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Text: On our call today, we have Ned Rand, President and CEO; Dana Hendricks, Chief Financial Officer; Mike Boguski, President of our Specialty Property and Casualty lines; and Kevin Shook, President of our Workers' Compensation Insurance operations.
Ned, the floor is yours.
We closed the NORCAL transaction on May five, roughly halfway through the reporting period, and the financial teams of our newly combined organization did a great job getting everything ready to report our results.
We've made excellent early progress on our integration plan and already NORCAL is proving its value as we expand our operating model to a truly national platform.
As I said in the release yesterday, closing the NORCAL transaction was a transformative event for ProAssurance and the combined companies are off to a strong beginning.
As you will hear from both Mike and Kevin, the strategic changes we've made over the past two years are beginning to show through, and I'm very encouraged by the results of the second quarter.
We remain in an uncertain environment due to the continuing effects that pandemic has had on our healthcare and civil court systems and as workplaces navigate the return to work to an office environment.
In spite of these uncertainties, I am confident we have the right team in place, especially as we add in our colleagues from NORCAL to succeed as we move forward.
The NORCAL acquisition was, of course, the most impactful item in the quarter, and we'll get to that in a moment.
But first, I think it's important to answer the question of, excluding the noise from the transaction, how did we do this quarter?
In short, it was a good quarter.
We expected significant improvement year-over-year just by nature of the adverse events booked in the year ago period, and we saw that improvement and then some.
Our Specialty P&C business continues to show improvement with strong rate gains, solid retention and top line growth.
Lloyd's turned in an excellent result at a little over $4 million.
Our Workers' Compensation Insurance and Segregated Portfolio Sale Reinsurance businesses both produced underwriting income in a very challenging marketplace, with their expense ratios benefiting from the restructuring completed last year.
Finally, we saw excellent returns from our investments in LPs and LLCs, driven by the market increase in the first quarter.
Recall, those investments are typically reported on a quarter lag.
All told, a solid result as we continue to execute strategies that drive steady incremental improvement.
Now for the results for the quarter.
We will be filing our 10-Q on or before Monday, which will provide a great look into exactly how NORCAL contributed to the quarter and the effects of transaction accounting.
I'll address certain of those impacts throughout my remarks today.
At the consolidated level, we reported net income of $92.1 million in the second quarter or $1.70 per diluted share, driven by a gain on bargain purchase of $74.4 million related to the NORCAL acquisition, partially offset by $20.3 million of pre-tax transaction-related costs.
Because these one-time items are unique and unusual in nature and non-indicative of regular operations, they are excluded from operating earnings and segment reporting.
We reported non-GAAP operating income of $26.6 million or $0.49 per share, again, driven by strong performance from our LP and LLC investment portfolio and meaningful year-over-year improvement in our underwriting results.
All segments contributed to our profitability this quarter.
Consolidated gross premiums written increased nearly 13% year-over-year, driven primarily by the addition of NORCAL's premium to our Specialty P&C results, as well as $14 million of new business written in the quarter from our core operating segments.
Our consolidated current accident year net loss ratio was 81.9%, a year-over-year improvement of 28.1 points, primarily attributable to the adverse effect of losses associated with significant events in the second quarter of last year in Specialty P&C.
More importantly, that improvement also reflects the continued benefits of our reunderwriting efforts.
We recognized net favorable development of $13.8 million in the current quarter, driven largely by the Specialty P&C segment, which included $2.1 million related to the amortization of the purchase accounting fair value adjustment on NORCAL's assumed reserve.
Our consolidated underwriting expense ratio increased in the quarter to 32.3%, driven by the pre-tax transaction costs associated with our acquisition of NORCAL.
Excluding those transaction costs, the expense ratio in the quarter was 23.8%, reflecting the continued impact of restructuring efforts, but also included the impact of certain purchase accounting adjustments.
As a part of purchase accounting, we wrote off NORCAL's capitalized DPAC asset on the acquisition date.
As a result, DPAC amortization expense for NORCAL in the second quarter was only $900,000 and represented expenses capitalized and subsequently amortized since the acquisition.
This amount is approximately $6.3 million lower than would be considered normal.
In our Form 10-Q, we will provide a detailed breakout of the various items affecting our expense ratio in the quarter to help our readers arrive at a run rate.
From an investment perspective, our consolidated net investment result increased year-over-year to $29.3 million, driven by $11.9 million of income from our unconsolidated subsidiaries, which were driven by the results of our investments in LPs and LLCs, as previously discussed.
Consolidated net investment income was $17.4 million in the quarter, down slightly from the year ago period, primarily due to lower yields from our short-term investments in corporate debt securities, due to the current low interest rate environment.
This decrease was partially offset by $2.7 million of net investment income from additional invested assets that came over from the NORCAL acquisition.
They've done a great job.
Mike, congratulations on a significant improvement in Specialty P&C this quarter.
What can you tell us about the results?
I want to start by extending congratulations to the Specialty P&C team for the continuing turnaround of our operating results, over the past two years to achieve an operating profit, the close of the transaction with NORCAL and the great start to integration of the companies.
We are proud of all that has been accomplished and look forward to a bright future with our new team members and business partners at NORCAL.
The significant year-over-year improvement in the segment's results was driven by several components.
Primarily, the comprehensive business strategy executed since 2019 to address our operating and underwriting results and the resulting reunderwriting and rate strengthening efforts in our legacy HCPL business.
We recorded improvement in operating metrics for all lines of business in the segment, including higher premium retention, continued rate gains, a reduced expense ratio and a lower current accident year loss ratio.
Most material to the improved results for the quarter was the impact of certain adverse events recorded in the second quarter of 2020.
However, we recorded improvement in the current accident year net loss ratio, even excluding those adverse events, a direct result of the continued benefits of our HCPL reunderwriting efforts.
Also contributing to profitability in the quarter was $10.5 million of net favorable reserve development spread relatively evenly across lines of business within the segment.
Just a brief aside before we move on from the loss ratio.
The reduction in HCPL claims frequency observed in 2020 has continued into 2021 thus far, as courts and jury trials in most places have yet to return to normal schedules.
We remain cautious in recognizing these favorable frequency trends in our current accident year loss pick due to the long-tailed nature of our lines of business and the high degree of continuing uncertainty that COVID-19 has introduced into operating conditions.
We continue to carefully monitor pandemic related claim activity and no adjustments have been made to the COVID-19 IBNR reserves booked in the second quarter of 2020.
Moving on to our top line.
Gross premiums written during the second quarter increased by over 30% or approximately $35 million.
We benefited from $22.4 million delivered by the NORCAL team and growth in our legacy business of 6.9%.
We achieved this growth with focus on underwriting discipline and we will continue to manage the segment's top line as necessary to achieve our long-term profit objectives.
Premium retention for the segment was 86% in the quarter, driven by retention rates that either improved or remained flat in all lines of business.
Furthermore, we achieved average renewal price increases of 10% in the segment this quarter, driven by 11% in Standard Physicians and 10% in Specialty Healthcare.
Although not reflected directly in our rates or pricing, we continue to strengthen rate adequacy through adjustments to product structure, terms and conditions.
Our small business unit and medical technology liability business also achieved increased rate gains of 6% and 8%, respectively.
New business written in the quarter totaled $7.2 million, an increase of $2.6 million from the year ago quarter and primarily driven by $3.7 million written in our HCPL specialty business.
The Specialty Property and Casualty segment reported an expense ratio of 17.1% for the first quarter -- for the second quarter, an improvement of 2.8 points from the year ago quarter, driven by significantly higher earned premiums, the impact of transaction accounting and benefits from prior organizational restructuring efforts.
This was partially offset by a slight increase in technology costs.
To conclude, we are pleased with the results of our reunderwriting, restructuring, expense management and operational improvements in our legacy Specialty P&C business over the past two years.
We are extremely excited about the strategic value of the NORCAL transaction and the bright future ahead.
We have made excellent progress on our integration plan during the quarter, and we are well on our way to building our future business model on a national basis with the goal of enhanced and sustainable performance through all economic and insurance cycles.
And congratulations again to you and the team.
Kevin, Workers' Compensation Insurance and the Segregated Portfolio Cell Reinsurance segments had solid results to report as well.
Can you walk us through those?
The Workers' Compensation Insurance segment produced income of $1.1 million and a combined ratio of 99.6% in the second quarter of 2021 compared to 98.7% in 2020.
The increase in the combined ratio year-over-year reflects a higher accident year loss ratio in 2021, partially offset by an improvement in the underwriting expense ratio.
During the quarter, the segment booked $57.8 million of gross premiums written, an increase of 1.1% year-over-year despite negative audit premium.
Renewal price decreases in our traditional book of business were 3% in the second quarter of 2021 and premium renewal retention was 85%.
Traditional new business writings increased by $300,000 to $6.1 million in the quarter.
Audit premium in our traditional book of business decreased $1.3 million year-over-year reflecting the economic conditions associated with the COVID-19 pandemic and its impact on final audits of policyholder payrolls.
The increase in the calendar year loss ratio to 68.3% in 2021 reflects an increase in the current accident year loss ratio, partially offset by prior year favorable development of $1.9 million in 2021 compared to $1.5 million in 2020.
The increase in the full year 2021 accident year loss ratio during the quarter reflects our response to observed higher claim activity as workers return to full employment with the easing of pandemic related restrictions in our operating territories.
The trend in higher claim activity was concentrated in our historically profitable small business unit, most notably in restaurant, hospitality and small construction market segments and was from accounts within our renewal policyholder base.
We booked a current accident year loss ratio of 73% for the second quarter of 2021, which brings the ratio for the six months ended June 30th to 72%.
Despite the increase in claim activity in our small business unit, overall frequency continues to be below pre-pandemic levels, albeit higher than 2020.
The claims operation closed 15.4% of 2020 and prior claims during the 2021 quarter consistent with second quarter historical trends.
Reported COVID claims continued to decrease during the second quarter of 2021.
Of note is the fact that there are no currently reported COVID claims with accident dates in the month of June.
However, there was a slight increase in reported COVID claims during July.
We continue to monitor legislative attempts to broaden workers' compensation coverage in our underwriting territories but observed minimal movement during the second quarter.
The 2021 underwriting expense ratio decreased to 31.3%, primarily due to the restructuring initiatives implemented in August of 2020, partially offset by a decrease in net premiums earned.
Other underwriting and operating expenses were $8.3 million in the quarter, a decrease of 7% or approximately $700,000.
The Segregated Portfolio Cell Reinsurance segment produced income of $955,000 and a combined ratio of 84.4% for the second quarter of 2021.
Premium trends in the SPC Re segment were largely consistent with those in the Workers' Compensation Insurance segment.
We renewed all of the captive programs that were available for renewal during the current quarter.
The SPC Re calendar year loss ratio increased from 45.9% in 2020 to 51.9% in 2021.
The 2021 accident year loss ratio was 62.9%, up from 57% in 2020 and reflects both the continuation of intense price competition in the workers' compensation business and the impact of higher claim activity as workers return to employment.
Favorable loss reserve development was $1.8 million in the second quarter of 2021 compared to $1.9 million in 2020.
In all, another solid quarter in a very competitive marketplace.
Ned, can you give us just a quick look at the Lloyd's results before closing comments?
Happy to do so, Ken.
As you know, for the 2021 underwriting year, we reduced our participation in Syndicate 1729 from 29% to 5% and our participation in Syndicate 6131 from 100% to 50%.
The gross premiums written in the segment this quarter reflect that change.
As a result of these reductions, we received a return of capital of $24.5 million.
Despite the reduced participation, results improved meaningly meaningfully from the year ago period to $4.3 million.
Before we get to questions, I want to reiterate how pleased we are to deliver improved results after an exceptionally challenging year.
While we still have much to do in pursuit of our long-term profit objectives, I believe our progress from a year ago speaks for itself.
I look forward to seeing what we can accomplish in the second half of the year.

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proassurance q2 earnings per share $1.70.
q2 earnings per share $1.70.
q2 operating earnings per share $0.49.

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