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Text: As a precautionary measure, and as a part of our ongoing pandemic plan, the participants in our call today are joining us remotely from their respective offices.
We have Ned Rand, President and CEO; Dana Hendricks, Chief Financial Officer; Mike Boguski, President of our Specialty Property & Casualty lines; and Kevin Shook, President of our Workers' Compensation Insurance Operations.
Ned, will you lead us off?
It's hard to believe it's been a full quarter since we started meeting this way with each of us on our own offices and harder still to believe that it might not be the last time we do so.
While the COVID-19 pandemic continues to shape everything from how we interact with each other on a daily basis to the global economy, it absolutely does not impair our mission to protect others.
If anything, the pandemic reinforces our resolve to protect our customers, there's [Phonetic] truly brave individuals who work tirelessly to protect us all in turn.
The results in the second quarter were affected by a few significant items that we will discuss shortly.
However, as this conference call marks the first anniversary of my tenure as CEO and installation of the executive leadership team that we formed, I want to recognize the accomplishments the team has spearheaded in the past year.
When Mike Boguski moved over from Eastern to lead the Specialty Property & Casualty, I asked him to employ his exceptional operational skills to foster a results-oriented culture of accountability.
He has delivered as expected instituting a comprehensive review of the Specialty Property & Casualty segment and undertaking a full reunderwriting of our Specialty healthcare book of business.
At Eastern, Kevin Shook and his team have led the company constantly and profitably through one of the most challenging periods in Workers' Compensation Insurance history, facing intense competition, and with the onset of the COVID-19 virus and subsequent shuttering of the national workforce, unprecedented uncertainty.
Our rural underwriting strategy and efficient claims handling have brought success in the market that constantly tests its participating writers.
Dana Hendricks led the treasury, accounting and IT teams through the implementation of a new general ledger and accounts payable solution, which reduced reliance on manual processes, implemented a common chartered accounts across the Company's four accounting locations, and improved overall system performance.
This was an important step in furthering our goal of becoming a more efficient and effective organization, further unifying the ProAssurance family of companies.
Our human resource team, led by Noreen Dishart, worked tirelessly to shape and execute the remote work plan that allowed 95% of our employees to work from home.
Almost immediately, she then turned around and began putting together the Return to Office plan.
The key considerations of both plans were ensuring we are flexible to accommodate the varying working needs of our employees while remaining cohesive to serve our customers, all the while making sure ProAssurance continues to be a great place to work.
Amid all of these efforts, The NORCAL transaction was being finalized during the last half of 2019, announced in Q1 of 2020, and today continues to proceed through the required state and federal regulatory approvals.
Perhaps more than any other initiative, this acquisition represents the combined efforts of the executive leadership team and those of the whole Company.
Even though segments or departments without a direct hand in the transaction assist in the effort through their contributions to the capital position of the Company or their support of critical functions, without which there could be no deal at all.
We look forward to working with the exceptional people at NORCAL, adding profitable business in attractive territories and achieving strategic gains in scope and scale that are ever more important as the healthcare professional liability market continues to evolve.
All that to say, it has been a very busy year in which the executive team and each member of the Company has much to be proud of.
I am tremendously grateful for the opportunity and experience of serving them, and I look forward with excitement and enthusiasm to the next year and those that follow.
For the second quarter, we reported a net loss of $18.1 million or a loss of $0.34 per share and an operating loss of $32.4 million or $0.60 per share.
As Ned mentioned and as we described in yesterday's release, there are two items of particular note that affected our second quarter results.
Those will be discussed in the segment's discussions momentarily.
Similar to last quarter, the COVID-19 pandemic and its influence on our investments featured prominently in the quarter's results.
So I'd like to provide some expanded detail for each component.
The biggest impact came from higher losses from our unconsolidated subsidiaries.
We invest in various LPs and LLCs and the results of those investments are typically reported on a one quarter lag.
Accordingly, the $18.6 million loss in the current quarter from our LPs and LLCs is a result of the impact of the disruption in global financial markets during the first quarter due to COVID-19.
We expect a recovery in value of those investments in the third quarter, comparable to the recovery in the broader market this past quarter, which leads us to a brighter note.
We've recorded consolidated net realized investment gains of $20 million in the second quarter.
This was driven by increases in the fair value of our equity portfolio and convertible securities as financial markets began to stabilize following the initial shock of the pandemic, representing a recovery in fair value of approximately 40% since the first quarter.
Lastly, consolidated net investment income decreased quarter-over-quarter, primarily attributable to a lower allocation to equity securities and partial reinvestment in fixed maturities, coupled with lower yields on our short-term investments due to the recent aggressive action taken by the Federal Reserve to reduce interest rates.
Given the uncertainty presented by the pandemic, we allowed cash to build to ensure support of business operations and our customers accordingly.
We're being patient and evaluating investment opportunities and the economy in general to determine how best to allocate capital.
Excluding the impacts of these items, the consolidated current accident year net loss ratio decreased 1.5 percentage points, driven by our Specialty Property & Casualty and Lloyd's Syndicates segment, partially offset by higher current accident year net loss ratio in our Workers' Compensation Insurance segment.
We've recognized $17.1 million in net favorable prior accident year development, stemming from all of our segments other than the Lloyd's segment.
Mike and Kevin will address this more specifically in their remarks later as a part of the segment discussion.
Our consolidated underwriting expense ratio was 28.3% in the second quarter, a decrease of 1.7 percentage points from the year ago period, driven by the effect of the tail premium earned associated with the large national healthcare account.
Excluding that earned tail premium, our expense ratio was relatively flat quarter-over-quarter as the incremental improvements we have made in becoming a more efficient and effective organization over the past year, along with the expense savings related to COVID-19, have mitigated the upward pressure on our expense ratio due to the lower earned premium, as we continued to reunderwrite our Specialty book.
This leads us to a combined ratio of 130.1% for the second quarter.
In all, the financial market fluctuations associated with the pandemic and the effects of the large national healthcare account make it difficult to see the incremental improvements we are achieving in our underlying businesses.
But rest assured, we are making progress.
The Specialty Property & Casualty segment recorded a second quarter loss of $56.6 million, primarily due to a tail policy issued to a large national healthcare account.
We recognized what we assume will be a full limits loss for this tail policy, which resulted in a $45.7 million net underwriting loss in the quarter.
The establishment of a $10 million reserve related to COVID-19 also contributed to the operating loss, which I'll expand upon shortly.
Gross premiums written were $107.1 million, a decrease of 16.3% quarter-over-quarter.
The lower topline revenue reflects our strategy to strengthen rate levels in our Standard Physician business, execution on state strategy initiatives, recognition of pandemic-related premium credits, and continued reunderwriting efforts in our Specialty business, which includes national accounts, excess and surplus lines, hospitals, and healthcare facilities.
The Specialty reunderwriting efforts began in the third quarter of 2019 followed by the new executive hires in our Healthcare Professional Liability underwriting operation during the previous quarter.
We are pleased with our progress to date.
The first year reunderwriting in our Specialty business will be completed by the end of the third quarter of 2020.
We expect to see the benefits of this effort continue in future quarters.
We continue to focus on underwriting discipline and achievement of our long-term profit objectives, shrinking our topline, if necessary, to improve our bottom line.
In relation to these strategic underwriting efforts, premium retention in the segment was 71% for the quarter, primarily driven by a 29% retention in our Specialty lines.
The lower Specialty retention was driven by the loss of two large accounts, representing premium writings of $11.8 million, which includes the aforementioned large national account.
In addition, the non-renewal of certain risk profiles within the senior care business had a significant impact on specialty premium retention in the quarter.
Notably, the premium level for this book of business has been reduced by 75% in the past year.
While this reduction lower premium retention in the segment, it also reduced our exposure to the claim activity associated with the pandemic in the senior care space.
In our Standard Physicians line, retention was 82%, primarily impacted by our state strategy pricing adjustments in challenging venues and competitive market conditions.
The lower premium retention was offset by renewal premium increases of 20% in Specialty and 12% in Physicians.
In addition to the rate increases in Specialty, we also significantly strengthened rate adequacy through improvement of product structure, terms and conditions.
We are pleased to report strong premium retention results in our Medical Technology Liability business and Small Business Unit, which were 88% and 91% respectively.
New business writings in the Specialty Property & Casualty segment were $4.6 million in the quarter compared to $8.1 million in the second quarter of 2019.
This result reflects careful risk selection, disciplined underwriting evaluation, competitive market conditions, and the impact of slower submission activity due to market disruptions from COVID-19.
New business writings in our Medical Technology business increased to $2 million compared to $1.3 million in the second quarter of 2019.
This was driven by increased demand for pandemic-related products in the medical technology space.
We are proud to support our long-term and new Medical Technology clients that are working to turn the tide against this pandemic.
The current accident year net loss ratio was 137.7% in the second quarter, a 43.7 percent point [Phonetic] increase from the year ago period, primarily attributable to the large national account tail policy written in the quarter.
To a lesser extent, the increase also reflects the $10 million reserve related to COVID-19.
Overall, the accident year net loss ratio reflects recognition of higher claim severity trends and loss volatility in certain states and a higher loss pick within our Specialty business.
Excluding the COVID reserve and the impact of the national health account, the current accident year net loss ratio was 93%.
In the second quarter, we observed significant reductions in our claim frequency as compared to the same quarter in 2019.
This reduction is likely associated with COVID-19.
However, we have remained cautious in recognizing these favorable frequency trends in our current accident year reserves due to the possibility of delays in reporting and uncertainty surrounding the length and severity of the pandemic.
We've recognized net favorable prior year development of $15.4 million compared to $12.4 million in the prior year quarter.
The net favorable development was equally distributed across our Healthcare Professional, podiatric, and Medical Technology Liability businesses.
The Specialty Property & Casualty segment reported an expense ratio of 19.9% in the second quarter, a 3.8-percentage point decrease from the same quarter in 2019.
The decrease was primarily related to the one-time impact of the fully earned large national account tail premium, and to a lesser extent, the decrease in travel expenses and cost savings associated with remote work related to COVID-19.
We anticipate these pandemic-related expense reductions will continue for the remainder of the year.
The reduction in the expense ratio also reflects the incremental improvements during the past year due to organizational structure enhancements, improved operating efficiency, and expense reductions, offset by 0.4 percentage points of one-time charges related to restructuring costs.
We continue to build an operating model that will position us well to be successful throughout the various insurance and economic cycles.
Just a quick update on the NORCAL transaction.
We continue to proceed through the regulatory and integration planning process.
We remain excited about the combination of the companies and continue to work together with the NORCAL team to complete this transaction.
We still aim to close the deal by year-end 2020.
So what details can you give us about the virus' effects to our premiums or our claims?
The pandemic continues to impact our business, including premium and exposure reductions, new business disruption, jury trial delays, and cash flow implications from deferred premiums.
To be more specific, we processed approximately $3.7 million of premium reductions and $5.3 million of premium deferrals during the quarter.
We have collected the vast majority of the outstanding deferrals early in the third quarter.
The revenue reduction related to premium credits was partially offset by the aforementioned increase in new business writings in our Medical Technology business.
There are only three reported COVID-19 claims with limited exposure during the quarter in our Healthcare Professional Liability business.
As previously mentioned, we established a $10 million COVID loss reserve.
This was related to reported incidents in our Senior Care business, primarily from non-renewed accounts.
This reserve represents our best estimate on ultimate claims-related expenses based on current information and reported incidents.
The vast majority of the states in which we write Senior Care business have enacted immunity legislation.
We continue to monitor such legislation on a state-by-state basis and other regulatory trends.
Now, let's turn to Kevin Shook for comments about the results of the Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance segments.
The Workers' Compensation Insurance segment produced operating income of $1 million and a combined ratio of 98.7% for the second quarter of 2020.
During the quarter, the segment booked $57.2 million of gross premiums written, a decrease of 10.9% quarter-over-quarter.
Renewal price decreases were 4% for the quarter and are representative of the continued competitive pressures in our underwriting territories despite COVID-19 and the associated economic conditions.
Premium renewal retention was 87% for the 2020 quarter compared to 81% in 2019, as we continue to see stronger premium retention each month during the pandemic.
New business writings were relatively flat quarter-over-quarter at $6.5 million in 2020 compared to $6.6 million in 2019.
Audit premium for the second quarter of 2020 was approximately $200,000 compared to $1.2 million for 2019.
The calendar year loss ratio was consistent quarter-over-quarter, reflecting an increase in the current accident year loss ratio from 68.2% in 2019 to 70.6% in 2020, offset by higher prior-year net favorable development of $1.5 million in 2020 compared to $1.1 million in 2019.
The increase in the current accident year loss ratio primarily reflects the impact of renewal rate decreases.
Despite a 39% decrease in reported claim frequency during the pandemic, we concluded that it was prudent to continue recording a higher accident year loss ratio, given the many uncertainties surrounding COVID-19.
As part of our normal actuarial process, we will reevaluate the current accident year loss ratio in the third and fourth quarters of 2020, as more information becomes available regarding the pandemic and its potential impacts on our claim results.
Our claims operation closed almost 35% of 2019 and prior claims during 2020, which is consistent with historical claim closing rates.
Our claims professionals remain highly effective while working remotely during the pandemic.
Our short-tailed claim-closing business model results in fewer open claims, which will assist us through the pandemic with a manageable prior year's open claims inventory.
The underwriting expense ratio in the quarter was 31.7%, an increase of slightly less than 1 percentage point from the same quarter in 2019, primarily due to the decrease in net premiums earned, partially offset by a decrease in general expenses.
We continue to carefully monitor all general expenses in anticipation of a decline in premium from reduced payrolls associated with the pandemic.
Moving to the Segregated Portfolio Cell Reinsurance segment, operating income was approximately $1.6 million for the quarter, which represents our share of the net underwriting profit and investment results of the segregated portfolio cell captive programs in which we participate to varying degrees.
Gross written premium and the SPC reinsurance segment decreased to $15 million for 2020 from $17 million in 2019.
This reflects premium renewal retention in 2020 of 87%, new business writings of $741,000, and renewal rate decreases of 5%.
Excluding the effect of the 2019 E&O policy discussed on previous calls, the SPC reinsurance 2020 calendar year loss ratio decreased from 52% in 2019 to 45.9% in 2020, the result of a decrease in the current accident year loss ratio, offset by slightly lower net favorable reserve development of $1.9 million in the quarter.
The decrease in the current accident year loss ratio in 2020 is primarily due to a decrease in large claim activity.
Now, I'm going to provide you with some additional color on the COVID-19 pandemic and its current impact on our Workers' Compensation business.
With respect to premiums, despite proactive communications to do so, we continue to observe minimal activity on the part of policyholders to submit updated payroll information and endorse their premium mid-term.
For mid-March to the end of July, we have endorsed 992 policies mid-term for a total premium reduction of $2.6 million.
We have processed 224 policy cancellations, resulting from business closures, which reduced our premiums by less than $1 million through the end of July.
We continue to offer policy cancellation suspensions and to defer premium payments for customers on a case-by-case basis as substantially all policyholders use installment plans.
To date, we have received less than 250 requests to defer premium installment payments on a policyholder base of more than 13,700.
We believe our rural underwriting strategy and diverse book of business has assisted us in managing the pandemic to date.
We continue to monitor closely COVID demographics in our 19 core states that represent 99% of our in-force book of business.
According to data from the Center for Disease Control, as of the end of July, the combined number of cases reported from the largest county in each of our 19 core states represents approximately 17% of total COVID cases reported, while the number of cases reported from our largest county in these same 19 states is less than 8% of the total.
We believe this is attributable to our rural underwriting focus, whereby the counties in which we primarily operate currently report on average fewer cases than larger metro areas despite our higher premium allocation to the healthcare sector.
The current length and severity of the pandemic and its ultimate impact on premium is difficult to predict.
We continue to expect downward pressure in future quarters on direct and net written premium resulting from changes in payroll estimates.
Regarding claims, since around mid-March through the end of July, we continue to observe a decline in reported claim activity as I previously mentioned.
As businesses reopen and employees return to work, we expect reported claim activity to increase.
In our Workers' Compensation Insurance segment, we have 271 COVID cases reported as of July 31, with an undeveloped gross incurred value of approximately $1.3 million.
Sadly, we had a claim reported to us where the injured worker passed away from COVID.
The total incurred on this claim represents approximately $550,000 of the $1.3 million.
In our Segregated Portfolio Cell Reinsurance segment, which contains more than half of our long-term care exposure, there are 236 COVID cases reported through July, with an undeveloped gross incurred of $400,000.
Of the four Senior Care programs in this segment, we have an ownership interest in just one, and that ownership is 25%.
Similar to the premium side, there was much uncertainty with respect to COVID claims and the ultimate outcome will depend on the length and severity of the pandemic and the result of legislative attempts to broaden coverage for workers' compensation claims.
While legislative attempts to expand compensability and reduce burden of proof related to acquiring the virus at work seem to have lost traction in certain states as they attempt to reopen, we can only conjecture that a second wave or the continuation of increased reported cases may revive efforts in this regard.
So Ned, how are things developing at Lloyd's with the virus?
Ken, they're developing about how we would expect.
Because we typically report our Lloyd's results on a one quarter lag, we're seeing most of the initial response to the pandemic showing up in our Lloyd's Syndicates results this quarter.
The projections we disclosed in our Q1 release have held and we booked approximately $1.5 million related to the virus in the second quarter, net of reinsurance.
We estimate we will recognize an additional $1.4 million, net of reinsurance, in the third quarter of this year.
We will continue to be as forthcoming and transparent as we can, given the multitude of evolving variables.
A few remarks on Lloyd's outside of the pandemic.
This was the first quarter in which our reduced participation in Syndicate 1729 came through our results, a change that brought down gross premiums written in the segment, but also one we expect will bring down volatility going forward.
Because of this reduced participation, we expect to receive a return of approximately $33 million of our funds at Lloyd's during the third quarter of 2020.
Meanwhile, we are seeing encouraging signs of hardening in every line of business in which we participate, particularly in the reinsurance segment, where rate increases and withdrawing capacity have created opportunity for those that continue to write in the space.
Any final comments for us?
Just to reiterate what I said in the beginning.
The previous four quarters have been unquestionably challenging but I am proud of the work we've accomplished in that time.
Our goal of becoming a more efficient and effective organization is one of continuous improvement, one that we'll never call finished, but one toward, which I think great progress has been made.

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compname reports q2 loss per share $0.34.
q2 operating loss per share $0.60.
q2 loss per share $0.34.

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