year 2019 prior accident year loss development was favorable point sixmillion.
As favorable workers comp development offset unfavorable commercial auto development.
Similar to the industry, we experienced unfavorable development and commercial auto during 2019.
The commercial auto unfavorable development income statement impact was partially mitigated by our reinsurance treaties, which are highlighted on page five of the presentation.
Fourth quarter investment income increased to 6.8 million growth of 12.9% versus the prior year quarter.
The level of fourth quarter investment income reflects our asset allocation shift to fixed income.
For full year 2019 investment income increased to 26.2 million growth of 19.1% versus 2018.
Operating cash flow was once again positive during the quarter, resulting an 87 million a positive operating cash flow for 2019.
You're in book value per share was $25.51, an increase of one dollar and 56 cents per share or 6.5% for the year.
This increase was net of 40 cents per share in cash dividends.
Including dividend paid total value creation was 8.2%.
During 2019, we spent 11.5 million to repurchase 677000 shares.
These purchases were immediately accretive to book value per share given an average price 67% of the year end book value.
We do continue to note that our operating initiatives are supported by a strong balance sheet.
As a reminder, we have posted our press release quarterly financial statements and a brief presentation reviewing our fourth quarter results on our website.
The presentation highlights our accident year loss ratio trends, excluding prior period loss development on page four.
The value of our reinsurance treaties on page five.
And our investment pool portfolio asset allocation and high quality short duration fixed income holdings on page six.
This concludes our fall more commentary at this time, we would be happy to take questions.
Thank you at this time, we will be conducting a question and answer session. You would like to ask a question. Please press star one on your telephone keypad for participants using speaker equipment and may be necessary to pick up your handset before pressing the star Keith.
The confirmation tone will indicate your line is in the question Q you May press Star too if you would like to remove yourself from the Q.
One moment, please while we poll for questions.
Our first question comes from the line of John Keefe object keeping investments. Please proceed with your question.
Yes, good morning, other long term shareholder and I generally agree with your operating strategy got a couple of questions about your presentation of the numbers first has to do with the expense ratio.
Your presentation of the expense ratio.
Includes or excludes deferred acquisition cost for brokerage costs can you explain to me why that is.
Our expense ratio it does include.
All expenses.
Net of and then we.
Adjusts for fees.
Standard without all insurance companies, we don't report it okay.
Well, Joe insurance Investor a first time participant on the call your Oh Excel spreadsheet.
[noise], showing current and historical numbers, which by the way it's very helpful.
Not side of it excludes deferred acquisition costs.
I'm reading that correctly it seems as a few.
Calculate the expense ratio.
Using other.
Operating expenses, not including brokerage cost and that is very unconventional industrywide have I got that straight or <unk>.
Let me, let me repeat so you're talking about on page three of the presentation.
And our used to say really talking about the line, where we subtract out commissions and other.
Yeah, I don't have that in front me, but your but that is correct that is what I'm, referring to okay. So traditionally what is in the commission and other.
He is not deferred acquisition costs those are.
Basically other revenue items that we make as a company.
That we use to offset expenses.
When insurance companies do.
The expense ratio calculation, so really the expense ratio and the underwriting ratio.
Our all based on premiums earned.
As the denominator.
And so you know the calculation as here's loss in L.A. divided by premiums earned and then here our expenses less fee income.
To get to an expense number that you divide by the premiums aren't.
Okay, Yeah, I understand the calculation of a ratio. So excuse me I think you just gave me a very helpful answer the up the brokerage costs, which you worked the commissions, which you exclude or not.
Expenses that are associated with acquiring new business or Justin vessels, but that's right. This is income to Oh correct.
Okay got it sorry and charge of people on this call for having to bear fruit that question. They are.
Second question I have is you've you've referred to book value creation, Oh, I should say value creation metaphor for a while Tim can you clarify for me.
Why changes in book value.
Oh, which for you when.
Most insurance companies is.
Movements in the fixed income portfolio, plus underwriting losses minus minus dividends.
Wow, that's a proxy for value creation.
Well, we do talk about our increase to book value.
Which is one number but when we look at the value that was created during a time period.
You're right basically.
The difference in book value is going to be driven by investment income.
Our change in equity asset values gains and losses, and then our underwriting income.
So when we talk about value creation, we talk about those items, specifically net income impact.
On the book value.
And we exclude dividends paid out.
Right I understand the calculation is the long term thought behind this that the stock price ultimately will.
Move in sync with a book value changes over the period of time, that's right. The insurance industry is heavily tied to valuing based on multiples that book value per share and so that's why we talk about it and you know we feel it's an important too.
Discuss the change in book value and book value creation, Yeah, we were very.
He focused on improving but body, but yeah, that's a key metric for us.
What about the stock price.
Absolutely a you know.
That's.
Obviously exactly what we want to drives a higher stock valuations you know part of what we can control and do.
To get that to move is to make sure that we have positive net income were growing book value per share and we're delivering shareholder value.
<unk> over a consistently over a period of time, then that will be reflected and a better stock price.
Great. That's true last question what is your although we target and what combined ratio given this interest rate environment will it require for you to hit that or Oh, yes.
Yeah, we.
We are always looking at what that target or we should be I just recently we.
Ran through a study and and felt that at 10% or are we which is really kind of where the market expectation is and then another study that was based more on a discounted cash flow methodology. It kinda pegged the market at a 10% or are we so that is our current target.
It depends on the coverage that you're talking about but in general I think a combined ratio between 96 and 97 would be where we are looking.
To target our business.
May I ask one more question any timeframe us when that might be achieved.
Well, our our current goal.
Is to achieve underwriting breakeven by the fourth quarter.
Oh the ship.
What about a 96 or 97 combined ratio.
I think let me just take on for it first I think come.
If you look at the trajectory in 2019 of a combined ratio decrease.
We believe that we need to and can continue to to get similar rate increases in 2020 as we did in 2019.
And so I think but that the rough trajectory that you saw in 2019 or is it good proxy for how we feel the book, while improving 2020, and although 2021 is a long time away. How we how we think the book will continue to pre it to improve in 2021. So you know.
It's.
This is a very volatile market that we're in we think that we have a great book of business. We think that the market will continue to support the type of price increases that the the.
No, we and our competition need.
[music].
And should that be true, we're fairly confident that trajectory of improvement is I is a good or is it good proxy for the next couple of years.
Excellent. Thank you very much for your time and for the call.
Hi, Thank you for being a longtime shareholder junk.
Yes, Sir.
Our next question comes from other line of Steve spends of RBC wealth management. Please proceed with your question.
Good morning, gentlemen.
Regulations on the progress that you are clearly are making.
Thank you.
Wall Street Journal about six or eight weeks ago had and article on mid sized to smaller shippers.
And in it there was the primary discussion was based on volume for their business second portion was on the expenses expense side or the commentator that they quoted indicated that he is monthly insurance cost year over year had jumped from $161000.
Month of $300000 a month.
Is that.
In looking at on the plane Callaway typical of what's going in the industry is it atypical.
As as sort of the first question not are trying to understand the volume side of your business.
Well I'm sorry, so on the well let me try to take the second the second part on pricing.
You know that it's a quite a stratified industry. I mean, you go to see a very different pricing outcome for truck as <unk>, who have invested in safety and really invested in safety and have a safety culture and have great telematic equipments on the trucks.
And have lower drive a turnover and have a good accident rates that then than truck as you have not invested in safety and safety technology and the driving older fleets and have a heidrive driver turnover. There was if there was a very very very.
Distinct kind of pricing stratification [laughter]. So it's hard to say whether that particular outcome was typical for the industry.
I will tell you that.
The most part in the book of business that we have.
Rate increases and ill, 15% to 30% for primary is is quite typical and then when you get into the excess placement to the extent that a chunk of buys more than a primary <unk> million 2 million the pricing for access as it has become.
The the pricing and the availability of capacity for access as a real challenge for the industry, which we have so if I made the decision not to be.
Yeah. We are a primary writes up because we like to have the advantage of about claims team involved with claims Ali.
[music].
But I can understand if a truck it was combining the pricing for that excess would that pricing for the primary how you could get into some some you know very substantial increases in the cost of Oh of insurance for small and FA and for large truckers.
And if on the volume side I mean generally speaking it out book, we're not seeing.
I mean, we measure we measure we raised upon mileage and our exposures haven't really changed meaningfully year over yeah. It's just very similar mileage rate, that's being driven by a by the not book does that does the onto your question.
Yes, that's very helpful.
And in fact next question for you had to do with this hum mileage a billing process.
We're in the 11th year of an economic recovery here, where I think as a general rule. It is driven up miles driven and increasingly also I think with the Amazon application of the.
Commerce.
Favoring a your business.
That regard.
Our <unk> where are you at this point with respect to your commercial shipping.
Volume related number one and number two do you have any general thoughts in a weaker economy I'm, assuming one of these days we get one.
As to.
How that may affect how many of you have the same number of snowstorms and ice, but you have fewer miles driven it seems to me that there could be some a correlation in a down economy.
I mean, I think I think generally speaking if we had fewer miles driven.
We think it would have few accidents fewer losses so.
It generally, but there's a little bit of there is linear parity between miles driven and a and losses up obviously, otherwise you wouldn't be wouldn't rate on that we wouldn't use our exposure basis. So if if they have a fewer miles driven and that should be fewer losses.
You know as a.
Density traffic density is a is a is another way of measuring accident rates on the roads. So to the extent that that's fewer drivers as well as fewer miles being being driven you know that could bring the number of losses down to but I I would I would say just in general we would.
We would view a downturn in mileage being offset by downtime in losses, so it probably to be fairly a fairly linear.
Okay. Thank you had so that's very helpful. Last question for you since we shouldn't have to make this.
That equity investment decision daily terms of our mix of assets.
Your announcement referred to today two year.
Reallocation of equity investments and limited partnership and cash cash equivalent instrument and the short duration high quality bonds.
Not clear to me.
Whether or not your equity investments that are not structured in a limited partnership fashion.
What your asset allocation is where your tilting.
Our view is what kind of in the worst of both world here as a value bar you give us a little light as to the investment side of your life.
What's you're facing what you're thinking.
Well.
I think a lot of that comment actually where we are today is we've made this significant shift if you go back two years ago, we were much more heavily weighted and equities and Lps.
And if you go back and look at investment income by quarter, you can see just steady growth as we.
Sold off equities Lps and put more money into fixed income relate to.
Based on volatility on the underwriting side and the business we wanted to.
Limit volatility of our investment portfolio.
You know on the equity side, Oh, we have very involved robust a quarterly meetings with our investment committee of the board and a we are always looking and questioning what are.
Asset allocation should be and then specifically and equities or if we should be doing something different.
So comment today for even running below companies to providing dividend returns that are to access the 10 year treasury.
How does that tilt you're thinking.
You know I think.
Can you actually can you restate the question.
It's very common today for high grade equities.
The road JP Morgan as an example, other U.S. bank their dividends in many cases are three and a half 4% as of yesterday.
Tenure Treasury is.
Not much more than a third of that.
How does that reality.
In terms of investment income.
Effect here.
Batteries for thinking.
Yeah, I, you know I, we definitely take.
A total portfolio approach so.
That is obviously attractive and in line with.
Our goal of really limiting volatility in our portfolio while maximizing.
Return.
Okay.
That's helpful <unk> on for.
For all of US who are investors. These everybody's you times and.
Appreciate that what you have accomplished on the portfolio.
Thank you. Thank you. Thank you.
Your next question come from the line of Brett Reece of Janney Montgomery Scott. Please proceed with your question.
Hi, gentlemen.
But.
The appetite for the board to buy stock with it being such a discount from book value how how much can it be without jeopardizing you know your ratings.
[noise] well, we have a healthy authorization.
You know, we're going to keep an eye.
Well buyback stock as much as we kind without jeopardizing our ratings I don't want to give you a a number of or set an expectation for.
20, or 2020, you do we do want to make sure that we've got some they've got dry powder in a volatile underwriting environment or and then balance that with the obvious accretion from from buying back stock or the the board is very comfortable with us having a healthy authorization.
And then make is going to try to make a point in time decisions based on.
Yeah ill, keeping powder dry and all capital base and a and the stock price.
Right well last year, you able to buy back 677000 shares of stock. This year things arent you business is improving so he can I assume you you will be able to buy back.
You know at least a minimum of 677000 without jeopardizing your rate your ratings since things are improving.
I wouldn't put a specific number on it.
I think we will.
You know I think using go local <unk> look at what we've done recently.
Get some insight from that if there are opportunities for us too.
Grab more shares at a significant discount than we will do that in addition, we are.
Constantly reviewing in our capital position and capital needs.
Enrolling Alan thing as you mentioned required capital for our Ambacs rating.
I'm looking at kind of that risk capital buffer based on historical income liability asset volatility.
Reviewing specific risks gross strategic capital needs and then really.
After that considering what do we do a share repurchase and dividends and so we will continue to evaluate that we will evaluate it as we move through the year and we have clarity around our performance.
And.
We certainly understand there's an opportunity to repurchase shares in the market and there will be no lack of discussion between our group internally and or the board around that.
Okay appreciate that.
Could you explain you know two two and Noninsurance analyst what the unfavorable prior period loss development was was about and do you think that.
That's it going forward.
Well.
So on favorable is essentially we right we right.
What we called long tail business. So in any given yeah, you're going to put aside as a percentage of the premium that comes in for the product for you all your future view of how claims will mature.
At a point in time, you might have you might have reserves full claims that that have been made and then you might have bulk cool or Oh, I, Vietnam and cut but not reported.
Reserves put away for future claims old to the extent that claims get larger those are estimates you know this this is a long tail business in and.
Of course, one of the most substantial risks that an insurance company faces is that risk of getting your estimates right in a long long tail environment for claims and especially in an environment, where as I said in my opening comments, we're certainly seeing a a pronounced.
You know targeting of the trucking industry by the plaintiffs spa. So in other words claims lost costs are going up so to the extent that those <unk> that but an insurance company any insurance company gets gets those reserve estimates wrong, you could have favorable development in which case you.
Would release reserves because you if you put aside too much if you like Oh, you could have unfavorable development in which case, you a putting putting more money into into reserves and that's coming out of a particular up.
A particular quarter the view of reserve adequacy.
We are in an environment, where the lawyers the paint this bar a pretty focused on the trucking industry. We think that we have an advantage over others in as much as we are specialists and trucking and we only right prime already so we have a early view of claims we have a seasoned book of business and that annex.
Variance claims professionals, so we should be in a better positioned than others to pick.
On a fairly accurate estimate of future development I'm, sorry, a future.
Outcomes My claims, but there is always the risk that that the claims come in.
With numbers greater than we anticipated.
In our case, we benefit from a.
A a essentially a stop loss reinsurance treaty so.
The way that works now is food for accident years 2013, since 2018 any unfavorable development in our commercial auto portfolio 75 to send to the is reinsured. So only 25% of that would would come to our would hit up up here now so that's a fairly.
A unique.
Feature of protective and does give us a lot of protection from.
Potential adverse development you know all that being said Brett we do feel good about all reserves, we do feel good about Oh claim Siemens trial team's ability to to how about your estimates on a on all claims so while our you know it's that as an insurance company, writing long tail business in a volatile space.
Yes, we have that risk, but we feel good about our ability to manage that risk and very good about they stop loss reinsurance treaty that would apply to the extent of the base adverse development in our commercial auto portfolio.
Right and I just wanted to make sure I you know I heard this right.
The company is guardedly optimistic that you'll be able to over the next.
Year barring unforeseen circumstances.
To get the combined ratio down 200 or down to that you know 96, and 97, which is your ultimate goal.
Over the next full quotas, we're guardedly optimistic that we will we will we will exit twentytwenty.
With a combined ratio a slightly under 100.
And.
What.
What would keep you up at night that would be Ral you know that that much too you know below 100 is it a <unk> pricing <unk> the hard market you enjoy stopping or is it just the loss incidence trends.
When you into to spike ever higher what you know what could derail.
That goal.
I would say, it's more of a lotta I mean, it's.
Given the.
Given how this this segment of the insurance industry has suffered so you. If you would be hard pressed to find a competitor who didnt have a story of underwriting loss over the last few years from commercial auto.
And I think the market in general is regulating itself with discipline to achieve the price increases to to be a long long term sustainable provider capacity for the trucking industry. So I I don't really I don't have a basic done at the market's going to slow down in the next couple of years because.
You know.
Oh, the insurance companies most of the insurance companies, who are in this space recognize that the that we have not taken enough premium for the losses that were paying out plus expenses.
It. Additionally, if you think about the way, though that this industry accounts for revenue.
We on a we own a premium over the length of a policy. So if you might have one yet policy and most all policies of one yes. They are an over 365 days so during twentytwenty.
<unk> for the premium roughly.
Well from policies that we've written in 2019, and we have a fairly good idea of the profitability of the policies that we wrote in 2019.
And that earns into twentytwenty. So that's somewhat de risks, our <unk> pricing ability to get pricing risk in 2020. The second your second conjecture is it more what would concern us is.
Do.
Even with the increased.
Loss picks that we have chosen for 2019 and 2020 is it possible, but those are in fact understated.
Is it possible that claims inflate even more than they have in phases over the last few years, such that we need to put even more money.
Aside from every.
Every dollar that comes and we had to put even more into reserves and <unk> and <unk> in other words charge, even more than we thought was an acceptable price for the product.
That's that's certainly that's it that's a risk that's the rest of the entire industry would face I, we do feel pretty good again about our ability to gauge the trajectory of loss cost inflation and to price that into our product and although we don't disclose what that what that gauge what I try and.
Factories, it's if it's a it's a fairly high train factor that we use <unk>, representing the inflation of claims every yet and a and we review that.
Just various axes with regularity to ensure that we are in fact.
Comfortable with the increase that we price for each call to based on loss cost inflation, but that's but that's always good to be at risk.
Right right.
Thank you for answering my questions and it and it's also encouraging that you know that there were other people on the call, which I take that is a good sign yeah me too.
[laughter].
Our next question is from the line of Ron Bobman of capital returns management. Please proceed with your question.
Hi, Thanks, a lot.
I had a couple of questions a couple of different areas, Jeremy the 16.3% rate increase that you.
Specified for the fourth quarter X multiyear.
Policies do you had the comparable figures for Q3 Q2 in Q1, I'm curious about the sort of the the rate increase trajectory.
Could you also provide us some retention information. Please yeah sure. If you don't mind outcomes, just give you an allergies rather than rather than very specific numbers I. Just don't have them in front of me, but cute Q3 in Q2 would've been higher than 16 on that comparison, they would have been into Twentys <unk> actually remember <unk> the number well another was.
And your next question would logically be well is it trailing off I Oh, you're stepping back a you know exhibiting is now let's say a mountain discipline and I don't I think the answer is no no no no we.
This is a relatively small book and there's going to be cyclicality in the accounts that come up for renewal.
And the decisions that we make on the profitability of particular accounts I think what you what you would've seen in if you are comparing Q4 to Q3, you know that were there were a couple of accounts in Q4 that we felt really really good about and they were lodge ER and we made a decision.
To a to kind of buck the trend, although other renewals on those accounts, which net net depressed the overall loss ratio.
But I feel very good about those decisions and I feel very good about the Oh I suppose it would be the mean that were still trending a in the you know high teens low twentys for commercial auto.
As becoming to 2020, you will have we will have now no more.
Well, if those two year deals that you've heard us speak about before where we were precluded from renegotiating price by contract those those don't exist anymore.
Borrow half a dozen that we're comfortable with.
And.
And I think the market will continue to support the type of rate increases that with a that we've achieved so I'm. So I'm confident that will get what we need in Twentytwenty and I don't think you should look at at the Q4 as representing some type of material slowdown even if it was several points less than than than than Q3.
Okay. Thanks, how about retention give some figures in that retention percentage.
Yeah retention and commercial auto is in the low seventys. It it ticked up a couple of points in Q4 from Q3, and but again, it's it's a it's a number that we're quite comfortable with.
I just want to go back to and mentioned with with our rate achievement to that those are accounts that.
We issued new policies for so in in any given quarter. Two we could have had accounts, where we were taking significant rate action on.
And they simply non renewed.
Right and so you know it.
Yes, we can look at the number but the number in of itself is just an indication of direction.
And again it could be in what we've seen is that we've lost quite a few accounts that we were taking significant rate action on and you know we're fine with that yeah. It's a very good point, John then and then for run too when we look at all renewals. There's a that's a pretty market difference between the rate that we were trying to.
Get on the business that we lost and the rate that we were trying to get on the business that we retained in other words, we're retaining.
The business that we retain needs less rate then the business that we lost.
I understand obviously.
Obviously as outsiders, we we suffer and lack any sort of granularity and detail on these figures I I urge you in that regard to a expand the the Powerpoint presentation to include some rate information and if you need to I'd urge you to look at it at a very very fine company selective that provide.
Yes cohorts over long periods of time of.
Five diamond down to one diamond books of business and the different rates that they achieved in the different cohorts as they saw fit to you know we need more from this cohort and less from that cohort, but but.
This is important information that that shareholders would benefit from and I don't think any area.
Well as much in the way of it sort of competitive issue.
So I'd a question on the buyback next.
A year to date 2020 have you bought any stock back.
Oh, we have we are in our blackout period, we've repurchased right under 500000 shares which met our AR.
Authorize.
Dollars I'm sorry.
Which met our authorized.
Share repurchase that we'd given in the blackout period.
I'm so use the word authorized so so right, but I I think it you Didnt mean in a sense of the board buyback authorization, how much remains on the board's buyback authorization.
I don't know started that your as but we have we have significant room, yeah, we have significant room, there and when whenever I I said authorized we during the blackout period, we authorize a certain number of shares and to be repurchased on our behalf and we can interfere with.
That wants it sat it's it's not so Ted Tenbfive I take it okay right right and then Okay. And then you would look to potentially refresh the tenbfive. When the next open period allows you to put one in places so I think about it in that regard.
That's right okay.
You, which.
[laughter] a calendar perspective, you you bought a relatively small amount back in the fourth quarter as compared to.
Prior quarters during 2019, while at the same time.
The stock.
With this cheap if not cheaper than to a degree earlier parts of the calendar year.
And at the same time, you were seeing I think increased stability in your loss reserves. So.
Why was that sort of a little bit less of an appetite.
Towards the end of the calendar year versus the beginning.
I think really it was just a you know more thorough review of our capital position and our thoughts around capital needs and the amount that we felt comfortable.
Dividending out and I'm, putting into share repurchase and that's something that we will continue to discuss.
And.
We'll do that on a we do it on a monthly basis internally and we'll do it every quarter with Ford <unk>. Okay.
What what I'm sort of struggling with it. So the stock is trading <unk> you know 60, some odd percent 60 61, 62% of of book value.
The accident year combined.
Combined ratio is one ofour, so I don't I don't fully understand sort of the the thought that buyback is sort of.
The capital available for buyback is what's left after supporting underwriting.
Why not either underwrite less or buy more reinsurance if we're posting a one ofour as sort of the indicated underwriting loss right four cents on the on the dollar.
Why not keep less of it either on a gross or a net basis.
And allocate more to buybacks or if there's room to de risk the investment portfolio, so as to free up capital and get more aggressive on the buyback I I don't understand the logic.
Of supporting underwriting that that you're.
You know you're booking as if it's losing four cents.
Yeah, So I guess, a a few comments one.
Our underwriting income is our is supported by investment income, which is the cash flow that we obviously get from taking in premiums and the timing between premiums and loss. So that's you know something that we would consider and the overall equation.
The other the other thing I just mentioned as.
With our underwriting ratio if we decide to reduce revenue there are fixed costs that are being covered so it's not it's not like we pulled back from revenue and immediately there's a there's a benefit in fact, if we significantly pulled back from revenue we would need to look at ER.
Fixed cost structure and make some moves there.
So these are all things that we talk about we see the opportunity and.
And we're going to continue to investigate and discuss ways that.
We can potentially buyback more shares than what we've recently done <unk>.
I I got you know, we we aim to price our product to a profit.
Mike spoke about earlier, obviously this is bringing earns in so the premium that were done in the full fourth quarter, what would be business that was written in the fourth quarter of 18 first quarter of but like you know what I'm, saying so it does.
It's been written over the past last year.
There's there's nothing that were writing today, the we ought deliberately pricing to I want to floral one a five year old one of <unk>, <unk>, where pricing that business to a profit. It has to an in if we don't think we can get the right price than we walked away from business, that's why our retention.
Commercial auto is is relatively low at a.
Low seventys.
And when we write new business, we write that at a price point that from a pricing debit and credit standpoint is it better price than our renewal book. So we feel good though that we actually are deploying capital.
Into business, the ultimate it's going to give us a profit.
And.
If we weren't able to achieve that we would shrink business more them more than you've seen it shrink in which case, presumably capital would free up over time, but oh, we actually think the market conditions.
And our pricing models support us keeping a volume that's not how many different from where it was a year ago.
I appreciate I understand you're you're very good point with respect to sort of the earned in underwriting results.
I still find it.
At the.
Expected ultimate underwriting profit from you know the most recently underwritten book of business is in a cumulative sense.
After discounted back and after retention issues is gonna be comparable and really hold the candle to buying back stock at 60, 65% of book value and you're talking about a 50% rate of return and surely you book you believe in the balance the integrity of the balance sheet. So.
I am I.
I'd encourage you to to look for.
Available pools of capital, whether it's in the investment portfolio de risking or buying more reinsurance or just buying back at a quicker pace. So thanks, a lot I appreciate your time, and and and I and I'd Echo. The earlier comment you made a lot of progress and the civilian the reserves speaks volumes about that.
I I just wanted to mention one thing too on the investment side you know our.
Our investment portfolio is.
Significantly more than our equity because of that float in the business.
And so it's not necessarily what we do with our investment portfolio.
Our.
In order to repurchase more shares it's more about the level of equity that we have and what that level of equity does in terms of ensuring our.
And best rating.
And then providing us capital under that A.M. best model and under different stress test scenarios to grow the business.
Or take strategic action. So we can't really do anything with the investment portfolio at to free up cash to repurchase shares if that makes sense.
Thanks for your comment from appreciate it.
Okay.
Your next question comes from the line of Blaine blood affords the LLC. Please proceed with your question.
Yes.
My question revolves around more overall organizational strategy I would echo previous previous comments around.
The improvements around loss ratio and combined ratio.
Kudos to the management team around that.
One of the things that we have heard over.
Over and over again, another with other investments around insurance companies.
Is the communication around alternative risk financing strategy around.
Captive structures alternative risk financing structure large deductible programs could you could you help maybe speak to that a little bit around.
Is that part of the strategy for protective moving forward as you continue to focus on the quality accounts in the book of business one of the things that we've seen in research and study is that some of those accounts are looking for some of those alternatives.
Yeah, you know, it's a it's an excellent question.
In General Mike Mike quick thoughts of would be we don't have a strategic goal of being a a big provider a captive solutions.
I think a longer wants it might be.
You know, it's hard to do it's quite hard to do both.
Having via feet in both kind of.
Both areas facilitating captives and also taking risk is not impossible, but it's quite it's quite hard to do without kind of confusing you'll you'll constituents.
We do see some customers who are interested in captives, but to be very Frank we don't see many of our logic customers, who oh urging us to have a captive solution for them and all moving into into captives.
But.
You know as you know that pros and cons due to captives and the financial impact or to them and the amount of race that would that would take on a cost of a captive.
And we have not found it to be a we haven't found it to be an impediment to us.
Winning good customers retaining customers being able to managed the claims about customers.
Having a good value proposition or so for the time being it's not its not an area that we've <unk> rushing to find solutions for our customers and nor is it an area that our customers are buying down the tool for us to two to to produce solutions for them.
Excellent. Thank you so much for that could you then could you didn't speak to maybe the the strategy around that we noticed in the and they report.
The what the retention that was being taken historical rates and versus existing retention on the 25 $25 of every.
$165.
Do you see a you see a significant impact to reserves as we've taken on the additional retention layer you could speak to that.
That would be helpful as well.
No no no. They know the impact to reserves no. You know, we we would words of its not really impactful to offers us it was a.
It was a decision or I think was a it was a was the right decision.
It was based upon our confidence level in in a ability to decrease our loss ratios and move further away from anywhere the the I stop loss would trigger.
At a heightened confidence in our pricing models and our ability to to get more price for the rest and I'm frankly.
That that reinsurance as it should do it became very expensive. So we bounced off our increased confidence in about a in our ability to improve our.
Our or a loss ratios and get for that further away from any point, while you might trigger I stop loss with with.
<unk> increased cost of insurance, if the cost of reinsurance was significantly less than it had appeared to be we might have we might have both little bit more but poverty, an awful lot more because again, we're pretty confident in our ability to achieve the.
Loss ratios in that a 2019 treaty here.
I think we we also took a lot of actions to.
Change our limits profile and so we have less exposure to higher limits and definitely less exposure to higher limits and we had.
Back in 15 16 17.
So that was another contributing factor.
Thirdly, no and I think it does aligned with your increased underwriting scrutiny the things you're doing there on the underwriting profit in your.
More stringent underwriting guidelines so makes perfect sense. Thank you so much of the time.
Thank you. Thank you.
We have reached the end with the question and answer session I will now turn the call back over to management for any closing remarks.
Well, thank you ofer for being on the call 'em. Thank you for you already intelligent thought provoking questions and thank you for your support look forward to speaking to you all again next quarter.
This concludes todays conference you may disconnect. Your lines at this time. Thank you for your participation have a great day.