Q2 2019 Earnings Call
Good morning, everyone. Welcome to Proassurance has conference call to discuss the company's results for the second quarter 2019.
These results were reported in a news release issued on August seven.
2019.
In Q.
Released for a cautionary statements about the significant risks uncertainties and other factors that are out of the company's control and could affect proassurances, that's nice and alter expected results.
Please review the statements.
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 U.S. Federal securities laws and subject to applicable safe Harbor.
Protection.
The conference call is accurate only on August eight 2019, and except as required by law or regulation Proassurance will not undertake and expressly disclaims any obligation to update.
Or alter information.
This close as part of these 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-GAAP numbers.
To their GAAP counterparts.
Now as I turn the call over to Mr., Ken Mcewen.
I would like to remind you that this call is being recorded and there will be time for questions. After the conclusion of prepared remarks, but certainly Q I'm. Please go ahead.
Thank you Nicole.
Our call today, our president and CEO , Ned Rand, Chief Financial Officer, Dan Hendrix, Mike Boguski, President of our specialty property casualty lines, and Kevin Schneider President of our workers compensation operations and that usually starts off thank you Ken.
This is my first earnings call as CEO I want to begin by thanking Stan.
For his innumerable contributions to proassurance.
During his 12 years of leadership.
I look forward to continuing to work with him in his new role as executive Chairman.
I would also like to welcome and congratulate Mike Boguski and Kevin shock in their new roles on our executive leadership team.
Which became effective shortly after our first quarter call.
I'm excited for the insight and experience he brings to the table.
And look forward to what we will accomplish together.
There are a couple of one time items that can make quarter over quarter comparisons tricky this quarter and these are laid out in detail in our earnings release and our 10-Q.
Then Kevin will provide some additional details.
Behind the noise created by these items.
Sure enough positive things that this was a good quarter.
We were able to secure rate increases across our specialty property casualty segment.
With only a modest impact to our retention.
This is a result of our dedication to disciplined underwriting.
Making sure we write business an assumed risk only if we can get appropriate premium.
Good day exposure that's presented.
To do other otherwise would compromise the security of our customers our employees and our shareholders.
Net favorable reserve development declined as a result of our focus on the risk of increasing severity trends in the broader health care professional liability market.
I would again emphasize that we're not seeing these trends and our paid data.
However, the greater number of large verdicts.
Increasing cleanest attorney demands.
And higher jury awards.
And the continued roll back a state specific damage caps.
The man, we take the necessary steps to ensure the integrity of our balance sheet.
The increase in the combined ratio.
Likewise loss driven.
Further exemplifies the reality of the environment for which Weve so carefully prepared.
One of the increasing risks.
In which only those companies who are prepared for the worst can achieve the best.
As we have said before Proassurance is built to withstand and indeed drive in challenging times such as these.
And as you will hear from Mike and Kevin and Dana, we're taking the steps necessary to ensure our continued long term success.
With that I'd like to ask David to take us into the details of the quarter Dan.
Thanks Ned.
Consolidated net income for the quarter totaled approximately $11.5 million or 21 cents per diluted share a decline quarter over quarter.
This was primarily due to a decrease in equity in earnings of unconsolidated subsidiary.
A higher current accident year net loss ratio.
And a lower amount of favorable development relating to prior accident years.
The results of our specialty B and C segment continue to reflect our cautious approach to the loss environment that had previously mentioned.
non-GAAP operating income, which excludes the effect.
The after tax effect of net realized investment gains.
It was approximately $4.1 million in the quarter or eight cents per diluted share and consistent with the first quarter.
Please refer to our news release for a reconciliation of net income to non-GAAP operating income.
Consolidated gross premiums written were relatively unchanged from the year ago quarter, excluding the effect of the loss portfolio transfer completed in the second quarter of 2018, and the effect of the regular renewal cycle of our 24 month policies.
Premiums written declined in our workers compensation insurance and segregated portfolio cell reinsurance segment, which Kevin will address later in the call.
These decreases were offset by an increase in the Lloyd segment as Ed stated in his introduction, we are dedicated to maintaining that disciplined underwriting standards necessary to write business at premium appropriate to the assumed risk.
We are willing to walk away from business, we deem to be underpriced.
The loss ratio and combined ratio were affected by $10 million laws within one of the segregated portfolio cells in our SBC operation.
Importantly, we are not an owner or participate in this sale and ultimately this law has no impact on our earnings.
Excluding the effects of this loss and loss portfolio transfer our consolidated current accident year net loss ratio increased from 80.6% to 83.5% and our expense ratio was relatively unchanged.
Net favorable reserve development was $16 million in the quarter down $22.8 million in the prior year period.
Further in fact of our consideration of the current loss environment.
This brings us to a consolidated combined ratio of 105.8% for the quarter, excluding the effect of the email policy loss portfolio transfer or a 6.4 point increase compared to the year ago quarter, and a slight improvement compared to the first quarter.
Our consolidated net investment result for the quarter was $18.4 million.
A decline of $9.4 million compared to the year ago quarter.
This was primarily due to a $10.5 million decline in earnings from our unconsolidated subsidiaries.
Driven by lower reported earnings from two of our limited partnership investments.
This was somewhat offset by an increase of approximately $1.2 million and net investment income primarily attributable to higher yield in certain asset classes within our fixed maturity and short term investment portfolios as well as an increase in our average investment in fixed maturity securities.
We believe pricing and the healthcare professional liability market is firming.
This creates growth opportunities for companies with strong balance sheet.
Other organically as customers seek for higher quality companies for their coverage name or through mergers and acquisitions.
Our capital management strategy is geared towards ensuring by the strength of our balance sheet and that we are poised to take advantage of potential opportunities as they appear.
Now I'll turn the call over to Mike Boguski for his comments on the results from our specialty property property and casualty segment Mike.
Thank you Dan I'd like to start by congratulating that on his promotion to Chief Executive Officer.
We all look forward to supporting his vision and leadership into the future.
Also congratulations to Kevin sure on his promotion to president of Eastern.
Especially PMC segment recorded a second quarter operating loss of $8.4 million.
An improvement from the first quarter loss of $12 million.
In addressing the factors that led to that result, it's important to understand the significant impact.
That's the loss portfolio transfer booked in the second quarter of 2018 had on the quarter over quarter comparison.
The loss portfolio transfer accounted for $26.6 million of premium written and fully earned in the second quarter of 2018.
Which was also booked at a 95% loss ratio.
For a more meaningful comparisons my discussion of the numbers and ratios for specialty property and casualty will exclude the effect of the loss portfolio transfer.
Starting with the top line trends gross premiums written were essentially flat quarter over quarter.
Exclusive of the impact of the $5.5 million increase in 24 month policy premium due to the timing of the renewal cycle.
We were pleased and encouraged by solid premium retention across the specialty PNC segment during the quarter, while achieving renewal rate increases of approximately 4%.
Highlighting two important portfolios of business in this segment the physician premium retention was 88% during the quarter, while achieving rate increases of 3%.
Premium retention for the facility's book was 80%.
Reflecting continued underwriting discipline, while successfully securing an average renewal rate increase of 17% on this business in the quarter.
Also we were particularly pleased with the 92% premium retention and our pediatric and chiropractic business this quarter.
This underwriting discipline combined with our deep specialization high quality risk selection.
And ability to obtain the right price for the exposure.
Are the cornerstones of our strategy to achieve a long term underwriting profit.
We will also to can continue to focus on driving operational efficiency and improving our competitive position into the future.
New business written in the quarter was $8.1 million consistent with the second quarter of 2018.
The increased accident year loss ratio trends drove the operating loss in the quarter.
The calendar year loss ratio increased to 84.1% as compared to 73.4% in the second quarter of 2018.
This was driven by a 3.3 percentage point increase in the accident year loss ratio and lower favorable reserve development.
We continue to take the necessary steps.
To maintain the strength of our balance sheet.
This requires a cautious view of emerging severity trends.
Resulting in higher accident year loss pick and less favorable development.
The expense ratio was flat quarter over quarter.
Finally, we were very pleased with the strong performance of our life Sciences operation, which has produced an attractive underwriting profit in the first half 2019.
Kim.
Thank you Mike Mike Yes.
Kevin will you please take us through the worst.
Thanks, and insurance and segregated portfolio cells reinsurance segments.
I will thank you Ken the workers compensation insurance segment produced operating income of $2.3 million for the quarter.
The workers compensation insurance marketplace continues to be highly competitive as evidenced by our gross premiums written which declined 9.4% quarter over quarter to $64.2 million.
New business written decreased to $6.6 million from $13.4 million a year ago.
This decrease is due in part to the effect of the Great Falls renewal rights transaction, which added $4.3 million of traditional workers compensation new business for the second quarter of 2018.
Premium retention decreased to 81% due in large part to our continued commitment to our underwriting.
As we've discussed in the past a strong economy results in low unemployment and more inexperienced workers entering the workforce, resulting in increases in both claims frequency and severity.
That said, our careful assessment of risk resulted in a price decrease of just 4% on renewing premium in keeping with improving loss trends.
Eastern is committed to its disciplined individual account underwriting and consistent application of a business model that has made us successful through changing insurance cycles and economic times.
This strategy resulted in strong claim closing patterns in the quarter with 19% of 2018 and prior claims closed during the quarter and 39% closed during 2019.
As a result, we recognized net favorable reserve development of $1.1 million and our workers compensation insurance segment for the quarter.
The increase in the current accident year loss ratio to 68.2% primarily reflected the impact of an annual aggregate deductible that was added to our reinsurance treaty effective may Onest 2019.
The impact of renewal rate decreases on the 2019 accident year loss ratio was offset by the previously mentioned favorable claim trends during 2019.
Before I get into the results of the segregated portfolio cell reinsurance segment I want to touch base on the loss at Dana mentioned earlier, one of the segregated portfolio cell problem programs at eastern rate assumed in errors and omissions liability policy from a captive insurer unaffiliated with Proassurance.
During the quarter a claim was filed under this policy that met the lifetime maximum loss limit of $10 million, we have no participation our ownership interest in this particular cell.
This loss increased net losses and loss adjustment expenses and decreased the segregated portfolio cell dividend expense correspondingly, resulting in no impact to our operating results. However, the dividend expense is not included in the calculation of the expense ratio, resulting in the higher combined ratio.
Excluding the impact of the you know reserve the accident year loss ratio actually decreased by 2.3 percentage points to 63.8% and the combined ratio for this segment increased 3.4 percentage points to 82.8%.
For more details please refer to our filed Form 10-Q for the second quarter, which includes a comparison of reported figures adjusted for the effect of the no reserve.
The segregated portfolio cell reinsurance segment reported operating income of $848000 for the quarter.
Gross premiums written were $16.9 million in the quarter down 11.5% from $19.1 million in 2018, primarily attributable to decreases in retention and renewal pricing again, both resulting from our response to the intense competition in the marketplace.
Alternative market solutions are in high demand as policyholders seek ways to manage controllable expenses, we offer a unique product that allows both healthcare professional liability and workers compensation lines in a single segregated portfolio cell leveraging model line expertise for both coverage types.
Retention decreased 85% in the quarter, but remains flat at 93% year to date.
Even at 85% the retention rate is solid in this competitive market.
Following trends similar to those of our workers compensation insurance segment.
Pricing on workers compensation business, and our segregated portfolio cell reinsurance segment is down 7% in line with loss trends within this segment of our business.
We recognized net favorable reserve development of $2.3 million in the quarter compared to $3 million in the same quarter of 2018, which primarily reflected better than expected claim trends in the 2015, 2016 and 2017 accident years Ken.
Thanks, Kevin Ned will you please give us an update on Lloyds before your closing comments sure Ken.
As we've stated for several quarters now.
We view, our participation and the two Lloyds of London syndicates in which we participate as an investment.
As with any investment we consider the long term value created by such a partnership more than the short term fluctuations.
We believe that our original thesis of affiliating with Duncan Dale Ando underwriting partners remains valid today.
And the second quarter, but the net loss ratio and the underwriting expense ratio declined by 3.1, and 2.3 percentage points respectively.
While net premiums written almost doubled to $18.8 million.
This increase was driven by both increases in renewal pricing and exposure growth on new business.
New business growth was strong as well the renewal rate increases are particularly encouraging.
This is Jay will be bidding together its proposed business plan for 2020 over the next several months.
And we will be in a better position to discuss the tonnage 20 year of account once that is complete.
We do continue to look at ways to reduce our exposure to the syndicate.
Thank you Ed any closing comments for us before we begin taking questions.
Yeah, Ken Thank you.
I want to reiterate our commitment the strength and stability over growth at any cost.
And to building long term value over short term results.
If there is an advantage to be found in a quarter like this one.
As the evidenced that these statements are more than just words.
Their philosophy.
One of them, which we believe wholeheartedly and one that will keep us pointed in the right direction.
Our competitors become lost.
Because of this consistent strategy across all lines of business in which we specialize.
I believe we have the best book of business in the industry.
With the most innovative products and services.
Combined with our exceptional employees across our operating subsidiaries.
Gross turns is positioned to excel during what we expect to be a tumultuous period for many of our competitors and the property casualty industry at large.
Ken.
Thank you Ned Nicole that can that concludes our prepared remarks, we are ready for questions.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you.
Speakerphone, please pick up your handset before pressing the keys.
Your question. Please press Star then too.
Our first question comes from Greg Peters of Raymond James. Please go ahead.
Good morning, I have a couple of questions.
I wanted to.
Circle back to the specialty property casualty results.
And specifically you talked about.
What you're doing from.
An underwriting perspective, and reserving perspective about increased severity in the market, but not in your own book.
I'm trying to reconcile that.
Cautious posture with the fact that you're continuing to report favorable reserve development to me it seems like if you're concerned about.
Substantial increases in severity that reserve development would also.
Diminished substantially.
Yes, Greg it's Ned.
So if you would if you kind of look over time, you will see that the.
Amount of favorable development on has reduced overtime.
But we do continue to view, our reserves as adequate and continue to see on a quarter over quarter basis.
The loss trends well worse than they have been.
Our are still not at the level that is embedded in our reserving for those prior accident years.
So that's why we end up continuing to have a level of favorable development. We we as we have talked in the past take a pretty conservative view.
When we establish those reserves.
And pretty pessimistic view of weight loss trends will do.
And loss trends, while worse than they have been over the last number of years continue to be slightly better than kind of what's embedded in that reserving analysis.
Can you just remind me.
When when you started to change your posture with the severity was it six quarters ago.
Or was I'd have to look back drag, but yeah. It was probably about six or so quarters ago, where we began to.
Talk about the fact that within the market place, we were seeing severity increases and I do want to go back to one other comment you said.
Where we have not really seen these changes in severity with on our own book of business is in our paid losses.
We have observed increases and case reserves being established by our claims professionals across the organization.
And it's just still too early to tell given at the tail on this business as to whether these are going to develop into paid losses or not.
So the the target accident year would probably be 16, or 17 that we'd want to track.
Over the next several quarters to see how that.
Ultimate pattern develops to get a sense of where you are.
Your your business was going to be going is that fair assessment.
I think that as you know it takes 24 or more months before we begin to have any kind of pay data.
Really emerging out of those accident years and better claims data so I think thats a.
Hi, good assumption Greg.
Okay. Thanks.
I guess on the Lloyd's business.
The the and I know, you're it's just an investment for you, but it seems like.
A lot of the rate movement and that market has been around property exposures and I'm. Just curious if you have a sense of.
For the 2019 year potential more exposure to hurricane catastrophe type volatility for.
The Lloyds business than in previous years, because that's where most of the action has been or maybe I have a different maybe on the wrong perspective.
I think for the overall market, Greg you're right.
The largest most significant rate increases within the Lloyds marketplace have been in the property lines, especially those property lines that are loss affected.
And the same would hold true for us.
For our book of business, the I would say that on a net basis. When you factor in the reinsurance that has bought by the syndicate that our exposure has not grown dramatically from prior periods.
We do still remain exposed to that Ken just atrophy exposure as we talked a couple of quarters ago.
We have looked at ways to lessen the exposure on the 2019 year of accounting to be honest, we are just not found.
Terms that we found acceptable to us the economics were just not.
I guess, what I would call fair enough and the scenarios that we looked at and so we continue to be a full participant in the 29 tenure of accounting.
As I mentioned in our prepared remarks or are you looking at the 2020 year account now.
Got it well congratulations on your first conference call everyone without Stan Yes, you read your prepared script as as well as you've ever done before so.
Thanks, Greg.
Our next question comes from Christopher Campbell of KBW. Please go ahead.
Hi, yes, good morning.
Yes first questions on the specialty PMC segment physicians rates for you a little bit slower sequentially about 100 beds.
Anything happening there that's kind of reducing the rate momentum you are seeing and med Mal.
Yes.
Chris It's Mike one thing to keep in mind on the.
Physicians rates included our Podiatric.
Business as well so the physicians rates were actually a little bit over roughly in the 4% range.
And there was a slight decrease of the Podiatric business of about 1.4% I believe in the quarter, which brought it down to the 3%.
Well, what we've we've seen kind of quarter over consistently throughout.
Towards the end of 18 and 19 is consistent.
You know kind of three to five point rate rate increases on that book.
And no interest will always be some quarter over quarter comparisons just based on the states that have heavier renewals in a given quarter as Mike mentioned, the pediatric business, having a heavy second quarter renewal impact.
So it's more timing I think Ben trends, indicating.
Okay, Great and then I guess, just overall, where do you think the market needs to get to in terms of rate to get to rate adequacy or is that kind of still too early to call with no uncertainty that you're seeing on the loss cost side.
Yeah, Chris I think it probably is a little early to call I. Thank you everybody.
It is now more weight to what we've been talking about for first six or so quarters. We budget, we have begun to see more of that kind of more disciplined underwriting and drive toward upright toward price in the marketplace.
The large verdicts continue the headline makers continue this certainly has not abated.
The reinsurers will feel the most pain on those large projects, but that will have a trickle down effect on to the market.
But I think because a lot of this is really just in the incurred stage and not the paid stage, it's going to be a little bit longer before we know kind of where the.
Kind of a tipping point is on price and that's always a challenge and that's why we have cycles in the industry because we.
Consistently overshoot undershoot.
Given the fact that we're looking backwards at losses to try and price today.
Yes. This is Mike I think I'd just add on that.
We've seen a general message out there are competitors.
Looking to achieve rate on that.
On the renewal books for both their facilities business in there and their physician book it varies by region and state but.
Year ago, we weren't seeing that so I think thats, just kind of an encouraging trend for us.
Alright, and then why is health care so much.
Our.
The physicians book.
Why does I mean, so much more rate.
I think there are two reasons that I would point to one you've got more commercial capital that typically players in that space.
And it can be more rate focused rate.
Great driven because that's what they have to compete on they don't necessarily bring a particular expertise to the marketplace and so big premium dollars on individual accounts that attracts commercial capital.
They tend underprice the business I think the other thing that's going on as well.
This is not exclusive to the facility space, but.
From a.
Social perspective, it's a lot easier to come up with a big jury award against an impersonal.
Brick and building.
Commercial enterprise than it is defined against a physician.
We certainly see cases, where were juries are awarding big verdicts against physicians as well, but it's a lot easier I think for a jury to find against.
Bricks and mortar.
Great and then.
Just switching the workers comp why were the workers comp rates down more.
In the FCC segment, then the workers comp segment I guess, what are you seeing in terms of frequency and severity in both of those segments.
Yes. This is that this is Kevin the frequency and severity has been very consistent with the overall book of business. The segregated portfolio cell business is a little more economically sensitive.
Theres been more growth in it so more experienced workers on and I think thats, probably driven up the severity a little bit there the frequencies band kind of flat.
And that book of business I wouldn't focus so much on the second quarter rate decline of 7%, but really look at the year to date.
It's a very profitable book of business, we individually account underwrite every single policy.
And.
The rate is indicative of.
You know our desire to keep the good accounts.
But I would certainly look more at our six month results than it would focus in on the second quarter result itself.
Okay got it and as the workers comp are you what are you seeing in your core workers comp all our frequency flat in that or is it or is it still down what's happening there. Yes. So in 16 and 17. It was kind of flat to up may be a point.
This year, we're actually seeing it flat to down a little bit and severity trends fairly consistent with what I just said about the.
The segregated portfolio cell reinsurance segment.
Okay got it and then oil what rates are what rate increases are you guys getting in the Lloyds book.
Hey, Chris it's it's not I don't have the specifics on that property exposures. Its certainly in the teens in greater.
The casualty buckets, and probably low to mid single digits.
Okay, great well, thanks for all the answers best of luck in that third quarter.
Thanks, a lot. Thank you.
Once again, if you have a question. Please press Star then one.
Next question comes from Mark Hughes of Suntrust. Please go ahead.
Hey, Good morning, guys. This is Michael rumors in for Mark Thanks for taking our questions. This morning.
I guess first how much higher does physician price you need to go before you consider with equity <unk> equity. So for example, like.
You can drop your accident year loss ratio down to be more in line with your long term average.
Yes.
Michael I think that it's too early to call that.
We have not seen.
The severity trends really manifest in paid losses and until we get a sense of where paid losses are actually heading.
It's hard to know.
We believe are getting the rate that we need.
But it's early days yet to tell.
I think one other point it's Mike.
Keep in mind there is.
As the renewal rates.
Just starting to come through in 18, and 19 increases and that takes time to earn out over it in force book.
So that will be helpful into into the future but.
And then we've got a.
Obviously correlate that to where the loss trends are going.
Okay. Thanks for that.
I guess second what is your perception of your competitors view.
On loss trends in the medical professional liability segment. So are they acting like theres meaningful inflation in the system or is it just pretty much business as usual.
He said a few minutes ago, we are beginning to see competitors react.
To the severity trends in the marketplace.
And I think we were probably calling that pretty early.
And were Alon six quarters ago, when we were.
And I would say that the industry is really caught up to us at this point.
Okay.
Yes, I apologize if we miss that from earlier.
Maybe what.
Maybe one on workers comp here.
So are there any one or two sort of competitors that are being particularly aggressive in this space.
Which led to kind of like a slowdown written premiums or is it just basically a broader market shift.
It's a it's a broader market shift I mean, we're seeing competition from the package players that are leveraging harm to offset losses in commercial auto and umbrella and general liability, we're seeing competition from online workers comp players and just in speaking about the decrease in direct written premium I mean again, it's a result of our focus on underwriting profit and individually account underwriting.
Every one of our policies to make sure that we've got the adequate rate for exposure.
But competition remains heavy.
It's coming from kind of all sides in all regions and.
We've built eastern for sustainable results through changing insurance cycles and economic times.
So.
That's that's helpful.
And then maybe one housekeeping apologize once again, if this has already been discussed their <expletive> .
But what does your reasonable outlook for equity and earnings of consolidations in that scenario.
That's a good question it is a.
It's kind of a volatile part of our investment portfolio. So it's hard to predict.
Kind of quarter over quarter on a number of those investments there as a reporting lag a timing lag.
You can kind of look back it.
The economic performance over the prior quarter, and sometimes get an indication of where we think things might be headed.
But as I think we said since we began investing and some of these investments it is volatile.
Over the long term and our focus as always is over the long term, we are getting and have been getting superior returns because of these investments and is going to add volatility. Unfortunately, right now where our operating earnings our game stressed that volatility.
Manifest itself, a little more than it would have in the past, but I really I'm, sorry, but I can't give you any good guidance on that.
Understood.
Okay, great guys. Thanks for all the questions.
This concludes our question and answer session.
Like to turn the conference back over to Mr., Ken Mcewen for any closing remarks.
That's all we have thank you for joining us and we will talk to you again in November .
The conference has now concluded. Thank you for attending today's presentation you may now.
Disconnect.