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ProAssurance Reports Results for Second Quarter 2022

·12-min read

BIRMINGHAM, Ala., August 08, 2022--(BUSINESS WIRE)--ProAssurance Corporation (NYSE: PRA) reports a net loss of $1.7 million, or $0.03 per diluted share, and operating income(1) of $16.3 million, or $0.30 per diluted share, for the three months ended June 30, 2022.

Highlights - Second Quarter 2022(2)

  • Gross premiums written increased to $235.5 million (+13%) and net premiums earned increased to $247 million (+4%)

  • Favorable prior accident year reserve development of $19 million (+38%)

  • Consolidated combined ratio, excluding transaction-related costs, of 102.9%, down 2.5 points from first quarter 2022 and up 3.0 points from second quarter 2021

  • Net investment income increased to $22 million (+26%)

  • Operating ROE(1) of 5.3 %, up 3.1 points from first quarter 2022 and down 2.7 points from second quarter 2021

  • Adjusted book value per share(1) of $25.96, down $0.06 and $0.20 per share from March 31, 2022 and December 31, 2021, respectively

(1)

Represents a Non-GAAP financial measure. See a reconciliation to its GAAP counterpart under the heading "Non-GAAP Financial Measures" that follows

(2)

Comparisons are to the second quarter of 2021

Management Commentary & Results of Operations

Our operating results for the second quarter of 2022 reflect continued improvement in underwriting results as we focus on disciplined underwriting and execute on our strategic business initiatives. Compared to the first quarter of 2022, our operating income improved $8.6 million excluding transaction-related costs; this generated an improvement of 2.5 points in our consolidated combined ratio to 102.9%, driven by higher favorable prior accident year reserve development in our Specialty P&C segment. Despite the improvement as compared to the previous quarter, our operating income decreased $10.3 million compared to the second quarter of 2021. This was due to the lower level of NORCAL's DPAC amortization in the second quarter of 2021 (approximately $6.3 million lower than would have otherwise been recognized due to the impact of GAAP purchase accounting,) which resulted in a more favorable expense ratio for that quarter.

Ned Rand, President and Chief Executive Officer of ProAssurance, remarked on the first full year of operations since closing the NORCAL transaction. "We are proud of what we have accomplished in our first year of combined operations. Due to extensive planning, process improvements, and diligent efforts from all team members across the organization, we have seen notable improvement in the NORCAL book since becoming a part of ProAssurance."

Consolidated gross premiums written increased 13%, driven by additional premiums in the Specialty P&C segment in the current quarter due to the timing of the prior year NORCAL acquisition. Our Workers’ Compensation Insurance and Segregated Portfolio Cell Reinsurance segments contributed to the increasing top line as well.

Net investment income increased due to the addition of NORCAL’s investment portfolio and the positive effect of rising interest rates; average book yields are beginning to increase as we reinvest maturing positions at higher rates. We expect the current rising interest rate environment to have a continued favorable impact on investment income prospectively.

Our book value per share of $21.63 declined approximately 9% since March 31, 2022, as higher interest rates persisted into the current quarter. This resulted in after-tax unrealized holding losses of $109 million from our fixed maturity portfolio (which directly impacts equity through AOCI) and net investment losses of $24 million, primarily unrealized losses from our convertible and equity securities (which are reflected on the income statement). Adjusted book value per share, which excludes AOCI, is $25.96 as of June 30, 2022 as compared to $26.02 as of March 31, 2022.

Mr. Rand continued: "While our results for the current quarter reflected an improvement in underwriting results from the first quarter of 2022, higher interest rates continued to impact our book value through the investments we carry at fair value. However, the rise in interest rates is beginning to show the earnings power of our $4.5 billion investment portfolio, which can have a meaningful impact on our future investment income."

CONSOLIDATED INCOME STATEMENT HIGHLIGHTS

Selected consolidated financial data for each period is summarized in the table below.

Three Months Ended June 30

Six Months Ended June 30

($ in thousands, except per share data)

2022

2021

Change

2022

2021

Change

Revenues

Gross premiums written(1)

$

235,475

$

208,509

12.9

%

$

571,082

$

433,228

31.8

%

Net premiums written

$

210,151

$

188,214

11.7

%

$

521,066

$

390,484

33.4

%

Net premiums earned

$

247,271

$

238,993

3.5

%

$

512,982

$

426,351

20.3

%

Net investment income

21,944

17,417

26.0

%

42,387

32,434

30.7

%

Equity in earnings (loss) of unconsolidated subsidiaries

5,180

11,927

(56.6

%)

12,799

18,715

(31.6

%)

Net investment gains (losses)(2)

(23,884

)

10,833

(320.5

%)

(37,390

)

19,682

(290.0

%)

Other income(1)

5,314

2,458

116.2

%

8,119

4,462

82.0

%

Total revenues(1)

255,825

281,628

(9.2

%)

538,897

501,644

7.4

%

Expenses

Net losses and loss adjustment expenses

177,670

181,852

(2.3

%)

387,093

331,636

16.7

%

Underwriting, policy acquisition and operating expenses(1)

77,333

77,188

0.2

%

149,109

133,638

11.6

%

SPC U.S. federal income tax expense

349

504

(30.8

%)

991

860

15.2

%

SPC dividend expense (income)

(854

)

2,864

(129.8

%)

1,513

4,606

(67.2

%)

Interest expense

4,919

5,176

(5.0

%)

9,360

8,389

11.6

%

Total expenses(1)

259,417

267,584

(3.1

%)

548,066

479,129

14.4

%

Gain on bargain purchase

74,408

nm

74,408

nm

Income (loss) before income taxes

(3,592

)

88,452

(104.1

%)

(9,169

)

96,923

(109.5

%)

Income tax expense (benefit)

(1,933

)

(3,598

)

46.3

%

(3,950

)

(2,862

)

(38.0

%)

Net income (loss)

$

(1,659

)

$

92,050

(101.8

%)

$

(5,219

)

$

99,785

(105.2

%)

Non-GAAP operating income (loss)

$

16,328

$

26,602

(38.6

%)

$

24,008

$

28,688

(16.3

%)

Weighted average number of common shares outstanding

Basic

54,068

53,965

54,040

53,942

Diluted

54,186

54,048

54,165

54,023

Earnings (loss) per share

Net income (loss) per diluted share

$

(0.03

)

$

1.70

$

(1.73

)

$

(0.10

)

$

1.85

$

(1.95

)

Non-GAAP operating income (loss) per diluted share

$

0.30

$

0.49

$

(0.19

)

$

0.44

$

0.53

$

(0.09

)

(1)

Consolidated totals include inter-segment eliminations. The eliminations affect individual line items only and have no effect on net income (loss). See Note 11 of the Notes to Condensed Consolidated Financial Statements in our June 30, 2022 report on Form 10-Q for amounts by line item.

(2)

This line item typically includes both realized and unrealized investment gains and losses, as well as investment impairments. Detailed information regarding the components of net investment gains (losses) are included in Note 3 of the Notes to Condensed Consolidated Financial Statements in our June 30, 2022 report on Form 10-Q.

The abbreviation "nm" indicates that the information or the percentage change is not meaningful.

BALANCE SHEET HIGHLIGHTS

($ in thousands, except per share data)

June 30, 2022

December 31, 2021

Total investments

$

4,548,977

$

4,828,323

Total assets

$

5,891,190

$

6,191,477

Total liabilities

$

4,721,301

$

4,763,090

Common shares (par value $0.01)

$

634

$

633

Retained earnings

$

1,423,865

$

1,434,491

Treasury shares

$

(415,962

)

$

(415,962

)

Shareholders’ equity

$

1,169,889

$

1,428,387

Book value per share

$

21.63

$

26.46

Non-GAAP adjusted book value per share(1)

$

25.96

$

26.16

(1)

Adjusted book value per share is a Non-GAAP financial measure. See a reconciliation of book value per share to Non-GAAP adjusted book value per share under the heading "Non-GAAP Financial Measures" that follows.

CONSOLIDATED KEY RATIOS

Three Months Ended June 30

Six Months Ended June 30

2022

2021

2022

2021

Current accident year net loss ratio

79.5

%

81.9

%

80.2

%

82.2

%

Effect of prior accident years’ reserve development

(7.6

%)

(5.8

%)

(4.7

%)

(4.4

%)

Net loss ratio

71.9

%

76.1

%

75.5

%

77.8

%

Underwriting expense ratio(2)

31.3

%

32.3

%

29.1

%

31.3

%

Combined ratio

103.2

%

108.4

%

104.6

%

109.1

%

Operating ratio

94.3

%

101.1

%

96.3

%

101.5

%

Return on equity(1)

(0.4

%)

9.0

%

(0.7

%)

5.0

%

Non-GAAP return on equity(1)(2)

5.3

%

8.0

%

3.7

%

4.3

%

Combined ratio, excluding transaction-related costs(3)

102.9

%

99.9

%

104.3

%

104.2

%

(1)

Quarterly amounts are annualized. Refer to our June 30, 2022 report on Form 10-Q under the heading "Non-GAAP Operating ROE" in the Executive Summary of Operations section for details on our calculation.

(2)

See a reconciliation of ROE to Non-GAAP ROE under the heading "Non-GAAP Financial Measures" that follows.

(3)

Our consolidated underwriting expense ratios for three and six months ended June 30, 2022 includes $0.7 million and $1.9 million, respectively, as compared to $20.3 million and $21.2 million for the same respective periods of 2021 of transaction-related costs included in consolidated operating expenses associated with our acquisition of NORCAL. These costs do not reflect normal operating results.

SPECIALTY P&C SEGMENT RESULTS

Three Months Ended June 30

Six Months Ended June 30

($ in thousands)

2022

2021

% Change

2022

2021

% Change

Gross premiums written

$

167,760

$

142,035

18.1

%

$

425,433

$

280,323

51.8

%

Net premiums written

$

150,015

$

127,434

17.7

%

$

384,853

$

248,747

54.7

%

Net premiums earned

$

183,547

$

168,635

8.8

%

$

381,514

$

284,249

34.2

%

Other income

1,903

1,471

29.4

%

2,924

1,939

50.8

%

Total revenues

185,450

170,106

9.0

%

384,438

286,188

34.3

%

Net losses and loss adjustment expenses

(137,002

)

(140,214

)

(2.3

%)

(302,960

)

(241,400

)

25.5

%

Underwriting, policy acquisition and operating expenses

(48,077

)

(28,877

)

66.5

%

(90,958

)

(55,223

)

64.7

%

Total expenses

(185,079

)

(169,091

)

9.5

%

(393,918

)

(296,623

)

32.8

%

Segment results

$

371

$

1,015

(63.4

%)

$

(9,480

)

$

(10,435

)

9.2

%

SPECIALTY P&C SEGMENT KEY RATIOS

Three Months Ended June 30

Six Months Ended June 30

2022

2021

2022

2021

Current accident year net loss ratio

84.1

%

89.4

%

85.0

%

89.6

%

Effect of prior accident years’ reserve development

(9.5

%)

(6.3

%)

(5.6

%)

(4.7

%)

Net loss ratio

74.6

%

83.1

%

79.4

%

84.9

%

Underwriting expense ratio

26.2

%

17.1

%

23.8

%

19.4

%

Combined ratio

100.8

%

100.2

%

103.2

%

104.3

%

The positive segment result in the quarter reflects continued improvement in operating performance and includes the effect of certain purchase accounting adjustments. Segment results were driven by lower accident and calendar year loss ratios, diligent focus on re-underwriting, prudent expense management, and continued discipline in the execution of the NORCAL integration plan.

The top line increase in premium is related to the NORCAL acquisition which closed in May of 2021. Gross written premiums increased 18% to $168 million in the second quarter.

Overall, the segment’s premium retention in the quarter was 84%. Premium retention of 86% for our Standard Physician business was reduced by a 72% retention in our Specialty Healthcare business, as we continue to focus on underwriting discipline in the large account space. Premium retention was 95% and 92% in our Medical Technology and Small Business Units, respectively. Renewal pricing increases were 6% in the quarter. We also continue to strengthen our pricing position in Specialty Healthcare through improved product structures, terms, and conditions. We wrote approximately $8 million of new business in the quarter, which is relatively consistent with the second quarter of 2021.

The current accident year loss ratio improved 5.3 percentage points driven primarily by a 2.4 point improvement in the NORCAL book. Overall, we continue to observe lower claims frequency in our healthcare liability business, which we believe is attributable to a combination of our underwriting efforts and the pandemic. We continue to remain cautious in recognizing the full impact of this trend in our current accident year loss estimate due to the long-tailed nature of our Healthcare Liability claims and the uncertainty of the pandemic impact.

We recognized net favorable prior accident year reserve development of $17 million in the second quarter, compared to $11 million in the same period of 2021. Favorable development in the quarter included $3 million related to the beneficial amortization of the purchase accounting adjustments on NORCAL's reserves, compared with $2 million in the same period of 2021.

The expense ratio in the second quarter of 2022 was 26.2%. Excluding the prior year impact of purchase accounting related to NORCAL’s DPAC, the change in estimate of ULAE, and year over year changes in tail premium, the expense ratio increased 1.1 percentage points as compared to the same period of 2021. The increase in the ratio was related to a higher volume of premium subject to broker commissions in the NORCAL book. This was partially offset by the impact of our continued focus on operational excellence, disciplined integration in the NORCAL transaction, and the benefit of higher earned premium levels.

Refer to our June 30, 2022 report on Form 10-Q for additional details on items impacting our Specialty P&C segment’s current accident year net loss ratio and underwriting expense ratio.

WORKERS’ COMPENSATION INSURANCE SEGMENT RESULTS

Three Months Ended June 30

Six Months Ended June 30

($ in thousands)

2022

2021

% Change

2022

2021

% Change

Gross premiums written

$

63,634

$

57,845

10.0

%

$

135,752

$

130,173

4.3

%

Net premiums written

$

42,558

$

40,784

4.3

%

$

87,824

$

87,668

0.2

%

Net premiums earned

$

41,709

$

40,626

2.7

%

$

82,393

$

80,636

2.2

%

Other income

517

900

(42.6

%)

1,199

1,293

(7.3

%)

Total revenues

42,226

41,526

1.7

%

83,592

81,929

2.0

%

Net losses and loss adjustment expenses

(27,947

)

(27,751

)

0.7

%

(55,158

)

(53,958

)

2.2

%

Underwriting, policy acquisition and operating expenses

(13,669

)

(12,712

)

7.5

%

(26,669

)

(24,998

)

6.7

%

Total expenses

(41,616

)

(40,463

)

2.8

%

(81,827

)

(78,956

)

3.6

%

Segment results

$

610

$

1,063

(42.6

%)

$

1,765

$

2,973

(40.6

%)

WORKERS’ COMPENSATION INSURANCE SEGMENT KEY RATIOS

Three Months Ended June 30

Six Months Ended June 30

2022

2021

2022

2021

Current accident year net loss ratio

71.8

%

73.0

%

71.8

%

72.0

%

Effect of pr...