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ProAssurance Accelerates Reporting of Results for First Quarter 2019ProAssurance Corporation (NYSE: PRA) reports the following results for the three months ended March 31, 2019. We are releasing results earlier than previously announced, upon the substantial completion of the quarterly financial close process. We expect to timely file our quarterly report on Form 10-Q when our usual quarterly financial close process is finalized.
Management Commentary "Our concern about the broad loss trends in healthcare professional liability continues to have a major impact on operating results, and this increasing severity will likely affect our results for the foreseeable future. Our view of these trends influences our current accident year loss picks, which continue to rise, and leads us to increased caution in our analysis of prior period reserves, both of which have a significant impact on the operating results of our largest operating segment, Specialty P&C. We make no apology for taking the actions needed to protect our balance sheet, no matter the short-term impact. This is consistent with our long-term strategy and the long tail nature of our business. As has historically been the case the caution we take in establishing our reserves allows us to focus on our future without undue concerns about past liabilities, something that will be especially important as Mike Boguski and his team bring together all of our Specialty P&C operations under unified leadership. All of this overshadows several positive aspects of the quarter, including higher renewal pricing, solid retention of existing business, continued profitability in our Workers' Compensation Insurance segment, and a recovery of the majority of last quarter's mark-to-market losses in our equity trading portfolio resulting in a quarter-over-quarter increase in net income," said Stan Starnes, the Chairman and Chief Executive Officer of ProAssurance. First Quarter 2019
Non-GAAP Financial Measures Non-GAAP operating income is a financial measure that is widely used to evaluate performance within the insurance sector. In calculating Non-GAAP operating income, we have excluded the after-tax effects of the items listed in the following table that do not reflect normal operating results. We believe Non-GAAP operating income presents a useful view of the performance of our insurance operations; however, it should be considered in conjunction with net income computed in accordance with GAAP. The following table reconciles net income (loss) to Non-GAAP operating income:
Capital Management We have not repurchased any shares of our stock in 2019 and did not repurchase any shares in 2018. As of April 25, 2019, approximately $110 million remains available in our Board-authorized stock repurchase program. In March 2019, our Board of Directors declared a regular dividend of $0.31 per share, which was paid on April 22, 2019. Conference Call Information ProAssurance management will now discuss first quarter 2019 results during a conference call at 9:00 a.m. ET on Friday, April 26, 2019. This replaces the call originally scheduled for Friday, May 3, 2019. We invite anyone who would like to participate in the call to dial (888) 349-0134 (US), (855) 669-9657 (Canada) (toll free) or (412) 317-5145; no access code is required. We will webcast the call at Investor.ProAssurance.com. A replay will be available by telephone through at least December 31, 2019 at (877) 344-7529 (US), (855) 669-9658 (Canada) (both toll-free), or (412) 317-0088, using access code 10128025. A replay also will be available for one year on our website, Investor.ProAssurance.com. We also will make the replay and other information about ProAssurance available on a free subscription basis through Investor.ProAssurance.com or through Apple's iTunes. Investors may follow @PRA_Investors on Twitter to be notified of the latest financial news about ProAssurance. About ProAssurance ProAssurance Corporation is an industry-leading specialty insurer with extensive expertise in healthcare professional liability, products liability for medical technology and life sciences, legal professional liability, and workers' compensation insurance. The Company is recognized as one of the top performing insurance companies in America by virtue of our inclusion in the Ward's 50 for twelve straight years. ProAssurance Group is rated "A+" (Superior) by A.M. Best; ProAssurance and its operating subsidiaries are rated "A" (Strong) by Fitch Ratings. For the latest on ProAssurance and its industry-leading suite of products and services, cutting edge risk management and practice enhancement programs, follow @ProAssurance on Twitter or LinkedIn. ProAssurance's YouTube channel regularly presents thought provoking, insightful videos that communicate effective practice management, patient safety and risk management strategies.
Gross premiums written in the Specialty P&C segment were $166.4 million, an 18.4% increase from first quarter 2018. Compared to last year's first quarter, twelve month term physician premiums increased $19.9 million which reflected timing differences of $6.8 million related to a few large policies that shifted their 2018 renewal dates to the first quarter of 2019. Excluding the effect of these timing differences, twelve month term policies increased $13.1 million as compared to the first quarter of 2018. The increase was primarily due to new business written and an increase in premium assumed in which we participate on a quota share basis. The growth in our twelve month term policies was partially offset by a decline in twenty-four month term policies of $1.6 million which reflected the normal cycle of renewals. Premiums in our healthcare facilities line grew 47.3% quarter-over-quarter, to $22.2 million. The increase in our healthcare facilities premium was driven by new business, timing differences related to the renewal of certain policies and an increase in renewal pricing due to changes in the loss experience of a few large policies. New business in the first quarter of 2019 totaled $20.9 million, including $14.4 million of new physician business and $4.3 million of new healthcare facilities business. Our premium retention rate in physician professional liability, the largest line in this segment, was 91% in the quarter, unchanged from the year-ago quarter; premium retention in healthcare facilities was 71% compared to 86% in the first quarter of 2018. The decrease in retention in our healthcare facilities line is due to the loss of a single large policy due to price competition, which underscores the fact that retention in the healthcare facility line can be more volatile given the size of average premiums and competition. Renewal pricing on physician business increased 4% quarter-over-quarter, and renewal pricing in our healthcare facilities line was 13% higher, quarter-over-quarter. The current accident year net loss ratio was 93.1%, an increase of approximately three points over first quarter 2018. The increase in the current accident year net loss ratio was primarily due to the effect of a reduction during the first quarter of 2018 to ceded premiums owed under reinsurance agreements for prior accident years which increased net premiums earned during the 2018 three-month period; however, no such adjustments were made during the 2019 three-month period. As in previous quarters, the increase is, in part, the result of our consideration of potential higher severity trends associated with large, more complex risks. In addition, the increase in the current accident year net loss ratio was due to changes in the mix of business including a higher volume of earned premium in our excess and surplus lines of business. As we further penetrate the facility and large group space, we are writing a majority of these risks on an excess & surplus lines basis, and many are booked at a higher initial loss ratio due to the uncertainty of the ultimate loss experience. Net favorable prior year reserve development, which is also affected by our cautious analysis of current loss trends, was $7.9 million, compared to $20.6 million in the year-ago quarter. While we have not seen signs of increased severity in our paid losses, we remain concerned about these loss trends in the broader market.
Gross premiums written in the Workers' Compensation Insurance segment decreased 2.5% quarter-over-quarter, to $89.4 million, primarily reflecting decreases in new business, a decrease in audit premium and a decline of 2% in renewal pricing, partially offset by a one-point increase in our retention rate to 87%. New business was $7.5 million in 2019, compared to $16.6 million in 2018, and audit premium decreased 46% to approximately $700,000. Of note, the Great Falls renewal rights transaction accounted for $3.7 million of new business in the first quarter of 2018, the first full quarter after the transaction, compared to approximately $800,000 of new business in our New England region in the first quarter of 2019. The renewal pricing declines and the decrease in new business reflects our adherence to our underwriting and pricing standards in a very competitive market. Our alternative market business, which we predominately cede to the Segregated Portfolio Cell Reinsurance segment, accounted for $34.6 million of the gross premiums written in the quarter, a 6.1% increase over the prior year period. The calendar year net loss ratio increased from 65.2% to 66.3%, quarter-over-quarter, due to an increase in the current accident year net loss ratio, partially offset by an increase in net favorable prior year reserve development. The increase in the current accident year net loss ratio from 66.1% to 68.2% primarily reflected the effect of the continuation of intense price competition and the resulting decline in renewal pricing. Net favorable prior year reserve development of approximately $900,000 in the quarter resulted from overall favorable trends in claim closing patterns, primarily in the 2016 accident year, and includes purchase accounting amortization of approximately $400,000. The underwriting expense ratio increased from 30.5% to 30.9% quarter-over-quarter, primarily reflecting the impact of the decline in audit premium.
The Segregated Portfolio Cell Reinsurance segment represents the operating results (underwriting profit or loss, plus investment results) of Segregated Portfolio Cells (SPCs) within Eastern Re and Inova Re, our Cayman Islands SPC operations. The segment operating results of $1.4 million represent our share of the results of segregated portfolio cell programs in which we participate to a varying degree. Gross written premiums increased 12.4% quarter-over-quarter, to $36.4 million, primarily reflecting a six-point increase in the workers' compensation renewal retention rate to 97% and an increase in audit premium, partially offset by a decrease in new business and a decline of 2% in renewal pricing. The renewal pricing declines and decrease in new business reflect the competitive worker's compensation pricing environment. The majority of the gross written premium in the quarter, $32.1 million, related to workers' compensation, while the remainder was primarily from healthcare professional liability. We retained all 10 of the available alternative market programs, including nine workers' compensation programs and one healthcare professional liability program up for renewal during the three months ended March 31, 2019. The current accident year net loss ratio decreased slightly from 67.2% to 66.7%, which primarily reflected a decline in severity-related claim activity, partially offset by the effect of the continuation of intense price competition and the resulting renewal pricing decreases. The favorable trends in prior accident year claim closing patterns, particularly in accident years 2015-2017, resulted in net favorable prior year reserve development of approximately $2.3 million, compared to $1.5 million in the year-ago quarter. The underwriting expense ratio in the Segregated Portfolio Cell Reinsurance segment primarily reflects the ceding commission percentage paid to the Workers' Compensation Insurance and Specialty P&C segments for insurance services provided to the segregated portfolio cell programs. The ceding commissions are primarily reflected in the respective segments as a reduction to underwriting expenses.
Results of our Lloyd's Syndicates segment are generally reported on a one-quarter lag and include the operating results from our majority participation in Lloyd's of London Syndicate 1729 and our 100% participation in Syndicate 6131, which is a Special Purpose Arrangement that underwrites on a quota share basis with Syndicate 1729. For the 2019 underwriting year, we slightly decreased our participation in the operating results of Syndicate 1729 from 62% to 61%; however, due to the quarter delay these changes will not be reflected in our Lloyd's Syndicates segment results until the second quarter of 2019. Furthermore, our participation in Syndicate 6131 was not reflected in our Lloyd's Syndicates segment results until the second quarter of 2018 as Syndicate 6131 began writing business effective January 1, 2018. Syndicate 1729 underwrites risks over a wide range of property and casualty insurance and reinsurance lines in both the U.S. and international markets while Syndicate 6131 focuses on contingency and specialty property business, also within the U.S. and international markets. Additionally, results associated with the majority of investment assets solely allocated to Syndicate operations and certain U.S. paid administrative expenses are, and have been, reported currently for each period. Gross premiums written during the first quarter of 2019 reflects our increased participation in the operating results of Syndicate 1729 from 58% to 62% and our participation in the operating results of Syndicate 6131. Gross premiums written in the quarter were $23.6 million, an increase of $11.2 million over the year ago quarter primarily driven by new business written, primarily property insurance coverages, and, to a lesser extent, volume increases on renewal business. Net premiums earned were $18.6 million, an increase of $6.2 million over the same quarter of 2018. As in prior quarters, this increase primarily reflected an increased amount of business sourced in the open market, where premium is earned over twelve months, as opposed to business written under delegated underwriting authority, where premium is earned over twenty-four months. The current accident year net loss ratio was 54.5%, a decrease of just over 16 points compared to the same period of 2018, driven by the effect of higher net premiums earned. We recognized approximately $800,000 of net unfavorable prior year reserve development for the 2019 three-month period, compared to approximately $300,000 of net favorable prior year reserve development for the same period in 2018. The net unfavorable prior year reserve development for the 2019 three-month period was driven by higher than expected losses and development on certain large claims which resulted in unfavorable development with respect to a previous year of account. Expenses were $8.5 million in the quarter compared to $7.2 million in the first quarter of 2018. The increase in the 2019 three-month period was primarily due to the anticipated growth in Syndicate 1729 operations, an increase in DPAC amortization primarily due to an increase in net premiums earned and broker commissions, and, to a lesser extent, increases in various operational expenses associated with establishing Syndicate 6131. The 12.7 point decrease in the underwriting expense ratio for the first quarter of 2019, compared to first quarter 2018, was primarily due to the increase in net premiums earned, partially offset by an increase in broker commissions and operating expenses, as previously discussed. Maximum underwriting capacity for Syndicate 1729 in 2019 is approximately $166.8 million of which $101.7 million is our allocated underwriting capacity. This excludes approximately $15.6 million dedicated to Syndicate 6131 for which ProAssurance is the sole capital provider. The capital we are providing for Syndicate 6131 comes from capital we have already committed to the Lloyd's segment. We currently support our commitment with investment securities deposited with Lloyd's which had a fair value of approximately $144.5 million at March 31, 2019. We are actively evaluating our options for reducing the volatility of results in this segment. We are evaluating using a reinsurance arrangement to mitigate the risks of our corporate member within the syndicate structure during 2019. We will then have the ability to evaluate the full range of strategic options for our participation in 2020 and beyond.
The operating income in our Corporate segment for the quarter was primarily the result of $34.3 million of net realized investment gains, primarily driven by $30.3 million of unrealized holding gains on our equity trading portfolio. The quarter-over-quarter increase in net investment income is primarily due to higher earnings from our short-term investment holdings due to higher interest rates and, to a lesser extent, an increase in income from our fixed maturity securities due to higher yields from all asset classes within that portfolio. The decrease in equity in earnings (loss) of unconsolidated subsidiaries was primarily attributable to lower reported earnings from our limited partnership and limited liability company investment portfolio. Our income tax expense in the quarter was $6.7 million, primarily the result of an increase in deferred taxes on the unrealized gains on our trading portfolio in the quarter. Our projected annual effective tax rate was a benefit of 13.1% as of March 31, 2019 before discrete items were considered. For the 2019 three-month period, the most significant discrete item that affected our effective tax rate was the treatment of net realized investment gains and losses. Caution Regarding Forward-Looking Statements Statements in this news release that are not historical fact or that convey our view of future business, events or trends are specifically identified as forward-looking statements. Forward-looking statements are based upon our estimates and anticipation of future events and highlight significant risks, assumptions and uncertainties that could cause actual results to vary materially from our expected results. We expressly claim the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, for any forward-looking statements in this news release. Forward-looking statements represent our outlook only as of the date of this news release. Except as required by law or regulation, we do not undertake and specifically decline any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Forward-looking statements are generally identified by words such as, but not limited to, "anticipate," "believe," "estimate," "expect," "hope," "hopeful," "intend," "likely," "may," "optimistic," "possible," "potential," "preliminary," "project," "should," "will," and other analogous expressions. When we address topics such as liquidity and capital requirements, the value of our investments, return on equity, financial ratios, net income, premiums, losses and loss reserves, premium rates and retention of current business, competition and market conditions, the expansion of product lines, the development or acquisition of business in new geographical areas, the availability of acceptable reinsurance, actions by regulators and rating agencies, court actions, legislative actions, payment or performance of obligations under indebtedness, payment of dividends, and other similar matters, we are making forward-looking statements. These forward-looking statements are subject to significant risks, assumptions, and uncertainties, including, among other things, the following factors that could affect the actual outcome of future events:
Additional risks, assumptions and uncertainties that could arise from our membership in the Lloyd's market and our participation in Lloyd's Syndicates include, but are not limited to, the following:
Our results may differ materially from those we expect and discuss in any forward-looking statements. The principal risk factors that may cause these differences are described in "Item 1A, Risk Factors" in our Form 10-K and other documents we file with the Securities and Exchange Commission, such as our current reports on Form 8-K, and our regular reports on Form 10-Q. We caution readers not to place undue reliance on any such forward-looking statements, which are based upon conditions existing only as of the date made, and advise readers that these factors could affect our financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. Except as required by law or regulations, we do not undertake and specifically decline any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. View source version on businesswire.com: https://www.businesswire.com/news/home/20190425006008/en/ |