Q4 2022 ProAssurance Corp Earnings Call
Speaker 1: thir to.
Speaker 2: Good morning all, I would like to welcome you to Prera Shore & Q4 2022 earnings conference call.
Speaker 2: All lines have been placed on mute to prevent any background noise, and after the speakers are mapped we will conduct a question and answer session. To ask a question at this time please press the star followed by one on your telephone keypad. If you change your mind at any time please press star 2.
Speaker 2: and for operator assistance at any point please press start the Iran. Thank you. I'll now turn the conference over to your host Jason Gainesrich. So please go ahead Jason.
Speaker 3: Thank you, Brica. Good morning, everyone. Welcome to Prousurance's conference call to discuss the company's fourth quarter in year-end 2022 results.
Speaker 3: These results were reported in a news release issued on February 27, 2023, and in the company's annual report on Form 10K, which was also filed on February 27, 2023. 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 pro-eachances business and alter expected results. Please review those statements.
Speaker 3: Management expects to make statements on this call dealing with projections, estimates, and expectations, and explicitly identifies these as forward-looking statements within the meaning of the U.S. Federal Security's laws and subjects to applicable safe harbor protections. The content of this call is accurate only on February 28, 2023.
Speaker 3: and accept as required by law or regulation, pro-churance will not undertake and expressly disclaim any obligation to update or alter information disclosed as part of these forward-looking statements. The management team of pro-churance also expects to reference non-GAP items during today's call.
Speaker 3: The company's recent news release provides a reconciliation of these non-GAF numbers to their GAAP counterparts. I would like to remind you that the call is being recorded and there will be a time for questions after the conclusion of prepared remarks. This morning we will discuss selected aspects of results and remind investors that they should review our company, press release, and filing on Form 10K for full and complete information.
Speaker 3: On our call today, we have Ned Rand, President and CEO , Dana Hendrix, Chief Financial Officer, Mike Bogusky, President of our specialty property and casualty lines, and Kevin Schuch, President of our Workers' Confensation Insurance Operations.
Speaker 3: All today we have Ned Rand, President and CEO , Dana Hendrix, Chief Financial Officer, Mike Bugusky, President of our specialty property and casualty lines, and Kevin Schuch, President of our Workers' Confensation Insurance Operations. Ned, thank you Jason.
Speaker 3: Good morning everyone. Thanks for joining us today and welcome to our fourth quarter and four-year conference call. I continue to be optimistic about the future at Pro Assurance.
Speaker 3: For the full year, we start improving in our operating ratio and our current accident year loss ratio, reflecting the steady efforts of the team members across in line to business.
Speaker 3: Loss ratios are improving as we continue to see the results of re-underwriting in the healthcare line in prompt reaction to industry trends in the workers' compensation business. Our core markets continue to be competitive, offering us opportunities to differentiate ourselves from the competition by outstanding customer service in pursuit of our mission to protect others.
Speaker 3: participated severity trends. We do see below historical frequency in some parts of the country. And we are carefully monitoring the impact that these trends have on our current loss picks and prior year development and the health care professional liability business. Our investment team did an admirable job in navigating the challenging markets last year.
Speaker 4: one fixed income markets.
Speaker 4: In addition, our floating rate holdings also benefit from the higher rates as they reset at higher coupon payments and increase our net investment income. As our core fixed income assets mature, they too benefit from higher returns.
Speaker 4: And we expect net investment income to be meaningfully higher in 2023 than in recent years. I'm now going to turn things over to Dana to provide insight into our high-level results that she shares the consolidated metrics for the company for the fourth quarter in the four-year. Dana?
Speaker 5: Thanks, Ned, and good morning, everyone. For the fourth quarter, we reported operating income of $3.5 million or $6.4 million for diluted share. And for the full year, we reported operating income of $24.5 million or $45 for share. Consolidated gross premiums written, greater $224 million during the quarter.
Speaker 5: And with the addition of a full year of North Cal premium, grew to $1.1 billion for the year. Our core operating segments contributed $14.55 million of new business in the quarter and the year respectively.
Speaker 5: Strong retention and renewal pricing gains in the specialty PNC segment help to maintain premium levels in a competitive market environment. Excluding the impact of purchase accounting and transaction-related costs, our consolidated combined ratio increased about six points in the fourth quarter and about one point in the full year compared to the same periods in 2021.
Speaker 5: The higher combined ratio in the quarter primarily reflected lower prior accident ear favorable development and a higher expense ratio which I'll touch on shortly. Benefiting from higher investment income are operating ratio improved by almost one point in the full year, also excluding the impact of purchase accounting and transaction related cost.
Speaker 5: As mentioned on previous calls, 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 ULE in our specialty PNC segment. That change resulted in a decrease in our consolidated net loss ratio of about three points for the quarter.
Speaker 5: and two and a half points for the full year with an equal and offsetting increase to our consolidated expense ratio. It's gliding the change in ULE and purchase accounting effects, our consolidated current accident year net loss ratio improved by almost a point in both the quarter and the full year.
Speaker 5: This improvement was driven by our reduction to some initial loss ratios in our standard physician business due to favorable claim, frequency trends, as well as favorable loss trends in our workers' compensation insurance and segregated portfolio cell re-insurance segments.
Speaker 5: This improvement was largely offset by our increase to initial loss ratios in some jurisdictions in our HCPL book due to higher than anticipated loss severity trends that emerged primarily during the current quarter. While we recognize net favorable prior accident year reserve development of $5 million and $37 million in the fourth quarter and full year respect.
Speaker 5: Transaction related costs and one-time expenses increased about two points in the quarter and about half a point in the full year.
Speaker 5: The higher expense ratio in the quarter primarily reflected in increase in policy acquisition costs and lower earned premium in our specialty PNC segment.
Speaker 5: Our consolidated net investment result was $28 million and $101 million for the fourth quarter and full year respectively.
Speaker 5: We are currently reinvesting maturing bonds that yield to approximately 225 basis points higher than the portfolio's average book yield, increasing investment income in future quarters. Our reported earnings from investments in L.P.'s and L.S. declined in both the fourth quarter and full year as market valuations in 2022 have been lower.
Speaker 5: than in 2021. Interstrate movements had a significant impact on the fair value of our fixed income holding this year. On prices rallied during the fourth quarter leading to aftertack unrealized holding gains of $26 million. Overall, we recognized $315 million of aftertack unrealized holding losses.
Speaker 5: on our fixed income portfolio for the year. These unrealized gains and losses flow through our other comprehensive loss directly to equity. Along with dividends declared, these items account for substantially all of the decline in book value for the year.
Speaker 5: Since our investment approach holds the vast majority of these securities to maturity, we consider these changes in fair value to be temporary.
Speaker 5: As existing holding Smith cluster to maturity with each passing quarter, the unrelized losses are naturally reduced over time.
Speaker 5: Additionally, each quarter that reinvestment rights remain at current levels provides continuing opportunity to increase the portfolio of both yields and future investment incomes.
Speaker 5: each quarter that reinvestment rates remain at current levels, provides continuing opportunity to increase the portfolio of book yield and future investment incomes. With that, I will hand the call back to Jason.
Speaker 3: Thank you, Dana. Next, we would like to hear from Mike Boguski, some highlights of the progress made in the specialty P&C segments. Go ahead, Mike. Thank you, Jason. The specialty P&C segment results for the quarter and full year are highlighted by Top Line Premium Growth.
Speaker 3: pricing increases in improvement in current action at year loss ratios, as well as premium retention across the segment. Excluding a 2.7 percentage point unfavorable impact from one time expenses and purchase accounting adjustments related to the Norkow acquisition.
Speaker 3: The full year 2022 combined ratio was relatively flat as compared to 2021. We continue to be pleased with the strategic value that the North Gal ask acquisition has delivered to the organization, including talent, premium growth.
Speaker 6: Invested asset leverage, operating expense synergies, and regional diversification of our business.
Speaker 6: Grocery and premium increased to $173 million in the quarter and $837 million for the year. Representing top line growth of 23% in the year, primarily driven by the North Cal acquisition. Premium retention for this segment was 85% in the quarter.
Speaker 6: and 84% for the year, both improvements compared to the same periods in 2021. The result for the full year was driven by an 88% retention in our standard physician business. In addition, we delivered strong premium retention of 91 and 90%
Speaker 6: in our small business and medical technology units respectively. Our specialty healthcare retention was 69% for the year as we continue to execute our discipline underwriting strategy in the specialty space.
Speaker 6: We know pricing increases were 7% for the quarter and full year. We were pleased with the price increase of 9% in the quarter and 10% for the year in specialty health care. In addition, we continue to secure and improve terms, conditions and product structure in the specialty business.
Speaker 6: The specialty business market conditions appeared to be farming throughout the 4th quarter and the start to 2023. New business for the segment was $10 million for the quarter and $37 million for the year of reflection of competitive market conditions. The segment action at your loss ratio for the quarter was relatively flat.
Speaker 6: couple of states. We recognize net favorable prior action a year development of $3 million in the quarter and $30 million for the year as compared to $13 million and $33 million in the comparable periods in 2021. As outlined by Ned in his open comment,
Speaker 6: We are currently operating in a claims environment that is pressured by social inflation and severity trends. We experience higher than anticipated severity and select your stickions in our standard physician business and to a lesser extent our specialty business resulting in less favorable development as compared to Q4 of 2021.
Speaker 6: The expense ratio for the quarter was 25.6% and 25% for the year. After excluding purchase accounting, various one-time items and the ELAE change, the expense ratio increased 3.4% to the quarter.
Speaker 6: The increase is primarily driven by lower urn premium in the quarter due to our prior re-underwriting efforts and a higher volume of premium subject to broker commissions.
Speaker 6: For the year, the expense ratio increased 0.9 percentage points, primarily reflecting increased volume of business subject to broker commissions is noted in the quarter and higher cost related to technology initiatives and travel.
Speaker 6: In summary, the segment delivers strong top line growth as well as improved premium retention and action at year loss ratios.
Speaker 6: We continue to be pleased with the success of the North Carolina integration. These achievements in 2022 position us favorably for the year ahead in spite of ongoing economic and social inflation pressures and the continued headwinds of a competitive marketplace.
Speaker 6: With respect to my decision to retire this year, I want to take this opportunity to thank all my colleagues' approach as well as our agency and strategic business partners for your tremendous support over the past 37 years. It has been an amazing journey and I am extremely grateful for the valued relationships, experiences, and all that we accomplished together.
Speaker 6: I'd like to express my appreciation and sincere thanks to Ned Rand, Approach the Insurance Board of Directors and our executive leadership team for the opportunities to lead and serve the organization over the past nine years. I am grateful for your confidence and support during my tenure.
Speaker 6: A special shout out and thank you to Kevin Shirk, our Eastern Senior Executives and Team Members. For 22 years together we have the entrepreneurial experience of building a specialty workers compensation and segregated portfolio cell business.
Speaker 6: that start over to Tattoo Parlor in 1997 and recently celebrated its 25th anniversary. We not only build a business together but we also raised our families and supported our communities together.
Speaker 6: It was a truly special journey together and I want to thank you all from the bottom of my heart. I'd like to conclude with a heartfelt thank you to Rob Francis, our senior executive as a special PNC and all team members for your hard work, dedication and commitment to excellence over the past four years.
Speaker 6: Together we navigated challenges, built a strong foundation for the future, and successfully executed on the largest transaction in the history of pro-assurance with the acquisition and integration of NORCAL.
Speaker 6: I am proud of all that we have accomplished together and extremely grateful for your tremendous support and value friendships.
Speaker 6: that we have accomplished together and extremely grateful for your tremendous support and valued friendships. Jason, back to you.
Speaker 4: Thank you for the summary, Mike. We all wish you the very best in your retirement. Kevin, what key points do you have to share with us from the Workers' Compensation Insurance and the segregated portfolio cell re-insurance segments? Thank you, Jason. The Workers' Compensation Insurance segment produced a combined ratio of 99.9 percent for the year-rending December 31, 2022, including 100.2 percent for the fourth quarter. The combined ratio was lower year-over-year, reflecting an improved loss ratio in 2022, partially offset by a higher underwriting expense ratio.
Speaker 4: The 2022 full year combined ratio, excluding intangible asset amortization and the corporate management fee was 96.8%.
Speaker 4: Gross-written premium increased in the 2020-24th quarter and full year by 4.5% and 2.7% respectively. The increase in year-over-year gross premiums written reflects higher payroll audits and related premium adjustments, partially offset by the continuation of a very competitive workers' compensation marketplace. Audit premium increased $14 million year-over-year.
Speaker 4: ratio, both for the quarter and full year, reflects a lower current accident year loss ratio and higher net favorable reserve development in 2022 compared to 2021. The current accident year loss ratio was 72% in 2022 compared to 74% in 2021.
Speaker 4: 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 reduction in skilled job training, alternative work arrangement risks, and employee fatigue.
Speaker 4: That favorable development was $8 million for all of 2022 compared to $7 million in 2021. During 2022, the claims operation closed 62% of all 2021 in prior claims, representing one of the best claim closing percentages.
Speaker 4: in the last 10 years. Our expense ratio increased in 2022 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. Moving briefly to segregated portfolio cell re-insurance, this segment reported a loss of $284,000 for the year ended 2022, which included underwriting income of $2.4 million that was more than offset by unrealized investment losses. All wrap up by thanking our workers compensation team members.
Speaker 4: Business and agency partners for everything we accomplished together in 2022. Our team members continue to demonstrate an unbending commitment to our core values and enthusiastically execute our service model. We are off to a solid start in 2023, focusing our strategies on profitable growth opportunities, as well as marketplace challenges, including the continuation of price decreases, qualified labor shortage and economic and medical inflation. With that, I'll turn it back to you, Jason.
Speaker 3: Thank you, Kevin. Ned, would you please close out the remarks with a discussion of the Lloyd segment. Thanks, Jason. The Lloyd segment, through the full year, produced a small underwriting profit with a combined ratio of 99.7%. In total, the segment produced a small loss for the year. We will likely recall that we discussed the impact of Hurricane E in last quarter. And the losses produced by that storm are included in the full year results for 2022.
Our estimated share of the losses produced by the hurricane was just under $2 million. 2023 gives us reasons to be optimistic about the prospects for our organization. We look forward to seeing the results of the continued hard work to create scale and efficiencies across the company. The improvement in net investment income that we can achieve will be a key driver or results going forward. I want to take a moment and thank everyone at Pro Assurance for what you do every day to support our customers and how each of you has responded to the challenges presented by the Marketplace. I am grateful. I also want to thank Mike for all that he has done for Pro Assurance over the last nine years. Mike's leadership and passion will certainly be missed by all of us. And while I'm certain that we will stay in touch, I will miss his friendship. We wish him well in his retirement. Thank you for your participation in today's call and now the team and I will be happy to answer your questions. Thank you. If you would like to ask a question, please press the star then one or your telephone keypad.
If you change your mind please rest first, too.
Can you mind please first start to? We have the first question from?
Craig, Peter, and Raymond Jane. You're on the Zipin. Hey, good morning. This is SitOn for Greg. I'm just curious if you could talk to your approach to case reserves and how or when you go about recognizing good or bad news in your reserves. Hey, say good morning. Yeah, happy to talk on that. It's more art than science. And our claims professionals will monitor and manage the claims that are in each of their portfolios and no make adjustments up or down as they determine.
the facts that come in, you know, what they support. And the discovery on a medical professional liability claim in particular can be quite lengthy. So, you know, we will establish an initial reserve with the limited information that we have, and then adjust that as the facts come in. I think what's really important in that process is that we're consistent in what we do.
and consistent over time, and that allows our actuaries to use the data and that consistent data to make projections into the future. What we saw in the fourth quarter was our claims professionals reacting a couple of jurisdictions to what we see as an heightened claim environment. And that's ordinary course of business for us. Okay, got that. And then maybe if you could give us some more perspective on...
change in open claims and how that's migrated over the last several years? As far as the number of open claims said... Yeah, yeah, correct. Yeah, I don't know that we have that information in front of us today. I don't think the quantum of open claims is changed dramatically as we stated. We have seen across a number of jurisdictions, it continues to decline in claim frequency and as compared to five years ago, that means the inventory is down. But, you know, I don't have the specific details in front of me. I'm sorry.
and open claims and how that's migrated over the last several years? As far as the number of open claims said... Yeah, yeah, correct. Yeah, I don't know that we have that information in front of us today. I don't think that quantum of open claims is changed dramatically as we've stated. We have seen across a number of jurisdictions that continue to decline and claim frequency. And, you know, as compared to five years ago, that means the inventory is down. But, you know, I don't have the specific details in front of me. I'm sorry. All right. Yep. Thanks.
Thank you. I have a reminder to ask any questions. It is staff followed by one. We now have the next question from Mark Hughes to his securities. Your line is open. Thank you. Good morning. Morning, Mark. And I missed some of your comments from earlier, but I'm just curious when you think about the heightened cleansed environment. How does this compare to 2016, 2017, where you saw kind of some signs that got you concerned? I think you were early in identifying the social inflation that you know, you know, emerged more broadly. You know, but a lot of time has passed between them and now a lot of the COVID, etc. I wonder if you could just.
kind of comparing contrast what it is now versus then and if you can maybe lay your finger on areas, lines of business, commonalities and what's happening this time around. Yeah, you know, I think what we saw, Mark, is maybe it's not of this time around, is that we saw a pause through COVID in some of those trends that we were talking about back in 17 and 18. COVID hit the court system shut down and there was kind of a pause and as the court systems have reopened as the backlog of cases worked their way through the legal system, I'd say we're seeing a continuation of those trends that we identified before that time and kind of that trend continuing, which is, you know, more.
comparing contrast, what would it now versus then? And if you can maybe lay your finger on areas like the business, commonalities, and what's happening this time around. Yeah, I think what we saw, Marcus, is maybe it's not at this time around, is that we saw a pause through COVID in some of those trends that we were talking about back in 17 and 18 COVID hit, the court systems shut down, and there was kind of a pause. And as the court systems have reopened, as the backlog of cases worked their way through the legal system, I'd say we're seeing a continuation of those trends that we identified before that time. And kind of that trend continuing, which is, you know, more than the prior year and the number of very large verdicts.
And that, you know, we saw that step up in 15 to 16, 16 to 17, 17 to 18. And what happened in 22, I don't have the exact numbers. When I'm confident, topped what happened in 18 and 19 as far as the quantum of those cases. You know, what we are seeing, I think, is I'm sorry, Mark, go ahead. Well, all that's a question, but I'd love to hear you extend your comments on that. But I was going to ask, are competitors recognizing this, and therefore it may be as being translated into, you know, an improved competitive dynamic, or at least pricing that may give you the opportunity to do what you want. Can you use some ability to keep up with lost cost trends? Yeah. All right. Let me kind of continue my answer. I'll come right back to that. You know, what you're driving some of this is always hard to tell.
But I think just some of the tensions and hostilities that bubble in our underlying communities add to the way juries are reacting and responding. And I think that's a big contributor to it. Going into COVID, we had this idea that healthcare workers as heroes, which became a very common theme, would push back against that and perhaps for a very short period of time it did. But we certainly, we don't see that playing out right now. There's just more anger and frustration out there than anything. As for competitors, absolutely you're seeing it because I would tell you that if you look at those very large verdicts that occurred in 2022, they weren't ours. And so they are absolutely being seen by the marketplace.
They're being felt by the reinsurers as well. And that will play out in pricing as well. You know, we're in this interesting dynamic where a lot of the companies that we can be against are extremely well capitalized. And some of them are willing to throw that capital back at underpricing business. That will catch up with them, I believe, eventually. But there are certainly all the factors in the marketplace that should push pricing higher. And we can't control how they respond. We can control how we respond, which will be to continue to drive right forward in this environment.
Yeah. And the most important is that the transferred over into workers comp or that separate dynamic and any inflationary pressure there. Like Kevin, Kevin answered that. But certainly we kind of get the, we get a tailwind from inflation in wages that will translate to increased premium and then eventually that will work its way into the end of the claims cost as well. I don't know if anything you've added to that, Kevin.
had some some top line expansion. Is this an environment where you you just recognize you want to hold share and cost baby up a bit but but you don't want to see erosion in the book or how do you view the
your top line posture under the circumstances and a very dynamic environment.
Yeah, well, it might take that one. Yeah, Mark, especially PNC, first of all, the growth was obviously via acquisition this year. And NorCal contributed 23% growth to the organization, high quality book of business that's been re-underwritten. I think positions as well for the future. What we're seeing in general is healthcare growth.
in the healthcare professional liability market of, you know, two to three percent. And we'll approach it with a disciplined underwriting in each of our businesses, whether it's our life science businesses, our small business business and our healthcare professional liabilities really focused on the bottom line versus top line expansion. Now, if the market changes, and we did see some firming in our specialty areas, in the fourth quarter and start to 23, we'll take advantage of those pricing opportunities. And congratulations, Mike. We'll miss you on the call. That's too much.
in the healthcare professional liability market of, two to three percent, and we'll approach it with a disciplined underwriting in each of our businesses, whether it's our life science businesses, our small business business, and our healthcare professional liabilities really focused on the bottom line versus top line expansion. Now, if the market changes, and we did see some firming in our specialty areas in the fourth quarter and start to 23, we'll take advantage of those pricing opportunities. And congratulations, Mike. We'll miss you on the call. That's a lot. Now, thank you, Mark. Appreciate that.
Thank you. I would remind you if you would like to ask any further questions, please press star on your telephone keypad. We have no further questions in the key, so I'd like to hand it back to Jason. Thank you, Breaka, and thank you to everyone that joined us today. We look forward to speaking with you again.
Thank you for joining that does complete today's call. You may now disconnect your lines and have a lovely day.