Birmingham, AL – ProAssurance Corporation (NYSE: PRA) recently reported results for the three and nine months ended September 30, 2020.
“We are continually taking steps to better our Company and improve our results, and the third quarter of 2020 was no exception. As you will see below, we have taken action to streamline our operations and continue to gain meaningful price increases in our healthcare professional liability line of business. While some of the strategic changes we have taken over the last twelve months have resulted in one-time charges, the beneficial results of these efforts are beginning to manifest as lower underlying operating expenses and improved loss experience. This executive team and the employees we support are building the next iteration of ProAssurance, underlining our commitment to achieving sustainable profitability and excellence in our specialized markets.
Unfortunately, the continued market volatility caused by COVID-19 and sustained depression of our stock price has overshadowed these improvements. In recognition of these market factors, we have recognized an impairment of goodwill relating to past acquisitions for our Specialty Property & Casualty reporting unit during the third quarter of 2020, in the amount of $161.1 million. I remain confident that our solid foundation along with the strategic initiatives undertaken over the last sixteen months will reward our customers, shareholders, and employees in quarters and years to come.
As time goes on, and we learn more about how the COVID-19 virus is affecting the lines of business in which we specialize, we have seen some favorable changes in loss trends, however whether these changes are permanent or merely temporary is still unknown. We have thus remained cautious in recognizing the impact of these trends given the continuing uncertainty brought about by the pandemic.
I continue to be proud of our employees’ response to the pandemic. They embody Treated Fairly, and keep our customers and business partners at the forefront of all that they do.
We operate in long-tail, long-cycle businesses, and as a result, patience is needed as the decisive actions we have taken to date will take time to manifest in our operating results. I am encouraged and excited by the progress we’ve made to-date, and remain confident that we are positioned for success in the quarters and years ahead.” -Ned Rand, President & Chief Executive Officer
Key Takeaways – Third Quarter 2020
For the third quarter of 2020, we reported a net loss of $150.0 million, or $2.78 per share, and Non-GAAP operating income of $2.6 million, or $0.05 per share. The net loss is wholly attributable to the previously mentioned $161.1 million non-cash, pre-tax goodwill impairment charge attributable to the Specialty Property & Casualty (“Specialty P&C”) reporting unit.
Despite the net loss, there were several positives in the third quarter from each of our operating segments:
- In our Specialty P&C segment, re-underwriting and restructuring efforts that began in July of 2019 are substantially complete as of September 30, 2020, and contributed to a reduction of our current accident year net loss ratio by 4.7 percentage points quarter-over-quarter to 89.8%. The segment’s expense ratio was essentially flat at 23.8%, despite the inclusion of one-time expenses related to restructuring, and reflective of incremental improvements in operating efficiencies over the past year.
- In our Workers’ Compensation Insurance segment, we made permanent organizational adjustments to our business model in the third quarter that we believe will promote profitable growth and enhanced service while also reducing annual expenses by approximately $3.0 million. Further, in recognition of continuing favorable loss trends in 2020, including lower frequency and severity as a result of COVID-19, we reduced our nine-month current accident year net loss ratio to 69.2% from 70.4% as of the first half of 2020, resulting in a current accident year loss ratio of 66.9% for the current quarter.
- The Segregated Portfolio Cell Reinsurance (“SPCR”) segment reported a 27.4% increase in income from the year-ago period, driven by higher net realized gains and, to a lesser extent, higher net favorable reserve development totaling $4.0 million. The SPCR segment’s combined ratio improved 5.4 percentage points to 74.1%.
- The combined ratio in our Lloyd’s Syndicates segment improved 10.5 percentage points to 89.6% in the third quarter, driven by higher net favorable development totaling $2.6 million and a reduction in underwriting expenses by approximately $2.5 million due to our reduced participation in Syndicate 1729 at Lloyd’s of London.
Consolidated gross premiums written in the current quarter were $245.1 million, a decrease of approximately $20.4 million, or 7.7%, from the same quarter in 2019, driven by the re-underwriting efforts in our Specialty P&C segment, our decreased participation in Syndicate 1729, and competitive market conditions in our Workers’ Compensation Insurance and SPCR segments.
Consolidated net premiums earned were approximately $194.6 million, a decrease of approximately $21.2 million, or 9.8%, from the year-ago quarter and primarily attributable to the pro rata effect of lower net premiums written during the preceding twelve months.
Our consolidated current accident year net loss ratio decreased 1.6 percentage points to 80.7%, driven by a lower current accident year net loss ratio in our Specialty P&C and Workers’ Compensation Insurance segments, partially offset by a higher current accident year net loss ratio in our Lloyd’s Syndicates segment. However, our consolidated net loss ratio in the current quarter of 74.8% was relatively unchanged from the year-ago period, as the effect of our lower current accident year net loss ratio was offset by lower prior accident year reserve development.
Net favorable reserve development recognized in the third quarter was $11.5 million, a decrease of $4.4 million from the year-ago quarter. The decrease is attributable to our Specialty P&C segment, which recognized approximately $7.8 million lower favorable reserve development from the comparable period in 2019, partially offset by higher favorable reserve development in each of our remaining operating segments.
Our consolidated expense ratio in the third quarter was 30.5%, an increase primarily attributable to one-time expenses of $3.2 million, mainly comprised of early retirement benefits granted to certain employees during the third quarter of 2020.
Our consolidated combined ratio for the quarter was 105.3%, a quarter-over-quarter increase of 1.7 percentage points.
Net investment income decreased to $16.9 million, primarily attributable to a decrease in our allocation to equity assets in our portfolio and lower yields from our short-term investments and corporate debt securities given the actions taken by the Federal Reserve to reduce interest rates in response to COVID-19.
Equity in earnings (loss) of unconsolidated subsidiaries increased by $6.1 million, driven by $9.4 million of income from our LP/LLC investments, which are typically reported to us on a one-quarter lag. As such, the gain in the third quarter was largely driven by an improvement in the global financial markets since the first quarter of 2020, which were depressed due to the onset of COVID-19.
Net realized investment gains were $8.8 million in the current period, primarily driven by realized gains from the sale of certain corporate bonds and, to a lesser extent, unrealized holding gains resulting from an increase in fair value on our equity portfolio and convertible securities.
For the third quarter of 2020, we recognized an income tax expense of $2.1 million, compared to an income tax benefit of $6.7 million in the same quarter of 2019.
The complete results release is available here: ProAssurance Reports Results for Third Quarter 2020