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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, will you please start us off?
It was our first full quarter with NORCAL and we remain very pleased with the progress we are making on the integration of our two companies.
Even outside of daily underwriting, claims and risk management operations, our investment results alone begin to show the earnings power of this combined enterprise, and I'm excited to complete the integration plan in 2022.
Meanwhile, results in our legacy ProAssurance Healthcare Professional Liability business continued to show improvement as we make incremental progress toward underwriting profitability and expand the regional operating structure to maximize service quality for our customers.
On the Workers' Compensation side, we are reacting to what we perceive as a tough loss environment as the impact of labor shortages, time away from work and the mental wear and tear of the continuing pandemic weigh on employers and their workforces.
However, this segment remains profitable through 9/30, and we remain confident in our ability to succeed across economic and insurance cycles.
Kevin will highlight some of the positives during his remarks later in the call.
In all, it was a quarter where we executed on a plan and that's the continuing national challenges presented by the pandemic, and I'm proud of the work that we've completed to date.
Now I'll ask Dana to share results for the quarter.
It was another solid quarter, and we reported net income of $12.2 million or $0.23 per share and operating income of $13.8 million or $0.25 per share.
While this result was driven primarily by our investments, particularly our equity and earnings from unconsolidated subsidiaries, we also improved results in our Specialty P&C segment through continued rate gains, strong retention and top line growth, both including and excluding the effect of the added NORCAL premium.
Further, we reduced expense ratios in all segments as the structural changes implemented in 2020 continue to pay returns.
These improvements were partially offset by unfavorable development in our Lloyd's Syndicate segment, lower income from our Segregated Portfolio Cell Reinsurance segment and a loss in our Workers' Compensation Insurance segment.
Consolidated gross premiums written increased nearly 26% year-over-year, driven primarily by the addition of NORCAL's premium to our Specialty P&C results as well as $15.5 million of new business written in the quarter from our core operating segments.
Our consolidated current accident year net loss ratio was 85.2%, a year-over-year increase of 4.5 points as improvements in our legacy Specialty P&C business were offset by higher average loss ratios in the NORCAL book of business and a higher net loss ratio in our Workers' Compensation business.
We recognized net favorable development of $8.6 million in the current quarter, driven largely by the Specialty P&C segment at $6.8 million, which includes $2.3 million related to the amortization of the purchase accounting fair value adjustment on NORCAL's assumed reserve.
We also recorded $1.5 million and $1.6 million of favorable development in the workers' compensation insurance and segregated portfolio sale reinsurance segments, respectively.
The Lloyd's segment recorded unfavorable development of $1.3 million, primarily related to natural catastrophe losses.
Excluding onetime transaction-related costs, our consolidated underwriting expense ratio decreased approximately seven points in the quarter to 23.3%.
That's driven by the effect of significantly higher earned premium acquired through NORCAL and lower related expenses.
Year-over-year improvement is also attributable to restructuring in the third quarter of 2020 and related onetime costs.
N our Form 10-Q, we provide a detailed breakout of the items affecting our expense ratio in the quarter to help readers arrive at a run rate.
From an investment perspective, our consolidated net investment result increased nearly 60% year-over-year to $34.5 million.
This includes $15.2 million of equity in earnings from our unconsolidated subsidiaries due to the results of our investments in LPs and LLCs.
Consolidated net investment income was $19.3 million in the quarter, up significantly from the year ago period and primarily due to higher investment balances following the NORCAL transaction.
Higher investment balances were offset slightly by lower yields from our short-term investments in corporate debt securities due to the low current interest rate environment.
We're going to pivot to Mike Boguski for commentary on the Specialty Property & Casualty segment.
Before we get into the results of the quarter, I'd like to provide a brief overview of where things stand with both legacy ProAssurance and NORCAL business.
First, we continue to achieve incremental improvements and results from our legacy business, including higher gross premiums written, rate and retention gains, decreased operating expenses and improved the loss experience.
On the NORCAL front, we are extremely pleased with progress to date and the overall execution of our integration plan.
During the quarter, we announced and implemented our Healthcare Professional Liability organizational structure and regional service model on a national basis.
We successfully integrated reinsurance programs, financial and investment operations and retained 87% NORCAL's business, while achieving average rate increases of approximately 11% on the book since the close of the transaction.
This is a great start to the reunderwriting efforts on the NORCAL book.
We are ahead of plan on targeted expense synergies, achieving $17.2 million through the end of the third quarter on an overall plan of $18 million.
Information Systems Consolidation is proceeding as planned, and the cultures are merging together the combination of exceptional talent from both organizations.
Now for the results of the third quarter.
Gross premiums written during the quarter increased by over 48% or approximately $77 million.
NORCAL contributed just over $72 million of that increase.
Premium retention for the segment was 84% in the quarter, driven by retention rates that have either improved or remained consistent in all lines of business.
Furthermore, we achieved average renewal pricing increases of 9% in the segment this quarter, driven by 9% in standard physicians and 13% in specialty healthcare.
Although not reflected directly in our rates or pricing improvement, we continue to strengthen rate adequacy through adjustments to product structure, terms and conditions.
Both our small business unit and medical technology liability business achieved average rate gains of 8%.
New business written in the quarter totaled $11.2 million, an increase of $2.5 million from the year ago quarter and primarily driven by $6.4 million written in our HCPL specialty business.
The current accident year net loss ratio was essentially flat from the year ago quarter as improvements, in our legacy HCPL business were offset by higher average loss ratios associated with NORCAL business.
As previously stated, we are off to a great start in the reunderwriting of the NORCAL business.
We are confident the HCPL loss ratio in the segment will continue to benefit from the previous reunderwriting work in our legacy ProAssurance business, execution of the NORCAL plan and lower claims frequency experienced for several quarters.
The segment net loss ratio decreased to 86.6% due to a higher net favorable reserve development, which was $6.8 million in the quarter.
His includes $2.9 million related to the amortization of the purchase accounting fair value adjustment on NORCAL's reserves.
The reduction in HCPL claims frequency observed in 2020 has continued into 2021 thus far, some of which is driven by the impacts of the COVID-19 pandemic and our reunderwriting efforts.
Given these favorable trends, we began to recognize some of the benefits in our healthcare professional liability current accident year loss ratio during the third quarter of 2021.
The segment reported an expense ratio of 17.7% for the first -- third quarter, a year-over-year improvement of 6.1 points driven by significantly higher earned premiums, the impact of transaction accounting and benefits from prior organizational restructuring and expense management efforts.
Exclusive of the NORCAL impact, the expense ratio decreased approximately one point.
Overall, we continue to be pleased with the improvement in our operating results and the NORCAL integration process.
Kevin, will you please bring us up to date on the Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance segments?
The Workers' Compensation Insurance segment recorded an underwriting loss of $2.2 million and a combined ratio of 106.3% in the third quarter of 2021.
The increase in the combined ratio quarter-over-quarter reflects a higher accident year loss ratio in 2021, partially offset by an improvement in the underwriting expense ratio.
Of note is the fact that the reported combined ratio includes intangible asset amortization and a corporate management fee.
The combined ratio, excluding these items for 2021 was 103% for the quarter and 97.4% year-to-date, an indicator of the results of our ongoing business performance.
During the quarter, the segment booked $64.6 million of gross premiums written, an increase of 2.5% quarter-over-quarter.
Renewal pricing increased 1% in our traditional book of business in 2021 compared to a decrease of 3% in 2020 and premium renewal retention was 87% for the third quarter of 2021 compared to 84% in 2020.
Traditional new business writings for 2021 were $3.5 million compared to $6.2 million in 2020.
We continue to see higher premium retention and lower new business, a trend that began at the beginning of the pandemic.
Audit premium in our traditional book of business improved $700,000 quarter-over-quarter to an audit premium return to customers of $100,000, a significant improvement over recent quarters.
The increase in the calendar year loss ratio from 62.2% in 2020 to 74.3% in 2021 reflects an increase in the current accident year loss ratio.
Favorable prior year reserve development was $1.5 million in 2021 compared to $2 million in 2020.
The increase in the full year 2021 accident year loss ratio during the quarter reflects higher claim activity as workers return to full employment with the easing of pandemic-related restrictions in our operating territories and the labor shortage, resulting in increased overtime hours by existing employees, a reduction in skilled job training and increases in alternative work arrangement risks.
The trend in higher claim activity continues to be concentrated in our historically profitable small book of business, most notably in restaurant hospitality and small construction market segments and was from accounts within our renewal policyholder base.
We recorded a current accident year loss ratio of 77.8% for the third quarter of 2021, which brings the ratio for the nine months ended September 30 to 74%.
Our detailed actuarial process each quarter is consistent in scope and scale with that at year-end, and this, coupled with our short-tailed claim strategies, enables us to react and record these trends real time.
Despite the increase in claim activity in our small book of business, overall frequency continues to be below pre-pandemic levels and the lowest in 10 years with the exception of accident year 2020.
The claims operation closed 12.2% of 2020 and prior claims during the 2021 quarter consistent with third quarter historical trends.
There were 160 reported COVID claims with accident dates in the third quarter of 2021 with a total recorded incurred loss expense of $127,000, which management relates to the spread of the Delta variant.
We continue to monitor legislative attempts to broaden workers' compensation coverage in our underwriting territories but observed minimal movement during the third quarter.
The 2021 underwriting expense ratio decreased to 32% from 35.2% in 2020 and primarily due to the realization of the restructuring initiatives implemented in August of 2020 and the recording of $900,000 in employee severance costs in the third quarter of 2020.
Other underwriting and operating expenses were $8.6 million in the third quarter of 2021, a decrease of 13.7%.
The Segregated Portfolio Cell Reinsurance segment produced income of $539,000 and a combined ratio of 87.7% for the third 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 segment calendar year loss ratio increased from 42.7% in 2020 to 56.7% in 2021, driven largely by a decrease in prior year favorable development quarter-over-quarter.
The 2021 accident year loss ratio was 67.2% compared to 67.3% in 2020.
The 2021 accident year loss ratio reflects the continuation of intense price competition and the resulting renewal rate decreases in the Workers' Compensation business and the impact of higher claim activity as workers return to employment, offset by favorable trends in prior accident year claim results and its impact on our analysis of the current accident year loss estimate.
Favorable loss reserve development was $1.6 million in the third quarter of 2021 compared to $4 million in 2020.
Despite the increase in loss activity in the Workers' Compensation Insurance segment, I want to emphasize that there were several positive indications for the quarter, including a decreased expense ratio, gross written premium growth of 2.5%, strong premium renewal retention, improved audit premium and rate increases of 1%, the first rate increase in many years.
Though the Lloyd's segment reported a profit in the third quarter, it was a smaller one than the year ago quarter due to the expected top line reduction and some adverse catastrophe development.
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.
Meanwhile, adverse development, primarily driven by certain large catastrophe-related losses further thinned the margin this quarter.
Change is hard, particularly during a period of national uncertainty and upheaval.
You've done a remarkable job, and we're on the right track.

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compname posts quarterly earnings per share of $0.23.
q3 non-gaap operating earnings per share $0.25.
qtrly net income of $12.2 million, or $0.23 per diluted share.

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