ProAssurance Corp (PRA) 2016 Q1 法說會逐字稿

Good morning, everyone. Welcome to the conference call to discuss ProAssurance's results for the first-quarter of 2016. These results were reported in a news release earlier today, and also in the Company's filing of its quarterly report on Form 10-Q.

These documents are intended to provide you with important information about the significant risks, uncertainties, and other factors that are out of the Company's control and could affect ProAssurance's business and alter expected results. Further, we caution you that Management expects to make statements on this call dealing with projections, estimates, and expectations, and explicitly identifies these as forward-looking statements within the meaning of the US Federal Securities laws and subject to applicable Safe Harbor protections.

The content of this call is accurate only on May 9, 2016, and except as required by law or regulation, ProAssurance will not undertake and expressly disclaims any obligation to update or alter information disclosed as part of these forward-looking statements. The Management team of ProAssurance expects to reference non-GAAP items during today's call.

The Company's recent news release provides a reconciliation of these non-GAAP numbers to their GAAP counterparts. Now as I turn the call over to Mr. Frank O'Neil, I would like to remind you that this call is being recorded. And there will be a time for questions after the conclusion of prepared remarks.

Thank you, Carrie. Participating in today's call are our Chairman and CEO, Stan Starnes; Howard Friedman, the President of our Healthcare Professional Liability Group; Chief Financial Officer and Executive Vice President, Ned Rand; and Mike Boguski, the President of the Eastern Insurance Alliance, our Worker's Compensation subsidiary. I'm going to ask Stan to give us some opening comments. Stan?

Thanks, Frank, and thank you to everyone has joined us to learn about first-quarter 2016 results, hear an update on the view of the markets we serve, and learn about the progress of our strategic initiatives to address the opportunities in these markets. My comments and our announcement of preliminary results on April 28 laid the groundwork for my opening thoughts.

We are not going to tell you that we are pleased with our investment results this quarter. We fell short of expectations as far as our investment performance was concerned. However, in fairness, the energy sector has been a challenge for most companies in that field and for those who have invested in it.

However, from an operational standpoint, we continue to be competent in the strategy we have laid out. We remain a solidly profitable company with strong underwriting results, a disciplined approach to business that our ability challenging any conviction that our strategic initiatives are succeeding while also sowing the seeds of future success.

We will make that the focus during our remarks today which we will open with Ned's discussion of financial results. Ned?

Thanks, Stan. Because investments are such a big factor in our results, I'll deal with those first. That will cover our corporate segment operations as well.

As you know if you've looked at any of our investor presentations, only about 5% of our portfolio is energy related, but it had an outsized effect this quarter. We maintain a well diversified portfolio, which includes equities and alternative investments. There can be volatility in both and in any one quarter they may provide a tailwind as they have in the past or as in this quarter, a headwind.

We had $8.4 million in realized investment losses in the quarter, which included $9.7 million of impairments, compared to a gain of $4.8 million in 2015. The culprit was mainly energy-related investments. Our net investment result was down approximately $7 million from last year's first quarter, from $29 million to $22 million.

Net investment income was down $1.9 million of the first quarter of 2015 as a result of lower investment balances, caused by the significant amount of capital we returned to shareholders last year and continuing low interest rate environment. Our investment and unconsolidated subsidiaries resulted in a $3.6 million loss compared to a $1.6 million game in the prior year. Most of that decline was due to an increase in the amortization of tax credits related to the acceleration of operating losses, as well as lower returns on our alternative investments.

Now I'll turn to results of our insurance activities, which paint a brighter picture. Gross premiums written were essentially flat year-over-year. Dissecting that we achieved 3% growth and Worker's Compensation and a 47% increase in our Lloyd's Syndicate segments which was profitable for the first time in its short history.

Specialty P&C our largest segment was down 4% primarily because of a decline in physician premiums. And it facilities with a focus on evolving and complex health systems was marginally higher and indicative of our growing standard in that market and the brokers that serve it.

Cross-selling continues to accelerate with $4.9 million of direct premium in the quarter directly related to these efforts. That compares to $800 million in the first quarter of 2015. And includes the second combined healthcare professional liability and Worker's Compensation and segregated cell program. Another indication of the growing traction in this area of our strategy.

Net premiums earned, grew 3% year-over-year, again led by workers comp and Lloyd's somewhat offset by Specialty P&C, net favorable development was $20.7 million in the quarter, reflecting the continuation of a favorable loss severity trends compared to our expectations. Favorable development was $4.8 million lower than in 2015, which helped to move our consolidated calendar year net loss ratio to 62.5%, 1.3 points higher than in 2015's first quarter.

The consolidated kind accident year loss ratio was 78.6%, down 2.1 points quarter over quarter, primarily due to the effect of a lower loss ratio on our Lloyd's segment. The expense ratio was up as well, two discrete items contributed to the increase in this quarter. The first thing, approximately $640,000 to begin determination of the legacy pension plan from a line of business divested by Eastern in 2010.

The second being $1 million in cost associated with the preacquisition liability from a discontinued operation. For modeling purposes we expect additional expenses of $1.6 million to $2.1 million during 2015 in connection to the ultimate termination of that legacy pension plan. And we expect to spend another $700,000 in the second quarter 2016 for the final segment of the preacquisition liability.

Net income was $19.3 million or $0.36 per diluted share. Operating income was $24.8 million or $0.46 per diluted share. Both results effective primarily by the investment related I outlined earlier.

Our effective tax rate in the quarter was 6.6% versus 16.9% in Q1 of 2015 as we've been mentioning for a couple of quarters, we anticipated lower effective tax rate driven by an accelerated in the benefit coming from some of our tax credits and the impact of this and our other tax preference investments on a lower pretax income number.

We repurchased approximately 27,700 shares of our common stock during the first quarter at a cost of approximately $1.3 million and for April 29, we have added approximately 7,100 shares at a cost of approximately $342,000, leaving us with approximately $110 million in a repurchase authorization as of that date. Book value increased by $0.42, $37.30.

And finally, and March 31, we held $196 million in unpledged cash and liquid investments outside our insurance subsidiaries and available for use by the holding Company. Frank?

Thank you, Ned. Let's circle back for our questions later on that. Howard, we will get you to address Specialty P&C segment results.

Thanks, Frank. The insurance lines and Specialty P&C continue to be some of the most competitive in the industry. Gross premiums were down 3.7% with physician premiums, the largest component, down 3.3%. However, healthcare facilities were up 5.5% and medical technology and life sciences up 4.2%.

Recall that are M&A strategy of the past five years has been focused on adding to our capabilities so that we can address the widest spectrum of healthcare related risks. With Medmarc being a key part of that we are pleased the increase there. It's also no secret that the facility market is a vital part of the healthcare professional liability line and becoming more important, so gains in this area help validate our strategy.

Remember that this is generally a once a year sales cycle and each year we gain credibility as the market. As we're focused increase of sales and marketing efforts in this area, we are becoming more successful both and broker outreach to gain acceptance in the broker community, and with the buyers service by the brokers.

The increase premiums tell us were having some success as does the number of submissions which are up 23% over last year. And it's not just in facilities where we are seeing success, Ned mention the latest combined healthcare and Worker's Compensation segregated portfolio cell.

That added $1.9 million of new healthcare professional liability gross written premium to an established Worker's Compensation program it during the quarter. And just a note, Ned mentioned $800 million and cross-selling premium should have been $800,000, someday I hope to reach that $800 million milestone. (laughter)

Not this quarter.

Certainly the retrenchment of AIG others areas of healthcare liability is playing a role and increased activity and success. As an example in the second quarter, we received the order to bind a significant national account that we expect to be effective June 1. That was a former AIG insured and the sale resulted from a broker driven selection process.

Not only are we adding new [business in] the segment, $10.6 million in total, but we are retaining business at prices that meet our profitability targets and underwriting standards in one of the toughest pricing environment I've ever seen. Physician premium retention was 88% in the quarter, a 3 point improvement over last year's first quarter, when we saw the loss of some large accounts and hospital insurance programs.

Our retention is attributed to our agents and to the employees who deliver the kind of service that results and policy holders being willing to forgo significant price differentials to stay with us. Pricing on our renewing physician business is was flat year-over-year.

Our overall ceded premiums written declined about $250,000 from 2015, due to a decrease in reinsurance cost, but we did see an increase in premiums ceded in shared risk is arrangements which were up $1.7 million compared to the first quarter of last year. We think these programs provide us with access to new business that we would not otherwise the and it's also another example of how we are pivoting to address new markets and seeing success in these efforts.

Net favorable loss development in the first quarter of 2016 in the Specialty P&C segment was $27.2 million, a decrease of $4.6 million quarter over quarter, but that decrease is reflective of the overall stability of the loss environment in the segment, which remains largely unchanged. I want to stress that we're using the same disciplined methods to establish reserves (technical difficulty) but I want to also highlighted by the reduction in our agreement over the past several years has consequently reduced our absolute level of reserves.

You'll note a 1 point increase in our current accident year loss ratio mainly due to reserves from mass tort exposures. We are establishing this reserve based on our mass tort experience over the past few years not because of any specific events in the quarter, and we will monitor activity as the year progresses.

That increase was somewhat offset by lower allocation of certain personnel related costs to unallocated loss adjustment expenses. Frank?

Thank you, Howard. We'll go next to Mike Boguski for comments about the Workers' Compensation segment. Mike?

Thank you, Frank. The Worker's Compensation segment 2016 first-quarter operating results decreased compared to the same period in the prior year, driven by an increase in the net loss ratio and underwriting expense ratio.

Gross premiums written increased to $78 million for the three months ended March 31, 2016, compared to $75.9 million for the same period in 2015 -- an increase of 3%. This includes new business writings of $9.4 million during the quarter.

Audit premium was $1.5 million in the first quarter of 2016, a gain of approximately 10% year-over-year, driven by improved economic conditions and strong financial underwriting. Renewal pricing decreased 1.8% in the quarter reflecting increase price competition in the Worker's Compensation marketplace.

Premium retention was 88.4% for the first quarter, driven by strong renewal retention results and our alternative market program business. We were successful in renewing all nine of be available alternative market programs in the quarter. Alternative market programs directorate and premium increase 16.2% compared to same first quarter 2015.

Importantly, we added a new healthcare Worker's Compensation program representing $1.9 million of new premium during the quarter. Overall, we were pleased with our healthcare market penetration and Worker's Compensation. The healthcare book to business grew 15.5% quarter over quarter as compared to Worker's Compensation segment growth up 3%.

The increase in the first quarter of 2016 accident year loss ratio reflects the norm rate reductions down the quarter and Management's view that the growing economy will continue to result in more severity-related claims with less experience workers. Favorable reserve development was $1.1 million in the quarter compared to $1.7 million in the first quarter of 2015, primarily related to alternative market business, but also includes a $400,000 in both periods related to the amortization of purchase accounting fair value adjustments.

We successfully closed 16% of 2015 and prior claims during the quarter, a result that is consistent with historical averages. The increased 2016 expense ratio is impacted by the 1.2 point increase in 2016 related to a settlement charge as part of the pension termination Ned mention other. And 2016 combined ratio of 97.2% includes 2.4 percentage points of intangible asset amortization at 1.1 percentage points of a corporate management fee.

Thanks, Mike. Let's go back to Howard a get an update on the Lloyd's segment.

Thanks, Frank. The big news is that the Lloyd's segment was profitable this quarter, segment operating profits were $1.6 million in the quarter compared to a loss of $1.1 million in the year ago quarter. Remember we are reporting on a one quarter lag with the exception of certain US-based administrative expenses and investment results associated with our funds at Lloyd's which are held as an investment.

In the three months we're reporting, our 58% participation in Syndicate 1729 resulted in $6.9 million of gross premiums written, an increase of almost 47% over last year. Net earned premiums were up more than 100%.

We continue to benefit from the maturation of the Syndicate's operations and a greater ability to underwrite increasing submissions with a full staff on board. Underwriting expenses continue to rise as of the business is built out, but the underwriting expense ratio continues to decline, down almost 21 points from the same reporting quarter in 2015. That reduction is a direct result of the increase top line in the Syndicate.

Claims activity keeping pace with the growth in premium, net losses and LAE were $6.2 million for the period, of a little more than 54% compared to last year. The Syndicate's loss experience remain immature and a generally continues to utilize a Lloyd's historical data for similar risks to establish be expected loss ratios with consideration given to loss experience incurred to date.

We expect loss ratio to fluctuate from quarter to quarter as the Syndicate rights a variety of business in different risks classes and the book begins to mature. We recognize net favorable loss development of $400,000 for the quarter.

The mix of premiums is dominated by property coverage, which is approximately 56% of the Syndicate premiums. Casualty coverage accounts for approximately 39% and property reinsurance comprises the remaining 5%. The majority of the Syndicate's US business remains US-based.

We are also looking forward to increased global healthcare professional liability activity now that an underwriting team that was previously at market form has joined the Syndicate 1729. This team has a successful track record and has not been involved in underwriting business and some of those countries which have been notoriously unprofitable. The team's key international territories include Canada, Australia, South America, and the Middle East.

Separately from this activity at the Syndicate, we are pursuing international healthcare professional liability opportunities and our Specialty P&C segment, both on a direct basis and through reinsurance. We hope to have more to report in the future, but due to the developmental nature of potential business, we will not be able to comment further at this time. Frank?

Thanks, Howard. Stan, some final thoughts from you, please.

Thanks, private where optimistic about our future and we continue to see the positive results of our strategies to capitalize on the emerging trends in healthcare. You've heard about success in growing the business required to succeed in the new healthcare environment and I would stress that we are also winning and the traditional healthcare delivery setting. There will always be a market for small groups and solo practitioners and we will continue to serve it with an unparalleled commitment to this segment, just as we always have.

If you're looking for bottom line results from these early efforts, please remember that this is a long tail business. We know that we're adding to our top line with alternative market programs, cross-selling, and a better penetration of the broker markets in the client they represent.

But that long tail business, underwritten with the same discipline as always, has yet to work its way to the bottom line. We are confident it will, and we're confident in our future. Frank, let's take questions.

All right. Carey, that you get if you'll open the lines will respond to questions.

(Operator Instructions)

Our first question comes from Amit Kumar of Macquarie. Please go ahead.

Thanks and good morning, and thanks for taking my call. A few quick questions. Number one, just going back to the discussion on pricing, you know pricing was flat this quarter. I'm talking about the healthcare piece. In the 10-Q you mentioned how pricing is down 17% from 2006. Stan, I'm just curious, is this the new normal?

How should we think about pricing going forward? You talked about competition, you talked about new opportunities, you talked about the changing landscape, but all this being equal, are we entering sort of a new cyclical shift in terms of how we should think about incremental pricing from here?

I think the way that we should think about that, Amit, is to focus on the fact that we have never been a top line organization or a top line Company. We remain very disciplined in the way we underwrite our risk and the way we price our risk, and if we cannot obtain an adequate price for the risk we are asked to take, we respectfully decline the risk.

Now, part of the reason pricing is down -- and the significant part of the reason that pricing is down in our book is because losses are down. We've been in a benign loss environment for a number of years, and you would expect pricing to fall as the loss environment improves. One company and one organization cannot create a cycle.

I think what's fair to say, though, is that we are looking at loss, we are looking at our expenses, and we are pricing the business at a level that will continue to produce the same type of profits that we had secured in the past. But, if we can't get the adequate price, we'll walk away from the risk and we are happy to see our top line fall rather than writing unprofitable business or business that carries with it too much risk.

So I think the key word in all of this is discipline. It's a discipline that has characterized everything we've done for decades, and it will continue to characterize what we do in the past. Howard, anything to add to that?

No, not at all.

I'll circle back on that question. The second question was related to the buyback. Now the buyback was muted. In fact, it's one of the lowest in several quarters. I know you briefly alluded to some of the opportunities in the pipeline. Was that the reason why the buyback was so low?

I know you don't give any specific guidance, and I'm not looking for any, but should we be thinking about that this is sort of the new way to think about the buyback going forward, or am I over thinking this?

Hey, Amit, it's Ned. The main reason for the decline in the quarter was just we were priced out of the market for the way we established pricing. We look at, as we talked about in the past, about a three-year payback when we are looking at the dilution cost by buying above book value. And so we just didn't find the price there given where the stock was trading. That was the main driver.

Got it. That's helpful. And final question, and I'll re-queue. In terms of the Lloyd's book, and you obviously had some US exposure, how should we think about -- could there be exposure from the Texas losses or from the Canadian wildfires going forward?

Amit, this is Howard. We actually had an update on those the last week. The Canadian wildfires may present some loss exposure, kind of early at this point. They are actually still evaluating the situation, today, even in terms of the infrastructure and the damage to property. The Syndicate does not have a large exposure to Canadian property particularly in that area, but there may be some coming out of the overall cap reinsurance treaties.

Texas hail also presents some potential activity, and that will take a while to be evaluated since hail claims notoriously take a long time to emerge depending on going through the whole pipeline. Again, not expected to be a large exposure, but probably some loss activity that will impact the Syndicate.

And will that be in the Q2 numbers or because of the lag in Q3, or --

Amit, if it's a material number, kind of material beyond our expectations of losses, we would bring that forward into the second quarter. If it's kind of in line with the loss ratios we're booking, it would just roll to the third quarter. So for the lag, if is there something in the material that happens in the current quarter, we will recognize that.

Got it. Okay. I'll stop here and I'll go back. Thank you.

Our next question comes from Mark Hughes of SunTrust. Please go ahead.

Thank you. Good morning. I'm interested -- you said -- it sounds like you picked up a large account related to the retrenchment at AIG. Is that the -- big enough that you can call out the revenue associated with it or the premium associated with it?

Mark, this is Howard. We have not written that account yet. I mentioned in the earlier remarks that we [bound] the account and expect it to be effective June 1. So at this point, no, we don't have a number to provide to you. It will be in the --

You suggested submissions are up 23%. Is that a -- is that increase in submission, is that flowed through your process? Your growth obviously was more in the single digits. Would we anticipate with submissions up that you might have the potential for an acceleration, or are you seeing those submissions a lot of them are not passing muster?

There's always that. First you get the submission, and then you decide whether it's something that you want to quote or decline and then assuming that you do quote whatever proportion that is then you have obviously competition. And [bind] ratio is usually in the mid-to high single-digits, low double digits as opposed to -- and particularly on larger account business.

But at the same time, you can't write anything unless you get the at-bats. And having the submissions up 23% is something that we've worked very hard at, and we think that we're getting a good cross-section, so it's not just a matter of more submissions with a higher declination ratio. We're getting more submissions, more at-bats, making more quotes. So I think it will result in additional new business as we go through the year.

[Can you refresh on] what was the submission growth, say last year, maybe for full year just sort of the norm in 2015?

I really don't have it offhand, and it's something we've been working on more diligently, so I think this may be the first time we've actually put a number out there and I don't have a number for growth rate last year at this point.

But you would say that 23% is an improvement?

Well, yes, the 23% is the growth in submissions over the first quarter of last year. I just don't know what the growth was in last year's first quarter over the prior year.

Right. And then you mentioned I think the new team in international health care professional liability, anyway the -- how meaningful is that new team relative to your existing book?

Well, remember that's Lloyd's, Mark.

Yes.

It's not here in our healthcare, it's at Lloyd's. And obviously Duncan Dale, who runs the Syndicate, is the head of Dale Underwriting Partners, is high on this group. He thought it was a great opportunity for the Syndicate and he acted on it.

And it's been discussed in the British Insurance Press in terms of names and who they are and background. But we've discussed it with Duncan and we are very satisfied with the decisions he's made (inaudible), and we look forward to the contributions they'll make at the Syndicate as they come on board and ramp up.

Okay. Any thoughts you can give when we think on a go forward basis to income and unconsolidated subs, what we might expect as Q2, what's the normal run rate here?

Mark, that's a real challenge. I think you need to think about it in two pieces. There's the amortization of the tax credits, and we provided some guidance in past investor presentations on kind of expectations about that, but even that has a good bit of a variability to it.

And recognize that that's amortization, so that's a decrease or a negative number for those returns. And then everything else in there is a variety of investments that, as I mentioned in my prepared remarks, have some volatility associated with them. In some quarters they have very strong performances, and some quarters not so much.

So it's very difficult to predict. And I know that makes it hard on all of you try to model our results. The amortization to the tax credits is probably the most predictable part, and you can kind of look from quarter to quarter at the trends that are going on there. The returns and the rest of the portfolio are going to be very difficult to project.

How about the latest thoughts on tax rate?

I continue to think that -- again, it's a number of factors there. Obviously the tax rate -- the effective tax rate was decreased in the quarter in part because of the sizable realized losses we had in the quarter because that tax rate is driven by the impact that our tax preference and investments have on pretax income, and the realized losses in the quarter brought pretax income down.

So we continue to look at somewhere in the low- to mid-teens for the year, recognizing that it could be lower than that depending on things like realized losses, and also just how quickly some tax credits come online.

Got you. And then the cross selling, seems like that's picked up a little bit of steam here. Was that you just happened to have a good quarter and a few things hit, or is this improvement sustainable?

You know, Mark, we are very pleased with it. It probably doesn't hurt to recall what the sales cycle is like in this business. As we've said before, we are not selling iPhones where somebody comes in today and looks at them and comes back tomorrow and buy one.

You generally get one chance a year to show our product and our offerings to a potential customer, and it takes some time for them to get familiar with us and us with them, and the cycle can last occasionally several years while you make presentations and deal with submissions before you can finally land one. So it's not possible to predict.

What we've said is, and this is back from the beginning of the Eastern transaction, we expect the cross selling to begin as a trickle, grow into a creek, hopefully ultimately become a stream, and maybe someday gets to be a river. But it's a lengthy process, and one that will grow over time but it will grow at an unpredictable rate.

And it depends a lot of things that are happening outside of our specific market with the actual healthcare concerns themselves and the Workers' Comp concerns and the Life Sciences concerns within their own markets. So we are pleased with the results. It continues to improve. We put a lot of emphasis on it.

We think it'll get better and better, but it will be -- it won't be entirely predictable in terms of how it occurs and it won't be particularly smooth. I mean, you'll see different amounts. I think over the long run, it will be linear, but not in any given quarter.

And then one final one if I may. On the Workers' Comp area, be interested to see some of these broader commercial pricing surveys suggest, actually moderation in the declines, low single-digit rather than mid single-digit, you know, maybe it's the latter part of 2015. Curious the way you see Workers' Comp shaping up. Is the pricing pressure stabilizing? Is this -- could it possibly be going back in the other direction, just less negative, or how do you see it?

Let me let Mike Boguski respond to that. Mike?

Sure. Thank you, Mark. Just to give you kind of a broader perspective, from 2011 to 2015 our rates were up about 13.7% on a compounded basis. That was about $27 million of renewal rate increases over that period. We gave back 1.8% in the quarter, really driven by competitive pressures in our operating territories.

There's no question it's a competitive marketplace. We will continue to be disciplined, approach it on individual account basis. The early returns in the second quarter have been more stable than the first quarter and so we are pleased with that.

And, again, it can be driven from any one quarter by larger accounts, let's say experience [mild] reductions in those types of competitive pressures. So we're keeping an eye on it. We certainly know that we've got to continue to evaluate our medical trend, our frequency and severity, and make the appropriate discipline pricing decisions.

And to be clear, what was more stable than Q2 so far rather than Q1?

April's renewal rate position.

Got you. Okay. All right. Thank you very much.

Our next question comes from Paul Newsome of Sandler O'Neill. Please go ahead.

Good morning. Just wondering about sort of lessons learned from the investment losses this last quarter. It sounds like you're not really thinking about making any major changes, but I'd like to know if there was any sort of things you learned from the process?

And then the other thing is that most things are reported on a delay, hedge funds and such. Can you talk about the timing of how these things got reported given sometimes the delay in the timing of the reports?

And I'm also sort of thinking prospectively in the next quarter if we have what we're seeing with other companies where they the hedge funds, and the alternatives tend to be delayed by a quarter. So if we see continued losses in some of these books, do we see continued write-downs as well in the next quarter?

Hi, Paul. I think there's a lot there, so let me try and take it bit by bit. As far as any changes in our fundamental approach to our portfolio, something that we look at kind of consistently and we make small changes fairly regularly, but I don't foresee right now us making any wholesale changes. We're a long-term investor and all the investments we make -- and while the oil and gas there's a lot shaking out in there, they'll be some true losers. Some of this we believe will see recovery overtime.

We do receive some of our information on a one quarter lag from a number of our hedge funds, but we also have the ability within some of those, we know what they hold, and we're able to look in and kind of get current market information as indicators. On the energy, I guess maybe I'm separating two pieces, on the realized losses in the quarter there's really no delays in that.

Right, so that's all bonds and the like, and so there's no delays. It's the equity and earnings of unconsolidated subsidiaries where we have the delays.

And so, yes, there's the potential for further declines there, but there's also the potential for recoveries in some of those as well. So we'll see what the second quarter brings. But there is a one quarter delay in some of the funds that report in our equity and unconsolidated subs, but on the realized losses, the things that we impair during the quarter, there's no such delay.

Great. Thank you very much.

Our next question comes from Matt Carletti of JMP Securities. Please go ahead.

Thank you. I just had a couple questions. There's been a lot of talk about rate changes, specifically in the medical liability field, whether in the quarter or kind of over the past several years.

Can you give us some color on how much of terms and conditions changed, if at all? Is that a kind of apples to apples sort of comparison, or are terms and conditions also slowly leaking over that timeframe as well?

Hi, Matt. On these physician businesses, terms and conditions have not changed dramatically. The vast majority of the policies are pretty straightforward. On some of the larger accounts you can always have situations where maybe deductibles increase, and then you get into the question of how much credit should be granted for the change and deductible or retention.

Also certain provisions of the policies related to maybe reporting endorsement or tail coverage could be liberalized. But overall, I don't think the physician policies have experienced a great deal of change in terms of conditions.

On the facility side, and particularly as you get into the larger facilities, I think that's where we're seeing in the industry a good bit of liberalization, if you will, on terms and conditions, particularly with respect to the amount of coverage that's being provided within -- or in excess of aggregate limits of retentions.

If you write a larger hospital system, for example, and let's say your excess of certain amount per claim and an annual aggregate as more and more exposure comes into these self-insured programs or to the self-insured [layer], for example, hospital acquires yet another physician practice, keeps going into that retention, but the aggregate limit that you're sitting on top of really doesn't change.

So you then can have sort of an unanticipated, if you're not monitoring it carefully, an unanticipated increase in your exposure because it's more likely that the insured will have losses that exceed the aggregate with more and more exposure being added. And that's what we try to watch.

Fortunately, we don't have a lot of accounts that are in that situation. More of our business is either smaller deductible or even in some cases first dollar, but we are pretty careful about that. Hopefully that answers your question.

No, it was really helpful. It definitely sounds like it's more around the edges than anything that's a real, real headwind. Maybe just one other question, and this relates to the Lloyd's business. It's Lloyd's broadly as probably as competitive a market as we've seen in over a decade. Pretty -- accelerated a lot in the last even 12, 18 months. A lot of broker facilities and things like that.

Duncan's reputation certainly proceeds him, but can you give us a little color on what's allow them to profitably grow the book? I know they are small so they can be very nimble, and what's meaningful to them isn't huge in the grand scheme of the market, but any color will be helpful. Thanks.

Sure. I think really what has allowed them to grow the business is really the reputation not only of Duncan, but the other members of the team, whether it's their property insurance underwriter, Ian Bridge, or Chris Sharp on the property reinsurance side. And then the collective group that's involved with Duncan on the casualty side, have long-term relationships with the brokers and even more importantly with the buyers. The US primary companies that see reinsurance businesses as well as the US-based MGA-type business on the binding authorities.

And I think if you looked at it, compared to the amount of business that this group collectively wrote prior to coming to the Syndicate, they're only writing a small fraction of that total right now. So there's a lot of selectivity, and also a lot of opportunity as the market continues to develop and hopefully moves towards a harder portion of the cycle.

But I think really what they've done so far is to try to be very selective in terms of the business that they were previously writing, and looking at the opportunities to get onto that business in small ways, probably smaller percentage participations than any of them had previously, but the opportunity to grow that. So I think it really is the reputation and knowledge of the market that's allowed them to do what they've done.

And Matt, I would just add to that, if that sounds a lot like the way we approach business, that's the very reason Duncan came to us to provide the majority capital backing for the Syndicate. We just spent a week with Duncan as a part of our planning efforts and he takes a very long term view of the world.

He takes a very disciplined approach to pricing, he's willing to walk away from business, he feels no top line pressure from us. Because we recognize that in Duncan's business, just as in ours, the top line can be a disastrous problem for you down the road if you don't approach it very disciplined. So Duncan approaches the business the same way we do and we think it will pay off for him the same way it's paid off for us historically.

Great. No doubt it sounds like there's a good fit there. Thank you for the answers and best of luck for the remainder of the year.

(Operator Instructions)

Our next question comes from Ryan Byrnes of Janney. Please go ahead.

Great. Thanks, good morning, everybody. Just for Howard, I think that the mass tort was a pressure again for the underlying loss ratio, kind of second quarter in a row. Last quarter was more of a pressure. But I just wanted to see if you could expand -- give a little more color on that and see if there's any sort of geographical pattern or type of case that's creating this pressure?

Not really a geographical pattern. The type of case or typical situation, I think talked about last time a little bit as well is -- often arises out of some type of a billing investigation or governmental investigation, sometimes related to Medicare, Medicaid, sometimes related just to the Justice Department, for example, US Justice Department getting involved, looking at what they might believe to be overutilization of certain medical procedures.

The most common one that's been on the news a lot and all over the country, really, has been the utilization of cardiac stents and when they are justified, when they are not. There have been any number of investigations around the country, and many of those I'm sure even though they weren't ours, resulted in significant litigation, large numbers of claims being filed after the investigation itself gets into the news.

But it could be other medical procedures, medical devices as well. And in terms of what we did, we obviously talked about it in the fourth quarter call. We did a very in depth evaluation of the mass tort scenarios and situations that we were involved with.

And looking at it in the first quarter, while we really didn't have anything significant in terms of new activity, just looking at experience, we expect that there are claims that we already have in our inventory on an individual basis that could end up as being part of mass tort litigation once it starts to become clear what the claims involve. And that was the reason for making the provision that we did in the quarter.

Okay. No, great. Thanks for that color. And then just my last question.

I think I heard you guys mention that the core specialty book may look to write some international insurance and/or reinsurance going forward. And I realize you may not give too much color, but how would you go about doing that, especially on the primary side? Do you guys currently have licenses to write in other jurisdictions?

No, we don't. We do not. We mentioned I think in the very limited amount of text that we gave you that we are looking into it right now. And that would mean it could be on a license basis, it could be on a reinsurance basis, and it could also be on some type of -- even though it is not the correct terminology, and excess and surplus lines are not admitted basis in certain countries. And really we are developing, and trying to develop those opportunities right now.

Okay. Great. That's all I had.

Our next question is a follow-up from Amit Kumar of Macquarie. Please go ahead.

Thanks again for that. I guess going back to the overarching discussion on pricing and loss cause. And I guess what Ryan and Matt are also asking -- ProAssurance has obviously been on the top value creators in the industry, the med [metal] piece has generated meaningful set of returns from the redundancies which have diminished over time.

Stan, if you look at these various buckets, how should investors think about the transformed ProAssurance's reprofile versus the past? And I guess related to that, do these new opportunities coming to ProAssurance from the dislocation, which will have much higher pricing, do they sort of help for that so that the return back to the prior return profile, or are we just in a different place today?

Well, we continue to price our healthcare business to the same targets we always have. The ROE question frankly is as dependent on the interest rate environment as it is anything else, and I don't know when that will change and apparently nobody else in the world does either because we've all gotten it consistently wrong.

But as long as we are in this low interest rate environment, our investments will be affected by that. But we will continue to price the business the way we've always priced the business with the same targets in mind. As you know, we have capital beyond that that we need at the moment.

Our Board looks at capital very importantly. If you could somehow snap your fingers and right size the capital for the business we are writing today, that would have a significant impact on the ROE. The problem is A, you can't snap your fingers and do that from a standpoint of liquidity and otherwise.

And B, our mission is to keep our eyes on the future as much as the present day, and we have to manage the capital of the organization that will enable us to take advantage of the opportunities that will come to us, not just in the next quarter, but in the next year and in the coming five years. So all of that plays into it and it does not lend itself to predictability.

But I would say to you that an investor at ProAssurance can be assured that we're going to continue to run the Company in a disciplined way, that we would take a very measured and disciplined approach to our capital management, and the past is prologue. And as you know, since the current senior management team came together, we've almost doubled the equity in the organization while returning over $1 billion to shareholders through special dividends and buybacks.

And altogether, we think we have a capital management system in place that serves our investors and the organization well. But there are a lot of different constituencies, a lot of different tensions, and we try to mention those with a long-term view toward optimizing the performance of the organization all to the benefit of our shareholders.

Got it. That is actually quite helpful. And finally, maybe a numbers question for Ned. When we were talking about the level of I guess materiality or cap load built in, have you discussed that number previously, or how should we think about the number?

Amit, can you repeat your question? I'm sorry.

Oh, when we were talking about the Lloyd's piece, and we were talking about -- you had responded saying that if it was material, I will talk about it, book it earlier. What is that level -- every company has a threshold of sort of materiality where they're either preannounced, or they break it out separately. Have you talked about what that sort of level is, or threshold is?

We have not. For us if it's a number that we think would be meaningful to an investor, then we would disclose it, but we do not have a hard fast number. If it would move the loss ratio a few points in a quarter, we'd probably decide that was material, but we don't have a specific number in mind.

Got it. That actually is helpful, the few points comment. Okay. That's all I have. Thank you for the answers and good luck for the future.

This concludes our question and answer session. I would now like to turn the conference back over to Frank O'Neil for any closing remarks.

Thank you, Carrie, and thanks to everybody who joined us today. We will speak to you next in early August. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.