ProAssurance(PRA) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements ProAssurance reported a Q1 2022 net loss of $3.6 million, a significant downturn from prior year income, primarily due to net investment losses and a decline in total assets and shareholders' equity Condensed Consolidated Balance Sheets As of March 31, 2022, ProAssurance's total assets decreased to $6.06 billion from $6.19 billion, mainly due to reduced investment fair value, while shareholders' equity declined to $1.28 billion Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Investments | $4,693,669 | $4,828,323 | | Total Assets | $6,058,598 | $6,191,477 | | Reserve for losses and loss adjustment expenses | $3,603,246 | $3,579,940 | | Total Liabilities | $4,776,830 | $4,763,090 | | Total Shareholders' Equity | $1,281,768 | $1,428,387 | Condensed Consolidated Statements of Income and Comprehensive Income ProAssurance reported a Q1 2022 net loss of $3.6 million, a reversal from Q1 2021 net income, primarily due to net investment losses, despite increased net premiums earned Q1 2022 vs Q1 2021 Performance (in thousands, except per share data) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net premiums earned | $265,711 | $187,358 | | Total revenues | $283,072 | $220,017 | | Net losses and loss adjustment expenses | $209,423 | $149,785 | | Total expenses | $288,649 | $211,546 | | Net income (loss) | ($3,560) | $7,735 | | Diluted earnings (loss) per share | ($0.07) | $0.14 | | Comprehensive income (loss) | ($144,410) | ($25,970) | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities decreased to $14.3 million in Q1 2022, with increased cash used in investing activities, resulting in a $71.5 million decrease in cash and equivalents Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $14,265 | $28,700 | | Net cash used by investing activities | ($77,134) | ($26,261) | | Net cash used by financing activities | ($8,632) | ($3,386) | | Increase (decrease) in cash and cash equivalents | ($71,501) | ($947) | | Cash and cash equivalents at end of period | $72,101 | $214,835 | Notes to Condensed Consolidated Financial Statements The notes detail financial statement presentation, accounting policies, and specific items, including a change in ULAE estimate, fair value measurements, and segment performance across five segments - In Q1 2022, the company revised its estimate of Unallocated Loss Adjustment Expenses (ULAE) due to the integration of NORCAL. This change in accounting estimate was applied prospectively, increasing underwriting expenses by $7.3 million with an offsetting decrease to net losses and loss adjustment expenses, resulting in no impact on total expenses or net income[31] - The company operates in five reportable segments: Specialty P&C, Workers' Compensation Insurance, Segregated Portfolio Cell Reinsurance, Lloyd's Syndicates, and Corporate[30] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management attributes the Q1 2022 net loss to significant investment losses, with the NORCAL acquisition impacting premiums and the combined ratio improving to 105.8%, while liquidity remains strong Critical Accounting Estimates Management identifies critical accounting estimates including loss reserves, reinsurance, investments, goodwill, and income taxes, noting a shift to the discrete effective tax rate method for Q1 2022 due to unreliability - The company's critical accounting estimates involve significant management judgment and include: Reserve for losses and loss adjustment expenses, Reinsurance, Valuation of investments and impairment of securities, Goodwill, Income taxes[163] - For Q1 2022, the company switched from the estimated annual effective tax rate method to the discrete effective tax rate method for recording income taxes because minor changes in estimated ordinary income would have a significant effect on the annual rate, making it unreliable[163] Liquidity and Capital Resources and Financial Condition ProAssurance maintains strong liquidity with $65 million in cash and $250 million available credit, despite a decrease in Q1 2022 operating cash flow to $14.3 million primarily due to NORCAL acquisition impacts - As a holding company, ProAssurance held approximately $65 million in cash and liquid investments outside its insurance subsidiaries at March 31, 2022[166] - The company has a $250 million Revolving Credit Agreement, with a potential $50 million accordion feature, and no outstanding borrowings as of May 4, 2022[166] - Operating cash flow decreased by $14.4 million in Q1 2022 compared to Q1 2021, primarily due to a $67.8 million increase in paid losses (largely from NORCAL) and a $51.7 million increase in cash paid for operating expenses[177] - The company anticipates receiving an $11.7 million tax refund during 2022 related to the carryback of its 2020 Net Operating Loss (NOL) under the CARES Act[182] Results of Operations ProAssurance reported a Q1 2022 net loss of $3.6 million, driven by a negative swing in investment gains, despite 41.8% growth in net premiums earned and an improved combined ratio of 105.8% Consolidated Results Summary (in thousands) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net premiums earned | $265,711 | $187,358 | | Net investment gains (losses) | ($13,506) | $8,849 | | Net income (loss) | ($3,560) | $7,735 | | Non-GAAP operating income (loss) | $7,683 | $2,085 | Key Ratios | Ratio | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net loss ratio | 78.8% | 79.9% | | Underwriting expense ratio | 27.0% | 30.1% | | Combined ratio | 105.8% | 110.0% | - The acquisition of NORCAL was a primary driver of performance, contributing $80.8 million in additional earned premiums in the Specialty P&C segment for Q1 2022[201] Quantitative and Qualitative Disclosures About Market Risk ProAssurance's primary market risks are interest rate and credit risk, with a 100 basis point interest rate increase potentially decreasing fixed maturities by $139 million, while credit risk is mitigated by investment-grade securities - The company's principal market risks are interest rate risk and credit risk[338] Interest Rate Sensitivity of Available-for-Sale Fixed Maturities (Fair Value in millions) | Interest Rate Shift | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | -100 bps | $3,844 | $3,976 | | Current | $3,701 | $3,834 | | +100 bps | $3,562 | $3,691 | | +200 bps | $3,429 | $3,551 | - As of March 31, 2022, 91% of the company's fixed maturity securities were rated investment grade, mitigating credit risk exposure[347] - Receivables from reinsurers totaled approximately $479 million at March 31, 2022. The company has not historically experienced material credit losses from reinsurers[349] Controls and Procedures Management concluded disclosure controls were effective as of March 31, 2022, excluding NORCAL as permitted, with no significant changes in internal controls over financial reporting during the quarter - Management concluded that disclosure controls and procedures were effective as of March 31, 2022[351] - The assessment of internal controls over financial reporting excluded the recently acquired NORCAL, which constituted approximately 30.8% of total assets. NORCAL will be included in the assessment as of December 31, 2022[352] PART II. OTHER INFORMATION Legal Proceedings The company refers to Note 6 for details on legal proceedings, which are primarily related to insurance policies and claims handling, with no material corporate legal action reserves as of March 31, 2022 - For information on legal proceedings, the report refers to Note 6 of the financial statements[354] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's December 31, 2021, Form 10-K report - There have been no material changes to the risk factors previously disclosed in the company's Form 10-K for the year ended December 31, 2021[355] Unregistered Sales of Equity Securities and Use of Proceeds ProAssurance did not repurchase common shares in Q1 2022, with approximately $109.6 million remaining available for future repurchases or debt retirement under the Board's authorization plan Issuer Purchases of Equity Securities (Q1 2022) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Dollar Value of Shares that May Yet Be Purchased ($ in thousands) | | :--- | :--- | :--- | :--- | | Jan 1 - 31, 2022 | 0 | N/A | $109,643 | | Feb 1 - 28, 2022 | 0 | N/A | $109,643 | | Mar 1 - 31, 2022 | 0 | N/A | $109,643 | | Total | 0 | N/A | $109,643 | - The Board has authorized $600 million for the repurchase of common shares or retirement of debt under a plan started in November 2010 with no expiration date[356] Exhibits This section lists filed exhibits, including officer certifications required by SEC rules and XBRL data files for interactive data purposes - Filed exhibits include officer certifications (Rule 13a-14(a) and 18 U.S.C. 1350) and XBRL Instance Documents[357]