Q3 2020 Protective Insurance Corp Earnings Call

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Thank you thank.

Thank you all for joining us this morning.

It's active insurance corporations third quarter 2020 conference call.

You did not receive a copy of the press release.

The access it online at the company's web site, along with an investor presentation to accompany today's call and Arts way, which.

Which is available at www dot protective insurance Dot com.

I would like to remind everyone that we are hosting a live webcast of 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.

Which are not historical maybe deemed forward looking statements within the meaning of the private Securities Litigation Reform Act like 95.

Although protective insurance Corp. believes the expectations reflected in any forward looking statements are based on reasonable assumptions.

You could 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 included a couple talk from time to the company's filings, yes, you see.

I would now like to introduce Jeremy Johnson CEO protective insurance Corporation.

Turning the call over to him. Please go ahead.

Thank you.

Good morning, and thank you all for joining John and me this morning.

I just thought I once again, thank you my colleagues for your hard work and commitment to protective and to our clients.

Clearly paying off.

Well the seventh consecutive quarter our accident.

Accident quarter combined ratio has improved.

We're not where we want to be yet, but our progress it's clear and sustainable.

Risk selection rate increases greater than trend claims management and loss prevention services continue to drive our loss ratios down.

We remain focused on expense discipline.

Moreover, we had healthy growth in our target segments in the quarter.

Gross written premium was up 8% over prior year.

Cool ongoing books growth was even stronger at 18% this.

This is driven by a combination of factors.

Exposure basis, and thus premiums have increased in segments focused on pickup and delivery and last mile.

Rates are up significantly across our commercial auto book and we are writing new business, especially in smaller fleets, where we have had let's historical market penetration.

We are in a hardening market, but my clients still have options and they choose to do business with us.

We continue to monitor claims frequency closely.

As you may recall in the second quarter, there was a clear reduction in frequency across our book related to fewer vehicles on the road and we recorded a 3.5 point benefit no loss ratio in Q2 in this quarter. However, the frequency band if it is not so clear and differs by segment. The overall, there's no notable frequency we're done.

And reflected in our loss ratio.

On the asset side.

Our portfolio continues to respond to the improvement in equity and fixed income markets. Although it is still down for the year. We are encouraged by the recovery and remain fully confident and the underlying strength of our held to maturity fixed income before portfolio.

Now turning to the numbers third quarter net income was $3.3 million or 23 cents per share, which compares to a net loss.

Oh 0.7 million or five cents per share for the prior year third quarter.

For the first nine months of 2020 net loss totaled 7.5 million or 53 cents per share compared to net income of 3.6 million or 24 cents per share for the 2019 period.

Income from core operations being the sum of underwriting income and investment income was $5.1 million for the quarter.

Presenting an income from core operations per share of 36 cents.

For the first nine months of Twentytwenty income from core operations was $13 million or 92 cents per share.

I just had a yeah, we've steadily improved our accident quarter underwriting results throughout 2020.

Excluding loss development for all periods, the current accident quarter loss ratio was 71.6.

This is a 5.2 point improvement from Q3 2019.

Normalizing for the Q2 frequency benefit the accident quarter loss ratio improved by nearly two points from Q2.

We have a nominal amount of unfavorable development in the quarter, an accident quarter combined ratio at 100.0 improved by seven points from Q3, 2019, and 1.4 points from Q2 of this year.

I'm very confident we will continue to improve our accident year underwriting results in Q4 and through 2021.

Rates in all 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 was any more rate to give up and we will remain disciplined with pricing and risk selection notwithstanding competitive pressures.

Rates were up 18% in the quarter and our commercial auto book significantly ahead of loss trend.

In the quarter for all our products rates were up 8%.

As I've said in past calls it is clear that the planes as Buck continues to aggressively trying to target the trucking industry.

We will remain focused on price discipline reserve adequacy and claim strategies for long term profitability and value creation for all our constituents we.

We believe that our claims teams are the best in the industry and our clients rely on our expertise to ensure appropriate but optimal outcomes and what can be very complex litigation.

I believe we are extremely well positioned in all market there.

There was continued momentum the pricing environment, our clients and distribution partners value us and we are investing in our teams and our technology to support future profitable growth.

With that I'll now turn the call over to John.

Thanks, Jeremy Gray.

The great thing when planning and execution pays off.

Since the beginning of the pandemic, we have been focused on expense management, placing a temporary hiring freeze on most open positions and challenging discretionary spending that effort continues.

The lower expense ratio for the third quarter is a tribute to expense management and the benefit of fixed cost leverage with the strong growth in premiums.

Investment income in the quarter was impacted by higher average cash balances. The continued drop an average quarterly money market rates.

And lower reinvestment rates, we acknowledge that we will be exposed to reinvestment risk as long as the note.

New low rate environment persists and are seeking prudent ways to maintain book yield balancing risk and reward in this uncertain market.

Through the income statement, we wrecked recorded a small investment gain in the quarter what does not seen in the income statement is another 7.5 million and pre tax fixed income gains that were recognized through comprehensive income.

The pre tax investment gains for the quarter were 7.6 million.

Most of the gains were in high beta fixed income investments.

Spreads across nearly all fixed income sectors tightened over the period with pricing gains most pronounced in the higher beta segments of the fixed income market, including high yield bonds Cellos and CMBS.

During the quarter, we increased our Cecil credit allowance related to the P.S.G. staffing matter by 1.5 million.

This adjustment recognizes changes to assumptions about cash recovery timing as well as an increase in P.S. cheese estimated ultimate obligation, which was increased in the second quarter.

For additional details see the disclosure in footnote 10 of the 10-Q.

This adjustment does not change our views on the merits of this case.

Due to our positive quarterly results, we further reduced our deferred tax asset valuation allowance by 900000 to 1.5 million at 930.

And finally due to our fixed income investment gains and income from core business operations book value per share increased by 54 cents per share during the quarter to $2 to $24, an 18 cents 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.

That we will now open for Q and a.

At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment, it may be necessary to become your hands.

Before pressing the star keys.

One one weeklys long poll for questions.

And our first question is from Brett Reece with Janney Montgomery Scott. Please proceed with your question.

Good morning, Jeremy Good morning, John.

Congrats on the progress on the combined ratio.

What what's the target you know over the next.

Yeah, right. So when and you know what what pace do you think you can you know get down to that target.

Hi, Brett Hey, well. Thank you I appreciate the they acknowledge but we are pretty proud of of the trajectory I'm a little reluctant to give you firm targets, but I will tell you that from a loss ratio standpoint, we.

Do feel though that we can continue to improve that loss ratio through 2020 one.

We have a <unk>.

I think what ive disclosed in the past, we ultimately targeting a combined of around about a 96.

It will get us to about a 10% of our OE I don't want to tell you that we're going to get that I don't want to tell you. When we when we think well get there, but that is a hot or our long term target is to run the portfolio with a 96 combined I would anticipate that you will see continued improvement in the loss ratio through 2021.

I would say from an expense standpoint, I think I've mentioned in a in the past we do anticipate that the expense ratio will probably be up by about a point over the next couple of years, reflecting the investments that we're going to make a in our technology transformation.

Okay I, thank you for that.

With respect to interest rate.

I mean, it looks like they're going to remain lower for longer.

You know there is an insurance company in Canada Fairfax Holdings that creatively you know.

To generate income you know is putting up.

I think.

Billion sick and having a firm that.

They're comfortable with.

Opportunistically invest in in first mortgages on on real estate.

Is the company opened to you know to these type of venture as you know in an attempt to kind of think outside the box you know to keep keep yields up in that.

Depressed interest rate environment.

Yes, it's a a it's a great question, Brett and I I think.

Yeah, the entire insurance industry is going to struggle a little bit to to achieve that right balance of risk and reward given given the the the low interest rate environment yeah.

No I'd make a couple of kind of.

Contextual comments, we have we've significantly shifted the allocation in the portfolio.

Over the last couple of years.

And certainly in the last nine months, we have moved into a more defensive position on the portfolio, which we think is the right thing to do given our capital position as well as frankly, a continued focus on improving the the the underlying.

Underwriting results.

I think you you should expect us to have a relatively conservative view on on our investments.

The the continued a interest rate environment is one that were going to we will continue to look at allocation in the portfolio, but I don't think you're going to see us taking you know a wild opportunistic bets on the asset side.

Okay fair enough.

Thank you for taking my questions and I Hope you know both of you stay well unsafe you too.

School.

And again as a reminder, if you have any questions you May press star one on your <unk> home keep <unk>.

And our next question is from James begins with Com Valley Capital. Please proceed with your question.

Hey, Good morning concert, taking my questions I've got three.

The first one of the seven and a half million in unrealized fixed income gains in comprehensive income where there any categories that had an unrealized loss this quarter.

Ah, yes, the mortgage backed securities had a.

Yes, a small unrealized loss, though.

Okay. So I think in your opening comments.

You noted that the higher beta stuff did well so certainly the CMBS or I think you included that as part of that group, where you just suggesting that.

Some of them went up and I guess, others went down more than the ones that went up to create that loss.

Oh, yes definitely in our high beta segment.

We saw gains on our commercial mortgage backed securities.

Okay. So.

I'm a little confused are you, saying that the super stuff the stuff. This week with a sleeper did worse than the stuff that is more volatile.

I think we have a schedule in our in our 10-Q on that so why don't we follow up with you Oh, that's flight schedule, Yes sure understand thank you and then.

Can you walk me through the comments you made about personal style, but consider allowance sounded like because.

The ultimate obligation grew if you continue.

To have to revise their obligation higher and I I know that the revision didn't seem like it was.

Relative to the total amount or do you expect that you'd have to continue to revise your allowance up in tandem with that.

So we have not increased in the quarter, we did not increase our view of the ultimate obligation.

That has stayed the same we disclose that.

About 46 million.

Given our view on the.

The <unk> the process of the litigation are and where the cases being saw the venues that the cases being heard and we think we felt it was appropriate to extend our view of when we will start to see cash flows and we push that out by a yeah that that impacts are.

They Cecil allowance that Weve that we took in January of this year by about a million and a half but it does not reflect any change in our views on the merits of the case no on the on the outstanding Ultimate.

Okay, and then just let me dive into that comment about the jurisdiction that the last I read it sounded like the California Court had agreed that the appropriate venue for the case with Indiana I'm. Assuming originally you guys. Maybe we're expecting Indiana, then it's a good California not back to Indiana, So kinda talk.

Me about.

The current jurisdiction and I would assume Indiana.

For by protective.

Yeah, I mean, it's quite complicated so I don't I don't want to spend too much time on on on the details. There are two cases, so originally P.S.G. board a case against US in California. We subsequently bought a case against them in Indiana that case in California was.

Dismissed in favor of jurisdiction in Indiana.

That is on appeal al case in Indiana as of September 23rd the judge in Indiana felt that kinda <unk> given the appeal, California was the appropriate venue for the case to be heard.

[laughter], So, California thinks it is the right place, Indiana things, California directly.

Yes.

Okay, we are considering various strategies to to seek the most appropriate venue and otherwise to to bring them out to a conclusion.

Okay and then one more question. Thanks for your time last quarter I believe you called out some some fees.

Hi, depending bankers for the strategic review and describe how that impacted.

The combined ratio did we have anything like that in Q3 and when that process concludes will you be disclosing it to investors.

Yeah, we had about $400000 related to a special committee, we will disclose the costs each quarter, but we won't comment any further on the <unk> on the special Committee process.

Okay. Thank you.

Thank you.

And our next question is from Steve experience with RBC wealth management. Please proceed with your question.

Good morning, gentlemen.

I had two questions.

Sales of a new tractors are very high and stuff I've.

Been substantial and had picked up.

And.

I'd be interested in knowing if there is any metric that relates to the technology and accident avoidance.

That is in the new vehicle has the old ones fall off is.

Is it too early we see it showing up.

Hi, discernible how should we look at that.

It's a great question.

No certainly most we tried to two right what we would consider to be safety focused on financially secure fleet. So we try to pick where do you think the the cream of the Oh the trucking industry.

Most of our customers turned athletes have a in a fairly short amount of time and so have the opportunity to to pick up new equipment with the latest <unk> telematics camera type equipment and and for those who are with who have older equipment.

Many of them are making the investments aftermarket investment in at least cameras, if not other technology I I don't have a metric for you off high and that would say you know to what extent do well what percentage of our book has X Y Z technology, but I would just tell you again.

We are focused on a and it's part of our underwriting to focus on the risks that we think.

Most focused on on quality hardware quality drivers good benefits for that drive as a it's a it's certainly at the heart of our underwriting to to to pick the most safety focused risks.

From a competitive standpoint does this put you in disadvantaged position them advantaged position, how would you characterize that.

Well you know, we certainly are competitors, who will write fleets at a premium that we would not put out a quote full there there we got a lot of submissions that we say no to a we don't but our philosophy is that a is not that there is an appropriate price for everywhere.

So if we wanted to compete on every single fleet that was out there we could certainly <unk>.

Bring it would be a different business model, a we are limiting ourselves to do those those fleets that we do think have a safety culture. Our mission is safer roads and say for people.

We are deliberately targeting what we think are they are the better fleets now I don't say that with any disrespect to any competitor who feels that they can charge you know 50% more for a.

A less quality fleet and perhaps make a profit doing that a boat, but our model is suddenly to focus on on the better risks to provide those better risks with great advice to have strong relationships with those better risks to build those relationships over time to try not to churn through our book So I.

No the I would call it either an advantage or disadvantage. It's the segment that we're focused on.

Okay. Thank you for that one last question.

Last mile portion of the delivery services that you underwrite obviously is growing rapidly or there are opportunities there.

Is that a segment of the market in which you are able to compete.

And.

And to the extent that it's a rapidly growing portion of the transportation business.

What's the underwriting environment like.

Yeah, it's it's.

It's good Oh, we think that there are a lot of opportunities for us in last mile and not just for commercial auto but also for other workers comp and for occupational Axtone products that are obviously, a huge part of what we do we've we've seen significant growth in in last mile.

<unk>.

Pickup and delivery, which is not exactly the same as as as last mile but is somewhat synonymous given via the internet shopping yeah that there's been a lot of growth. There as you know we have a a wonderful relationship with with Fedex and with the 5000, DAU, So independent contractors, who make up that deliver.

Free network for Fedex ground, and we've seen that we've seen.

A lot of growth or in that in that book and in that opportunity and we think they'll be more growth opportunities that we have a handful of other program opportunity up programs on the books, where we also see growth and.

And we are entertaining opportunities that are coming to us now offer up or the potential.

Potential sponsors who would like to build programs for their independent contractors focused on on that called last mile segment.

And then last question related to that what.

Should we be expecting.

Growth in the amount of underwriting, which you were doing simply because the market is getting better and I would say if you keep your market share, but the market grows.

And I realize it's something that doesn't happen overnight.

But when and how should we expect to see that begin to be reflected and.

And your revenues.

What do you all now.

I understand.

It's hard to split out because we don't have segmentation so.

Yeah No show so you're so we saw a fairly significant growth in our exposure basis in the quarter and we anticipate that that will continue over the next several quarters or.

We think that they're up high single digit growth opportunities in the book or moving into a into next year.

Okay, great. Thank you very much I. Appreciate the work you guys are getting done it's a it's.

Great to see.

Thank you appreciate that thank you visible.

And we have reached the end of the question and answer session and I will now turn the call over to management for closing remarks.

Well. Thank you all as always I do appreciate your time and your and your ongoing support we do feel very good about what we've achieved this year and where we stand and our opportunity moving into a 20 to 21.

Thank you will.

This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.

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