Q1 2022 ProAssurance Corp Earnings Call
Outlook to stable.
We believe this is indicative of the strong capitalization and financial flexibility of our family of companies following the acquisition of nor Cal.
Finally, I'll note that we successfully implemented our return to office plan in March.
Is this establishes a more regular cadence to our office environment.
We are eager to keep our full attention on what we do best protecting others.
Now I'll ask Dana to share results for the quarter Dana.
Thanks, Ned and good morning, everyone for the first quarter, we reported a net loss of $3 6 million or.
<unk> <unk> seven per share and operating income of $7 7 million or <unk> 14 per share.
The main difference between the net loss and operating income in the quarter was of course, the impact of the current investment environment, which I will discuss further after touching on our core operating results.
Our operating income in the quarter reflected improvement in underwriting results the benefit of expense synergies from the nor Cal acquisition and growth in net investment income.
From a production standpoint gross premiums written increased almost 50% due to the addition of the norcal premium base excluding.
Excluding nor count our topline decline, reflecting our dedication to disciplined underwriting and our specialty P&C segment and the impact of our lower participation in Lloyds Syndicate 17, 29, beginning with the 2021 underwriting year.
From an underwriting results perspective, our consolidated combined ratio excluding transaction related costs improved just over four points from the prior year quarter, driven by an almost five point improvement in the combined ratio in our specialty P&C segment.
However, all of our operating segments, excluding workers' compensation insurance contributed to that result.
Before discussing the components of the combined ratio.
Briefly touch on the change in our estimate of unallocated loss adjustment expenses or <unk> and our specialty P&C segment in the quarter we.
We decreased our estimate of USAA to incorporate changes to the segments expense model after substantially integrating norcal into our operations.
Change resulted in a decrease in our consolidated net loss ratio of two seven points with an equal and offsetting increase to our consolidated expense ratio.
Note the change had no impact to our total expenses combined ratio or operating results.
Excluding the change in <unk> E. Our consolidated current accident year net loss ratio was about one point higher as the impact of lower loss ratios than our standard physician books were muted by the addition of the nor Cal book, which carries a higher average loss ratio.
The consolidated current accident year net loss ratio also reflected a higher ratio in our workers' compensation insurance segment, driven by the continuation of intense marketplace competition, and resulting renewal rate decreases partially offset by the impact of favorable claims trends on our current year loss estimate.
As it relates to prior accident years, we recognized just over $5 million of favorable development in the quarter. The majority of which came from our specialty P&C and workers' compensation insurance segment.
Excluding the change in UAE are.
Holidayed expense ratio improved almost six points, reflecting both improved leverage on our operating expense base and synergies realized from the nor Cal acquisition as well as the benefit from prior organizational restructuring.
From a NIM benefit results perspective, net investment income grew with the addition of <unk> investment portfolio or.
Our equity and earnings from our LP and LLC portfolio produced $10 million in the quarter.
Strong result.
However, we anticipate the impact of current market volatility to be reflected in next quarter's results as our LP an LLC investments are reported on a one quarter lag.
As I previously mentioned the investment environment was a challenge this quarter as interest rate increases weighed on bond prices.
These interest rate increases led to net investment losses of $14 million recognized through earnings leading to the net loss in the quarter.
Net investment losses were primarily related to changes in the fair value of our bond funds, which are classified as equity.
The current interest rate environment also led to $141 million of after tax unrealized holding losses on our fixed income portfolio.
These unrealized losses flow through our other comprehensive loss directly to equity.
Accounting for most of the decline in book value.
Like to stress that we have a history of strong operating cash flows.
And an investment approach that holds most securities until maturity we're.
We're happy to trade temporary fixed income price declines with the opportunity to reinvest at higher yields.
In fact current bond reinvestment rates are approximately 100 to 150 basis points higher than our reported average book yield for the quarter.
Overall, we're pleased with our quarterly operating results as we continue to show improvement in underwriting results and see the benefit of the operational leverage of the norcal transaction with that I'll turn it back over to Jason.
Thanks Dana.
We're going to pivot to Mike Mcguffey for commentary on the specialty property and casualty segment Mike.
Thank you Jason the positive operating momentum in the segment continued in the first quarter of 2022.
The five point improvement year over year, and the combined ratio reflected the benefits of prior re underwritten and reorganization efforts.
As well as the early success of the Norco integration.
This included $129 million of gross written premium from nor Cal in the quarter.
<unk> contribution to the topline growth in the segment.
Importantly, this reflected strong premium retention of 90%.
Price increases of 11% in the Norcal standards physician book.
Overall gross premiums written in the quarter with $258 million a year over year increase of eight 6%.
Premium retention of 83% approaching increases of 9%.
Both year over year improvements in our underwriting performance.
Specialty healthcare retention was 61% in the quarter.
Due to the loss of three large accounts, representing $12 million of premium writings.
We remain focused on bottom line results in the large account space.
$8 million of new business was written across the segment.
A decrease of $4 million for the comparable quarter as we continue to be disciplined in a competitive marketplace.
Excluding the year over year over year changes outlined previously by Dana.
We experienced a three point reduction in the legacy <unk> current accident year loss ratio.
As a result of the execution of our underwriting strategies.
This was offset by a higher average loss ratio on the norcal book of business.
Building at a relatively flat year over year loss ratio.
We continue to be pleased with our underwriting efforts on the Norco book.
As we focus on bringing the loss ratios in line with the legacy approach Orange book.
We were encouraged by lower than historical frequency reductions in our healthcare professional liability business, which we attribute to disruption in the court systems and the benefit of continued underwriting efforts.
Due to the uncertainty of COVID-19 disruptions in the long tailed nature of our lines of business, we remain cautious and recognizing these favorable frequency trends.
Current accident year loss ratio.
Exclusive of yearly changes the segment expense ratio declined by five percentage points year over year.
This included $1 $6 million of nonrecurring expenses incurred during the current period related to the transaction.
Our restructuring efforts.
The largest drivers of improvement or.
The prior organizational restructuring.
Proactive expense management strategies and of course, the expense synergies recognized from the nor Cal acquisition.
We established an initial plan to achieve $18 million in expense synergies from the transaction and through our efforts to date, we have achieved $22 5 million in annual savings.
We continue to be pleased with the norco integration and ongoing improvements in our operating performance we.
We would describe the nor Cal integration is exceeding our expectation and is ahead of schedule from numerous perspectives, including re underwriting efforts operations top line growth and expense synergies.
Overall, the combination of the companies has improved our future competitive position Jason.
Thanks, Mike.
When you bring us up to date on the workers' compensation insurance and segregated portfolio cell reinsurance segments.
I will Jason. Thank you the workers' compensation insurance segment produced income of $1 million and a combined ratio of 99% for the quarter ended March 31 2022.
The combined ratio, excluding intangible asset amortization and the corporate management fee was 96% an indicator of the results of our ongoing business performance. During the first quarter. The segment booked $72 million of gross premiums written essentially flat compared to the first quarter of 2021.
We continue to exercise prudence in underwriting focusing on adequate rate for exposure, particularly in this highly competitive pricing environment and workers' compensation.
Renewal price decreases in our traditional book of business were 4% in 2022 compared to 2% in 2021 and premium renewal retention was 85% for the first quarter of 2022 versus 89% in 2021 new.
Business writings for 2022 were $4 million compared.
Compared to $6 million in 2021.
Premium in our traditional book of business increased about $1 million quarter over quarter indicative of the paywall rebound after the lifting of pandemic restrictions and our underwriting territories.
We made no adjustment to our earned but Unbilled audit premium otherwise known as <unk> in the first quarter.
We will continue to monitor process audit activity and the impact of higher wages on the E. Bob asset in future quarters, but remain conservative in our view of increasing this asset currently.
The calendar year loss ratio increased slightly to 67% in 2022, reflecting a higher current accident year loss ratio.
While the current accident year loss ratio increased one point to 72% compared to the first quarter a year ago, the ratio improved compared to our full year 2021 ratio of 74%.
Favorable development was $2 million in both 2021 and 2020 too.
Early in and throughout 2021, we discussed the increase in loss activity, we experienced and recognized related to return to employment and the labor shortage.
The short tailed nature of our business model enabled us to recognize these trends real time.
The decrease in the first quarter of 2022 accident year loss ratio compared to the 2021 full year reflects the impact of favorable claim trends, partially offset by renewal rate decreases driven by the competitive marketplace.
Our claims operation COVID-19% of 2021 and prior claims during the first quarter of 2022 indicative of the short tailed nature of our workers' compensation business model.
Turning to expenses the underwriting expense ratio increased in the first quarter from 31% in 2021% to 32% in 2022, largely due to higher general expenses from team member compensation business related travel and the early termination of a REIT.
Estate lease.
Wrapping up with the segregated portfolio cell reinsurance segment, we reported a segment loss of $153000 for the quarter, which included underwriting income of $476000 that was more than offset by investment losses.
We renewed all of the alternative market programs that were available for renewal during the quarter.
Jason.
Thank you Kevin now I will turn it back to Ned for a review of the results from Lloyd's.
Thanks, Jason.
The Lloyd's segment reported a profit in the first quarter and a significantly improved combined ratio compared to the first quarter of 2021.
For the 2022 underwriting year, we're continuing participation at 5%.
17 29.
Also for the 2022 underwriting year.
Syndicate 61, 31 ceased underwriting on a quota share basis with syndicate $17 29.
And it's applicable business will be retained within syndicate $17 29.
That wraps up our review of the consolidated and by segment results for the quarter.
Before turning the call back over.
Like to offer my heartfelt gratitude to our longtime CEO and executive Chairman, Stan Starnes, who will be retiring as executive chairman of the <unk> Board of directors on May 24th.
Stan thank.
Thank you for your support of me personally.
And for all that you've done over the past 15 years for our team members Insureds and partners.
Do you have left a lasting influence from <unk> and we wish you the very best in all that you continue to do for the community around you.
Narrow team, we'd be happy to answer what questions you have about our results or other aspects of our business.
Thank you Ned Ruby that concludes our prepared remarks, we are ready for questions.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad now when preparing to ask your question. Please ensure you are on mute locally if you change your mind conquest, followed by <unk>.
Our first question is from Greg Peters of Raymond James Your line is now open. Please go ahead.
Yes, good morning, everyone.
For my first question I'm going to focus on just the top line.
In specialty PCC.
I know you provided us color.
About what was going on there.
And I guess, what I'm looking for more information.
On the.
The results excluding the benefit from norcal it looks like there was a slight decline in premium.
So.
If you could give us some more color around.
The 61% retention and specialty healthcare.
That would be helpful.
Good morning, Greg It's Mike.
Just to comment on the premium range exclusive of norcal. It really was driven by specialty we had three large accounts.
In the quarter, representing $12 million of premium that.
We lost which drove the 61% premium retention rate and the decline in premium.
Exclusive of Norco.
That is really very much a design strategy to be disciplined in the large account space.
Okay, a number of large accounts.
Over the last two quarters, roughly about $30 million of not meet our profit expectations.
Been really disciplined on that side of it and made those decisions.
Okay.
Well that makes sense.
And I guess going forward do you think the book is settling out at this point or do you anticipate some further disruptions.
Based on your underwriting actions.
The really great news on that front drag is once we get to the third quarter of.
2022.
We will have been through our re underwriting efforts approach Torrance legacy and we will be through all of the norco re underwriting efforts.
The large account activity just going back to that for a minute.
It's taken a lot of premium and loss volume volatility out of our organization.
But I will outline there as we know Greg as you look at that large account space, our largest account is $5 million or lower.
So we no longer.
Have accounts on the books and that kind of 7% to $10 million range, so that should be helpful.
From a retention perspective, and a loss volte volatility perspective, as we go forward.
Got it makes sense okay.
And then my second question.
Is pivoting to investment income.
I understand there is.
Some issues with investment gains and losses in equity earnings on consolidated but.
Your investment income.
Bob.
<unk> was up 36%.
And Dan I was wondering if you could just provide us a little bit more color behind the moving pieces because with the bump up in rates I'm sure that some point, that's going to be a benefit to your fixed income portfolio.
Sure sure happy to do that.
So.
As I think about it.
Average yield.
For our fixed income maturity portfolio in the quarter.
Our average yield was about two three points.
Slightly lower than the first quarter of the prior year.
That said with the rise in the interest rates, our current reinvestment rates about 100 to 150 basis points higher than that average yield.
So while our fixed income portfolio is primarily composed of high quality fixed income securities.
With more than 90% being investment grade.
And our weighted average effective duration is around three eight years.
We would expect the portfolio to completely reprice.
Between years, three and four so.
Looking forward to that aspect of the rising interest rate environment.
Okay.
Thanks for the color I guess I'd be remiss, if I just didn't ask a reserving question.
You know of.
The courts were seemingly closed or.
Maybe there was a growing backlog of claims because of Covid. Just curious where you are on that process Thats My last question.
Yes, it's a good question, Greg and I think it's really kind of state specific as to where their CT systems are while CT systems have have opened up largely.
You are right in saying that they are pretty big back large the court systems are having to work their way through so.
We're not up to I would say the kind of the activity that we would historically have seen it certainly is certainly is picking up.
I think from a reserving standpoint, it's the uncertainties around what all that means that that causes us to be very cautious.
Mike mentioned in his remarks.
Yet again, a decline in claims frequency.
But we're reluctant to really respond to that because we don't know.
It's over the Horizon, one thing we know.
As regards COVID-19 and potential claims that might arise from Covid is that we're beginning to approach the time, where the statute of limitations will begin to run.
And what we're uncertain about is whether or not we will see a flood of claims for the industry.
That should approaches.
Certainly don't anticipate that but we also don't want to be overly enthusiastic.
And buying into the claim frequency reductions both in our reserving in and how we price going forward.
Makes sense. Thank you for the answers.
Thanks, Greg.
Our next question is from Mark Hughes of Trust. Your line is now open. Please go ahead.
Yeah. Thanks, good morning.
Good morning.
Net or Mike when you think about the.
The decline in the frequency once again.
When you're pushing your physician pricing and it's great to see up 10%.
How do you make those judgments about whether you need the pricing if claims are still.
Bill falling.
Hey, Mark Good morning, it's Mike.
Yes, just a little color on the frequency trends.
Those trends.
We remain at similar levels to 2021, and our healthcare professional liability book, which.
It was.
Significantly lower than.
Freedom pre pandemic levels.
So.
That's kind of the good news.
I think it really relates back to what Ned just outlined.
We need to make sure that our pricing is adequate.
If the pension the pipe from the court systems.
Come back later in the year in future years, So we want to make sure that.
We're pricing for that exposure.
Certainty.
I do think the.
We're very encouraged by then.
The pricing level increases, particularly with the norcal book to start the year part of the reason we were able to book a $129 million, which was half of our segments premium in the quarter is that a great retention on that at 90% and the.
Standard position physician business, plus 11% increases so we're pleased with that result.
No I think yes, I think that.
Conversely at Walmart.
Okay.
The $129 million from nor Cal what was their written premium in this quarter last year.
I don't think we've got that right in front of us and we had about a 90% retention of the business that renewed in the first quarter for norco.
Yes.
So at this point.
In pushing for rate increases is there a.
Yes.
<unk>.
Combined ratio target.
Lot of moving parts I understand your conservatism around.
Booking losses.
We think kind of a year or two years out on a normalized basis.
Should the combined ratio would be in the health care business.
Mark we continue to target 700 basis points over a 10 year treasury for the kind of overall return for the organization and when we look at.
The individual lines of business and it varies by line, but we need to write in that.
Hi, mid Ninety's combined ratio in order to achieve those objectives.
Okay.
And thats for the organization as a whole.
Yes, it's going to vary a point or two by line, depending kind of on the duration and liabilities and leverage that.
You feel you need for that particular line of business. So because of the duration of the liabilities and the volatility of our work comp business is lower than our health care business. We think we can write that on a slightly more levered basis than we do the health care and specialty P&C business, but.
It's a one or two.
Swing in the loss ratio from that but it's for all of them then it's going to be that high.
Hi, mid 90% call. It 90 690 798.
Combined ratio that we need to hit in order to achieve those targets.
Then one quick.
Our final question Dana the $10 million equity in earnings.
You pointed out that debt.
Reported on a lag and presumably this equity market weakness in the Q Q1 will impact that.
How correlated is that with the broader equity markets are there other sensitivities.
That.
That drive that result, if you could just.
Refresh me on that.
Sure.
Sort of Directionally related.
<unk>.
The Lps and <unk> are going to track Directionally theyre not going to be a literal tie to what's going on in the broader equity market that just more generally.
So we certainly if we saw $10 million in income from those Lps and <unk> in the first quarter based on sort of market movement of the fourth quarter, we're going to look to say something significantly less than that in the second quarter.
Thank you.
Thank you.
Our next question is from Matt <unk> of JMP Securities. Your line is now open. Please go ahead.
Hey, Thanks, good morning.
Yes.
Good morning, Matt.
Dana This is a quick one just on the commentary around the UA and they are the good guy on the loss ratio.
I guess, that's up on the loss ratio down on the expense ratio.
Is that is that a one time or is there any kind of ongoing persistency to that that kind of trading off movement.
Yeah, So Matt.
The reverse of what you said.
It was it resulted in a lower <unk>.
Current accident year loss ratio and a higher expense ratio.
Got it that's great and then it will persist.
Not a one time event it will persist.
Okay, and just kind of reset the bar going forward okay.
That's great helpful and then and then and then.
Net or Mike.
Just the commentary around the three points kind of improvement in the legacy <unk> portfolio.
And then kind of the offsetting norcal can you just digging a little deeper on why it is that norcal runs a little higher or is it anything to do is just geography and markets around or is it just a difference in kind of pro assurances corporate targets versus where for norcal targets have been historically.
Yes, good morning, good morning, Matt.
Just a couple comments on that.
It's really I think about starting point, we started at a higher average loss ratio at Nortel and you just keep in mind.
The two years prior to have a nortel.
On board, we had done some really good work on our re underwriting.
Efforts with our legacy business and really brought those loss ratios in line and they continue to improve on an accident year basis.
Really good news is norcal did a nice job of underwriters and a nice job of getting off to a good start in 2020.
Which helped us on that book of business as we moved into 'twenty, one and 'twenty two we accelerated.
The re underwriting efforts double digit price increase.
A lot of work good point on state strategy.
We've really worked to increase our writings in core states, maybe deemphasize them in non noncore states, which also improves profitability as we go forward. So it's just a process of.
Working through that over the next 18 to 24 months, earning out the premium from from.
Those rate increases and just bringing it in line the other thing to two.
Two things I would add to that Matt I agree with everything Mike just said so we still have in this quarter unearned premium.
That was in place at the time of the acquisition for business, we didn't underwrite it's a part of <unk>, earning in.
So I think thats, one aspect of it and the other I think it just has to do with familiarity with the book.
We are still learning.
Nor Cal book of business, we were pleased with all that we learned about it but that lack of familiarity I think causes us to be cautious as we as we set initial reserves on that as well.
Okay makes sense, thanks, very much for the color.
Yes, Thanks, Matt Thank you Matt.
Our next question is from Gary Ransom of Dowling <unk> Partners. Your line is now open. Please go ahead.
Good morning, I had a follow up on the UAE question too if it persists. It sounds like there was just an allocation issue that somehow norcal was allocating UAE and expense differently from you I reading that correctly or was there something else.
No Gary I guess essentially so.
He is an allocation of general operating expenses.
Two losses to reflect the fact that there are various aspects of your operations your claims professionals.
Your accounting folks and kind of different aspects of the organization that spend time on the claims process and the adjudication of claims and so we allocate a portion.
Of our expenses to losses.
Bringing nor Cal and all the reorganization will efforts that we've done over the last.
Couple of years kind of led to a reevaluation of what percent of those expenses should we be allocating to losses and.
And we reduced that allocation in the quarter, So you've got a smaller allocation.
General operating expenses into losses.
And Consequentially more.
<unk> expenses that are kind of retained within that general operating expense number.
It's just an allocation and change that allocation reflective of some of the changes we've made in the organization.
And so would that mean that this quarter. It was a little bit bigger because there was a <unk> reserve that was also getting reallocated. Yes. So this has this this does not impact the <unk> reserve, we do carry ULE reserve and that reserve tries to estimate the operating expenses are running off.
The book of claims this is solely has to do with with UAE or operating expenses in the current quarter.
Okay. Thank you I think I understand now.
On another another procedural issue can you remind us how you.
Review of the reserves over the course of the year.
Or do you.
Completely review, though every quarter or is there some schedule that you follow.
Yes, it's a good question. So we do review them every quarter.
But recognizing especially for the long tailed nature of the businesses, we write that not a lot happens in any given quarter, we do deeper dives on the actuarial analysis in the second quarter and fourth quarter.
Okay.
There is a comprehensive review there is a comprehensive review that's done every quarter.
We just go a little deeper on those two other quarters.
Alright, I was sort of asking because there in the recent quarters, there was almost a little bit of a.
Up and down pattern to the quarterly reserve releases were.
Okay.
Yes.
Sweet Reserve.
Yeah, Gary it's a good observation and I think that is reflective of that more.
More in depth analysis, and just the fact that you've got.
When we get to the second quarter, we've got six months of additional data as opposed to just a quarter.
Again, and again, given the nature of our business, we really hesitate to make any kind of big moves in big decisions based on 90 days of data.
And very differently.
Right.
Sure absolutely.
And then.
Another.
Another question on metrics as you were talking about the.
The frequency declining and how you are trying to recognize that do you see have any insight into what the doctors themselves are seeing in terms of the flow of patients presumably that kind of went down at least for non COVID-19 patients during 'twenty.
Maybe thats building up does that.
Do you get can you see those metrics and if so does that inform you at all about how to be cautious or what to watch for.
So youre absolutely right, especially during the summer of 'twenty you saw the provision of services outside of kind of emergency room and Covid related things.
Reduced dramatically.
And so one expectation would be that at some point that reduction in the provision of services by the physician community wood.
Results in a reduction in claim frequency.
And historically I would say there is anywhere from six to 24 months lag in.
And that kind of reporting time horizon.
And we write and writing a claims made book of business is when that report comes through that kind of matters to us. So we don't know as we sit here today. If that is part of the reason for the decline in frequency.
It certainly could be.
I think by and large.
With exceptions as there are.
<unk>.
Increases in suite through the Omnicom.
<unk>.
Him through when you get to those peaks I think the provision of.
More elective procedures and things slowed down again, but nothing like we saw in 2020, and I think by and large.
Physicians options are back to <unk>.
Full capacity full capacity may be different today than it was pre pandemic.
And it might be in a lot of instances lower more provision of services through through telehealth. As an example, so maybe not as many people coming into the doctor's offices.
The flow of business being a bit different we're closer today.
Two.
Pre pre COVID-19.
Great.
If not all the way back.
Right Okay. Okay.
That's helpful.
And maybe one last question on workers' comp rates I noticed they were down more in this quarter.
Versus where they've been most of last year or is there anything to read into that.
There is not.
Just a very very competitive marketplace.
We're very focused on keeping our good risks.
That have made us profitable for so long. So if we're if we have to get back a few points of rate.
We're okay with it but there's really nothing more than that to read into that.
And as far as you can see the workers' comp loss trends still are.
Relatively favorable.
Yes, they certainly at least for the first quarter of 2022.
Last year, we talked a lot about the labor shortage and return to employment.
Of byproducts of the pandemic and.
For the first three months of this year, where we're seeing that on the decline so.
It does it does remain relatively relatively favorable yes.
Great. Thank you very much for all those answers.
Thanks, Gary.
We have no further questions, so I'll hand back to a J.
Jason.
Thanks, Robbie and thanks to everyone that joined US today, we look forward to speaking with you again in 2022.
Good day.
This concludes today's call. Thank you for joining you may now disconnect your line.