Q2 2021 ProAssurance Corp Earnings Call
Good morning everyone and welcome to proassurance. Has conference call to discuss the company's second quarter 2021 results. These results are reported in a news. Release issued on August 5th..2021 please review that document management expects to make statements on this. Call dealing with projections estimates and expectations and explicitly identifies. These as forward-looking statements within the meaning of the US Federal Securities laws, and subject to applicable. Safe, Harbor protection.
The content of this call is accurate, only on August 6th 2021 and except as required by law or regulation proassurance will not undertake an expressly disclaims, any obligations to update or alter information. Disclosed, as part of the forward-looking statements, the management team of proassurance also expects to reference non-gaap items. During today's call the company's recent news. Release provides, a Reconciliation of these non get numbers to their Gap counterparts.
Now, as it turn the call over to mr. Ken McEwen I would like to remind you that the call is being recorded and there will be a time for questions at the conclusion of the prepared. Remarks mr. McEwen, please go ahead.
Good morning everyone or call. Today we have Ned Rand president and CEO Dana Hendricks. Chief Financial Officer. Mike boguski president of our specialty Property and Casualty lines and Kevin shook president of Our Workers. Compensation Insurance operations, Meza Flores yours.
Thanks Ken.
I want to start off this morning with a thank you to everyone at proassurance. This has been an exciting quarter on many fronts. Thanks to their efforts. We close the NorCal transaction on May 5 roughly halfway through the reporting period and the financial teams of our newly combined organizations, did a great job getting everything, ready to report our results.
We've made, excellent.
Early progress on our integration plan and already NorCal is proving its value. As we expand our operating model to a truly National platform.
ERM as I said in the release yesterday closing, the NorCal transaction was a transformative event for proassurance and the combined companies are off to a strong beginning.
As you will hear from both Mike and Kevin the Strategic changes we've made over the past 2 years, are beginning to show through and I'm very encouraged by the results of the second quarter.
We remain in an uncertain environment due to the continuing effects. The pandemic has had on our health care and civil court systems and as workplace is navigate the return to work to an office environment in spite of these uncertainties. I'm confident we have the right team in place, especially as we add in our colleagues from NorCal to succeed as we move forward.
Third. Now, I'd like to turn the call over to Dana so she can lead us into the results for the quarter. Dana
Thanks Ned in the quarter and we'll get to that in a moment. But first I think it's important to answer the question of excluding the noise from the transaction. How did we do this quarter in short? It was a good quarter. We expected significant Improvement year over year just by nature of the Adverse Events booked in the year ago period.
And we saw that Improvement and then some our specialty P&C business continues to show improvement with strong rate gains solid retention and top-line growth Lloyd's turned in an excellent result at a little over 4 million dollars are Workers, Compensation Insurance, and segregated portfolio, sell reinsurance business has both produced underwriting income in a very challenging market. Place with their expense ratios benefiting from the restructuring.
Last year, finally, we saw excellent returns from our investments in LPS and LLCs driven by the market increase in the first quarter recall. Those Investments are typically reported on a quarter lag, all told a solid result as we continue to execute strategies that drive, steady incremental Improvement.
Now, for the results of the quarter, we will be filing our tank you on or before Monday, which will provide a great look into exactly how NorCal contributed to the quarter and the effects of transaction accounting.
I'll address certain of those impacts throughout my remarks today at the Consolidated level. We've reported net income of ninety..2 point 1 million dollars in the second quarter or 1 dollar and 70 cents per diluted share driven by a gain on bargain purchase of seventy 4 point 4 million dollars related to the NorCal acquisition. Partially offset by 20 point, 3 million dollars of pre-tax transaction related costs,
because these
Time. Items are unique and unusual in nature and not indicative of regular operations. They are excluded from operating earnings and segment reporting.
We reported non-gaap operating income of twenty, 6 point 6 million dollars or 49 cents per share. Again driven by strong performance from our LP and LLC Investment Portfolio and meaningful year-over-year improvement in our underwriting results.
All segments contributed to our profitability, this quarter.
Consolidated gross premiums written increased nearly 13 percent year over year driven primarily by the addition of NorCal, has premium to our specialty PNC results, as well as 14 million dollars of new business written in the quarter from our core operating segments.
Our Consolidated current accident year. Net loss ratio is 8, e, 1.9 percent a year over year Improvement of twenty 8 point 1 point. Primarily attributable to the adverse effect of losses associated with significant events in the second quarter of last year and Specialty PNC, more importantly that Improvement. Also, reflects the continued benefits of our re underwriting efforts.
We recognized net, favorable development of Thirteen point 8 million dollars in the current quarter driven. Largely by the specialty PNC segment which included 2 point 1 million dollars related to the amortization of the purchase accounting. Fair value adjustment on NorCal, has assumed Reserve our Consolidated underwriting expense ratio increased in the quarter to 32.3% driven by the pre-tax transaction costs associated with
Their acquisition of NorCal excluding those transaction costs. The expense ratio in the quarter was 23.8% reflecting the continued impact of restructuring efforts. But also included, the impact of certain purchase accounting adjustments.
As a part of purchase accounting, we wrote off NorCal is capitalized, Deepak asset on the acquisition date. As a result Deepak amortization. Expense for NorCal. In the second quarter was only 9 hundred thousand dollars and represented expensive capitalized and subsequently amortize. Since the acquisition. This amount is approximately 6 point 3 million dollars lower than would be considered normal.
And our form 10-q, we will provide a detailed breakout of the various items affecting our expense ratio in the quarter to help our readers arrive at a run rate.
From an investment perspective are Consolidated. Net investment result increased year over year to twenty 9 point 3 million dollars driven by eleven point 9 million dollars of income from our own Consolidated subsidiary which were driven by the results of our investments in LPS and LLCs is previously discussed Consolidated. Net investment income was seventeen point 4 million dollars in the quarter down slightly from the year ago period primarily due to lower yields
From our short-term investments in corporate debt, Securities due to the current low interest rate environment. This decrease was partially offset by 2.7 million dollars of net investment income from additional invested assets that came over from the NorCal acquisition, I'll conclude by thanking our accounting and financial reporting team for their extraordinary efforts in getting the NorCal Financial results integrated with our Consolidated results. In such a short time frame, they've done a great job.
Ken.
Dana. My congratulations on a significant Improvement and Specialty PC. It's being see this quarter. What can you tell us about the results?
Thanks Ken. I want to start by extending. Congratulations to the specialty PNC. Team for their continuing turnaround, over operating results over the past 2 years, to achieve, an operating profit, the close of the transaction with NorCal and the great start integration of the companies.
We are proud of all that has been accomplished and look forward to a bright future with our new team members and business partners. At NorCal the significant year-over-year Improvement in the segment's, results was driven by several components primarily the comprehensive business strategy executed since 2019 to address our operating and underwriting results and the resulting re under running and rate, strengthening efforts in our Legacy hcp L business.
We recorded Improvement and operating metrics for all lines of business. In the segment, including higher premium retention continued rate gains or reduced expense ratio and a lower current accident year loss ratio, most material to improve results of the quarter was the impact of certain Adverse Events record in the second quarter of 2020. However, we record Improvement in the current accent year, net loss ratio, even excluding those aversive Adverse Events a direct result of the
You benefits of rhcp L re underwriting efforts also contributing to profitability in the quarter was 10.5 million dollars of net, favorable Reserve development spread relatively evenly across lines of business within the segment, just a brief aside. Before we move on from the loss ratio, the reduction in each CPL claims frequency observed in 2020, has continued into 2021 as far as Court.
Us and jury trials. In most places have yet to return to normal schedules. We remain cautious in recognizing these favorable frequency Trends in our current accident year lost. Pick do the long-term nature, long-tailed nature of our lines of business and the high degree of continuing uncertainty that COVID-19 has introduced into operating conditions.
We continue to carefully monitor pandemic related claim activity and no adjustments have been made to the COVID-19 IB and our reserves booked in the second quarter of 2020.
Moving on to our Top Line, gross premiums written during the second quarter increased by over 30 percent or approximately 35 million dollars, we benefited from twenty 2 point, 4 million dollars delivered, by the NorCal team and growth in our Legacy. Business of 6.9%, we achieve this growth with focus on underwriting discipline and we will continue to manage the segment's top line as necessary to achieve our long-term profit objectives.
Premium retention for the segment, was 86%. In the core driven by retention rates, that either improved or remain flat and all lines of business. Furthermore, we achieved average renewal price increases of 10% in the segment. This quarter driven by 11% in standard positions and 10% and Specialty Healthcare, although not reflected directly in our rates or pricing, we continue to strengthen rate adequacy through adjustments to productivities.
Structure terms and conditions.
Or smoke.
Is this unit and medical technology? Lab business liability business. Also achieved increase rate gains of 6% and 8% respectively.
New business written in the quarter totaled, 7.2 million dollars an increase of 2.6 million dollars from the year-ago quarter. And primarily driven by 3 point 7 million dollars written in rhcp, especially business.
The specialty Property and Casualty segment, reporting expense ratio of 17.1 percent for the first quarter for the second quarter and Improvement of 2.8 points. From the year-ago quarter driven by a significantly higher earned premiums. The impact of transaction accounting and benefits from prior organizational, restructuring restructuring efforts. This was partially offset by a slight increase in technology costs.
To conclude. We are pleased with the results are very underwriting restructuring expense management and operational improvements in our Legacy specially PNC business over the past 2 years. We are extremely excited about the Strategic value of the NorCal transaction. And the bright future ahead. We have made excellent progress on our integration plan during the quarter. And we are on are well on our way to building our future business model on a national basis with the goal.
Enhanced and sustainable, performance, through all economic and insurance Cycles. Ken thanks Mike and congratulations again to you and the team, Kevin Workers Compensation Insurance and the segregated portfolio cell. Reinsurance segments have solid report solid results to report as well. Can you walk us through? Those. Sure. Can the Workers Compensation Insurance, segment produced income of 1.1 million dollars and a combined ratio of ninety 9 point, 6 percent in the second quarter of
2021 compared to 98.7 percent in 2020. The increase in the combined ratio your over year reflects a higher accident, your loss ratio in 2021 partially offset by an improvement in the underwriting expense ratio during the quarter. The segment booked fifty 7 point 8 million dollars of gross premiums written in increase of 1.1 percent year over year despite negative audit premium
Renewal price decreases in our traditional book of business were 3 percent in the second quarter of 2021. And premium renewal retention was 85%. Traditional new business writings increased by 300 thousand dollars to 6 point 1 million dollars in the quarter audit premium and our traditional book of business decreased 1.3 million dollars year over year, reflecting the economic conditions associated with the COVID-19 pandemic.
Impact on Final audits of policyholder, payrolls the increase in the calendar year loss ratio to 68.3% in 2020. Run reflects an increase in the current accident, your loss ratio partially offset by prior your favorable development of 1.9 million dollars in 2021 compared to 1 point 5 million dollars in 2020.
The increase in the full year 2021 accident your loss ratio. During the quarter, reflects our response to observed higher claim activity as workers return to full employment with the easing of pandemic related restrictions in our operating territories. The trend in higher claim, activity was concentrated in our historically profitable, small business unit, most notably and Restaurant, Hospitality and small construction markets.
Mint.
Us from accounts within our renewal policy holder base. We booked a current accident, your loss ratio of 73 percent for the second quarter of 2021. Which brings the ratio for the 6 months. Ended June 30th to 72 percent, despite the increase in claim activity in our small business unit overall, frequency continues to be below pre-pandemic levels, albeit higher than 2020.
Claims operation close, 15.4% of 2020 and prior claims during the 2021 quarter. Consistent with second quarter, historical Trends, reported COVID-19, claims continued to decrease during the second quarter of 2021 of note, is the fact that there are no currently reported COVID-19 claims with accident dates in the month of June. However, there was a slight increase in reported
Covid, claims during July, we continue to monitor. Legislative attempts to broaden workers, compensation coverage and our underwriting territories, but observed minimal movement. During the second quarter, the 2021 underwriting expense ratio. Decrease, the 31.3% primarily due to the restructuring initiatives implemented in August of 2020. Partially offset by a decrease in net premiums earned
other underwriting and operating expenses were 8 point 3 million dollars in the quarter. A decrease of 7% or approximately 700,000 dollars. The segregated portfolio sell reinsurance segment, produced income of 9 hundred and fifty 5 thousand dollars and a combined ratio of eighty 4 point 4 percent for the second quarter of 2 thousand and Twenty 1. Premium Trends and the SPC re segment were largely consistent with those in the
There's Compensation Insurance segment, we renewed all of the captive programs that were available for Renewal during the current quarter.
DSP Siri calendar year loss ratio increased from 45.9% in 2022.51.9% in 2021. The 2021 accident, your loss ratio was 62.9% up from 57 percent in 2020 and reflects both the continuation of intense price competition in the workers compensation business and the impact of higher claim activity
As workers return to employment, favorable loss. Reserve development was 1 point 8 million dollars in the second quarter of 2021 compared to 1 point 9 million dollars in 2020 in all another solid quarter in a very competitive Marketplace Ken
Thanks, Kevin. This is just a quick look at the Lowe's results. Before closing comments. Yeah. Happy to do so Kim.
As you know, for the 2021 underwriting year, we reduced our participation and Syndicate 1729 from 29 percent to 5 percent and our participation in Syndicate..6131 from 100 percent to 50 percent, the gross premiums written in the segment. This quarter reflect that change. As a result of these, reductions we received a return of capital of twenty 4 point 5 million dollars.
despite the
Is participation results improve meaningly from the year ago period to 4.3 million dollars.
Before we get to questions, I want to reiterate how pleased we are to deliver improved results. After an exceptionally challenging year,
while we still have much to do in pursuit of our long-term profit objectives. I believe our progress from a year ago speaks for itself. I look forward to seeing what we can accomplish in the second half of the Year Ken
Sean, that concludes our prepared remarks, we are ready for questions.
Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star then 1 on your touch-tone phone, if you are using a speakerphone please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question please press star. Then to the first question today will come from Paul Newsome with Piper Sandler. Please go ahead.
Good morning. Congratulations on whether or not the medical malpractice, especially if the competitive environment has changed materially over the last quarter and if it's if it's getting a little bit easier,
Great ball. Thanks Mike. You want to take that?
At sure. No, thank you. Good morning, Paul. What we've really seen over over the last really, just doing the last 2 years. Is that still remains fairly competitive in our, in our H CPL standard positions, business, particularly in some of our core States and rhcp, L specialty business. There was, there was definitely an opportunity to to underwrite, and strengthen rates, terms, Products truck.
Conditions in general, that's continued. I think the only thing that I'd say that that's been pretty interesting is that with the reduce reduction of frequency in the industry, as a result of COVID-19, that's may be slowed down, you know, the pricing trends go and going forward as people are taking a look at that frequency reduction. I will say this extremely pleased with our our rate trends in the quarter doubled.
Digits and standard double digits and R RH C, PL, especially business. And a great been a really good result across the segment. Thanks, Mike. I might add on the frequency reduction that that Mike referred to. We remain very, very cautious, both in and how we're reserving because of that frequency reduction and and also how we're pricing because of that frequency reduction, we don't we don't know all the drivers of the frequency reduction and whether or not there's just a
Pension the pipe because of the court systems being slowed down.
So we remain very cautious, and recognizing some of those potential benefits, I'd say that maybe some others in the industry or being a little more aggressive than how they're recognizing it.
My second question, the piece that I have the hardest time is the earnings piece and I was wondering if you could give us some thoughts as to how we might do that piece. And you know, I'm guessing that there was a benefit from the very strong financial markets. But maybe some words on that that gives us a little bit of a better sense of how to think about prospects.
Yeah and I'll let Dana answer that. But yeah, it is it is we recognize that it's a challenge. It's a volatile earnings component that over over the longer term. We're very confident is producing outsized returns for us. There's 2 components to that..1 is the tax credits and we give some information and our art NQ that shows how that part, which actually is a reduction to that line is expected to earn out. And then the other component is
how the the LPS and other Investments perform and very much driven by kind of the economic backdrop for, for those Investments, but Dana can probably elaborate a bit
Yeah, I think actually, Ned you've hit on, you've hit on the primary component, certainly they what I'd tell you Paul is is that, you know, 1 thing to consider in those Investments is there typically reported to us on a 1/4 lag. So for our second quarter, you really have to kind of, be thinking about how the market was responding in in the first quarter of 2012.
When T1, and that's going to be what's going to come through in our second quarter. So really, that's how you ought to be thinking about it. In terms of the tax credits that that Ned mentioned. We do provide a schedule of the anticipated tax credit portion on our website and so you can take a look at that as well to get sort of the 2 component pieces.
Fantastic. Thank you guys.
The next question today will come from Mark Hughes with truest please. Go ahead. Yeah, thank you. Good morning.
You mentioned other courts being closed may be impacting frequency. I assume the trial attorneys are still out there doing their thing and they would still be looking for for cases that they think they can profit from you would still get noticed in that way. Is that correct is that you don't have to necessarily be going to court? Or is that is that often when you get notices
Aspect of the Court, the logistical process. Yeah. Yeah, sure. Mark. You're right that the mere fact, that the court systems have shut down, you know, may or may not be the total driver there, and that's why we kind of remain remain cautious. If we don't know what all the drivers are, we do believe that there are, there are probably a plaintiff lawyers that are sitting on lawsuits waiting to file them until the court systems, open back up, just because they do.
I don't necessarily want to start off in a position where you're negotiating to settle with without the prospect of of being able to litigate. And so we think there is some impact. We don't know exactly what that impact is. And that's why why we remain cautious, Mike. I don't know if you had anything to that.
No, no, that's spot-on. Thank you.
Then Mike. I think you'd probably covered some of this ground but you you are pricing. Looks like it accelerated in the quarter as you pointed out is up double digits, both on position and Specialty. So then you mentioned some slowdown and pricing Trends related to this. Continuing decline in frequency, is that said, Slow Down been more recently for you reflecting on the first half and total,
Yeah, good morning Mark. Good question. You know, 1 of the things to keep in mind in the second quarter and and I think this is terrific news. We as you're well aware, we we added the NorCal results into our into our premium is twenty 2 point 4 million dollars and we did have some benefit from rate gain there. They produced about 16 points of rate. From that May 5th the June 30th time frame so that was helpful.
I think the Slowdown was candle. He was just just from last year to, you know, the first couple of quarters of this year and I think the other thing to keep in mind is that we've been we've been re underwriting for a couple years and, you know, to get to, you know, at the rate the rate structures and adequacy that we think can produce a long-term underwriting profit so that does slow down as you get into the second year of re underwriting. And and again
Those those frequency Trends. It is state-by-state. So, you know, there are, there are some competitors State competitors that are are maybe being more aggressive. As we look at competitive pressures, resulting from the claims the potential claims frequency reductions
Understood. And if we think back, you know 3.4 years ago, you were obviously early in body, some of these social inflation trends when you think of some of those earlier accented years is it fair to say those in particular, you know, 2020 and probably distorting all of this. But is it fair to say that the inflation in the older claims is
is more in line with what you might have expected at the time rather than the kind of what what the concern was about the in acceleration.
I think is Ned stated obviously the the slow down the court systems has impact on that. But I think just in general severity Trend it again is very much a state-by-state and it's kind of hanging in there around 3%. As you look at our kind of 2020 and 2021 results.
Thank you, welcome.
The next question today will come from a Geoffrey Ransom with Delan Partners. Please go ahead.
Sorry if it's Gary Ransom. Yeah. I I had a couple questions on a NorCal. Is there anything that you are no of now that my distort quarters in the future? Or there any expenses or anything else that might that just you know, weren't were booked in the second quarter but might have an unusual effect at some point in the future.
Irr. Yeah. Gary Dana can kind of give you some highlights of, of some of those details might be a lot more detail on our art in queue, as well. Dana
Yeah, sure. So as you think about, you know, the impact of of, of NorCal on the second quarter, I think that there are a few component pieces..1 in particular that you'll, you will want to be thinking about is, and I mentioned this in my opening opening remarks around deferred policy acquisition costs, and that is an expense that we'll be building.
Over time over the course of the next year. So, when you, when you think about, you know, the capitalized policy acquisition costs that were written off, right at the time of, at the time of the acquisition. Then what happens is the building of DAC begins again, and corresponding amortization essentially starts over day 1, a
After the acquisition. So the impact in the second quarter for us was very significant because we had the benefit of the earned premium, with very little Associated deferred policy acquisition costs. So if we were at a full run rate or DAC, amortization expense expenses would have been Higher by about 6 million dollars which is about 3 point 8 points in the specialty PNC. Segments are
2 and a half points. If you're thinking about it from a Consolidated perspective, so thinking about future, Close Quarters. As you look at deferred policy, acquisition costs in the building of that amortization, and you can expect it to increase expense each quarter until that amortization reaches its normal run rate, which it will reach that normal run rate in the second quarter of 2022. So I'd expect that that increase on a quarterly basis to be around 3 million.
Dollars.
And that's the that.
The biggest piece that I would say that's sort of, you know, kind of missing from second quarter that you need to be thinking about for the future. Okay, that's that's helpful and maybe a little bit more strategically. Can you help us? Understand how the, how the strategy improves either top line or profitability as you go through this integration? Are there things about distribution we should be thinking about
About or or product that you know, cells across the 2 books of business. Maybe if you just help us understand how the integration helps Top Line specifically and or bottom line over time. Yeah. That might get into the details and maybe just a couple of high-level thoughts. You know? 1 aside from the premium growth that will see is the investment income gross.
We brought in an additional 1 billion dollars in investment assets, beyond the purchase price that will help Drive investment earnings. As, as we move forward, as we've spoken about previously, you know, we expect to bring in, or to reduce overall expenses between the combined organizations in excess of 18 million dollars as a part of those integration efforts.
So so those are some things to keep in mind at a pretty high level. Mike you want to talk to some of the specifics around other integration impacts.
Yeah, sure. No, thank you. Yep, first of all, the the integration plan, you know, it is meticulous. And and it's well thought out. And we're just getting some very nice early integration wins. And what I mean by that is we've already announced RH C PL, you know, National structure with 5 regions and again, that that will put us really close to the customer and agents as we
For Revenue, Synergy wins. We do think that there the revenue Synergy wins. There's a tremendous opportunity there because you look at bringing NorCal and integrate into into the company. We have Geographic expansion. We also, for NorCal have the addition of, you know, our life sciences products are workers comp products or
A Nova captive facilities. So there's a there's a really great opportunity to do some cross marketing and and that's a big part of our strategic planning process, this fall. So we're pretty excited about that but when you just look at it from an overall, you know, integration plan perspective, we think we will have a much more diverse book of business National platform.
Reduce the expense.
Best of breed talent. And and we, you know, we feel confident that it's, it's going to bring some really nice strategic value to us in over the next Insurance cycle or excited about it.
Oh, thank you very much.
Again, if you would like to ask a question, please press star and then 1. The next question will come from Miss carletti with JMP. Please go ahead.
Thanks. Good morning. For first question, just circling back on on the expense reduction conversation there. And that I think I heard you say, kind of the combined expecting about 18 million and expense synergies, just trying to kind of, he helped us a little bit with just kind of pairing that up with the expense number. We saw in the quarter. I mean, I talked in his comments, of course, about the DAC and how it's going to build over the next year. Just trying to get a feel for if you have a rough timing on that 18 million. And if we are
Seeing any of it in the current quarter of that's all kind of yet in future quarters. So, you know, the largest component of of that will be driven by Personnel changes that we make some of those happened day..1 with the departure of the most Senior Management at NorCal as well as the board at NorCal and during the quarter, we had our first
First reduction in force, the reduced Staffing as well, we would expect that that will continue over the next 18 to 24 months as we continue to integrate the organizations. And so they'll probably be some lumpiness and expenses as as a result of those actions. But but I would say that, you know, we've got a good start just because of those kind of early day, 1 changes.
But it will be about 2 years before we see the full benefit of that Mike. Anything you dat?
Yes. Now that just I would just say that's in the second quarter. It was approximately 10 million dollars and you know, we would project roughly 5 million in the third quarter. So I think to Ned's Point earlier, we did get an early run at that and it goes the Personnel, obviously drives that. But you also have some some other areas that are helpful to that, reinsurance consolidation, it consolidation and those types of
Early wins. So I think the good news on the overall plan is, is will be substantially to the the the number that we publicly stated pretty early in the process.
Great, thanks for the color and your congrats on, get the deal closed and it sounds like you're off to a good start.
Thank you.
This will conclude today's question and answer session. I would now like to turn the conference back over to Ken McEwen for any closing remarks.
Thank you, Sean. Thank you to everybody who joined us today. Please stay safe and healthy and we look forward to speaking with you again. In November. Thank you.
This will conclude today's question-and-answer session around the today's conference. Thank you for attending the presentation and you may now disconnect