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Text: On our call today are President and CEO, Ned Rand, Dana Hendricks, our Chief Financial Officer, Mike Boguski, President of our Specialty P&C line, and Kevin Shook, President of our Workers' Compensation and Operations.
Ned, floor is yours.
In the history of the company, I don't think we've ever had so much to talk about on an earnings call.
For over 40 years, ProAssurance and its predecessors have navigated the peaks and valleys of the long-cycle characteristics of our businesses.
The two announcements we made yesterday, our fourth quarter and full-year 2019 results and the NORCAL transaction serve as an example of what we have always believed, it is during the most challenging stages of the long cycle that the greatest opportunities arise.
With that, we'll jump right in.
As we pre-announced on January 22, we had adverse development that came out of our regular year-end review of updated loss data with internal and external actuaries.
This adverse development was largely attributable to increased reserve estimates for a large national healthcare account and to a lesser extent in our broader excess and surplus book of business.
Given this reserve strengthening, we reported a net loss of $59.4 million for the quarter or a loss of $1.10 per share, and net income of $1 million for the year or net income of $0.02 per share.
Our consolidated operating loss was $68.3 million for the quarter or a loss of $1.27 per share.
For the year, we reported a consolidated operating loss of $43.8 million or a loss of $0.81 per share.
For the quarter, our consolidated current accident year net loss ratio increased by 20.4 percentage points to 109% and the full-year ratio was 90.3%, an increase of 6.6 percentage points.
Excluding the reserve adjustments related to the large national healthcare account, these ratios were 93.5% and 86.4% respectively.
We experienced unfavorable development in our prior accident year reserves of $30.4 million for the quarter, which drove the calendar year net loss ratio to 123.2%.
However, for the full year, we recorded favorable development of $11.8 million and our calendar year net loss ratio was 89%.
Our underwriting expense ratio was 31.5% for the fourth quarter and 29.9% for the year.
This brings us to a combined ratio of 154.7% for the quarter and 118.9% for the year.
In our Corporate segment, we reported net investment income of $21.6 million in the quarter and $87.1 million for the full year.
Due to the reserve adjustments recorded in the fourth quarter, we recognized a consolidated pre-tax loss for the year, which resulted in the recognition of $21.9 million tax benefit from tax credits, which was the primary driver of the total tax benefit of $29.8 million for both the full year, as well as the current quarter.
The Specialty P&C segment recorded year-end 2019 operating loss of $147.9 million.
This result was driven by a reserve strengthening in the fourth quarter of 2019 as referenced by Dana in her comments related to the large national account, and excess and surplus lines business.
I want to be clear that the Specialty P&C segment has favorable loss reserve development of $45.8 million exclusive of the large national account during 2019.
In 2019, the new leadership team executed a comprehensive business strategy in response to emerging emerging loss trends and changing conditions in healthcare professional liability.
This includes organizational structure enhancements, consolidation of operations, recruitment of additional talent in healthcare professional liability specialty underwriting, tightening of underwriting criteria terms and conditions, as well as price strengthening.
In early 2020, we introduced the field organization of the future for our healthcare professional liability business.
We established four operating regions with regional hubs and reduced the number of offices from 20 to 10 across our operating territories.
We believe the strategic business decisions that have been made to date will improve the operating efficiency, pro forma expense structure, and value-added service to distribution partners and customers.
We expect to see the benefits of these actions in late 2020 and beyond.
We are encouraged by our early progress, and we'll continue to execute the strategy throughout 2020 to position us well for the future.
I will now update you on year-end 2019 results starting with the top line trends.
Gross premiums written were essentially unchanged as compared to 2018, finishing 2019 at $577.7 million.
The increase to gross premiums written in our physicians business is driven by solid production results and renewal rate increases.
This is offset to some degree by the reunderwriting efforts in our healthcare, facilities and certain sectors of the excess and surplus lines business.
Gross premiums written for the other lines in Specialty P&C were relatively flat year-over-year.
Overall, we observed firming of the market in healthcare professional liability.
However, this was offset by the excess capital in the space and pockets of intense competition, particularly in the physicians business.
Premium retention for the segment was 86% for the year, 3 percentage points lower than the prior year, reflecting our focus on underwriting discipline and our willingness to walk away from business that does not fit our risk appetite or longer-term profit objectives.
We were aggressive in reunderwriting our healthcare facilities in excess and surplus lines business.
As a result, premium retention in our healthcare facilities business was 62% for the year and 47% for the quarter.
Exclusive of the facilities, business premium retention was 88% in each of our physicians, medical technology and legal liability businesses for the year.
A strong result in a market that remains competitive.
We are also encouraged by renewal rate increases of 14% in our healthcare facilities and 6% in physicians, our largest portfolio business.
In our large account business, we achieved significant improvement in terms, conditions and product structure, improving overall rate adequacy in that segment.
We wrote $42.6 million of new business in 2019 compared to $47.9 million in 2018, reflecting our disciplined underwriting evaluation of the business presented to us.
Our physician new business was a driver at $25.1 million of writings during 2019.
The increase in the current accident year loss ratio to 105.5% was due to the previously mentioned underwriting loss for a large national account, and to a lesser degree, adverse loss trends in our excess and surplus lines of business.
For 2019, the prior-year adverse loss development related to the large national account was $51.5 million, which was entirely responsible for the $5.7 million of adverse development recorded in the segment for 2019.
As previously stated in my opening comments, excluding the impact of the large national account, loss reserves developed favorably by $45.8 million.
On a very bright note, we're extremely pleased with the exceptional underwriting results in our life science business during 2019.
We are excited to announce the NORCAL Group acquisition and look forward to the combination of the companies.
This is a transformative strategic transaction for both organizations and provides us with geographic diversification, a true national platform, significant penetration in the physician market, best-in-class talent and high quality distribution partners.
We look forward to working with the exceptional employees, distribution and strategic business partners of both companies to create a premier organization to serve the healthcare market, ultimately creating long-term value for our shareholders.
Please keep in mind, the transaction is subject to regulatory approvals and other required closing conditions.
Kevin, will you please lead us through the results of our Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance segments?
The Workers' Compensation Insurance segment produced operating income of $12.5 million and a combined ratio of 94.7% for the 2019 year in a highly competitive marketplace.
During 2019, gross premiums written, which includes traditional and alternative market business ceded to the SPC Reinsurance segment, decreased 5% to $278.4 million, compared to $293.2 million for 2018.
The consistent application of our individual account underwriting strategy, which carefully assesses the underlying risks of each policy, resulted in this production decrease in 2019.
Correspondingly, new business writings for 2019 were $30.8 million, compared to $51.5 million in 2018.
However, it's important to note that 2018 includes $11.7 million of new business related to the Great Falls renewal rights transaction.
Audit premium was $5.7 million in 2019, compared to $5.9 million in 2018.
Renewal price decreases were 4% and premium renewal retention was 83% for the 2019 year.
We continue to monitor closely historical loss ratio results on the business we renewed, versus lost or non-renewed to determine we are retaining profitable accounts that value the Eastern service model.
The increase in the calendar year loss ratio reflected an increase in the current accident year loss ratio from 68% in 2018 to 68.4% in 2019.
Net favorable reserve development was $7.8 million for the year.
The 2019 net favorable loss reserve development reflected better-than-expected claim results, primarily related to accident years 2015 and 2016.
The claims operation enclosed 65.7% of 2018 and prior claims during 2019, the best claim closing result in Eastern's history and indicative of the short-tail strategy embedded in our Workers' Compensation business model.
The increase in the current accident year loss ratio reflects the impact of renewal rate decreases and the effect of updated contract terms to our reinsurance treaty renewed in the second quarter of 2019, which included the addition of an annual aggregate deductible, substantially offset by the previously mentioned favorable claim trends in 2019.
The full-year 2019 underwriting expense ratio increased to 30.4%, compared to 29.9% in 2018, primarily due to an increase in policy acquisition and employee benefit-related costs.
The Segregated Portfolio Cell Reinsurance segment operating result was $3.5 million for the 2019 year, which represents our share of the net operating profit of the Segregated Portfolio Cell captive programs, in which we participate to varying degrees.
Gross written premium in the SPC Reinsurance segment increased to $87.1 million for 2019, from $85.1 million in 2018.
This includes premium renewal retention in 2019 of 91%, new business writings of $3.8 million, and audit premium of $2 million, offset slightly by renewal rate decreases of 5%.
The 2019 calendar and accident year loss ratios were impacted by $10 million reserve recorded in the second quarter of 2019 for an errors and omissions liability policy assumed by one of Eastern Re's Segregated Portfolio Cells.
As a reminder, the recording of this reserve increased net loss and loss adjustment expenses, but had no effect on our operating results as we have no participation or ownership interest in this particular cell.
Year-over-year, the SPC Reinsurance 2019 calendar year loss ratio increased to 54.4% excluding the impact of the $10 million E&O reserve driven by an increase in the current accident year loss ratio, partially offset by net favorable loss reserve development of $10.1 million in 2019, compared to $9.0 million in 2018.
The favorable development reflects better than expected claim results, primarily related to accident years 2015 through 2018.
The increase in the current accident year loss ratio in 2019 is due to an increase in severity-related claim activity.
Underwriting expenses in the SPC Reinsurance segment represents the ceding commission paid to the Workers' Compensation Insurance and Specialty P&C segments for the services they provide to the segregated portfolio cells.
Ned, will you please give us a quick update on Lloyd's before we get to the NORCAL transaction?
As you know, for the past year, we've been looking at ways to reduce our exposure at Lloyd's.
And as a result, we have decreased our participation in Syndicate 1729's operating results for the 2020 underwriting year from 61% to 29%.
Due to the one quarter lag, we'll begin to see the effect of this change come through during our second quarter 2020 results.
Duncan Dale and his team have build an excellent operation at Lloyd's as evidenced by the fact that he was able to secure additional capital providers for the Syndicate at a time when others are struggling to do so.
We look forward to continuing our relationship with Dale Underwriting Partners under the new arrangement, which we believe is more in line with our operating goals for the 2020-year.
I'm going to turn to talk a little bit about the NORCAL transaction, but before I do, I'm going to get Dana to give us a little additional financial information.
Although in NORCAL will not follow its year-end 2019 annual statutory statements for its group of companies with the California Department of Insurance until March 1, it maybe helpful for you to know that when they do, we expect it will show consolidated statutory surplus of approximately $575 million as of December 31, 2019.
That will reflect reserve strengthening for both current and prior accident years.
Back to you, Ned.
We've always been selective in our approach to M&A activity, growing where and more importantly when it makes sense to do so.
The increasing complexity of modern medicine, a shifting healthcare professional liability loss environment, and the growing competitive importance of scope and scale in our industry make it an ideal time for two companies with decades of specialized experience to align their futures.
We expect this transaction to deliver multiple strategic and financial benefits, including enhancements to our scale and capabilities, expanded access to the high quality California physician market, and an expected $18 million in pre-tax synergies.
These synergies will consist of corporate and back-office expenses, staffing, and other cost areas such as technology and real estate, along with consolidation of reinsurance and investments.
We anticipate the transaction will be accretive to earnings in the second year of ownership, and over the long term, generate highly attractive returns for shareholders.
As Mike said, bringing the NORCAL Group into the ProAssurance family of companies represents a transformational strategic opportunity.
I know there is more to do, but the work that's been done to get us to this point is truly outstanding.
With this transaction, ProAssurance gains a truly national platform in healthcare professional liability with operations in all 50 states.
It doubles the size of our physician book of business, opening the door to the California market and simultaneously makes ProAssurance the third largest writer of healthcare professional liability insurance in the country.
As always, our due diligence process on NORCAL's loss reserves, in particular, has been very thorough with both internal and external experts contributing to the project for well over a year.
We believe the transaction valuation at this level is attractive.
We expect the transaction to close by the end of 2020, but we have a lot of work ahead of us to ensure a smooth transition.
It was during the last true hardening of the market under conditions similar to those we perceive today, that the merger between for ProNational and Medical Assurance created ProAssurance.
I said before that this cycle feels different, and we should not expect the markets to harden as quickly, nor perhaps as dramatically, as in the early 2000s.
While we continue to navigate the challenges of an evolving market, we are confident that our strategy is the right one, and we're excited for the next stage of ProAssurance's journey.

user
compname reports qtrly loss per share $1.10.
qtrly loss per share $1.10.
qtrly adjusted loss per share $1.27.
results for 2019 were not acceptable.

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