ProAssurance Corp (PRA) 2018 Q4 法說會逐字稿

Good morning, everyone. Welcome to ProAssurance's conference call to discuss the company's fourth quarter and full year 2018 results. These results were reported in a news release issued on February 21, 2019, and in the company's annual report on Form 10-K, which was also filed on February 21. 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.

We also 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 U.S. Federal Securities Laws and subject to applicable Safe Harbor protections.

The content of this call is accurate only on February 22, 2019, 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 also 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 the call is being recorded, and there will be time for questions after the conclusion of prepared remarks.

Thank you, Denise. On our call today are our Chairman and CEO, Stan Starnes; President and Chief Operating Officer, Ned Rand; and Chief Financial Officer, Dana Hendricks; Howard Friedman and Mike Boguski, the presidents of our Healthcare Professional Liability and Workers' Compensation operations are also on the call. And we're going to go first to Stan.

Thank you, Frank. As I said in our earnings release, 2018 has not been without its challenges, especially given the volatility in the equity markets, which had such a negative effect on our net income in the quarter, the effects of a devolving loss environment in our medical professional liability line and the higher-than-expected property and natural catastrophic losses in our Lloyd's investment.

I mention those first so as not to be seen as glossing over the challenges. But you will hear a number of positives in this call as well. Our Workers' Compensation Insurance segment is achieving excellent results despite a very competitive market. We are seeing clear signs of market firming in our medical professional liability business with higher pricing and strong retention.

After we complete our remarks on this quarter, we will discuss the management changes we announced yesterday. But first, we'll get some high-level comments on consolidated results from Ned.

Thank you, Stan. Top line growth was, again, a highlight for us in the fourth quarter and for the year. For the quarter, consolidated gross premiums written were $212 million, an increase of $20 million or 10.4% over the same quarter in the prior year. This contributed to a year in which total gross premiums written reached a record $957 million, an increase of $82 million or 9.4% over 2017, with year-over-year growth in all of our operating segments.

This success was due in part to almost $100 million in new business written through our domestic operations in 2018, a key indicator to us that our products are successfully differentiated in a very competitive market.

For the fourth quarter, gross premiums written grew 7.7% or $4.6 million in our Workers' Compensation Insurance segment and 3.9% or $635,000 in our Segregated Portfolio Cell Reinsurance segment quarter-over-quarter to $65 million and $17 million, respectively. In our Specialty P&C segment, gross premiums were essentially unchanged quarter-over-quarter, primarily due to timing differences, which Howard will touch on later. Gross premiums written in our Lloyd's segment increased to $25.8 million.

While we are pleased with this top line growth, there are significant challenges that must be met to carry that growth to the bottom line. The consolidated current accident year net loss ratio for the quarter was 88.6%, up 7 points over last year's fourth quarter. This was primarily due to 2 factors: First, the higher-than-expected property and natural catastrophe-related losses in our Lloyd's segments, which we will discuss in greater detail shortly; and the continuing caution we apply to our loss picks in light of the potential for increased loss severity within our medical professional liability lines. As we've said before, we believe that caution will continue to affect our evaluation of potential loss trends and reserves within our Specialty P&C segment for the foreseeable future.

In the meantime, we continue to benefit from strong retention in our domestic insurance operations and are encouraged by growing evidence of the return to rational pricing and underwriting in the medical professional liability market. Combined with over $23 million in new business written in the fourth quarter of 2018 through our Specialty P&C and Workers' Compensation Insurance segments, these factors serve to highlight our ability to increase premiums and add business, while maintaining our underwriting discipline. We continue to grow market share by providing real value to our policyholders.

I'm going to ask Dana to share some highlights on the noninsurance-related results in the quarter. Dana?

Thanks, Ned. On a consolidated level, our net investment result was $20.9 million, a decline of $4.7 million as compared to the fourth quarter of 2017, attributable to a decline in both net investment income as well as equity in earnings from unconsolidated subsidiaries. The decline in net investment income of $1.9 million quarter-over-quarter reflected lower average investment balances, particularly in our muni bond portfolio, as we have reduced that asset class as a result of tax reform. This was partially offset by an increase in income from our equity securities, which reflects an increase in our equity allocation.

The decrease in equity in earnings of unconsolidated subsidiaries of $2.8 million quarter-over-quarter was primarily due to the volatility of the broader equity market, which led to lower reported earnings from a few LP investments and an increase in tax-deductible operating losses associated with our tax credit investments.

Net realized investment losses for the quarter totaled $46.1 million, primarily due to mark-to-market adjustments on our equity trading portfolio. Importantly, the recovery in the equity market since the first of the year has reversed about $32 million of that loss. The net realized investment losses were the primary drivers of the consolidated net loss for the quarter of $24.4 million or $0.46 per diluted share.

Non-GAAP operating income for the quarter was $9.7 million or $0.18 per diluted share. As of December 31, we held approximately $236 million in unpledged cash and liquid investments outside our insurance subsidiaries.

This brings us to capital management. We did not repurchase any shares in the quarter or the year, for that matter, as the price did not reach a level where we felt repurchasing was our best use of capital.

I'll remind you that we target a 36-month or shorter payback period when contemplating buying above book value, which we believe removes the motion from the decision about repurchases. We have approximately $110 million still available in our board-authorized stock repurchase program.

We will continue to evaluate our capital position with our board on a regular basis, keeping in mind factors such as capital requirements imposed by regulators and rating agencies and the opportunities to add business as we see potential changes in the market, that includes writing new business or through M&A. Frank?

Thanks, Dana. Now we're going to go to Howard and Mike for commentary on our operating segments domestically. Howard, will you start?

Thanks, Frank. The results of our Specialty P&C segment continue to be affected by our consideration of potentially higher severity trends, especially with regard to large, complex risks. Again, we have not seen these trends manifest within our paid losses, but we remain concerned about increasing severity in the broader market. To that effect, net favorable loss development was $22 million compared to $37 million in the year ago quarter, and $77 million for the year compared to $119 million in 2017.

That said, I believe there are positives to consider that highlight the underlying strength of the segment and its future. First, even though the fourth quarter was flat over the same quarter in the prior year, we saw an increase in gross premiums written of 5.1% for the year over 2017. The year-over-year gain was driven largely by an increase of $17 million in health care facilities premiums or 36.3% quarter-over-quarter.

As the trends of consolidation and migration of physicians from independent practices to hospital-based medicine progresses, health care facilities continue to be an important focus for us. Retention on health care facilities increased to 88% in the quarter, up 5 points over the same quarter in 2017. And retention for the year was 87%, up 1 point over last year.

In addition to a 7% price increase on health care facilities renewals, both for the quarter and the year, we generated $7 million in new business in the quarter, up from approximately $800,000 in the same period of 2017. This reaffirms that we are succeeding in the marketplace and building on our ongoing visibility in the broker community, which largely controls the facilities business.

In the fourth quarter, we wrote $5 million in physician new business. However, gross premiums written in our physician business declined by $4 million quarter-over-quarter. The decreased top line premium was due primarily to the timing of the renewal of a few large policies that shifted $5 million of expiring premium into the first quarter of 2019.

Physician retention is down 4 points to 88% for the quarter, but flat at 90% year-over-year. Physician renewal pricing increased by 2% and 3% for the quarter and year, respectively. These rate increases affirm the market conditions that we have discussed for several quarters and are consistent with the beginning of a firmer market. As expectations of severity climb, we would expect pricing to follow.

While we believe that ProAssurance will benefit as the market reacts to emerging loss trends, we want to underscore our continuing dedication to protecting the strength of our balance sheet. That requires that we take a cautious view of the potential for a rise in severity, which in turn influences our loss picks and colors the evaluation of our reserves.

Our current accident year loss ratio increased by almost 7 points to 100.3% in the quarter and by almost 4 points to 93.8% for the year. A significant portion of the increase in loss ratio for the quarter and less so for the year was due to an increase in ceded premium, which reduced the denominator of the loss ratio. The loss portfolio transfer in the second quarter also increased the loss ratio for the year, since it had very low expenses and therefore a higher loss ratio.

Finally, with the broader loss environment continuing to show signs of increased severity, we selected higher initial loss ratios in certain portions of our business to reflect the caution expressed above. We believe it is more important than ever to establish and evaluate reserves with a conservatism that has resulted in success over the years. So the bottom line is that we see no signs that these trends will change in the near future, meaning you should expect our reserve and loss severity assumptions to continue to affect this segment in 2019.

Before I turn it over to Frank, I want to emphasize that these trends and projected loss severity have an equal and perhaps greater influence on our competitors, especially those who have made a grab for market share at the expense of the quality of their balance sheets while the market was softer. As the market continues to provide challenges, the rewards of conservative reserving practices and rational pricing are paid back with interest.

The proof is in the pudding, as the saying goes, and a prime example is our medical technology and life sciences business, which for the year added $35 million of gross premiums to our top line and $14 million to our bottom line, primarily as a result of favorable development. Further, the life sciences combined ratio for the year was 40.2%. That kind of profitability is made possible by resisting the temptation to write easy business in lieu of good business. Frank?

Thank you, Howard. Mike, you're up next to discuss both of our Workers' Compensation focus segments.

Thank you, Frank. The Worker's Compensation Insurance segment operating results increased 35% to $14.3 million for 2018 compared to $10.6 million for 2017. This was driven by an increase in net premiums earned and a decrease in the underwriting expense ratio, partially offset by an increase in the net loss ratio.

During the year, gross premiums written, which includes traditional business and the alternative market business ceded to the SPC reinsurance segment, increased 11% to $293.2 million compared to $264 million for 2017, an increase of $29.2 million. This was driven by consistent production results and strong retention, including the Great Falls Insurance Company renewal rights transaction.

New business writings for 2018 were $51.5 million compared to $47.7 million in 2017, including $11.7 million of new business related to Great Falls. Order premium was $5.9 million as compared to $4.1 million in 2017. Renewal prices decreased -- decreases were held to 1% during 2018 compared to renewal price decreases of 3% in 2017. We are pleased with our premium retention rate of 86% for the year, a solid result in an increasingly competitive workers' compensation marketplace, where retention rates at that level are increasingly difficult to achieve.

The increase in the calendar year net loss ratio reflected an increase in the current accident year net loss ratio, partially offset by favorable trends in prior accident year claim closing patterns, resulting in net favorable development of $8 million in 2018 compared to $5.7 million in 2017.

The 2018 net favorable loss reserve development reflected better-than-expected claim results, primarily related to accident years 2015 and 2016. The increase in the current accident year net loss ratio from 66.1% in 2017 to 68% in 2018 is due to an increase in severity-related claim activity related to economic growth trends.

The claims operation closed 64.2% of 2017 and prior claims during 2018, indicative of the short-tailed nature of our Worker's Compensation business model. The decrease in the full year 2018 underwriting expense ratio primarily reflected the effect of the increase in premiums earned and the continued effective management of general expenses. The combined ratio of 93.6% improved approximately 1 point in 2018 compared to 2017. The 2018 combined ratio includes 1.3 percentage points of intangible asset amortization and 0.8 percentage points of a corporate management fee.

I want to highlight a few items in the Workers' Compensation Insurance results for the fourth quarter of 2018. Gross written premium increased almost 8% over the same period in 2017, and the combined ratio was 88.2%, including a calendar year net loss ratio of 60.4% and an underwriting expense ratio of 27.8%. The Worker's Compensation Insurance segment operating results increased to $6.6 million for the fourth quarter of 2018 compared to $5.1 million for the same period in 2017, an increase of 30%.

Two important strategic initiatives that were launched in 2017 continue to produce profitable premium in 2018. The Great Falls Insurance Company renewal rights transaction, which now serves as our New England regional office, added $15 million of direct-written premium in 2018; and the Eastern Specialty Risk high hazard employee unit, which launched in 2017, contributed $8.2 million.

Now, I'd like to focus on the Segregated Portfolio Cell Reinsurance segment. The segment's operating result of $2.3 million for 2018 represents our share of the net operating profit of the segregated portfolio cell captive programs, in which we participate in varying degrees. Gross written premium in the SPC reinsurance segment increased to $85.1 million for 2018 from $77.7 million in 2017. This includes flat renewal pricing in 2018 compared to renewal price decreases of 4% in 2017.

Production results for 2018 include premium renewal retention of 91% and new business writings of $8.3 million, which were ceded to the SPC from the Workers' Compensation Insurance segment. Year-over-year, the SPC 2018 calendar year net loss ratio decreased to 52.4% from 54.9%, driven by net favorable development of $9 million in 2018 compared to $8.5 million in 2017 and a decrease in the current accident year net loss ratio. The favorable development reflects better-than-expected claim results, primarily related to accident years 2015 through 2017.

The current accident year loss ratio was 64.5% for 2018 compared to 67.4% in 2017. The decrease in the current accident year net loss ratio is due to a decrease in large claim activity in 2018 compared to 2017. Underwriting expenses in the SPC reinsurance segment represent the ceding commission paid to the Workers' Compensation Insurance and Specialty P&C segments for the services provided to the SPC business. Frank?

Thank you, Mike. Howard, back to you now for some commentary on Lloyd's.

Sure, Frank. Please remember, we are reporting on a 1-quarter lag, as we have since the inception of the segment. However, in quarters such as this one, where material effects of an event are either known or projected, we have accelerated certain results into the current reporting quarter.

The additional net pretax loss costs from exposure to Hurricane Michael were $6.8 million, net of reinsurance and reinstatement premiums. Normally, these losses would be reported in our first quarter of 2019 due to the aforementioned quarter delay. However, due to the availability and materiality of these estimates, we have accelerated our reporting of these storm-related losses into our fourth quarter of 2018.

Segment operating results for the quarter also included are our allocated share of the estimates for losses in connection with certain other natural catastrophes, which included volcanic eruptions in Hawaii and Hurricane Florence, which affected several states along the Mid-Atlantic. We estimate our allocated share of the net pretax losses associated with these natural catastrophe and property losses to be approximately $3.2 million, which brings our total natural catastrophe-related losses to approximately $10 million in the quarter.

The current accident year net loss ratio was 104.5% for the quarter and 74% for the year. We recognized $1.7 million in adverse development in the quarter. This drove adverse development for the year to $2 million as compared to favorable development of approximately $800,000 in 2017.

As Ned mentioned earlier, gross premiums written were $25.8 million. The increase is due primarily to our greater participation in the operations of Syndicate 1729 from 58% to 62% effective January 1, and our 100% participation in Syndicate 6131, which is the special purpose arrangement written through Syndicate 1729.

Gross premiums written in the quarter also increased, albeit to a lesser extent, by the effect of reinstatement premiums received of $913,000 in 2018 as compared to $234,000 in 2017 in connection with natural catastrophe-related losses. For the year, gross premiums written increased 26.4% to $88.7 million.

Net premiums earned increased $6.2 million to $18.1 million, an increase of 52.1% over the prior year quarter. As in prior quarters, this primarily reflected the increased amount of business produced in the open market, where premium is earned over 12 months; as opposed to business written under delegated underwriting authority, where premium is earned over 24 months.

The growth in expenses continues to result from the addition of staff needed to accommodate the segment's growth and by higher commissions resulting from premium growth. The increase in gross premiums written mentioned earlier is a step in the right direction towards achieving the necessary scale for the syndicate to reduce the impact of operating expenses. Frank?

Stan, I know you want to make some comments about Lloyd's.

Thanks, Frank. As we said in our prerelease, we are disappointed in the financial results of our investment at Lloyd's. While we believe the reasons we decided to invest in Lloyd's are still valid, we also understand that investors are concerned with the financial performance of this investment and the volatility it has introduced into our results.

As we said, we are undertaking a review of all of our options with this investment in an effort to reduce both the financial significance of the investment and the associated earnings volatility. As we're just beginning this process, we cannot yet project what the ultimate result will be. We continue to believe in what Dale Underwriting has created and want to help position the syndicate for long-term success.

Our evaluation will be comprehensive and would include a range of all alternatives, including finding ways to reduce the volatility of the syndicate's result through partial reinsurance of our participation or reducing the capacity we provide. We are not going to rush into anything, but we recognize the importance of resolving this, and we will not drag our feet in reaching the final determination of the best course of action for ProAssurance and our investors.

Now, I would like to ask Ned to discuss the management changes that we announced yesterday afternoon. Ned?

Thank you, Stan. As we noted in our press release, Howard has indicated his desire to retire from the day-to-day activities of running our Healthcare Professional Liability business, and we have reluctantly agreed.

We're pleased that he will continue to play an important role in the organization going forward. We and our investors owe Howard a deep debt of gratitude for his years of service, insight and wisdom. It's a debt we can never repay. Rather than have me address his reasons for stepping away from some of his many duties, I thought it best that you hear from him. Howard?

Thanks, Ned. And thank you to Stan, Mike, Dana and everyone else at ProAssurance who have been so gracious, supportive and understanding of my decision. I spoke to several hundred of our ProAssurance associates yesterday afternoon and I'll tell you what I told them. I love what I do and I get a great deal of satisfaction and joy every day.

After more than 22 years at ProAssurance and almost 40 years in the medical professional liability business, there's still something new, interesting and professionally challenging every day. I'd love to leave such a great group of people through the next portion of the market cycle with all of the challenges and satisfaction that will come from it.

At the same time now, there are many other things I'd like to do, time with my grandchildren, hobbies, travel and many other interests. My wife and I want to do those things while we can, while we're healthy and active.

I'm very happy that I'll be able to have a continuing but limited role with ProAssurance after mid-May and contribute in a small way to its ongoing success. I also want to personally thank many of you out there on this call for the years of meetings, friendship and support even with your tough questions. Thanks, everyone.

Thanks, Howard. As a result of Howard's decision, we've been able to create new opportunities for Mike Boguski and Kevin Shook. Both Mike and Kevin have proven to be great assets for ProAssurance, I'm excited for them and for ProAssurance. Mike understands the history of this side of our business and the culture of service excellence that has evolved from that history. He also understands the bottom line expectations that we honor, and I'm sure his operational insights will be of value in improving everything we do.

Kevin knows Eastern's operations inside and out and has been a vital part of Eastern's success. I'm confident he will ensure that our Worker's Compensation operations continue the upward trajectory that Mike has launched. Mike and Kevin, any remarks from your end?

Ned, I'll start. First of all, I'd like to thank Stan and Ned for the opportunity to lead the Specialty Property & Casualty segment into the future. I look forward to the challenges and opportunities ahead with a great deal of enthusiasm.

I want to congratulate Howard on a truly outstanding career. It's been a truly fantastic experience to work alongside Howard over the past 5 years. I also look forward to working with Howard in his actuarial role in the organization and to benefit from his vast health care industry experience and institutional knowledge. Thank you, Howard, from all of us.

I want to express my deep gratitude and appreciation to the Eastern team members, senior executives, agency partners and strategic business partners for their tremendous support, dedication and commitment over the past 22 years. Together, we've built an industry-leading worker's compensation specialist from a start-up position in 1997 to a $290 million top line business at year-end 2018 that has consistently delivered an attractive underwriting result over the various economic and insurance cycles. I'm extremely proud of all that we've accomplished together over the past 22 years. Thank you so much.

I want to finish by congratulating Kevin Shook on the well-deserved promotion to the President of Eastern. I'm extremely confident that Kevin will lead the Workers' Compensation and SPC Reinsurance businesses to the next level of success. He's battle-tested and very well prepared for this leadership role. He brings a wealth of talent, experience, leadership skills, work ethic and energy to the organization in his role.

On a personal level, Kevin has been a trusted adviser, a valued business partner and a great friend over the past 18 years. I'm extremely grateful that this strong relationship will continue in our new executive leadership roles in the ProAssurance organization. Thank you, Kevin, so much.

And thank you, Mike. I would like to begin by expressing my gratitude to you, Mike, Stan and Ned for the opportunity to become Eastern's second president since its founding in 1997. I've been with Eastern for almost 18 years, beginning first as its CFO until January of '14 when I was promoted to Executive Vice President overseeing all field operations in our captive business.

I would like to thank our dedicated employees, agency partners and strategic business partners for the valuable contributions to Eastern over the years. Together, we will lead the Workers' Compensation and SPC businesses to the next phase of success. I would also like to congratulate Howard on an outstanding career and wish him continued success in his new actuarial role.

I'm especially grateful to Mike. Mike is a great mentor, friend and trusted partner. Mike has led Eastern's strategic vision, operational and financial discipline and energetic culture, and has been very collaborative in these endeavors, which has prepared me well for the future. I look forward to Mike's leadership in our Specialty P&C business, and the enthusiasm, innovation, dedication, talent and experience that he will bring to this new role.

I'm now going to turn it back to Stan for closing remarks.

Thank you, Kevin. I conclude by again noting our gratitude to Howard, Mike and Kevin for their past service and for their anticipated future contributions. There will be ample opportunity in our May call to more fully comment on these changes and on our ongoing gratitude. Frank?

Thank you, Stan. Denise, that concludes our prepared remarks. Will you open the lines for questions?

(Operator Instructions) And your first questions this morning will come from Amit Kumar of Buckingham Research.

Howard, on your retirement news, thanks for all the help over the years. It's been great to learn so much from you on different topics.

Thank you, Amit.

And then maybe I'll just have a few questions on Lloyd's and then I'll requeue. The first question I had was -- let me ask you this since it's -- probably, there's no way to ask this. What's -- your desire to retire, was it accelerated by what's going at Lloyd's or not?

I'll say no, absolutely not. I've tried to state the reasons, and those are 100% the reasons. Lloyd's is a -- I believe, a good long-term business in general. And I think, as Stan said, we have to look at the options for ProAssurance. But no, nothing to do with Lloyd's. All to do with me, unfortunately.

Yes, on the outside, I think the timing of press release coinciding with strategic options just made me wonder. Moving on, I wanted to better understand Lloyd's. I know we spent a lot of time in 2013 and 2014 understanding this. The first question I had, is the noise coming mostly from the 6131 piece that the special -- the contingency and the specialty property business? Or is this from 1729?

Amit, it's Ned. As we said in our release and in the prepared remarks, the impact was coming from catastrophe losses -- property catastrophe losses and those are associated with 1729. As we've discussed in the past, there's essentially 3 lines of business or buckets of business: there's 1729, right, that's got a nice casualty book of business, it has a specialty property book of business and then a property reinsurance business that includes property cat.

2017 and 2018 have been 2 very challenging back-to-back catastrophe years. In 2017, you had 3 hurricanes coming together to form very large significant losses for the industry. And in 2018, it's been more of a frequency of severity with no individual event being as big as those in 2017, but just a lot of sizable events coming together in 2018. But it's all really been within the core 1729.

Got it. And the next question, again staying on Lloyd's, is the $200 million capital commitment, is that some sort of a contractual commitment, i.e., we are pretty much set for 2019, and I guess, any actions can only be peripheral at this time, i.e., no reinsurance, et cetera. And then 2020, when your 6-year commitment ends, then things change? Or how should I think about that piece?

It's a good question, Amit. So for -- I think for 2019, as far as the capital that we've committed kind of following the Lloyd's process, we've made a commitment to the syndicate for 2019 and that capital is committed. Now there are things that we potentially can do and will evaluate using reinsurance, as Stan said, to dampen and mute some of the volatility that we have seen, and that's kind of independent of that capital commitment, and we can effect that at any time.

So the commitment is there for 2019. And then as we work toward 2020, as Stan mentioned, one of the things that we will be evaluating is whether or not we should reduce that capital commitment by bringing in other capital providers into the syndicate, and that's something that we'll evaluate as well.

Got it. That's actually very helpful. The only -- the final question, and I will stop here, is going back to the -- or you can use the term core, the medical professional liability business line and talking about the discussion on loss cost trend. I actually was going back and reading some of your transcripts from when we started talking about it. This might be for Howard.

When we look at the time when we started talking about it initially and when we look at it today, and I know that one common theme has been your comment that these losses haven't yet manifested themselves in the paid losses, and yet you remain concerned. Has anything changed from the time frame when you were initially talking about it? Is it changing faster? Slower? Any comparative view would be very helpful, Howard, and I will stop here.

Sure. Well, I think what I'd say is we have not and still really don't see the effects in our paid losses. So that aspect has not changed. We continue to see a lot of severity-related activity in the general news related to large verdicts and settlements for both physician and hospital claims. Some of it, I think as we spoke about before, probably driven by higher available coverage limits with the consolidation in health care, larger entities, purchasing larger limits, and therefore, more resources available to -- as a target.

The only thing I'd say that has changed, from our perspective, is that we're continuing to see those things. It wasn't just an aberration, at least in terms of the news items and the experience in the judicial system. And we're still working through the lag -- the time lag, as you know, for resolution of claims in this business is measured in years. So it will be a little longer, I think, before we can confirm whether there's an effect on our paid losses or if we are going to find that we've been conservative in the approach that we're taking on the reserve side.

Okay. That's very helpful. And Howard, once again, thanks for all your help over the years.

You're welcome and great to know you. Thank you, Amit.

The next question will be from Mark Hughes of SunTrust.

My congratulations, as well, to everyone on their new roles. On the current accident year losses in the Specialty P&C, you mentioned the impact of the denominator, I guess, with the ceded premiums, a higher reduced denominator, and I assume that's around the facilities business. How do we think about that on a go-forward basis? The full year current accident year, if I'm looking at this properly, is 94%. Is that a good barometer going forward?

I think, certainly, the full year is a better barometer going forward. In the fourth quarter, the increase in the ceded premium is really a result of the adjustment for those prior year reinsurance contracts that had retrospectively rated premiums and adjustment that came from the increase in the loss estimates.

So in other words, that is a follow-through of increasing losses, i.e., increasing ceded losses, resulting in more ceded premium accrual. And those years that have the retrospectively rated reinsurance contract, we're moving further away from them. For the most part, it's 2015 and prior with respect to premiums that can go up, as well as down. So I certainly think that the full year loss ratio estimate is a better gauge. Obviously, it's going to depend on what we see in those -- in loss activity in 2019 and from which years it comes.

And when I think about the -- your experience in the fourth quarter, and this is just a 1-quarter snapshot, but the physician pricing up 2%, the retention was a little lower in the high 80s. Still very good, clearly, but a little bit lower. But on the other hand, you continue to see signs of severity-related issues. What is -- are your competitors still not responding to this environment?

It varies. Like lot of other things, we certainly see some competitors that are responding in terms of, say, being less competitive, if you will. And we see others that aren't: either ignoring it, not seeing it in their numbers or not seeing it yet. It's hard to tell exactly what the rationale is.

Our retention and price change, as you know, will vary from quarter-to-quarter because the mix of business varies depending on which states have heavier concentrations in a given quarter in terms of the rate change, as well as individual large accounts that for one reason may or may not renew.

Our fourth quarter results were, in part, driven by a few situations where we -- on the physician larger group business, where we're on the wrong end of a consolidation, one group acquiring the other and ours was the smaller or less influential and we didn't have the opportunity to offer or to get in there and sell the larger group, the existing group, our products. We're certainly going to be back in there next year and the year after to try to do that.

But that happens and sometimes we win on those and sometimes we lose. So that will drive new business or retention one way or the other and that's, for the most part, what happened in the retention numbers for Q4.

I think, Howard, you were also mentioning to me that, fourth quarter 2017, there was a little bit of a spike, so the comparison may be skewed.

Yes. Yes, 92% in Q4 last year was a very good number and we were happy about it at the time, but it is above average.

And maybe just -- also just in -- what Howard said, but as we write larger and larger physician accounts, that retention number will become more volatile.

Yes.

Then one final question, Mike, on the Workers' Comp business, the favorable loss costs have really been the story in comp for a while now. The latest trends in frequency and severity, do you have any signals if that's maybe changing? Is that trend continuing?

Mark, it's a great question. Our frequency has been -- if you look at it over a long-term basis, it's averaged to be down about 3.8% on average. It's up 3% in '17, it's up about 1% in 2018. But overall, the frequency trends have been -- are starting to stabilize a little bit from the prior years.

On the severity side, what we've experienced in our traditional Worker's Comp segment this past year, we saw the trends from the inexperienced workers in a very low unemployment rate economy. And that -- on the flip side, we've also seen a slowdown in our SPC business on the severity side, which is a good sign going forward. That's a very economically sensitive business.

So we think as the economy stabilizes, as we get more on a normalized growth rate nonemployment rate that, that will certainly slow down for us on the severity side. You know I think the other important point there is the tremendous amount of resources we're putting into mitigating severity exposures with our risk management investments across our operating territories.

The next question will be from Christopher Campbell of KBW.

I guess my first question is just looking at the physicians' pricing within Specialty P&C. It was down about 30 -- or 300 bps sequentially quarter-over-quarter. Anything special happening there in terms of the rate hardening?

No, I'd say it's really just a -- again, the mix of accounts, geography and so forth that renewed in the fourth quarter versus what we had in other quarters during the year, and it will vary from quarter-to-quarter. Obviously, we are comfortable with the pricing on the renewals. In given states or given accounts, we might need more or less. And depending on the concentration of those, the quarterly results will change.

Got it. That makes a lot of sense. And then just another question on the Specialty P&C segment. I understand that you're holding on to the higher loss picks, where potential claims cost increases and it sounds like "for the foreseeable future."

So I guess, how long should we think about that just in terms of not 2019, not 2020, and not 2021? I mean -- I guess, just given the tail, like how long would it take until you guys felt comfortable about potentially lowering your loss picks and/or releasing some of those as reserves if you're not -- if you don't see the uptick in higher verdicts flow into your book?

Historically, we typically have not changed our initial loss picks in terms of modifying the accident year estimate for typically 2 years unless there was something driving it one way or the other. So that's sort of a historical baseline. With the concern that we have about severity, we actually are probably holding it a little longer at this point, at least for some of the more recent accident years, before we even come to that conclusion. So I'd say, minimum 2 and could be longer than that.

Got it. So minimum from 2 from when you started increasing the loss picks, correct?

Again, yes, that is our typical view in terms of an accident year. Unless there's something out there that is really dramatically different, we haven't seen dramatically different, I'd say, minimum 2 from when we started, yes.

But 2 years is kind of -- Chris, just to make sure it was understood. 2 years for each and every accident year before we feel like we've got credible data coming through on our paid information. So it's not we get 2 years from kind of when we started and every accident year would be adjusted. We look at the accident years individually and think we need 2-plus years of data for that accident year.

Got it. But -- all right. Say, you're in -- okay, so you've raised a lot -- so you've boosted a lot of the loss picks in 2018. So if we get to 2020 and you haven't seen the severities materialize, does that feed back into your accident year 2021 pick, I guess, is what I'm trying to understand. Is that because you haven't seen that severity? Or is -- you have to kind of factor in what you're starting to see in '19.

I think for the -- yes, it's an interesting question, Chris. I think going [for that] kind of perspective, it becomes both a blend of our view of what the loss environment is like and then the pricing environment that'll influence. Ultimately there's loss picks we make in any given year prospectively. So certainly, if we began to see in 2020 that the loss environment was improving, that would influence where we would set our 2021 reserves, but also a significant influence where that would be the pricing we're getting in the marketplace.

Great. And then just a few on capital management, I know the special dividend's a little bit lower. And I guess just in terms of reducing that, does that imply that you're looking at anything near term?

And I guess, could you just give us some color at a high level like what would be the type of -- if there was something that you were interested in inorganically, what kind of premiums, what lines of business, med mal or on the Workers' Comp side, which states? I guess, could you just give us some color what would be interesting to ProAssurance nowadays.

Sure. So I guess to get to the first part of your question on capital management, we do an evaluation on an annual basis and really more regularly with our board about our capital position and will take actions as we deem appropriate. And a lot of what factors into that is kind of the prospects we see and then -- short, mid and long term to deploy capital.

And we think with the volatility that we're seeing in the marketplace, with the loss severity changes that we anticipate, that there will be lots of opportunities to grow our Healthcare Professional Liability business in particular. And so that is part of what led into the decision around capital.

As we think about the M&A environment, really focus on the areas that we know. So it's really kind of the health care professional liability world and the work comp world. Things that fill out our geographic footprint are generally more interesting to us than things that overlap with our geographic footprint. Companies that have specializations and niche players like our podiatric company, PICA, are interesting to us because they bring something unique to the marketplace.

We do not need to do any transactions to expand our product offerings and really even to expand our geographic reach. But we are -- we don't have geographic concentrations everywhere. So the transactions we do, I think, if we do them, will be very selective and kind of meet those criteria.

The next question will be from Marcos Holanda of Raymond James.

Congratulations, Howard. I also wish the best of luck for the new management team. I wanted to come back to the medical malpractice discussion. I was reading an article this morning about -- of a med mal insurer that went under state control earlier this month. And it just got me thinking -- and also if you guys can give us some more color on the landscape that you're seeing.

Are -- do you think -- are facilities and the physicians attuned to these trends that you guys are seeing? Or are they now sort of coming after your product, quality coverage? And if you can give us anything on the competition versus the mutuals, that would be great.

Sure. Yes, the -- I think the article you're referring to is the Capson being put into rehabilitation by the Texas Department of Insurance last week. And you know it's unfortunate, on the one hand, for policyholders that are involved. And it's a beginning, I think, of something that we will see more of in the medical professional liability landscape. If you think about it, I think this is the fourth situation over the past 1.5 years or so that one of the smaller, relatively younger companies has been, in one way or another, put out of business.

And at the same time, they are small, they're isolated, but I think it's a reflection of what happens in the market when companies are pretty price-oriented in their approach. They tend to not specialize, but look to build a book of business on a very wide-ranging geographical basis, and the competition really doesn't allow for them to be successful in that regard if it's just based on price, because there's always somebody who's going to push the price down further.

We see a number of the smaller mutual companies that are starting to have pretty high expense ratios. They have plenty of capital, obviously. But as the book of business shrinks because of health care consolidation and physicians becoming part of larger groups that some of these small companies can't handle or going to work for hospitals and losing the business entirely and to the industry even, some of these small companies are running high expense ratios and are beginning to run significant combined ratios as well, and really using the capital that they have to just subsidize the business. So I think we'll see more of that.

In terms of whether physicians and all are attuned to it, I think they will start to be again. There was a lot of attention to this 15 years ago when we had a number of significant insolvencies and physicians losing coverage, guarantee funds being involved and hospitals absorbing claims that should have been paid by those failed physician insurance companies. But it's not at that level yet. And depending on the memories, it will -- it may take a little while to get there.

Got it. And then just another one here on your Worker's Comp. As it relates to pricing, do you guys think or do you foresee that price -- there could be an inflection point in pricing even if the economy slows down here in the next couple years?

The biggest challenge we've seen on the pricing side is that, as a result of the different bureaus and the NCCI looking at frequent -- the frequency-based trends that have come down dramatically, loss cost decreases for rates have been pressured and, to some degree, on a double-digit basis in some of our core states.

So what we try to do is be more focused on individual account underwriting, looking at the quality of risk and really pricing it more on a loss pick basis. To put in stable price out there that's competitive over the long term is a long-term value, and so we're trying to stay away from following the loss cost into the pricing tag, and we've been -- have had a lot of success on that front.

Over -- from 2011 through the end of 2018, our compounded renewal rates increases have been just about 9%, 8.8%, despite significant loss cost decreases by the rating bureau. So we're also hopeful that some of these severity trends will start to convert more into the pricing side as well. But we've been really consistent in our pricing, we protected a high-quality book of business and that will continue in 2019.

Mike, you might also talk about what drives the cycle as different companies have different views of where loss costs are.

I mean, it's -- the competitive pressures are all over the map, frankly. I mean, we have some really competitive folks out there. But from a cycle standpoint, when you see -- when you start to see adverse development in comp and those types of issues is when you start to see prices come up. And also, whether or not the regional and large-stock players on the multiline basis come in and out of the market, that will drive it to some degree.

And Mr. O'Neil, we have no additional questions in the queue. I would like to hand the conference back to you for any final comments.

That's it, Denise. Thank you very much. We will talk to everybody again, in May. Thank you.

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines.