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ProAssurance Reports Results for Fourth Quarter 2018

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ProAssurance
Corporation
(NYSE:PRA) reports the following results for the
quarter and year ended December 31, 2018:

 
CONSOLIDATED INCOME STATEMENT HIGHLIGHTS
 
  Three Months Ended December 31   Year Ended December 31
($ in thousands, except per share data) 2018   2017   % Change 2018   2017   % Change
Revenues
Gross premiums written* $ 211,697 $ 191,744 10.4 % $ 957,311 $ 874,876 9.4 %
Net premiums written $ 182,684 $ 167,434 9.1 % $ 834,914 $ 764,018 9.3 %
Net premiums earned $ 202,033 $ 182,972 10.4 % $ 818,853 $ 738,531 10.9 %
Net investment income $ 24,207 $ 26,070 (7.1 %) $ 91,884 $ 95,662 (3.9 %)
Equity in earnings (loss) of unconsolidated subsidiaries $ (3,300 ) $ (455 ) (625.3 %) $ 8,948 $ 8,033 11.4 %
Net realized investment gains (losses) $ (46,139 ) $ (2,401 ) (1,821.7 %) $ (43,488 ) $ 16,409 (365.0 %)
Other income (expense)* $ 2,677 $ 2,933 (8.7 %) $ 9,833 $ 7,514 30.9 %
Total revenues* $ 179,478 $ 209,119 (14.2 %) $ 886,030 $ 866,149 2.3 %
Expenses
Net losses and loss adjustment expenses $ 154,089 $ 105,102 46.6 % $ 593,210 $ 469,158 26.4 %
Underwriting, policy acquisition and operating expenses* $ 59,742 $ 63,647 (6.1 %) $ 238,556 $ 235,753 1.2 %
Total expenses* $ 218,021 $ 174,885 24.7 % $ 857,005 $ 737,526 16.2 %
Income tax expense (benefit) $ (14,093 ) $ 16,892 (183.4 %) $ (18,032 ) $ 21,359 (184.4 %)
Net income (loss) $ (24,450 ) $ 17,342 (241.0 %) $ 47,057 $ 107,264 (56.1 %)
Non-GAAP operating income $ 9,669 $ 29,517 (67.2 %) $ 79,527 $ 108,538 (26.7 %)
Weighted average number of common shares outstanding
Diluted 53,791 53,686 0.2 % 53,749 53,611 0.3 %
Earnings per share
Net income (loss) per diluted share $ (0.46 ) $ 0.32 (243.8 %) $ 0.88 $ 2.00 (56.0 %)
Non-GAAP operating income per diluted share $ 0.18 $ 0.55 (67.3 %) $ 1.48 $ 2.02 (26.7 %)
 
* Consolidated totals include inter-segment eliminations. The
eliminations affect individual line items only and have no effect on
net income (loss). See Note 16 of the Notes to Consolidated
Financial Statements in the December 31, 2018 Form 10-K for amounts
by line item.
 
 
CONSOLIDATED KEY RATIOS
 
  Three Months Ended December 31   Year Ended December 31
2018   2017 2018   2017
Current accident year net loss ratio 88.6 % 81.7 % 83.7 % 81.7 %
Effect of prior accident years' reserve development (12.3 %) (24.3 %) (11.3 %) (18.2 %)
Net loss ratio 76.3 % 57.4 % 72.4 % 63.5 %
Expense ratio 29.6 % 34.8 % 29.1 % 31.9 %
Combined ratio 105.9 % 92.2 % 101.5 % 95.4 %
Operating ratio 93.9 % 78.0 % 90.3 % 82.4 %
Return on equity* (6.3 %) 4.0 % 3.0 % 6.3 %
 
* Quarterly computations of ROE are annualized
 

Management Commentary

"In 2018 we faced a number of challenges: a very competitive insurance
market, a developing loss environment in our medical professional
liability line, further catastrophe losses at Lloyd's
and a volatile investment market. However, we have maintained our
profitability and we can point to a number of positive developments such
as the overall performance of our Workers' Compensation Insurance
segment, along with solid retention, new business gains and higher
renewal pricing in our Specialty P&C segment. These reinforce our
confidence in our long-term strategy that positions us for future
success. At the same time, we also acknowledge that there is work to be
done, especially as regards our investment at Lloyd's. As mentioned in
our previous release of preliminary results, we are disappointed in the
financial performance of that investment and we are working with our
colleagues in London to address our concerns. Our strategic review of
this business will focus on the profitability of the overall business,
the volatility in our quarterly earnings that this business has created
as well as the appropriate level of our participation with the
Syndicate," said Stan
Starnes, the Chairman and Chief Executive Officer of ProAssurance.

Fourth Quarter 2018 Highlights

  • Consolidated gross premiums written increased by $20.0 million, a
    10.4% increase over the fourth quarter of 2017. In our Lloyd's
    Syndicates segment, gross premiums written increased to $25.8 million.
    Gross premiums written grew 7.7% in our Workers' Compensation
    Insurance segment and 3.9% in our Segregated Portfolio Cell
    Reinsurance segment, quarter-over-quarter, to $65.0 million and $16.8
    million, respectively. Gross premiums written in our Specialty P&C
    segment were essentially unchanged, quarter-over-quarter.
  • Net premiums earned increased $19.1 million, or 10.4%
    quarter-over-quarter. Net premiums earned in our Lloyd's Syndicates
    segment were $18.1 million. Net premiums earned were up 23.8% compared
    to the year-ago quarter in our Workers' Compensation Insurance segment
    to $50.8 million, and up 12.2% in our Segregated Portfolio Cell
    Reinsurance segment, to $19.7 million. The quarter-over-quarter
    increase in net premiums earned in our Specialty P&C segment was 0.8%,
    or approximately $900,000.
  • Our coordinated sales & marketing programs produced $3.4 million of
    business in the quarter.
  • Our consolidated current accident year net loss ratio was 88.6%, an
    increase of approximately seven points over the prior year's quarter
    primarily due to higher natural catastrophe-related losses in the
    fourth quarter of 2018 as compared to 2017 in our Lloyd's Syndicates
    segment and the continued caution we are exercising in our view of
    potential loss severity trends in the healthcare professional
    liability line within our Specialty P&C segment.
  • Net favorable development in the fourth quarter of 2018 was $25.0
    million, compared to $44.3 million in the prior year quarter.
  • The consolidated underwriting expense ratio was 29.6%, a
    quarter-over-quarter decline of approximately five points, due to the
    increase in net premiums earned in the fourth quarter, as well as a
    $3.9 million decrease in underwriting, policy acquisition and
    operating expenses.
  • Net realized investment losses were $46.1 million in the quarter,
    primarily reflecting mark-to-market adjustments in our equity trading
    portfolio. This compares to net realized investment losses of $2.4
    million in the final quarter of 2017.
  • Our consolidated net investment result was $20.9 million, a decline of
    $4.7 million as compared to the fourth quarter 2017; net investment
    income was $24.2 million, a $1.9 million decrease,
    quarter-over-quarter, primarily due to lower earnings from our fixed
    income portfolio as we have reduced our municipal bond holdings as a
    result of tax reform.
  • We had a tax benefit of $14.1 million in the quarter, compared to a
    tax expense of $16.9 million in the fourth quarter of 2017 primarily
    driven by the pre-tax loss.

Full Year 2018 Highlights

  • Consolidated gross premiums written were $957.3 million in 2018, a
    9.4% increase over 2017, with year-over-year increases in all
    operating segments.
  • Net premiums earned were $818.9 million in 2018, an increase of 10.9%.
    Again, all operating segments saw a year-over-year increase in net
    premiums earned.
  • Our coordinated sales & marketing programs produced $19.5 million of
    business in 2018, compared to $16.3 million in 2017.
  • Our consolidated current accident year net loss ratio increased two
    points year-over-year, to 83.7%. The current accident year net loss
    ratio in our Specialty P&C segment increased approximately four points
    due to the continued caution we are exercising in our view of
    potential loss severity trends in the healthcare professional
    liability line. The current accident year net loss ratio in our
    Workers' Compensation Insurance segment increased approximately two
    points due to increased claim severity. These increases were somewhat
    offset by a decline of approximately five points in our Lloyd's
    Syndicates segment, and approximately three points in our Segregated
    Portfolio Cell Reinsurance segment.
  • Net favorable development in 2018 was $92.1 million, compared to
    $134.4 million in 2017. In our Specialty P&C segment, favorable
    development was $77.0 million, in our Workers' Compensation Insurance
    segment favorable development was $8.1 million, and there was $9.0
    million of favorable development in our Segregated Portfolio Cell
    Reinsurance segment. Our Lloyd's Syndicates segment had unfavorable
    development of $2.0 million.
  • The consolidated underwriting expense ratio was 29.1%, a
    year-over-year decline of almost three points primarily due to an
    increase in net premiums earned across all of our operating segments
    and, to a lesser extent, a decrease in operating expenses in our
    Corporate segment.
  • Net realized investment losses were $43.5 million in 2018, primarily
    reflecting market volatility in 2018, which caused our equity
    securities to decline in value. This compares to net realized
    investment gains of $16.4 million in 2017.
  • Our consolidated net investment result was $100.8 million, a decline
    of $2.9 million or 2.8% year-over year, primarily attributable to a
    decrease in net investment income due to reduced earnings from our
    fixed income portfolio which reflected lower average investment
    balances.
  • We had a tax benefit of $18.0 million in 2018, compared to a tax
    expense of $21.4 million in 2017 primarily due to lower pre-tax
    income, a lower corporate tax rate, a portion of our investment income
    being tax-exempt and our ability to utilize tax credits in the current
    tax year as well as the previous tax year through carryback provisions
    of the tax law.

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:

 
RECONCILIATION OF NET INCOME TO NON-GAAP OPERATING INCOME
 
 

Three Months Ended
December 31

  Year Ended December 31
(In thousands, except per share data) 2018   2017 2018   2017
Net income (loss) $ (24,450 ) $ 17,342 $ 47,057 $ 107,264
Items excluded in the calculation of Non-GAAP operating income:
Net realized investment (gains) losses 46,139 2,401 43,488 (16,409 )
Net realized gains (losses) attributable to SPCs which no
profit/loss is retained (1)
(2,922 ) 891 (2,535 ) 3,083
Guaranty fund assessments (recoupments) (29 )   (4 )   148     (157 )
Pre-tax effect of exclusions 43,188 3,288 41,101 (13,483 )
Tax effect (2) (9,069 )   (1,151 )   (8,631 )   4,719  
After-tax effect of exclusions 34,119     2,137     32,470     (8,764 )
Non-GAAP operating income, before tax reform adjustments 9,669 19,479 79,527 98,500
Tax reform adjustments excluded in the calculation of Non-GAAP
operating income:
Adjustment of deferred taxes upon the change in corporate tax rate (3) 6,541 6,541
Adjustment of deferred taxes upon the change in limitation of future
deductibility of certain executive compensation (3)
    3,497         3,497  
Non-GAAP operating income $ 9,669     $ 29,517     $ 79,527     $ 108,538  
Per diluted common share:
Net income (loss) $ (0.46 ) $ 0.32 $ 0.88 $ 2.00
Effect of exclusions 0.63     0.23     0.60     0.02  
Non-GAAP operating income per diluted common share $ 0.18     $ 0.55     $ 1.48     $ 2.02  
 

(1)

Net realized investment gains (losses) on investments related to
SPCs are recognized in our Segregated Portfolio Cell Reinsurance
segment and the portion of operating earnings, including the gain
or loss, net of our participation, is due to the external cell
participants through the SPC dividend expense (income). To be
consistent with our exclusion of net realized investment gains
(losses) recognized in earnings, we are excluding the portion of
net realized investment gains (losses) that is included in the SPC
dividend expense (income) which is due to the external cell
participants.

 

(2)

The annual expected incremental tax rate for 2018 is 21% as
compared to 35% for 2017, associated with the taxable or tax
deductible items listed above. Excluding certain discrete items,
which are tax effected at the annual expected incremental tax rate
in the period they are included in net income, the effective tax
rate for each period was applied to these items in calculating net
income. See further discussion under the heading "Taxes" in the
Executive Summary of Operations section of our 2018 Form 10-K
filed on February 21, 2019.

 

(3)

Due to tax reform enacted by the TCJA, we remeasured our deferred
tax assets and liabilities based on the newly enacted tax rate of
21% and recognized a charge of $6.5 million, which is included as
a component of income tax expense from continuing operations for
the three months and year ended December 31, 2017. In addition, we
made a reasonable estimate of the effects on our deferred tax
asset balances at December 31, 2017 as it related to the
limitation on the future deductibility on certain executive
compensation and recorded a provisional charge to income tax
expense of $3.5 million for the three months and year ended
December 31, 2017. During 2018, we were able to complete our
accounting for the impact of the TCJA on our December 31, 2017
deferred tax asset balances related to executive compensation; no
measurement period adjustment was recorded in 2018 as a result.

 
 
BALANCE SHEET HIGHLIGHTS
 
(In thousands, except per share data)   December 31, 2018   December 31, 2017
Total investments $ 3,349,382 $ 3,686,528
Total assets $ 4,600,726 $ 4,929,197
Total liabilities $ 3,077,724 $ 3,334,402
Common shares (par value $0.01) $ 630 $ 628
Retained earnings $ 1,571,847 $ 1,614,186
Treasury shares $ (417,277 ) $ (418,007 )
Shareholders' equity $ 1,523,002 $ 1,594,795
Book value per share $ 28.39 $ 29.83
 

Capital Management

In November 2018, our Board of Directors declared a special dividend of
$0.50 per share in addition to a regular dividend of $0.31 per share;
both were paid on January 9, 2019. We remain dedicated to effective
capital management as evidenced by our return of more than $2.0 billion
to shareholders in the form of regular and special dividends in the
eleven years the current management team has been in place.

Conference Call Information

ProAssurance management will discuss fourth quarter and year end 2018
results and other topics of interest to investors during a conference
call at 9:30 a.m. ET on Friday, February 22, 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.

   

SPECIALTY P&C SEGMENT RESULTS

 
Three Months Ended December 31 Year Ended December 31
($ in thousands) 2018   2017   % Change 2018   2017   % Change
Gross premiums written $ 121,060 $ 121,292 (0.2 %) $ 577,196 $ 549,323 5.1 %
Net premiums written $ 99,546 $ 103,327 (3.7 %) $ 494,148 $ 466,621 5.9 %
Net premiums earned $ 113,434 $ 112,535 0.8 % $ 491,787 $ 449,823 9.3 %
Total revenues $ 115,333 $ 114,280 0.9 % $ 497,631 $ 455,511 9.2 %
 
Net losses and loss adjustment expenses $ 91,687 $ 67,738 35.4 % $ 384,431 $ 285,250 34.8 %
Underwriting, policy acquisition and operating expenses $ 28,589 $ 29,369 (2.7 %) $ 112,419 $ 107,972 4.1 %
Segregated portfolio cell dividend expense (income) $ $ % $ $ 5,181 (100.0 %)
Total expenses $ 120,276 $ 97,107 23.9 % $ 496,850 $ 398,403 24.7 %
Segment operating results $ (4,943 ) $ 17,173 (128.8 %) $ 781 $ 57,108 (98.6 %)
 
 
SPECIALTY P&C SEGMENT KEY RATIOS
 
  Three Months Ended December 31   Year Ended December 31
2018   2017 2018   2017
Current accident year net loss ratio 100.3 % 93.4 % 93.8 % 89.9 %
Effect of prior accident years' reserve development (19.5 %) (33.2 %) (15.6 %) (26.5 %)
Net loss ratio 80.8 % 60.2 % 78.2 % 63.4 %
Underwriting expense ratio 25.2 % 26.1 % 22.9 % 24.0 %
Combined ratio 106.0 % 86.3 % 101.1 % 87.4 %
 

Gross premiums written in the Specialty P&C segment were $121.1 million,
essentially unchanged from the prior year quarter. In the quarter, our
physician premiums declined $3.7 million due to the timing of the
renewal of a few large policies that resulted in the shifting of
approximately $5.0 million of expiring premium into the first quarter of
2019 and, to a lesser extent, a decline in our medical technology
premiums due to retention losses. This was largely offset by a $4.8
million increase in facilities premiums driven largely by new business.
For the year, gross premiums written were $577.2 million, a 5.1%
increase as compared to 2017. The increase was primarily driven by the
effect of a loss portfolio transfer entered into during the second
quarter of 2018 which resulted in $26.6 million of one-time premium
written and fully earned during the year. Physician premiums declined
$13.2 million primarily due to the aforementioned shifting in renewal
dates and the normal cycle of renewals of twenty-four month physician
policies. Facilities premium increased 36.3% or $17.3 million compared
to 2017.

New business in the fourth quarter of 2018 totaled $13.1 million,
including $4.9 million of new physician business and $6.6 million of new
healthcare facilities business. For the year, new business written was
$47.9 million, including $19.8 million of new business in each of the
physician and healthcare facilities lines.

Renewal pricing on physician business, the largest source of revenue in
this segment, increased 2% quarter-over-quarter, and renewal pricing in
our healthcare facilities line was 7% higher, quarter-over-quarter. For
the year, renewal pricing on physician business increased 3% and renewal
pricing in our healthcare facilities line was 7% higher.

Our premium retention rate in physician professional liability, the
largest line in this segment, was 88% in the quarter, down from 92% in
the year-ago quarter; premium retention in healthcare facilities, which
can be more volatile given the size of average premiums and competition,
was 88% compared to 83% in the fourth quarter of 2017. For 2018,
physician premium retention was 90%, unchanged from 2017, and healthcare
facilities premium retention was 87%, a one point improvement compared
to the prior year.

The current accident year net loss ratio was 100.3%, an increase of
approximately seven points over fourth quarter 2017. The majority of
that increase resulted from our consideration of potential higher
severity trends associated with large, more complex risks. We have not
seen these expected losses manifest themselves in our paid losses,
however we remain concerned about trends in the broader market. The
year-over-year increase in the current accident year net loss ratio of
approximately four points reflects the same concerns.

Net favorable loss development, which is also affected by our cautious
analysis of current loss trends, was $22.0 million, compared to $37.4
million in the year-ago quarter, and was $77.0 million for the year
compared to $119.4 million in 2017.

   

WORKERS' COMPENSATION INSURANCE SEGMENT RESULTS

 
Three Months Ended December 31 Year Ended December 31
($ in thousands) 2018   2017   % Change 2018   2017   % Change
Gross premiums written $ 64,959 $ 60,314 7.7 % $ 293,230 $ 264,048 11.1 %
Net premiums written $ 44,769 $ 39,413 13.6 % $ 195,350 $ 173,566 12.6 %
Net premiums earned $ 50,848 $ 41,063 23.8 % $ 186,079 $ 163,309 13.9 %
Total revenues $ 51,432 $ 41,443 24.1 % $ 188,491 $ 165,405 14.0 %
 
Net losses and loss adjustment expenses $ 30,689 $ 22,714 35.1 % $ 118,483 $ 102,233 15.9 %
Underwriting, policy acquisition and operating expenses $ 14,147 $ 13,664 3.5 % $ 55,693 $ 52,576 5.9 %
Total expenses $ 44,836 $ 36,378 23.3 % $ 174,176 $ 154,809 12.5 %
Segment operating results $ 6,596 $ 5,065 30.2 % $ 14,315 $ 10,596 35.1 %
 
 
WORKERS' COMPENSATION INSURANCE SEGMENT KEY RATIOS
 
  Three Months Ended December 31   Year Ended December 31
2018   2017 2018   2017
Current accident year net loss ratio 68.0 % 66.5 % 68.0 % 66.1 %
Effect of prior accident years' reserve development (7.6 %) (11.2 %) (4.3 %) (3.5 %)
Net loss ratio 60.4 % 55.3 % 63.7 % 62.6 %
Underwriting expense ratio 27.8 % 33.3 % 29.9 % 32.2 %
Combined ratio 88.2 % 88.6 % 93.6 % 94.8 %
 

The Workers' Compensation Insurance segment year end operating result
increased 35.1% to $14.3 million. Both the quarter-over-quarter and full
year increase in the Workers' Compensation Insurance segment operating
results reflected an increase in net premiums earned and a decrease in
the underwriting expense ratio, partially offset by an increase in the
net loss ratio. This resulted in improvements in both the quarterly and
year end combined ratios compared to 2017. The year-end 2018 combined
ratio of 93.6% improved 1.2 points compared to 2017.

Gross premiums written increased 7.7% in the fourth quarter of 2018
compared to the same period in 2017 driven by premium retention of 85%
and an increase in audit premium, partially offset by a renewal rate
decrease of 2% and a decrease in new business writings, both reflective
of a very competitive workers' compensation marketplace. Audit premium
totaled $2.3 million in the fourth quarter of 2018 compared to $1.3
million in 2017. New business decreased to $10.2 million for the fourth
quarter of 2018 compared to $14.9 million in the fourth quarter of 2017,
which contained the initial production from the Great Falls Insurance
Company renewal rights transaction. For the year ended December 31,
2018, gross premiums written were $293.2 million, an increase of $29.2
million or 11.1%, and included new business of $51.5 million compared to
$47.7 million in 2017, premium renewal retention of 86% and renewal rate
decreases of 1%. The year-over-year growth trend was driven by the
success of the Great Falls transaction and consistent production results
across our operating territories.

The increase in the calendar year net loss ratio in the quarter
reflected an increase in the current accident year net loss ratio and
overall favorable trends in prior accident year claim closing patterns
which resulted in net favorable development of $3.9 million in 2018
compared to $4.6 million in 2017. The increase in the current accident
year net loss ratio from 66.1% in 2017 to 68.0% in 2018 is due to an
increase in severity-related claim activity in 2018 related to economic
growth trends. For the year ended December 31, 2018, net favorable loss
reserve development was $8.0 million compared to $5.7 million for 2017.
The 2018 net favorable loss reserve development reflected better than
expected claim results primarily related to accident years 2015 and 2016.

The quarter-over-quarter and full year decrease in the underwriting
expense ratio reflected the increase in net premiums earned and the
continued effective management of general expenses.

   

SEGREGATED PORTFOLIO CELL REINSURANCE SEGMENT RESULTS

 
Three Months Ended December 31 Year Ended December 31
($ in thousands) 2018   2017   % Change 2018   2017   % Change
Gross premiums written $ 16,830 $ 16,195 3.9 % $ 85,086 $ 77,675 9.5 %
Net premiums written $ 14,838 $ 14,280 3.9 % $ 75,547 $ 68,862 9.7 %
 
Net premiums earned $ 19,692 $ 17,546 12.2 % $ 73,940 $ 68,197 8.4 %
Net investment income 466 290 60.7 % 1,566 1,059 47.9 %
Net realized gains (losses) (3,615 ) 1,199 (401.5 %) (3,149 ) 3,914 (180.5 %)
Other income 35 32 9.4 % 211 115 83.5 %
Net losses and loss adjustment expenses (11,165 ) (11,148 ) 0.2 % (38,726 ) (37,455 ) 3.4 %
Underwriting, policy acquisition and operating expenses (6,357 )   (5,526 ) 15.0 % (22,426 )   (20,764 ) 8.0 %
SPC net operating results (944 ) 2,393 (139.4 %) 11,416 15,066 (24.2 %)
Segregated portfolio cell dividend (expense) income (1) 665     (1,694 ) (139.3 %) (9,122 )   (10,590 ) (13.9 %)
Segment operating results (2) $ (279 )   $ 699   (139.9 %) $ 2,294     $ 4,476   (48.7 %)
 

(1)

Represents the operating (profit) loss due to external cell
participants.

(2)

Represents our share of the operating profit (loss) of the SPCs in
which we participate.

 
 
SEGREGATED PORTFOLIO CELL REINSURANCE SEGMENT KEY RATIOS
 
  Three Months Ended December 31   Year Ended December 31
2018   2017 2018   2017
Current accident year net loss ratio 60.3 % 75.4 % 64.5 % 67.4 %
Effect of prior accident years' reserve development (3.6 %) (11.9 %) (12.1 %) (12.5 %)
Net loss ratio 56.7 % 63.5 % 52.4 % 54.9 %
Underwriting expense ratio 32.3 % 31.5 % 30.3 % 30.4 %
Combined ratio 89.0 % 95.0 % 82.7 % 85.3 %
 

The 2018 quarterly operating loss of approximately $300,000 and the
operating profit of $2.3 million for the year ended December 31, 2018
represent our share of the operating results from segregated portfolio
cell programs in which we participate to a varying degree. The decrease
in the 2018 segment operating result as compared to 2017 was primarily
driven by unrealized investment losses in the fourth quarter of 2018.

Gross written premiums were $16.8 million for the fourth quarter of 2018
compared to $16.2 million in 2017. Premium retention for worker's
compensation business in the segregated portfolio cells, which is the
majority of the business, was 88% in the fourth quarter of 2018 and
renewal pricing decreased 1% compared to renewal pricing decreases of 3%
in 2017. New business was $1.3 million in the fourth quarter of both
2018 and 2017. We renewed all six of the alternative market programs
that were available for renewal in the fourth quarter and 22 of 23
during 2018. For the year ended December 31, 2018, gross premiums
written were $85.1 million, an increase of $7.4 million or 9.5%, and
included new business of $8.3 million compared to $9.9 million in 2017,
premium renewal retention of 91% and renewal rate remained unchanged as
compared to 2017.

The decrease in the current accident year net loss ratio is due to a
decrease in large claim activity in 2018 compared to 2017. There were no
reinsured claim occurrences in the fourth quarter of 2018 compared to
four in 2017. Favorable trends in prior accident year claim closing
patterns resulted in net favorable development of approximately $719,000
in the fourth quarter of 2018 compared to $2.1 million for the same
period in the prior year. For the year ended December 31, 2018, net
favorable loss reserve development was $9.0 million compared to $8.5
million for 2017. The 2018 net favorable loss reserve development
reflected better than expected claim results primarily related to
accident years 2015 through 2017.

The expense ratio in the Segregated Portfolio Cell Reinsurance segment
reflected the ceding commission percentage paid to the Workers'
Compensation Insurance and Specialty P&C segments for insurance services
provided to the segregated portfolio cell programs. The ceding
commissions are reflected in the respective segments as a reduction to
underwriting expenses.

   

LLOYD'S SYNDICATES SEGMENT RESULTS

 
Three Months Ended December 31 Year Ended December 31
($ in thousands) 2018   2017   % Change 2018   2017   % Change
Gross premiums written $ 25,797 $ 13,229 95.0 % $ 88,746 $ 70,224 26.4 %
Net premiums written $ 23,531 $ 10,414 126.0 % $ 69,869 $ 54,969 27.1 %
Net premiums earned $ 18,059 $ 11,828 52.7 % $ 67,047 $ 57,202 17.2 %
Net investment income $ 987 $ 542 82.1 % $ 3,358 $ 1,736 93.4 %
Other gains (losses) $ 19 $ 166 (88.6 %) $ (138 ) $ (1,369 ) 89.9 %
Total revenues $ 19,065 $ 12,536 52.1 % $ 70,267 $ 57,569 22.1 %
 
Net losses and loss adjustment expenses $ 20,548 $ 3,502 486.8 % $ 51,570 $ 44,220 16.6 %
Underwriting, policy acquisition and operating expenses $ 7,938 $ 7,176 10.6 % $ 31,686 $ 26,963 17.5 %
Total expenses $ 28,486 $ 10,678 166.8 % $ 83,256 $ 71,183 17.0 %
Total income tax expense (benefit) $ 38 $ (73 ) 152.1 % $ (317 ) $ (568 ) 44.2 %
Segment operating results $ (9,459 ) $ 1,931 (589.8 %) $ (12,672 ) $ (13,046 ) 2.9 %
 
 
LLOYD'S SYNDICATES SEGMENT KEY RATIOS
 
  Three Months Ended December 31   Year Ended December 31
2018   2017 2018   2017
Current accident year net loss ratio 104.5 % 31.6 % 74.0 % 78.7 %
Effect of prior accident years' reserve development 9.3 % (2.0 %) 2.9 % (1.4 %)
Net loss ratio 113.8 % 29.6 % 76.9 % 77.3 %
Underwriting expense ratio 44.0 % 60.7 % 47.3 % 47.1 %
 

Results of our Lloyd's Syndicates segment are generally reported on a
one-quarter lag, except in quarters such as this one in which the
projected or known material effects of an event are able to be reported
in the current reporting quarter. This segment currently represents our
62% participation in Syndicate 1729 at Lloyd's of London and our 100%
participation in Syndicate 6131, a special purpose arrangement (SPA),
focusing on contingency and specialty property business that is
underwritten on a quota share basis with Syndicate 1729. 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 in the quarter were $25.8 million, an increase of
$12.6 million over the year ago quarter primarily reflecting our
increased participation in the operating results of Syndicate 1729, our
participation in the operating results of Syndicate 6131 and, to a
lesser extent, the effect of reinstatement premiums received in 2018 in
connection with natural catastrophe and property losses. Gross premiums
written for 2018 increased to $88.7 million, driven largely by the
greater participation in the results of the two Syndicates and the
reinstatement premiums.

Net premiums earned were $18.1 million, an increase of $6.2 million over
the final quarter of 2017. For the year ended December 31, 2018, net
premiums earned were $67.0 million, an increase of $9.8 million compared
to a year ago. 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.

Net losses in the fourth quarter were $20.5 million, which includes
estimated losses resulting from Hurricane Michael that we would normally
report with our first quarter 2019 results. However, given the
availability and materiality of the estimated storm-related losses, we
accelerated our reporting of an estimated $6.8 million of pre-tax
losses, net of reinstatement premiums, into the fourth quarter of 2018.
This is consistent with our policy of disclosing significant losses in
the quarter which they become known to us. For 2018, net losses were
$51.6 million compared to $44.2 million in 2017. Increased natural
catastrophe and property losses drove the increases in both periods.

In the fourth quarter of 2018, our current accident year net loss ratio
was 104.5% as compared to 31.6% in the year-ago quarter. Year-over-year,
the current accident year net loss ratio decreased from 78.7% in 2017 to
74.0% in 2018. These ratios reflected increased natural catastrophe and
property losses from the volcanic eruptions in Hawaii and storm damage
related to Hurricanes Florence and Michael, with loss estimates from
Hurricane Michael being accelerated into the fourth quarter as described
above. There was $1.7 million of unfavorable development in the quarter,
compared to favorable development of approximately $200,000 in the
year-ago quarter. This drove unfavorable development for the year to
$2.0 million as compared to favorable development of approximately
$800,000 in 2017.

The volatility of these results continues to be of concern to us and we
believe successfully mitigating that volatility must be part of our
evaluation of all possible strategic options for our investment in
Lloyd's, which we announced in early February.

We continue to see moderation in the level of expenses, which were $7.9
million in the quarter and $31.7 million for the year. This compares to
$7.2 million in the fourth quarter of 2017 and $27.0 million for 2017.
We believe the expense ratio will improve if the Syndicates' operations
are able to achieve scale, but the timing of that milestone is, by
necessity, a part of our strategic review.

Maximum underwriting capacity for Syndicate 1729 in 2019 is
approximately $163.3 million of which $99.5 million is our allocated
underwriting capacity. This excludes approximately $15.3 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 $142.7 million at December 31,
2018.

   

CORPORATE SEGMENT RESULTS

 
Three Months Ended December 31 Year Ended December 31
($ in thousands) 2018   2017   % Change 2018   2017   % Change
Net investment income $ 22,754 $ 25,211 (9.7 %) $ 86,960 $ 92,867 (6.4 %)
Equity in earnings (loss) of unconsolidated subsidiaries $ (3,300 ) $ (455 ) (625.3 %) $ 8,948 $ 8,033 11.4 %
Net realized investment gains (losses) $ (42,468 ) $ (3,602 ) (1,079.0 %) $ (39,879 ) $ 12,388 (421.9 %)
Total revenues $ (22,226 ) $ 22,068 (200.7 %) $ 59,554 $ 116,176 (48.7 %)
Operating expenses $ 3,415 $ 8,214 (58.4 %) $ 18,767 $ 29,275 (35.9 %)
Interest expense $ 4,855 $ 4,442 9.3 % $ 16,163 $ 16,844 (4.0 %)
Income tax expense (benefit) $ (14,131 ) $ 16,965 (183.3 %) $ (17,715 ) $ 21,927 (180.8 %)
Segment operating results $ (16,365 ) $ (7,553 ) (116.7 %) $ 42,339 $ 48,130 (12.0 %)
 

The operating loss in our Corporate segment for the quarter was
primarily the result of a $42.5 million net realized investment loss in
our equity portfolio. As of February 15, 2019, we estimate that
mark-to-market adjustments would reverse approximately $32 million or
75% of that loss.

The decline in net investment income (quarter-over-quarter and
year-over-year) is primarily due to lower earnings from certain classes
of investments. The decrease in equity in earnings (loss) of
unconsolidated subsidiaries was primarily due to lower reported earnings
from a few LP investments and increases in the amortization on our tax
credit partnerships. In addition, our net investment result reflected
the impact of the adoption of a new accounting standard during the first
quarter of 2018 which requires that certain equity investments be
measured at fair value with changes in fair value recognized in net
income.

For the year, the segment's operating results were positive, although
lower than in 2017 due to the effects of the fourth quarter loss. Our
income tax benefit in the quarter of $14.1 million was primarily the
result of our net loss, a lower corporate tax rate, a portion of our
investment income being tax-exempt and our ability to utilize tax
credits in the current tax year as well as the previous tax year through
carryback provisions of the tax law. Those same factors produced a tax
benefit for the year of $17.7 million.

Our effective tax rate is a benefit of 62.1% at December 31, 2018 due to
the effects cited above. Our utilization of tax credits was $5.3 million
in the quarter, unchanged from fourth quarter 2017. Our projected tax
credits for 2019 are less than those used in 2018, however, they
continue to have a significant impact on the effective tax rate for 2019.

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:

  • changes in general economic conditions, including the impact of
    inflation or deflation and unemployment;
  • our ability to maintain our dividend payments;
  • regulatory, legislative and judicial actions or decisions that could
    affect our business plans or operations, including the impact of
    Brexit;
  • the enactment or repeal of tort reforms;
  • formation or dissolution of state-sponsored insurance entities
    providing coverages now offered by ProAssurance which could remove or
    add sizable numbers of insureds from or to the private insurance
    market;
  • changes in the interest and tax rate environment;
  • resolution of uncertain tax matters and changes in tax laws, including
    the impact of the TCJA;
  • changes in laws or government regulations regarding financial markets
    or market activity that may affect our business;
  • changes in the ability of the U.S. government to meet its obligations
    that may affect the U.S. economy and our business;
  • performance of financial markets affecting the fair value of our
    investments or making it difficult to determine the value of our
    investments;
  • changes in requirements or accounting policies and practices that may
    be adopted by our regulatory agencies, the FASB, the SEC, the PCAOB or
    the NYSE that may affect our business;
  • changes in laws or government regulations affecting the financial
    services industry, the property and casualty insurance industry or
    particular insurance lines underwritten by our subsidiaries;
  • the effect on our insureds, particularly the insurance needs of our
    insureds, and our loss costs, of changes in the healthcare delivery
    system and/or changes in the U.S. political climate that may affect
    healthcare policy or our business;
  • consolidation of our insureds into or under larger entities which may
    be insured by competitors, or may not have a risk profile that meets
    our underwriting criteria or which may not use external providers for
    insuring or otherwise managing substantial portions of their liability
    risk;
  • uncertainties inherent in the estimate of our loss and loss adjustment
    expense reserve and reinsurance recoverable;
  • changes in the availability, cost, quality or collectability of
    insurance/reinsurance;
  • the results of litigation, including pre- or post-trial motions,
    trials and/or appeals we undertake;
  • effects on our claims costs from mass tort litigation that are
    different from that anticipated by us;
  • allegations of bad faith which may arise from our handling of any
    particular claim, including failure to settle;
  • loss or consolidation of independent agents, agencies, brokers or
    brokerage firms;
  • changes in our organization, compensation and benefit plans;
  • changes in the business or competitive environment may limit the
    effectiveness of our business strategy and impact our revenues;
  • our ability to retain and recruit senior management;
  • the availability, integrity and security of our technology
    infrastructure or that of our third-party providers of technology
    infrastructure, including any susceptibility to cyber-attacks which
    might result in a loss of information or operating capability;
  • the impact of a catastrophic event, as it relates to both our
    operations and our insured risks;
  • the impact of acts of terrorism and acts of war;
  • the effects of terrorism-related insurance legislation and laws;
  • guaranty funds and other state assessments;
  • our ability to achieve continued growth through expansion into new
    markets or through acquisitions or business combinations;
  • changes to the ratings assigned by rating agencies to our insurance
    subsidiaries, individually or as a group;
  • provisions in our charter documents, Delaware law and state insurance
    laws may impede attempts to replace or remove management or may impede
    a takeover;
  • state insurance restrictions may prohibit assets held by our insurance
    subsidiaries, including cash and investment securities, from being
    used for general corporate purposes;
  • taxing authorities can take exception to our tax positions and cause
    us to incur significant amounts of legal and accounting costs and, if
    our defense is not successful, additional tax costs, including
    interest and penalties; and
  • expected benefits from completed and proposed acquisitions may not be
    achieved or may be delayed longer than expected due to business
    disruption; loss of customers, employees or key agents; increased
    operating costs or inability to achieve cost savings; and assumption
    of greater than expected liabilities, among other reasons.

Additional risks, assumptions and uncertainties that could arise from
our membership in the Lloyd's market and our participation in Lloyd's
Syndicates include, but are not limited to, the following:

  • members of Lloyd's are subject to levies by the Council of Lloyd's
    based on a percentage of the member's underwriting capacity, currently
    a maximum of 3%, but can be increased by Lloyd's;
  • Syndicate operating results can be affected by decisions made by the
    Council of Lloyd's which the management of Syndicate 1729 and
    Syndicate 6131 have little ability to control, such as a decision to
    not approve the business plan of Syndicate 1729 or Syndicate 6131, or
    a decision to increase the capital required to continue operations,
    and by our obligation to pay levies to Lloyd's;
  • Lloyd's insurance and reinsurance relationships and distribution
    channels could be disrupted or Lloyd's trading licenses could be
    revoked, making it more difficult for a Lloyd's Syndicate to
    distribute and market its products;
  • rating agencies could downgrade their ratings of Lloyd's as a whole;
    and
  • Syndicate 1729 and Syndicate 6131 operations are dependent on a small,
    specialized management team and the loss of their services could
    adversely affect the Syndicate's business. The inability to identify,
    hire and retain other highly qualified personnel in the future could
    adversely affect the quality and profitability of Syndicate 1729's or
    Syndicate 6131's business.

Our results may differ materially from those we expect and discuss in
any forward-looking statements. The principal risk factors that may
cause these differences are described in "Item 1A, Risk Factors" in our
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.

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