ProAssurance Corp (PRA) CEO Edward Rand on Q1 2020 Results - Earnings Call Transcript

ProAssurance Corp (NYSE:PRA) Q1 2020 Earnings Conference Call May 8, 2020 10:00 AM ET

Company Participants

Ken McEwen - Manager, IR

Edward Rand - CEO, President & Director

Dana Hendricks - EVP & CFO

Michael Boguski - President, Specialty Property & Casualty

Kevin Shook - President, Eastern Alliance Insurance Group

Conference Call Participants

Mark Hughes - SunTrust Robinson Humphrey

Charles Peters - Raymond James & Associates

Ronald Bobman - Capital Returns Management

Matthew Carletti - JMP Securities

Jon Newsome - Piper Sandler & Co.

Operator

Good morning, everyone, and welcome to ProAssurance's conference call to discuss the company's first quarter 2020 results. These results were reported in a news release issued on May 7, 2020, and in the company's quarterly report on Form 10-Q, which was also filed on May 7, 2020. Included in those documents were cautionary statements about the significant risks, uncertainties and other factors that are out of the company's control. It could affect ProAssurance's 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 securities laws and subject to applicable safe harbor protections. The content of this call is accurate only on May 8, 2020, and except as required by law or regulation, ProAssurance will not undertake and expressly disclaims any obligation to update or alter information disclosed as part of these forward-looking statements. The management team of ProAssurance also expects to reference non-GAAP items during today's call. The company's recent news release provides a reconciliation of these non-GAAP numbers to their GAAP counterparts.

Now I will turn the call over to Mr. Ken McEwen. And I would like to remind you that the call is being recorded, and there will be a time for questions after the conclusion of the prepared remarks. Mr. McEwen, please go ahead.

Ken McEwen

Thank you, Jamie. In addition to our remarks on the results for the first quarter, we're going to be covering some of our knowns and unknowns related to the COVID-19 pandemic in the interest of providing information to the extent reasonably possible at this time. As a precautionary measure and as a part of our ongoing pandemic plan, the participants in today's call are joining us remotely from their respective offices.

We have Ned Rand, President and CEO; Dana Hendricks, Chief Financial Officer; Mike Boguski, President of our Specialty P&C lines; and Kevin Shook, President of our Workers' Compensation Operations. Ned, there's a lot to discuss today, where would you like to start?

Edward Rand

Thanks, Ken. I'd like to start by thanking this team and our employees across the country for their extraordinary response to the challenges brought about by COVID-19. As you mentioned, we're all in separate offices for today's call. It's just one of the precautions we've taken to ensure our employees and our communities remain safe and healthy, but it's far from the only one. Since mid-March, over 95% of our workforce has been working from home. That's over 900 people making a sudden and dramatic change to their daily lives, not to mention the disruption they're already facing outside of their work for ProAssurance. I could not be more proud of their commitment, discipline, and resourcefulness, and it's because of their efforts that the coronavirus has had minimal effect on our day-to-day operations.

We know we are far from the only ones facing change. Businesses across the country have been forced to either adopt similar precautions or shut their doors completely. We're extremely fortunate to be in a position where we can adopt these changes and still continue to provide for our customers. As a specialty writer of healthcare professional liability and Workers' Compensation Insurance, we interact on a daily basis with the unsung heroes on the front lines of this virus: health care professionals and first responders, business owners and their employees, people whose lives and livelihoods are at stake as they responded to conditions forced upon them by the virus. I want to extend our sincere thanks for their efforts over the past 2 months, as they labor to keep the virus from affecting our lives any further than it already has. We are grateful for the opportunity to serve them and our communities.

Our mission is to protect others. That has never been clearer to me than during the past few months, as it means so much more than simply paying out a claim. It means being flexible. It means being resourceful. It means being compassionate. It means being treated fairly. I know investors would like to hear exactly how COVID-19 will affect ProAssurance's results for the coming quarters. Believe me when I say nobody would like to have a definitive answer more than we would. Unfortunately, this pandemic is not so easily quantified, and it is simply too early to know the full extent of the crisis. We do have some initial information that we'll share throughout the call in addition to the underlying results for the quarter. But I ask for your patience while we navigate this global crisis.

Now I'd like to ask Dana to take us through the results for the quarter, and provide a little more information about the effect of the virus. Dana?

Dana Hendricks

Thanks, Ned. For the first quarter of 2020, we reported a net loss of $22 million or a loss of $0.41 per share, and an operating loss of $1.1 million or $0.02 per share. The net loss was driven primarily by net realized investment losses of $28.7 million, primarily due to the change in fair value of our equity portfolio and convertible securities attributable to the virus' disruption of the global financial markets. Given how quickly the virus affected the economy over the last several weeks, and the unknown time frame of a return to normalcy, we cannot estimate the potential long-term effects to our portfolio. The Federal Reserve's interventions have and will continue to have an effect on business and consumer confidence, and we will have a better understanding of how our portfolio will perform as we progress throughout the year. That said, the company proactively sold a significant portion of its equity exposure in December of 2019 as well as in late February. As such, we experienced lower losses than we might have otherwise.

In the first quarter, net investment income decreased from the year-ago period to $20.8 million, primarily reflecting the decrease in our allocation to equities and partial reinvestment in fixed maturities as well as lower overall investment balances as compared to the same quarter of 2019. We do have some exposure in private equity as well as the credit markets, and are monitoring these investments closely as the pandemic time line unfolds. We reported an overall loss from investments in unconsolidated subsidiaries of $1.6 million as the earnings generated from certain LPs and LLCs did not exceed the tax deductible operating losses recorded from our tax credit partnership investment. The year-over-year decrease was due to lower earnings from 2 LPs specifically, which invest broadly in stocks and commodities.

We are allowing cash to build so that we can support the operating business accordingly. We are being patient and evaluating investment opportunities and the economy in general to determine how best to allocate capital. As a part of this assessment of capital, we made the decision to reduce our dividend from $0.31 per share to $0.05 per share, beginning with the cash dividend declared yesterday by our Board of Directors. The dividend is being rightsized to reflect our current earnings profile given the challenging stage of the market cycle we're in, and to face the uncertainties introduced by the COVID-19 pandemic.

Regarding the operating segments, the trends we have discussed in prior quarters continue to develop in our results. For the first quarter, our consolidated current accident year net loss ratio was 83.8%, 2.1 percentage points higher than the year ago quarter. We recognized $6 million of favorable development in our prior accident year reserve, a decrease quarter-over-quarter, primarily attributable to elevated loss severity in the broader healthcare professional liability industry, including our excess and surplus lines of business. Our decision was also influenced by uncertainties regarding how the COVID-19 pandemic will impact our business, including variables such as premium volume, claims frequency and severity and the legal and political environment, to name a few. These factors brought our consolidated net loss ratio to 80.9%, 4.1 percentage points higher than the first quarter of last year.

Our underwriting expense ratio was 30.4% for the quarter, up from 29.5% in the prior year period, primarily due to lower consolidated net earned premiums. Additionally, the increase reflected $1.4 million of onetime expenses in our Specialty P&C segment, primarily related to the restructuring of our healthcare professional liability field office organization to improve our future competitive position. Mike will elaborate on this and other efforts in the specialty P&C segment shortly. This brings us to a combined ratio of 111.3% for the quarter. Mike, will you get us started on the results of our operating segments with some details on the Specialty P&C segment?

Michael Boguski

Thank you, Dana. The Specialty P&C segment recorded a first quarter loss of $18.5 million, reflecting a challenging loss environment across the broader healthcare professional liability market. This result was driven by our recognition of higher claim severity trends, loss activity in our excess and surplus lines and healthcare facilities business, and less quarter-over-quarter prior-year favorable development. We also experienced loss volatility in certain states within our physicians business, which increased the current accident year loss pick. Given the year-end 2019 reserve strengthening, severity trends and the uncertainty of the loss trend impact from COVID-19, the Specialty P&C segment recorded very limited prior year favorable development in the quarter.

In the first quarter, gross premiums written were $155.4 million, a decrease of 6.6% quarter-over-quarter. The decline in premium levels reflects our strategy to strengthen rate levels in our physicians business, and continued reunderwriting efforts in our national accounts, excess and surplus lines and health care facilities business. Premium retention was 81% in the quarter. The 8-point decrease as compared to the first quarter of 2019 reflects decisions not to renew certain products and risks that did not meet our disciplined underwriting criteria and long-term profit objectives as well as highly competitive market conditions across our operating territories. The lower premium retention result was offset by renewal rate increases of 11% across the Specialty P&C segment, including 13% for physicians and 20% in healthcare facilities.

We were also successful in strengthening rate adequacy in excess and surplus lines in our healthcare facilities business beyond premium trends through significant improvements in product structure, terms and conditions. New business writings were $4.4 million in the quarter compared to $20.9 million in the first quarter of 2019. This result reflects competitive market conditions, disciplined underwriting evaluation and, to a lesser degree, the impact of slower submission activity from COVID-19. For comparison purposes, the new business results in the first quarter of 2019 included 2 large national accounts totaling $9.4 million.

The expense ratio remained relatively flat quarter-over-quarter despite the reductions in earned premium. In addition, in the first quarter, we incurred $1.4 million in onetime charges related to the restructuring of our healthcare professional liability field organization. This includes office lease charges and severance expenses related to the structural change.

The current accident year net loss ratio was 94.2%, slightly higher than the first quarter of 2019. This reflects recognition of higher claim severity trends, social inflation, loss volatility in certain states and higher loss picks within our excess and surplus lines and healthcare facilities business.

Before we go into the pandemic and its effect on the segment, I wanted to talk about recent developments pertaining to the large national health care account we discussed last quarter. As you'll recall, we increased reserve estimates for this account in the fourth quarter of 2019, as losses exceeded the assumptions the company made when originally underwriting this risk. The policy term for this account expires towards the end of the second quarter of 2020. Based on renewal discussions, we believe it is more likely than not that the account will not renew on terms offered by ProAssurance, and the insurer will exercise its option to purchase the extended reporting endorsement or tail coverage. Based on preliminary projected exposure data provided to the company, if the account exercises its option to purchase sale coverage, a net loss of up to approximately $50 million could be recognized in the second quarter of 2020, as all premium and corresponding losses will be fully recognized in the same period that tail policy is written.

The COVID-19 pandemic outbreak is unprecedented. Over the past 60 days, we have navigated unchartered waters with our valued employees, distribution partners and customers. As Ned stated in his introduction, we are extremely proud of our employees' response to this crisis. The implementation of our pandemic plan and remote work strategy was very well executed, resulting in minimal disruptions to our operations and service to customers. COVID-19 is expected to have a significant short-term impact on the healthcare professional liability industry. Most health care segments are experiencing major reductions in business volume, billings and cancellation of elective procedures. The impact on our business includes premium and exposure reductions, new business disruption with distribution partners, jury trial delays and cash flow implications from deferred premiums. As of May 4, 2020, 26 COVID-19 claims have been filed in our healthcare professional liability operation. In addition, we have processed approximately $1 million in premium credits for 700 physicians as of that date.

We expect increased claim frequency in our long-term care business. However, this will be mitigated to some degree by a significant reduction in exposure and product structure improvements over the past 9 months as a result of our aggressive reunderwriting efforts.

Our customer base is facing extremely difficult financial challenges and disruptions to their practices, and we will continue to accommodate their needs during this crisis. The health care professionals that we serve deserve our sincere thanks and appreciation for their efforts in preventing the disease of this virus and treating patients in a very difficult environment. We will continue to closely monitor COVID-19 immunity legislation on a state-by-state basis, and the impact of the federal stimulus and other regulatory trends. It is early in the game, and we will have a clearer view of the effects of the pandemic when we report on our second quarter results in August.

The Specialty P&C team continues to execute a comprehensive business strategy in response to the current underwriting results, claim severity trends, and now, the business impact from COVID-19. This includes organizational structure enhancements, reunderwriting efforts, staffing and expense reductions and state strategy profit improvement initiatives. During the quarter, as we previously announced, we implemented our healthcare professional liability field organization of the future, establishing 4 operating regions with regional hubs, reducing the number of offices from 20 to 10, adjusting staffing levels and launching a remote work strategy in certain operating territories. We are confident that the strategic business decisions made over the past 9 months will lead to improved operational efficiency, underwriting results, pro forma expense improvement, and value-added service to distribution partners and customers.

The transaction with the NORCAL Group has proceeded through the first phase of state and federal regulatory filings, including the filing of NORCAL's plan of conversion. We remain excited about the combination of the companies and look forward to working together with the NORCAL team to complete this transaction. Ken?

Ken McEwen

Thanks, Mike. Kevin, will you please lead us through the results of the Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance segments?

Kevin Shook

Thank you, Ken. The Workers' Compensation Insurance segment produced operating income of $1.3 million and a combined ratio of 98.7% for the first quarter of 2020. During the quarter, the segment booked $79.2 million of gross premiums written, a decrease of $10.1 million quarter-over-quarter. That includes traditional business and alternative market business, predominantly ceded to the Segregated Portfolio Cell Reinsurance segment. Alternative market premiums accounted for $8.6 million of the overall gross written premium decline.

Renewal price decreases were 4%, and premium renewal retention was 83% for the quarter, and are representative of the continued competitive pressures in our underwriting territories. New business writings were $9.1 million compared to $7.5 million in the same quarter of 2019. The increase in the calendar year loss ratio for the quarter reflects an increase in the current accident year loss ratio from 68.2% in 2019 to 70.2% in 2020, partially offset by prior year net favorable development of $1.5 million in 2020 compared to $888,000 in 2019. The increase in the current accident year loss ratio reflects the impact of renewal rate decreases and an $860,000 reduction in the earned but unbilled audit premium estimate during the quarter.

Our claim operation closed almost 20% of 2019 and prior claims during the 2020 quarter, which is consistent with the results from the first quarter of 2019. The 2020 underwriting expense ratio increased to 31.8% compared to 30.9% in 2019, primarily due to the decrease in net premiums earned, partially offset by a decrease in policy acquisition expenses. The 2020 underwriting expense ratio also includes approximately 0.6 percentage points related to a new integrated underwriting and claims system scheduled for full implementation by the end of 2021.

The Segregated Portfolio Cell Reinsurance segment operating income was approximately $18,000 for the quarter, which represents our share of the net underwriting profit and investment results of the segregated portfolio cell captive programs, in which we participate to varying degrees. Gross written premium in the SPC reinsurance segment decreased to $27.1 million for 2020, from $36.4 million in 2019. This includes premium renewal retention in 2020 of 78%, new business writings of $1.1 million, and renewal rate decreases of 6%.

Gross written premium and renewal retention were impacted by a $5.2 million reduction in premium for a large health care account that selected a lower funding option for its captive at Inova Re, in which we have no ownership participation. Quarter-over-quarter, the SPC reinsurance 2020 calendar year loss ratio remained flat, the result of a decrease in the current accident year loss ratio offset by slightly lower net favorable reserve development of $1.8 million in the quarter. The decrease in the current accident year loss ratio in 2020 is primarily due to a decrease in large claim activity.

Now let's turn to the challenges presented by the COVID-19 pandemic. First and foremost, I would like to echo the thanks expressed thus far to the multitude of health care workers and first responders and all others doing their part to fight this unimaginable pandemic. I am going to discuss COVID-19 in 3 main areas: employees, premiums, and claims.

With respect to employees on our Workers' Compensation business, we have taken all necessary precautions to protect their safety. Our valued employees remain productive, renewing policies, writing quality new business, managing claims, assisting injured workers, performing virtual risk management consultations and maintaining visibility initiatives through phone, e-mail, leveraging technology and social media efforts. I am proud of the way our employees have all risen to this challenge, with flexibility, courage and commitment.

On the premium side, payroll is estimated at policy inception and adjusted either through an audited expiration or during the policy period via an endorsement. To date, we have received minimal requests to endorse policies midterm. ParallelPay, our pay-as-you-go product, currently represents approximately 15% of our overall premium volume. For ParallelPay, premium adjustments fluctuate real time with payroll changes. We have suspended policy cancellations for 60 days, and offered to defer premium payments for customers on a case-by-case basis as substantially all policyholders use installment plans. To date, we have received less than 200 requests to defer premium installment payments on a policyholder base of more than 13,600. New business submission activity continues, but at slightly lower levels compared to the same period in 2019. Having said all of this, we do expect downward pressure in future quarters on direct and net written premium resulting from changes in payroll estimates, but with the length and severity of the pandemic currently unknown, it is too early to estimate the impact on premium.

Regarding claims, since around mid-March, we have observed a decline in reported claim activity, with the most recent 5 weeks equaling less than half of normal volume. Currently, COVID-19 claims have been filed by 41 of our policyholders, with 164 reported claims. Healthcare-related risks in our Workers' Compensation Insurance segment represent approximately 20% of the in-force net written premium, but to date, our rural underwriting strategy has mitigated exposure to COVID-19 cases in larger cities, where the more severe outbreaks are currently present. We continue to monitor legislative attempts to broaden coverage for workers' compensation claims.

With regard to the pandemic impact on the open claim inventory for pre-COVID claims, the majority of injured workers are getting treatment for their work-related injuries at hospitals and treatment facilities in our operating territories that are not currently inundated with COVID-19 cases. Our short-tailed claim-closing business model results in fewer open claims, which will assist us as we navigate through the pandemic, with a manageable prior year's open claims inventory. Ken?

Ken McEwen

Thanks, Kevin. Ned, I know the COVID-19 exposure in our Lloyd's syndicates represents a big question mark for our investors. Will you give us some color regarding coverage exposure to the virus?

Edward Rand

Sure, Ken. Because we typically report our Lloyd's results on a 1 quarter lag, most of the effects of COVID-19 to date as they pertain to the syndicate will be included in our second quarter results. It is simply too early to say what the end result will be. However, based on what we know at this time, we believe we will have losses of approximately $1.5 million related to the virus reflected in the second quarter of 2020, net of reinsurance. Furthermore, the largest risk the syndicates have identified to date is related to the contingency book of business, and we estimate that potential exposure to be approximately $2.5 million net of reinsurance, again, based on what we know today. We continue to work closely with Dale Underwriting Partners to monitor this situation, and we will be as forthcoming and transparent as we can, given the multitude of evolving variables.

In any event, I want to note that we do write some business interruption insurance, and we share the industry's concerns regarding legislative attempts to expand coverages where no coverage was intended. Ken?

Ken McEwen

Thanks, Ned. Any closing comments for us before we go to Q&A?

Edward Rand

Yes, Ken, thank you. I do have a few. Despite the broadening uncertainty introduced by the COVID-19 pandemic, our entire organization is deeply committed to the lines of business in which we specialize and our continued service to in support of our customers and distribution partners is unquestionable. As I said in the release yesterday, these are extraordinary times, but we are blessed to ensure and employ extraordinary people. We are fast approaching the first anniversary of this executive leadership team as it is currently structured, and the strategic initiatives begun over the past 12 months has positioned ProAssurance well to meet the challenges of the evolving marketplace. It will take time for the benefits of these changes to be fully realized. But I have every confidence in this leadership team and our exemplary employees.

I want to close by once again extending our sincere gratitude to the health care professionals and first responders on the front line for their incredible response to this crisis and for doing everything in their power to contain and to heal the damage of the virus.

Ken McEwen

Thanks, Ned. Jamie, that concludes our prepared remarks. We are ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question today comes from Mark Hughes from SunTrust.

Mark Hughes

I wonder if you could talk about the nature of the claims you've received so far in the Specialty P&C business? I think you mentioned 26 claims. I wonder if you could just sort of sketch out your exposure, what you anticipate in terms of the nature of those sorts of claims, on how you defend against them, what the liability is? At least as much as you can touch on those topics.

Edward Rand

I'm going to let Mike handle the bulk of that. I think one of the big challenges, and he'll get into the specifics right now, it's just there's so many unknowns, especially with the legislative efforts that are trying to provide some immunity to health care workers as they try to battle a disease that no one has ever seen before. But Mike, do you want to give some specifics to Mark's question?

Michael Boguski

Yes, Ned. We had 26 COVID-19 claims reported. Interestingly, we had no claims reported in the long-term care segment of our business. And the liability exposures to date, I talked to the team yesterday, they don't look at these claims as high-value exposures that we're seeing. And basically, it's claims in the nature of preventing the spread of the disease and those types of issues from a liability perspective. But we are really, really early in the game with, again, only 26 claims. And we would expect to really see the impact as we look out through the second quarter.

Mark Hughes

Maybe same sort of question on the workers' comp side where you've received claims. How do you look at those? Kind of the duration, severity. Yes. How do we assess that?

Edward Rand

Yes, Mark. Sure. Good question as well. Kevin, do you want to take that?

Kevin Shook

Absolutely. So as I mentioned in my remarks, we have 164 claims that we've received to date. Just to put that into perspective, 51 of that is in our captive business in the SPC re and 113 of it is in our traditional book. And based on what we know now, a lot of it is medical, paying for medicine for the injured workers. We have not yet been made known of a fatality or, at this point in time, a significant hospital stay. So from a severity perspective, it's been pretty tame so far.

Our reserving philosophy, Mark, is: number one, verifying the exposure to an individual or a patient who has a positive test; making sure that there's a positive test for the injured worker; verifying that there's a greater chance in occupation than in a general public. And I will tell you of those 164 claims, 163 of them are, as you can imagine, are in our health care book of business. Verifying that residents, patients and other employees have also tested positive.

So we're doing a lot of investigation, and I would characterize our approach as being a reasonable resolution to some of these broader-based state mandates that are out there right now. We've been working closely with the American Property Casualty Insurance Association and believe that their outline of how this should play out is reasonable. And that's how we've been managing our clients.

Edward Rand

Mark, I would just add to -- I'm sorry. I would just add to Kevin. One of the things we are watching very closely are these presumption efforts at the state level that would potentially kind of provide coverage where perhaps coverage was not intended. And they can be pretty broad. There's legislation that's proposed that would say that any day missed from work related to COVID-19, one, is presumed to have been contracted in the workplace, and the employees should not have to take a sick day for it, right? So just broadening the coverage pretty dramatically. As Kevin indicated, there are a lot of industry efforts to try and combat what we think is a legislative overreach. And we're working hard with the industry to make sure that doesn't happen. But that is probably a big unknown that does remain out.

Mark Hughes

That's good. I'll ask one more. The large account that you referenced. I think you said that the tail policy, the loss could be as much as $50 million. What would be the premium associated with that? And then what was the premium that, that account generated in 2019?

Edward Rand

Yes. We've not given out specifics at that level of detail, partly just out of sensitivity to the insured. But Mike, you may have some further comments.

Michael Boguski

Yes. Thank you, Ned. Just to give a little bit of a bigger picture color on this. As I said, we had -- it was an account written since 2016. We had the outsized underwriting loss. It's really relative to product structure, severity trend, pricing on that. And there's the option to purchase the extended reporting endorsement later in the second quarter. So when we look at just kind of the limits out there and the premium -- projected premium off of a price that was pretty competitive, we came up with some potential exposures up to that $50 million number. And where we're at is that, there's -- we've been notified of the intent that they want to move forward. But Mark, there's still a binding and a billing process and other negotiation points that will happen over the next couple of weeks that -- so which is why we presented it the way we did. So that's kind of where we're at.

Mark Hughes

And just to clarify, Mike, the number that we've put out there is net of any premium that we would expect to receive?

Michael Boguski

Yes.

Operator

Our next question comes from Greg Peters from Raymond James.

Charles Peters

Just a follow-up on the large account. Have they given you any opportunity to get payback on this tremendous amount of loss that you're incurring on their behalf?

Edward Rand

Mike, I'll let you handle that one.

Michael Boguski

Greg, there's no provisions in the policy or contract that would allow that for us.

Charles Peters

I understand, but you've helped them by protecting them. You're -- the whole concept of being treated fairly, you're treating them fairly. But are they treating you fairly in return? I mean, this is -- well, listen, I don't want to -- let's pivot. You announced the dividend cut, and usually, when you cut a dividend, it's a measure deployed to protect liquidity. So can you talk about liquidity of the company? Can you talk about the capital position of the company? And can you talk about the rating agency-related ratios as we think about how the balance sheet looks going forward?

Edward Rand

Greg, it's a good question, and we'll get Dana to comment on the particulars. I would say that the uncertainty that COVID brings around liquidity and performance are a contributing factor. So there's just a lot of unknowns that we're trying to prepare for as well. But Dana, do you want to get more to the specifics of what Greg's asked?

Dana Hendricks

Sure. Just to give a little more information around cash and liquidity. Greg, we have cash and liquid investments of about $242 million outside of the insurance subsidiaries, which is available to us for use without any regulatory approval or any other restriction. Of course, additionally, we have $250 million in permitted borrowings available under our revolving credit agreement, as well as the possibility of a $50 million accordion feature associated with that agreement. However, the potential for subscription of that as of now is a bit uncertain, of course, due to the COVID-19 and related events. So that's just a little additional color for you.

Charles Peters

Okay. I guess, two other questions. Just as I digest the concept of this incredibly large loss from this one account that I continue to be challenged with, I'm just curious if you have identified any other areas? Are there multiyear contracts that you have? Multiyear policies within your specialty med mal business? And then you also -- you mentioned the contingency business at Lloyd's is being exposed. Can you clarify what you meant by contingency business?

Edward Rand

Sure. We'll take that in reverse order. Contingency business is largely event cancellation business. And as we said, we've got, we believe, about $1.5 million that will flow through next quarter, and then potential additional exposure of that $2.5 million. The business there is well reinsured, and that limits the exposure that the syndicate faces. But it's largely event cancellation, and there's a lot of uncertainty around event cancellation right now. What we're seeing right now is a lot of event postponement. And because there seems to be a lot of headway and advanced notice on any cancellations, the economic impacts are being minimized, a bit of something we're watching very closely. Mike, do you want to take the second part of that question on the large account?

Michael Boguski

Sure, Ned. Just a couple of points. I mentioned in our last call that we've been through the book of business, Greg, and this was a unique national account structure -- a unique structure for this national account, and there are no other structures in our book of business that would even be close to the structure that was offered here. So I'm very confident in that. The large account and excess surplus line space has been challenging, both for the industry and for ProAssurance. And what we've done, Greg, last year, at this time, it's been about a year now, we recruited Rob Francis, our EVP of Underwriting, and several underwriting specialists to look over and manage these books of business. And this team is extremely talented and has continued to aggressively reunderwrite that specialty book really starting in the third quarter of 2019.

Just as an example, the first quarter of that book, we mentioned the 20% rate increases, but we also have rate strengthening beyond the premium increases due to the improved terms and conditions. And these are being supported by the market. So we're extremely encouraged by our progress. And the first -- we will conclude that first year renewal cycle in Q2 of 2020. So we've really aggressively reunderwritten the specialty business over the past 9 months. We will proceed over the second quarter and into the early third quarter, where the new leadership team has had a full view of that book of business. And we're really encouraged by our process and the rate improvement in terms and conditions and the performance of that team.

Operator

Our next question comes from Ron Bobman from Capital Returns.

Ronald Bobman

Ned, could you talk a little bit about the -- and I think you sort of touched on it, sort of the Good Samaritan legislative efforts and what that may or may not mean? My opening question.

Edward Rand

Yes, Ron, there's a number of different components of legislation, some at the national level and some at the state level. And a lot of it is just still very much up in the air. So some of the Good Samaritan legislation is allowing doctors to operate across borders and kind of into areas of practice perhaps that they normally wouldn't specialize on. And then there's a lot at the state level to look at providing some level of immunization for doctors, either in the treatment of the disease and/or in the diagnosis of the disease.

And it's really -- it's a state-by-state effort, and it's still pretty early days in those. But what that legislation seeks to do is just recognize the merit of challenges that this disease faces, with shortages on testing and the ability to test for the disease, and then just all the unknowns that have been presented by the disease. But it's ongoing efforts, and ones that we're watching very, very closely. We've really not, to date, kind of factored those into our analysis. And we want to wait and get more clarity around them before we decide if they're going to have any impact.

Ronald Bobman

Ned, is the thought that they're going to be limited to individuals and professionals and not the institutions, the hospital companies and the facilities? You just said doctors, I think, but I want to...

Edward Rand

Yes. Yes. I think it depends on a state-by-state basis. I think that most of the way the legislation is written, it's broader than that and would pick up the institutions as well.

Ronald Bobman

Okay. Could you -- I've heard of tail covers in the context of like D&O insurance, but I was not familiar with it in the -- and I'm not sure if we were talking about workers' comp or MPL as far as this large account. And maybe it's MPL. So could you explain it a little bit for sort of the nonpractitioners, me included? To understand what it is?

Edward Rand

Absolutely. So the vast majority of the business we write on an MPL basis is on a claims-made basis. And so if you've got a policy that's on a claims-made basis and you kind of terminate that policy, then you potentially are left with you, the insurer, to potentially live with exposure for claims that arise and -- that occurred during the policy period, but arise after the policy period where you would report that claim later. The tail policy is, as Mike called it, is an extended reporting endorsement. And so it allows for a longer period of time for you to report claims under the policy. And so it -- more or less, and people probably cringe, the real technical people -- more or less, converts at the very end of that life of that policy, that policy from a claims-made policy to more of an occurrence-based policy.

Ronald Bobman

Okay. And then -- and it comes about because the new carrier that's picking up the risk is only picking up incurred losses from that new policies inception date? Is that...

Edward Rand

Typically, that's right. So if you think about kind of a first year claims-made cover that somebody buys, it is going to have -- it may have a small look-back period, but it's going to basically say that its claims arising during the policy period that occurred from some date and typically, it's that first date. That date then, if you get into the second, third, fourth, fifth year of a claims-made policy, the kind of the look-back period goes along with that. But yes, that's exactly right.

Ronald Bobman

Okay. It sounds like from your prepared remarks regarding NORCAL, transaction is -- the intention is very much -- is to proceed as originally planned. But nonetheless, what are the termination provisions from a practical perspective? And/or is there an explicit breakup fee that is included in the acquisition agreement?

Edward Rand

Yes. So the only breakup fee is essentially, if they were to take a topping offer back to us. There are MAC clauses and the like in the agreement. However, pandemic is excluded. I think that's one of those things that historically has always been thrown in, and people are going to look at very, very differently going forward. But -- so they're -- it is an agreement and is a contract. It's one that we think we should honor. And we think it's smart to honor. We think that the strategic rationale for the transaction probably is greater today than it was at the time that we entered into the transaction. And so we remain very excited about the opportunity to bring the organizations together, but we also recognize the challenges of doing it in this environment.

Operator

Our next question comes from Matt Carletti from JMP.

Matthew Carletti

I hate to harp on this tail exposure, but I'm just trying to understand it a little better. When you say -- I think the quote -- I wish I wrote it down -- was kind of a net loss up to $50 million. Can you just walk us through a little bit of kind of how you get there? And what I mean by that is, that you guys looking at and taking a pretty dire frequency severity, just kind of stressing the exposures there? I know it's hard to max them out against reinsurance, but is that how you're getting there? Is it to your guys' estimate of losses that will come through in that tail period and you're straining that very hard to try to put this behind you for good? Or is there a potential that, even after this $50 million, that there's another surprise down the road?

Edward Rand

That's a good question. Mike, do you want to address that?

Michael Boguski

Yes. Sure, Ned. I mean, we've done a detailed actuarial review internally. And the -- based on those trends, obviously, you'll be getting exposure base for that tail coverage. And as we looked at that, we have a high, high, high confidence level that the $50 million is the top end of that. And so I would not expect any future exposure on that tail provision, Matt.

Matthew Carletti

Okay. That's helpful. And then just in terms of the mechanics that we'll see in Q2, and I know you can't give certain numbers, that's fine. But it sounds like, assuming that account doesn't renew, there will be some, presumably, a fairly large number of premium that goes away. But then if they elect this option, I think I heard you say that whatever that premium is, will be kind of fully written and earned in the quarter? And then that the $50 million loss, if you will, the losses as it would come through loss ratio would actually be larger than that, that the $50 million is the spread between the losses and the premiums you recognized. Is that generally correct?

Edward Rand

Yes, that's generally correct, with the $50 million being the top end of that. I mean, there's the ability to really look at that closer to see what the actual number would be. So yes, that's correct.

Matthew Carletti

Okay. Great. Just a couple other small questions. One is on NPL, just related to broader COVID activity. More so on the premiums, can you walk us through -- I'm thinking about a lot of your insured that your kind of elective procedures or maybe their offices are closed or they're not able to work right now. How does that work in terms of premium recognition? Is it pretty straightforward that if they're closed up for a month or two they're going to get premium relief? Or how do the mechanics of that work? I'm just trying to get a feel for what I would presume would be at least in some areas, some specialties, a lack of frequency because there's just no procedures happening against your premium collection against those specialties.

Michael Boguski

Yes. Ned, I'll take that. There's really two aspects to it. One, there's the premium side of it, as you see these business volume reductions and nonelective procedures being canceled. And the exposure base on that can be reduced from, say, a full-time physician to a part-time physician, which is the premium credit number that I referred to in my opening comments. So what we'll be doing there, Matt, is just looking at those trends every quarter as we go out through the rest of the year, to see what the impact will be on our book of business. At the end of the day, it's just an exposure reduction, and you should see the resulting claimed frequency reduction as well.

The second piece is just helping our customer base with premium deferrals. And we've deferred premiums across Specialty P&C up until June 30 to help our customers. And we'll reevaluate at that point whether the demand has come back in the health care world, and we can get back to a more normal situation with collection of premiums. But those are the -- really, the 2 big numbers.

Matthew Carletti

Okay. And then the next quick one on kind of staying on MPL. Just -- I'll preface this because I know it's really early days, but we've heard in a few other areas of the market kind of from claimants' desire -- already seeing a desire to settle or case might have been going to court, taking lower settlement amounts in certain places. I think really just the idea of recession hitting, there being an increased need for cash in certain parts of the economy, I think the courts being effectively closed probably helps aid that. Have you seen any of that, even if just anecdotal? Or is it just too soon?

Michael Boguski

It's too soon. Not in the short run. We are hopeful that the health care heroes that we see with our physicians and their professional staff, that the -- they just kind of the jury views going out into the future will be less angry and more reasonable with respect to social inflation and claim severity. That's one kind of trend that's kind of kicked around with all of this. I think that's kind of interesting. We'll see how that plays out. But very, very early. And as you stated earlier, which is spot on, I mean we've seen significant level of trial delays and mediation delays, which kind of limits our ability to make some of these settlements.

Edward Rand

And one thing just to caution on that is the slowdown in the kind of the jury, the civil processes, that it's likely to see the loss adjustment expenses go up if it takes longer to get things to trial and it just -- as those things extend in time, they are more likely more legal fees. We don't know what the impact of that will be, but that has the potential to be a kind of a negative on that kind of expectation as well.

Matthew Carletti

That makes sense. One last question, actually shifting to workers' comp. You touched on your thoughts on some of the presumptive efforts. Kind of just can you give us a little picture of the exposures in the book in the sense that, one, I think -- I'm going from memory here, but I think kind of 1 quarter or so of the book is broadly health care-related, and if you could pick that apart a little bit and just give us an idea of what might be kind of true essential workers? I think of those as more like a hospital setting or things like that as opposed to elective procedures or a dentist office or something that might actually be closed right now.

And then aside from that, too, like kind of the outside of health care, the other chunk of the book, what is your exposure to some of the most, I think, exposed from a revenue standpoint areas like restaurants and retail and hospitality, things like that?

Kevin Shook

Yes. Happy to do it, Matt, it's Kevin. With respect to health care, as you said, our overall book, it's 24.6%. There's $63.3 million of premium, about 1,600 policies. Of our total book, ambulance makes up 1.9%, so that's 1.9% of the 24.6%; doctors and dentists are 2.2%; home health care is 3.9%; hospitals is 1.8%; long-term care is 8.5%. But importantly, in long-term care, 5.1 percentage points of the 8.5% is in captives, in 4 captives, and we have a 25% ownership interest in 1 of those captives. And then social services is 5.7%, and then we've got another category of 0.6%.

Importantly, on the health care side, there's 2 things: these are larger health care exposures, even the ambulance business that we do are the larger accounts; and the rural focus, I think, is another really, really important point. We're not in the large cities, but we're not also in a lot of the rurally depressed areas. So that's kind of the health care piece of it.

In terms of some of the other more sensitive areas, we have an automobile book of business that's about 6.3% of our total in-force premium, and in-force premium, just using round numbers, is around 2.60%. Construction makes up about 14% of our overall book. But again, a big piece of that is going to be in captives. Hospitality and entertainment is about 4.9% of our book. And kind of looking at endorsements from March 20 through the end of April, and we've been proactive about endorsements and just talking about economically sensitive books of business, we had 421 policies endorsed during this "COVID period" for a reduction of $1.1 million, and that's only 0.4% of our total in-force book. But it was automobile, construction, hospitality, restaurants and retail, and then 1 larger staffing account. And then interestingly, during that same period, we had 140 other class codes that endorsed up for about $110,000 of premium. So that's the health care piece. That's the more economically-sensitive piece and just a little bit of flavor on endorsements.

Operator

Our next question comes from Paul Newsome from Piper Sandler.

Jon Newsome

I apologize, I got cut off here, so I may be asking questions that are already asked. If they have, just cut me off. But first, I was hoping you could talk a little bit more about how we might think about the bad debt issues with some of your hospital customers and doctors covers? Obviously, it's sort of an unprecedented time for them in their own financial positions, and it's just -- is there any early read on how we should think about how many of these folks just will not be able to pay the premiums that you're extending for them?

Edward Rand

I'm not sure, Mike or Dana, who -- which of you wants to go first on that?

Michael Boguski

Dana, you can go ahead.

Dana Hendricks

Yes. I think that it's really just too early in the process for us to have some solid information around the data in order to provide a solid response to that, Paul.

Edward Rand

I will say it's something that we're watching very, very closely. Mike mentioned the deferral and payments that are -- that we're making, and we're monitoring those very, very closely, and it is very much on our radar. Mike, what would you add?

Michael Boguski

Yes. I was just going to add, we continue to have a disciplined financial underwriting process, particularly in specialty and large accounts for this health care facilities business, long-term care business. And we had a significant -- the one thing that we're pleased with in this reunderwriting process is we have done a lot of that work already in this past 9 months. We did reduce our exposure in long-term care, as an example, from about $27 million to $13 million, when we talk about a sector that we've nonrenewed. So that is kind of a sector that will both be hit by the COVID-19 claim activity, plus there'll be certainly some distress on the financial side. So we're pleased with that exposure reduction.

And all of the -- I don't think there's any question that there'll be some financial distress in the hospital market. We'll continue to be disciplined. That's roughly a $40 million book for us. The other thing I would say just about our hospital business in general and our long-term care business is we are not in the "hotspots" from a geographical perspective. As an example, our long-term care business, we don't have exposure in New York, New Jersey. And with our hospital business, very, very similar. Limited exposure to what we would consider the hotspot areas, just as a subsequent comment to that marketplace.

Jon Newsome

That really actually sets me up with my next question. I was just wondering if you have any early read on the market change in pricing in terms of conditions. You guys have obviously been leading it. And I personally think we're going to have a heck of a hard market. So I'm just wondering if you've seen reactions yet from your competitors to follow your lead?

Edward Rand

That's an excellent question. No question in our specialty business that we've seen significant firming and premiums, terms and conditions. And the underwriting data really does show that, Paul. I think the other area of reunderwriting is, as you look at state strategy, there are certain states and challenging jurisdictions that have driven some loss activity and more volatility, both in the MPL business and in our book of business for our physicians. That said, the firming has really been more on the specialty side. There are pockets of very severe state-by-state competition in our physician books, which makes it challenging. And I think the economics will make it challenging on rate trend for the remainder of the year.

I mean, we had an excellent first quarter in our physicians results. First of all, as I mentioned earlier, Specialty P&C was up 11%, physicians were up 13% and our facilities were up 20%. So we've been really encouraged kind of over the last 9 months where the direction of where the pricing is going and there may be a little slowdown in some areas as we go through the rest of the year. But I do think those specialty areas are pretty firm right now.

Operator

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

Mark Hughes

Dana, on investment income, net investment income, you've been running kind of steady $23 million, $24 million per quarter. You obviously had some pressure on that this quarter. How much of that will be recurring? Do we get back to the prior run rate? Or are there floating rate securities or what have you that will mean pressure on a go-forward basis on that as well?

Dana Hendricks

Yes. I think we'll go forward. We will see some return there, Mark. But overall, we do have a lower allocation to our equity portfolio and the yields coming from that. So we will maybe not reach back to that completely the level that you're talking about, but we will return toward that direction.

Operator

[Operator Instructions]. And ladies and gentlemen, at this point, I'm showing no additional questions. I'd like to turn the conference call back over to Mr. McEwen for any closing remarks.

Ken McEwen

Thank you, Jamie, and thank you to everyone who joined us today. Please stay safe and healthy, and we look forward to speaking to you again for the second quarter.

Operator

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for joining. You may now disconnect your lines.