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ProAssurance Accelerates Reporting of Results for First Quarter 2019

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ProAssurance 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.

CONSOLIDATED INCOME STATEMENT HIGHLIGHTS
    Three Months Ended March 31
($ in thousands, except per share data)

2019

 

2018

 

% Change

Revenues
Gross premiums written* $ 279,826 $ 243,010 15.1 %
Net premiums written $ 245,742 $ 215,132 14.2 %
Net premiums earned $ 208,149 $ 187,159 11.2 %
Net investment income $ 22,818 $ 22,027 3.6 %
Equity in earnings (loss) of unconsolidated subsidiaries $ (810 ) $ 1,640 (149.4 %)
Net realized investment gains (losses) $ 36,623 $ (12,517 ) 392.6 %
Other income (expense)* $ 2,095 $ 2,723 (23.1 %)
Total revenues* $ 268,875 $ 201,032 33.7 %
Expenses
Net losses and loss adjustment expenses $ 159,755 $ 129,786 23.1 %
Underwriting, policy acquisition and operating expenses* $ 61,392 $ 57,360 7.0 %
Total expenses* $ 230,264 $ 192,598 19.6 %
Income tax expense (benefit) $ 6,961 $ (3,422 ) 303.4 %
Net income (loss) $ 31,650 $ 11,856 167.0 %
Non-GAAP operating income $ 4,163 $ 21,487 (80.6 %)
Weighted average number of common shares outstanding
Diluted 53,808 53,682 0.2 %
Earnings per share
Net income (loss) per diluted share $ 0.59 $ 0.22 168.2 %
Non-GAAP operating income per diluted share $ 0.08 $ 0.40 (80.0 %)
 
* Consolidated totals include inter-segment eliminations. The
eliminations affect individual line items only and have no effect on
net income (loss). See Note 13 of the of the Notes to Condensed
Consolidated Financial Statements in the March 31, 2019 Form 10-Q
for amounts by line item, which is scheduled to be filed by May 2,
2019.
 
 
CONSOLIDATED KEY RATIOS
          Three Months Ended March 31

2019

   

2018

Current accident year net loss ratio 81.7 % 81.5 %
Effect of prior accident years' reserve development (4.9 %) (12.2 %)
Net loss ratio 76.8 % 69.3 %
Expense ratio 29.5 % 30.6 %
Combined ratio 106.3 % 99.9 %
Operating ratio 95.3 % 88.1 %
Return on equity* 8.2 % 3.0 %
 
* Quarterly computations of ROE are annualized
 
 

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

  • Consolidated gross premiums written were $280 million, an increase of
    $36.8 million, or 15.1% over the first quarter of 2018. In our Lloyd's
    Syndicates segment, gross premiums written were $23.6 million, an
    increase of $11.2 million or 90.8%, quarter-over-quarter. Gross
    premiums written in our Specialty P&C segment were $166.4 million, an
    increase of $25.9 million or 18.4% quarter-over-quarter. In our
    Segregated Portfolio Cell Reinsurance segment, gross premiums written
    were $36.4 million, an increase of $4.0 million or 12.4% over 2018's
    first quarter. Gross premiums written in our Workers' Compensation
    Insurance segment were $89.4 million, a decline of $2.3 million or
    2.5% from last year's first quarter.
  • Net premiums earned increased $21.0 million, or 11.2%
    quarter-over-quarter. Net premiums earned in our Specialty P&C segment
    were $124.1 million, an increase of 7.9% over the first quarter of
    2018. In our Workers' Compensation Insurance segment, net earned
    premiums were $45.9 million, up 7.6% compared to the year-ago quarter.
    In our Segregated Portfolio Cell Reinsurance segment, net premiums
    earned were $19.5 million, a 14.5% quarter-over-quarter increase. Net
    premiums earned in our Lloyd's Syndicates segment were $18.6 million,
    a quarter-over-quarter increase of 49.4%.
  • Our coordinated sales & marketing programs produced $8.5 million of
    business in the quarter and broker submissions increased 15.6% over
    the first quarter of 2018.
  • Our consolidated current accident year net loss ratio was 81.7%,
    essentially unchanged quarter-over-quarter.
  • Net favorable prior year reserve development in the first quarter of
    2019 was $10.3 million, compared to $22.8 million in the prior year
    quarter.
  • The consolidated underwriting expense ratio was 29.5%, just over a one
    point decline, quarter-over-quarter, due to the increase in net
    premiums earned which outpaced the increase in consolidated DPAC
    amortization.
  • Net realized investment gains were $36.6 million in the quarter,
    primarily reflecting mark-to-market adjustments in our equity trading
    portfolio. This compares to net realized investment losses of $12.5
    million in the first quarter of 2018.
  • Our consolidated net investment result was $22.0 million, a decline of
    $1.7 million compared to the first quarter of 2018. The decline in our
    consolidated net investment result was primarily due to a $2.5 million
    quarter-over-quarter decline in earnings from our unconsolidated
    subsidiaries, partially offset by an increase of approximately
    $800,000 in net investment income primarily attributable to higher
    earnings from our short-term investment holdings due to higher
    interest rates.
  • We recorded tax expense of $7.0 million in the quarter, compared to a
    tax benefit of $3.4 million in the first quarter of 2018. This was
    primarily driven by an increase in deferred taxes on the unrealized
    gains on our trading portfolio in the quarter.

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 March 31
(In thousands, except per share data)

2019

 

2018

Net income (loss) $ 31,650 $ 11,856
Items excluded in the calculation of Non-GAAP operating income:
Net realized investment (gains) losses (36,623 ) 12,517
Net realized gains (losses) attributable to SPCs which no
profit/loss is retained (1)
1,741 (410 )
Guaranty fund assessments (recoupments) 88     84  
Pre-tax effect of exclusions (34,794 ) 12,191
Tax effect, 21% (2) 7,307     (2,560 )
After-tax effect of exclusions (27,487 )   9,631  
Non-GAAP operating income $ 4,163     $ 21,487  
Per diluted common share:
Net income (loss) $ 0.59 $ 0.22
Effect of exclusions (0.51 )   0.18  
Non-GAAP operating income per diluted common share $ 0.08     $ 0.40  
 
(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 21% rate is the annual expected statutory tax
rate associated with the taxable or tax deductible items listed
above. Excluding net realized investment (gains) losses, which are
discrete items and are tax effected at the annual expected statutory
tax rate in the period they are included in net income, our
effective tax rate for the respective periods 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 March 31, 2019 Form 10-Q expected to be filed by May 2, 2019.
 
 
BALANCE SHEET HIGHLIGHTS
(In thousands, except per share data)              

March 31, 2019

   

December 31, 2018

Total investments $ 3,414,614 $ 3,349,382
Total assets $ 4,717,108 $ 4,600,726
Total liabilities $ 3,155,212 $ 3,077,724
Common shares (par value $0.01) $ 631 $ 630
Retained earnings $ 1,586,393 $ 1,571,847
Treasury shares $ (417,277 ) $ (417,277 )
Shareholders' equity $ 1,561,896 $ 1,523,002
Book value per share $ 29.06 $ 28.39
 
 

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.

SPECIALTY P&C SEGMENT RESULTS

            Three Months Ended March 31
($ in thousands)

2019

   

2018

   

% Change

Gross premiums written $ 166,431 $ 140,520 18.4 %
Net premiums written $ 140,657 $ 118,848 18.4 %
 
Net premiums earned $ 124,067 $ 114,947 7.9 %
Other income 1,209       1,256   (3.7 %)
Total revenues 125,276 116,203 7.8 %
 
Net losses and loss adjustment expenses (107,658 ) (83,522 ) (28.9 %)
Underwriting, policy acquisition and operating expenses (29,615 )     (27,980 ) (5.8 %)
Total expenses (137,273 )     (111,502 ) (23.1 %)
Segment operating results $ (11,997 )     $ 4,701   (355.2 %)
 
SPECIALTY P&C SEGMENT KEY RATIOS
            Three Months Ended March 31

2019

   

2018

Current accident year net loss ratio 93.1 % 90.6 %
Effect of prior accident years' reserve development (6.3 %) (17.9 %)
Net loss ratio 86.8 % 72.7 %
Underwriting expense ratio 23.9 % 24.3 %
Combined ratio 110.7 % 97.0 %
 
 

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.

WORKERS' COMPENSATION INSURANCE SEGMENT RESULTS

            Three Months Ended March 31
($ in thousands)

2019

   

2018

   

% Change

Gross premiums written $ 89,354 $ 91,667 (2.5 %)
Net premiums written $ 51,407 $ 55,481 (7.3 %)
 
Net premiums earned $ 45,939 $ 42,700 7.6 %
Other income 729       851   (14.3 %)
Total revenues 46,668 43,551 7.2 %
 
Net losses and loss adjustment expenses (30,443 ) (27,825 ) (9.4 %)
Underwriting, policy acquisition and operating expenses (14,192 )     (13,030 ) (8.9 %)
Total expenses (44,635 )     (40,855 ) (9.3 %)
Segment operating results $ 2,033       $ 2,696   (24.6 %)
 
WORKERS' COMPENSATION INSURANCE SEGMENT KEY RATIOS
            Three Months Ended March 31

2019

   

2018

Current accident year net loss ratio 68.2 % 66.1 %
Effect of prior accident years' reserve development (1.9 %) (0.9 %)
Net loss ratio 66.3 % 65.2 %
Underwriting expense ratio 30.9 % 30.5 %
Combined ratio 97.2 % 95.7 %
 
 

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.

SEGREGATED PORTFOLIO CELL REINSURANCE SEGMENT RESULTS

      Three Months Ended March 31
($ in thousands)

2019

   

2018

   

% Change

Gross premiums written $ 36,365 $ 32,340 12.4 %
Net premiums written $ 32,682 $ 28,962 12.8 %
 
Net premiums earned $ 19,502 $ 17,036 14.5 %
Net investment income 448 356 25.8 %
Net realized gains (losses) 2,141 (473 ) 552.6 %
Other income 87 30 190.0 %
Net losses and loss adjustment expenses (10,745 ) (9,953 ) (8.0 %)
Underwriting, policy acquisition and operating expenses (5,235 )     (5,114 ) (2.4 %)
SPC net operating results 6,198 1,882 229.3 %
Segregated portfolio cell dividend (expense) income (1) (4,787 )     (1,747 ) (174.0 %)
Segment operating results (2) $ 1,411       $ 135   945.2 %
 
(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 March 31

2019

   

2018

Current accident year net loss ratio 66.7 % 67.2 %
Effect of prior accident years' reserve development (11.6 %) (8.8 %)
Net loss ratio 55.1 % 58.4 %
Underwriting expense ratio 26.8 % 30.0 %
Combined ratio 81.9 % 88.4 %
 
 

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.

LLOYD'S SYNDICATES SEGMENT RESULTS

            Three Months Ended March 31
($ in thousands)

2019

   

2018

   

% Change

Gross premiums written $ 23,588 $ 12,361 90.8 %
Net premiums written $ 20,996 $ 11,841 77.3 %
 
Net premiums earned $ 18,641 $ 12,476 49.4 %
Net investment income 1,006 751 34.0 %
Other gains (losses) 32       277   (88.4 %)
Total revenues $ 19,679 $ 13,504 45.7 %
 
Net losses and loss adjustment expenses (10,909 ) (8,486 ) (28.6 %)
Underwriting, policy acquisition and operating expenses (8,469 )     (7,246 ) (16.9 %)
Total expenses (19,378 ) (15,732 ) (23.2 %)
Total income tax expense (benefit) (304 )     (6 ) (4,966.7 %)
Segment operating results $ (3 )     $ (2,234 ) 99.9 %
 
LLOYD'S SYNDICATES SEGMENT KEY RATIOS
            Three Months Ended March 31

2019

   

2018

Current accident year net loss ratio 54.5 % 70.7 %
Effect of prior accident years' reserve development 4.0 % (2.7 %)
Net loss ratio 58.5 % 68.0 %
Underwriting expense ratio 45.4 % 58.1 %
 
 

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.

CORPORATE SEGMENT RESULTS

            Three Months Ended March 31
($ in thousands)

2019

   

2018

   

% Change

Net investment income $ 21,364 $ 20,920 2.1 %
Equity in earnings (loss) of unconsolidated subsidiaries $ (810 ) $ 1,640 (149.4 %)
Net realized investment gains (losses) $ 34,304 $ (11,990 ) 386.1 %
Total revenues $ 55,763 $ 11,513 384.3 %
Operating expenses $ 4,570 $ 4,678 (2.3 %)
Interest expense $ 4,330 $ 3,705 16.9 %
Income tax expense (benefit) $ 6,657 $ (3,428 ) 294.2 %
Segment operating results $ 40,206 $ 6,558 513.1 %
 
 

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:

  • 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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