ProAssurance Corporation (PRA) Q1 2018 Earnings Report, Transcript and Summary

Good morning, everyone. Welcome to the Conference Call to discuss ProAssurance's Results for the First Quarter 2018. These results were reported in the news release, issued on May 3, 2018 and in the Company's quarterly report on Form 10-Q, which was also filed on May 3. 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 May 3, 2018 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. [Operator instructions]. 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 a time for questions after the conclusion of prepared remarks.

Thank you, Drew. On our call today, we have Chairman and CEO, Stan Starnes; our Chief Operating Officer and Chief Financial Officer, Ned Rand; and Howard Friedman, and Mike Boguski, the President of our Healthcare Professional Liability and Workers Compensation operations. Stan, will you start us off?

Thank you, Frank. As I said in our news release, the trends that we discuss at link with you during our February year-end conference call are continuing into 2018. And that bolsters our optimism for the future. I do not believe anyone with any knowledge of healthcare professional liability, getting nor the back that the business climate is starting to change, and we stand to benefit over the long-term, because of our superior financial strength, keen understanding of the market and our ability to meet the liability needs that our competitors cannot address. In Workers Compensation Eastern's differentiated products and specialized underwriting are producing profitable results in a market that is as competitive as anyone could remember. I know that 2008 is a source of concern for some investors and we'll discuss our continuing confidence into value Syndicate 1729 is creating for the organization. We'll start with a brief overview of the consolidated financial results from Ned.

Thank you, Stan. We saw a 5% increase in gross premium written in the quarter. Workers compensation by the way with an 8.5% increase, which highlights the success of our Great Falls renewal rates transaction in New England late last year. Premiums and Specialty P&C were up 2.7%. However, both segments were somewhat offset by a 2.8% decline in gross premiums written in our Lloyd's segment. In addition to achieving strong retention, we continue to find opportunities to rate properly price new business, despite the competitive market. In the quarter, we were at a total of $30.4 million in new business and much of that was written through broker submissions, underscoring the importance of the successful broker-outreach we have undertaken. Our coordinated sales and marketing strategy produced $8.8 million of business, an increase of $1.1 million year-over-year. The consolidated current accident year net loss ratio was 81.5%, an increase of approximately 0.5 point over first quarter 2017 and reflect of our continued uncertainty about the long-term loss trends in healthcare professional liability. Something Howard will have more details on in his comments. Our net favorable loss development was $22.8 million, with favorable development from all three operating segments. More about that in our segment discussion. Our expense ratio was down six-tenths of a point compared first quarter 2017. Primarily due to lower share-based compensation expenses in our corporate segment, reflecting reduced incentive compensation levels. With regard to our investment related results, our net investment results were $23.7 million, down $1.3 million due to reduced earnings from our fixed income portfolio. Primarily reflecting lower investment balances, resulting from our capital management initiatives. We've recorded net realized investment losses of $12.5 million due to mark-to-market adjustments. Of note, as a result of the tax changes enacted at the end of the 2017, we have divested about half of what was a $632 million mini bond portfolio, given the reduced tax efficiency. We recorded a small gain on those sales and then proceed to cap them or will be invested in corporate bonds, taxable municipal bonds and some asset backed securities. Last quarter, we also mentioned our ongoing analysis of the base of origin and any used tax or B. They could have imposed additional taxes on the premiums we see to our segregated cell captive operation in the Caymans. However, we expect the captive cell owners will elect to be taxed as U.S. taxpayers, which would exclude the premium seeded to those cells from the scope of the B. As a result, we believe any remaining in-Scope premium which fall below these threshold for application of the tax as the B is currently structured. We can elaborate more on this in future quarters but we're not making any provisions for higher taxes due to the beat at this time. On the subject of taxes, the net realized investment losses I mentioned previously contributed to a significant increase in our income tax benefit which was $3.4 million in the first quarter versus $1.2 million in Q1 2017. In summary, net income for the quarter was $11.9 million or $0.22 per diluted share, operating income for the quarter was $21.5 million or $0.40 per diluted share. At March 31, our book value was $29.28 per share further reflecting the net realized losses in the period and at the end of the quarter we had approximately $103.2 million an unpledged cash and liquid investments outside our insurance subsidiaries. Frank?

Thanks Ned. Let's dive into our segment discussions with Howard Friedman and Specialty P&C. Howard?

Thanks, Frank. I'll like Stan's comments. The healthcare professional liability market does feel as if the tide that looks at all boats that starting to go out. Just in the last three weeks, we have seen two smaller competitors received downgrades from Lambeth [ph] won after posting a combined ratio of 180 for 2017. Another significant competitor in the Northeast is now on negative watch. Industry wide, we continue to see a number of reports of large verdicts and while our pay loss data remains relatively stable, we are reflecting caution about this severity movement in our loss picks. The other concern for the future is that when severity increases frequency often follows due to the publicity of the large verdict invariably generate. We've seen this before and the end result is typically a hardening of the market that benefits companies such as ProAssurance when competitors with weaker balance sheets and potentially weaker reserves feel a pinch. While we recognize there could be some short-term pain, the long-term outlook is encouraging. For our Specialty P&C segment, gross premiums written grew 2.7% in the first quarter. Within that $3.7 million increase was $1.9 million resulting from one of our insured facilities bringing risks previously placed elsewhere into their ProAssurance contract. We believe that's another sign that we offer a product that larger entities prefer. We also wrote a $1 million policy for a multi-state dental group. This was a broker driven submission and bears out two points. First, our broker outreach continues to produce results and second that consolidation in healthcare continues. The idea that you could aggregate enough dentists to reach a premium level of $1 million would have been unheard of even five years ago. Our premium retention in the physician line which is the single largest line in the segment was 91% for the quarter. that's a one-point increase over Q1 2017 and pricing on renewing physician business a key indicator of market strength was up 1% quarter-over-quarter. Renewal pricing in healthcare facilities for leasing some of our largest policies was 3% higher quarter-over-quarter. We view this as another indication that the healthcare professional liability market seems to be a little less price competitive. Our current accident year net loss ratio for the quarter was 90.4% up 1.7 points over the first quarter last year as we continue to be cautious in our view of upcoming litigation trends and as we reflect changes on our overall mix of business as a shift towards larger policies and more complex risks. Favorable reserve development continues to be strong although lower than last year, something we have expected and tried to communicate. In the quarter, we recognized $20.6 million of favorable net loss reserve development in Specialty P&C. Finally, our underwriting expense ratio increased 1.3 points compared to last year's first quarter, primarily due to acquisition costs associated with higher commission expenses on the larger policies we are writing, somewhat offset by an increase in net premiums earned as compared to 2017. Frank?

Thank you, Howard. Now, we'll bring in Mike Boguski for comments about first quarter results and workers compensation. Mike?

Thank you, Frank. The Workers' Compensation segment operating results were $2.8 million for the three months ended March 31, 2018, consistent with the $2.9 million producing the same period in the prior year. Gross premiums written increased 8.5% to $91.3 million for the three months ended March 31, 2018, compared to $84.2 million for the same period in 2017. This includes the business writings to $16.6 million during the quarter compared to $49 in the first quarter of 2017. Our 2018 business results included $3.7 million related to the 2017 Great Falls renewal rates transaction as Ned previously mentioned. We continue to be pleased with the immigration and our geographic expansion into New England. Order premium was $1.3 million in the first quarter of 2018, a slight increase compares to the $1.2 million in 2017. Renewal pricing decreased 2.6% in the quarter while premium retention was 86% compared to 89% for the same period in 2017. The renewal pricing and premium retention results reflect continued price competition in the workers compensation market place. We were successful in renewing nine of the 10 available alternative market programs in the quarter. The program that did not renew was a result of the strategic decision by the program on or to accept the captive. Overall, alternative market program gross written premium increased 4.5% in 2018 compared to the same quarter in 2017. We reflect the new business writings of $2.9 million and a premium retention of 91%. The first quarter 2018 accident year loss ratio, in a traditional business was 66.1%, consistent with the 66% booked for the same period in 2017. We've continued experience favorable trends and claim closing results, which have offset the impact of renewal pricing decreases. We successfully closed 21.8% of 2017 and prior claims during the quarter. A strong result start 2018 and consistent with recent trends. Favorable reserve development was $1.9 million in the quarter compared to $2.4 million in the first quarter of 2017 primarily related to alternative market business, but also includes approximately $400,000 in both periods related to the amortization of purchase accounting fair value adjustments for our traditional business. The decrease in the 2018 expense ratio, reflect the increase in net premium written and effective management of operating expenses. The 2018 combined ratio of 92.6% improved 1.5 percentage points of intangible asset amortization and 1.2 percentage points of a corporate management team.

Thanks Mike. I'm going to ask Howard to bring us up-to-date on Lloyd's, but also want to remind you that the results of our 58% participation in Syndicate 1729 are reported on a one-quarter lag. Two other reminders, first as we mentioned last quarter, we increased our participation in Syndicate 1729 to 62% as of January 1st. Second, Syndicate 6131 the special purpose arrangement or SPA begin writing on a quota share basis with Syndicate 1729 as of January 1st. Due to the one quarter reporting lag, both changes will begin to be reflective in our operating results next quarter. So, with that I'll ask Howard to tell us about Lloyd's.

Thanks Frank. Gross premium written were down approximately $350,000 quarter-over-quarter to $12.4 million. Lloyd's is a very comparative environment and the Syndicate's attention to disciplined underwriting and proper pricing led to loss premium that was not fully offset with new business, although, we did write $3.6 million of new business in the quarter. Net premiums earned were $12.5 million or 14.3% decline quarter-over-quarter. Due to an increase in ceded premiums earned. As ceded premium increase results from revisions made last year to the Syndicates reinsurance program to provide more protection and capacity. This created a relatively higher proportion of ceded premium, since reinsurance on a property catastrophe business which is now more heavily reinsured earns over a 12-month period, while reinsurance on many other classes of business earns over 24 months. The decrease in net premiums earned was the primary factor driving a 2.7-point quarter-over-quarter increase in the net loss ratio. Also contributing was a decrease in net favorable prior year development as compared to last year as well as fourth quarter losses resulting from the California wildfires. It's important to note that the syndicate like the overall Lloyd's market makes every effort to evaluate and establish accurate initial reserves for each loss event. However, the nature of the business with some coverage provided in the aggregate for events like windstorms or a various lair on individual larger risks makes the initial estimates subject to change as additional information becomes available and underlying claims are resolved. The syndicate takes a conservative approach to establishing initial loss estimates often increasing the overall loss expectations for the given underwriting year rather than absorbing initial loss reports in IB&R. All of that to say that while we think the Syndicate's loss reserves are conservative and will develop favorably overtime. There will be some lumpiness in this segment. Underwriting an operating expense were up approximately $1 million over the first quarter of 2017. This was due mainly to increased staffing to address the anticipated growth in Syndicate 1729's operations and to a lesser extent new operational expenses connected to the startup of the SPA Syndicate 6131, which is focusing on contingency and specialty property business. We believe the addition of skillset of underwriters with proven track record of success in writing in the assured tail risks has important diversification to the Lloyd's segment. Our early indications for next quarter are that the results will unfortunately be comparable to this quarter as the Syndicate continues to see attritional losses from the 2017 year of account at higher than expected levels. We remain optimistic though that the 2018 underwriting year will reflect improved results given the pricing improvements that the Syndicate are seeing. Frank?

Thank you, Howard. Stan, I know you specifically wanted to address low wage, to wrap things up.

Thanks, Frank. It's clear from some of the medians we've had with investors over the past few months that our investment in Syndicate 1729 and we do view it as an investment is a cause for concern for some. I want to take a moment to again layout our vision and assure you that it is our judgment that Lloyd's is an important part of the future, we see unfolding for assurance. First, I assure you that we are cognizant of the fact that we have committed significant capital to the Syndicate. At the same time, I think our proven record with effective capital management should reassure you that we do not commit capital to Lloyd's on a whim. Like any other startup, Syndicate will take some time to reach its full potential and market conditions admittedly have made it harder than we expected or could have predicted. However, I won't emphasize our continued confidence, inducting Dale [ph] and his team. But our vision is more than just participation in the ultimately underwriting profitability of the Syndicate. We know that having the ability to address international risk especially in our Life Sciences division will open up new opportunities that would be almost impossible were it not for Lloyd's. And we are seeing opportunities open internationally for us through our contacts associated with the Syndicate. While these opportunities are small, we do believe that the world of litigation environment is trending closer to the American model for better or worse. And we have positioned to benefit when and where we are willing to commit our capital and expertise. Finally, we are building real value at Lloyd's. The capital we have committed has tendency rights. And that along has value. We also have a stake in the underwriting operations with fee business to the Syndicate and that has right now and can have a mix value as the book of business grows. As I said we understand that our 2008 Syndicate segment is not making any positive contribution to our bottom line at the moment. However, we are confident that it will always will provide us opportunities to write profitable business outside our borders. Just as we were confident that carefully adding strategic pieces to address the evolution of risk in the United States would ultimately boost our bottom-line. And as for our domestic operating subsidiaries, I think you can feel the optimism in our remarks. The healthcare liability market shows signs of return as we have always known it would and we are operating profitably in the niche, we have created in the workers' compensation. And that cycle will return when the national and package players see the results of their unsustainable pricing. In short, we continue to run strong in a long and challenging rate. I am extraordinarily optimistic. Thank you.

Thank you, Stan. Drew we will turn over the call for questions now. Thank you.

[Operator Instructions] The first question comes from Paul Newsome of Sandler O'Neill. Please go ahead.

Hi, Paul.

Good morning. Thanks for the call. I was hoping you could give us a little bit of a history lesson from your perspective on medical malpractice turns and presumably we're going to see more losses before we really see any big price increases, because there always seems to be a lag between recognition of trend change. But could you tell us kind of what historically has happen in your opinion if there is anything today that would make it different in terms of when, when we would see sort of an inflection point between when the claim start showing up and then you see the resulting price increases. Just what historically has happened?

Hi, Paul, it's Howard. Yeah, for the history lesson, OK, before my time, but mid-1970s or early to mid-1970s significant increase in the frequency of medical malpractice as it was called on litigation coming after long period of time where medical malpractice was an afterthought for most physicians and sometimes even covered on their personal alliance policies. But there was an increase interest and that's what led to the departure of the commercial carriers at Hartford and other employers of all saw that we're offering that coverage in the late 60s and early 70s. With the increased frequency also came increased severity as well. And ultimately that resulted in a formation of all of the - what's known as the PIA, or mutual type companies, the physician and in some cases, hospital owned carriers in the mid to late 1970s. Things settled down for a while, but if you recall most of the business back then was written on an occurrence basis, and it was just the matter of time before the tail kind of caught up with things. And in the mid-1980s beginning about 1984, so the losses really began to emerge on that business that had been written by these new companies and those losses ripple through the industry and all the way through the reinsurance markets as well and the result of that, the latency of those claims and the increased costs and the adverse loss development resulted in the reinsurance market for occurrence pretty much drawing up and most of the business being converted to claims made. Things kind of settle down because a lot of companies continue to write or continue to charge the occurrence price for their first-year claims made coverage and recovered for several years. And then as the 1990s progress, there was total reform and there was total reform in the mid to late 70s, there was another round of total reform in the mid to late 1980s which in both cases settle things down for a while. And the marketplace became rather competitive in the mid-1990s. I think in our history, what we have seen over the past 10 years or so now, some of the commercial carriers came back in and I think some of the existing carriers got to be a little bit overconfident. And then we saw a big increase in severity in the late 90s, in retrospect 1998, 1999, but really didn't become evident until around early 2000. And again, a fair amount of adverse loss reserve development that was driven by a severity at that point really not by change in frequency, resulted in several insolvencies, resulted in same fall even the marketplace and also resulted in capital calls via a lot of the policyholder own mutual and reciprocals and another round of total reform. So again, so that round of total reform in the early 2000s really had a dramatic affect it appears on frequency. We think it was the total reform, lot of other things that may have caused that as well, and nobody is really clear. And once again things kind of got more competitive. Frequency dropped dramatically. Severities became more moderate. And overall inflation in the economy was rather low as you know from probably 2005 up through the present time. So, in terms of what's happening now, not completely clear yet, some of the severity now we think is being driven by the - I think I mentioned this last call the aggregation of risks positions into hospitals, hospitals acquiring other hospitals and becoming larger. So, essentially larger targets where physicians independently have $1 million policy limits now as part of hospitals and employee physicians really have the whole asset base of the institution behind them. So, I think the expectations and the - certainly our attorneys are looking at larger potential awards and juries are seeing the institutions in many cases as being much larger and more capitalized. So that in itself I think is driving some of the severity that we see in the market. And again, wanted to point out that we're not really seeing this in our paid data, but we're being cautious about it because of what we're seeing in terms of the news the verdicts that have come in other areas of the industry and even in some of the cases that we're seeing and reserving now that have higher damages or higher potential damages. So not sure if that was the history lesson you wanted but.

No, that's wonderful. And very useful. If you're think the claims not necessarily paid, but in sort of your outlook in general. Does that mean that essentially there is a little bit more I know --, there is a little bit more conservatism in your IB$R and the actually you're sitting today that because you're factoring in this severity which you not seen yet and paid, but you think that looks like it's very much out there.

I would say yes, I mean that certainly the intend in that by establishing higher what is essentially a higher initial loss ratio estimate or higher initial loss take on the same business. Assuming that we weren't concerned about, there is more conservatism there. If there is the change in actuality, then I think we're prepared in those reserves to deal with that. And that's always been our objective is to be prepared to deal with whatever comes our way in the reserves that we established initially. And at this point in time that means selecting a higher initial loss tech which has obviously some short-term impact, but I think positioned ourselves more favorably for the future.

Okay. Thank you very much.

The next question comes from Arash Soleimani of KBW. Please go ahead.

Thanks. Good morning. How is it going?

Fine, thanks.

So, kind of the similar questions. I noticed that Howard said this time and you guys have also said in the past that you're not seeing it in your peak, the severity uptick. But in the release, you also seem to imply that. You are seeing trends of increasing severity and the continued impact the results. So, I guess is it that you're not seeing at all in you results or you're just, you're seeing that the market and you trying to be cautious. I just want to make sure that you're really not seeing any impact in pro assurances' book of business.

Well, I think what we're seeing, what we said even last quarter is that we are seeing instances certainly where our claims evaluation the evaluation of cases that are being reported to us potentially have higher damages and we're reserving for those on a case basis. So, in that regard you can say we're seeing something potentially. But we're also saying and as we reiterated this time that it's not coming through at this point on paid losses. In other words, cases that are being resolved in our settlements and payment of verdicts that ultimately go to judgment and we end up paying have not changed more than the kind of severity trend that we've talked about before this 3% or so. So, it's a mix signal we're seeing it as the potential being there on open clients or knew they reported clients but how that plays out we don't know yet.

Okay. And I know in your 10-K, you guys say that you bake in a 2% to 3% severity trend in your pricing, so is that still the trend that you're baking in or do you see that moving up and then I think you say like in terms of your reserve and you are going to make a 10-point cushion above the pricing. So just want to see if those metrics have sort of changed at all given what you're seeing in the market?

Yeah, I'd say that what we're building - well, first thing it varies by state and it varies by product, but overall, I think that 3% number let's say is still a good average weighted average estimate of what we're building in for severity trend right now. And the way that we reserve has not changed. In other words, we established initial reserves that 8 to 10 points over our expected pricing loss ratio. I'm not using the word cushion I'm using the word, the difference between where we establish our initial reserves versus our pricing. We price in order to be competitive and we reserve more conservatively than that because where severity might go.

Okay. And I was surprised with the 1% rate increase in physicians since it looked like it was down from the 2% in 3Q and 4Q of 2017. And I guess the comments you guys have been making it would seem to point to an increase for accelerating rates and the deceleration we saw this quarter, so just wanted to know if you had any comments on that?

Well, again a few things in any given quarter it's the mix of the business that renews in that quarter and the states that might be more heavily concentrated. The business is not uniform from the perspective of even in the physician book across our book of business by state, there are some states that are much heavier January 1, some states that are more July and so forth. The 1% I think it's compared maybe to 1.4% last quarter if I recall correctly not significantly different from my perspective and again on the physician book of business particularly the smaller and medium sized physician business we think that the rate adequacy is there. We're more concerned about it for the larger accounts and more concerned about it for the facilities where as you saw we got a higher average increase, so it really is mix specific.

Yeah, the other thing I just want to point out Arash, and I don't want you to get out of sequence here, we're not talking about a sequential change from Q4 of 2017 to Q1 of 2018 we're comparing Q1 of 2018 to Q1 of 2017 so the same business does renew in Q4 of 2017 and Q1 of 2018 we're comparing quarter-over-quarter so don't try to draw any kind of rate trend thinking we're talking about a sequential number here.

Okay, that's helpful. And just I had a follow up on the question I had before when we were talking about the severity trend and Howard mentioned the 3% so I guess what's the, based on what you're seeing I guess do you see the potential for 3% to become 5% or is this severity kind of prices that is this potentially occurring is that more of just like one point I guess I'm trying to get a sense of how large the uptick in severity could be like 3 to 5, 3 to 4 just I mean…

It's very difficult to say and I'd love to answer myself obviously in terms of setting pricing. Right now, again we're not seeing it directly. We're being conservative in terms of what we're observing or hearing about in the marketplace, what we're hearing about in terms of reported jury verdicts and that type of thing. If you look back into the early 2000s, they were certainly times where we were using severity trend of 7%, 8%, 9% in our rate filings. I don't see that on the horizon right now but that if you want a historical perspective that's certainly exited there for a number of years.

All right, perfect. Thanks very much for the answers.

The next question comes from Amit Kumar of Buckingham Research Group. Please go ahead.

Thanks, and good morning.

Good morning, Amit.

Just a few questions. The first question goes on the broader discussion on the market trend and I think Paul was asking about the cycle. could you talk a bit about, how should we think about capital allocation based on the environment and how could that potentially impact the special dividend down the road, because clearly it seems that the trends are turning which is giving you probably new opportunities. So just refresh us, because the special dividend has sort of stayed flat over the past few years?

Hey Amit, it's Ned. So, I think kind of two parts to that question. How we think about capital allocation, certainly we are keeping an eye on where the markets are headed and want to make sure that we have enough capital to support the business going forward. Funny thing about that - one of the funny things, the capital models that the rating agency uses, it's largely driven by premium you can charge two times the amount for the same risk, the capital models would say you need - the amount of capital for the same risk just based on what you are charging. So, we are very observant about what's going on to make sure that we have capital to support that. I caution about taking the special dividends we paid in the past and projecting them into the future, I think we have said repeatedly, we make an analysis of our capital needs and the capital we hold every quarter and try to be prudent stewards of that capital and we'll continue to do that.

The second question I had was on the broader market conditions in the hospital I guess business space, one player has exited or told people that they are exiting. What sort of opportunities does that create for ProAssurance?

I think it creates certainly some good - potentially good opportunities. Anytime there is that type of action smaller players, larger player or whatever, there is dislocation, there is some risks that would not have gotten on to the market for this upcoming renewal that will be now. There is also I think an increased awareness by the brokers and even by some of the larger accounts that risk managers within hospitals and so forth when they see that when they hear about that, but there is a potential slide towards quality, there is a potential slide towards stable, insurers those that they think that they could go with and stay with for a number of years and that's something that we really have demonstrated and stressed. So, the idea of maybe just looking for the next year as premium, the lowest premium take a little bit of a back seat towards gone to a carrier that is going to be around that will be in the market to handle your claims down the road and I not talking about insolvency necessarily I am just talking about a company that leaves the market obviously less interest in claims handling three years down the road because it's not a current customer. So, I think all of that benefits us tremendously. And we hope to be able to take advantage of it and hope that there are others that will particularly from the commercial side that make the same decisions about holding back from the marketplace.

Got it. The final question is, if I were to sort of step back and your answers to Arash and Paul, you talked about market trends and you also talked about paid for ProAssurance. So, clearly you are being ahead of the curve and you are not witnessing those trends in your own book. Are you surprised by the stock reaction today, do you think that the market is over reaching on the trend line and getting ahead of itself on the commentary?

Amit, I don't know if there is anybody in this room, that can tell you what the stock market means or what it's doing on any given day. I would simply emphasize to you that we as always are very focused on the long term, we're very focused on the long-term profitability of the organization, we're very focused on long term world fare of our shareholders and lots of different things motivate investors, take lots of different moves and we understand that but we need to remain focused on the things that will serve us well. We're in a long tail line of business. They don't change a lot quarter-to-quarter without some major form of disruptions. So, we have to be careful not to be influenced, but the thing is that we see a little help to us today and no help to tomorrow that's why we regard the long-term. Additionally, I think investors are understandingly influenced by the perception of the analyst and they just a wide divergence in the estimates the analyst give of prior earnings and that wide divergence is understandable, because of the uncertainties that exist with respect to our lines of business. To give estimates burning you have to make projections as to what the favorable loss development or the adverse stability is going to be, and we don't have any idea what that's going to be next quarter and who we see the actual results. We're a very result driven organization. So, that wide diversity of expectations probably triggers some of the volatility in our shares, that's not a criticism of you guys, I think you got an almost impossible job and you're doing well but I think it does account for a little bit of volatility you're seeing, but the message I would give to you and all of our investors is we remain very focused on the fundamentals of our business. We remain very focused on providing long term value returns to our shareholders. We remain committed to the notion that if we don't have a good use for the capital we'll return it to the shareholders as we have done in enormous amounts over the last number of years and nothing is changed about that. and so that part of the reason I remain very-very optimistic about the future as I know that we're focused on the long-term and the things that will make us strong for the next number of years.

Good answer. Thanks for taking my questions and good luck for the future.

Thank you very much.

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

Good morning, Mark.

Good morning. Switch to workers comp so sort of curious Mike I know you've been pursuing higher shared ideas, strategy can you talk about any progress there?

Yeah, Mark, we're off to a really good start with our Eastern specialty risk unit. In the first quarter and last year we wrote $5 million premium with an attractive loss ratio. The first quarter of 2018 we wrote $1.8 million in that unit with favorable loss ratios as well. We have not seen claims severity in the unit and it's contributing to our operating earnings so we're off to a good start.

The corporate expenses in the quarter, am I right in thinking those were a little bit below trend, anything unusual there how should we think about that going forward?

Hey Mark, it's Ned. As we said in our comments that's really driven by the compensation expense and in particularly the compensation the long-term compensation expense which is driven impart by the results in the organization and that was down both in kind of the impact of earnings on that as just as well as the [indiscernible] of awards that have been granted in the last several years.

Then the tax rate that was applicable this quarter what were the puts and takes there when we look at the operating earnings what was applicable to tax rates?

Yeah, so same way when you look at the operating earnings the tax rate is around a negative 2.4% or 2% or somewhere in that range. And really, we've got a couple of factors, we've got the impact of the municipal bonds that we do hold which lower us from the 21% rate likewise dividends that will bring us down. But most meaningful, it's the low-income housing tax credits and historic tax credits that we carry. And we get into a negative effect of tax rate because we had the ability to carry kind of the excess credits that we've got back one year. So, we can carry a portion of those try to back to a prior year which brings us to a negative effective rate in the quarter.

Very good. Thank you.

[Operator Instructions]. The next question comes from Matt Carletti of JMP Securities. Please go ahead.

How are you doing, Matt?

Good morning. I'm doing great, how about you guys.

Good, thanks.

Just going on. Just following on the tax question, I guess net given some of the changes you've talked about in the investment portfolio and kind of the overtime the run-off the tax credits. What's the good kind of run-rate to assume as we look forward for income taxes? Because I assume it's not negative 2% to perpetuity

Not in perpetuity. I mean that negative 2% is based on kind of our view of the tax rate for the year outside of for operating earnings. A lot of variables that play there. So that certainly can change. But as we sit today kind of a very low single digit or very low single digit negative tax rate is what we would anticipate. Now like I said a lot of things we can cause that to change so that is kind of for the 2018 year what we currently would expect. And then the tax credit trend again. I'm sorry the tax credits, so we've made these tax credit investments in 2009 timeframe. And so, we're beginning to see those begin to tail off, so we've got around $21 million or so of tax credits for this year. And that number that will be available for next year will reduce and reduce going forward for the next several years.

Okay, great. Thank you. And then two other questions.

Matt, let me point out that there are some, there is a couple of slides in our latest investor deck that provide some level of detail on how those will run off.

Okay, great. Next question if I could just revisit the history lesson real quick, kind of follow on. Kind of the last major cycle which I think Howard you pointed to is kind of feeling the most like this one kind of the late '90s and the early 2000s. Once we started seeing severity rise, some downgrades, some competitive wins in the market kind of where we are today? How long was it before pricing kind of really saw change? And when it did happen how sharply did that happen?

So, I think the - we started to see severity at least in terms of being recognized and acted upon in the early mid-2000 at least by some of the companies including ourselves. Pricing began to change at that point for some companies like us. And others really took over the course of the next 18 months or so. The one thing that I'll point out though is that, there were some intervening forces there that really accelerated thing. One was the departure of San Paolo which was the largest carrier at the time and the medical professional liability market announcing at the end of 2001 that they were leaving entirely. And then two or three pretty significant failures that begin in 1998-99 and continued up through about 2002 that in combination is San Paolo diminish the overall market capacity by probably by a 1 or so in premium volume. And that and itself drove pricing just supply demand kind of thing. So, I think the pricing changes that result in the absence of anything as dramatic as that in terms of the market availability. I think the pricing changes will take a little while if assuming that this severity is accurate and real and everything else any severity increase. I think it's going to take a while. The other thing is different right now is that there were many competitors in the market that have very large capital bases relative to their premium. And while that while there was adequate capital maybe more than adequate capital in late 90s that probably wasn't to the same extent than it is right now in terms of the overall industry premiums to surplus ratio just as real with own kind of thing. I think that will also have a little bit of a dampening effect until some of the loss activity becomes very apparent and the competitor's sides are not used their capital is supported but actually need to use changes and pricing to respond to it.

Okay. And then last question just thinking about kind of the industry and barriers to entries as pricing does let's say improve over next however long it takes, couple of two, three years. If we pick one end of the spectrum being say property cap reinsurance where alternative capital is readily available, and you can kind of get up and running very quickly. How would you characterize the medical liability business today in terms of somebody that's been out of the market for a very long time wanted to get back in or a newcomer wanted to get in terms of whether infrastructure relationships claims albeit how hard is that?

It's Stan, Matt, I think it's difficult to call it this remains a retail business and by that, I mean it's a state-by-state business, if you're in this business in 50 states, you're in 50 different businesses. It takes claims people on the ground, it takes a local knowledge that cannot be acquired overnight. From the financial standpoint, I mean, and this should be in this business is easily you could be CAT business, but it's the operations that are local and that require infrastructure around the country in the areas in which you're operating. There have been some efforts over the last number of years to write it over the internet or to write the business from one location and they just hadn't faired that well and I think one reason they hadn't faired that well is because and its base this remains a very local business. And as Howard indicated earlier and looking at these local businesses, you also have to differentiate between the individual physician business and the larger risk, the hospitals, integrated clinical networks, those sorts of things and I think the pricing for those will probably behave very differently. You saw the difference in the price increases in this quarter, over first quarter of last year and there was a difference in individual physicians and the larger risk. The thing about the larger risk is that there are relevantly fewer competitors for those risks, there are not as many companies that have geography and the balance sheet to compete for those risks and those are the risk that people are beginning to shy away from in terms of staying out or getting out of market. And if the severity thing proves to be accurate that's another factor you have to take into account. Remember severity refers to every open claim you have. So, if you've got claims that rose in 2012 and we all do, they were priced with one thing in mind, if severity is what it is in 2017 that's how those claims will have to be resolved, so severity is the big-big kicker. Frequency, we think we can manage because we write essentially claims made book of business and don't have much occurrence business of any type, so we think we're well-positioned there. But remember, the reason we get so conservative about severity is because it does have an outsized impact in the sense that it goes to every open claim that you have. And what looks to be adequate capital today could be inadequate capital tomorrow simply because of severity. So, as you look at the competitive landscape, you have to keep all those things in mind. Unfortunately, they don't lend themselves to predictions as to when something will happen. And we're not in the business of making those predictions, we have to run the business based on the data we see at the time and the conclusions we draw from that data. I hope that makes some sense to you.

It does absolutely. Thank you very much for the color.

The next question comes from Bob Farnam of Boenning & Scattergood. Please go ahead.

Yeah, hi there. Good morning. I think just to expanding on Matt's question there, the severity question is going to be coming from litigation, I would imagine is that probably the driver, so you really can't tell whether things are going to be changing in terms of litigation environment in near-term, is that?

Yeah, remember that one of the things that makes the NPL business different than most other insurance business is it virtually every one of our claims is a lawsuit and you're right. That's the driver of severity. You read the paper about these big verdicts. Big verdicts produce, the verdicts happen in relatively small number of cases because I mean while we've been on this call, automobile carriers have had more claims than we'll have in a year. but the small number of cases that produce these big verdicts, it ripples through every open claim you've got and when the claim is more or reach about the large verdicts, their settlement demands go up to accommodate that. And that's where you really see the impact of severity is in the rising settlement demand and what happens in that regard in terms of your claims handling. So, it's not like the CPI [ph] where you can look at up from quarter-to-quarter. It's something that you have to deal with on a regular basis based on what you're seeing at the time. And I am fond of saying that we are in a business where we drive down the road with windshield blacked out, the only view we have is through the rear-view mirror. So, that's what we have to do in terms of analyzing severity.

Right, and so I guess this whole conversation about the historical element is, yeah back in history you had crisis that premium leaving the market and rates going up a lot, but you really can't - just because the severity looks like it's tweaking up now doesn't necessarily mean that anything is coming, coming right around the corner, you could still be I this kind of hold pattern for a while before things really hit the fan, I would imagine.

It's certainly a possibility. I mean - I don't discount any possibility, I don't discount the possibility of a slow upward trend, I don't discount the possibility of something happened more rapidly than that. We try very hard to make rationale judicious decisions based on what's in the best long-term interest of the organization. I can tell you this from my experience doing all that history, Howard talked about, is we all - almost always get it wrong in terms of timing.

Right, okay. And one off that topic, so with Lloyd's operation, I imagine there is still frustration out there just because the as you have been years now in that business and the business seems to be improving all that much. I guess you want to point a potential of other international opportunities. Is that - you're looking pretty much in professional liability or you're looking to get into other lines and you know maybe just give us an example of what these international opportunities might be for you to build some business there?

Hey Rob, this is Ned. I think where we see the opportunities are both in the healthcare professional liability line and our life sciences products liability line. As Stan mentioned in the prepared remarks, we see a lot of world litigation environment and its trending towards a U.S. style litigation environment and as a consequence to that in the healthcare professional liability area you're seeing the increase in severity and frequency of claims in a lot of countries. ] On the life science side, a lot of development of products, a lot of clinical trial work happens outside the United States and there are certainly opportunities out there. The focus on the Syndicate over the last number of years has been to build the infrastructure and to get it up and running, to get it profitable that the challenge is now in the level of business that we've written and it has not been enough for the infrastructure we are building, we know that will come overtime, but it is not happening as quickly as we would like, because we are being very cautious and how we do underwrite that business. But there won't be - it won't come on time when we can really leverage that for these other opportunities. That's what we expect them to come from.

Right, and all the international opportunities will flow through these syndicates.

Not necessarily. I think a lot of the sourcing may come through this Syndicate and then it maybe business that the Syndicate chooses the write, it maybe business that we choose to write more directly through a reinsurance arrangement, with one of our U.S. domestic carriers.

Right, okay. Great, thanks.

And we have a follow-up from Arash Soleimani of KBW. Please go ahead.

Thanks. How much of the specialty business does on an E&S basis?

I'd say probably, and this is off the top right now, probably in the 10% maybe 10% to 15% range overall, we write E&S business for physicians, facilities, allied health. We also write E&S business on in our product liability area and that's why I am little bit - I am giving you a bit of an estimate right now, because just trying to put this together and I head as we go.

And also - I usually ask how much of the specialty like ProAssurance specialty.

Specialty P&C segment.

Okay.

And the reason I was asking is because in the earnings release, I think you had said that part of the loss ratio impact came from higher loss expectations for E&S. So, I guess I just wanted to see why you were mentioned E&S specifically. Because it looks like the kind of severity trends that you guys have mentioning. Seem like there will be I guess more outside E&S it seems like it would also apply to the standard market. So, I was just curious why you pointed out E&S in the release?

Yeah, that's one of the places we see a lot of the larger risks. Because it requires more creativity - write the business.

Okay, that's fair. And then just the quick follow up on Lloyd's. I think the expense ratio you said there came from and investments associated with anticipated growth in 1729 and then also with the establishment of 6131. So, in terms of 1729 piece I guess was the investments exactly there? Because I saw it from a headcount perspective and that was probably kind of starting to reach the level of it was sort of going to level out at.

Arash, it's a great question. So, you may recall, that Lloyd's right now we use the services of a turnkey service provider called Asta that handles a lot of the back-office operations. So historically they've done accounting, they done systems, they done HR, they done auctorial a lot of that back-office work has been handled by Asta. The plans for the Syndicate are ultimately to migrate away from Asta and have all those services in house. And so, we are slowly decreasing our dependency on Asta and using less and less Asta Resource by bringing additional resources into the organization so as an example we brought in late last year an actuary to handle reserving and some of the solvency modeling and things of that that we've relied on Asta for. There is a handover period where you end up kind a doubling up on cost as you bring somebody and get them up to speed get all of the work and processes that's migrated to those individuals at the same time you got Asta providing the services and you double up for the allowance. We're going to see that often on for the next several quarters as we continue to build out the infrastructure of the organization and bring work internal that has currently been provided by Asta. But as that's being done we'll have done duplication of expenses.

All right, so it's basically it sounds like you're saying, 2018 will be a year of overlap but then 2019 should be kind of like it seen in ....

Yeah, it will depend on when we kind of the term they use at the - turn the key. It will be depending upon when we make that final transition away entirely from Asta and kind a stand up their underwriting partners as the jury standalone managing agency. So, it may not be by the end of 2018 I guess as what I'm planned. So, we could see this continuing into 2019.

Okay, that's fair. All right, thanks again for taking the follow-up.

Sure.

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

Thanks everyone. May the force be with you and we will talk to you in August.