Q4 2019 Earnings Call
Good morning, everyone and welcome to Pro shorts conference call to discuss the company's fourth-quarter and full-year 2019 results. These results were reported in the news release issued on February 20th of 2020. And in the company's annual report on form 10-K, which was also found on February 20th of 2020 included in these documents were cautionary statements about the significant risk, uncertainties and other factors that are out of the companies control and could affect proassurance business and alter expected results. Please review those statements management expects to make statements on this call dealing with projections and expectations and explicitly identifies these as forward-looking statements within the meaning of the US Federal Securities Law and subject to applicable Safe Harbor protections. The content of this call is accurate own life on February 21st of 2020 and except as required by law or regulation insurance will not Undertake and expressly disclaims any obligation to update or alter information disclosed this part of the month.
looking statements the management team of
Also expects a reference to non-gaap items during today's call. The company's recent news release provides a Reconciliation of these non-gaap numbers to there Gap counterparts now as I turn the call over to mister King McEwen, I would like to remind you that this call is being recorded and there will be a time for questions after the conclusion of prepared remarks Mister make you in please go ahead down on our call today our president and CEO Ned ran Dana Hendrix our Chief Financial Officer. Mike bogusky president of our specialty P&C line and Kevin shook president of our workers compensation the operations office again.
I hope everyone has had a chance to review our news releases and 10K is this call is going to be a little different in history of the company. I don't think we've ever had so much to talk about on a call. So we're going to avoid repeating too much of what's been reported in yesterday's announcements to leave as much time at the end as possible for questions.
Before I turn it over to Dana for a look at our Consolidated results just a couple of comments.
For forty years proassurance and its predecessors have navigated the Peaks and valleys of the long cycle characteristic of our businesses.
The two announcements we made yesterday our fourth-quarter and full-year 2019 results and the NorCal transaction serve as an example of what we have always believed. It is during the most challenging stage of billing cycle that the greatest opportunities arise with that will Jump Right In Dana. Thanks Ned as we pre-announced on January 22nd, we had adverse development that came out of our regular year-end review of updated lost data with internal and external actuaries. This adverse development was largely attributable to increase Reserve estimates for a large National Healthcare account and to a lesser extent and our broader, excess and surplus book of business given this Reserve strengthening. We reported a net loss of $59,000 for the quarter or loss of $1.10 per share and net income of $1 for the year or net. Income of $0.02 per share are
The holiday did operating losses.
68.3 million dollars for the quarter or a loss of $1.27 per share for the year. We reported a Consolidated operating loss of 43.8 million dollars a pack or a loss of $0.81 per share.
For the quarter are Consolidated current accident year net loss ratio increased by 20.4 percentage points to 109% and the full-year ratio is 90.3% off an increase of 6.6 percentage Point, excluding. The reserve adjustments related to the large National Healthcare account. These ratios were 93.5% and 86.4% respectively, we experienced unfavorable development in our prior accident year reserves of 30.4 million for the quarter which drove the calendar year net loss ratio to 123.2% However for the full year, we recorded favorable development of 11.8 million dollars and our calendar year net loss ratio is 89%
our underwriting
Expense ratio was 31.5% for the fourth quarter and 29.9% for the Year. This brings us to a combined ratio of 154.7% full quarter and one hundred and 18.9% for the year in our corporate segment. We reported net investment income of 21.6 million dollars in the quarter and fifty Seven Point 1 billion dollars for the full year due to the reserve adjustments recorded in the fourth quarter. We recognize the Consolidated pre-tax loss for the year which resulted in the ignition of a 21.9 million dollar tax benefit from tax credit, which was the primary driver of the total tax benefit of 29.8 million dollars for both the full years as well as the current quarter.
For more details on the results from our specialty PNC segment. I'll turn it over to Mike Mike. Thank you Dana, especially in segments record a year end 2019 operating loss of 147.9 million dollars. This result was driven by a reserve strengthening in the fourth quarter of 2019 as referenced by Dana and her comments related to the national account and excess and surplus lines business. I want to be clear that the specialty PNC segment had favorable laws Reserve development a 45.8 million dollars exclusive to the large National count during 2019.
2019 the new leadership team executed a comprehensive business strategy in response to emerging emerging laws Trends and changing conditions in healthcare professional liability. This includes organizational structure enhancements consolidation of operations recruitment of additional talent and Healthcare professional liability specialty underwriting tightening of writing criteria terms and conditions as well as price strengthening in early 2020. We introduced the field organization of the future for health care professional liability business office.
We establish for operating regions with regional hubs and reduce the number of offices from 20 to 10 across their operating territories. We believe the Strategic business decisions that have a great day today will improve the operating efficiency pro forma expense structure and value-added service to distribution partners and customers
we expect to see the benefits of these actions in late 2020 and Beyond we are encouraged by early progress and will continue to execute execute the strategy throughout 2028 Edition as well for the future. I will now update you on your end 2019 results starting with the top-line trends gross premiums written were essentially unchanged as compared 2018 finishing 2019 at 577.7 million dollars.
Yes.
Increase the gross premiums written in our positions business is driven by solid production results and renewal rate increases. This is offset to some degree by the underwriting efforts in our Healthcare facilities and certain sectors of the excess and surplus lines business.
Those premiums written for the other lines and Specialty PNC. We're relatively flat year-over-year overall. We observe firming of the market and Healthcare professional liability. However long this was offset by the excess capital in the space and pockets of intense competition particularly in the Physicians business.
Premium retention for the segment was 86% for the year three percentage points lower than the prior-year reflecting our focus on underwriting discipline and our willingness to walk away from business that does not fit our risk appetite or longer-term profit objectives.
We were aggressive in underwriting our health care facilities in excess and surplus lines business as a result premium retention and our health care facilities business with 62% of the year and 47% for the quarter.
Exclusive of the facilities business premium retention was 88% in each of our Physicians Medical Technology and legal liability businesses for the year a strongbox in the market that remains competitive.
We are also encouraged by renewal rate increases of 14% in our Healthcare facilities and 6% and Physicians our largest portfolio business.
You're a large account business. We achieved significant Improvement in terms conditions and product structure improving overall rating rate adequacy in that segment. We took forty two point six million dollars of new business in 2019 compared to forty seven point nine million dollars in 2018 reflecting are disciplined underwriting evaluation of the business presented with us.
Our physician new business was the driver at 2125 Point 1 million of writing during 2019.
Krishna car accident accident your loss ratio to 100 5.5% was due to the previously mentioned underwriting loss for a large national account and to a lesser degree at home was transgender access to Surplus lines business.
For 2019 the prior-year adverse laws development related to the large national account was 51.5 million dollars, which was entirely responsible for the 5.7 million dollars of adverse development recorded in the segment for 2019.
As previously stated in my opening comments, excluding the impact of the large national account loss reserves developed favorably by 45.8 million dollars a month on a very bright. Now we are extremely pleased with the exceptional underwriting results in our life sciences business turn 2019.
We are excited to announce in NorCal group acquisition and look forward to the combination of the companies. This is a transformative strategic transaction for both organizations and provides us with a graphic diversification a true National platform significant penetration in the physician Market testing class talent and high quality distribution Partners month.
We look forward to.
Working with the exceptional employees distribution and strategic business partners of both companies to create a premier organization that serve the health care Market ultimately creating long-term value for our shareholders.
Please keep in mind the transaction is subject to regulatory approvals and other required closing conditions Ken. Thanks, Mike, Kevin. Will you please leave us through the results of Our Workers Compensation Insurance portfolio cell reinsurance segments. I will can the Workers Compensation Insurance segment produced operating income of 12.5 million dollars and a combined ratio of 93.7% for the 2019 year in a highly competitive Marketplace during 2019. Gross premiums written which includes traditional and Alternative Market busy needed to the SPCA Erie Insurance segment decrease 5% to 278.4 million dollars compared to two hundred ninety three point two million dollars for 2018 Dodge a consistent application of our individual account underwriting strategy, which carefully assesses the underlying risks of each policy resulted in this production decrease in to Thursday.
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Correspondingly new business writings for 2019 were Thirty point eight million dollars compared to fifty one point five million in 2018. However, it's important to note that 2018 includes eleven point seven million dollars of new business related to the Great Falls renewal rights transaction audit premium was five point seven million dollars in 2019 compared to 5.9 million dollars in 2018 renewal price decreases were 4% and premium renewal retention was 83% off for the 2019 year. We continue to monitor closely historical loss ratio results on the business. We renewed versus lost or non-renewed to determine are retaining profitable accounts that value the Eastern service model.
The increase in the calendar year loss ratio reflected an increase in the current accident year loss ratio from 68% in 2018 to 68.4% in 2019 that favorable Reserve development was seven point eight million dollars for the year. The 2019 net favorable lost Reserve development reflash better-than-expected claim results primarily related to accident years, 2015 and 2016. The claims operation closed 65.7% of 2018 and prior claims during 2019 the best plan closing result in eastern history and indicative of the short-tailed strategy embedded in our workers compensation business model.
the increase in the
An accident your loss ratio reflects the impact of renewal rate decreases and the effect of updated contract terms to our reinsurance treaty renewed in the second quarter of 2019, which included the addition of an annual aggregate deductible substantially offset by the previously mentioned favorable claim Trends in 2019 full year, 2019 underwriting expense ratio increased to 30.4% compared to 29.9% in 2018 primarily due to an increase in policy acquisition and employee benefit related costs. The segregated portfolio cell reinsurance segment operating result was three point five million dollars for the 2019 year which represents our share of the net operating profit of the segregated portfolio cell captive programs in which we participate to varying degrees dog.
Premium and the SPCA Erie Insurance segment increased to eighty seven point 1 million dollars for 2019 from 85.1 million dollars in 2018. This includes premium renewal retention in 2019 of 91% new business writings of three point eight million dollars and audit premium of two million dollars offset slightly off. My renewal rate decreases a 5% the 2019 calendar and accident. Your loss ratios were impacted by a $10 Reserve in the second quarter of 2019 for an errors and omissions liability policy assumed by one of Eastern re segregated portfolio cells as a reminder off the recording of This reserved increased net loss and loss adjustment expenses, but had no effect on our operating results as we have no participation or ownership interest in this particular job.
Year the SPC reinsurance 2019 calendar your loss ratio increased to 54.4% excluding the impact of the $10 off Reserve driven by an increase in the current accident your loss ratio partially offset by net favorable lost Reserve development of 10.1 million dollars in 2019 Compact 9 million dollars in 2018. The favorable development reflects better-than-expected claim results primarily related to accident years 2015 through 2018. The increase in the current accident year loss ratio in 2019 is due to an increase in severity related claim activity.
Underwriting expenses and the SPC reinsurance segment represent the seating commission paid to the workers compensation insurance and Specialty P&C segments for the services. They provide to the segregated portfolio sells 10th Thanksgiving. And will you please give us a quick update on Lloyds before we get to NorCal transaction? Sure. Can I you know for the past year we've been looking at ways to reduce our exposure at Lloyds and as a result, we have decreased our participation in Syndicate $17.29 operating results for the 2020 underwriting Year from 61% to 29% due to the 1/4 lag will begin to see the effect of this change comes through during our second quarter 2020 results.
nothing
His team have gone an excellent operation at Lloyds is evidenced by the fact that he was able to secure additional Capital providers for The Syndicate at a time when others struggled to do so, we look forward to continuing our relationship with Dale and running Partners under the new Arrangement, which we believe is more in line with our operating goals for the 2020 year going to turn to talk a little bit about the NorCal transmission before I do I'm going to get Dana to give us a little additional financial information Dana sure all the indoor Cal will not file a tier end 2018 annual wage statements for a group of companies with the California Department of Insurance until March 1st. It may be helpful for you to know that when they do we expect it will show consolidating a statutory Surplus approximately $575. As of December Thirty One 2019 that will reflect Reserve strengthening for both current. Yep.
prior accident years
Like the unit. Thanks, Dana.
We've always been selected in our approach to him in a activity growing where and more importantly when it makes sense to do so.
The increasing complexity of modern medicine a shifting Healthcare professional liability loss environment and a growing competitive importance of scope and scale at our industry make it an ideal time for two companies with Decades of specialized experience to align their futures.
We expect this transaction to deliver multiple strategic and financial benefits, including enhancements to our scale and capabilities.
Expanded access to the highly to the high-quality California physician market and an expected 18 million dollars in pre-tax energies. They synergies will consist of corporate and back office expenses Staffing in other cost areas such as technology and real estate along with consolidation of reinsurance and Investments.
Anticipate the transaction will be accretive to earnings in the second year of ownership and over the long term generate highly attractive returns for shareholders.
It's Mike said bringing the Northbound group into the pro Insurance family of companies represents a transformational strategic opportunity.
I'd like to thank Scott senior president and CEO of NorCal and his team for all their efforts to bring us to this point since we first began discussing the possibility in the spring of 2018.
I'd also like to thank Mike bogusky and his team as well. I know there's more to do but the works the work that's been done to get us to this point is truly outstanding with this transaction proassurance James a truly National platform and Healthcare professional liability with operations in all 50 states. It doubles the size of our physician book of business opening the door to the California market and simultaneously May prosurance the third-largest writer of health care professional liability insurance in the country is always our due diligence process on on your loss reserves in particular has been very thorough with both internal and external experts contributing to the project for well over a year. We believe the transaction valuation at this level is attractive.
We expect the transaction to close by the end of twenty.
20 but we have a lot of work ahead of us to ensure a smooth transition.
It was during the last true hardening of the market under conditions similar to those we perceive today that the merger between prime National and medical insurance created proassurance. I said before or this cycle feels different and we should not expect the markets to harden this quickly in or perhaps as dramatically as in the early 2000s regardless of how the next phase of the cycle of manifests through insurance will be prepared. Thanks to our commitment to early and decisive action.
Well, we continue to navigate the challenges of an evolving Market. We are confident that our strategy is the right one and we're excited for the next stage of proassurance is Journey Ken. Thanks, Ned that concludes our prepared remarks. We are ready for questions.
Yes, sir.
We will now begin the question-and-answer session to ask a question. You may press that one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your name, please press start to add this time will pause momentarily to assemble our roster.
And our first question will come from a mid Kumar of Buckingham research, please go ahead and good morning. Can you guys hear me? Well, yeah, I mean, thanks. Okay. Perfect. You can head sit here. So let's start with I have some questions on NorCal reserves loss ratios as well as the Surplus. So did they took the number of five seven five million? Was that the Surplus number you mentioned?
Yes. Yes. That's it. I'm looking at this correctly. What's the Surplus for NorCal at nine months 740 million?
Yes.
That's about right. So that's a two hundred million shift which which obviously seen some material shift. Can you just discuss a bit more money based on your input or was that, you know a number your team looked at the results did a deep dive and hence. That was a pretty close adjustment.
Amid, no absolutely not that that adjustments that they are taking in the fourth quarter are certainly adjustments that their management team views as prudent for them to do that is is in no way reflective of any input from proassurance.
Okay, the the reason why I'm asking is, you know, then you look at that level of adjustment and even if you go back and look at the nine month development wage even mind with adverse development. It was spread in 18 17 16 in tires. It seems there is there's something going on across the book in terms of loss fix. I'm just curious as to the level of comfort you have merging with a company which is which was running at historically the combined ratio of hundred thousand and now recently is witnessing massive amounts of adverse Development Across multiple. So what gives you comfort that there wouldn't be no additional issues as you merge and as you sort of, you know, the tires over, you know, the next several months and maybe uncover additional, you know, Reserve.
being strengthening
And it's it's not it's a good question. When is we've been kicking the tires for for quite a while. So, you know as far as the due diligence process, it's been a thorough NorCal has been very forthcoming and and and open the information that is provided to us. And so that gives us a great deal of comfort zone. If you look at the way that the transaction is structured. There's an initial base consideration of 450 million dollars and then contingent consideration of up to a hundred and fifty million dollars that is subject to the development of reserves from the date of acquisition, um over a three-year period And so to answer your very specific question of how do we gain Comfort one? It is through our due diligence process and understanding of how reserves are being held today, but it's also through the structure of the transaction that we think gives us protection as well dead.
This is this, you know, maybe staying on the topic as we go forward. Do you expect in how to expect to I guess to look at preserving or claims, you know how the claims are being done differently. I would imagine you're contemplating meaningful changes or actions down the road for the NorCal book.
Yeah, so so obviously the transaction is subject to regulatory approval and a vote by the NorCal policy holders and they will continue to run as a stand-alone company, you know influence from us over that time. Once the transaction is closed. We I think under Mike's leadership and Mike mentioned some of the changes that we've made a partner in the NorCal transaction and reorganizing in restructuring the health care professional liability business for proassurance and in North NorCal will slot well into that wage structure that we have becoming a west coast region for us. But under the the the leadership in particular on the claim side of Darryl Thomas who has led claims for prosurance for we were talking about this earlier twenty-five years to or follow-up questions and I'll reach you. The first question is NorCal is California specific if you look at the market share and then you look at Pro Services market share wage.
The minimum in California North Carolina think is fourteen fifteen percent of that market in L. When you think about the entire topic of social inflation off, you know?
The changes Etc involvement all the pressures you've been talking about. I would imagine they're booked would feel continued pressure on that front. And and I was curious if you had a place you on social inflation as it relates to their States versus your States.
You know, one of the things that I think has been interesting about this kind of most recent round of socialization is that it doesn't feel geographically specific.
You know, we we have seen in our own booking and and the marketplace more broadly large verdicts in places where I would say large verdicts are not expected. And so well it is true that kind of certain hotbeds continued to be hot. The concept of social inflation is is much more broad than that speaking about California in particular California has some of the longest-standing tort reform in the country as regards Medical Professional liability. It was established in the seventies. I believe has been challenged all the way up to the US Supreme Court and so it has a good environment for the physicians in that state to operate in because of that tort reform and and we're very comfortable with the marketplace home last question and I would reach you in your opening remarks and in the slideshow you talk about accretion to EPS Etc. Is there any way you can talk about what? Yep?
You would View.
This NorCal book-running at post, you know, everything, you know, I'm just curious. Do you think it turns and underwriting profit down the road or it's more of an investment in complain things off.
We absolutely think that over the long term that the performance of that book of business will line up with the performance of the existing proassurance book of business and the objective facts that entire book is to return an underwriting profit and and get to that 10% or 700 basis points above the 10-year treasury. I guess that's a little less than 10% right now return for our shareholders and and we're very confident in our ability to do that.
Okay, I will I will stop here and reach you. Thanks for all the answers. Thanks, and that
Our next question will come from Matt of JMP, please. Go ahead.
Thanks. Good morning. I just wanted to go to the results in the quarter and just see if what additional color you could give us around that that large National Healthcare account that that drove the adverse development and and even if not specific to that account is help us understand kind of what is driving a you know, a loss of that magnitude. I think we have a good feel for kind of the limits profiles and and reinsurance profiles in your in your positions book. But can you walk us through kind of what you're seeing whether in this case or broadly in the health-care side and then how we might think about reinsurance structures on on that side of the business?
Matt it's Mike.
You know just talking about the the specialty business in general. There's no question as the Physicians Market is consolidating and and there's been more capital and competition in that large account space that the the loss of volatility General has been more volatile than the positions book and that and that's true with respect the severity and it's true with respect to just you know, overall overall loss ratio results month with respect to the the the national account, you know, it was at the end of the day and the reinsurance side. It was not a a vertical severity Insurance exposure. It was it was a unique structure that was more on an aggregate basis. I will say this with respect to that structure. We we have no others in birth.
in our book of business
And it was a Miss on the the loss production projections and attachment points. The the the pricing there's a unique unique structure and there were severity over. That. That was was what was maybe not as complicated as well as we needed to and that really at the end of the day off is the the rationale for for that result. You know, we're we're encouraged that we've identified it. We're certainly would have looked at our overall specialty book of business to make sure we don't have any similar structures and we dealt and we just have to take it from here.
And so in regards to that is there I guess that particular structure. Is there any kind of our we close to any sort of limits on the account page or or reinsurance? You kind of capping it or is it more of you guys are just put a good scrub on it but a lot of conservatism on it and and you're at a higher confidence point, you know in in in the region, it's the higher confidence point in reserving. Okay, great. Thank you. And then just one more if I could I guess probably for Ned the shifting back from NorCal. I'm curious you could just update us and kind of your view of where the cycle is. I mean to me, you know, this is a you know, a very strong signal that you see light at the end of the month that you know that you see things changing and and I think in your words and I would agree it it will take time. But maybe just kind of if you could frame kind of your decision to enter into a dog.
In like this alongside kind of your updated view on on where the cycle is headed.
Yeah, it's it's a hard question to answer just because I think there are just so many unknowns but maybe talk about a couple of things on kind of the causation side of of them what people are labeling social inflation. We're encouraged that the broader PNC Market is recognizing these Trends, you know, we began recognizing reflecting on our results and and our pricing these Trends back in 2018. And it's good that I rest of the industry is is beginning to do so as well. And so I think that will help certainly from the pricing environment on the actual social inflation side to go to the jury Behavior component, you know, where we are and the Pendulum swinging up or back down is is much harder to know we've we've been through these Cycles before and and I'm you know my guide ma'am.
It says the pendulum's probably swinging up still with kind of where we are from a from a jury and trial standpoint, but we are getting the traction and pricing that is need to keep up with that shift.
You know when it reaches its peak and and you know, if and when Jerry Behavior changes or moderates, that's a little harder to to know, but we feel like we're in we're in a good position and acting effectively to what is going on.
Okay, great. Well, thank you for the thank you for the answers and congrats on the deal and best of luck, you know getting it getting it close and integrated. Thanks, Matt. Thank you, man.
And our next question will come from Greg Peters of Raymond James, please go ahead good morning couple of questions. First of all on North Palm. Can you step back and provide us a sense of business mix and what I'm thinking about is small group positions individual practices versus maybe and large-sized groups.
Hey Greg, this is Mike. We think one of the Strategic advantages of and benefits of this transaction for both organizations. It is the fact that NorCal is primarily efficient a physician's market and has a much higher-profile in in in in the book of business on on each side of it. So when we look at it, we we kind of believe that market The Physician markets. When we combine those that that business has a long list of a Runway to go on price adequacy and the competitive issues out there then say some of the things that we're seeing in the in the specialty and large account area, and we think that's really good a good thing for us long-term because we you know, we would expect less volatile volatility in that combined book of positions business than we would in the wage.
The the the the large account sector and and ruff ruff.
We interrupt terms were you know, roughly 65% if you look at proassurance, we're two-thirds Physicians and one-third specialty then when you kind of suck to look at back at the eighteen results and put the companies together would be more like 75% positions and 20% specialty. So we think that's a good good product mix going forward.
Thanks for that color one just follow on on that point. We know that the the Physicians Market has been shrinking Market most everywhere in the country. Is it would you characterize the trends that have affected your business the Physicians business and most of the country also being relevant in California dead.
Yeah, I think they are Greg California is a little different and that one of the things California does not allow is for hospitals to directly higher position. So you do not see that phenomenon, but but they're kind of work around that have been created. We're we're trust and other organizations are created that are affiliated with hospitals Thursday, then employee Physicians. Um, but the physician Market is a little bit different in in that regard. But yeah the same consolidation trends that are occurring elsewhere in the country are certainly occurring in California and and just the one other minor point. I should assume that most of the NorCal book is claims made except perhaps a nose coverage or a tail coverage type of exposure. Yes. Okay, and and they said they'll have their statements filed on March one and obviously you can you can get a lot more detail log.
about their book of business
Right. So so I just the final NorCal question for me in that would be considering the substantial Reserve changes that they're going to post a year-end nineteen that would suggest that their business has been underpriced and I'm not sure about malpractice in the state of California, but we know all the lines of insurance in the state of California very hard to get rate increases approved by the Department of Insurance who is almost an add it to the insurance industry. I'm curious whining about your perspective on whether the business is adequately price today, or they have enough rate in the pipeline or to how you view the negotiations and discussions going with the California Department of getting additional rate.
Yep. So yeah, I think California is is a reasonable and rational department and and we'll look at the Lost friends that underpinned the results at NorCal and and allowed to take any actions that are appropriate some Norcos book of business is greater than just California. I think that's important to recognize and you know, if you if you have access to our press release on the transaction, there's a a small slide deck that's included with that and you can see that God only in reality only 31% of North how's business is California based business. So the other states are equally important and NorCal as much of the industry as reps have come down rather than filing reduced rates as used credit mechanisms within the discretion of the rate filings. They have in place to the lower that price in which gives a lot of Latin wage.
In the ability to raise pricing.
And that's similar to what we have done. So, you know, we're confident that NorCal will be able to take any steps that they believe are necessary. I don't want to get into the cocktails of kind of their claims business. But but we do have confidence that some of the things that have led to the the results that they are posting are a little bit anomalous wage and that they they had the ability both through how they manage and handle claims and pricing to respond quickly to it and you didn't include it include an ADC cover on the purchase digit. We did not I would just add that. You know, one of the other benefits is just kind of Life scale and scope and operating efficiency efficiency. And I think that's going to be really helpful to us both on the expense management side and and and the operational efficiency side. We also added dead.
He'll to markets one which we have less pain.
Situation in in Texas that are attractive markets and we have limited penetration in Pennsylvania and NorCal has a strong strong position there. So I think when you just kind of look at the overall Geographic diversification, you know kind of spread a risk on the book that will be helpful as well.
Great. Thank you for those answers. I'm just going to the last question sort of dovetails with some of the previous answers you provided about where we are in the cycle and say we don't know where we are. But you know you pointed out that that the company began to change its posture on the market back in 2018. So we're now entering the third year of your if you will change posture more conservative or cautious as it relates to friends you were seeing in the industry regarding Bank settlements. And for the most part as you is this process was evolving you were pointing out to investors that for the most part you weren't seeing those Trends in your book if you were seeing in the industry, and so therefore you are exercising caution.
now that we've got
2019 in the Box. Can you say that you're still seeing the industry trends that are negative and I think that's an affirmative but you're not seeing the same Trend show up in your book club. So I just wanted to what we have said previously is that we were we were seeing it in our incurred losses that the loss reserves being established by law professionals, but not see it materialize itself in a material way in our paid claims. Okay. Sorry about that. Yeah, and I would say that we are beginning to see a pickup in our paid claims as well.
So we you know the cost and in the Prudence that we have been taking I think is proving to be justified.
And so, you know as we got into that year-end analysis, you know, we did did begin to see some of that and that really was Mike alluded to we had about $15 of adverse development in a book.
and that's
To contribute to that. We remain very very comfortable with where our reserves are established. And as I said earlier that we're you know that we're making the ground necessary and the price increases that we're seeing great. Thanks for your answers.
And our next question will come from Mark Hughes of SunTrust, please go ahead.
Thank you. Good morning morning reflecting on that you're starting to see the severity in your page is 6% raise enough to hook cover. What's going on here in markets Mike when you kind of look at the severity Trends it's it is really unique by the sector of business and the states. So we have seen you know, lower severity Trends in some states higher severity trends for example in the specialty off excess and surplus lines business, you know, overall it's been ranging in that kind of two to 5% range. And when we look at that age, you know, we got six six to fourteen six and position fourteen on the specialty this past year. I said, we had a very strong January on the right side as well.
That is above.
Of the severity Trend and the good news there as well as the frequency trend has been very flat or slightly down. So we're we are from an underwriting perspective clearly given up retention for for the rate side for the the rate adequacy Seaside going forward the other the other thing that I think is important, but my highlighted it is on the specialty book in particular. It's not just the rate increases. It's the underlying structure of the policies with higher deductibles hire a SARS two-factor rate increases that don't get reflected in that rate increase number and I think that is important. So when you combine