Good morning, everyone. Welcome to ProAssurance's Conference Call to discuss the Company's Third Quarter 2020 Results. These results were reported in a news release issued on November 5, 2020, and in the company's quarterly report on Form 10-Q, which was also filed on November 5, 2020. Included in these documents are cautionary statements about the significant risks, uncertainties, and other factors that are out of the company's control and could cause ProAssurance business and alter expected results. Please review those statements. 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 security laws and subject to applicable Safe Harbor protection. The content of this call is accurate only on November 6, 2020, and, except as required by law or regulation, ProAssurance will not undertake and expressly disclaim 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. Ken McEwen, I would like to remind you that this call is being recorded, and that there will be time for questions at the conclusion of prepared remarks. Mr. McEwen, please go ahead.

Thank you, Cole. On our call today we have Ned Rand, President and CEO; Dana Hendricks, Chief Financial Officer; Mike Boguski, President of our Specialty Property and Casualty Lines; and Kevin Shook, President of our Workers' Compensation Insurance Operations. Ned, there's a lot to impact this quarter. Will you start us off?

Sure, Ken. In the third quarter, we continued to see improvement in our underlying operations, as the beneficial results from our re-underwriting and restructuring efforts begin to manifest this lower recurring operating expenses and improved loss experience in each of our operating segments. As onetime incurred charges related to these efforts are put behind us, we anticipate a continued favorable trajectory into the fourth quarter and into 2021. Aside from our regular operating results, we continue to learn more about the COVID-19 virus as each day passes, and we gain insight into the impact it has on our business and those of our customers. There is still much to learn about the disease. While we have seen some favorable claims trends that are likely the result of the pandemic, we've remained cautious in recognizing these trends in our results, given the uncertainty surrounding the length and severity of the pandemics. Unfortunately, the continued market volatility caused by COVID-19 and sustained depression of our stock price has overshadowed the improvements we've made this year. I'll let Dana expand on the goodwill impairment charge we announced in yesterday's release, but I want to note that the charge has no effect on our liquidity or our statutory entities and is strictly an accounting transaction. As I mentioned in yesterday's release, I remain confident that our solid foundation and the strategic initiatives we have undertaken in the past 16 months will reward our customers, shareholders and employees in the quarters and years to come. Dana?

Thanks, Ned. I'll start with the goodwill impairment charge recognized in the quarter as it had the largest impact to our net results. We routinely review our goodwill for potential impairment annually on October 1. Because of continued market volatility caused by COVID-19 and the sustained depression of our stock price, we performed interim quantitative impairment tests in the third quarter. More detail is available in our filed Form 10-Q. But to summarize, we determined that while no impairment was necessary for our workers' compensation or segregated portfolio sale reinsurance reporting units, a full impairment of goodwill was indicated for the specialty P&C reporting unit. Consequently, we recorded a noncash pretax goodwill impairment charge of $161.1 million, which drove a net loss in the third quarter of approximately $150 million, or $2.78 per share. Importantly, we reported non-GAAP operating income of $2.6 million in the third quarter, or $0.05 per share. This excludes the effects of certain items, primarily the goodwill impairment and realized investment gains. This result reflects lower consolidated net premium earned, largely offset by lower current accident year net losses and loss adjustment expenses and lower operating expenses. Each of these components will be discussed in more detail in the segment-specific portions of our call, but I think it's important to note here that they are all primarily related to the intentional restructuring and re-underwriting efforts completed over the past year. Consolidated net investment income decreased quarter-over-quarter to $16.9 million. This was primarily attributable to our lower allocation to equity securities, coupled with lower yields on our short-term investments and corporate debt securities, given actions taken by the Federal Reserve to reduce interest rates in response to COVID-19. However, we reported $4.9 million in income from our unconsolidated subsidiaries. We invest in various LPs and LLCs, and…

Thank you, Dana. The specialty P&C segment recorded a third quarter loss of $12.5 million. Now, while we're not satisfied with the result, it does reflect an improvement from the first and second quarters of 2020. And there are a number of encouraging aspects of the quarter, which I'll expand upon throughout my comments. Gross premiums written were $158.3 million, a decrease of 4.1% percent quarter-over-quarter, reflecting our re-underwriting efforts in healthcare professional liability and timing differences in the regular renewal cycle of 24-month policies. Notably, within our specialty book, we have reduced gross premiums written in our Senior care line by almost 82% quarter-over-quarter. Further, the timing differences related to the 24-month policies in our standard physician line contributed $3.9 million to the reduction. We have begun the process of converting all 24-month policies to 12-month policies, which we anticipate will be completed early in the second quarter of 2021. As we've discussed in recent quarters, the re-underwriting efforts began in the third quarter last year following the new executive hires in our healthcare professional liability underwriting operation during the previous quarter. As of the end of the third quarter 2020, these targeted re-underwriting efforts in our HCPL business are substantially complete. We expect to benefit from the re-underwriting efforts in future quarters. We continue to focus on underwriting discipline and achievement of our long-term profit objectives, shrinking the segment's top line, if necessary, to improve our bottom line. In relation to these strategic underwriting efforts, premium retention in the segment was 81% for the quarter, driven largely by a 55% retention in our specialty lines primarily related to the Senior care line of business and includes a nonrenewal of a $5.6 million policy in that line during the quarter. In our Standard Physician line, retention was 85%, lower…

Thank you, Mike. Now I'll turn it over to Kevin Shook for comments about the results of the workers' compensation insurance and Segregated Portfolio Cell reinsurance segments. Kevin?

Thank you, Ken. The workers' compensation insurance segment produced income of $1.5 million and a combined ratio of 97.4% for the third quarter of 2020. During the quarter, the segment booked $63 million of gross premiums written, a decrease of 10% quarter-over-quarter. Renewal price decreases were 3% for the quarter, representative of the continued competitive pressures in our underwriting territories despite COVID-19 and the associated economic conditions. Premium renewal retention was 86% for the 2020 quarter compared to 84% in 2019 as we continued to see stronger premium retention each month during the pandemic. New business writings decreased quarter-over-quarter to $7.4 million in 2020 compared to $11.3 million in 2019. Audit premium for the third quarter of 2020 resulted in return premium to policyholders of $1.6 million compared to additional premium to the company of $1.8 million for 2019, a quarter-over-quarter decrease attributable to the economic impact of COVID-19 on policyholder payrolls. We continue to expect downward pressure in future quarters on direct and net written premium resulting from changes in payroll estimates. The calendar year net loss ratio decreased 3.2 percentage points to 62.2% in the third quarter due to a decrease in the current accident year loss ratio and higher prior-year net favorable reserve development of $2 million in 2020 compared to $1.4 million in 2019. The reduction in the 2020 accident year loss ratio from 70.4% at June 30, 2020 to 69.2% at September 30, 2020 was driven by our recognition of favorable claim trends in the 2020 accident year, which I'll describe in more detail momentarily. As this reduction was fully recognized in the current quarter, the result is a third quarter current accident year loss ratio of 66.9%. The 2020 accident year loss ratio of 69.2% at September compares to 68.2% for the same period…

Thank you, Kevin. Ned, before we get to your closing comments, I'd like to turn to the Lloyd's Syndicate segment for a moment. Is there anything you want to tell us about the results from London?

Thanks, Ken. And yes, there were several notable changes to our results at Lloyd's from the prior year quarter. First, our results in the quarter were income of $3.7 million, one of the best quarters we've had since we invested in the syndicates. Our combined ratio improved 10.5 percentage points to 89.6%, as both net losses and underwriting expenses were reduced by over 20%. In addition, as a result of our reduced participation, in the third quarter we received a return of approximately $32 million from our funds at Lloyd's. Lastly, Syndicate 6131 entered into a quota share reinsurance arrangement with an unaffiliated insurer, effectively reducing our net participation in the syndicate by half. The agreement is effective July 1, 2020, so it will not be reflected in our results until the fourth quarter of 2020 due to the quarter lag. We continue to work closely with Dale Underwriting Partners to monitor the global legislative situation pertaining to COVID. Thankfully, contractual policy language has largely held against attempts to expand coverage where no coverage was intended particularly in the United States, and our loss estimates to date have held up. Speaking of loss estimates, given the number of natural catastrophes that occurred during the quarter, I want to note that, to date, our exposure to these events has been within our cat expectations for the fourth quarter. Before we open the call to questions, I want to reiterate that the changes we've implemented in the quarter and over the past 16 months have been important. The changes are focused on both achieving our long-term profitability goals and enhancing the excellent products and services we provide to our customers. As a company, we have always operated with the understanding that the long cycles inherent in our industry will challenge us in…

Thank you, Ned. Cole, that concludes our prepared remarks. We are ready for questions.

[Operator Instructions] And our first question today will come from Greg Peters with Raymond James.

So let's go back to NORCAL. Everything is going on track. Since this is going to be a pretty major acquisition, can you talk about how their results have trended on a year-to-date basis, and if they are deploying any re-underwriting initiatives, et cetera, just so we can have a sense of how the two organizations might look when they're combined?

Mike, do you want to take that?

As far as the NORCAL results through nine months, they're certainly executing on an underwriting plan with a rate achievement and looking at their specialty book of business is similar to ours. So we're pleased with that. They're certainly booking higher accident year loss ratios. I believe its high 90s and kind of a combined ratio roughly in the kind of 120 range through 9/30. The other thing I'd say just overall is they're seeing the same things we are with less claims frequency in their accident year 2020 accident year book of business as a result of the uncertainty of the pandemic. And I think as you look at the combination of the companies, Greg, there's about $20 million of expense synergies. And we will proceed with a very consistent underwriting model and strategy when we combine the companies together. And I think the other thing to keep in mind on the transaction, just from a strategic standpoint, is we're combining our roughly $250 million of Standard Physician business with theirs. And that's been the more profitable segment of the market. Theirs represents roughly $250 million to $275 million. And as we put them together, we will certainly take advantage of the geographic diversification and all the expense synergies and combine our underwriting strategies. And I'll just say there, it's been a more profitable piece of the NPL business over the cycle. And they also have a smaller specialty book of business relative to ours. So the game plan is to integrate, build an attractive national platform with scale on a regional basis, and continue to work hard to bring the organizations together to produce a profit for shareholders.

So just one follow-up on the NORCAL. If I look at your specialty PC business, and you guys provided detail around why the top line is moving down, is it fair to assume that their top line, their gross premium written and their net written premium on a year-to-date basis is also down between 5% and 10%, like yours?

Greg, I'd have to check notes on that. But for sure, in Specialty, I think the Standard physician book has been much more stable for them. And I think important to that is the Specialty book at NORCAL is very small. I mean, it is 90%-plus just physician business. So that doesn't have the impact that it would have like it does on our book.

So let's just be clear, you said it's running around 120 combined ratio year-to-date. That's their total business, correct?

That's correct.

I mean, I have a capital question, but before I get to that, I just -- net investment income. So just look at the consolidated numbers. And I know you provided some detail on why certain things are down. But on a year-to-date basis, it's down 20%, down 28.5%, just from Page 1 of your press release in the third quarter. I understand there's a lot of moving pieces with the volatile markets, et cetera. But when we're sitting here on the outside looking in, and what kind of guidepost can you put around our investment income assumptions? And let's keep NORCAL aside. When we think about 2021 and 2022, is it going to stabilize at this new run rate? Is it going to go up? Can you help us put something together there?

Dana, do you want to respond to that?

I'll be happy to, Ned. Yes, Greg, it's a good question. So when you're looking at our current quarter results, let's say, or on a year-to-date basis, and you're comparing that to the prior year, probably one of the most significant factors that are impacting those numbers is the fact that since that time, over the course of, say, the second half of 2019 and early in 2020, we were de-risking our investment portfolio. So you're seeing the results now of a lower allocation, the impact of a lower allocation to our equity investments. And of course, additionally, you're seeing the impact of just the lower yields overall in the remainder of the portfolio. So as you look, sort of, I think that what we've got here in the current quarter is a good basis for go-forward.

So just to clarify, I'm looking at your total portfolio $3.366 billion. You're saying, on a consolidated basis, $55 million, $56 million quarterly number off that asset base is sort of a good run rate to assume, going forward? Again, ex-NORCAL, because obviously, when you bring NORCAL in, there's going to be an adjustment.

Yeah. So in the current quarter, we're at about $16 million. So in that 60 range is where -- you can sort of start off of that consolidated view of our net investment income and go forward from there, because we're not reallocating, at this point, any portion of the portfolio significantly.

I would keep in mind though, Greg, that we're probably reinvesting at lower rates than what's maturing off the portfolio, given where rates are right now.

Right. Thank you very much for that. That does help us sort of set expectations at least on it as we think about next year. I guess the final question, and I'm sure there's others who are going to ask questions, would be just around capital. The goodwill charge, obviously, doesn't necessarily affect capital, but your book value per share did take a hit. So where do you think the company is in terms of excess capital today? And I guess, more important, once NORCAL is done, where do you think the company will be on a pro forma basis in terms of excess capital once on the close of NORCAL?

Greg, so just a good question. One of the challenges, I think, of the environment that we that we are in right now, and all the uncertainty that comes along with it, is a need and a desire to hold more capital and be more conservative in your capital base. So I think that leads what we think from kind of a liquidity standpoint, that's really where we're focused in funding for the NORCAL transaction. And we've got, I think, a very solid plan on how we're going to approach that and what we think will close in the first quarter of next year. The transaction with NORCAL is a book value transaction the way it's structured. And so it doesn't erode any capital in the organization, and it allows us, on an operational basis, to operate at a slightly higher leverage ratio, but one that we think is very sustainable for the organization. And so I'm not sure if that's entirely responsive to your question, but that's kind of our view of things.

And well, it isn't really, but I understand parts of it. I'll take the rest off-line.

And our next question will come from Mark Hughes with Truist.

Yes. Thank you. When we think about the fourth quarter, you're through with your re-underwriting program, you've been putting rate increases in place. This quarter, your specialty P&C written premium was down kind of mid-single digits. Is there an inflection point in the fourth quarter? I know you don't provide guidance, but I'm just trying to think about, now that you're through, just as you say, a lot of these steps, what is the profile of the business? I'm thinking more specialty P&C. How does that look in the fourth quarter and into next year?

And maybe I'll take kind of the inflection point question, then I'll let Mike talk more specifically about the specialty bucket. Because we write a very long-tailed line of business, and compounded by the uncertainty that the pandemic brings, if there is an inflection point that's going to come, it's not going to come in the fourth quarter. It's somewhere down the road when we have greater clarity about the ultimate impacts of the pandemic and the ultimate impacts of all the measures that we've taken. We're very positive and very bullish on everything we're doing, but it's going to take time for the confidence to come through, especially in the actuarial analysis of those measures. And we're going to be cautious.

Yes. And if I might, I was thinking a little more top-line. I'm completely with you on the visibility around the [indiscernible].

Yes, okay, I'm sorry. I misunderstood your question. Yes, so Mike can talk more about the kind of inflection point on the top line, or lack thereof. So Mike, why don't you handle that?

Just to kind of look at the overall specialty P&C segment, we're kind of seeing at our medical technology business. Relatively flat trends, but some pretty good new business opportunities as a result of the pandemic and certainly our excess product. In our small business unit, IST, which is roughly $100 million book, we're kind of looking at that. And we're seeing strong retentions, some rate starting to come through the book, and hopeful to see that grow a little bit more on the new business side, both in the fourth quarter and then as we move forward out into 2021. I think in healthcare professional liability, when you look at the top line, specialty has been re-underwritten pretty aggressively over the last year as you can tell by the retentions over the last several quarters. We're substantially through that. We do have, Mark, some two-year policies that were written in 2019 that will come up kind of in the first quarter that are larger that could provide us with potential volatility. But I will say this, that we're substantially through that process. And we're expecting retentions to stabilize throughout 2021 in the specialty area. In the Standard Physician business, again, we are pleased with the 85% retention this quarter. There's a lot of competition in that market. I think the specialty market certainly has firmed much more, and we have the ability to achieve additional rate product structure terms and condition improvement. But we still see, particularly on a state-by-state base, a Standard Physician market being pretty competitive. So we're keeping an eye on that as far as retention rates going forward. But as far as the major components of the re-underwriting effort, we've really been through them as we proceed into the fourth quarter, like I said, with a couple of larger accounts in 2021 in Specialty that could provide some volatility.

Thank you for that. The impairment, Dan, I think you suggested it didn't impact the workers' comp business. If it's a function of kind of the broader stock price, what's the distinction between the older net now acquisitions versus the worker's comp acquisition?

Mark, I think it's really where the volatility in our business has been. That is the distinction. So when you look at the volatility of our operating results, they're emanating from the specialty P&C side of things. And the results in the work comp side have been much more stable.

Ned, when you mentioned Lloyds, the outlook for the losses from the recent weather, when you say the it's within expectations, is that to say it still will be a tough quarter, We're still gathering data. And as is always, with the storms and other cat events, it takes a little while before you have the kind of totality of things. We said, we kind of expect it within our expected cat load, but it certainly will put some pressure on the quarter. I don't know, Dana, if we've got any more insight since we got the quarter lag, we've got any more insight at this point into what we think that might look like.

No, I think you've accurately reflected what we know at this point.

I think we're likely to post a loss for the quarter, but not a tremendously sizable loss, something under a couple of million dollars.

[Operator Instructions] Our next question will come from Paul Newsom with Piper Sandler. Please go ahead.

Sorry, you've hit most of my questions, but I'd like to beat the Lloyd's thing just a little bit longer, just so I know.

The reduced participation on Syndicate 6131, which is a small special-purpose syndicate that we participate in, that reinsurance was effective July 1, so it'll be in our fourth quarter, their third quarter. The reduced participation in the syndicate 1729 started in the first quarter of this year for them, and so it had been our second quarter. But recognized that, because a lot of the business they write is reinsurance that earns out over 24 months as opposed to 12 months, that it doesn't manifest itself quite as quickly as it would if everything were just earning out over 12 months.

Okay. I think I got that. Apologize. It's not you.

No. I'm sure I'm sure it's me, Paul. Thanks.

And then, any sort of broader thoughts on the competitive environment in the Specialty business? I mean obviously, you've talked about a little bit already. But I guess I'm a little bit surprised to see comments about continued competition. And I guess is that because other folks are not seeing the results that you are? Or is it some other things that you think may be going on in the competitive environment?

Yeah, I'll let Mike respond initially to that. Mike, do you want to talk about what you guys are seeing in the specialty P&C market?

Yeah. Thanks, Ned, and good morning, Paul. Just a couple of observations. It has clearly been more competitive in the Standard Physicians market, but it's state-by-state in the more challenging venues. And as you could see with our results through the third quarter, with double-digit rate increases, there are areas where the Standard Physician market is firming up, and that's more of a state-by-state basis. There are some other states that they're highly, highly competitive and you're not able to achieve and secure as much new business as you want in those targeted states. The Specialty, which includes just the hospital market, senior care market, has been pretty firm all year. I mean, we've been really pleased, both on new business and the renewal terms, that we've been able to secure in that market has been really helpful to turn that book around. And I'm talking about the rates, the product structure changes, terms, conditions, reduced limits, all those add up to a much more profitable book on the renewals that we've handled and selective new business that we've written there. And then, the other thing that I'd say, just in general, is new business opportunities have definitely been down a bit across the HCPL market as a result of the disruptions from COVID-19 as far as submission activity. So we're hoping that will pick up as we go through the fourth quarter and into 2021. We did see some nice cadence in new business in the fourth quarter, and we're hoping that continues. We wrote $8.7 million, just slightly less than the 2019 quarter of $9 million. So, we're hopeful to have a more consistent new business year in 2020 as some of the issues with the pandemic hopefully reside, hopefully just kind of get a little bit more easier for us to deal with in the marketplace.

And I just want to clarify. Mike, I think you said fourth quarter for that $8.7 million, that was our third quarter new business number.

Yes. Thank you, Ned.

And I think I heard someone knock on wood about improved situation, so I'm going to do the same.

And our next question is a follow-up from Mark Hughes with Truist.

I think you might have touched on this. But as you look at how older claims are developing in the current environment; clearly, new claims are down. So I'm curious whether the current circumstances have affected your ability to close the claims, any maybe administrative disruptions, anything like that; or alternatively, whether there's been more motivation to close claims. I'd just be interested to hear you talk about what's going on in the back book, so to speak.

Yes, Mark, thanks, and I'll let Mike chime in, as well. But one of the bigger issues is, especially early on in the pandemic, is that the court systems largely shut down. And as an organization that goes to bat for its insureds, not having the courts open for those trials certainly has slowed things down on that end. And then, I think it's probably a mixed bag on what the ultimate impact of that is. I think for some people, it is probably driving towards settlement sooner; and for others, they're happy to ride out kind of the administrative delays. We are beginning to see the court systems open up some maybe not fully, but in certain jurisdictions, they are working toward trials, and certainly things like depositions and other parts of the process have opened back up much more significantly. So I got some statistics from Rob Francis. We have only had 4 trials since February. Over that same time frame last year, we had 74 trials. So that gives you a sense of what's going on with the court system. Mike, I'm not sure what you might add to that.

No, Ned, I don't have anything additional to add.

So four trials in February. And this may be too narrow gauge to be relevant, but your favorable development was a little lower this quarter. Is it just not possible to get resolution; and so, therefore, the reserves are kind of frozen in place? If you're only talking about 4 trials versus 74 last year, that's a pretty big difference.

Again, we talked about the uncertainty that comes in that COVID brings, and this is one of those areas. And so it is, as I said, it's a mixed bag on kind of the impact it's having on closures. I think it is slowing down claim closures. And what the actuaries hate more than anything is inconsistency in data, right? And so when you have these disruptions and patterns, it becomes a greater challenge to analyze. And I think when that happens, you approach that with a lot of caution as to what it means, which is what we're doing.

And I had one other question, and again, a lot of this has been touched on. But if I was just doing kind of the simple approach of the trend in pricing versus the trend in losses, kind of loss cost inflation versus pricing trends, how would you characterize it in the health care professional liability space?

Mike, do you want to add that?

Yes, I will. Just from a standpoint of frequency, it's been relatively flat except for this COVID impact that we've been talking about. On the severity trend, there's such a variation by state. We have some states that have pretty benign severity trends. There's others that are high single digit. But just kind of what we're tending to see is severity trend in that kind of 3% to 3.5% to 4% range depending on the state. And then obviously, we're taking our rate actions off of that kind of trend as we move forward. And we are getting nice margin over our loss cost trends as we look out throughout 2020, for sure. And I guess the other thing that I'd say is just you can see that in the kind of accident year loss ratio reduction since the year-end 2019, it's roughly 6.5 points exclusive of COVID and exclusive of the large national healthcare tail. So we're seeing some positive trends.

And again, the 6.5 points, and I'm sorry if I missed that point, but that number is if you exclude COVID, if you exclude the large national accounts within the specialty P&C, the improvement is 6.5 points?

Yes. That's a number relative to year-end 2019, and it's an accident year number.

Yeah. Okay. And then, Dana, the income from the equity in unconsolidated subsidiaries, the $5 million this quarter, I think it was much more of a downdraft last quarter. Do you have any early view on how that's going to shake out in the fourth quarter? I think is that another one that's on a one quarter lag. Do we have visibility for that?

So within the equity and earnings, those LPs and LLCs tend to follow the broader equity market. It's just that we were reporting them on a quarter lag. So that's how you see it come through our financial statement. So that's probably the best guidance that I can give you around equity and earnings.

Yeah okay. All right. Thank you very much.

[Operator Instructions] And this will conclude our question-and-answer session. Would the company like to make any closing remarks?

No. Thank you, Cole. I just want to thank everybody that joined us today. And again, please stay safe and healthy, and we look forward to speaking with you again in February.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time. And have a great day.