ProAssurance Corporation (NYSE: PRA) reports the following
results for the three months ended March 31, 2020:
CONSOLIDATED INCOME STATEMENT
HIGHLIGHTS
Three Months Ended March
31
($ in thousands, except per share
data)
2020
2019
%
Change
Revenues
Gross premiums written*
$
262,442
$
279,826
(6.2
%)
Net premiums written
$
232,217
$
245,742
(5.5
%)
Net premiums earned
$
203,855
$
208,149
(2.1
%)
Net investment income
$
20,830
$
22,818
(8.7
%)
Equity in earnings (loss) of
unconsolidated subsidiaries
$
(1,562
)
$
(810
)
(92.8
%)
Net realized investment gains (losses)
$
(28,673
)
$
36,623
(178.3
%)
Other income (expense)*
$
2,251
$
2,095
7.4
%
Total revenues*
$
196,701
$
268,875
(26.8
%)
Expenses
Net losses and loss adjustment
expenses
$
164,832
$
159,755
3.2
%
Underwriting, policy acquisition and
operating expenses*
$
62,056
$
61,392
1.1
%
SPC U.S. federal income tax expense
$
222
$
—
nm
SPC dividend expense (income)
$
(508
)
$
4,787
(110.6
%)
Total expenses*
$
230,731
$
230,264
0.2
%
Income tax expense (benefit)
$
(12,076
)
$
6,961
(273.5
%)
Net income (loss)
$
(21,954
)
$
31,650
(169.4
%)
Non-GAAP operating income (loss)
$
(1,146
)
$
4,163
(127.5
%)
Weighted average number of common
shares outstanding
Basic
53,808
53,683
0.2
%
Diluted
53,885
53,808
0.1
%
Earnings (loss) per share
Net income (loss) per diluted share
$
(0.41
)
$
0.59
(169.5
%)
Non-GAAP operating income (loss) per
diluted share
$
(0.02
)
$
0.08
(125.0
%)
* Consolidated totals include inter-segment eliminations. The
eliminations affect individual line items only and have no effect
on net income (loss). See Note 12 of the Notes to Condensed
Consolidated Financial Statements in the March 31, 2020 Form 10-Q
for amounts by line item.
The abbreviation “nm” indicates that the information or the
percentage change is not meaningful.
CONSOLIDATED KEY RATIOS
Three Months Ended March
31
2020
2019
Current accident year net loss ratio
83.8
%
81.7
%
Effect of prior accident years’ reserve
development
(2.9
%)
(4.9
%)
Net loss ratio
80.9
%
76.8
%
Expense ratio
30.4
%
29.5
%
Combined ratio
111.3
%
106.3
%
Operating ratio
101.1
%
95.3
%
Return on equity*
(6.0
%)
8.2
%
* Quarterly computations of ROE are
annualized
Management Commentary
A company as close to our country’s working professionals as
ours cannot help but feel a range of emotions when observing the
impacts of the COVID-19 virus. Every day, we see the difficulties
facing our customers as they adapt to the conditions forced upon
our hospitals, our businesses, and even our homes. We share their
concerns, and our hearts go out to all those affected by the
pandemic.
At the same time, every day we see examples of heroism,
particularly from healthcare professionals and first responders as
they put their health and safety at risk to serve their
communities. Our healthcare system is being tested in a way we have
never seen before, and yet they show up day after day to serve
others. It is truly inspiring, and we are grateful for the
opportunity to support them and our communities in what ways we can
- to date, we have made a number of substantial grants to support
COVID-19 relief from funds previously set aside in the ProAssurance
Corporation Fund at the Community Foundation of Greater Birmingham.
Recipients of the grants include:
- UAB School of Medicine COVID-19 Clinical and Laboratory
Research Fund
- United Way of Central Alabama Community Crisis Fund
- United Way of Greater Nashville
- United Way of Lancaster, PA
- Community Foundation of Greater Birmingham COVID-19 Response
Fund
- Birmingham YMCA (providing daycare services for emergency
responders and healthcare workers)
I also extend my tremendous gratitude to all ProAssurance
employees. In just one week, 95% of our workforce across the
country made the change to begin working from home. The transition
proceeded smoothly, and I am incredibly proud of their response in
keeping ProAssurance up and running despite the disruption to their
daily lives. Many of our employees have children and are serving
simultaneously as employee, spouse, teacher, and daycare service
while dealing with the uncertainty introduced by the COVID-19
virus. Their dedication is nothing short of extraordinary, and as a
result, ProAssurance has experienced minimal interruption to our
operations and continues unabated in our mission to Protect
Others.
COVID-19 was declared a pandemic near the end of the first
quarter, and therefore the effects of the virus on our operating
results were largely isolated to the last few weeks of March.
However, the shock to the global financial system had an immediate
impact on our investment portfolio, resulting in steep declines in
mark-to-market values of our equities investments.
Outside of our investments’ performance, results for the first
quarter reflected the continued challenges in the healthcare
professional liability market and the intense competition in
workers’ compensation insurance. While we are confident that the
strategic initiatives announced in February will add value to the
company and provide attractive returns for investors, the broad
effects of the COVID-19 virus in the property and casualty industry
will ripple through our results for the rest of 2020, and possibly
beyond.
ProAssurance has a long history of returning capital to
shareholders through dividends. Given our current earnings profile,
the effects that underlying conditions in the broader insurance
marketplace continue to have on our results, and the uncertainties
introduced by the COVID-19 pandemic, we are making the decision to
reduce our quarterly dividend from $0.31 per share to $0.05 per
share, beginning with the dividend declared today by our Board of
Directors. The cash dividend will be payable on July 8, 2020 to
shareholders of record as of June 11, 2020.
These are extraordinary times, but we are blessed to insure and
employ extraordinary people. I have every confidence that
ProAssurance, our customers, distribution partners, employees, and
shareholders will emerge stronger on the other side of this
crisis.
-Ned Rand President & Chief Executive Officer
Key Takeaways - First Quarter 2020
- For the first quarter of 2020, we reported a net loss of $22.0
million, or $0.41 per share, and an operating loss of $1.1 million,
or $0.02 per share.
- Consolidated gross premiums written in the first quarter of
2020 were $262.4 million, a decrease of $17.4 million, or 6.2%,
from the same quarter in 2019.
- Consolidated net premiums earned for the quarter decreased $4.3
million, or 2.1%, from the year-ago quarter to $203.9 million,
driven by decreases in net premiums earned in our Specialty
Property & Casualty, Workers’ Compensation Insurance, and
Segregated Portfolio Cell Reinsurance (“SPCR”) segments, partially
offset by an increase in net premiums earned in our Lloyd’s
Syndicates segment.
- Net favorable reserve development recognized in the first
quarter was $6.0 million, $4.3 million lower quarter-over-quarter.
The decrease is primarily attributable to our Specialty P&C
segment given elevated loss severity in the broader healthcare
professional liability (“HCPL”) industry, including our excess and
surplus lines of business, and uncertainties around the impact the
COVID-19 pandemic will have on variables such as premium volume,
claims frequency and severity, historical paid and incurred loss
trends, general economic and social trends, inflation, and the
legal and political environment.
- Our consolidated underwriting expense ratio was 30.4%, a
quarter-over-quarter increase of approximately 0.9 percentage
points primarily due to lower consolidated net premiums earned, as
described above. Additionally, the increase in our consolidated
underwriting expense ratio reflected an increase in operating
expenses in our Specialty P&C segment driven by $1.4 million of
one-time expenses primarily related to the restructuring of our
HCPL field office organization, and, to a lesser extent, an
increase in operating expenses in our Workers’ Compensation
Insurance segment primarily due to costs related to technology
enhancements.
- Our consolidated current accident year net loss ratio was
83.8%, a quarter-over-quarter increase of 2.1 percentage points
driven by increases in our Lloyd’s Syndicates, Workers’
Compensation Insurance, and Specialty P&C segments. The higher
current accident year net loss ratio in our Specialty P&C
segment reflected higher severity trends in our HCPL book of
business, particularly in our healthcare facilities and excess and
surplus lines. After accounting for the effect of prior accident
years’ reserve development of 2.9%, our consolidated net loss ratio
for the first quarter was 80.9%.
- The increases to our consolidated underwriting expense and net
loss ratios during the first quarter of 2020 resulted in a
consolidated combined ratio of 111.3%.
- Net realized investment losses were $28.7 million, primarily
due to changes in fair value of our equity portfolio and
convertible securities attributable to the recent disruptions in
the global financial markets related to COVID-19.
- Our consolidated net investment result was $19.3 million in the
first quarter of 2020, down $2.7 million from the year-ago period,
primarily driven by a decrease in our allocation to equities and
partial reinvestment in fixed maturities, as well as lower overall
investment balances as compared to the prior-year period.
- We recognized an income tax benefit of $12.1 million for the
first quarter of 2020 as compared to income tax expense of $7.0
million in the same quarter of 2019.
Non-GAAP Financial Measures
Non-GAAP operating income (loss) is a financial measure that is
widely used to evaluate performance within the insurance sector. In
calculating Non-GAAP operating income (loss), we have excluded the
effects of the items listed in the following table that do not
reflect normal operating results. We believe Non-GAAP operating
income (loss) presents a useful view of the performance of our
insurance operations, however it should be considered in
conjunction with net income (loss) computed in accordance with
GAAP. The following table reconciles net income (loss) to Non-GAAP
operating income (loss):
RECONCILIATION OF NET INCOME (LOSS) TO
NON-GAAP OPERATING INCOME (LOSS)
Three Months Ended March
31
($ in thousands, except per share
data)
2020
2019
Net income (loss)
$
(21,954
)
$
31,650
Items excluded in the calculation of
Non-GAAP operating income (loss):
Net realized investment (gains) losses
28,673
(36,623
)
Net realized gains (losses) attributable
to SPCs which no profit/loss is retained (1)
(2,498
)
1,741
Guaranty fund assessments
(recoupments)
(2
)
88
Pre-tax effect of exclusions
26,173
(34,794
)
Tax effect, 21% (2)
(5,365
)
7,307
After-tax effect of exclusions
20,808
(27,487
)
Non-GAAP operating income (loss)
$
(1,146
)
$
4,163
Per diluted common share:
Net income (loss)
$
(0.41
)
$
0.59
Effect of exclusions
0.39
(0.51
)
Non-GAAP operating income (loss) per
diluted common share
$
(0.02
)
$
0.08
(1) Net realized investment gains (losses) on investments
related to SPCs are recognized in our Segregated Portfolio Cell
Reinsurance segment. SPC operating results, including any realized
gain or loss, that are attributable to external cell participants
are reflected in the SPC dividend expense (income). To be
consistent with our exclusion of net realized investment gains
(losses) recognized in earnings, we are excluding the portion of
net realized investment gains (losses) that is included in the SPC
dividend expense (income) which is attributable to the external
cell participants.
(2) The 21% rate is the annual expected statutory tax rate
associated with the taxable or tax deductible items listed above.
Our effective tax rate for the respective periods was applied to
these items in calculating net income (loss), excluding net
realized investment gains (losses) and related adjustments. Net
realized investment gains (losses) in our Corporate segment are
discrete items and are tax affected at the annual expected
statutory tax rate (21%) in the period they are included in our
consolidated tax provision and net income (loss). The taxes
associated with the net realized investment gains (losses) related
to SPCs in our Segregated Portfolio Cell Reinsurance segment are
paid by the individual SPCs and are not included in our
consolidated tax provision or net income (loss); therefore, both
the net realized investment gains (losses) from our Segregated
Portfolio Cell Reinsurance segment and the adjustment to exclude
the portion of net realized investment gains (losses) included in
the SPC dividend expense (income) in the table above are not tax
effected. See further discussion under the heading "Taxes" in the
Executive Summary of Operations section of our March 31, 2020 Form
10-Q filed on May 7, 2020.
BALANCE SHEET HIGHLIGHTS
($ in thousands, except per share
data)
March
31, 2020
December
31, 2019
Total investments
$
3,241,153
$
3,390,409
Total assets
$
4,730,850
$
4,805,599
Total liabilities
$
3,303,341
$
3,293,686
Common shares (par value $0.01)
$
632
$
631
Retained earnings
$
1,463,017
$
1,505,738
Treasury shares
$
(415,962
)
$
(415,962
)
Shareholders’ equity
$
1,427,509
$
1,511,913
Book value per share
$
26.51
$
28.11
Capital Management
We have not repurchased any shares of our stock in 2020 or 2019.
As of May 1, 2020, approximately $110 million remains available in
our Board-authorized stock repurchase program. In March 2020, our
Board of Directors declared a regular dividend of $0.31 per share,
which was paid on April 15, 2020. In addition, on May 7, 2020 our
Board of Directors declared a regular dividend of $0.05 per share,
payable on July 8, 2020 to shareholders of record as of June 11,
2020.
Conference Call Information
ProAssurance management will discuss first quarter 2020 results
during a conference call at 10:00 a.m. ET on Friday, May 8, 2020.
We invite anyone who would like to participate in the call to dial
(888) 349-0134 (US), (855) 669-9657 (Canada) (toll free) or (412)
317-5145 (international); no access code is required. We will
webcast the call at Investor.ProAssurance.com. A replay will be
available by telephone through at least May 8, 2021 at (877)
344-7529 (US), (855) 669-9658 (Canada) (both toll-free), or (412)
317-0088 (international), using access code 10141808. A replay also
will be available for one year on our website,
Investor.ProAssurance.com. We also will make the replay and other
information about ProAssurance available on a free subscription
basis through Investor.ProAssurance.com or through Apple’s iTunes.
Investors may follow @PRA_Investors on Twitter to be notified of
the latest financial news about ProAssurance.
About ProAssurance
ProAssurance Corporation is an industry-leading specialty
insurer with extensive expertise in healthcare professional
liability, products liability for medical technology and life
sciences, legal professional liability, and workers’ compensation
insurance.
The Company is recognized as one of the top performing insurance
companies in America by virtue of our inclusion in the Ward’s 50
for thirteen consecutive years. ProAssurance Group is rated “A”
(Excellent) by A.M. Best; ProAssurance and its operating
subsidiaries are rated “A” (Strong) by Fitch Ratings. For the
latest on ProAssurance and its industry-leading suite of products
and services, cutting-edge risk management and practice enhancement
programs, follow @ProAssurance on Twitter or LinkedIn.
ProAssurance’s YouTube channel regularly presents
thought-provoking, insightful videos that communicate effective
practice management, patient safety and risk management
strategies.
SPECIALTY P&C SEGMENT
RESULTS
Three Months Ended March
31
($ in thousands)
2020
2019
%
Change
Gross premiums written
$
155,381
$
166,431
(6.6
%)
Net premiums written
$
131,255
$
140,657
(6.7
%)
Net premiums earned
$
120,359
$
124,067
(3.0
%)
Other income
1,698
1,209
40.4
%
Total revenues
122,057
125,276
(2.6
%)
Net losses and loss adjustment
expenses
(110,931
)
(107,658
)
3.0
%
Underwriting, policy acquisition and
operating expenses
(29,585
)
(29,615
)
(0.1
%)
Total expenses
(140,516
)
(137,273
)
2.4
%
Segment operating results
$
(18,459
)
$
(11,997
)
(53.9
%)
SPECIALTY P&C SEGMENT KEY
RATIOS
Three Months Ended March
31
2020
2019
Current accident year net loss ratio
94.2
%
93.1
%
Effect of prior accident years’ reserve
development
(2.0
%)
(6.3
%)
Net loss ratio
92.2
%
86.8
%
Underwriting expense ratio
24.6
%
23.9
%
Combined ratio
116.8
%
110.7
%
The Specialty P&C segment recorded a first quarter 2020
operating loss of $18.5 million reflecting a challenging loss
environment across the broader HCPL market. This result was driven
by our recognition of higher claim severity trends, loss activity
in our excess and surplus lines and healthcare facilities business,
and lower quarter-over-quarter prior year favorable development. We
have also experienced loss volatility in certain states with
challenging environments, which increased the current accident year
loss picks in our physician’s book of business.
In the first quarter of 2020, gross premiums written were $155.4
million, a decrease of $11.1 million, or 6.6% quarter-over-quarter.
The decrease reflects our strategy to strengthen rate levels in our
physicians book of business, and continued re-underwriting efforts
related to our national accounts, excess and surplus lines and
healthcare facilities business. During the first quarter of 2020,
our physicians and healthcare facilities business declined by $6.5
million and $4.4 million, respectively.
Premium retention was 81% in the first quarter of 2020. The
eight percentage point decrease from the year-ago quarter reflects
our decision not to renew certain products and risks that did not
meet our disciplined underwriting criteria and long-term profit
objectives, as well as highly competitive market conditions across
our operating territories. The lower premium retention was
partially offset by renewal premium increases of 11% across the
Specialty P&C segment, including 13% for physicians business
and 20% in healthcare facilities business during the first quarter
of 2020.
New business writings were $4.4 million in the first quarter of
2020, compared to $20.9 million in 2019. This result reflects
competitive market conditions, disciplined underwriting evaluation,
and, to a lesser degree, the impact of slower submission activity
from COVID-19. Additionally, new business results in the comparable
quarter of 2019 included two large national accounts totaling $9.4
million.
The current accident year net loss ratio was 94.2% in the first
quarter of 2020, slightly higher than the first quarter of 2019.
This reflects recognition of higher claim severity trends, social
inflation, loss volatility in certain states, and higher loss picks
within our excess and surplus lines and healthcare facilities
business. We recognized net favorable development of $2.4 million
during the first quarter of 2020 due to a reduction in our reserve
for potential extra-contractual obligations/excess of policy limit
(“ECO/XPL”) claims. Net favorable reserve development was $5.5
million lower from the same period last year, as we continue to see
elevated loss severity in the broader HCPL industry, including our
excess and surplus lines of business and are observing early
indications of these increased severity trends in our paid loss
data. Furthermore, we remain cautious in our evaluation of claim
severity trends and any potential impact from COVID-19 to overall
loss trends. Given these factors and uncertainties as well as a
lack of sufficient and reliable data related to the pandemic, we
have taken no action to change our previously established reserve
estimates during the first quarter of 2020 outside of the reduction
in our reserve for potential ECO/XPL claims.
COVID-19 is expected to have a significant impact on the HCPL
industry. While there were no material effects to our Specialty
Property & Casualty segment results in the first quarter of
2020, we anticipate the virus could have a meaningful impact on
revenue trends in the second quarter of 2020 and future quarters.
Overall, the impact on our business is likely to include premium
and exposure reductions, new business disruption, jury trial delays
and cash flows implications from deferred premiums. Our customer
base is facing extremely difficult financial challenges and
disruption to their practices, and we will continue to adapt to the
degree that we’re able to accommodate their needs during this
crisis.
The transaction with the NORCAL Group (“NORCAL”) has proceeded
through the first phase of state and federal regulatory filings,
including the filing of NORCAL’s plan of conversion. We remain
excited about the combination of the companies and look forward to
working together with the NORCAL team to complete this
transaction.
WORKERS’ COMPENSATION INSURANCE SEGMENT
RESULTS
Three Months Ended March
31
($ in thousands)
2020
2019
%
Change
Gross premiums written
$
79,243
$
89,354
(11.3
%)
Net premiums written
$
50,312
$
51,407
(2.1
%)
Net premiums earned
$
44,515
$
45,939
(3.1
%)
Other income
757
729
3.8
%
Total revenues
45,272
46,668
(3.0
%)
Net losses and loss adjustment
expenses
(29,769
)
(30,443
)
(2.2
%)
Underwriting, policy acquisition and
operating expenses
(14,164
)
(14,192
)
(0.2
%)
Total expenses
(43,933
)
(44,635
)
(1.6
%)
Segment operating results
$
1,339
$
2,033
(34.1
%)
WORKERS’ COMPENSATION INSURANCE SEGMENT
KEY RATIOS
Three Months Ended March
31
2020
2019
Current accident year net loss ratio
70.2
%
68.2
%
Effect of prior accident years’ reserve
development
(3.3
%)
(1.9
%)
Net loss ratio
66.9
%
66.3
%
Underwriting expense ratio
31.8
%
30.9
%
Combined ratio
98.7
%
97.2
%
The Workers’ Compensation Insurance segment reported quarterly
operating income of $1.3 million in the first quarter of 2020
compared to $2.0 million in the same quarter of 2019, reflecting a
decrease in net premiums earned and increases in the net loss and
underwriting expense ratios.
The quarter-over-quarter decline in gross premiums written of
$10.1 million reflects a 4% reduction in renewal pricing, and
premium retention of 83%, partially offset by an increase in new
business written. Gross premiums written for business ceded to the
SPCR segment represents $8.8 million of the overall production
decline during the first quarter of 2020. New business written
increased to $9.1 million for the first quarter of 2020, compared
to $7.5 million in the same quarter of 2019. Audit premium was
approximately $900,000 for the 2020 quarter compared to
approximately $700,000 in the same quarter of 2019. Net premiums
earned included a reduction of approximately $860,000 in our earned
but unbilled (“EBUB”) premium estimate, reflecting current payroll
estimates on the in-force book of business.
The increase in the calendar year net loss ratio for the 2020
quarter reflects an increase in the current accident year net loss
ratio, driven by premium renewal pricing decreases from the
continuation of intense price competition and the decrease in net
premiums earned, as previously discussed. The increase in the
calendar year net loss ratio was partially offset by overall
favorable trends in prior accident year claim closing patterns
resulting in net favorable development of $1.5 million compared to
approximately $888,000 in 2019. The 2020 net favorable development
reflects better than expected claim results primarily related to
the 2015 and 2016 accident years.
The quarter-over-quarter increase in the underwriting expense
ratio primarily reflected the decrease in net premiums earned, as
previously discussed, and an increase in costs related to the
implementation of a new policy administration and claims system.
These increases were partially offset by a decrease in policy
acquisition costs.
The COVID-19 pandemic and resulting economic impact, coupled
with the current intense workers’ compensation market conditions,
presents unique challenges for insurance carriers, their employees,
agency partners, policyholders, and injured workers. We are
continuously evaluating these impacts on our business, including
payroll reductions, business closings, cash flows, COVID-19 related
claim activity, current and prior year open claims and the evolving
legal and regulatory environment, and we will undertake all
appropriate responsive measures to maintain progress toward our
strategic and profitability goals.
SEGREGATED PORTFOLIO CELL REINSURANCE
SEGMENT RESULTS
Three Months Ended March
31
($ in thousands)
2020
2019
%
Change
Gross premiums written
$
27,140
$
36,365
(25.4
%)
Net premiums written
$
23,990
$
32,682
(26.6
%)
Net premiums earned
$
16,980
$
19,502
(12.9
%)
Net investment income
254
448
(43.3
%)
Net realized gains (losses)
(3,207
)
2,141
(249.8
%)
Other income
136
87
56.3
%
Net losses and loss adjustment
expenses
(9,352
)
(10,745
)
(13.0
%)
Underwriting, policy acquisition and
operating expenses
(5,079
)
(5,235
)
(3.0
%)
SPC U.S. federal income tax expense(1)
(222
)
—
nm
SPC net operating results
(490
)
6,198
(107.9
%)
Segregated portfolio cell dividend
(expense) income (2)
508
(4,787
)
110.6
%
Segment operating results (3)
$
18
$
1,411
(98.7
%)
(1) Represents the provision for U.S. federal income taxes for
SPCs at Inova Re, which have elected to be taxed as a U.S.
corporation under Section 953(d) of the Internal Revenue Code. U.S.
federal income taxes are included in the total SPC net operating
results and are paid by the individual SPCs.
(2) Represents the net operating (profit) loss due to external
cell participants.
(3) Represents our share of the net operating profit (loss) of
the SPCs in which we participate.
SEGREGATED PORTFOLIO CELL REINSURANCE
SEGMENT KEY RATIOS
Three Months Ended March
31
2020
2019
Current accident year net loss ratio
65.7
%
66.7
%
Effect of prior accident years’ reserve
development
(10.6
%)
(11.6
%)
Net loss ratio
55.1
%
55.1
%
Underwriting expense ratio
29.9
%
26.8
%
Combined ratio
85.0
%
81.9
%
The Segregated Portfolio Cell Reinsurance segment reported
operating income of $18,171 for the first quarter of 2020, which
represents our share of the operating results from segregated
portfolio cell programs in which we participate to a varying
degree. The decrease in the 2020 segment operating result compared
to 2019 is due primarily to net realized investment losses in 2020
driven by disruption in the financial markets related to
COVID-19.
The decline in gross premiums written and the renewal retention
rate of 78% for the first quarter of 2020 were driven primarily by
the reduction in premium funding for a large workers’ compensation
alternative market program and renewal pricing decreases of 6%. New
business written was approximately $1.1 million for the first
quarter of both 2020 and 2019. We renewed all of the workers’
compensation and HCPL alternative market programs that were
available for renewal during the first quarter of 2020.
The calendar year net loss ratio was flat quarter-over-quarter.
This result includes a decrease in the current accident year net
loss ratio to 65.7%, offset by lower net favorable development. The
decrease in the current accident year loss ratio reflects a decline
in large claim activity, partially offset by renewal price
decreases. We recognized net favorable development of approximately
$1.8 million in the first quarter of 2020 compared to $2.3 million
in the same quarter of 2019. The 2020 net favorable loss reserve
development reflects better than expected claim results, primarily
related to accident years 2016 through 2018.
The increase in the underwriting expense ratio in the Segregated
Portfolio Cell Reinsurance segment reflects the ceding commission
percentage paid to the Workers’ Compensation Insurance and
Specialty P&C segments for insurance services provided to the
segregated portfolio cell programs. The ceding commissions are
reflected in the respective segments as a reduction to underwriting
expenses.
The workers’ compensation captive programs in the Segregated
Portfolio Cell Reinsurance segment have COVID-19 challenges similar
to those in the Workers’ Compensation Insurance segment. Certain
captive programs within this segment insure more economically
sensitive businesses including construction, auto dealers,
temporary staffing, food processing and lumber mills. Additionally,
certain programs cover healthcare-related risks such as long-term
care, ambulance services, and home healthcare. We are closely
monitoring each program on an individual basis to assess potential
impacts from the COVID-19 pandemic and associated economic
trends.
LLOYD’S SYNDICATES SEGMENT
RESULTS
Three Months Ended March
31
($ in thousands)
2020
2019
%
Change
Gross premiums written
$
27,861
$
23,588
18.1
%
Net premiums written
$
26,660
$
20,996
27.0
%
Net premiums earned
$
22,001
$
18,641
18.0
%
Net investment income
1,159
1,006
15.2
%
Other gains (losses)
(151
)
32
(571.9
%)
Total revenues
$
23,009
$
19,679
16.9
%
Net losses and loss adjustment
expenses
(14,780
)
(10,909
)
35.5
%
Underwriting, policy acquisition and
operating expenses
(9,142
)
(8,469
)
7.9
%
Total expenses
(23,922
)
(19,378
)
23.4
%
Total income tax (expense) benefit
29
(304
)
(109.5
%)
Segment operating results
$
(884
)
$
(3
)
(29,366.7
%)
LLOYD’S SYNDICATES SEGMENT KEY
RATIOS
Three Months Ended March
31
2020
2019
Current accident year net loss ratio
68.7
%
54.5
%
Effect of prior accident years’ reserve
development
(1.5
%)
4.0
%
Net loss ratio
67.2
%
58.5
%
Underwriting expense ratio
41.6
%
45.4
%
Combined ratio
108.8
%
103.9
%
Results of our Lloyd’s Syndicates segment are generally reported
on a one-quarter lag and include the operating results from our
participation in Lloyd's of London Syndicate 1729 and our 100%
participation in Syndicate 6131, which is a Special Purpose
Arrangement that underwrites on a quota share basis with Syndicate
1729. To reduce our exposure and the associated earnings
volatility, we decreased our participation in the operating results
of Syndicate 1729 for the 2020 underwriting year to 29% from 61%
which, due to the quarter lag, will not be reflected in our results
until the second quarter of 2020. Our Lloyd's Syndicates segment
also includes 100% of the operating results of our wholly owned
subsidiaries that support our operations at Lloyd's. In addition to
our participation in Syndicate operating results, we have
investments in and other obligations to our Lloyd's Syndicates
consisting of a Syndicate Credit Agreement and Funds at Lloyd’s
(“FAL”) requirements. For the 2020 underwriting year, our FAL are
comprised of investment securities and cash and cash equivalents
deposited with Lloyd's, which at March 31, 2020 had a fair value of
approximately $136.2 million.
We recorded an operating loss of $884,000 in the first quarter
of 2020, driven primarily by certain large contingency losses
incurred during the current quarter as well as lower estimated
reinsurance recoveries related to property and catastrophe related
losses as fewer losses in the current period breached the
reinsurance retention limits.
Gross premiums written were $27.9 million in the first quarter
of 2020, an increase of 18.1% primarily driven by volume increases
on renewal business and renewal pricing increases, primarily
property insurance coverages, as well as new business written,
primarily casualty coverages.
Net premiums earned increased 18.0% quarter-over-quarter to
$22.0 million, primarily due to the pro rata effect of higher
premiums written during the preceding twelve months, primarily
property insurance coverages.
For the first quarter of 2020, the current accident year net
loss ratio was 68.7%, an increase of 14.2 percentage points
quarter-over-quarter primarily driven by higher contingency losses
and the decrease in estimated reinsurance recoveries, as described
above.
We recognized $330,000 of net favorable development for prior
accident year reserves in the quarter, compared to approximately
$758,000 of net unfavorable development in the same quarter of
2019.
Syndicate 1729’s maximum underwriting capacity for the 2020
underwriting year is approximately $168 million, of which
approximately $47.9 million is our allocated underwriting capacity.
Syndicate 6131, for which we are the sole capital provider, has a
maximum underwriting capacity for the 2020 underwriting year of
approximately $15 million. The underwriting capacities for both
syndicates are provided using currency exchange rates as of March
31, 2020.
Currently, we anticipate losses related to COVID-19 of
approximately $1.5 million, net of reinsurance, will be reflected
in our results for the second quarter of 2020. Furthermore, the
largest risk the Syndicates have identified to date is related to
the contingency book of business, specifically event cancellation,
and we estimate that additional potential exposure to be
approximately $2.5 million, net of reinsurance, based on what we
know at this time.
We continue to work closely with Dale Underwriting Partners to
monitor the Syndicates’ exposure.
CORPORATE SEGMENT RESULTS
Three Months Ended March
31
($ in thousands)
2020
2019
%
Change
Net investment income
$
19,417
$
21,364
(9.1
%)
Equity in earnings (loss) of
unconsolidated subsidiaries
$
(1,562
)
$
(810
)
(92.8
%)
Net realized investment gains (losses)
$
(25,547
)
$
34,304
(174.5
%)
Total revenues
$
(7,059
)
$
55,763
(112.7
%)
Operating expenses
$
4,827
$
4,570
5.6
%
Interest expense
$
4,129
$
4,330
(4.6
%)
Income tax expense (benefit)
$
(12,047
)
$
6,657
(281.0
%)
Segment operating results
$
(3,968
)
$
40,206
(109.9
%)
Effective tax rate
35.5
%
18.0
%
17.5
pts
For the first quarter of 2020, our Corporate segment reported an
operating loss of $4.0 million, a quarter-over-quarter decrease of
109.9%, which was driven by net realized investment losses due to
changes in the fair value of our equity portfolio and convertible
securities following the steep mark-to-market declines associated
with the COVID-19 pandemic. In addition, net investment income
decreased by $1.9 million to $19.4 million, primarily attributable
to a decrease in our allocation to equities and partial
reinvestment in fixed maturities.
We recognized a decrease in our LPs and LLCs investments due to
lower earnings from two LPs, reflecting the market environment
during the early part of the first quarter of 2020. For our
investments in LPs/LLCs, we record our allocable portion of the
partnership operating income or loss as the results of the LPs/LLCs
become available, typically following the end of a reporting
period. Due to this lack of availability, the impact of the recent
disruption in global financial markets due to COVID-19 on these
investments was not fully reflected in our results for the first
quarter of 2020.
We recorded a tax benefit of $12.0 million during the first
quarter of 2020, resulting in an effective tax rate of 35.5%. Our
effective tax rate as of March 31, 2020 was different from the
statutory federal income tax rate of 21% primarily due to the
pre-tax loss recognized during the 2020 three-month period as well
as the benefit of $4.5 million recognized from the tax credits
transferred to us from our tax credit partnership investments.
Furthermore, our effective tax rate was also affected by the
additional tax rate differential of 14% on the carryback of our
2019 net operating loss (“NOL”) to the 2014 tax year as a result of
changes made by the CARES Act to the NOL provisions of the tax
law.
Caution Regarding Forward-Looking Statements
Any statements in this news release that are not historical
facts are specifically identified as forward-looking statements.
These statements are based upon our estimates and anticipation of
future events and are subject to significant risks, assumptions and
uncertainties that could cause actual results to vary materially
from the expected results described in the forward-looking
statements. Forward-looking statements are identified by words such
as, but not limited to, “anticipate,” “believe,” “estimate,”
“expect,” “hope,” “hopeful,” “intend,” “likely,” “may,”
“optimistic,” “possible,” “potential,” “preliminary,” “project,”
“should,” “will,” and other analogous expressions. There are
numerous factors that could cause our actual results to differ
materially from those in the forward-looking statements. Thus,
sentences and phrases that we use to convey our view of future
events and trends are expressly designated as forward-looking
statements as are sections of this Form 10-Q that are identified as
giving our outlook on future business.
Forward-looking statements relating to our business include
among other things: statements concerning future liquidity and
capital requirements, investment valuation and performance, return
on equity, financial ratios, net income, premiums, losses and loss
reserve, premium rates and retention of current business,
competition and market conditions, the expansion of product lines,
the development or acquisition of business in new geographical
areas, the pricing or availability of acceptable reinsurance,
actions by regulators and rating agencies, court actions,
legislative actions, payment or performance of obligations under
indebtedness, payment of dividends and other matters.
These forward-looking statements are subject to significant
risks, assumptions and uncertainties, including, among other
things, the following factors that could affect the actual outcome
of future events:
- changes in general economic conditions, including the impact of
inflation or deflation and unemployment;
-
our ability to maintain our dividend payments;
-
regulatory, legislative and judicial actions or decisions that
could affect our business plans or operations, including the impact
of Brexit and the impact of changes in interpretations of certain
coverages as a result of COVID-19;
-
the enactment or repeal of tort reforms;
-
formation or dissolution of state-sponsored insurance entities
providing coverages now offered by ProAssurance which could remove
or add sizable numbers of insureds from or to the private insurance
market;
-
changes in the interest and tax rate environment;
-
resolution of uncertain tax matters and changes in tax laws,
including the impact of the TCJA;
-
changes in laws or government regulations regarding financial
markets or market activity that may affect our business;
-
changes in the ability of the U.S. government to meet its
obligations that may affect the U.S. economy and our business;
-
performance of financial markets affecting the fair value of our
investments or making it difficult to determine the value of our
investments;
-
changes in requirements or accounting policies and practices
that may be adopted by our regulatory agencies, the FASB, the SEC,
the PCAOB or the NYSE that may affect our business;
-
changes in laws or government regulations affecting the
financial services industry, the property and casualty insurance
industry or particular insurance lines underwritten by our
subsidiaries;
-
the effect on our insureds, particularly the insurance needs of
our insureds, and our loss costs, of changes in the healthcare
delivery system and/or changes in the U.S. political climate that
may affect healthcare policy or our business;
-
consolidation of our insureds into or under larger entities
which may be insured by competitors, or may not have a risk profile
that meets our underwriting criteria or which may not use external
providers for insuring or otherwise managing substantial portions
of their liability risk;
-
the effect of cyclical insurance industry trends on our
underwriting, including demand and pricing in the insurance and
reinsurance markets in which we operate;
-
uncertainties inherent in the estimate of our loss and loss
adjustment expense reserve and reinsurance recoverable;
-
changes in the availability, cost, quality or collectability of
insurance/reinsurance;
-
the results of litigation, including pre- or post-trial motions,
trials and/or appeals we undertake;
-
effects on our claims costs from mass tort litigation that are
different from that anticipated by us;
-
allegations of bad faith which may arise from our handling of
any particular claim, including failure to settle;
-
loss or consolidation of independent agents, agencies, brokers
or brokerage firms;
-
changes in our organization, compensation and benefit plans;
-
changes in the business or competitive environment may limit the
effectiveness of our business strategy and impact our revenues;
-
our ability to retain and recruit senior management and other
qualified personnel;
-
the availability, integrity and security of our technology
infrastructure or that of our third-party providers of technology
infrastructure, including any susceptibility to cyber-attacks which
might result in a loss of information or operating capability;
-
the impact of a catastrophic event, including the recent
COVID-19 pandemic, as it relates to our operations, investment
results, Lloyd's Syndicates and our insured risks;
-
the impact of acts of terrorism and acts of war;
-
the effects of terrorism-related insurance legislation and
laws;
-
guaranty funds and other state assessments;
-
our ability to achieve continued growth through expansion into
new markets or through acquisitions or business combinations;
-
our ability to complete our planned acquisition of NORCAL due to
regulatory approval or inability to fund the transaction, or
inability to successfully integrate NORCAL and achieve expected
synergies;
-
changes to the ratings assigned by rating agencies to our
insurance subsidiaries, individually or as a group;
-
provisions in our charter documents, Delaware law and state
insurance laws may impede attempts to replace or remove management
or may impede a takeover;
-
state insurance restrictions may prohibit assets held by our
insurance subsidiaries, including cash and investment securities,
from being used for general corporate purposes;
-
taxing authorities can take exception to our tax positions and
cause us to incur significant amounts of legal and accounting costs
and, if our defense is not successful, additional tax costs,
including interest and penalties; and
- expected benefits from completed and proposed acquisitions may
not be achieved or may be delayed longer than expected due to
business disruption; loss of customers, employees or key agents;
increased operating costs or inability to achieve cost savings and
synergies; and assumption of greater than expected liabilities,
among other reasons.
Additional risks, assumptions and uncertainties that could arise
from our membership in the Lloyd's market and our participation in
Lloyd's Syndicates include, but are not limited to, the
following:
- members of Lloyd's are subject to levies by the Council of
Lloyd's based on a percentage of the member's underwriting
capacity, currently a maximum of 3%, but can be increased by
Lloyd's;
-
Syndicate operating results can be affected by decisions made by
the Council of Lloyd's which the management of Syndicate 1729 and
Syndicate 6131 have little ability to control, such as a decision
to not approve the business plan of Syndicate 1729 or Syndicate
6131, or a decision to increase the capital required to continue
operations, and by our obligation to pay levies to Lloyd's;
-
Lloyd's insurance and reinsurance relationships and distribution
channels could be disrupted or Lloyd's trading licenses could be
revoked, making it more difficult for a Lloyd's Syndicate to
distribute and market its products;
-
rating agencies could downgrade their ratings of Lloyd's as a
whole; and
-
Syndicate 1729 and Syndicate 6131 operations are dependent on a
small, specialized management team, and the loss of their services
could adversely affect the Syndicate’s business. The inability to
identify, hire and retain other highly qualified personnel in the
future could adversely affect the quality and profitability of
Syndicate 1729’s or Syndicate 6131's business.
Our results may differ materially from those we expect and
discuss in any forward-looking statements. The principal risk
factors that may cause these differences are described in “Item 1A,
Risk Factors” in our December 31, 2019 report on Form 10-K, in
"Item 1A, Risk Factors" included in our March 31, 2020 report on
Form 10-Q and other documents we file with the SEC, such as our
current reports on Form 8-K and our regular reports on Form 10-Q.
We caution readers not to place undue reliance on any such
forward-looking statements, which are based upon conditions
existing only as of the date made, and advise readers that these
factors could affect our financial performance and could cause
actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in
any current statements. Except as required by law or regulations,
we do not undertake and specifically decline any obligation to
publicly release the result of any revisions that may be made to
any forward-looking statements to reflect events or circumstances
after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20200507006023/en/
Ken McEwen Investor Relations Manager 800-282-6242 •
205-439-7903 • KenMcEwen@ProAssurance.com
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