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Protective Insurance Corporation (PTVCA)
Q3Â 2020 Earnings Call
Nov 4, 2020, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings, and welcome to Protective Insurance Corporation Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded.
I will now turn the conference over to your host, Joseph Calabrese. You may begin.
Joseph Calabrese -- Investor Relations
Thank you, and thank you all for joining us this morning for the Protective Insurance Corporation's third quarter 2020 conference call. If you did not receive a copy of the press release, you may access it online at the company's website along with an Investor Presentation to accompany today's call and earnings release, which is available at www.protectiveinsurance.com. I would like to remind everyone that we are hosting a live webcast for the call, which may be accessed at the company's website as well.
At this time, management would like me to inform you that certain statements made during this conference call and in the press release, which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Protective Insurance Corporation believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurances that expectations will be obtained. Factors and risks that could cause actual results to differ materially from expectations are detailed in the press release and are included from time-to-time with the company's filings with the SEC.
I would now like to introduce Jeremy Johnson, CEO of Protective Insurance Corporation, and turn the call over to him. Please go ahead.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Thank you. Good morning, and thank you all for joining John and me this morning. I'd like to start by once again thanking my colleagues for your hard work and commitment to Protective and to our clients. Your efforts are clearly paying off.
For the seventh consecutive quarter, our accident quarter combined ratio has improved. We're not where we want to be yet, but our progress is clear and sustainable. Risk selection, rate increases greater than trend, claims management and loss prevention services continue to drive our loss ratios down and 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, and in our core ongoing books, growth was even stronger at 18%. This is driven by a combination of factors. Exposure basis and net [Phonetic] 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 less historical market penetration. We are in a hardening market, but our 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 in our loss ratio in Q2. In this quarter, however, the frequency benefit is not so clear and differs by segment. And overall, there is no notable frequency reduction 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're encouraged by the recovery and remain fully confident in the underlying strength of our hold-to-maturity fixed income portfolio.
Now turning to the numbers. Third quarter net income was $3.3 million or $0.23 per share, which compares to a net loss of $0.7 million or $0.05 per share for the prior year third quarter. For the first nine months of 2020, net loss totaled $7.5 million or $0.53 per share, compared to net income of $3.6 million or $0.24 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, representing an income from core operations per share of $0.36. For the first nine months of 2020, income from core operations was $13 million or $0.92 per share.
As I said earlier, 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 2 points from Q2. We have a nominal amount of unfavorable development in the quarter and our accident quarter combined ratio at 100%, improved by 7 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 our workers' compensation book were flat for the quarter. In general, we are pleased with the performance of our workers' compensation book. However, we do not believe there is any more rate to give up, and we will remain disciplined with pricing and risk selection notwithstanding competitive pressures. Rates were up 18% in the quarter in 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 plaintiff bar continues to aggressively 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 constituent. 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 in what can be very complex litigation.
I believe we are extremely well positioned in our market. There is continued momentum in the pricing environment, our clients and distribution partners value us, and we're investing in our teams and our technology to support future profitable growth.
With that, I'll now turn the call over to John.
John R. Barnett -- Chief Financial Officer
Thanks, Jeremy. 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 attributed to expense management and the benefit of fixed cost leverage with the strong growth in premium.
Investment income in the quarter was impacted by higher average cash balances, the continued drop in average quarterly money market rates, and lower reinvestment rates. We acknowledge that we will be exposed to reinvestment risk as long as the 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 recorded a small investment gain in the quarter. What is not seen in the income statement is another $7.5 million in 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, CLOs and CMBS.
During the quarter, we increased our CECL credit allowance related to the PSG staffing matter by $1.5 million. This adjustment recognizes changes to assumptions about cash recovery timing as well as an increase in PSG's estimated ultimate obligation, which was increased in the second quarter. For additional details, see the disclosure and 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 $900,000 to $1.5 million at 09/30 [Phonetic]. And finally, due to our fixed income investment gains and income from core business operations, book value per share increased by $0.54 per share during the quarter to $24.18 per share.
As a reminder, we have posted our press release, quarterly financial statements and a brief presentation reviewing our first quarter results on our website. With that, we will now open for Q&A.
Questions and Answers:
Operator
[Operator Instructions] And our first question is from Brett Reiss with Janney Montgomery Scott. Please proceed with your question.
Brett Reiss -- Janney Montgomery Scott -- Analyst
Good morning, Jeremy. Good morning, John. Congrats on the progress on the combined ratio. What's the target over the next year or so and what pace do you think you can get down to that target?
John R. Barnett -- Chief Financial Officer
Hi, Brett. Hey well, thank you. I appreciate the acknowledgment. We are pretty proud of the trajectory. I'm a little reluctant to give you firm target, Brett. I will tell you that from a loss ratio standpoint, we do feel that we can continue to improve that loss ratio through 2021. We have a -- as I think we've -- I've disclosed in the past, we're ultimately targeting a combined of around about 96%, that will get us to about a 10% ROE. I don't want to tell you that we're going to get there. I don't want to tell you when we think that we'll get there, but that is -- 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, as I think I've mentioned 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 in our technology transformation.
Brett Reiss -- Janney Montgomery Scott -- Analyst
Okay. I thank you for that. With respect to interest rate, I mean it looks like they're going to remain lower for longer. There is an insurance company in Canada, Fairfax Holdings that creatively to generate income, it's putting up, I think, $1.06 billion [Phonetic] and having a firm that they are comfortable with opportunistically invest in first mortgages on real estate. Is the company open to these type of venture in an attempt to kind of think outside the box to keep yields up in this depressed interest rate environment.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Yes, it's a a great question, Brett. And I think the entire insurance industry is going to struggle a little bit to achieve that right balance of risk and reward given the low interest rate environment. Yeah, I'd make a couple of kind of contextual comments, we have 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, our continued focus on improving the underlying -- underwriting results.
I think you should expect us to have a relatively conservative view on our investments. The continued interest rate environment is one that we're going to -- we will continue to look at allocation in the portfolio, but I don't think you're going to see us taking wild opportunistic bets on the asset side.
Brett Reiss -- Janney Montgomery Scott -- Analyst
Okay. Fair enough. Thank you for taking my questions, and I hope both of you stay well and safe.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
You too. Appreciate your support.
Operator
[Operator Instructions] Our next question is from Jayme Wiggins with Palm Valley Capital. Please proceed with your question.
Jayme Wiggins -- Palm Valley Capital -- Analyst
Hey, good morning. Thanks for taking my questions. I've got three. The first one, of the $7.5 million in unrealized fixed income gains in comprehensive income, were there any categories that had an unrealized loss this quarter?
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Yes, the mortgage-backed securities had a small unrealized loss there.
Jayme Wiggins -- Palm Valley Capital -- Analyst
Okay. So I think in your opening comments, you noted that the higher beta stuff did well. So when you refer to the CMBS, I think you included that as part of that group. Were 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.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Yeah, definitely in our high beta segment, we saw gains on our commercial mortgage-backed securities.
Jayme Wiggins -- Palm Valley Capital -- Analyst
Okay. So I'm a little confused. Are you saying that the safer stuff is that the procedure as safer did worse than the stuff that is more volatile.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
I think we have a schedule in our 10-Q on that. So why don't we follow up with you of today's specified that schedule.
Jayme Wiggins -- Palm Valley Capital -- Analyst
Yes, sure. Understand. Thank you. And then, can you walk me through the comments you made about personnel staffing and the increasing allowance, kind of like, because the ultimate obligation grew if you continue to have to revise their obligation higher and I know the revision didn't seem like it was huge relative to the total amount. Do you expect that you'd have to continue to revise your allowance up in tandem with that?
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
So we have not increased -- in the quarter, we did not increase our view of the ultimate obligation, that has stayed the same. We disclosed that as about $46 million. Given our view on -- let the process of the litigation and where the cases being sold, the venues that the case is being heard in [Phonetic], we think -- we felt it was appropriate to extend our view of when we'll start to see cash flows and we push that out by a year that then impacts are, they see still allowance that we took in January of this year by about $1.5 million, but it does not reflect any change in our views on the merits of the case nor on the outstanding ultimate.
Jayme Wiggins -- Palm Valley Capital -- Analyst
Okay. And then just let me dive into that comment about this jurisdiction. The last I read, it sounded like that California court had agreed that the appropriate venue for the case was Indiana. I'm assuming originally, you guys maybe were expecting Indiana, then it shifted to California and now back to Indiana. So kind of talk to me about the current jurisdiction and I would assume Indiana would be preferred by Protective.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Yes. I mean, it's quite complicated. So I don't want to spend too much time on the details. There are two cases. So originally PSG boarded a case against us in California, we subsequently board a case against them in Indiana. That case in California was dismissed in favor of jurisdiction in Indiana. That is on appeal. Our case in Indiana as of September 23, the judge in Indiana felt that -- given the appeal, California was the appropriate venue for the case to be heard.
Jayme Wiggins -- Palm Valley Capital -- Analyst
So California thinks Indiana is the right place. Indiana thinks California is the right place.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Yeah. We are considering various strategies to seek the most appropriate venue and other ways to bring the matter to a conclusion.
Jayme Wiggins -- Palm Valley Capital -- Analyst
Okay. And then one more question, thanks for your time. Last quarter, I believe you called out some fees, tie 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?
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Yeah. We had about $400,000 related to our special committee. We will disclose the costs each quarter, but we won't comment any further on the special committee process.
Jayme Wiggins -- Palm Valley Capital -- Analyst
Okay. Thank you.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Thank you.
Operator
And our next question is from Steve Smith with RBC Wealth Management. Please proceed with your question.
Steve Smith -- RBC Wealth Management -- Analyst
Good morning, gentlemen. Two questions, the sales of a new tractors very high end stuff have been substantial and have 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 as the old ones fall off is a tour of if you see, it's showing up. Is it discernible? How should we look at that?
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
It's a great question. Certainly, most -- we try to write what we would consider to be safety focused financially secure fleet. So we try to pick really the cream of the trucking industry. Most of our customers turn their fleets over in a fairly short amount of time. And so have the opportunity to pick up new equipment with the latest ADAS Telematics camera type equipment. 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 don't have a metric for you off hand that would say to what extent -- to what percentage of our book has X, Y, Z technology. But I would just tell you again, that we are focused on as part of our underwriting to focused on the risks that we think are most focused on quality hardware, quality drivers, and good benefits for their drivers. It's something at the heart of our underwriting to pick the most safety-focused risks.
Steve Smith -- RBC Wealth Management -- Analyst
From a competitive standpoint, does this put you in a disadvantage position and advantage position, how would you characterize that?
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Yes. Well, we -- there certainly are competitors who will write fleets at a premium that we would not put out a quote for, there we get a lot of submissions that we'd say no to, we don't -- our philosophy is that is not that there is an appropriate price for every risk. So if we wanted to compete on every single fleet that was out there, and we could certainly -- it would bring -- it would be a different business model. We are limiting ourselves to those fleets that we do think and have a safety culture.
Our mission is safer roads and safer people, and we are deliberately targeting what we think are the better fleets. Now, I don't say that with any disrespect to any competitor who feels that they could charge 50% more for a less quality fleet, and perhaps make a profit doing that. But our model is certainly to focus 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 don't know that, I would call it either advantage or disadvantage, it's the segment that we're focused on.
Steve Smith -- RBC Wealth Management -- Analyst
Okay. Thank you for that. One last question, the last mile portion of the delivery services that you underwrite, obviously it's growing rapidly. Are there opportunities there? Is that a segment of the market in which you are able to compete? And to the extent that it's a rapidly growing portion of the transportation business put the underwriting environment like.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Yes, it's good. 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 accident products that are obviously a huge part of what we do. And we've seen significant growth in last mile. Pickup and delivery, which is not exactly the same as last mile, but is somewhat synonymous given the internet shopping. Yes, there's been a lot of growth there. As you know, we have a wonderful relationship with FedEx and with the 5,000 or so independent contractors who make up the delivery network for FedEx ground.
And we've seen a lot of growth in that book, and in that opportunity, and we think there'll be more growth opportunities there. We have a handful of other program opportunity -- programs on the books where we also see growth. And we are entertaining opportunities that are coming to us now for other potential sponsors who would like to build programs for their independent contractors focused on that kind of last mile segment.
Steve Smith -- RBC Wealth Management -- Analyst
And then last question related to that, what -- should we be expecting a growth in the amount of underwriting that you were doing simply because the market's getting better than it's safe. 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 in your revenue?
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Well, you are now?
Steve Smith -- RBC Wealth Management -- Analyst
I understand, its hardest, because if we don't have segmentation, so.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Yes, no, sure. So we still have fairly significant growth in our exposure basis in the quarter, and we anticipate that that will continue over the next several quarters. We think that there are high-single digit growth opportunities in the book moving into next year.
Steve Smith -- RBC Wealth Management -- Analyst
Okay, great. Thank you very much. I appreciate the work you guys are getting done. It's great to see.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Thank you. I appreciate that. Thank you for your support.
Operator
And we have reached the end of the question-and-answer session. And I'll now turn the call over to management for closing remarks.
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
Well, thank you, all. As always, I do appreciate your time 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 2021. Thank you, all.
Operator
[Operator Closing Remarks]
Duration: 26 minutes
Call participants:
Joseph Calabrese -- Investor Relations
Jeremy D. Edgecliffe-Johnson -- Chief Executive Officer
John R. Barnett -- Chief Financial Officer
Brett Reiss -- Janney Montgomery Scott -- Analyst
Jayme Wiggins -- Palm Valley Capital -- Analyst
Steve Smith -- RBC Wealth Management -- Analyst
