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Protective Insurance Corporation (NASDAQ:PTVCA)
Q4 2019 Earnings Call
Feb 26, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, welcome to the Protective Insurance Corporation Fourth Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to your host, Marilynn Meek.

Marilynn Meek -- Investor Relations, MWW Group

Thank you Darrell. Thank you all for joining us this morning for the Protective Insurance Corporation's fourth quarter 2019 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

Good morning and thank you all for joining John and me this morning. Fourth quarter net income was $3.8 million and $0.26 per share, which compares to net loss of $24.6 million, or $1.65 per share for the prior year's fourth quarter. For the full year of 2019 net income totaled $7.3 million or $0.50 a share, which compares to a net loss of $34.1 million or $2.28 per share for the prior year period.

On an annualized basis, return on equity was 4.1% for the quarter and 2% for the year. Our quarterly results showed 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 higher quality mix of business focused on fleet transportation. We have steadily improved our accident year underwriting results throughout 2019. Excluding the loss development for all periods, the current accident quarter loss ratio improved by 0.5 points compared to Q3 of 2019 and improved by 7.4 points compared to Q4 of 2018. Improvements are driven by rate achievement and mix shift in commercial auto. Overall on the $48.7 million of commercial auto liability premium renewed during the quarter, rates improved by 13.2% removing two year policies whereby contract we could not improve pricing rates were up by 16.3%. Moreover, we are retaining higher percentages of the better priced customers and attracting new well priced risks into the portfolio.

Excluding loss development for all periods, Q4 booked an accident quarter combined ratio of 104.8% improved 2.2 points from Q3 of 2019 and improved 5.5 points compared to Q4 of 2018, while not an acceptable absolute outcome, I am pleased with the relative trend line confident in and committed to continued improvement. Furthermore, we have laid a strong foundation for continued financial progress in 2020 as a result of our recent underwriting actions fully earn in.

As we look to the next 12 months, I anticipate a market environment of continued price discipline, rate 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 our future profit and 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 and 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 our distribution channels through connectivity and analytics.

We are long term specialist and ensuring large fleets of trucks with a deep bench of experience and expertise and a recognized leadership position in our market. The trucking industry continues to be a favorite target of the plaintiff bar and across the country, our clients face the potential for outsized and sometimes devastating verdicts and settlement demand. Our claims team continues to provide valuable litigation defense and advice to our customers and our underwriters manage our risk to outsized volatility through moderating limits of liability in reinsurance. We are focused on establishing accurate reserves on new claims quickly and committed to continuously reviewing all the claims making adjustments when necessary. While we do not anticipate substantial adverse reserve development in prior accident years and experience limited material development in the quarter, we believe that our commercial auto reinsurance protection in the form of a 75% reinsured unlimited stop loss for treaty years 2013 through 2018 largely insulate our financial results from potential deterioration in our reserve position.

I'm pleased with our progress toward underwriting profitability. Our clients value us and reward us with their business. We have an exceptional team of employees and are well positioned moving into 2020.

With that, I'll now turn the call over to John. And, I look forward to your questions following John's comments.

John R. Barnett -- Chief Financial Officer

Thank you, Jeremy. As Jeremy discussed 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% to $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 in 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 was a high point for the company and 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 a better comparison it 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 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 unfavorable prior period loss development of $2.2 million in the prior year quarter and 1 million in the quarter, the combined ratio improved 5.5 points from 110.3% to 104.8%. For full year 2019 our operations produced an underwriting loss of $30.5 million, resulting in a combined ratio of 106.8%. This compares to a combined ratio of 108.6% for 2018.

For the full year 2019 prior accident year loss development was favorable $0.6 million, as favorable workers' comp development offset unfavorable commercial auto development. Similar to the industry, we experienced unfavorable development in commercial auto during 2019. The commercial auto unfavorable development income statement impact was partially mitigated by our reinsurance treaties, which are highlighted on Page 5 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 in $87 million of positive operating cash flow for 2019. Year end book value per share was $25.51, an increase of $1.56 per share or 6.5% for the year. This increase was net of $0.40 per share in cash dividends. Including dividends, paid total value creation was 8.2%.

During 2019 we spent $11.5 million to repurchase 677,000 shares. These purchases were immediately accretive to book value per share given an average price of 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 4, the value of our reinsurance treaties on page 5, and our investment portfolio asset allocation and high quality short duration fixed income holdings on page 6.

This concludes our formal commentary. At this time, we would be happy to take questions.

Questions and Answers:

Operator

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of John Keefe [Phonetic] of J Keefe [Phonetic] Investments. Please proceed with your question.

John Keefe -- J Keefe Investments -- Analyst

Yes, good morning. I'm a 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 costs, brokerage costs, can you explain to me why that is?

John R. Barnett -- Chief Financial Officer

Our expense ratio does include all expenses net of -- and then we adjust for fees, standard with all insurance companies. We don't report it.

John Keefe -- J Keefe Investments -- Analyst

Okay. I'm a long term insurance investor, first time participants on the call. Your Excel spreadsheet showing current and historical numbers, which by the way is very helpful, nets out or excludes deferred acquisition costs. If I'm reading that correctly, it seems as if you calculate the expense ratio using other operating expenses not including brokerage cost and that is really unconventional industrywide. Have I got that straight or ---?

John R. Barnett -- Chief Financial Officer

Let me -- let me repeat. So you're talking about on Page 3 of the presentation. And are you specifically talking about the line where we subtract out, commissions and other?

John Keefe -- J Keefe Investments -- Analyst

Yeah. I don't have that in front of me, but -- but that is correct. That is what I'm referring to.

John R. Barnett -- Chief Financial Officer

Okay. So traditionally what is in the commission and other 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 are all based on premiums earned as the denominator. And so the calculation is here is loss in LAE divided by premiums earned and then here are expenses less fee income to get to an expense number that you divide by the premiums earned.

John Keefe -- J Keefe Investments -- Analyst

Okay, yeah I understand the calculation of ratio. So, excuse me, I think you just gave me a very helpful answer. The brokerage costs which you -- the commissions, which you exclude are not expenses that are associated with acquiring new business or existing business?

John R. Barnett -- Chief Financial Officer

That's right. This is income to us. Correct.

John Keefe -- J Keefe Investments -- Analyst

Okay, got it, sorry. And sorry to people on this call for having to bare through that question. Second question I have is, you've referred to book value creation, I should say value creation therefore for a while. Can you clarify for me why changes in book value which for you and most insurance company is movements in the fixed income portfolio, cost underwriting losses minus dividends? Why that's a proxy for value creation?

John R. Barnett -- Chief Financial Officer

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.

John Keefe -- J Keefe Investments -- Analyst

Well, I understand the calculation. It is the long-term thought behind this that the stock price ultimately will move in sync with book value changes over a period of time?

John R. Barnett -- Chief Financial Officer

That's right. The insurance industry is heavily tied to valuing based on multiples of book value per share. And so that's why we talk about it and we feel it's important to discuss the change in book value and book value creation.

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

Yeah -- we're very focused on improving book value per share. That's a key metric for us.

John Keefe -- J Keefe Investments -- Analyst

What about the stock price?

John R. Barnett -- Chief Financial Officer

Absolutely. That's obviously, exactly what we want to drive higher stock valuations and part of what we can control and do to get that to move is to make sure that we have positive net income. We're growing book value per share and we're delivering shareholder value over consistently over a period of time then that will be reflected in a better stock price.

John Keefe -- J Keefe Investments -- Analyst

Great. That's true. Last question. What is your ROE target? And what combined ratio given this interest rate environment, will require for you to hit that ROE?

John R. Barnett -- Chief Financial Officer

Yeah, we -- we are always looking at what that target ROE should be. Just recently we ran through a study and felt that a 10% ROE, 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 kind of pegged the market at 10% ROE. 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.

John Keefe -- J Keefe Investments -- Analyst

May I ask one more question. Any timeframe as to when that might be achieved?

John R. Barnett -- Chief Financial Officer

Well, our current goal is to achieve underwriting break even by the fourth quarter of this year.

John Keefe -- J Keefe Investments -- Analyst

What about 96 or 97 combined ratio?

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

I think, let me just take that for a sec. I think If you look at the trajectory in 2019 of our combined ratio decrease, we believe that we need to and can continue to get similar rate increases in 2020 as we did in 2019. And so I think that the rough trajectory that you saw in 2019 is a good proxy for how we feel that book will improve in 2020 and although 2021 is a long time away, how we -- how we think the book will continue to -- to improve in 2021. So you know yeah, 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 -- that we and our competition need. And should that be true, we are fairly confident that trajectory of improvement is -- is a good -- is a as a good proxy for the next couple of years.

John Keefe -- J Keefe Investments -- Analyst

Excellent. Thank you very much for your time and for the call.

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

Thank you for being a long-term shareholder, John.

John Keefe -- J Keefe Investments -- Analyst

Yes, sir.

Operator

Our next question comes from the line of Steve Spence [Phonetic] of RBC Wealth Management. Please proceed with your question.

Steve Spence -- RBC Wealth Management -- Analyst

Good morning, gentlemen. Congratulations on progress that you clearly are making.

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

Thank you.

Steve Spence -- RBC Wealth Management -- Analyst

Wall Street Journal about six weeks or eight weeks ago had an article on mid-sized to smaller shippers. And in it there was a primary discussion was based on volume for their business. Second portion was on their expenses. Expense side, the commentator that they quoted indicated that his monthly insurance costs year-over-year had jumped from $161,000 a month to $300,000 a month. Is that -- looking at in other way, typical of what's going in the industry, is it a typical as sort of the first question, I'm trying to understand the volume side of your business?

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

Well, sorry -- well let me try to take a second part on pricing. It's a quite a stratified industry. I mean you're going to see a very different pricing outcome for truckers who have invested in safety and really invested in safety and have a safety culture and have great telematics equipments on the trucks. And have lower driver turnover and have a good accident rates than truckers who have not invested in safety and safety technology and driving older fleets and have a high driver overturn over. There is a very, very, very distinct kind of pricing stratification. So it's hard to say whether that particular outcome was typical for the industry. I will tell you that for the most part -- in the book of business that we have, rate increases in the 15% to 30% for a primary is quite typical. And then when you get into the excess placement, to the extent that a trucker buys more than a primary million, 2 million, the pricing for excess has become --- the pricing and the availability of capacity for excess is a real challenge for the industry. We have so far made the decision not to be. We are a primary writer because we'd like to have the advantage of our claims team involved with claims early. But I can understand if a trucker was combining the pricing for their excess with pricing for the primary how you could get into some very substantial increases in the cost of insurance for small and for large truckers.

On the volume side, I mean, generally speaking in our book we're not seeing, I mean, we measure -- we rate upon mileage and our exposures haven't really changed meaningfully year-over-year, it's very similar mileage rate that's been driven by in our book. Does that -- does that answer your question?

Steve Spence -- RBC Wealth Management -- Analyst

Yes, it's very helpful. And in fact, my next question for you had to do with this mileage billing process. We're in the 11th year of an economic recovery year where I think there's a general rule. It is driven up miles driven and increasingly also I think with the Amazonification of commerce favoring your business in that regard. Where are you at this point with respect to in your commercial shipping volume related? Number one. And number two, do you have any general thoughts in a weaker economy assuming one of these days we get one as to how that may affect? I mean, if you have the same number of snow storms and ice, but you have fewer miles driven it seems to me there could be some -- a correlation in a down economy?

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

I mean, I think generally speaking if we had fewer miles driven, we think we'd have fewer accidents, fewer losses. So generally there's a little bit of -- there is linearity between miles driven and losses, obviously otherwise we wouldn't rate on that. We wouldn't use that as our exposure basis. So, if there were fewer miles driven, there should be fewer losses as a -- density -- traffic density is another way of measuring accident rates on the roads. So to the extent that there is fewer drivers as well as fewer miles being driven, that could bring the number of losses down to. But I would say just in general, we would view a downturn in mileage being offset by a downturn in losses, so it probably would be fairly linear.

Steve Spence -- RBC Wealth Management -- Analyst

Okay, thank you. That's very helpful. Last question for you. Since we sit and have to make this debt equity investment decision daily in terms of our mix of asset. Your announcement referred to today to your reallocation of equity investments in limited partnership in cash and cash equity instruments and to short duration high quality bonds. It's 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 you're tilting? Our view is we're kind of in the worst of both worlds here as a value bar. Can you give us a little light as to the investment side of your life? What you're facing? What you're thinking?

John R. Barnett -- Chief Financial Officer

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 in 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 really to -- based on volatility on the underwriting side in the business we wanted to limit volatility of our investment portfolio. On the equity side, we have very involved robust quarterly meetings with our investment committee of the board and we are always looking and questioning what our asset allocation should be. And then specifically in equities if we should be doing something different.

Steve Spence -- RBC Wealth Management -- Analyst

It's so common today for even running those companies, providing dividend returns that are 2 times the 10-year treasury. How does that tilt your thinking?

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

I think -- can you -- actually can you restate the question?

Steve Spence -- RBC Wealth Management -- Analyst

It's very common today for high-grade equities up the road, JP Morgan as an example, other US bank. Their dividends in many cases are 3.5% to 4% as of yesterday. 10-year Treasury is not much more than a third of that. How does that reality in terms of investment income affect your strategy, you're thinking?

John R. Barnett -- Chief Financial Officer

Yeah. 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.

Steve Spence -- RBC Wealth Management -- Analyst

Okay. That's helpful. And for all those who are investors, these are not easy times. And so appreciate there what you have accomplished on the portfolio.

John R. Barnett -- Chief Financial Officer

Thank you.

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

Thank you. 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 gentlemen. The appetite for the Board to buy stock with it being such a discount from book value. How much can it be without jeopardizing your ratings?

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

Well, we have a healthy authorization. We're going to keep a -- we'll buy back stock as much as we can without jeopardizing our ratings. I don't want to give you a firm number or set an expectation for 2020. We do want to make sure that we've got dry powder in a volatile underwriting environment and then balance that with the obvious accretion from buying back stock. The Board is very comfortable with us having a healthy authorization and then we're going to try to make a point in time decisions based on keeping powder dry in our capital base and the stock price.

Brett Reiss -- Janney Montgomery Scott -- Analyst

Well, last year you were able to buy back 677,000 shares of stock. This year things -- your business is improving. So, can I assume you will be able to buy back at least a minimum of 677,000 without jeopardizing your ratings since things are improving?

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

I wouldn't put a specific number on it. I think we will -- I think you can go like at what using go look at what we've done recently, get some insight from that. If there are opportunities for us to grab more shares at a significant discount then we will do that. In addition, we are constantly reviewing our capital position and capital needs enrolling that balancing. As you mentioned required capital for our A.M. Best rating. Looking at kind of that risk capital buffer based on historical income, liability asset volatility, reviewing specific risks growth, strategic capital needs and then really after that considering what do we do with 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.

Brett Reiss -- Janney Montgomery Scott -- Analyst

Okay. Appreciate that. Could you explain to a non insurance analyst, what the unfavorable prior period loss development was about? And do you think that that's it going forward?

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

Well. So unfavorable is essentially we write what we call long tail business. So in any given year you're going to put aside a percentage of the premium that comes in for the product for your future view of how claims will mature at a point in time you might have reserves for claims that have been made and then you might have bulk or IBNI incurred, but not reported reserves put away for future claims or to the extent that claims get larger. Those are estimates. This is a long tail business.

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 tail environment for claims and especially in an environment where as I said in my opening comments, we're certainly seeing a pronounced targeting of the trucking industry by the plaintiffs bar. So in other words claims lost costs are going up. So to the extent that those and insurance company, any insurance company get those reserve estimates wrong, you could have favorable development, in which case you would release reserves because you've put aside too much if you like or you could have unfavorable development in which case you are putting more money into reserves and that's coming out of a particular quarter, a view of reserve adequacy.

We are in an environment where the lawyers, the plaintiffs bar are pretty focused on the trucking industry. We think that we have an advantage over others in as much as we are specialists in trucking and we only write primary. So we have a early view of claims. We have a season book of business and experience claims professionals. So we should be in a better position than others to pick a fairly accurate estimate of future development -- sorry our future outcomes from our claims. But there is always the risk that the claims come in with numbers greater than we anticipated. In our case, we benefit from essentially a stop-loss reinsurance treaty. So the way that works now is for accident years 2013 to 2018, any unfavorable development in our commercial auto portfolio, 75% of that is reinsured. So only 25% of that would come to our -- would hit up our P&L. So that's a fairly unique feature of Protective and does give us a lot of protection from potential adverse development.

All that being said, Brett, we do feel good about our reserves. We do feel good about our claims and our actuarial team's ability to have accurate estimates on our claims. So our -- as an insurance company writing long tail business in a volatile space, we have that risk, but we feel good about our ability to manage that risk. And very good about the stop-loss reinsurance treaty that would apply to the extent that there is adverse development in our commercial auto portfolio.

Brett Reiss -- Janney Montgomery Scott -- Analyst

Right. And I just want to make sure 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 to 100 or down to that 96 or 97 which is your ultimate goal?

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

Over the next four quarters, we are guardedly optimistic that we will exit 2020 with a combined ratio slightly under 100.

Brett Reiss -- Janney Montgomery Scott -- Analyst

And what would keep you up at night that would derail that march to below 100? Is it a pricing? Is the hard market you enjoy stopping? or is it just a lost incident trend continuing to spike ever high or what could derail that goal?

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

I would say it's more the latter. I mean, it's given the -- given how this statement of the insurance industry has suffered. So, you would be half pressed to find a competitor who didn't have a story of underwriting loss over the last few years from commercial order. And I think the market in general is regulating itself with discipline to achieve the price increases to be a long-term sustainable provider of capacity for the trucking industry. So, I don't really -- I don't have a major concern in the market, it is going to slow down in the next couple of years because all the insurance companies, most of the insurance companies who are in the space recognize that the that we have not taken in enough premium for the losses that we're paying out plus expenses.

Additionally, if you think about the way this industry accounts for revenue, we earn our premium over the length of our policies. So, if you write a one year policy and most of our policies are one year, we earn over 365 days. So, during 2020, half of the premium roughly will earn from policies that were written in 2019. And we have a fairly good idea of the profitability of the policies that we wrote in 2019 and that earned into 2020. So that somewhat de-risks our pricing ability to get pricing risk in 2020.

The second, your second conjecture is more what would concern us is to even with the increased loss picks that we have chosen for 2019 and 2020, is it possible that those are in fact understated, is it possible that our claims inflate even more than they haven't faced over the last few years. Such that we need to put even more money aside from every dollar that comes in, we have to put even more into reserve and in other worlds charge even more than we thought was an accessible price for the product. That certainly that's a risk, that's a risk that the entire industry would face. We do feel pretty good a gain about our ability to gauge the trajectory of lost cost inflation and to price that into our product. And although we don't disclose what that gauge or what that trend factor is, it's a fairly high trend factor that we use representing the inflation of claims every year and we review that across various axis with regularity to ensure that we are in fact comfortable with the increase that we price for each quarter based on loss cost inflation. But that's always going to be a risk.

Brett Reiss -- Janney Montgomery Scott -- Analyst

Right, right. Thank you, for answering my questions and it's also encouraging that there were other people on the call and which I take that is a good sign.

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

Yeah, me too.

Operator

Our next question is 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. I had a couple of questions in a couple of different areas. Jeremy, the 16.3% rate increase that you specified for the fourth quarter ex-multiyear policies. Do you have the comparable figures for Q3, Q2 and Q1? I'm curious about the sort of the rate increase trajectory. And could you also provide us some retention information, please?

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

Yeah, sure. And if you don't mind, I'll kind of just give you analogies rather than very specific numbers. I just don't have them in front of me. But Q3 and Q2 would have been higher than 16 on that comparison. They would have been in the 20s. I can't actually remember what the number was. And your next question would logically be, well is it trailing off, are you stepping back, are you not exhibiting just enough the same amount of discipline. And I don't I think the answer is no, no, no, and no. We, this is a relatively small book and there's going to be cyclicality in the accounts that come up for renewal, the decisions that we make on the profitability or particular accounts. And I think what you would have seen in if you were comparing Q4 to Q3, there were a couple of accounts in Q4 that we felt really good about. And they were large and we made a decision to kind of buck the trend of our 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 -- I especially would be the mean that were still trending in the high-teens low 20s for commercial auto.

And as we come into 2020, we'll have -- we will have now no more of those two-year deals that you've heard us speak about before where we were precluded from renegotiating price by contract, those don't exist anymore. And are half a dozen that we come through it. And I think the market will continue to support the type of rate increases that we've achieved. So, I'm confident that we'll get what we need in 2020 and I don't think you should look at Q4 as representing some type of material slow down even if it was several points less than Q3.

Ron Bobman -- Capital Returns Management -- Analyst

Okay, thanks. And how about retention, give some figures on that retention percentage?

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

Yes retention in commercial auto is in the low-70s. It ticked up a couple of points in Q4 from Q3. And again it's a number that we're quite comfortable with.

John R. Barnett -- Chief Financial Officer

I just want to go back to and mention with. With our rate achievement too, those are accounts that we issued new policies for. So, in any given quarter too, we could have had accounts where we were taking significant rate action on and they simply non-renewed. And so, we can look at the number, but the number in an of itself is just an indication of direction and again it could be and what we've seen is that we've lost quite a few accounts that we were taking significant rate action on and we're fine with that.

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

Yes. It's a very good point, John, and for Ron too. We've -- when we look at our renewals and there's a pretty marked difference between the rate that we were trying to get on the business that we lost and the rate that we are trying to get on the business that we retained. In other words, we are retaining -- the business that we retain needs less rate than the business that we lost

Ron Bobman -- Capital Returns Management -- Analyst

I understand. Obviously, as the outsiders, we suffer and lack any sort of granularity and detail on these figures. I'd urge you in that regard to a expand the PowerPoint presentation to include some rate information and if you need to I'd urge you to look at a very fine company selective that provided us 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 unless from that cohort.

But this is important information that shareholders would benefit from and I don't think in the area always much in the way of sort of competitive issue.

So, I've a question on the buyback next. Year-to-date 2020, have you bought any stock back?

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

We have we are in our blackout period. We've repurchased right under 500,000 shares which met our authorized -- dollars, I'm sorry, which met our authorized share repurchase that we had given in the blackout period.

Ron Bobman -- Capital Returns Management -- Analyst

And so you used the word authorized So, but I think you didn't mean it in the sense of the Board buyback authorization. How much remains on the Board's buyback authorization? I mean when we started the year.

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

I don't know what that number is, but we have significant room. Yes, we have significant room there. And whenever I said authorized, we during the blackout period, we authorized a certain number of shares and to be repurchased on our behalf when we can't interfere with that one to set, it's not specific.

John R. Barnett -- Chief Financial Officer

[Indecipherable]

Ron Bobman -- Capital Returns Management -- Analyst

Okay, right. And then, OK. And then you would look to potentially refresh the 10b5-1 then next open period allows you to put one in place. Is that how should I think about in that regard?

John R. Barnett -- Chief Financial Officer

That's right.

Ron Bobman -- Capital Returns Management -- Analyst

Okay. From a calendar perspective, 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 was cheap if not cheaper than two degree earlier parts of the calendar year. And at the same time, you were seeing at an increased stability in your loss reserves.

So, why was that sort of a little bit less of an appetite toward the end of the calendar year versus the beginning?

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

And really, it was just a more thorough review of our capital position and our thoughts around capital needs and the amount that we felt comfortable dividending out and 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 the Board.

Ron Bobman -- Capital Returns Management -- Analyst

Okay. What I'm sort of struggling with is so the stock is trading 60 some odd percent, 60%, 61%, 62% of book value. The accident year combined ratio is a 104. So, I don't fully understand sort of 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 104 as sort of the indicated underwriting loss right $0.04 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 is room to de-risk the investment portfolio so as to free up capital and get more aggressive on the buyback. I don't understand the logic of supporting underwriting that your booking as if it's losing $0.04?

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

Yeah, so, I guess a few comments. One, our underwriting income 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 something that we would consider in the overall equation. The other thing I'd just mention is with our underwriting ratio, if we decide to reduce revenue, there are fixed costs that are being covered. So, it's not like we pull back from revenue and immediately there is a benefit. In fact, if we significantly pull back from revenue, we would need to look at our fixed cost structure and make some move there. So, these are all things that we talk about. We see the opportunity and we're going to continue to investigate and discuss ways that we can potentially buy back more shares than what we've recently done.

John R. Barnett -- Chief Financial Officer

Yeah Ron, I would add we aim to price our product to a profit. As I spoke about earlier, obviously this is premium earns in. so, the premium that would earn in the fourth quarter would be business that was written in the fourth quarter of '18, first quarter of what you know what I'm saying. So it does, business that was seen written over the past year. There is nothing that we're writing today but we are deliberately pricing to a 104 or 105 or a 10 --. We are pricing that business to a profit. It has to earn in. if we don't think we can get the right price, then we walk away from business. That's why our retention in our commercial order is relatively low at a low-70s. And when we write new business, we write that at a price point that from a pricing debt and credit standpoint, is a better price than our renewal book. So, we feel good that we actually are deploying capital into business that ultimately is going to give us a profit. And if we weren't able to achieve that, we would shrink the business more than you've seen it shrink, in which case presumably capital would free up over time, but we actually think the market conditions and our pricing models support us keeping up volume that's now probably different from where it was a year ago.

Ron Bobman -- Capital Returns Management -- Analyst

I appreciate, I understand your very good point with respect to sort of the earned in underwriting results. I still find it that the expected ultimate underwriting profit from the most recently underwritten book of business is in a cumulative sense after discounted back in and after retention issues is going to be comparable and really hold the candle to buying back stock at 60% 65% of book value. I mean, you're talking about a 50% rate of return and surely you believe in the balance sheet -- the integrity of the balance sheet. I'd urge you to look for available pools of capital whether it's in the investing portfolio, de-risking, or buying more reinsurance or just buying back at a quicker pace.

So, thanks a lot. I appreciate your time and I caught your earlier comment. You made a lot of progress in the stability and the reserves, speaks volumes about that.

John R. Barnett -- Chief Financial Officer

I just wanted to mention one thing too. On the investment side, our investment portfolio is significantly more than our equity because of that flow 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 AM Best rating and then providing us capital under that AM Best model and under different stress test scenarios to grow the business or take strategic actions. So, we can't really do anything with the investment portfolio to free up cash to repurchase shares, if that makes sense.

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

Thanks for your comment, Ron. I appreciate that.

Operator

The next question comes from the line of Blaine Budd [Phonetic] of Boudoir LLC [Phonetic]. Please proceed with your question.

Blaine Budd -- Boudoir LLC -- Analyst

Yes. My question revolves around more overall organizational strategy, I would go previous comments around the improvements around loss ratio and combined ratio. Kudos to the management team around that. So, one of the things that we have heard over and over again on other with other investments around insurance companies is the communication around alternative risk financing in strategy around captive structures, alternative risk financing structure, large deductible program. 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.

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

Yeah, you know it's an excellent question. In general, my quick answer would be we don't have a strategic goal of being a big provider of captive solutions. I think a longer answer might be it's hard to do -- it's quite hard to do both. To have we have feet in both kind of both areas facilitating captives and also taking risks. It's not impossible but it's quite hard to do that kind of confusing your constituents. We do see some customers who are interested in captive, but to be very frank, we don't see many of our larger customers who are urging us to have a captive solution for them and/or moving into captives.

As you know that pros and cons to captive and the financial impact to them and the amount of risk that would take and the cost of the 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 good customers, being able to manage the claims of our customers, having a good value proposition. So for the time being, it's not an area that we're that we're rushing to find solutions for our customers and nor is it an area that our customers are banging down the door for us to produce solutions for them.

Blaine Budd -- Boudoir LLC -- Analyst

Excellent, yeah. Thank you so much for that. Could you then speak to maybe the strategy around -- we noticed in the report what the retention that was being taken, historical retention versus existing retention from the $25 of every $100 to the $65. Do you see a significant impact to reserves as we've taken on the additional retention layer? If you could speak to that, that would be helpful as well?

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

Not an impact to reserves, no. We would reserve. It's not really impactful to our reserves. It was a decision that I think was the right decision was based upon our confidence level in our ability to decrease our loss ratios and move further away from anywhere a stop loss would trigger and a heightened confidence in our pricing models and our ability to get more price for the risk. And then, frankly, that reinsurance as it should do became very expensive. So we were balanced our increased confidence in our ability to improve our loss ratios and get further away from any point while we might trigger a stop-loss with that increased cost of the insurance. If the cost of reinsurance was significantly less than it had appeared to be, we might have bought a little bit more, but probably not a lot more, because again, we're pretty confident in our ability to achieve the loss ratios in that 2019 treaty.

John R. Barnett -- Chief Financial Officer

I think we also took a lot of action to change our limits profile. And so, we have less exposure to higher limits and definitely less exposure to higher limits than we had back in '15, '16, '17. So that was another contributing factor.

Blaine Budd -- Boudoir LLC -- Analyst

Certainly. I think it does align with your increased underwriting scrutiny, the things you're doing there on the underwriting process and your more stringent underwriting guidelines. So makes perfect sense. Thank you so much for the time.

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

Thank you.

John R. Barnett -- Chief Financial Officer

Thank you.

Operator

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

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

Well, thank you all for being on the call. And thank you for your really intelligent thought-provoking questions. And thank you for your support. Look forward to speaking to you all again next quarter.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Marilynn Meek -- Investor Relations, MWW Group

Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer

John R. Barnett -- Chief Financial Officer

John Keefe -- J Keefe Investments -- Analyst

Steve Spence -- RBC Wealth Management -- Analyst

Brett Reiss -- Janney Montgomery Scott -- Analyst

Ron Bobman -- Capital Returns Management -- Analyst

Blaine Budd -- Boudoir LLC -- Analyst

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