Newswires
No comments
PROASSURANCE CORP – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes to those statements which accompany this report. Throughout the discussion we use certain terms and abbreviations, which can be found in the Glossary of Terms and Acronyms at the beginning of this report. In addition, a glossary of insurance terms and phrases is available on the investor section of our website. Throughout the discussion, references to "ProAssurance ," "PRA," "Company," "we," "us" and "our" refer toProAssurance Corporation and its consolidated subsidiaries. The discussion contains certain forward-looking information that involves significant risks, assumptions and uncertainties. As discussed under the heading "Caution Regarding Forward-Looking Statements," our actual financial condition and results of operations could differ significantly from these forward-looking statements.
ProAssurance Overview
ProAssurance Corporation is a holding company for property and casualty insurance companies. Our wholly owned insurance subsidiaries provide professional liability insurance, liability insurance for medical technology and life sciences risks and workers' compensation insurance. We also provide capital to Syndicate 1729 atLloyd's of London . We operate in five segments which are based on our internal management reporting structure for which financial results are regularly evaluated by our CODM to determine resource allocation and assess operating performance: Specialty P&C,Workers' Compensation Insurance , Segregated Portfolio Reinsurance, Lloyd's Syndicates and Corporate. Additional information onProAssurance's five operating and reportable segments is included in Note 18 of the Notes to Consolidated Financial Statements in ourDecember 31, 2021 report on Form 10-K and in the Segment Results sections herein that follow.
Critical Accounting Estimates
Our Condensed Consolidated Financial Statements are prepared in conformity with GAAP. Preparation of these financial statements requires us to make estimates and assumptions that affect the amounts we report on those statements. We evaluate these estimates and assumptions on an ongoing basis based on current and historical developments, market conditions, industry trends and other information that we believe to be reasonable under the circumstances, including the potential impacts of the COVID-19 pandemic (see "Item 1A, Risk Factors" in ourDecember 31, 2021 report on Form 10-K for additional information). We can make no assurance that actual results will conform to our estimates and assumptions; reported results of operations may be materially affected by changes in these estimates and assumptions. A detailed discussion of our critical accounting estimates is included in our Critical Accounting Estimates section in Item 7 of ourDecember 31, 2021 report on Form 10-K. Management considers the following accounting estimates to be critical because they involve significant judgment by management and those judgments could result in a material effect on our financial statements: •Reserve for losses and loss adjustment expenses •Reinsurance •Valuation of investments and impairment of securities •Goodwill •Income taxes
Estimation of Taxes / Tax Credits
For interim periods, we generally utilize the estimated annual effective tax rate method under which we determine our provision (benefit) for income taxes based on the current estimate of our annual effective tax rate. For the three months endedMarch 31, 2022 , we utilized the discrete effective tax rate method for recording income taxes after the estimated annual effective tax rate method produced an unreliable estimated annual effective tax rate. The discrete method is applied when the application of the estimated annual effective tax rate method is impractical and does not provide a reliable estimate of the annual effective tax rate. We believe the use of the discrete effective tax rate method is more appropriate than the annual effective tax rate method for the three months endedMarch 31, 2022 as minor changes in our estimated ordinary income would have a significant effect on the estimated annual effective tax rate and would result in sizable variations in the customary relationship between income tax expense (benefit) and pre-tax accounting income (loss). For the three months endedMarch 31, 2021 , we utilized the estimated annual effective tax rate method. Under the estimated annual effective tax rate method, items which are unusual, infrequent, or that cannot be reliably estimated are considered in the effective tax rate in the period in which the item is included in income, and are referred to as discrete items. In calculating our year-to-date income tax expense (benefit) under the estimated annual effective tax rate method, we include the estimated benefit of tax credits for the year-to-date period based on the most recently available information provided by the tax credit partnerships; the actual amounts of credits provided by the tax credit partnerships may prove to be different than our estimates. The effect of such a difference is recognized in the period identified. 37
--------------------------------------------------------------------------------
Table of Contents
Accounting Changes
During the first quarter of 2022, we revised our estimate of ULAE as a result of substantially integrating NORCAL into our Specialty P&C segment operations. ULAE are costs that cannot be attributed to processing a specific claim and are allocated to net losses and loss adjustment expenses on the Condensed Consolidated Statement of Income and Comprehensive Income. We have accounted for this change prospectively as a change in accounting estimate. Changes in accounting estimate are reflected prospectively beginning in the period the change in estimate occurs. The change in our estimate of ULAE resulted in an increase to underwriting, policy acquisition and operating expenses with an offsetting decrease to net losses and loss adjustment expenses in our Specialty P&C segment; there was no impact on total expenses or net income (loss) in our Condensed Consolidated Statement of Income and Comprehensive Income for the three months endedMarch 31, 2022 . See further discussion on this change in estimate in the Segment Results - Specialty Property & Casualty section that follows and in Note 1 of the Notes to Condensed Consolidated Financial Statements as a result of this change in the estimate. We did not have any other change in accounting estimate or policy that had a material effect on our results of operations or financial position during the three months endedMarch 31, 2022 . We are not aware of any accounting changes not yet adopted as ofMarch 31, 2022 that could have a material impact on our results of operations, financial position or cash flows.
Liquidity and Capital Resources and Financial Condition
Overview
ProAssurance Corporation is a holding company and is a legal entity separate and distinct from its subsidiaries. As a holding company, our principal source of external revenue is our investment revenues. In addition, dividends from our operating subsidiaries represent another source of funds for our obligations, including debt service and shareholder dividends. We also charge our operating subsidiaries within our Specialty P&C (including the acquired operating subsidiaries of NORCAL effectiveJanuary 1, 2022 ) andWorkers' Compensation Insurance segments a management fee based on the extent to which services are provided to the subsidiary and the amount of gross premium written by the subsidiary. AtMarch 31, 2022 , we held cash and liquid investments of approximately$65 million outside our insurance subsidiaries that were available for use without regulatory approval or other restriction. We also have$250 million in permitted borrowings available under our Revolving Credit Agreement as well as the possibility of a$50 million accordion feature, if successfully subscribed. As ofMay 4, 2022 , no borrowings were outstanding under our Revolving Credit Agreement. To date, during 2022, our operating subsidiaries have paid dividends to us of approximately$1 million . In the aggregate, our insurance subsidiaries are permitted to pay dividends of approximately$148 million over the remainder of 2022 without prior approval of state insurance regulators. However, the payment of any dividend requires prior notice to the insurance regulator in the state of domicile, and the regulator may reduce or prevent the dividend if, in its judgment, payment of the dividend would have an adverse effect on the surplus of the insurance subsidiary. We make the decision to pay dividends from an insurance subsidiary based on the capital needs of that subsidiary and may pay less than the permitted dividend or may also request permission to pay an additional amount (an extraordinary dividend). 38
--------------------------------------------------------------------------------
Table of Contents
Operating Activities and Related Cash Flows
Reinsurance
Within our Specialty P&C segment, we use insurance and reinsurance (collectively, "reinsurance") to provide capacity to write larger limits of liability, to provide reimbursement for losses incurred under the higher limit coverages we offer and to provide protection against losses in excess of policy limits. Within ourWorkers' Compensation Insurance segment, we use reinsurance to reduce our net liability on individual risks, to mitigate the effect of significant loss occurrences (including catastrophic events), to stabilize underwriting results and to increase underwriting capacity by decreasing leverage. In both ourSpecialty P&C and Workers' Compensation Insurance segments, we use reinsurance in risk sharing arrangements to align our objectives with those of our strategic business partners and to provide custom insurance solutions for large customer groups. Within our Lloyd's Syndicates segment, Syndicate 1729 utilizes reinsurance to provide capacity to write larger limits of liability on individual risks, to provide protection against catastrophic loss and to provide protection against losses in excess of policy limits. The discussion in our Liquidity section under the same heading in Item 7 of ourDecember 31, 2021 report on Form 10-K includes additional information regarding our reinsurance agreements.
The significant coverages provided by our current excess of loss reinsurance
agreements are detailed in the following table.
Excess of Loss Reinsurance Agreements
[[Image Removed: pra-20220331_g1.jpg]]
Healthcare Professional Medical Technology & Life Workers' Compensation -
Liability Sciences Products Traditional
(1) Effective October 1, 2020 , one prepaid limit reinstatement of $21M and a
second limit reinstatement of up to $21M for the second layer, subject to
reinstatement premium, which attaches after the first reinstatement has been
completely exhausted. All limit reinstatements thereafter require no additional
premium. Effective October 1, 2021 , limits can be reinstated a maximum of four
times.
(2) Prior to
(3) Historically, retention has ranged from 2.5% to 32.5%.
(4) Historically, retention has ranged from
(5) Includes an AAD where retention is 3.5% of subject earned premium in annual
losses otherwise recoverable in excess of the
occurrence.
39
--------------------------------------------------------------------------------
Table of Contents
For the workers' compensation business ceded to Inova Re and Eastern Re, each
SPC has in place its own reinsurance arrangements; which are illustrated in the
following table.
Segregated Portfolio Cell Reinsurance
[[Image Removed: pra-20220331_g2.jpg]]
Per Occurrence Coverage Aggregate Coverage
(1) The attachment point is based on a percentage of written premium within
individual cells, ranges from 85% to 94%, and varies by cell.
Cash Flows
Cash flows between periods compare as follows:
Three Months
Ended
(In thousands) 2022
2021 Change
Net cash provided (used) by:
Operating activities$ 14,265 $ 28,700 $ (14,435) Investing activities (77,134) (26,261) (50,873) Financing activities (8,632) (3,386) (5,246)
Increase (decrease) in cash and cash equivalents
The principal components of our operating cash flows are the excess of premiums collected and net investment income over losses paid and operating costs, including income taxes. Timing delays exist between the collection of premiums and the payment of losses associated with the premiums. Premiums are generally collected within the twelve-month period after the policy is written, while our claim payments are generally paid over a more extended period of time. Likewise, timing delays exist between the payment of claims and the collection of any associated reinsurance recoveries.
The decrease in operating cash flows of
primarily due to:
•An increase in paid losses of
primarily due to NORCAL paid losses and the payment of three large claims
totaling
40
--------------------------------------------------------------------------------
Table of Contents
•An increase in cash paid for operating expenses of$51.7 million driven by our Specialty P&C and Corporate segments. The increase in cash paid for operating expenses in our Specialty P&C and Corporate segments was driven by an increase in compensation-related costs primarily attributable to an increase in headcount due to the addition of NORCAL employees. Furthermore, the increase in our Specialty P&C segment reflected an increase in commissions paid driven by additional premiums from our acquisition of NORCAL. Additionally, the increase reflected the termination of deferred compensation arrangements assumed in the NORCAL acquisition during the first quarter of 2022 totaling approximately$13.2 million . See further discussion of NORCAL's deferred compensation arrangements in Note 2 to the Notes to Condensed Consolidated Financial Statements. •The effect of a tax refund of approximately$9.0 million which we received inFebruary 2021 . See additional discussion on this refund in our Liquidity section under the heading "Taxes" in Item 7 of ourDecember 31, 2021 report on Form 10-K.
The decrease in operating cash flows was partially offset by:
•An increase in net premium receipts of$95.4 million primarily driven by our Specialty P&C segment, partially offset by a decrease in our Lloyd's Syndicates segment. The increase in our Specialty P&C segment was due to additional premiums from our acquisition of NORCAL and the beneficial impacts of our re-underwriting efforts and focus on rate adequacy. The decrease in premium receipts in our Lloyd's Syndicates segment reflected our decreased participation in the results of Syndicate 1729 and Syndicate 6131 for the 2021 underwriting year. •An increase in cash received from investment income of$18.6 million driven by an increase in distributed earnings and redemptions from our portfolio of investments in LPs/LLCs. The increase in the current period also reflected an increase in our investment balances due to the acquisition of NORCAL.
The remaining variance in operating cash flows for the three months ended
individually insignificant components.
We manage our investing cash flows to ensure that we will have sufficient liquidity to meet our obligations, taking into consideration the timing of cash flows from our investments, including interest payments, dividends and principal payments, as well as the expected cash flows to be generated by our operations as discussed in this section under the heading "Investing Activities and Related Cash Flows."
Our financing cash flows are primarily comprised of dividend payments. See
further discussion of our financing activities in this section under the heading
"Financing Activities and Related Cash Flows."
Taxes
We are subject to the tax laws and regulations of theU.S. ,Cayman Islands andU.K. We file a consolidatedU.S. federal income tax return that includes the parent company and itsU.S. subsidiaries, except for ProAssurance American Mutual, ARisk Retention Group . Our filing obligations include a requirement to make quarterly payments of estimated taxes to theIRS using the corporate tax rate effective for the tax year. We did not make any quarterly estimated tax payments during the three months endedMarch 31, 2022 or 2021. As a result of the CARES Act that was signed into law onMarch 27, 2020 we were permitted to carryback NOLs generated in tax years 2019 and 2020 for up to five years. See further discussion in the Critical Accounting Estimate section under the heading "U.S. Tax Legislation" and Note 7 of the Notes to Consolidated Financial Statements in ourDecember 31, 2021 report on Form 10-K. We generated an NOL of approximately$33.3 million from the 2020 tax year that was carried back to the 2015 tax year that resulted in a claim for a refund of approximately$11.7 million , which we anticipate to receive during 2022. As a result of our acquisition of NORCAL, we recorded$46.8 million of net deferred tax assets reflecting the remeasurement of NORCAL's historical net deferred tax assets at the acquisition date ofMay 5, 2021 . The net deferred tax assets acquired from NORCAL were subject to recalculation following application of all purchase accounting adjustments and our assessment of the realizability of NORCAL's deferred tax assets. As a result of the NORCAL acquisition, we haveU.S. federal NOL carryforwards which as ofMarch 31, 2022 were approximately$43.0 million . These NOL carryforwards are subject to limitation by Internal Revenue Code Section 382 and will begin to expire in 2035. For additional information on the NORCAL acquisition see Note 2 and Note 7 of the Notes to Consolidated Financial Statements in ourDecember 31, 2021 report on Form 10-K. 41
--------------------------------------------------------------------------------
Table of Contents Investing Activities and Related Cash Flows Our investments atMarch 31, 2022 andDecember 31, 2021 are comprised as follows: March 31, 2022 December 31, 2021 Carrying % of Total Carrying % of Total ($ in thousands) Value Investment Value Investment Fixed maturities, available-for-sale U.S. Treasury obligations$ 225,676 5 % $ 238,507 5 % U.S. Government-sponsored enterprise obligations 16,733 1 % 20,234 1 % State and municipal bonds 492,291 10 % 519,196 11 % Corporate debt 1,870,256 40 % 1,898,556 39 % Residential mortgage-backed securities 417,848 9 % 453,941 9 % Commercial mortgage-backed securities 236,229 5 % 245,624 5 % Other asset-backed securities 441,788 9 % 457,664 9 % Total fixed maturities, available-for-sale 3,700,821 79 % 3,833,722 79 % Fixed maturities, trading 49,421 1 % 43,670 1 % Total fixed maturities 3,750,242 80 % 3,877,392 80 % Equity investments(1) 203,925 4 % 214,807 4 % Short-term investments 233,345 5 % 216,987 4 % BOLI 80,879 2 % 81,767 2 % Investment in unconsolidated subsidiaries 321,402 7 % 335,576 7 % Other investments 103,876 2 % 101,794 3 % Total investments$ 4,693,669 100 %$ 4,828,323 100 %
(1) Includes
subject to significant equity price risk.
AtMarch 31, 2022 , 99% of our investments in available-for-sale fixed maturity securities were rated and the average rating was A+. The distribution of our investments in available-for-sale fixed maturity securities by rating were as follows: March 31, 2022 December 31, 2021 Carrying % of Total Carrying % of Total ($ in thousands) Value Investment Value Investment Rating* AAA$ 1,055,035 28 %$ 1,129,136 29 % AA+ 117,938 3 % 130,077 3 % AA 243,342 6 % 254,570 7 % AA- 188,939 5 % 194,661 5 % A+ 223,591 6 % 221,473 6 % A 506,730 14 % 521,598 14 % A- 341,477 9 % 364,147 9 % BBB+ 285,373 8 % 292,984 8 % BBB 291,795 8 % 300,650 8 % BBB- 143,304 4 % 127,982 3 % Below investment grade 299,304 8 % 296,444 8 % Not rated 3,993 1 % - - % Total$ 3,700,821 100 %$ 3,833,722 100 %
*Average of three NRSRO sources, presented as an S&P equivalent. Source: S&P, Copyright ©2022, S&P Global Market Intelligence
42
--------------------------------------------------------------------------------
Table of Contents
A detailed listing of our investment holdings as ofMarch 31, 2022 is located under the Financial Information heading on the Investor Relations page of our website which can be reached directly at https://investor.proassurance.com/financial-information/quarterly-investment-supplements/default.aspx or through links from the Investor Relations section of our website, investor.proassurance.com. We manage our investments to ensure that we will have sufficient liquidity to meet our obligations, taking into consideration the timing of cash flows from our investments, including interest payments, dividends and principal payments, as well as the expected cash flows to be generated by our operations. In addition to the interest and dividends we will receive from our investments, we anticipate that between$70 million and$130 million of our portfolio will mature (or be paid down) each quarter over the next twelve months and become available, if needed, to meet our cash flow requirements. The primary outflow of cash at our insurance subsidiaries is related to paid losses and operating costs, including income taxes. The payment of individual claims cannot be predicted with certainty; therefore, we rely upon the history of paid claims in estimating the timing of future claims payments with consideration to current and anticipated industry trends and macroeconomic conditions. To the extent that we may have an unanticipated shortfall in cash, we may either liquidate securities or borrow funds under existing borrowing arrangements through our Revolving Credit Agreement and the FHLB system. Permitted borrowings under our Revolving Credit Agreement are$250 million with the possibility of an additional$50 million accordion feature, if successfully subscribed. Given the duration of our investments, we do not foresee a shortfall that would require us to meet operating cash needs through additional borrowings. Additional information regarding our Revolving Credit Agreement is detailed in Note 7 of the Notes to Condensed Consolidated Financial Statements.
At
fair value of
deposited with Lloyd's. See further discussion in Note 3 of the Notes to
Condensed Consolidated Financial Statements.
Our investment portfolio continues to be primarily composed of high quality fixed income securities with approximately 91% of our fixed maturities being investment grade securities as determined by national rating agencies. The weighted average effective duration of our fixed maturity securities atMarch 31, 2022 was 3.78 years; the weighted average effective duration of our fixed maturity securities combined with our short-term securities was 3.55 years. The carrying value and unfunded commitments for certain of our investments were as follows: Carrying Value March 31, 2022 ($ in thousands, except expected funding December 31, Unfunded Expected funding period) March 31, 2022 2021 Commitment period in years Qualified affordable housing project tax credit partnerships (1)$ 10,036 $ 12,424 $ 581 5 All other investments, primarily investment fund LPs/LLCs 311,366 323,152 158,580 5 Total$ 321,402 $ 335,576 $ 159,161 (1) The carrying value reflects our total commitments (both funded and unfunded) to the partnerships, less any amortization, since our initial investment. We fund these investments based on funding schedules maintained by the partnerships. Investment fund LPs/LLCs are by nature less liquid and may involve more risk than other investments. We manage our risk through diversification of asset class and geographic location. AtMarch 31, 2022 , we had investments in 34 separate investment funds with a total carrying value of$311.4 million which represented approximately 7% of our total investments. Our investment fund LPs/LLCs generate earnings from trading portfolios, secured debt, debt securities, multi-strategy funds and private equity investments, and the performance of these LPs/LLCs is affected by the volatility of equity and credit markets. For our investments in LPs/LLCs, we record our allocable portion of the partnership operating income or loss as the results of the LPs/LLCs become available, typically following the end of a reporting period. 43
--------------------------------------------------------------------------------
Table of Contents
Debt
AtMarch 31, 2022 our debt included$250 million of outstanding unsecured senior notes. The notes bear interest at 5.3% annually and are due inNovember 2023 although they may be redeemed in whole or part prior to maturity. There are no financial covenants associated with these notes.NORCAL Insurance Company , successor toNORCAL Mutual Insurance Company , issued Contribution Certificates, which bear interest at 3.0% annually and are due in 2031, to certain NORCAL policyholders in the conversion. The Contribution Certificates have a principal amount of$191 million and were recorded at their fair value of$175 million at the date of the NORCAL acquisition onMay 5, 2021 . The difference of$16 million between the recorded acquisition date fair value and the principal balance of the Contribution Certificates will be accreted utilizing the effective interest method over the term of the certificates of ten years as an increase to interest expense. Furthermore, interest payments are subject to deferral if we do not receive permission from theCalifornia Department of Insurance prior to payment. We received permission from theCalifornia Department of Insurance to pay the first annual interest payment which was paid inApril 2022 . See Note 2 and Note 13 of the Notes to Consolidated Financial Statements in ourDecember 31, 2021 report on Form 10-K for additional information on the Contribution Certificates issued in the NORCAL acquisition. There are no financial covenants associated with these certificates. We have a Revolving Credit Agreement, which expires inNovember 2024 , that may be used for general corporate purposes, including, but not limited to, short-term working capital, share repurchases as authorized by the Board and support for other activities. Our Revolving Credit Agreement permits borrowings of up to$250 million as well as the possibility of a$50 million accordion feature, if successfully subscribed. AtMarch 31, 2022 , there were no outstanding borrowings on our Revolving Credit Agreement; we are in compliance with the financial covenants of the Revolving Credit Agreement.
Additional information regarding our debt is provided in Note 7 of the Notes to
Condensed Consolidated Financial Statements.
Three of our insurance subsidiaries are members of an FHLB. Through membership,
those subsidiaries have access to secured cash advances which can be used for
liquidity purposes or other operational needs. In order for us to use FHLB
proceeds, regulatory approvals may be required depending on the nature of the
transaction. To date, those subsidiaries have not materially utilized their
membership for borrowing purposes.
44
--------------------------------------------------------------------------------
Table of Contents
Results of Operations - Three Months Ended
Months Ended
Selected consolidated financial data for each period is summarized in the table
below.
Three Months Ended
March 31
($ in thousands, except per share data) 2022 2021 Change
Revenues:
Net premiums written $ 310,915 $ 202,270 $ 108,645
Net premiums earned $ 265,711 $ 187,358 $ 78,353
Net investment result 28,063 21,805 6,258
Net investment gains (losses) (13,506) 8,849 (22,355)
Other income 2,804 2,005 799
Total revenues 283,072 220,017 63,055
Expenses:
Net losses and loss adjustment expenses 209,423 149,785 59,638
Underwriting, policy acquisition and operating expenses 71,776 56,451 15,325
SPC U.S. federal income tax expense 642 356 286
SPC dividend expense (income) 2,367 1,742 625
Interest expense 4,441 3,212 1,229
Total expenses 288,649 211,546 77,103
Income (loss) before income taxes (5,577) 8,471 (14,048)
Income tax expense (benefit) (2,017) 736 (2,753)
Net income (loss) $ (3,560) $ 7,735 $ (11,295)
Non-GAAP operating income (loss) $ 7,683 $ 2,085 $ 5,598
Earnings (loss) per share:
Basic $ (0.07) $ 0.14 $ (0.21)
Diluted $ (0.07) $ 0.14 $ (0.21)
Non-GAAP operating income (loss) per share:
Basic $ 0.14 $ 0.04 $ 0.10
Diluted $ 0.14 $ 0.04 $ 0.10
Net loss ratio 78.8 % 79.9 % (1.1 pts)
Underwriting expense ratio 27.0 % 30.1 % (3.1 pts)
Combined ratio 105.8 % 110.0 % (4.2 pts)
Operating ratio 98.1 % 102.0 % (3.9 pts)
Effective tax rate 36.2 % 8.7 % 27.5 pts
Return on equity* (0.8 %) 2.3 % (3.1 pts)
*Annualized. See further discussion on this calculation in the
Executive Summary of Operations section under the heading "ROE."
In all tables that follow, the abbreviation "nm" indicates that
the information or the percentage change is not meaningful.
45
--------------------------------------------------------------------------------
Table of Contents Executive Summary of Operations The following sections provide an overview of our consolidated and segment results of operations for the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 . Our results for the three months endedMarch 31, 2022 include NORCAL's results. See the Segment Results sections that follow for additional information regarding each segment's results.
Revenues
The following table shows our consolidated and segment net premiums earned:
Three Months
Ended
($ in thousands) 2022 2021
Change
Net premiums earned
Specialty P&C $ 197,967 $ 115,613
Workers' Compensation Insurance 40,684 40,011
673 1.7 %
Segregated Portfolio Cell Reinsurance 19,314 15,884
3,430 21.6 %
Lloyd's Syndicates 7,746 15,850 (8,104) (51.1 %)
Consolidated total $ 265,711 $ 187,358 $ 78,353 41.8 %
For the three months ended March 31, 2022 , consolidated net premiums earned
included additional earned premiums of $80.8 million in our Specialty P&C
segment from our acquisition of NORCAL. Excluding NORCAL, consolidated net
premiums earned decreased $2.5 million during the 2022 three-month period as
compared to the same period of 2021 driven by a decrease in net premiums earned
in our Lloyd's Syndicates segment, partially offset by an increase in net
premiums earned in our Segregated Portfolio Cell Reinsurance, Specialty P&C and
Workers' Compensation Insurance segments. The decrease in our Lloyd's Syndicates
segment was due to our decreased participation in the results of Syndicate 1729
and Syndicate 6131 for the 2021 underwriting year. Net premiums earned in our
Segregated Portfolio Cell Reinsurance segment increased during the 2022
three-month period driven by tail coverage premiums primarily related to one
program in which we do not participate, which resulted in $3.0 million of
one-time premium written and fully earned. Net premiums earned in our Specialty
P&C segment, excluding NORCAL, increased during the 2022 three-month period due
to the beneficial impacts of our re-underwriting efforts and focus on rate
adequacy. For our Workers' Compensation Insurance segment, the increase in net
premium earned during the 2022 three-month period reflected the prior year
effect of a reduction in our EBUB estimate and the impact of audit premium
billed to policyholders during the current period.
The following table shows our consolidated net investment result:
Three Months Ended
($ in thousands) 2022 2021 Change
Net investment income $ 20,443 $ 15,017 $ 5,426 36.1 %
Equity in earnings (loss) of unconsolidated
subsidiaries* 7,620 6,788 832 12.3 %
Net investment result $ 28,063 $ 21,805 $ 6,258 28.7 %
*Equity in earnings (loss) of unconsolidated subsidiaries includes our
share of the operating results of interests we hold in certain LPs/LLCs
as well as operating losses associated with our tax credit partnership
investments, which are designed to generate returns in the form of tax
credits and tax-deductible project operating losses.
Our consolidated net investment result for the three months endedMarch 31, 2022 included additional net investment income of approximately$6.5 million from NORCAL. Excluding NORCAL, consolidated net investment income decreased$1.1 million during the 2022 three-month period as compared to the same period of 2021 driven by lower yields on our corporate debt securities and, to a lesser extent, state and municipal bonds. The increase in our equity in earnings (loss) of unconsolidated subsidiaries for the three months endedMarch 31, 2022 as compared to the same period of 2021 was due to lower project operating losses associated with our tax credit partnerships which is an offset to earnings from our LP/LLC portfolio. The increase in our equity in earnings (loss) of unconsolidated subsidiaries for the three months endedMarch 31, 2022 also included additional earnings from our acquired interests in four LPs from NORCAL of approximately$0.4 million . 46
--------------------------------------------------------------------------------
Table of Contents
Expenses
The following table shows our consolidated and segment net loss ratios and net
prior accident year reserve development.
Three Months Ended
($ in millions) 2022 2021 Change
Current accident year net loss ratio
Consolidated ratio 80.8 % 82.5 % (1.7 pts)
Specialty P&C 85.8 % 89.8 % (4.0 pts)
Workers' Compensation Insurance 71.8 % 71.0 % 0.8 pts
Segregated Portfolio Cell Reinsurance 64.5 % 68.9 % (4.4 pts)
Lloyd's Syndicates 41.8 % 72.1 % (30.3 pts)
Calendar year net loss ratio
Consolidated ratio 78.8 % 79.9 % (1.1 pts)
Specialty P&C 83.8 % 87.5 % (3.7 pts)
Workers' Compensation Insurance 66.9 % 65.5 % 1.4 pts
Segregated Portfolio Cell Reinsurance 59.5 % 59.3 % 0.2 pts
Lloyd's Syndicates 61.5 % 81.8 % (20.3 pts)
Favorable (unfavorable) reserve development, prior
accident years
Consolidated $ 5.3 $ 4.8 $ 0.5
Specialty P&C $ 3.9 $ 2.7 $ 1.2
Workers' Compensation Insurance $ 2.0 $ 2.2 $ (0.2)
Segregated Portfolio Cell Reinsurance $ 0.9 $ 1.4 $ (0.5)
Lloyd's Syndicates $ (1.5) $ (1.5) $ -
The primary drivers of the change in our consolidated current accident year net
loss ratio for the three months ended March 31, 2022 as compared to the same
period of 2021 were as follows:
Increase (Decrease)
2022 versus 2021
Estimated ratio increase (decrease) attributable to:
NORCAL Operations
4.7 pts NORCAL Acquisition - Purchase Accounting Adjustment (0.9 pts) Change in Estimate of ULAE (2.7 pts) All other, net (2.8 pts)
Decrease in the consolidated current accident year net loss ratio
(1.7 pts) Excluding the impact of the items specifically identified in the table above, our consolidated current accident year net loss ratio for the three months endedMarch 31, 2022 decreased 2.8 percentage points as compared to the prior year period driven by our Specialty P&C, Lloyd's Syndicates and Segregated Portfolio Cell Reinsurance segments, partially offset by ourWorkers' Compensation Insurance segment. The improvement in the current accident year net loss ratio in our Specialty P&C segment for the three months endedMarch 31, 2022 was driven by a decrease to certain loss ratios in our Standard Physician line of business, which we began recognizing in the second half of 2021 and, to a lesser extent, changes in the mix of business. For our Lloyd's Syndicates segment, the lower current accident year net loss ratio reflected the impact of certain property and catastrophe related losses incurred during the prior year period and, to a lesser extent, decreases to certain loss estimates during the first quarter of 2022. The decrease in the current accident year net loss ratio in our Segregated Portfolio Cell Reinsurance segment was driven by favorable trends in prior accident year claim results and their impact on our analysis of the current accident year loss estimate, partially offset by the continuation of intense price competition and the resulting renewal rate decreases in the workers' compensation business. In ourWorkers' Compensation Insurance segment, the increase in the current accident year net loss ratio primarily reflects the continuation of intense price competition and the resulting renewal rate decreases, partially offset by the impact of favorable prior year claim trends on the current year estimate.The Workers' Compensation Insurance segment's current accident year net loss ratio for the three months endedMarch 31, 2022 also reflects an expectation that the labor shortage will continue to have an impact on claim activity during 2022. 47
--------------------------------------------------------------------------------
Table of Contents
As shown in the previous table, initial loss ratios associated with NORCAL policies were higher than the average for the other books of business in our Specialty P&C segment. The impact of NORCAL operations resulted in a 4.7 percentage point increase in our consolidated current accident year net loss ratio for the three months endedMarch 31, 2022 . Also as a result of our acquisition of NORCAL, our consolidated current accident year net loss ratio for the three months endedMarch 31, 2022 was impacted by amortization of the negative VOBA associated with NORCAL's assumed unearned premium which is recorded as a reduction to current accident year net losses and accounted for a 0.9 percentage point decrease in our current period ratio. The remaining unamortized negative VOBA will be fully amortized in the second quarter of 2022. During the first quarter of 2022, we decreased our estimate of ULAE in our Specialty P&C segment as a result of substantially integrating NORCAL into our operations, which accounted for a 2.7 percentage point decrease in our current period consolidated current accident year net loss ratio with an offsetting 2.7 percentage point increase in our current period consolidated expense ratio with no impact to our consolidated combined ratio, total expenses or net income. See additional information on this change in ULAE estimate in the Segment Results - Specialty Property and Casualty section that follows. In both the 2022 and 2021 three-month periods, our consolidated calendar year net loss ratio was lower than our consolidated current accident year net loss ratio due to the recognition of net favorable prior year reserve development, as shown in the previous table. Net favorable prior accident year development recognized was net of an increase in our reserve for potential ECO/XPL claims of$4.0 million for three months endedMarch 31, 2022 as compared to a reduction in this same reserve of$0.2 million during the same period of 2021. Further, net favorable development recognized during the 2022 three-month period included$2.9 million related to the amortization of the purchase accounting fair value adjustment on NORCAL's assumed net reserve and amortization of the negative VOBA associated with NORCAL's DDR reserve which is recorded as a reduction to prior accident year net losses and loss adjustment expenses. We have not recognized any development related to NORCAL's prior accident year reserves since the date of acquisition onMay 5, 2021 . See Note 2 of the Notes to Consolidated Financial Statements in ourDecember 31, 2021 report on Form 10-K for additional information on the NORCAL acquisition and the related purchase accounting adjustments. Excluding the increase in the ECO/XPL reserve and amortization of purchase accounting adjustments, we recognized net favorable prior accident year reserve development of$5.0 million in our Specialty P&C segment during the three months endedMarch 31, 2022 , principally related to accident years 2019 through 2021. For ourWorkers' Compensation Insurance and Segregated Portfolio Cell Reinsurance segments, the net favorable development recognized during the three months endedMarch 31, 2022 reflected overall favorable trends in claim closing patterns.
Our consolidated and segment underwriting expense ratios were as follows:
Three Months Ended March 31
2022 2021 Change
Underwriting Expense Ratio
Consolidated (1) 27.0 % 30.1 % (3.1 pts)
Specialty P&C 21.7 % 22.8 % (1.1 pts)
Workers' Compensation Insurance 32.0 % 30.7 % 1.3 pts
Segregated Portfolio Cell Reinsurance 22.6 % 31.6 % (9.0 pts)
Lloyd's Syndicates 35.0 % 41.6 % (6.6 pts)
Corporate (2) 3.3 % 3.8 % (0.5 pts)
(1) Consolidated underwriting expenses include transaction-related costs
associated with our acquisition of NORCAL. Beginning in the second
quarter of 2021, transaction-related costs rose to a significant level;
therefore, management determined that transaction-related costs will not
be included in a segment on a prospective basis beginning in the second
quarter of 2021 as we do not consider these costs in assessing the
financial performance of any of our operating or reportable segments.
While transaction-related costs are included in the Corporate segment's
underwriting expense ratio for the 2021 three-month period, they did not
have a significant impact on the ratio. See Note 11 of the Notes to
Condensed Consolidated Financial Statements for a reconciliation of our
segment results to our consolidated results.
(2) There are no net premiums earned associated with the Corporate
segment. Ratios shown are the contribution of the Corporate segment to
the consolidated ratio (Corporate operating expenses divided by
consolidated net premiums earned).
48
--------------------------------------------------------------------------------
Table of Contents
The change in our consolidated underwriting expense ratio for the 2022
three-month period as compared to the same period of 2021 was primarily
attributable to the following:
Increase (Decrease)
2022 versus 2021
Comparative three-month
(In percentage points) period
Estimated ratio increase (decrease) attributable to:
Increase in Net Premiums Earned and DPAC amortization(1)
(0.6 pts) Change in Estimate of ULAE 2.7 pts Tail Premium(2) (1.4 pts) All other, net (3.8 pts) Decrease in the underwriting expense ratio (3.1 pts)
(1) Excludes tail premium for the three months ended
(2) Represents the effect of the premium earned from tail policies for the
three months ended
there is typically minimal deferred acquisition costs associated with tail
premium (see further discussion in the Segment Results - Specialty Property
and Casualty and Segregated Portfolio Cell Reinsurance sections that follow).
Excluding the impact of the items specifically identified in the table above, our consolidated underwriting expense ratio for the three months endedMarch 31, 2022 decreased 3.8 percentage points driven by lower operating expenses due to the benefits from prior organizational restructurings and proactive expense management as well as expense synergies recognized from the NORCAL acquisition in our Specialty P&C segment. The decrease in the current period ratio also reflected the change in our allowance for expected credit losses in our Segregated Portfolio Cell Reinsurance segment related to the collection of customer accounts that were previously written off. As shown in the previous table, the consolidated underwriting expense ratio reflected a decrease in our estimate of ULAE which resulted in approximately$7.3 million of expenses remaining in operating expenses instead of being allocated to net losses and loss adjustment expenses. As a result, this change in ULAE estimate had offsetting impacts to our consolidated loss and expense ratios during the period with no impact to our consolidated combined ratio, total expenses or net income. See additional discussion on this change in ULAE estimate in the Segment Results - Specialty Property and Casualty section that follows. Taxes
Our provision for income taxes and effective tax rates for the three months
ended
Three Months Ended
($ in thousands) 2022 2021
Change
Income (loss) before income taxes
Less: Income tax expense (benefit) (2,017) 736 (2,753) 374.0 %
Net income (loss) $ (3,560) $ 7,735 $ (11,295) (146.0 %)
Effective tax rate 36.2% 8.7% 27.5 pts
We recognized an income tax benefit of $2.0 million and income tax expense of
$0.7 million during the three months ended March 31, 2022 and 2021,
respectively; however, the comparability of our effective tax rates is impacted
by the consolidated pre-tax loss recognized during the 2022 three-month period
as compared to consolidated pre-tax income recognized in the 2021 three-month
period. Furthermore, the comparability of our effective tax rates is impacted by
our use of the discrete effective tax rate method for the three months ended
March 31, 2022 versus our use of the estimated annual effective tax rate method
for the three months ended March 31, 2021 (see further discussion on these
methods in the Critical Accounting Estimates section under the heading
"Estimation of Taxes/Tax Credits").
Our effective tax rate for both the 2022 and 2021 three-month periods was
different from the statutory federal income tax rate of 21% primarily due to the
benefit recognized from the tax credits transferred to us from our tax credit
partnership investments. See further discussion of other notable items impacting
our effective tax rate in the Segment Operating Results - Corporate section that
follows under the heading "Taxes."
49
--------------------------------------------------------------------------------
Table of Contents
Operating Ratio
Our operating ratio is our combined ratio, less our investment income ratio. This ratio provides the combined effect of underwriting profitability and investment income. Our operating ratio for the three months endedMarch 31, 2022 and 2021 was as follows:
Three Months Ended
2022 2021 Change
Combined ratio 105.8 % 110.0 % (4.2 pts)
Less: investment income ratio 7.7 % 8.0 % (0.3 pts)
Operating ratio 98.1 % 102.0 % (3.9 pts)
Combined ratio, excluding transaction-related costs* 105.4 % 109.6 % (4.2 pts)
*Our consolidated combined ratio for the 2022 and 2021 three-month periods includes $1.2 million and $0.9 million ,
respectively, of transaction-related costs included in consolidated operating expenses associated with our acquisition of
NORCAL. Given these costs do not reflect normal operating expenses, we have excluded their impact from our calculation of
the consolidated combined ratio. See previous discussion under the heading "Expenses."
The primary drivers of the change in our operating ratio were as follows:
Increase (Decrease)
2022 versus 2021
Comparative
three-month
(In percentage points) periods
Estimated ratio increase (decrease) attributable to:
NORCAL Acquisition - Purchase Accounting Adjustments (2.1 pts) NORCAL Investment Results (2.4 pts) Investment Results (1) 2.7 pts All other, net (2.1 pts) Decrease in the operating ratio
(3.9 pts)
(1) Excludes net investment income contributed by NORCAL for the 2022 three-month period.
Excluding the impact of the items specifically identified in the table above, our operating ratio for the 2022 three-month period improved by 2.1 percentage points as compared to the same period of 2021 primarily due to an improvement in our expense ratio and net loss ratio in our Specialty P&C and Lloyd's Syndicates segments, partially offset by a higher net loss ratio in ourWorkers' Compensation Insurance . See previous discussion in this section under the heading "Expenses" and further discussion in our Segment Operating Results sections that follow.
ROE
ROE is calculated as annualized net income (loss) for the period divided by the average of beginning and ending shareholders' equity. This ratio measures our overall after-tax profitability and shows how efficiently capital is being used. Beginning in the second quarter of 2021, transaction-related costs rose to a significant level; therefore, management determined prospectively that transaction-related costs associated with our acquisition of NORCAL will not be annualized in our quarterly calculation of ROE as these costs are considered non-recurring in nature. ROE for the three months endedMarch 31, 2022 and 2021 were as follows: Three Months Ended March 31 2022 2021 Change ROE (0.8 %) 2.3 % (3.1 pts) Our ROE for the current year period was impacted by purchase accounting adjustments associated with our acquisition of NORCAL which increased our ROE by 1.7 percentage points. See Note 2 of the Notes to Consolidated Financial Statements in ourDecember 31, 2021 report on Form 10-K for additional information on the NORCAL acquisition and the related purchase accounting adjustments. Excluding the purchase accounting adjustments, ROE for the 2022 three-month period decreased 4.8 percentage points driven by unrealized holding losses resulting from changes in the fair value of our equity investments which decreased our ROE by 4.3 percentage points during the current period. 50
--------------------------------------------------------------------------------
Table of Contents
Book Value per Share
Book value per share is calculated as total shareholders' equity at the balance sheet date divided by the total number of common shares outstanding. This ratio measures the net worth of the Company to shareholders on a per share basis. Our book value per share atMarch 31, 2022 as compared toDecember 31, 2021 is shown in the following table. Book Value Per Share Book Value Per Share at December 31, 2021 $ 26.46 Increase (decrease) to book value per share during the three months endedMarch 31, 2022 attributable to: Dividends declared (0.05) Net income (loss) (0.07) OCI (1) (2.61) Other (0.01) Book Value Per Share at March 31, 2022 $ 23.72 (1) Primarily the impact of unrealized holding losses on our available-for-sale fixed maturity investments. See Note 8 of the Notes to Condensed Consolidated Financial Statements for additional information. 51
--------------------------------------------------------------------------------
Table of Contents
Non-GAAP Financial Measures
Non-GAAP operating income (loss) is a financial measure that is widely used to
evaluate performance within the insurance sector. In calculating Non-GAAP
operating income (loss), we have excluded the effects of the items listed in the
following table that do not reflect normal results. We believe Non-GAAP
operating income (loss) presents a useful view of the performance of our
insurance operations, however it should be considered in conjunction with net
income (loss) computed in accordance with GAAP.
The following table is a reconciliation of net income (loss) to Non-GAAP
operating income (loss):
Three Months Ended
March 31
(In thousands, except per share data) 2022 2021
Net income (loss) $
(3,560)
Items excluded in the calculation of Non-GAAP operating income (loss):
Net investment (gains) losses
13,506 (8,849)
Net investment gains (losses) attributable to SPCs which no
profit/loss is retained (1)
(602) 789 Transaction-related costs (2) 1,177 925 Guaranty fund assessments (recoupments) 13 4 Pre-tax effect of exclusions 14,094 (7,131) Tax effect, at 21% (3) (2,851) 1,481 After-tax effect of exclusions 11,243 (5,650) Non-GAAP operating income (loss)$ 7,683 $ 2,085 Per diluted common share: Net income (loss)$ (0.07) $ 0.14 Effect of exclusions 0.21 (0.10) Non-GAAP operating income (loss) per diluted common share$ 0.14 $ 0.04 (1) Net investment gains (losses) on investments related to SPCs are recognized in our Segregated Portfolio Cell Reinsurance segment. SPC results, including any net investment gain or loss, that are attributable to external cell participants are reflected in the SPC dividend expense (income). To be consistent with our exclusion of net investment gains (losses) recognized in earnings, we are excluding the portion of net investment gains (losses) that is included in the SPC dividend expense (income) which is attributable to the external cell participants. (2) Transaction-related costs associated with our acquisition of NORCAL. We are excluding these costs as they do not reflect normal operating results and are unique and non-recurring in nature. (3) The 21% rate is the annual expected statutory tax rate associated with the taxable or tax deductible items listed above. We utilized the discrete effective tax rate method for the three months endedMarch 31, 2022 while we utilized the estimated annual effective tax rate method for the three months endedMarch 31, 2021 . For the 2022 period, our statutory tax rate was applied to these items in calculating net income (loss). For the 2021 period, our effective tax rate was applied to these items in calculating net income (loss), excluding net investment gains (losses) and related adjustments. See further discussion on these methods in the Critical Accounting Estimates section under the heading "Estimation of Taxes/Tax Credits". Under both methods, net investment gains (losses) in our Corporate segment are treated as discrete items and are tax effected at the annual expected statutory tax rate (21%) in the period they are included in our consolidated tax provision and net income (loss). The taxes associated with the net investment gains (losses) related to SPCs in our Segregated Portfolio Cell Reinsurance segment are paid by the individual SPCs and are not included in our consolidated tax provision or net income (loss); therefore, both the net investment gains (losses) from our Segregated Portfolio Cell Reinsurance segment and the adjustment to exclude the portion of net investment gains (losses) included in the SPC dividend expense (income) in the table above are not tax effected. 52
--------------------------------------------------------------------------------
Table of Contents Segment Results - Specialty Property & Casualty Our Specialty P&C segment focuses on professional liability insurance and medical technology liability insurance as discussed in Note 18 of the Notes to Consolidated Financial Statements in ourDecember 31, 2021 report on Form 10-K. OnMay 5, 2021 , we completed our acquisition of NORCAL, an underwriter of healthcare professional liability insurance (Note 2 of the Notes to Consolidated Financial Statements in ourDecember 31, 2021 report on Form 10-K provides additional information regarding this acquisition). Segment results reflected pre-tax underwriting profit or loss from these insurance lines, and for the three months endedMarch 31, 2022 , included the pre-tax underwriting results of NORCAL as well as certain purchase accounting adjustments. Segment results for the three months endedMarch 31, 2022 exclude transaction-related costs as we do not consider these costs in assessing the financial performance of the segment. Segment results included the following: Three
Months Ended
($ in thousands) 2022 2021 Change
Net premiums written $ 234,838 $ 121,313 $ 113,525 93.6 %
Net premiums earned $ 197,967 $ 115,613 $ 82,354 71.2 %
Other income 1,019 469 550 117.3 %
Net losses and loss adjustment expenses (165,958) (101,186) (64,772) 64.0 %
Underwriting, policy acquisition and
operating expenses (42,878) (26,346) (16,532) 62.7 %
Segment results $ (9,850) $ (11,450) $ 1,600 14.0 %
Net loss ratio 83.8% 87.5% (3.7 pts)
Underwriting expense ratio 21.7% 22.8% (1.1 pts)
Premiums Written
Changes in our premium volume within our Specialty P&C segment are generally
driven by three primary factors: (1) the amount of new business written, (2) our
retention of existing business and (3) the premium charged for business that is
renewed, which is affected by rates charged and by the amount and type of
coverage an insured chooses to purchase. In addition, premium volume may
periodically be affected by shifts in the timing of renewals between periods.
For the three months ended March 31, 2022 , our premium volume was primarily
affected by our acquisition of NORCAL.
The professional liability market, which accounts for a majority of the revenues
in this segment, remains challenging as physicians continue joining hospitals or
larger group practices and, therefore, are no longer purchasing individual or
group policies in the standard market. In addition, some competitors have chosen
to compete primarily on price; both factors may impact our ability to write new
business and retain existing business. Furthermore, the insurance and
reinsurance markets have historically been cyclical, characterized by extended
periods of intense price competition and other periods of reduced competition.
The professional liability market has been particularly affected by these
cycles. Underwriting cycles are generally driven by an excess of capacity
available and actively pursuing business that is deemed profitable. Changes in
the frequency and severity of losses may affect the cycles of the insurance and
reinsurance markets significantly. During "soft markets" where price competition
is high and underwriting profits are poor, growth and retention of business
become challenging which may result in reduced premium volumes.
Gross, ceded and net premiums written were as follows:
Three Months Ended March
31
($ in thousands) 2022 2021 Change
Gross premiums written $ 257,672 $ 138,289 $ 119,383 86.3 %
Less: Ceded premiums written 22,834 16,976 5,858 34.5 %
Net premiums written $ 234,838 $ 121,313 $ 113,525 93.6 %
53
--------------------------------------------------------------------------------
Table of Contents
Gross Premiums Written
Gross premiums written by component were as follows:
Three Months
Ended
($ in thousands) 2022 2021 Change
Professional Liability
HCPL
Standard Physician(1) $ 52,653 $ 52,617 $ 36 0.1 %
NORCAL Standard Physician(2) 106,476 - 106,476 nm
Total Standard Physician 159,129 52,617 106,512 202.4 %
Specialty
Custom Physician(3) 7,407 15,837 (8,430) (53.2 %)
NORCAL Custom Physician(4) 11,638 - 11,638 nm
Hospitals and Facilities(5) 14,197 16,341 (2,144) (13.1 %)
NORCAL Hospitals and Facilities(6) 3,067 - 3,067 nm
Senior Care(7)(12) 4,493 5,041 (548) (10.9 %)
Reinsurance assumed(8) 9,761 10,437 (676) (6.5 %)
Total Specialty 50,563 47,656 2,907 6.1 %
Total HCPL 209,692 100,273 109,419 109.1 %
Small Business Unit(9) 22,519 22,766 (247) (1.1 %)
Tail Coverages(10)(12) 9,838 8,138 1,700 20.9 %
NORCAL Tail Coverages(10) 7,733 - 7,733 nm
Total Professional Liability 249,782 131,177 118,605 90.4 %
Medical Technology Liability(11) 7,700 6,984 716 10.3 %
Other 190 128 62 48.4 %
Total $ 257,672 $ 138,289 $ 119,383 86.3 %
(1) Standard Physician premium remained relatively unchanged during the 2022
three-month period as compared to the same period of 2021 as retention losses
were offset by an increase in renewal pricing, the conversion of twenty-four
month term policies and, to a lesser extent, new business written. Renewal
pricing increases during the 2022 three-month period reflect the rising loss
cost environment and new business written reflects general market conditions.
Retention losses during the 2022 three-month period were largely attributable to
our targeted state strategy to reassess our underwriting appetite in certain
unprofitable states. We will continue to perform a detailed evaluation of
venues, specialties and other areas to improve our underwriting results. We also
continue to focus on underwriting discipline as we emphasize careful risk
selection, rate adequacy, improved contract terms and a willingness to walk away
from business that does not fit our goal of achieving a long-term underwriting
profit. Retention losses during the 2022 three-month period also reflected the
loss of a $2.0 million policy that chose to utilize self-insurance as well as
the loss of a $1.0 million policy due to price competition. We ceased offering
twenty-four month term policies beginning in the second quarter of 2020, and the
majority of the policies that were up for renewal in 2021 were renewed to twelve
month term policies; however, a portion of the premium from 2020 related to
policies that are subject to renewal and conversion in 2022.
(2) NORCAL Standard Physician premium represents premium contributed by NORCAL
and is comprised of three and twelve month term policies. NORCAL Standard
Physician premium during the 2022 three-month period was impacted by retention
losses, including the loss of one large policy, partially offset by an increase
in renewal pricing and, to a lesser extent, new business written.
(3) Custom Physician premium includes large complex physician groups,
multi-state physician groups and non-standard physicians and is written
primarily on an excess and surplus lines basis. The decrease in Custom Physician
premium during the 2022 three-month period as compared to the same period of
2021 was driven by retention losses, partially offset by an increase in renewal
pricing and, to a lesser extent, new business written. Retention losses for the
2022 three-month period were driven by the loss of two large policies totaling
approximately $9.0 million due to price competition, which resulted in a
decrease in our Specialty retention rate of 18.9 percentage points. Renewal
pricing increases for the 2022 three-month period reflect the rising loss cost
environment and new business written reflects general market conditions.
54
--------------------------------------------------------------------------------
Table of Contents
(4) NORCAL Custom Physician premium represents premium contributed by NORCAL and includes large complex physician groups, multi-state physician groups and non-standard physicians and is written primarily on an excess and surplus lines basis. NORCAL Custom Physician premium during the 2022 three-month period was impacted by retention losses, partially offset by an increase in renewal pricing and, to a lesser extent, new business written. (5) Hospitals and Facilities premium (which includes hospitals, surgery centers and miscellaneous medical facilities) decreased during the 2022 three-month period as compared to the same period of 2021 driven by retention losses and, to a lesser extent, the timing of the renewal of a$1.6 million policy between periods; this policy will renew in the second quarter of 2022 as compared to the first quarter of 2021. Retention losses in the 2022 three-month period were largely attributable to the loss of a$1.4 million policy due to the insured entering into a captive arrangement and our non-renewal of a$1.2 million policy due to our focus on underwriting discipline. The decrease in Hospitals and Facilities premium for the 2022 three-month period was partially offset by new business written, primarily miscellaneous medical facilities, and, to a lesser extent, an increase in renewal pricing. Renewal pricing increases for the 2022 three-month period reflect rate increases and contract modifications that we believe are appropriate given the current loss environment and new business written reflects general market conditions. (6) NORCAL Hospitals and Facilities premium represents premium contributed by NORCAL and includes hospitals, surgery centers and miscellaneous medical facilities. NORCAL Hospitals and Facilities premium during the 2022 three-month period was impacted by retention losses, partially offset by new business written and, to a lesser extent, an increase in renewal pricing. (7) Senior Care premium includes facilities specializing in long term residential care primarily for the elderly ranging from independent living through skilled nursing. Our Senior Care premium decreased for the 2022 three-month period as compared to the same period of 2021 driven by retention losses, partially offset by new business written. The lower premium retention was primarily due to a large account renewing with a meaningful reduction in exposure. Renewal pricing for the 2022 three-month period remained relatively unchanged as compared to the same period of 2021. (8) We offer custom alternative risk solutions including assumed reinsurance. The decrease in premium during the 2022 three-month period primarily reflected the impact of an assumed reinsurance arrangement with a regional hospital group entered into during the first quarter of 2021 which resulted in$4.5 million of premium written, comprised of$2.3 million of retroactive premium written and fully earned and$2.2 million of prospective premium written (see Note 5 of the Notes to Consolidated Financial Statements in ourDecember 31, 2021 report on Form 10-K). The decrease in premium during the 2022 three-month period was largely offset by an increase in premiums assumed on a quota share basis through a strategic partnership in place since 2016 with an international medical professional liability insurer. In 2021, we increased our participation in the original program and entered into another program with this insurer in a new international territory. We anticipate the volume of premium assumed through this partnership will continue to grow going forward. (9) Our Small Business Unit is primarily comprised of premium associated with podiatrists, legal professionals, dentists and chiropractors. Our Small Business Unit premium remained relatively unchanged during the 2022 three-month period as compared to the same period of 2021 as retention losses were almost entirely offset by new business written and, to a lesser extent, an increase in renewal pricing. The increase in renewal pricing during the 2022 three-month period was primarily the result of an increase in the rate charged for certain renewed policies in select states. (10) We offer extended reporting endorsement or "tail" coverage to insureds who discontinue their claims-made coverage with us, and we also periodically offer tail coverage through stand-alone policies. Tail coverage premiums are generally 100% earned in the period written because the policies insure only incidents that occurred in prior periods and are not cancellable. The amount of tail coverage premium written can vary significantly from period to period. (11) Our Medical Technology Liability business is marketed throughout theU.S. ; coverage is typically offered on a primary basis, within specified limits, to manufacturers and distributors of medical technology and life sciences products including entities conducting human clinical trials. In addition to the previously listed factors that affect our premium volume, our Medical Technology Liability premium is also impacted by the sales volume of insureds. Our Medical Technology Liability premium increased during the 2022 three-month period as compared to the same period of 2021 due to new business written and, to a lesser extent, an increase in renewal pricing, partially offset by retention losses. Renewal pricing increases during the 2022 three-month period are primarily due to changes in the sales volume of certain insureds, including changes in exposure. Retention losses during the 2022 three-month period are primarily attributable to an increase in competition on terms and pricing, as well as merger activity within the industry. 55
--------------------------------------------------------------------------------
Table of Contents
(12) Certain components of our gross premiums written include alternative market premiums. We currently cede either all or a portion of the alternative market premium, net of reinsurance, to three SPCs of our wholly ownedCayman Islands reinsurance subsidiaries, Inova Re and Eastern Re, which are reported in our Segregated Portfolio Cell Reinsurance segment (see further discussion in the Ceded Premiums Written section that follows). The portion not ceded to the SPCs is retained within our Specialty P&C segment. Three Months Ended March 31 ($ in millions) 2022 2021 Change Senior Care$ 3.9 $ 4.2 $ (0.3) (7.1 %) Tail Coverages 3.0 0.3 2.7 900.0 % Total$ 6.9 $ 4.5 $ 2.4 53.3 %
Alternative market gross premiums written increased during the 2022 three-month
period as compared to the same period of 2021 driven by an increase in tail
coverage premium, primarily related to one program.
We are committed to a rate structure that will allow us to fulfill our
obligations to our insureds while generating competitive long-term returns for
our shareholders. Our pricing continues to be based on expected losses as
indicated by our historical loss data and available industry loss data. In
recent years, this practice has resulted in gradual rate increases and we
anticipate further rate increases due to indications of increasing projected
loss severity. Additionally, the pricing of our business includes the effects of
filed rates, surcharges and discounts. Renewal pricing also reflects changes in
our exposure base, deductibles, self-insurance retention limits and other policy
terms and conditions. See further explanation of changes in renewal pricing
above under the heading "Gross Premiums Written".
The change in renewal pricing for our Specialty P&C segment, including by major
component, was as follows:
Three Months Ended
March 31
2022
Specialty P&C segment 9 %
HCPL
Standard Physician 10 %
Specialty 6 %
Total HCPL 9 %
Small Business Unit 5 %
Medical Technology Liability 10 %
New business written by major component on a direct basis was as follows:
Three Months Ended
March 31
(In millions) 2022 2021
HCPL
Standard Physician(1) $ 1.8 $ 0.6
Specialty(1) 3.7 8.7
Total HCPL 5.5 9.3
Small Business Unit 1.0 1.0
Medical Technology Liability 1.7 1.8
Total $
8.2
(1) Includes premium contributed by NORCAL during the 2022
three-month period.
56
--------------------------------------------------------------------------------
Table of Contents
For our Specialty P&C segment, we calculate retention as annualized renewed
premium divided by all annualized premium subject to renewal. Retention is
affected by a number of factors. We may lose insureds to competitors or to
alternative insurance mechanisms such as risk retention groups, captive
arrangements or self-insurance entities (often when physicians join hospitals or
large group practices) or due to pricing or other issues. We may choose not to
renew an insured as a result of our underwriting evaluation. Insureds may also
terminate coverage because they have left the practice of medicine for various
reasons, principally for retirement, death or disability, but also for personal
reasons.
Retention for our Specialty P&C segment, including by major component, was as
follows:
Three Months Ended
March 31
2022 2021
Specialty P&C segment 83 % 77 %
HCPL
Standard Physician(1) 88 % 86 %
Specialty(1) 61 % 56 %
Total HCPL 82 % 73 %
Small Business Unit 91 % 91 %
Medical Technology Liability(2) 84 % 87 %
(1) Includes premium contributed by NORCAL during the 2022
three-month period. We continue the process of evaluating the
NORCAL book of business and implementing
underwriting strategies, which will likely impact retention in
future quarters.
(2) See Gross Premiums Written section for further explanation of
retention decline in 2022.
Ceded Premiums Written Ceded premiums represent the amounts owed to our reinsurers for their assumption of a portion of our losses. Our HCPL and Medical Technology Liability excess of loss reinsurance arrangements renew annually onOctober 1 . For those excess of loss reinsurance arrangements in effect prior toOctober 1, 2021 , we generally retained the first$2 million in risk insured by us and ceded coverages in excess of this amount. EffectiveOctober 1, 2021 , our HCPL treaty renewed at a lower gross rate and we generally retain from 0% to 5% of the next$24 million of risk for our HCPL coverages in excess of$2 million . Our HCPL excess of loss reinsurance arrangement that renewed onOctober 1, 2021 also incorporated NORCAL policies. Prior toOctober 1, 2021 , NORCAL policies were reinsured under separate reinsurance agreements, primarily excess of loss, which have historically renewed annually onJanuary 1 . For the NORCAL excess of loss reinsurance arrangement that renewed onJanuary 1, 2021 , retention was generally the first$2 million in risk and coverages in excess of this amount were ceded up to$24 million . For our Medical Technology Liability treaty which also renewed effectiveOctober 1, 2021 , we also retain 2.5% of the next$8 million of risk for coverages in excess of$2 million . There were no significant changes in the cost or structure of our Medical Technology Liability treaty upon theOctober 2021 renewal. In certain of our excess of loss arrangements, the ultimate amount of ceded premium is determined by the loss experience of the business ceded, subject to certain minimum and maximum amounts. Given the length of time that it takes to resolve our claims, many years may elapse before all losses recoverable under a reinsurance arrangement are known. As a part of the process of estimating our loss reserve we also make estimates regarding the amounts recoverable under our reinsurance arrangements. As a result, we may have an adjustment to our estimate of expected losses and associated recoveries for prior year ceded losses under certain loss sensitive reinsurance agreements. Any changes to estimates of premiums ceded related to prior accident years are fully earned in the period the changes in estimates occur. 57
--------------------------------------------------------------------------------
Table of Contents
Ceded premiums written were as follows:
Three
Months Ended
($ in thousands) 2022 2021 Change
Excess of loss reinsurance arrangements (1) $ 9,496 $ 7,678 $ 1,818 23.7 %
Other shared risk arrangements (2) 4,336 3,963 373 9.4 %
Premium ceded to SPCs (3) 6,881 4,469 2,412 54.0 %
Other ceded premiums written(4) 2,121 866 1,255 144.9 %
Total ceded premiums written $ 22,834 $ 16,976 $ 5,858 34.5 %
(1) We generally reinsure risks under our excess of loss reinsurance
arrangements pursuant to which the reinsurers agree to assume all or a portion
of all risks that we insure above our individual risk retention levels, up to
the maximum individual limits offered. Premium due to reinsurers also fluctuates
with the volume of written premium subject to cession under the arrangement. In
certain of our excess of loss reinsurance arrangements, the premium due to the
reinsurer is determined by the loss experience of that business reinsured,
subject to certain minimum and maximum amounts. The increase in ceded premiums
written under our excess of loss reinsurance arrangements during the 2022
three-month period as compared to the same period of 2021 was driven by
additional ceded premiums of $4.4 million as a result of incorporating NORCAL
policies into our existing HCPL excess of loss reinsurance arrangements with the
October 1, 2021 renewal, as previously discussed. Excluding NORCAL, ceded
premiums written under our excess of loss reinsurance arrangements decreased by
approximately $2.4 million primarily due to a decrease in the overall volume of
gross premiums written subject to cession and, to a lesser extent, the reduced
rate on the treaty year effective October 1, 2021 .
(2) We have entered into various shared risk arrangements, including quota
share, fronting, and captive arrangements, with certain large healthcare systems
and other insurance entities. While we cede a large portion of the premium
written under these arrangements, they provide us an opportunity to grow net
premium through strategic partnerships. These arrangements primarily include our
Ascension Health program. Ceded premiums written under our shared risk
arrangements during the 2022 three-month period remained relatively unchanged as
compared to the same period of 2021.
(3) As previously discussed, as a part of our alternative market solutions, all
or a portion of certain healthcare premium written is ceded to SPCs in our
Segregated Portfolio Cell Reinsurance segment under either excess of loss or
quota share reinsurance agreements, depending on the structure of the individual
program. See the Segment Results - Segregated Portfolio Cell Reinsurance section
for further discussion on the cession to the SPCs from our Specialty P&C
segment. The increase in premiums ceded to SPCs during the 2022 three-month
period as compared to the same period of 2021 was driven by the impact of tail
coverages, primarily related to one program (see discussion in footnote 12 under
the heading "Gross Premiums Written").
(4) The increase in other ceded premiums written during the 2022 three-month
period as compared to the same period of 2021 was primarily driven by the
incorporation of NORCAL's cyber liability coverages into our existing HCPL cyber
liability arrangement with the October 1, 2021 renewal.
Ceded Premiums Ratio
The ceded premiums ratio was as follows:
Three Months Ended March 31
2022 2021 Change
Ceded premiums ratio 8.9% 12.3% (3.4 pts)
The above table reflects ceded premiums written as a percent of gross premiums
written. The decrease in our ceded premiums ratio for the 2022 three-month
period as compared to the same period of 2021 was driven by the reduced rate on
our excess of loss reinsurance arrangements for the treaty year effective
October 1, 2021 as well as the impact of the addition of the NORCAL gross
written premium base for the 2022 three-month period. The decrease in our ceded
premiums ratio for the 2022 three-month period as compared to the same period of
2021 was partially offset by an increase in premiums ceded to SPCs. See
additional discussion on NORCAL ceded premiums and premiums ceded to SPCs above
under the heading "Ceded Premiums Written."
58
--------------------------------------------------------------------------------
Table of Contents
Net Premiums Earned
Net premiums earned consist of gross premiums earned less the portion of earned premiums that we cede to our reinsurers for their assumption of a portion of our losses. Because premiums are generally earned pro rata over the entire policy period, fluctuations in premiums earned tend to lag those of premiums written. The majority of our policies carry a term of one year; however, some of our Medical Technology Liability policies have a multi-year term and some of our NORCAL Standard Physician policies have a three-month term. In addition, prior to the third quarter of 2020, we wrote certain Standard Physician policies with a twenty-four month term. Tail coverage premiums are generally 100% earned in the period written because the policies insure only incidents that occurred in prior periods and are not cancellable. Retroactive coverage premiums are 100% earned at the inception of the contract, as all of the associated underlying loss events occurred in the past. Additionally, any ceded premium changes due to changes to estimates of premiums owed under reinsurance agreements for prior accident years are fully earned in the period of change.
Net premiums earned were as follows:
Three
Months Ended
($ in thousands) 2022 2021 Change
Gross premiums earned $ 212,279 $ 132,060 $ 80,219 60.7 %
Less: Ceded premiums earned 14,312 16,447 (2,135) (13.0 %)
Net premiums earned $ 197,967 $ 115,613 $ 82,354 71.2 %
Gross premiums earned during the 2022 three-month period included additional
earned premiums of approximately $79.7 million from our acquisition of NORCAL.
Excluding premiums associated with the NORCAL acquisition, gross premiums earned
remained relatively unchanged during the 2022 three-month period as compared to
the same period of 2021.
Ceded premiums earned decreased during the 2022 three-month period as compared
to the same period of 2021 driven by the pro rata effect of a decrease in
premium ceded under our shared risk and excess of loss arrangements during the
preceding twelve months.
Losses and Loss Adjustment Expenses
The determination of calendar year losses involves the actuarial evaluation of incurred losses for the current accident year and the actuarial re-evaluation of incurred losses for prior accident years, including an evaluation of the reserve amounts required for ECO/XPL losses. As part of the review of our prior accident year reserves, we also make estimates of expected losses and associated recoveries for prior year ceded losses under certain loss sensitive reinsurance agreements. This analysis may result in changes to estimates of premiums owed under reinsurance agreements for prior accident years which impact net premiums earned (the denominator of the net loss ratio) in the period the adjustment is made. No such adjustments were made during the three months endedMarch 31, 2022 or 2021. See previous discussion under the heading "Ceded Premiums Written" for additional information. Accident year refers to the accounting period in which the insured event becomes a liability of the insurer. For claims-made policies, which represent the majority of the premiums written in our Specialty P&C segment, the insured event generally becomes a liability when the event is first reported to us. For occurrence policies, the insured event becomes a liability when the event takes place. For retroactive coverages, the insured event becomes a liability at inception of the underlying contract. We believe that measuring losses on an accident year basis is the best measure of the underlying profitability of the premiums earned in that period, since it associates policy premiums earned with the estimate of the losses incurred related to those policy premiums. 59
--------------------------------------------------------------------------------
Table of Contents
The following table summarizes calendar year net loss ratios for our Specialty P&C segment by separating losses between the current accident year and all prior accident years. In addition, net loss ratios for the three months endedMarch 31, 2022 in the following table include the impact of NORCAL. Net Loss Ratios (1) Three Months Ended March 31 2022 2021 Change Calendar year net loss ratio 83.8 % 87.5 % (3.7 pts) Less impact of prior accident years on the net loss ratio (2.0 %) (2.3 %) 0.3 pts Current accident year net loss ratio (2) 85.8 % 89.8 % (4.0 pts)
(1)Net losses, as specified, divided by net premiums earned.
(2)Our current accident year net loss ratio (as shown in the table above) decreased 4.0 percentage points during the three months endedMarch 31, 2022 as compared to the same period of 2021. The change in our current accident year net loss ratio in each period was primarily attributable to the following: Increase (Decrease) 2022 versus 2021 Comparative three-month (In percentage points)
period
Estimated ratio increase (decrease) attributable to:
NORCAL Operations
4.0 pts
NORCAL Acquisition - Purchase Accounting Adjustment (1.2 pts) Change in Estimate of ULAE (3.7 pts) All other, net (3.1 pts) Decrease in current accident year net loss ratio
(4.0 pts)
Excluding the impact of the items specifically identified in the table above, our current accident year net loss ratio for the three months endedMarch 31, 2022 improved 3.1 percentage points as compared to the prior year period driven by a decrease to certain loss ratios in our Standard Physician line of business, which we began recognizing in the second half of 2021 and, to a lesser extent, changes in the mix of business. We continue to observe a reduction in claims frequency that started to emerge in 2020, some of which is due to our re-underwriting efforts and some of which, we believe, is associated with the COVID-19 pandemic including the disruption of the court systems. Given the consistent and prolonged nature of this favorable claims frequency trend, we reduced certain loss ratios in our Standard Physician line of business during the third and fourth quarters of 2021. We continue to remain cautious in recognizing the full impact of these favorable trends in our current accident year reserve due to the long-tailed nature of our HCPL claims as well as the uncertainty surrounding the length and severity of the pandemic. Initial loss ratios associated with NORCAL policies were higher than the average for our other books of business in this segment. The impact of NORCAL operations resulted in a 4.0 percentage point increase in our current accident year net loss ratio for the three months endedMarch 31, 2022 . We continue the process of evaluating the NORCAL book of business and implementingProAssurance's underwriting strategies. Also as a result of our acquisition of NORCAL, our current accident year net loss ratio for the three months endedMarch 31, 2022 was impacted by amortization of the negative VOBA associated with NORCAL's assumed unearned premium which is recorded as a reduction to current accident year net losses and accounted for a 1.2 percentage point decrease in our current period ratio. The remaining unamortized negative VOBA will be fully amortized in the second quarter of 2022 (see Note 2 of the Notes to Consolidated Financial Statements in ourDecember 31, 2021 report on Form 10-K for additional information on the remaining expected amortization of the NORCAL acquisition purchase accounting adjustments). During the first quarter of 2022, we decreased our estimate of ULAE as a result of substantially integrating NORCAL into our Specialty P&C segment operations, which accounted for a 3.7 percentage point decrease in our current period accident year loss ratio with an offsetting 3.7 percentage point increase in our current period expense ratio with no impact to our combined ratio or segment results (see discussion on our expense ratio in the following section under the heading "Underwriting, Policy Acquisition and Operating Expenses"). This change in estimated ULAE had no impact on our combined ratio or segment results. We re-evaluate our previously established reserve each quarter based upon the most recently completed actuarial analysis supplemented by any new analysis, information or trends that have emerged since the date of that study. We also take into account currently available industry trend information. 60
--------------------------------------------------------------------------------
Table of Contents
We recognized net favorable prior accident year reserve development of$3.9 million during the three months endedMarch 31, 2022 as compared to$2.7 million during the same period of 2021. Net favorable development recognized during the three months endedMarch 31, 2022 was net of an increase in our reserve for potential ECO/XPL claims of$4.0 million as compared to a reduction in this same reserve of$0.2 million during the same period of 2021. Furthermore, net favorable development recognized during the three months endedMarch 31, 2022 included$2.9 million related to the amortization of the purchase accounting fair value adjustment on NORCAL's assumed net reserve and amortization of the negative VOBA associated with NORCAL's DDR reserve which is recorded as a reduction to prior accident year net losses and loss adjustment expenses. See Note 2 of the Notes to Consolidated Financial Statements in ourDecember 31, 2021 report on Form 10-K for additional information on the remaining expected amortization of the NORCAL acquisition purchase accounting adjustments. We have not recognized any development related to NORCAL's prior accident year reserves since the date of acquisition onMay 5, 2021 . Excluding the increase in the ECO/XPL reserve and amortization of purchase accounting adjustments, we recognized net favorable prior accident year reserve development of$5.0 million during the three months endedMarch 31, 2022 , principally related to accident years 2019 through 2021. Development recognized during the three months endedMarch 31, 2021 principally related to accident years 2017 and 2018. A detailed discussion of factors influencing our recognition of loss development is included in our Critical Accounting Estimates section under the heading "Reserve for Losses and Loss Adjustment Expenses" in ourDecember 31, 2021 report on Form 10-K. Assumptions used in establishing our reserve are regularly reviewed and updated by management as new data becomes available. Any adjustments necessary are reflected in the then current operations. Due to the size of our reserve, even a small percentage adjustment to the assumptions can have a material effect on our results of operations for the period in which the change is made, as was the case in both 2022 and 2021.
Underwriting, Policy Acquisition and Operating Expenses
Our Specialty P&C segment underwriting, policy acquisition and operating
expenses, including NORCAL expenses for the 2022 three-month period, were
comprised as follows:
Three Months
Ended
($ in thousands) 2022 2021 Change
DPAC amortization $ 21,740 $ 12,396 $ 9,344 75.4 %
Management fees 1,402 1,001 401 40.1 %
Other underwriting and operating expenses 19,736 12,949
6,787 52.4 % Total$ 42,878 $ 26,346 $ 16,532 62.7 % DPAC amortization for the 2022 three-month period included approximately$8.1 million of DPAC amortization associated with NORCAL policies written subsequent to our acquisition; however, this level of DPAC amortization is approximately$1.0 million lower than would be considered normal for the quarter due to the application of GAAP purchase accounting rules whereby the capitalized policy acquisition costs for policies written prior to the acquisition date were written off through purchase accounting onMay 5, 2021 rather than being expensed pro rata over the remaining term of the associated policies (see Note 2 of the Notes to Consolidated Financial Statements in ourDecember 31, 2021 report on Form 10-K for more information). The remaining increase in DPAC amortization for the 2022 three-month period as compared to the same period of 2021 reflected an increase in brokerage expenses due to our increased participation with an international medical professional liability insurer in our Specialty line of business (see discussion under the heading "Gross Premiums Written"). Management fees are charged pursuant to a management agreement by the Corporate segment to the operating subsidiaries within our Specialty P&C segment for services provided based on the extent to which services are provided to the subsidiary and the amount of premium written by the subsidiary. Fluctuations in the amount of premium written by each subsidiary can result in corresponding variations in the management fee charged to each subsidiary during a particular period. Due to continued organizational structure enhancements in our Specialty P&C segment during 2021 as well as operational alignments as a result of the integration of NORCAL, the extent to which services are provided by the Corporate segment to the operating subsidiaries within the segment decreased further effectiveJanuary 1, 2022 . Accordingly, we reduced the fee charged to the operating subsidiaries in 2022. Also effectiveJanuary 1, 2022 , the management agreement included operating subsidiaries of NORCAL contributing to$0.6 million of additional management fees in the current period. Other underwriting and operating expenses increased during the 2022 three-month period primarily due to the addition of expenses contributed by NORCAL as well as a decrease in our estimate of ULAE which resulted in approximately$7.3 million of expenses remaining in operating expenses instead of being allocated to net losses and loss adjustment expenses. As a result, this change in ULAE estimate had offsetting impacts to our loss and expense ratios during the period with no impact to our combined ratio or segment results. See additional discussion on this change in ULAE estimate in the previous section under the heading "Losses and Loss Adjustment Expenses." Excluding expenses contributed by NORCAL and the impact of the change 61
--------------------------------------------------------------------------------
Table of Contents
in ULAE, other underwriting and operating expenses decreased due to benefits from prior organizational restructurings and proactive expense management, somewhat offset by one-time expenses of$1.6 million incurred during the current period mainly comprised of one-time bonuses, employee severance charges and lease exit costs.
Underwriting Expense Ratio (the Expense Ratio)
Our expense ratio for the Specialty P&C segment was as follows:
Three Months Ended March
31
2022 2021
Change
Underwriting expense ratio 21.7 % 22.8 %
(1.1 pts)
The change in our expense ratio for the 2022 three-month period as compared to
the same period of 2021 was primarily attributable to the following:
Increase (Decrease)
2022 versus 2021
Comparative three-month
(In percentage points)
period
Estimated ratio increase (decrease) attributable to:
Increase in Net Premiums Earned and DPAC amortization(1)
0.3 pts Change in Estimate of ULAE 3.7 pts Tail Premium(2) (1.2 pts) All other, net (3.9 pts) Decrease in the underwriting expense ratio (1.1 pts) (1) Excludes tail premium for the three months endedMarch 31, 2022 and 2021. (2) Represents the effect of the premium earned from tail policies for the three months endedMarch 31, 2022 as compared to the same period of 2021 as there is typically minimal expense associated with tail premium (see discussion under the heading "Gross Premiums Written"). Excluding the items specifically identified in the table above, our expense ratio for the 2022 three-month period decreased by 3.9 percentage points primarily due to lower operating expenses due to the benefits from prior organizational restructurings and proactive expense management as well as expense synergies recognized from the NORCAL acquisition. However, as previously discussed, DPAC amortization associated with NORCAL recorded during the 2022 three-month period was lower than would be considered normal for the quarter due to the application of GAAP purchase accounting rules. Normalizing this amortization would have increased our expense ratio for the 2022 three-month period by an estimated 0.5 percentage points. 62
--------------------------------------------------------------------------------
Table of Contents Segment Results -Workers' Compensation Insurance OurWorkers' Compensation Insurance segment includes workers' compensation products provided to employers generally with 1,000 or fewer employees, as discussed in Note 18 of the Notes to Consolidated Financial Statements in ourDecember 31, 2021 report on Form 10-K. Workers' compensation products offered include guaranteed cost policies, policyholder dividend policies, retrospectively-rated policies, deductible policies and alternative market programs. Alternative market programs include program design, fronting, claims administration, risk management, SPC rental, asset management and SPC management services. Alternative market program premiums are 100% ceded to either the SPCs within our Segregated Portfolio Cell Reinsurance segment or, to a limited extent, an unaffiliated captive insurer for one program. OurWorkers' Compensation Insurance segment results reflect pre-tax underwriting profit or loss from these workers' compensation products, exclusive of investment results, which are included in our Corporate segment. Segment results included the following: Three Months Ended March 31 ($ in thousands) 2022 2021 Change
Net premiums written$ 45,266 $ 46,884 $ (1,618) (3.5 %) Net premiums earned$ 40,684 $ 40,011 $ 673 1.7 % Other income 682 392 290 74.0 % Net losses and loss adjustment expenses (27,211) (26,207) (1,004) 3.8 % Underwriting, policy acquisition and operating expenses (13,001) (12,286) (715) 5.8 % Segment results$ 1,154 $ 1,910 $ (756) (39.6 %) Net loss ratio 66.9% 65.5% 1.4 pts Underwriting expense ratio 32.0% 30.7% 1.3 pts Premiums Written Our workers' compensation premium volume is driven by five primary factors: (1) the amount of new business written, (2) retention of our existing book of business, (3) premium rates charged on our renewal book of business, (4) changes in payroll exposure and (5) audit premium.
Gross, ceded and net premiums written were as follows:
Three Months Ended March
31
($ in thousands) 2022 2021 Change
Gross premiums written $ 72,118 $ 72,328 $ (210) (0.3 %)
Less: Ceded premiums written 26,852 25,444 1,408 5.5 %
Net premiums written $ 45,266 $ 46,884 $ (1,618) (3.5 %)
Gross Premiums Written
Gross premiums written by product were as follows:
Three Months Ended
($ in thousands) 2022 2021 Change
Traditional business:
Guaranteed cost $ 35,503 $ 38,196 $ (2,693) (7.1 %)
Policyholder dividend 7,862 7,520 342 4.5 %
Deductible 2,120 2,052 68 3.3 %
Retrospective(1) 646 455 191 42.0 %
Other 1,615 1,600 15 0.9 %
Alternative market business(2) 24,372 23,715 657 2.8 %
Change in EBUB estimate - (1,210) 1,210 nm
Total $ 72,118 $ 72,328 $ (210) (0.3 %)
(1) The change in retrospectively-rated policies included an adjustment that
decreased premium by $0.1 million for each of the three months ended March 31,
2022 and 2021.
63
--------------------------------------------------------------------------------
Table of Contents
(2) A majority of alternative market premiums are ceded to SPCs in our Segregated Portfolio Cell Reinsurance segment. See further discussion on alternative market gross premiums written in our Segment Operating Results - Segregated Portfolio Cell Reinsurance section under the heading "Gross Premiums Written" that follows. Gross premiums written remained relatively unchanged during the three months endedMarch 31, 2022 as compared to the same period of 2021 as decreases in new business, renewal retention and renewal rate changes were largely offset by an increase in audit premium and the prior year impact of the reduction of our EBUB estimate. Policy audits processed during the 2022 three-month period resulted in audit premium billed to policyholders totaling$1.7 million as compared to audit premium returned to policyholders of$0.8 million for the same period in 2021. We did not adjust our EBUB estimate for the 2022 three-month period; however, we reduced our EBUB estimate by$1.2 million for the same period in 2021. Renewal rate retention was 88% for the 2022 three-month period as compared to 90% for the same period of 2021. Renewal rate decreased 4% during the 2022 three-month period as compared to 3% during the same period of 2021. New business written decreased$2.1 million during the 2022 three-month period as compared to the same period of 2021, reflecting the competitive workers' compensation market conditions and a decrease in new business submissions in the 2022 three-month period.
We retained 100% of the nine workers' compensation alternative market programs
that were up for renewal during the three months ended
New business, audit premium, renewal retention and renewal price changes for our
traditional business and the alternative market business are shown in the table
below:
Three Months Ended March 31
2022 2021
Alternative
Traditional Market Segment Traditional Alternative Segment
($ in millions) Business Business Results Business Market Business Results
New business $ 3.5 $ 1.1 $ 4.6 $ 5.9 $ 0.8 $ 6.7
Audit premium (excluding EBUB)
$ (1.0) $ 0.2 $ (0.8) Retention rate (1) 85 % 92 % 88 % 89 % 92 % 90 % Change in renewal pricing (2) (4 %) (3 %) (4 %) (2 %) (5 %) (3 %)
(1) We calculate our workers' compensation retention rate as annualized expiring renewed premium divided by all annualized expiring
premium subject to renewal. Our retention rate can be impacted by various factors, including price or other competitive issues, insureds
being acquired, or a decision not to renew based on our underwriting evaluation.
(2) The pricing of our business includes an assessment of the underlying policy exposure and market conditions. We continue to base our
pricing on expected losses, as indicated by our historical loss data.
Ceded Premiums Written
Ceded premiums written were as follows:
Three Months Ended
($ in thousands) 2022 2021 Change
Premiums ceded to SPCs $ 21,488 $ 20,682 $ 806 3.9 %
Premiums ceded to external reinsurers 3,155 2,974 181 6.1 %
Premiums ceded to unaffiliated captive
insurer 2,884 3,033 (149) (4.9 %)
Change in return premium estimate under
external reinsurance 29 (474) 503 106.1 %
Estimated revenue share under external
reinsurance (704) (771) 67 (8.7 %)
Total ceded premiums written $ 26,852 $ 25,444 $ 1,408 5.5 %
Premiums ceded to SPCs represent alternative market business that is ceded under
100% quota share reinsurance agreements to the SPCs in our Segregated Portfolio
Cell Reinsurance segment. Premiums ceded to an unaffiliated captive insurer
represent alternative market business for one program that is ceded under a 100%
quota share reinsurance agreement. Alternative market premiums written increased
for the 2022 three-month period, which resulted in higher premiums ceded to
SPCs. See further discussion on alternative market gross premiums written in our
Segment Operating Results - Segregated Portfolio Cell Reinsurance section under
the heading "Gross Premiums Written" that follows.
Under our external reinsurance treaty for traditional business, we retain the
first $0.5 million in risk insured by us and cede losses in excess of this
amount on each loss occurrence, subject to an AAD, equal to 3.5% of ceded earned
premium for the treaty year effective May 1, 2021 . Premiums ceded under our
traditional reinsurance treaty are based on premium earned
64
--------------------------------------------------------------------------------
Table of Contents
during the treaty period. The increase in premiums ceded to external reinsurers
during the 2022 three-month period primarily reflected the increase in
reinsurance rates effective
Changes in the return premium estimate reflected adjustments to our estimate of expected future recovery of ceded premium based on the underlying loss experience of our reinsurance treaties that include a provision for return premium. As shown in the table above, we decreased our estimate of return premium by a nominal amount during the 2022 three-month period as compared to an increase of$0.5 million during the same respective period in 2021. Changes in the estimated return premium primarily reflect adjustments to loss estimates on previously reported reinsured claims. We are party to a revenue sharing agreement with our reinsurance broker under which we participate in the broker's revenue earned under our reinsurance treaties based on the volume of premium ceded. We estimate the amount of revenue we expect to receive under this agreement as premiums are recognized and ceded to the reinsurers. Ceded Premiums Ratio
Ceded premiums ratio was as follows:
Three Months
Ended
2022 2021 Change
Ceded premiums ratio, as reported 33.3 % 31.8 % 1.5 pts
Less the effect of:
Premiums ceded to SPCs (100%) 26.1 % 25.9 % 0.2 pts
Premiums ceded to unaffiliated captive insurers (100%) 1.5 % 1.7 % (0.2 pts)
Change in EBUB - % 0.1 % (0.1 pts)
Change in return premium estimate under external
reinsurance 0.1 % (1.1 %) 1.2 pts
Estimated revenue share (1.6 %) (1.8 %) 0.2 pts
Assumed premiums earned (not ceded to external
reinsurers) (0.3 %) (0.3 %) - pts
Ceded premiums ratio (related to external
reinsurance), less the effects of above 7.5 % 7.3 % 0.2 pts
The above table reflects traditional ceded premiums earned as a percent of
traditional gross premiums earned. As discussed above, premiums ceded under our
traditional reinsurance treaty are based on premiums earned during the treaty
period. The increase in the ceded premiums ratio for the three months ended
March 31, 2022 as compared to the same period in 2021 primarily reflected an
increase in reinsurance rates.
Net Premiums Earned
Net premiums earned consist of gross premiums earned less the portion of earned premiums that we cede to SPCs in our Segregated Portfolio Cell Reinsurance segment, external reinsurers (including changes related to the return premium and revenue share estimates) and the unaffiliated captive insurer. Because premiums are generally earned pro rata over the entire policy period, fluctuations in premiums earned tend to lag those of premiums written. Our workers' compensation policies are twelve month term policies, and premiums are earned on a pro rata basis over the policy period. Net premiums earned also include premium adjustments related to the audit of our insureds' payrolls, changes in our EBUB estimate and premium adjustments related to retrospectively-rated policies. Payroll audits are conducted subsequent to the end of the policy period and any related premium adjustments processed are recorded as fully earned in the current period. In addition, we record an estimate for EBUB and evaluate the estimate on a quarterly basis.
Net premiums earned were as follows:
Three Months Ended March 31
($ in thousands) 2022 2021 Change
Gross premiums earned $ 61,034 $ 58,632 $ 2,402 4.1 %
Less: Ceded premiums earned 20,350 18,621 1,729 9.3 %
Net premiums earned $ 40,684 $ 40,011 $ 673 1.7 %
65
--------------------------------------------------------------------------------
Table of Contents
The increase in net premiums earned during the three months endedMarch 31, 2022 as compared to the same period in 2021 primarily reflected the impact of the adjustment to EBUB in the prior year period. Excluding the adjustment to EBUB during the 2021 three-month period, net premiums earned decreased during the three months endedMarch 31, 2022 as compared to the same period in 2021 primarily due to the pro rata effect of a reduction in net premiums written during the preceding twelve months. The decrease in net premiums earned during the three months endedMarch 31, 2022 was partially offset by an increase in audit premium billed to policyholders.
Losses and Loss Adjustment Expenses
We estimate our current accident year loss and loss adjustment expenses by
developing actual reported losses using historical loss development factors,
adjusted to reflect current and expected trends based on various internal
analyses and supplemental information. The following table summarizes calendar
year net loss ratios by separating losses between the current accident year and
all prior accident years. Calendar year and current accident year net loss
ratios by component were as follows:
Three Months
Ended
2022 2021 Change
Calendar year net loss ratio 66.9 % 65.5 % 1.4 pts
Less impact of prior accident years on the net
loss ratio (4.9 %) (5.5 %) 0.6 pts
Current accident year net loss ratio 71.8 % 71.0 % 0.8 pts
The increase in the current accident year net loss ratio during the three months
ended March 31, 2022 as compared to the same period of 2021 primarily reflected
the continuation of intense price competition and the resulting renewal rate
decreases, partially offset by the impact of favorable prior year claim trends
on the current year estimate. The current accident year net loss ratio for the
three months ended March 31, 2022 also reflects an expectation that the labor
shortage will continue to have an impact on claim activity during 2022.
Calendar year incurred losses (excluding IBNR) in excess of our per occurrence
reinsurance retention, before consideration of the AAD (see previous discussion
under the heading "Ceded Premiums Written"), increased $1.7 million for the
three months ended March 31, 2022 as compared to the same period of 2021;
however, of the $1.7 million , we retained losses in excess of our per occurrence
retention totaling $1.0 million which reflected losses within the AAD. There
were no current accident year reported losses ceded to reinsurers during the
three months ended March 31, 2022 or 2021.
We recognized net favorable prior year development related to our previously
established reserve of $2.0 million for the three months ended March 31, 2022 as
compared to $2.2 million for the same period of 2021. The net favorable prior
year reserve development for the three months ended March 31, 2022 and 2021
reflected overall favorable trends in claim closing patterns. Net favorable
development for the 2022 three months ended was primarily related to accident
years 2019 and prior. Net favorable development for the 2021 three-month period
was primarily related to accident years 2017 and prior.
66
--------------------------------------------------------------------------------
Table of Contents
Underwriting, Policy Acquisition and Operating Expenses
Underwriting, policy acquisition and operating expenses include the amortization of commissions, premium taxes and underwriting salaries, which are capitalized and deferred over the related workers' compensation policy period, net of ceding commissions earned. The capitalization of underwriting salaries can vary as they are subject to the success rate of our contract acquisition efforts. These expenses also include a management fee charged by our Corporate segment, which represents intercompany charges pursuant to a management agreement, and the amortization of intangible assets, primarily related to the acquisition of Eastern byProAssurance . The management fee is based on the extent to which services are provided to the subsidiary and the amount of premium written by the subsidiary.
Our
operating expenses were comprised as follows:
Three Months Ended March
31
($ in thousands) 2022 2021 Change
DPAC amortization $ 7,061 $ 6,741 $ 320 4.7 %
Management fees 541 542 (1) (0.2 %)
Other underwriting and operating
expenses 8,868 8,252 616 7.5 %
Policyholder dividend expense 209 269 (60) (22.3 %)
SPC ceding commission offset (3,678) (3,518) (160) 4.5 %
Total $ 13,001 $ 12,286 $ 715 5.8 %
The increase in DPAC amortization for the three months ended March 31, 2022 as
compared to the same period in 2021 primarily reflected the increase in gross
premiums earned.
The increase in other underwriting and operating expenses for the three months
ended March 31, 2022 as compared to the same period of 2021 primarily reflected
an increase in costs related to compensation, business-related travel, lease
exit costs and an increase in the allowance for credit losses. Marketing costs
included advertising and website-related activities that were planned for 2022.
Business-related travel has increased as a result of the easing of
pandemic-related restrictions. During the first quarter of 2022, we recognized
one-time lease exit costs of $0.2 million due to the early termination of an
office lease; however, as a result, we anticipate annual expense savings of
approximately $0.1 million . The increase in the allowance for credit losses
primarily reflects an increase in accounts greater than 90 days old, which we
believe is a timing issue that will reverse in future periods.
As previously discussed, alternative market premiums written by our Workers'
Compensation Insurance segment are 100% ceded, less a ceding commission, to
either the SPCs in our Segregated Portfolio Cell Reinsurance segment or, to a
limited extent, an unaffiliated captive insurer. The ceding commission charged
to the SPCs consists of an amount for fronting fees, cell rental fees,
commissions, premium taxes and risk management fees. The fronting fees,
commissions, premium taxes and risk management fees are recorded as an offset to
underwriting, policy acquisition and operating expenses. Cell rental fees are
recorded as a component of other income and claims administration fees are
recorded as ceded ULAE. The increase in SPC ceding commissions earned for the
three months ended March 31, 2022 as compared to the same period of 2021,
primarily reflected the increase in alternative market ceded earned premium.
Underwriting Expense Ratio (the Expense Ratio)
The underwriting expense ratio included the impact of the following:
Three Months
Ended
2022 2021 Change
Underwriting expense ratio, as reported 32.0 % 30.7 % 1.3 pts
Less estimated ratio increase (decrease) attributable
to:
Impact of ceding commissions received from SPCs
3.5 % 2.9 % 0.6 pts Impact of audit premium (0.1 %) 1.0 % (1.1 pts) Change in return premium estimate under external reinsurance - % (0.2 %) 0.2 pts Estimated revenue share (0.3 %) (0.4 %) 0.1 pts Underwriting expense ratio, less listed effects 28.9 % 27.4 % 1.5 pts
Excluding the items noted in the table above, the expense ratio increased for
the three months ended
other underwriting and operating expenses, as previously discussed.
67
--------------------------------------------------------------------------------
Table of Contents Segment Results - Segregated Portfolio Cell Reinsurance The Segregated Portfolio Cell Reinsurance segment includes the results (underwriting profit or loss, plus investment results, net ofU.S. federal income taxes) of SPCs at Inova Re and Eastern Re, our Cayman Islands SPC operations, as discussed in Note 18 of the Notes to Consolidated Financial Statements in ourDecember 31, 2021 report on Form 10-K. SPCs are segregated pools of assets and liabilities that provide an insurance facility for a defined set of risks. Assets of each SPC are solely for the benefit of that individual cell and each SPC is solely responsible for the liabilities of that individual cell. Assets of one SPC are statutorily protected from the creditors of the others. Each SPC is owned, fully or in part, by an individual company, agency, group or association and the results of the SPCs are attributable to the participants of that cell. We participate to a varying degree in the results of selected SPCs and, for the SPCs in which we participate, our participation interest ranges from a low of 20% to a high of 85%. SPC results attributable to external cell participants are reported as an SPC dividend (expense) income in our Segregated Portfolio Cell Reinsurance segment. In addition, our Segregated Portfolio Cell Reinsurance segment includes the investment results of the SPCs as the investments are solely for the benefit of the cell participants and investment results attributable to external cell participants are reflected in the SPC dividend (expense) income. As ofMarch 31, 2022 , there were 27 (4 inactive) SPCs. The SPCs assume workers' compensation insurance, healthcare professional liability insurance or a combination of the two from ourWorkers' Compensation Insurance and Specialty P&C segments. As ofMarch 31, 2022 , there were two SPCs that assumed both workers' compensation insurance and healthcare professional liability insurance and one SPC that assumed only healthcare professional liability insurance.
Segment results reflects our share of the underwriting and investment results of
the SPCs in which we participate, and included the following:
Three
Months Ended
($ in thousands) 2022 2021 Change
Net premiums written $ 25,217 $ 22,188 $ 3,029 13.7 %
Net premiums earned $ 19,314 $ 15,884 $ 3,430 21.6 %
Net investment income 112 221 (109) (49.3 %)
Net investment gains (losses) (711) 987 (1,698) (172.0 %)
Other income 1 1 - - %
Net losses and loss adjustment expenses (11,491) (9,425) (2,066) 21.9 %
Underwriting, policy acquisition and operating
expenses (4,369) (5,025) 656 (13.1 %)
SPC U.S. federal income tax expense (1) (642) (356) (286) 80.3 %
SPC net results 2,214 2,287 (73) (3.2 %)
SPC dividend (expense) income (2) (2,367) (1,742) (625) 35.9 %
Segment results (3) $ (153) $ 545
Net loss ratio 59.5% 59.3% 0.2 pts Underwriting expense ratio 22.6% 31.6% (9.0 pts) (1) Represents the provision forU.S. federal income taxes for SPCs at Inova Re, which have elected to be taxed as aU.S. corporation under Section 953(d) of the Internal Revenue Code.U.S. federal income taxes are included in the total SPC net results and are paid by the individual SPCs. (2) Represents the net (profit) loss attributable to external cell participants. (3) Represents our share of the net profit (loss) of the SPCs in which we participate. 68
--------------------------------------------------------------------------------
Table of Contents
Premiums Written
Premiums in our Segregated Portfolio Cell Reinsurance segment are assumed from either ourWorkers' Compensation Insurance or Specialty P&C segments. Premium volume is driven by five primary factors: (1) the amount of new business written, (2) retention of the existing book of business, (3) premium rates charged on the renewal book of business and, for workers' compensation business, (4) changes in payroll exposure and (5) audit premium.
Gross, ceded and net premiums written were as follows:
Three Months Ended
($ in thousands) 2022 2021
Change
Gross premiums written$ 28,369 $ 25,151 $ 3,218 12.8 % Less: Ceded premiums written 3,152 2,963 189 6.4 % Net premiums written$ 25,217 $ 22,188 $ 3,029 13.7 % Gross Premiums Written Gross premiums written reflected reinsurance premiums assumed by component as follows: Three Months Ended March 31 ($ in thousands) 2022 2021 Change Workers' compensation$ 21,488 $ 20,682 $ 806 3.9 % Healthcare professional liability 6,881 4,469
2,412 54.0 %
Gross Premiums Written $ 28,369 $ 25,151
Gross premiums written for the three months endedMarch 31, 2022 and 2021 were primarily comprised of workers' compensation coverages assumed from ourWorkers' Compensation Insurance segment. Workers' compensation gross premiums written increased during the three months endedMarch 31, 2022 as compared to the same period of 2021 driven by an increase in audit premium billed to policyholders and new business written, partially offset by renewal rate decreases of 3%. Healthcare professional liability gross premiums written increased during the three months endedMarch 31, 2022 as compared to the same period of 2021 driven by the effect of tail coverage premium primarily related to one program in which we do not participate, which resulted in$3.0 million of one-time premium written and fully earned. We retained 100% of the eight workers' compensation programs and one healthcare professional liability program up for renewal during the three months endedMarch 31, 2022 .
New business, audit premium, retention and renewal price changes for the assumed
workers' compensation premium is shown in the table below:
Three Months Ended March 31
($ in millions) 2022 2021
New business $ 1.1 $ 0.8
Audit premium $ 1.6 $ 0.2
Retention rate (1) 92 % 92 %
Change in renewal pricing (2) (3 %) (5 %)
(1) We calculate our workers' compensation retention rate as annualized expiring renewed premium
divided by all annualized expiring premium subject to renewal. Our retention rate can be impacted
by various factors, including price or other competitive issues, insureds being acquired, or a
decision not to renew based on our underwriting evaluation.
(2) The pricing of our business includes an assessment of the underlying policy exposure and
market conditions. We continue to base our pricing on expected losses, as indicated by our
historical loss data.
69
--------------------------------------------------------------------------------
Table of Contents
Ceded Premiums Written
Ceded premiums written were as follows:
Three Months Ended March 31
($ in thousands) 2022 2021 Change
Ceded premiums written $ 3,152 $ 2,963 $ 189 6.4 %
For the workers' compensation business, each SPC has in place its own external
reinsurance coverage. The healthcare professional liability business is assumed
net of reinsurance from our Specialty P&C segment; therefore, there are no ceded
premiums related to the healthcare professional liability business reflected in
the table above. The risk retention for each loss occurrence for the workers'
compensation business ranges from $0.3 million to $0.4 million based on the
program, with limits up to $119.7 million . In addition, each program has
aggregate reinsurance coverage between $1.1 million and $2.1 million on a
program year basis. Premiums ceded under our SPC reinsurance treaty are based on
premiums written during the treaty period. The change in ceded premiums written
during the three months ended March 31, 2022 as compared to the same period of
2021 primarily reflected the change in workers' compensation gross premiums
written and the impact of rate increases under the external reinsurance treaty.
External reinsurance rates vary based on the alternative market program.
Ceded Premiums Ratio
Ceded premiums ratio was as follows:
Three Months Ended March 31
2022 2021 Change
Ceded premiums ratio 14.7% 14.3% 0.4 pts
The above table reflects ceded premiums as a percent of gross premiums written
for the workers' compensation business only; healthcare professional liability
business is assumed net of reinsurance, as discussed above. The ceded premiums
ratio reflects the weighted average reinsurance rates of all SPC programs. The
increase in the ceded premiums ratio for the three months ended March 31, 2022
primarily reflected an increase in reinsurance rates.
Net Premiums Earned
Net premiums earned consist of gross premiums earned less the portion of earned premiums that the SPCs cede to external reinsurers. Because premiums are generally earned pro rata over the entire policy period, fluctuations in premiums earned tend to lag those of premiums written. Policies ceded to the SPCs are twelve month term policies and premiums are earned on a pro rata basis over the policy period. Net premiums earned also include premium adjustments related to the audit of workers' compensation insureds' payrolls. Payroll audits are conducted subsequent to the end of the policy period and any related adjustments are recorded as fully earned in the current period.
Gross, ceded and net premiums earned were as follows:
Three Months Ended March 31
($ in thousands) 2022 2021
Change
Gross premiums earned$ 21,664 $ 17,967 $ 3,697 20.6 % Less: Ceded premiums earned 2,350 2,083 267 12.8 % Net premiums earned$ 19,314 $ 15,884 $ 3,430 21.6 % The increase in net premiums earned during the three months endedMarch 31, 2022 primarily reflected the aforementioned effect of$3.0 million of tail premium fully written and earned during the current period and the increase in audit premium billed to policyholders, partially offset by the pro rata effect of a reduction in net premiums written during the preceding twelve months. 70
--------------------------------------------------------------------------------
Table of Contents
Losses and Loss Adjustment Expenses
The following table summarizes the calendar year net loss ratios by separating losses between the current accident year and all prior accident years. The current accident year net loss ratio reflected the aggregate loss ratio for all programs. Loss reserves are estimated for each program on a quarterly basis. Due to the size of some of the programs, quarterly loss results can create volatility in the current accident year net loss ratio from period to period.
Calendar year and current accident year net loss ratios for the three months
ended
Three
Months Ended
2022 2021 Change
Calendar year net loss ratio 59.5 % 59.3 % 0.2 pts
Less impact of prior accident years on the net
loss ratio (5.0 %) (9.6 %) 4.6 pts
Current accident year net loss ratio 64.5 % 68.9 % (4.4 pts)
The current accident year net loss ratio decreased 4.4 percentage points for the
three months ended March 31, 2022 as compared to the same period of 2021. The
decrease in the current accident year net loss ratio for the three months ended
March 31, 2022 primarily reflected favorable trends in prior accident year claim
results and their impact on our analysis of the current accident year loss
estimate, partially offset by the continuation of intense price competition and
the resulting renewal rate decreases in the workers' compensation business.
Calendar year incurred losses (excluding IBNR) ceded to our external reinsurers
decreased $2.8 million for the three months ended March 31, 2022 as compared to
the same period of 2021. Current accident year ceded incurred losses (excluding
IBNR) increased $0.1 million for the 2022 three-month period as compared to the
same period of 2021.
We recognized net favorable prior year reserve development of $0.9 million for
the three months ended March 31, 2022 as compared to $1.4 million for the same
period of 2021. The net favorable prior year reserve development for the three
months ended March 31, 2022 related entirely to workers' compensation business,
which reflected overall favorable trends in claim closing patterns primarily in
accident years 2019 and 2020. The net favorable prior year reserve development
for the three months ended March 31, 2021 also related entirely to the workers'
compensation business which primarily reflected overall favorable claim trends
in claim closing patterns in accident years 2018 and 2019.
71
--------------------------------------------------------------------------------
Table of Contents
Underwriting, Policy Acquisition and Operating Expenses
Our Segregated Portfolio Cell Reinsurance segment underwriting, policy
acquisition and operating expenses were comprised as follows:
Three
Months Ended
($ in thousands) 2022 2021 Change
DPAC amortization $ 5,294 $ 4,636 $ 658 14.2 %
Policyholder dividend expense 66 173 (107) (61.8 %)
Other underwriting and operating expenses (991) 216 (1,207) (558.8 %)
Total $ 4,369 $ 5,025 $ (656) (13.1 %)
DPAC amortization primarily represents ceding commissions, which vary by program
and are paid to our Workers' Compensation Insurance and Specialty P&C segments
for premiums assumed. Ceding commissions include an amount for fronting fees,
commissions, premium taxes and risk management fees, which are reported as an
offset to underwriting, policy acquisition and operating expenses within our
Workers' Compensation Insurance and Specialty P&C segments. In addition, ceding
commissions paid to our Workers' Compensation Insurance segment include cell
rental fees which are recorded as other income and claims administration fees
which are recorded as ceded ULAE within our Workers' Compensation Insurance
segment.
Other underwriting and operating expenses primarily include bank fees,
professional fees and changes in the allowance for expected credit losses. The
decrease in other underwriting and operating expenses for the three months ended
March 31, 2022 as compared to the same period of 2021 primarily reflected the
change in our allowance for expected credit losses related to the collection of
customer accounts that were previously written off.
The decrease in policyholder dividend expense for the three months ended
SPC program, in which we do not participate.
Underwriting Expense Ratio (the Expense Ratio)
The underwriting expense ratio included the impact of the following:
Three Months Ended
2022 2021 Change
Underwriting expense ratio, as reported 22.6% 31.6% (9.0 pts)
Less: impact of audit premium on expense ratio (2.0%) (0.3%) (1.7 pts)
Underwriting expense ratio, excluding the effect of
audit premium
24.6% 31.9% (7.3 pts)
Excluding the effect of audit premium, the underwriting expense ratio decreased
for the 2022 three-month period. The decrease in the underwriting expense ratio
for the 2022 three-month period primarily reflected the change in the allowance
for expected credit losses and policyholder dividend expense, as discussed
above.
72
--------------------------------------------------------------------------------
Table of Contents
Segment Results - Lloyd's Syndicates
Our Lloyd's Syndicates segment includes the results from our participation in Syndicate 1729 and Syndicate 6131 atLloyd's of London . In addition to our participation in Syndicate results, we have investments in and other obligations to our Lloyd's Syndicates consisting of a Syndicate Credit Agreement and FAL requirements. For the 2022 underwriting year, our FAL was comprised of investment securities and cash and cash equivalents deposited with Lloyd's which atMarch 31, 2022 had a fair value of approximately$37.0 million , as discussed in Note 3 of the Notes to Condensed Consolidated Financial Statements. The discussion in our Segment Operating Results under the same heading in Item 7 of ourDecember 31, 2021 report on Form 10-K includes additional information regarding our participation.
We normally report results from our involvement in Lloyd's Syndicates on a
quarter lag, except when information is available that is material to the
current period. Furthermore, the investment results associated with our FAL
investments and certain
concurrently as that information is available on an earlier time frame.
To support and grow our core insurance operations, we reduced our participation in the results of Syndicate 1729, to 5% from 29%, and Syndicate 6131, to 50% from 100%, for the 2021 underwriting year. Due to the quarter lag, this reduced participation was not reflected in our results until the second quarter of 2021. Our participation in the results of Syndicate 1729 for the 2022 underwriting year remains unchanged from the 2021 underwriting year at 5%. EffectiveJanuary 1, 2022 , Syndicate 6131 ceased underwriting on a quota share basis with Syndicate 1729 as Syndicate 6131's applicable business is retained within Syndicate 1729 beginning with the 2022 year of account. The results from our participation in Syndicate 6131 from open underwriting years prior to 2022 will continue to earn out pro rata over the entire policy period of the underlying business. Due to the quarter lag, our ceased participation in Syndicate 6131 will not be reflected in our results until the second quarter of 2022. In addition to the results of our participation in Lloyd's Syndicates, as discussed above, our Lloyd's Syndicates segment also includes 100% of the results of our wholly owned subsidiaries that support our operations at Lloyd's. For the three months endedMarch 31, 2022 and 2021, the results of our Lloyd's Syndicates segment were as follows: Three
Months Ended
($ in thousands) 2022 2021 Change
Gross premiums written $ 5,817 $ 14,102 $ (8,285) (58.8 %)
Less: Ceded premiums written 223 2,217 (1,994) (89.9 %)
Net premiums written $ 5,594 $ 11,885 $ (6,291) (52.9 %)
Net premiums earned $ 7,746 $ 15,850 $ (8,104) (51.1 %)
Net investment income 211 729 (518) (71.1 %)
Net investment gains (losses) (399) (115) (284) (247.0 %)
Other income 134 221 (87) (39.4 %)
Net losses and loss adjustment expenses (4,763) (12,967) 8,204 (63.3 %)
Underwriting, policy acquisition and operating
expenses (2,709) (6,591) 3,882 (58.9 %)
Segment results $ 220 $ (2,873) $ 3,093 107.7 %
Net loss ratio 61.5% 81.8% (20.3 pts)
Underwriting expense ratio 35.0% 41.6% (6.6 pts)
Premiums
Net premiums written decreased during the 2022 three-month period as compared to
the same period of 2021 driven by our decreased participation in the results of
Syndicates 1729 and 6131 for the 2021 underwriting year, partially offset by
volume increases on renewal business and renewal pricing increases, primarily on
casualty and property insurance coverages, as well as new business written,
primarily on specialty property coverages. Net premiums earned decreased $8.1
million during the 2022 three-month period as compared to the same period of
2021 primarily attributable to the pro rata effect of a reduction in net
premiums written during the preceding twelve months.
73
--------------------------------------------------------------------------------
Table of Contents
Net Losses and Loss Adjustment Expenses
The following table summarizes calendar year net loss ratios by separating
losses between the current accident year and all prior accident years. Net loss
ratios for the period were as follows:
Net Loss Ratios
Three Months Ended
2022 2021 Change
Calendar year net loss ratio 61.5 % 81.8 % (20.3 pts)
Less: impact of prior accident years on the net loss
ratio
19.7 % 9.7 % 10.0 pts Current accident year net loss ratio 41.8 % 72.1 % (30.3 pts) The decrease in the calendar year net loss ratio for the three months endedMarch 31, 2022 as compared to the same period of 2021 was primarily driven by the impact of certain property and catastrophe related losses incurred during the prior year period and, to a lesser extent, decreases to certain loss estimates during the first quarter of 2022, partially offset by unfavorable prior year development. We recognized$1.5 million of unfavorable prior year development during each of the three months endedMarch 31, 2022 and 2021. The unfavorable prior year development for the three months endedMarch 31, 2022 was driven by higher than expected losses and development on certain large claims, primarily catastrophe related losses.
Underwriting, Policy Acquisition and Operating Expenses
For the 2022 three-month period, the underwriting expense ratio decreased by 6.6
percentage points as compared to the same period of 2021 which primarily
reflected the impact of our reduced participation in Syndicate 1729 and
Syndicate 6131 for the 2021 underwriting year. Due to the quarter lag, operating
expenses incurred during the first quarter of 2022 primarily were related to the
2021 underwriting year for which our participation is 5% and 50% in Syndicate
1729 and Syndicate 6131, respectively, whereas the net premiums earned during
the same period also includes premium from other open underwriting years in
which we participate at a higher degree.
74
--------------------------------------------------------------------------------
Table of Contents
Segment Results - Corporate
Our Corporate segment includes our investment operations, including the investment operations of NORCAL for the three months endedMarch 31, 2022 and excluding those reported in our Segregated Portfolio Cell Reinsurance and Lloyd's Syndicates segments as discussed in Note 18 of the Notes to Consolidated Financial Statements in ourDecember 31, 2021 report on Form 10-K. In addition, this segment includes corporate expenses, interest expense,U.S. income taxes and non-premium revenues generated outside of our insurance entities. Segment results for the three months endedMarch 31, 2022 exclude transaction-related costs and the associated income tax benefit related to the NORCAL acquisition as we do not consider these items in assessing the financial performance of the segment (for additional information on the NORCAL acquisition see Note 2 of the Notes to Consolidated Financial Statements in ourDecember 31, 2021 report on Form 10-K). Segment results for our Corporate segment were net earnings of$6.0 million for the three months endedMarch 31, 2022 as compared to$19.6 million for the same period of 2021 and included the following: Three
Months Ended
($ in thousands) 2022 2021 Change
Net investment income $ 20,120 $ 14,067 $ 6,053 43.0 %
Equity in earnings (loss) of unconsolidated
subsidiaries $ 7,620 $ 6,788 $ 832 12.3 %
Net investment gains (losses) $ (12,396) $ 7,977 $ (20,373) (255.4 %)
Other income $ 2,065 $ 1,894 $ 171 9.0 %
Operating expense $ 8,739 $ 7,175 $ 1,564 21.8 %
Interest expense $ 4,441 $ 3,212 $ 1,229 38.3 %
Income tax expense (benefit) $ (1,770) $ 736
Net Investment Income, Equity in Earnings (Loss) of Unconsolidated Subsidiaries,
Net Investment Gains (Losses)
Net Investment Income
Net investment income is primarily derived from the income earned by our fixed maturity securities and also includes dividend income from equity securities, income from our short-term and cash equivalent investments, earnings from other investments and changes in the cash surrender value of BOLI contracts, net of investment fees and expenses. Net investment income for the three months endedMarch 31, 2022 also includes income earned, net of investment fees and expenses, from investments acquired from NORCAL onMay 5, 2021 .
Net investment income (loss) by investment category was as follows:
Three Months
Ended
($ in thousands) 2022 2021 Change
Fixed maturities $ 21,100 $ 14,725 $ 6,375 43.3 %
Equities 701 694 7 1.0 %
Short-term investments, including Other 405 198
207 104.5 %
BOLI (47) 444
(491) (110.6 %)
Investment fees and expenses (2,039) (1,994) (45) 2.3 % Net investment income$ 20,120 $ 14,067 $ 6,053 43.0 % Fixed Maturities Income from our fixed maturities increased during the 2022 three-month period as compared to the same period of 2021 driven by higher average investment balances primarily attributable to the addition of fixed maturity securities valued at$1.1 billion to our portfolio onMay 5, 2021 as a result of the NORCAL acquisition (see Note 2 of the Notes to Consolidated Financial Statements inProAssurance's December 31, 2021 report on Form 10-K for additional information). The increase in income from our fixed maturities during the 2022 three-month period was partially offset by lower yields from our corporate debt securities and, to a lesser extent, state and municipal bonds. As a result of the NORCAL acquisition, average investment balances were approximately 66% higher for the 2022 three-month period as compared to the same period of 2021; excluding the impact of the acquisition, average investment balances were approximately 6% higher. 75
--------------------------------------------------------------------------------
Table of Contents
Average yields for our fixed maturity portfolio were as follows:
Three Months Ended March 31
2022 2021
Average income yield 2.3% 2.6%
Average tax equivalent income yield 2.3% 2.7%
Short-term Investments and Other Investments
Short-term investments, which have a maturity at purchase of one year or less are carried at fair value, which approximates their cost basis, and are primarily composed of investments inU.S. treasury obligations, commercial paper and money market funds. Income from our short-term and other investments increased during the 2022 three-month period as compared to the same period of 2021 primarily due to income contributed by investments acquired from NORCAL.
BOLI
We hold BOLI policies that are carried at the current cash surrender value of the policies, which includes the BOLI policies acquired from NORCAL. All insured individuals were members ofProAssurance or NORCAL management at the time the policies were acquired. The cash surrender value of our BOLI policies decreased for the 2022 three-month period as compared to the same period of 2021 driven by policies acquired from NORCAL.
Equity in Earnings (Loss) of Unconsolidated Subsidiaries
Equity in earnings (loss) of unconsolidated subsidiaries was comprised as
follows:
Three Months Ended
($ in thousands) 2022 2021 Change
All other investments, primarily investment fund
LPs/LLCs $ 10,008 $ 9,974 $ 34 0.3 %
Tax credit partnerships (2,388) (3,186) 798 (25.0 %)
Equity in earnings (loss) of unconsolidated
subsidiaries $ 7,620 $ 6,788 $ 832 12.3 %
We hold interests in certain LPs/LLCs that generate earnings from trading
portfolios, secured debt, debt securities, multi-strategy funds and private
equity investments. The performance of the LPs/LLCs is affected by the
volatility of equity and credit markets. For our investments in LPs/LLCs, we
record our allocable portion of the partnership operating income or loss as the
results of the LPs/LLCs become available, typically following the end of a
reporting period. Our investment results from our portfolio of investments in
LPs/LLCs for the 2022 three-month period included additional earnings of
approximately $0.4 million from acquired interests in four LPs as a result of
the NORCAL acquisition. Excluding NORCAL, our investment results from our
portfolio of investments in LPs/LLCs for the 2022 three-month period as compared
to the same period of 2021 decreased $0.4 million primarily due to lower
earnings from an LP/LLC.
Our tax credit partnership investments are designed to generate returns in the
form of tax credits and tax-deductible project operating losses and are
comprised of qualified affordable housing project tax credit partnerships and a
historic tax credit partnership. We account for our tax credit partnership
investments under the equity method and record our allocable portion of the
operating losses of the underlying properties based on estimates provided by the
partnerships. For our qualified affordable housing project tax credit
partnerships, we adjust our estimates of our allocable portion of operating
losses periodically as actual operating results of the underlying properties
become available. The primary benefit of credits and losses from our historic
tax credit partnership are earned in a short period with potential for
additional cash flows extending over several years. The results from our tax
credit partnership investments for the three months ended March 31, 2022
reflected lower partnership operating losses as compared to the same period of
2021.
The tax benefits received from our tax credit partnerships, which are not
reflected in our investment results, reduced our tax expense in 2022 and 2021 as
follows:
Three
Months Ended
(In millions) 2022 2021
Tax credits recognized during the period $ 1.2 $ 3.4
Tax benefit of tax credit partnership operating losses $ 0.5
The tax credits generated from our tax credit partnership investments of$1.2 million for the three months endedMarch 31, 2022 were deferred for use in future periods due our expected consolidated loss calculated on a tax basis. For the three months endedMarch 31, 2021 the tax credits generated from our tax credit partnership investments of$3.4 million were deferred to be utilized in future periods. Not included in the table above is$2.0 million of tax credits recaptured from the 2019 76
--------------------------------------------------------------------------------
Table of Contents
tax year during the three months endedMarch 31, 2022 due to the carryback of our estimated NOL for the three months endedMarch 31, 2022 to the 2021 tax year. The recaptured tax credits were earned in 2019 but not utilized until 2021 due to NOL's generated in both 2019 and 2020. As ofMarch 31, 2022 , we had approximately$49.9 million of available tax credit carryforwards generated from our investments in tax credit partnerships which we expect to utilize in future periods. Tax credits provided by the underlying projects of our historic tax credit partnership are typically available in the tax year in which the project is put into active service, whereas the tax credits provided by qualified affordable housing project tax credit partnerships are provided over approximately a ten year period.
Non-GAAP Financial Measure - Tax Equivalent Investment Result
We believe that to fully understand our investment returns it is important to
consider the current tax benefits associated with certain investments as the tax
benefit received represents a portion of the return provided by our tax-exempt
bonds, BOLI, common and preferred stocks, and tax credit partnership investments
(collectively, our tax-preferred investments). We impute a pro forma
tax-equivalent result by estimating the amount of fully-taxable income needed to
achieve the same after-tax result as is currently provided by our tax-preferred
investments. We believe this better reflects the economics behind our decision
to invest in certain asset classes that are either taxed at lower rates and/or
result in reductions to our current federal income tax expense. Our pro forma
tax-equivalent investment result is shown in the table that follows as well as a
reconciliation of our GAAP net investment result to our tax equivalent result.
Three
Months Ended
(In thousands) 2022 2021
GAAP net investment result:
Net investment income $ 20,120 $ 14,067
Equity in earnings (loss) of unconsolidated subsidiaries 7,620 6,788
GAAP net investment result $ 27,740
Pro forma tax-equivalent investment result$ 25,383
Reconciliation of pro forma and GAAP tax-equivalent
investment result:
GAAP net investment result
$ 27,740 $ 20,855 Taxable equivalent adjustments, calculated using the 21% federal statutory tax rate State and municipal bonds 133 115 BOLI (12) 118 Dividends received - 3 Tax credit partnerships* (2,478) 1,792 Pro forma tax-equivalent investment result$ 25,383 $ 22,883 *Due to our expected consolidated loss calculated on a tax basis for the three months endedMarch 31, 2022 , the tax credits recognized from our tax credit partnership investments were deferred to be utilized in future periods; however, during the three months endedMarch 31, 2022 , we recaptured a portion of tax credits earned in 2019, that were utilized in 2021, as a result of our expected carry back of our 2022 NOL to the 2021 tax year, resulting in a current tax expense related to tax credit partnerships. 77
--------------------------------------------------------------------------------
Table of Contents
Net Investment Gains (Losses)
The following table provides detailed information regarding our net investment
gains (losses).
Three Months Ended
(In thousands) 2022 2021
Gross realized gains, available-for-sale fixed maturities $ 1,105 $ 4,163
Gross realized (losses), available-for-sale fixed maturities (1,094) (187)
Net realized gains (losses), equity investments (693) 4,156
Net realized gains (losses), other investments 650 3,196
Change in unrealized holding gains (losses), equity investments (10,252) (3,788)
Change in unrealized holding gains (losses), convertible securities,
carried at fair value as a part of other investments
(2,475) (190) Other 363 627 Net investment gains (losses) $
(12,396)
We did not recognize any credit-related impairment losses in earnings or
non-credit impairment losses in OCI for the three months ended
We recognized$12.4 million of net investment losses during the 2022 three-month period which include approximately$8.8 million of net investment losses during the 2022 three-month period related to investments acquired from NORCAL. Net investment losses during the 2022 three-month period were driven by unrealized holding losses resulting from changes in the fair value of our equity investments. We recognized$8.0 million of net investment gains during the 2021 three-month period, driven primarily by realized gains on the sale of certain available-for-sale fixed maturities and equity investments.
Operating Expenses
Corporate segment operating expenses were comprised as follows:
Three Months Ended March 31
($ in thousands) 2022 2021 Change
Operating expenses $ 10,681 $ 9,719 $ 962 9.9 %
Management fee offset (1,942) (2,544) 602
(23.7 %)
Total $ 8,739 $ 7,175 $ 1,564 21.8 %
Operating expenses increased $1.0 million during the 2022 three-month period as
compared to the same respective period of 2021 primarily due to an increase in
compensation-related costs and, to a lesser extent, share-based compensation
expenses, partially offset by a decrease in professional fees. The increase in
compensation-related costs during the 2022 three-month period was driven by an
increase in segment headcount due to the addition of Corporate NORCAL employees.
Subsequent to acquisition on May 5, 2021 , compensation-related costs of all
NORCAL employees were reported in our Specialty P&C segment. Beginning in 2022,
compensation-related costs for Corporate NORCAL employees are reported in our
Corporate segment. In addition, the increase in compensation-related costs also
reflected higher amounts accrued for performance-related incentive plans due to
our improved performance metrics. The increase in share-based compensation
expense in the 2022 three-month period was attributable to the effect of the
incorporation of certain NORCAL employees into our share-based compensation
plans beginning in 2022.
Operating subsidiaries within our Specialty P&C segment and our Workers'
Compensation Insurance segment are charged a management fee by the Corporate
segment for services provided to these subsidiaries. The management fee is based
on the extent to which services are provided to the subsidiary and the amount of
premium written by the subsidiary. Under the arrangement, the expenses
associated with such services are reported as expenses of the Corporate segment,
and the management fees charged are reported as an offset to Corporate operating
expenses. Fluctuations in the amount of premium written by each subsidiary can
result in corresponding variations in the management fee charged to each
subsidiary during a particular period. Due to continued organizational structure
enhancements in our Specialty P&C segment during 2021 as well as operational
alignments as a result of the integration of NORCAL, the extent to which
services are provided by the Corporate segment to the operating subsidiaries
within the Specialty P&C segment decreased further effective January 1, 2022 .
Accordingly, we reduced the fee charged to the operating subsidiaries within the
Specialty P&C segment during the 2022 three-month period. Also effective January
1, 2022 , the management agreement included operating subsidiaries of NORCAL
contributing to $0.6 million of additional management fees in the current
period. There were no changes to the extent to which
78
--------------------------------------------------------------------------------
Table of Contents
services are provided by the Corporate segment to the operating subsidiaries
within our
Interest Expense
Consolidated interest expense for the three months endedMarch 31, 2022 and 2021 was comprised as follows: Three Months Ended March 31 ($ in thousands) 2022 2021 Change Senior Notes due 2023$ 3,357 $ 3,357 $ - - % Contribution Certificates (including accretion)(1) 1,853 - 1,853 nm Revolving Credit Agreement (including fees and amortization)(2) 246 214 32 15.0 % Mortgage Loans (including amortization) - 148 (148) nm (Gain)/loss on interest rate cap (1,015) (507) (508) (100.2 %) Interest expense$ 4,441 $ 3,212 $ 1,229 38.3 % (1) Includes accretion of approximately$0.5 million for the three months endedMarch 31, 2022 which is recorded as an increase to interest expense as a result of the difference between the recorded acquisition date fair value and the principal balance of the Contribution Certificates associated with our acquisition of NORCAL. (2) Primarily reflects unused commitment fees as there were no outstanding borrowings during either period. Consolidated interest expense increased during the three months endedMarch 31, 2022 as compared to the same period of 2021 driven by the addition of interest expense on the Contribution Certificates associated with our acquisition of NORCAL onMay 5, 2021 (see Note 2 of the Notes to Consolidated Financial Statements in ourDecember 31, 2021 report on Form 10-K). The increase in consolidated interest expense for the 2022 three-month period was partially offset by the change in fair value of our interest rate cap. See further discussion of our outstanding debt in Note 7 of the Notes to Condensed Consolidated Financial Statements and further discussion of our interest rate cap agreement and Contribution Certificates in Note 3 and Note 13 of the Notes to Consolidated Financial Statements in ourDecember 31, 2021 report on Form 10-K. Taxes Tax expense allocated to our Corporate segment includesU.S. tax only, which would includeU.S. tax expense incurred from our corporate membership inLloyd's of London . TheU.K. tax expense incurred by theU.K. based subsidiaries of our Lloyd's Syndicates segment is allocated to that segment. The SPCs at Inova Re, one of ourCayman Islands reinsurance subsidiaries, have each made a 953(d) election under theU.S. Internal Revenue Code and are subject toU.S. federal income tax; therefore, tax expense allocated to our Corporate segment also includes tax expense incurred from any SPC at Inova Re in which we have a participation interest of 80% or greater as those SPCs are required to be included in our consolidated tax return. Consolidated tax expense (benefit) reflects the tax expense (benefit) of both segments and the tax impact of items excluded from segment reporting, as shown in the table below: Three Months Ended March 31 (In thousands) 2022 2021 Corporate segment income tax expense (benefit) $
(1,770)
Income tax expense (benefit) - transaction-related costs* (247) - Consolidated income tax expense (benefit)$ (2,017) $ 736 *Represents the income tax benefit associated with the transaction-related costs related to our acquisition of NORCAL that are not included in a segment as we do not consider these costs in assessing the financial performance of any of our operating or reportable segments. See Note 11 of the Notes to Condensed Consolidated Financial Statements for a reconciliation of our segment results to our consolidated results. 79
--------------------------------------------------------------------------------
Table of Contents
Listed below are the primary factors affecting our consolidated effective tax rate for the three months endedMarch 31, 2022 and 2021. The comparability of each factor's impact on our effective tax rate is affected by the consolidated pre-tax loss recognized during the three months endedMarch 31, 2022 as compared to the consolidated pre-tax income recognized during the same period of 2021. Factors that have the same directional impact on income tax expense in each period have an opposite impact on our effective tax rate due to the effective tax rate being calculated based upon a pre-tax loss during the three months endedMarch 31, 2022 versus the pre-tax income during the same period of 2021. These factors include the following: Three Months Ended March 31 2022 2021 Income tax (benefit) Income tax ($ in thousands) expense Rate Impact (benefit) expense Rate Impact Computed "expected" tax expense (benefit) at statutory rate$ (1,171) 21.0 % $ 1,779 21.0 % Tax-exempt income (1) (95) 1.7 % (186) (2.2 %) Tax credits (1,205) 21.6 % (3,374) (39.8 %) Non-U.S. operating results (46) 0.8 % 603 7.1 % Tax deficiency (excess tax benefit) on share-based compensation 340 (6.1 %) 297 3.5 % Change in uncertain tax positions 21 (0.4 %) 57 0.7 % Estimated annual tax rate differential (2) - - % 2,087 24.6 % Other 139 (2.4 %) (527) (6.2 %) Total income tax expense (benefit)$ (2,017) 36.2 % $ 736 8.7 %
(1) Includes tax-exempt interest, dividends received deduction and change in
cash surrender value of BOLI.
(2) Represents the tax rate differential between our actual effective tax rate for the three months endedMarch 31, 2021 and our projected annual effective tax rate as ofMarch 31, 2021 as calculated under the estimated annual effective tax rate method. There was no tax rate differential recorded for the three months endedMarch 31, 2022 as we utilized the discrete effective tax rate method atMarch 31, 2022 (see further discussion in the Critical Accounting Estimates section). For the three months endedMarch 31, 2022 , we utilized the discrete effective tax rate method for recording the provision (benefit) for income taxes which treats the income tax expense (benefit) for the period as if it were the income tax expense (benefit) for the full year and determines the income tax expense (benefit) on that basis (see further discussion on this method in the Critical Accounting Estimates section under the heading "Estimation of Taxes/Tax Credits"). For the three months endedMarch 31, 2021 , the provision (benefit) for income taxes and the effective tax rate were determined utilizing the estimated annual effective tax rate method which is based upon our current estimate of our annual effective tax rate at the end of each quarterly reporting period (the projected annual effective tax rate) plus the impact of certain discrete items that are not included in the projected annual effective tax rate. Our effective tax rates for both the 2022 and 2021 three-month periods were different from the statutory federal income tax rate of 21% primarily due to the benefit recognized from the tax credits transferred to us from our tax credit partnership investments. We recognized tax credits of$1.2 million and$3.4 million during the three months endedMarch 31, 2022 and 2021, respectively. While projected tax credits for 2022 are less than 2021, they continue to have a significant impact on the effective tax rate for the 2022 three-month period. Our effective tax rate for the 2021 three-month period, as shown in the table above, differed from our projected annual effective tax rate of (38.4%) due to certain discrete items. These discrete items increased our effective tax rate by 47.1% for the 2021 three-month period mainly due to the treatment of net investment gains. When we utilize the estimated annual effective tax rate method, net investment gains and losses are treated as discrete items and reflected in the effective tax rate in the period in which they are included in income. This treatment of net investment gains of$8.0 million in our Corporate segment for the three months endedMarch 31, 2021 accounted for an increase of 19.8% in the projected annual effective tax rate. The remaining discrete items that affected our effective tax rate for the 2021 three-month period were comprised of individually insignificant components. 80
--------------------------------------------------------------------------------
Table of Contents
HERITAGE INSURANCE HOLDINGS, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
New Health and Medicine Findings from Alexandria University Described (Healthcare Utilization with Drug Acquisition and Expenses at the National Health Insurance Fund in Sudan): Health and Medicine
Advisor News
- Innovative financial literacy’s greatest hits
- Gen Z not following the typical path to retirement
- Survey finds some support for DOL fiduciary rule
- Nonprofit involvement: How do you get business and WIIFM?
- Workers still concerned about financial well-being
More Advisor NewsAnnuity News
- VOYA RETIREMENT INSURANCE AND ANNUITY COMPANY – 3rd QUARTER FINANCIALS 2024
- Riley LaTour Appointed Chief Risk Officer for Somerset Reinsurance Ltd
- NAFA Honors Passionate Industry Champion Rod Mims with 2024 Bo Johnson Spirit Award
- Steve Patton Named Senior Vice President of
Simplified Issue Solutions for AmeriLife Health
- Brighthouse Financial Announces Completion of Reinsurance Transaction
More Annuity NewsHealth/Employee Benefits News
- Health advocates call for extension of insurance subsidy that covers 67,000 young adults
- AG issues warning about health insurance scams
- Findings from Genentech Inc. Update Knowledge of Managed Care and Specialty Pharmacy (Patient Liability, Treatment Adherence, and Treatment Persistence Associated With State Bans of Copay Accumulator Adjustment Programs): Drugs and Therapies – Managed Care and Specialty Pharmacy
- Advocates highlight Idahoans' health care access under Medicaid expansion in short film
- What Kind of Coverage Do I Need for Medical Transport?
More Health/Employee Benefits NewsLife Insurance News
- Billionaire Greg Lindberg pleads guilty to a $2 billion insurance fraud scheme
- Third Quarter 2024 Conseco Life Insurance Company of Texas
- Billionaire Greg Lindberg pleads guilty to a $2 billion insurance fraud scheme
- New York Life Introduces New Resource for Financial Wellbeing in the Workplace
- California insurance department accused of hiding information on life insurance complaints
More Life Insurance News