Q3 2022 ProAssurance Corp Earnings Call
Ladies and gentlemen, good morning, and thank you for attending today.
Crow assurance third quarter 2022 earnings call. My name is Amber and I will be your operator for today's call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end if he would like to ask a question. Please press star one on your telephone keypad at any time and it's now my pleasure to hand, the conference over to her.
Host, Jason Gingrich with Pro assurance, Jason. Please proceed.
Thank you Amber and good morning, everyone welcome to <unk> conference call to discuss the company's third quarter 2022 results. These.
These results were reported in the news release issued on November eight 2022 and in the company's quarterly report on Form 10-Q, which was also filed on November eight 2022 <unk>.
Included in those documents were cautionary statements about the significant risks uncertainties and other factors that are out of the company's control and could affect <unk> business and alter expected results. Please review those statements Manley.
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 November 19, 2022, and except as required by law or regulation approach Orange will.
Not undertake and expressly disclaims any obligation to update or alter information disclosed as part of these forward looking statements.
Our management team approach of ours 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.
Like to remind you. This call is being recorded and there will be a time for questions. After the conclusion of prepared remarks.
On our call today, we have Ned Rand, President and CEO , Dana Hendricks, Chief Financial Officer, Mike Bogusky, President of our specialty property and casualty lines and Kevin shook President of our Workers' comp insurance compensation insurance operations. Ned will you start us off please.
Thank you, Jason and good morning.
The team here at flow assurance is pleased to discuss the quarters results with you and to provide an opportunity to hear from our line of business leaders on the progress, we're making and challenges we're addressing.
This quarter's results for pro assurance continue to reflect several trends that have been in place throughout the year.
First is ongoing improvement in both our core businesses specialty P&C and in workers' compensation.
Loss ratios are improving as we are seeing the results of re underwriting and the healthcare line and prop reaction to industry trends in the workers' compensation business.
Yes.
We are also pleased to see increases in policyholder retention across the board and the components of our specialty P&C business, which Mike will detail for you shortly.
It's been a couple of years of change for all of US and we believe that the reliability and customer focus of our operational teams coupled with our long standing reputation for excellence make pro insurance, an appealing choice for our insureds in a competitive marketplace.
Finally, the steady progression higher in interest rates and the effects of these rates will have on our investments excuse me. The effects of these rates have on investment markets and the economy continues to play a large role in our results.
We'll see the positive impact of just a couple of quarters of high higher interest rates and the level of income that our portfolio produces.
That's more of our portfolio turns over and is reinvested, we will continue to see that income grow and impact our bottom line.
Dana is prepared to take you through those numbers as she shares the results for the quarter and highlights the major drivers of our results Dana.
Thanks, Dan and good morning, everyone for the third quarter, we reported an operating loss of $3 million or <unk> <unk> per share operating loss in the quarter reflected a reduction in equity in earnings from the investment fund Lps and LLC, which posted a loss this quarter as a result of the broad decline in beds fixed it.
Common equity market that began early in the year and continued through the third quarter.
Gross premiums written were essentially unchanged from the third quarter of 2021 with an increase in specialty P&C premium offsetting declines in the workers' compensation insurance and Lloyd segments.
Strong retention and rate gains helped to maintain premium in a competitive market environment.
Excluding the impact of purchase accounting and prior year transaction related costs, our consolidated combined ratio improved one percentage point from the third quarter of 2021, driven by improvement in our standard physician business.
Investment results provided a further $2 five point improvement in the consolidated operating ratio our profitability ratio, which incorporates the effect of investment income in addition to underwriting results.
You will recall from last quarter's discussion that our net loss and expense ratios for 2022 as compared to prior periods are impacted by offsetting amounts due to our change in process of allocating UL AE in our specialty P&C segment.
Current quarter that change resulted in a decrease in our consolidated net loss ratio of about three points with an equal and offsetting increase to our consolidated expense ratio.
Excluding the change in UAE, our consolidated current accident year net loss ratio improved by two five points as compared to the third quarter of 2021.
The majority of this improvement came from lower claims frequency in the standard physician business.
Especially in the acquired nor Cal business and in the Workers' compensation insurance segment.
We recognize $7 million of favorable development in the quarter with each of our core operating segments contributing favorably.
Our consolidated expense ratio, excluding the change in <unk> and transaction related costs in the prior period. It was about four points higher than the prior year quarter.
Driven by the buildup of Norcal, Deepak amortization post acquisition and a reduction in net premiums earned compared to 2021 and certain one time expenses.
Net investment income grew 28% to $25 million in the quarter as interest rates continued their moves higher in conjunction with the sixth consecutive increases in the fed funds target rate.
Rate hikes gave us an opportunity in the third quarter to reinvest.
Cheering bond yields at approximately 180 basis points higher than the portfolio's average book yield increasing investment income in future quarters.
We welcome this development and the departure from the artificially low level of interest rates that we experienced over much of the past decade.
Rising interest rates also led to an additional $90 million of after tax unrealized holding losses on our fixed income portfolio.
These unrealized losses flow through other comprehensive loss directly to equity accounting for most of the decline in book value.
Since our investment approach holds the vast majority of securities to maturity. We consider these changes in fair value to be temporary.
As existing holdings move closer to maturity with each passing quarter, the unrealized losses, you're naturally reduced overtime.
Additionally, each quarter that investment reinvestment rates remain at current levels provides continuing opportunity to increase the portfolio book yield and future investment income.
With that I'll turn it back over to Jason.
Thanks, Dana now, we're going to pivot to Mike Bogusky for commentary on the specialty property and casualty segment Mike. Thank.
Thank you Jason specialty P&C segment results for the quarter are highlighted by continued improvements in loss and loss adjustment expenses.
Pricing increases and premium retention.
Excluding a three 9% percentage point impact from purchase accounting related to the Nortel acquisition.
The combined ratio improved one five percentage points as compared to third quarter of 2021.
The nor Cal acquisition continues to contribute top line growth, which.
Which resulted in increased gross written premium during the quarter.
We are pleased with the strategic value that the norcal transaction continues to deliver to the organization.
Gross written premium increased by 1% to $238 million in the quarter with year to date growth of 29%.
Net earned premium decreased 5% during the quarter as a result of the underwriting efforts over the past year.
Premium retention for the entire segment was 87% in a competitive marketplace.
Driven by an 89% retention in the standard physician business.
Specialty healthcare retention was 74% and has improved five percentage points compared to 2021.
We can continue to see aggressive competition in the large account space.
We delivered strong premium retention of 92%, 91% and our medical technology and small business units respectively.
Overall, the segments renewal pricing increases were 8% in the quarter.
Driven by the standard physician book at 9% New business was approximately $12 million in the quarter relatively consistent with the third quarter of 2021.
The current accident year net loss ratio for the quarter exclusive of purchase accounting and the yearly change improved approximately four percentage points driven by lower claims frequency in standard position book.
This included a two two percentage point improvement from the nor Cal book.
We recognized net favorable prior accident year reserve development of $6 million in the quarter compared to $7 million in the same period of 2021.
Favorable quarter redevelopment in both the current and prior years included approximately $3 million related to the beneficial amortization of the purchase accounting adjustments on nor Cal as reserves.
The expense ratio for the quarter was 26, 6%.
However, excluding purchase accounting various onetime items and the yearly change the expense ratio increased one percentage point as compared to the same period of 2000 2021.
The impact of onetime expense items was approximately one percentage point.
The increase in the ratio was mostly related to a higher volume of premium subject to broach broker commissions and the nor Cal book and lower levels of earned premium.
In summary.
The results in the quarter highlighted by improved loss ratios higher premium retention and continued benefits from integration and operational excellence strategies.
We believe these efforts are positioning the company well as we navigate the challenges of competitive pricing, a tight labor market as well as economic and social inflation.
We are confident in our ability to manage through these challenging.
This challenging environment.
Thank you.
Jason.
Thanks, Mike.
Kevin would 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's third quarter combined ratio decreased to 105% in 2022 compared to 106, 3% in 2021, reflecting a lower loss ratio, partially offset by an increase in the expense ratio.
The 2022 combined ratio, excluding intangible asset amortization and the corporate management fee was 97, 5%.
Gross written premium decreased for the third quarter, driven by renewal rate decreases lower new business and the loss of a large account, partially offset by higher payroll audits and related premium adjustments.
Renewal price decreases in our traditional book of business were 5% in 2022, and new business was down about $500000.
Our premium retention was 80% for the quarter driven by the movement of a large account to a competitor.
While the loss of this account resulted in a decrease to premium revenue during the quarter.
Maintaining our underwriting standards in this prolonged soft workers' compensation market cycle remains a top priority our strategies continue to focus on working with our valued distribution partners to secure quality, new business opportunities and retaining profitable accounts.
Audit premium in our traditional book of business increased $3 $5 million quarter over quarter indicative of the payroll rebound after the lifting of pandemic restrictions and our underwriting territories in 2021 audit.
Audit premium in the 2022 third quarter included an increase of $500000 to our earned but Unbilled audit premium asset we will continue to monitor processed audit activity and the impact of wage inflation on the Bob asset in future quarters.
The decrease in the calendar year loss ratio reflects an improvement in the current accident year loss ratio. The higher 2021 accident year loss ratio reflected elevated claim activity as workers return to employment with the easing of pandemic restrictions and the labor shortage, resulting in a.
And skilled job training alternative work arrangement risks and employee fatigue. During the first nine months of 2022. The claims operation closed 50% of 2021 and prior claims representing one of the best claim closing percentages in the last 10 years.
Our expense ratio increased during the third quarter, largely due to higher general expenses from team member compensation and an increase in business related travel with the full return to normal business activities and events this year.
I'll finish with the segregated portfolio cell reinsurance segment. This segment reported a loss of $248000 for the quarter, which included underwriting income of 450.
That was more than offset by investment losses, we renewed all of the captive program 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.
<unk> segment reported a small loss of $174000 in the quarter.
The impact to the bottom line over time as the Lloyd's investment will reflect our reduced participation.
Approximately 34% of the Lloyd's coverage written this property coverage our catastrophe reinsurance. Therefore, we do have some exposure to the losses, resulting from hurricane in.
Our initial indications are that the pro assurance share of incurred losses, resulting from the hurricane is likely to fall between one and $2 million.
Before we get to questions I want to offer a heartfelt. Thank you to all of our team members across the organization for your dedication and commitment.
You all continue to rise to the challenges in.
Bring your best efforts to work each day.
We are seeing significant progress on our results and we will always strive to continue that improvement.
Remain confident that we are taking the right steps to achieve our mission and to deliver for our customers and shareholders.
Thank you Ed.
That concludes our prepared remarks, and we're ready for questions.
Thank you we will now begin the Q&A session. If you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to remove that question. Please press star followed by two again to ask a question Thats Star one as a reminder, if you are using a speaker phone. Please remember to pick up your handset.
Before asking your question, we will pause here briefly ask questions are registered.
Our first question comes from Paul Newsome with Piper Sandler Paul Your line is now open.
Good morning, Thanks for the call.
I wanted to ask a little bit to see if we get a little bit more color on the reserve development.
Which have historically been very high.
Kevin.
Okay.
Different titles.
Process.
And then other people.
Companies, such that you will need the calendar use kind of the right number to look at.
Is that change should we consider basically.
Yes.
<unk> reserve development as part of the norm.
Hey, Paul it's that's a good question.
As we've talked over the last number of quarters.
We're taking what we think is a careful and cautious approach.
But with the establishment of reserves in the current calendar year.
As well as.
Any development that we're recognizing on a couple of points. We do it we do a deeper dive on reserves kind of in the second quarter and fourth quarter.
Think that deeper dive has become more important to the process as.
The data that feeds into the processes become a little less consistent because of.
The impact that Covid has had on claim.
Claim closing patterns and so.
I think that that leads into some of what we see in the quarter.
But I do think.
Your point of kind of the levels, if and if youre going back 10 years to the levels of favorable development that we saw in the past I think that's unlikely.
To occur if there's huge levels of magnitude but.
But we do believe that we are establishing our reserves on a very conservative basis.
Yeah.
And we think thats appropriate given.
Both the lack of consistency of data given COVID-19.
The challenges that we do see in the marketplace.
<unk> has prepared comments mission social inflation.
And Thats certainly something that we have an eye on.
The other thing that's happened in particular with our health care professional liability reserves again, turning back to Covid is the closing patterns have slowed which means the resolution of claims is taking longer.
That that impacts that reserve analysis, but also kind of the final conclusion that you rich so it used to be that.
Call. It three to four years, we felt we had pretty good clarity on where current accident year was headed.
In that timeframe is extended and while CT systems have opened back up and are moving probably at a pace similar to what they were operating at <unk>.
<unk> covered there remains a significant backlog in the court systems that has to be worked through Mike I don't know if theres anything you'd add to that.
No further comments.
Okay.
That's great.
Was hoping to turn towards.
Investment returns.
Obviously higher interest rates for your regular interest income, but the earnings.
Ian consulted CWC Charles.
Volatile.
So I kind of like two questions I wanted to ask what is.
Should we expect fourth quarter I would guess two to be able to loss for.
Alternative investments.
And then kind of Relatedly.
Could you talk about how.
Product.
And some of the others.
Type investments.
Filter into your pricing.
The insurance policies because I'm wondering if maybe this is the question really.
If we.
So back out or have some sort of normalized return for those kinds of investments.
Kind of ROE.
Currently pricing.
Our business as well.
Do you want to take the first part of that and then I'll maybe take the second part then yes that would be great.
Good morning, Paul and thanks for the question.
So a little just a little background, a little more insight on those investments in El Pais and all I'll say is that you are asking about.
We had a four and a half restful $8 million loss on those invested assets in the Lps and all I'll say.
Im putting aside the tax credit tax credit amortization that also fall into the equity and earnings line.
As a reminder, the day report to us on a one quarter lag and therefore the loss that we saw in the third quarter in our financial statements is a reflection of second quarter market changes.
While the majority of the investments in this category did see negative marks in the quarter. The biggest drivers really were in the software and Fintech sector, which I think we're all.
Generally that was following the markets are aware that they took a big hit in the second quarter.
Also too.
Experiencing a loss, but to a lesser degree where it was private equity credit.
Real estate did tend to fare pretty well in the second in the second quarter, which translated to our third quarter earnings.
That's a bit of a backdrop the other thing that I would say Paul is.
About this particular class of investments is that over the long term. They really have served us well over the last I went back and look.
But someone like you might be interested in knowing actually I went back and looked over the last five years and this is only the second quarter in which we realized a loss associated with data. This could you.
Class of investments the last thing in the second quarter of 2020.
Over the long term.
<unk>.
Investment classes really served us well and we do expect yields to be in the ballpark of say 6%.
Give or take 100 basis points.
And when I look back the last five years, I, certainly say that on average.
I hope that's helpful and responsive to your first question and then Paul on your second question the way that kind of the algorithms that we look at from a pricing perspective work as they have kind of a built in risk free rate.
Based on the cash flow is expected under the policy.
That.
For us translates to kind of a targeted loss ratio.
And so.
So that's the way the.
Pricing works and historically thats been a.
Kind of 10% to 13% Roe target.
Within the pricing mechanism that we use.
Recognizing that that's over.
Our long term and so that.
Depending on market conditions, you will achieve that in some periods and you'll probably underperform that.
Some periods.
As an organization, we target an Roe.
For our pro assurance at 700 basis points above your 10 year treasuries, so certainly that ROE target.
It is moving up as interest rates move up.
I think importantly to some of the comments that Dana made about.
The earnings power of the investment portfolio when you think about.
The leverage of our investments too.
Our equity it's about a four to one leverage which means on an after tax basis that you gained approximately 320 basis points of ROE for every 100 basis points of rate gain youre, making the portfolio and we think that'll be an important driver as we move forward.
Yeah, and I'd like to circle back to Pall, specifically out about what can we expect next quarter.
And Paul we will begin receiving report from these investments really in mid November .
And over the course of the six weeks thereafter, obviously as they began reporting into US. Then then we will have a sense of that but.
It's not something I'd be able to give you insights and on at this moment.
Great. Thank you always I appreciate the help.
Thanks, Paul.
Thank you.
There are currently no further questions in queue. So again as a reminder to submit for a question Thats Star one on your telephone keypad.
There are currently no further questions in queue. So I will pass the conference back over to Jason for any additional or closing remarks.
Thank you Amber and thank you to everyone that joined US today, we look forward to speaking with you again in 2023.
This concludes today's pro assurance third quarter 2022 earnings call. Thank you for your participation you may now disconnect your line.