Q2 2023 ProAssurance Corporation Earnings Call
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Good morning, everyone and welcome to <unk> conference call to discuss the company's second quarter 2023 results.
These results were reported in a news release issued August eight 2023, including the Companys quarterly report on Form 10-Q, which was also falls in poker site in 2023.
Cause it and Theres documents were cautionary statements about the significant risks uncertainties and other factors are off of the company's control.
<unk> business and also expected results. Please review those statements.
This morning management will discuss selected aspects of the of course the results on this call and investors should review the filing on Form 10-Q, and accompanying press release for a full and complete information.
Management expects to make statements on this call dealing with projections estimates and expectations and explicitly identify 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 early on August 19, 2023, and except as required by law or regulation per assurance, one not undertake and expressly disclaims any obligation to update information disclosed as part of these forward looking statements.
The management team for our assurance also expects to reference non-GAAP license during today's call.
Company's recent news release provides a reconciliation of these non-GAAP numbers.
Those pumps.
And now I'd like to remind you that the call is being recorded.
Great questions at the conclusion of the prepared remarks.
Speakers on the call today will be Ned Rand, President and CEO container Hendricks Chief Financial Officer also joining on the call today are executive leadership team members drove crunches curvature across 12 months.
Current Murphy.
Now I will turn the call over to Ned.
Okay.
Thank you Elliot and good morning.
Today is Dana and I are looking forward to giving you some insight into the second quarter numbers that we released last night and discussing the drivers we're seeing in the medical professional liability and workers compensation markets.
I'll provide some commentary regarding the market conditions, we're seeing.
And then Dana will provide the consolidated results and key drivers of our investment returns and book value.
The results, we released last night represent a solid quarter and highlight both the challenges and opportunities in the markets in which we operate.
At a high level, there's been relative stability in the current accident year loss ratio, albeit at higher and higher level than in 2022.
And a decline in favorable prior accident year Reserve development.
Underwriting expenses are stable for the quarter relative to the prior year and.
In investment results have improved significantly.
The competitive market and challenging claims environment that are impacting our current and prior accident year loss ratios.
Been persistent within our industry for some time now.
And we expect these to continue.
<unk> got some indication of what we can expect in coming quarters.
With that background I'll walk you through the results reported in our key segments.
Below are under are riding result in our specialty P&C segment was driven primarily by a reduction in favorable prior accident year reserve adjustments.
We have historically experienced considerable favorable development in this segment.
So the amount of development in recent years has been lower than the average of the past decade.
While we still booked favorable development in the quarter. Our assessment of the claims environment has made us cautious about reducing the level of outstanding reserves.
We continue to monitor increased severity trends and a handful of our legacy jurisdictions.
We also have responded to the difficult environment by setting higher initial case reserves on reported claims we booked a current accident year loss ratio of 84, 7%.
Lately from last year.
We recognized net favorable prior accident year reserve development of $7 million in the quarter.
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The claims environment that I described in detail on last quarter's call remains with us for the foreseeable future and we continue working diligently to manage losses and mitigate the impact of social inflation.
Given the current environment the impact of any change may not be obvious in a single quarter. Instead, we expect the results of our efforts to be evident over time.
Our gross written premium increased by 1% from a year ago with new business from our specialty line exceeding expectations and contributing to the topline growth.
Our strategy in the E&S and specialty market is to retain the business we like.
Reduced limits, where we can and walk away when we cannot achieve our targeted price and to be opportunistic on new accounts.
Consistent with that strategy, we were at $12 million of new business in the quarter up from $8 million last year.
The medical technology liability, new business production increase year over year, despite a very competitive environment.
Premium retention for the segment overall was 83% a point below last years as we continue to focus on price over volume.
Price competition is the largest driver of business not renewing with us.
We also continue to see health care consolidation and practice changes affecting retention levels.
And leading to the loss of some policyholder accounts in both standard and specialty Bucks.
Overall pricing in our specialty P&C segment increased by 6% in the quarter continuing to compound upon last year's 6% increase.
Underwriting expenses were down slightly from last year as we continue to focus on efficiencies and process improvements.
Systems integration and statutory to consolidation.
An increase in ceding commission, which reduces underwriting expenses contributed to the decline in expenses in this quarter.
Compensation and related costs increased in the quarter compared to the prior year.
A number of open positions have been filled.
The expense ratio of 26, 5% was slightly higher as a result of lower earned premium this quarter compared to 2022.
Turning to the Workers' compensation insurance segment gross written premium decreased by $1 million in the quarter with a challenging and competitive market impacting both retention and renewal pricing.
And our traditional business renewal pricing was down 7% and retention was 80% for the quarter we.
We saw an increase in audit premium for the quarter and increased our estimate of carry EBIT premium.
Helped offset the decrease in retention and pricing.
We also saw growth in new business in our traditional book, adding nearly $6 million of new accounts in the quarter.
The current accident year loss ratio of 72, 6% remained consistent with our Q1 loss ratio.
It was approximately a point higher than the second quarter of 2022.
A portion of this increase was due to higher head count and our claims department and the associated compensation costs, which flow into our loss ratio through unallocated loss adjustment expense.
We also saw an increase in estimated losses recognized under our reinsurance contracts annual aggregate deductible, which contributed to the increase in loss ratio.
We booked no change in prior accident year reserves compared to favorable development of $2 million last year.
This led to an increase in the calendar year loss ratio.
Expenses increased compared to last year with compensation costs travel expenses and it costs driving the increase.
The increase in compensation costs, primarily reflected a higher head count in this segment as we felt open positions.
The segment expense ratio was 35% for the quarter.
I'll finish with the segregated portfolio cell reinsurance segment, which posted a profit of just under $1 million for the quarter and the Lloyds Syndicate segment, which generated a small profit.
Now I'd like to turn the call over to Dana to share our consolidated results and some highlights from the balance sheet and investment returns Dana.
Thanks, Ned and good morning, everyone.
The second quarter, we reported net income of $10 $6 million or <unk> 20 per share and operating income of $8 $6 million or <unk> 16 per share.
The difference between the two is the impact of net investment gains.
The operating gain in the quarter reflected improved loss and combined ratios compared to the first quarter of this year, coupled with strong performance from our fixed income investments and L. P. L. L C investments.
Our consolidated combined ratio increased five points from the second quarter of 2022 with lower favorable development on prior accident years driving the change.
Improved investment results provided a four point benefit to the consolidated operating ratio.
Therefore, the operating ratio increased one point from last year.
Our consolidated current accident year net loss ratio was essentially unchanged from the second quarter of 2022.
Excluding the impact of purchase accounting and prior year ceded premium adjustments.
Primary driver behind the change in the consolidated net loss ratio for the quarter was the reduction in favorable prior year Reserve development.
In the second quarter.
In the second quarter of 2022, we recognized $19 million of favorable development in 2023, we recognized favorable development of $6 million.
The consolidated expense ratio decreased slightly to 31, 1% and was aided by an increase in tail premium earned this quarter as compared to last year's second quarter.
The ratio also benefited from a decline in transaction related costs, which were in our 2022 expenses, but not in 2023.
Excluding those beneficial effects and the impact of changes in the Deepak amortization of net premiums earned the expense ratio increased by half a percentage point due to higher compensation and travel costs.
Net investment income grew by 44% to $32 million in the quarter as our reinvestment rate has exceeded that of the maturing assets and each of the last eight quarters and our floating rate securities reset to higher yields as well.
As noted earlier the increased investment income had a positive impact on operating performance as it largely mitigated the increase in the combined ratio when comparing to last year.
In the second quarter, we reinvested maturing bond yields approximately 180 basis points higher than the portfolio's average book yield.
Equity in earnings from our investment in L. P and L. L C, which are typically reported to us on a one quarter lag increased to $8 million in the quarter.
However, the results in the quarter include the fourth quarter result of eight funds due to the timing of when those funds report to us.
As we noted in our last earnings call, we expected positive marks on the eight funds.
Net investment gains, which are excluded from operating income and drive the difference between operating and net income were $3 million in the quarter driven by $2 million in gains from the change in fair value of the contingent consideration liability associated with the norcal transaction.
Other income decreased to $2 $7 million in the quarter from $5 $3 million in the same quarter at 2022 due to changes in fair in foreign currency exchange rates and the impact of foreign currency denominated loss reserves in our specialty P&C segment.
This quarter the effect of foreign currency movements was a loss of $400000 due to the strengthening of the euro in the quarter compared to a gain of $2 $5 million in the prior year period.
Our book value per share at quarter end was $21 24 up 4% from year end driven by after tax holding gains of $24 million on our fixed maturity portfolio, which flows directly to equity.
Our share repurchase contributed 32 cents to the increase in book value.
Adjusted book value per share, which excludes $5.07 of accumulated other comprehensive loss, primarily from unrealized holding losses is $26.31 as of June 30th.
We consider these unrealized losses to be temporary as we have both the intent and ability to hold to maturity.
We're pleased to report a solid quarter, which included increasing investment income an uptick in new business and a stable current accident year loss ratio.
That concludes our prepared remarks Elliot we're ready for questions.
Thank you if you'd like to ask a question. Please press star followed by one on your telephone keypad. If you would like to withdraw your question. Please press star.
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My first question today comes from Mark Hughes with Truest. Your line is open.
Yes. Thank you good morning.
Good morning, Mark.
Sure.
You talked about kind of relative stability I think in the in the.
Byron.
Any experience in <unk> around the large claims I think the Q1 experience.
A pretty meaningful.
That extended through.
The rest of the year.
Is it a nice question Mark.
Yeah you.
In the first quarter, we had a couple of I would call very large claims that impacted the quarter. We continue across the market to see those sorts of claims occurring although we didn't have any of that occurred in our book during the quarter. So we you know we remain cautious in that regard I would I would say is an observation that while we're not necessarily.
Saying the environment getting better we're not seeing that get worse.
But have our eyes wide open as to what May come.
But.
When you think about the new business, new business seem to be up pretty strongly.
Pricing.
6% pretty consistent with prior quarters.
I guess the same question do you Wanna be pursuing new business with the in this kind of environment with the.
Current accident year loss picks are up in the mid eighties.
And it's a good question and I I mean, the short answer for US is yes, if youre if youre doing it in a way that is smart I'm going to ask Rob Francis maybe chime in on that a little bit Rob sure Hi, Mart, Rob Francis So.
Pursuing new business, obviously in a in a market, where we don't think pricing is firm can be tricky, but that's what underwriting of course, it's all about we think our success in new business over the past six months has been largely driven by our execution of our strategy, which following our integration of norcal was really two.
To reconfirm, our relationships with our with our elite and larger agency partners, and we think thats bearing fruit.
Also we are seeing some of the larger carriers.
A little bit more price discipline. They are filing for some single digit rate increases and sticking to those rate increases even if some of the smaller mutual companies regional companies are happy to undercut business. So it's a it's a pick and choose situation, but we do think there are a few opportunities out there. Thanks a lot.
Yeah.
I appreciate that and then the on the workers comp.
No.
Prior year development.
Current accident year loss picks up a little bit I'm, just looking year over year.
Can you give us a sense of what you see there and particularly is there any kind of medical inflation.
But I've been emerging.
Yeah, maybe I'll make a brief comment and then we'll get Kevin Chuck chime in.
So I believe yes, we are beginning to see inflation work its way into.
Kind of a work comp claims costs and I think as we've talked about previously you you get a nice tailwind in the beginning as compensation costs go up to drive premium up and then you're going to catch that on that.
A little bit later as a headwind as it works its way into claims costs and we're beginning to see that inflation creep and Kevin what would you add to that.
No I think thats exactly right, we've been cautious in releasing prior year reserves, because we are starting to see inflation come through the books.
Both on policies written later in 'twenty, two and into 'twenty three.
22 benefited from the topline audit premium in the industry was saying, there's a tailwind, but if our policyholders are paying workers more it will eventually go through indemnity inflation and health care workers, where wage inflation is very prevalent is ultimately going to increase the cost of care and just.
Lastly, with our claims tale being about half of the industry.
We're certainly going to see inflation before a lot of our peers. So while frequencies down the average cost per claim is up and it is being driven largely by indemnity and a little bit by by medical.
Thanks, Kevin I want to emphasize two things that Kevin or one thing that Kevin referred to and the impact I think it is in two different places.
We do have a shorter tail business than most of the work comp industry and I think that.
Causes us and allows us to recognize trends faster than a lot of the industry.
The other thing that it does though by closing clients.
High inflation environment as we avoid the compounding impact of inflation over a long period of time, because we've been able to close the clients.
I think those are both really important factors as we look at our business.
Thank you very much.
Thanks Mark.
Yeah.
Our next question comes from John <unk> with Piper Sandler Your line is open.
Yes.
Good morning.
Thanks for the call.
Wanted to ask a little bit about the.
Price increases on medical malpractice.
Practice or.
Personal auto new business.
6% seemed a little low.
Given what you've described as a pretty high inflationary rate.
And.
Is that enough to get you to a place where you can.
Moved.
Effective.
Technical margins.
Uh huh.
Or you just sort of holding still.
From a margin perspective.
<unk> business.
Yeah, Paul Thanks for the further question.
I think one of the things that it doesn't just get reflected in that rate increases. The other actions, we're taking as an organization around just the re underwriting of the book.
The business that we're walking away from.
And especially in our specialty business kind of the restructuring of some of the terms and conditions on the E&S business in particular.
When you put all that together and then you compound the rate increases that we've been achieving over the last three to four years, we feel like we are.
Getting beyond trend and then making incremental improvement in the underwriting results.
But it's just it's not going to.
And as fast as it did in the early two thousands where we were getting 30% 40% rate increases that's just not the market we live in today.
Yes.
Is the same true on Workers' comp business do you think you are raising rates faster than the underlying claims inflation rate as well or.
I think we Arizona timeframes on that issue.
Yeah, and then maybe Kevin can chime in but.
But we we were not raising rates and comp right now rates are coming down in comp.
But we think we're controlling the way they are coming down and have been controlling the way they've been coming down over the last number of years I think when you look at kind of rating Bureau, our indications and Kevin I'll Correct me when I go astray here, but you know we're on.
Eight or something years of rate reductions.
And the work comp market and if you just took those indications.
Rates in the in the pro assurance book would be far lower than where they are today as an individual account underwriter using a lot of underwriting adjustment we've held against a lot of that declining trend.
We do recognize that the decline in loss cost justifies the decline in rate.
But we're holding where we think we need to hold Kevin I may have misstated some of that any anything you'd add.
No nothing to add.
Alright. Thanks.
Great. Thank you I'll help as always I appreciate it.
Thanks, Paul.
Our next question comes from Bob Farman with Janney. Your line is open.
Hey, there good morning.
A couple of questions one on the workers comp segment, it's more of a more of a broad view so the workers comp.
Line.
For the industry has done pretty well over the last decade, or so but it seems like you guys have had a hard time generating any meaningful underwriting profit.
Several years now so I'm just curious.
What's the primary difference between your book and maybe the overall book is it just the shorter tailed aspect of it and you're recognizing the severity trends or is there something else that's going on that's creating a less profitable.
Most profitable books in the industry.
Yeah, Bob It's a great question and I think it is essentially what you said, which is where we are closing claims faster, which I think means that we are kind of opening up to some of the things that are happening in the loss environment and costs and the loss environment, perhaps faster.
And then some of the industry will ultimately recognize them.
As to the mix of business I don't think Theres anything particular to our mix of business is vastly different in fact, because we right.
Largely more so.
Suburban and rural risks and smaller employers generally has his favoured.
The loss environment, where you've kind of got a more heart more wholehearted effort to get <unk>.
<unk> workers back to the wellness and the dignity of work.
Kevin what would you add to that.
Yeah, absolutely Bob it's really all how we have recognized prior year development and booked our accident year loss ratios more precisely because of that shorter claims tail. So if you think about the industry depending upon the research that you read.
Calendar year combines our 90 192 estimates for 'twenty, three but Theres 15 points 14 points of favorable development, which means the accident year combined are 104 to 108.
When we look at our book of business and did this at the end of 'twenty, two and we compare our accident year loss ratios over the last five years to the industry. We're still several points better. So I think it's the acceleration of the development that we've already taken in the past more precise accident year loss rate.
<unk> and the industry.
<unk> being slower from a claims perspective, when it comes to a favorable development. So.
Okay, So when youre, saying, so 72, and a half or so that you're booking thus far this year, you're saying.
Current accident year loss ratio, you're thinking that's that's actually decent relative to the industry at least it appears that you go against.
No that's correct and keep in mind when the industry historically has booked and again lately 14, or 15 point historically eastern has booked three or four points.
So I do think that is the biggest difference.
Okay, great. Thanks for that color and the second question I had.
On the on the segregated portfolio cell reinsurance now this may be something better taken offline, but but I was just curious.
The underwriting performance of the portfolio to sell.
Segment.
It's done really well for some time, so I could go back. So I was just curious what makes what makes the underwriting results in that segment much stronger than in the specialty P&C in the workers' compensation segments.
I think it's the way that we share risk right I mean, there's more skin in the game for all of the participants spirit accompany on captive, where they're taking risk or an agency on captive where we're sharing risk alongside an agency partner.
Everyone is sharing more fully and that risk I think that leads to better results.
Okay, Alright that makes sense alright.
Alright, that's it for me thanks for the color guys.
Thanks, Bob.
As a reminder, if you'd like to ask any further questions. Please press star one on your telephone keypad now.
<unk> <unk> with JMP.
Understood.
Thanks, Good morning.
Good morning, Matt.
I was hoping you could just give us a little more color around the competitive environment, just trying to get a feel for two things.
One is.
When you guys are competing for business is it.
One or two kind of.
Aggressive outliers that are proud of.
Garnering market share or are you guys. The outlier on the high end of this most of the rest of the market that is less interested in making a profit.
And then when you do win business.
You guys are obviously very well known for kind of that your reputation of standing by your Insureds and.
Defending them.
In the past I think you've talked about how there is some amount.
People are willing to pay for that.
Did you find that is the same now or better or worse.
Yes so.
On the on the first question around the competitive environment I don't think the environment is kind of symmetrical as you're you're hoping to make it really is almost down to a risk by risk.
And who competes on a particular arrest that can be driven by geography. It can be driven by the type of risks are there.
It does.
To kind of Echo what Rob said earlier, we are beginning to see kind of larger carriers that are.
Showing greater price discipline.
But we continue to have a number of very well capitalized mutual companies that that are willing to chase price down to levels that we think.
Don't make a lot of sense and kind of who is getting involved in any one.
Risks.
Barry so.
Sometimes we are going to be the outlier because we're going to be the higher price. We do see that frequently I think that's in part why you're seeing 83%.
Retention in the quarter.
And other times, we are gonna find risk, where our service model allows us to charge a higher price than south.
You know the the Insureds that we are.
Selling to today are different than in a lot of ways from the insurance of 10 plus years ago, and so the value proposition.
Can and does change for for larger more complicated ensure.
Insureds do that hospital systems are very very large groups of physicians that defense, while very valuable, especially and just our ability to work up claims even if theyre not going to go to trial I'm just the diligence that our claims team puts into.
Understanding and researching and finding experts around claims continues to add value. Even if you don't plan to go to trial, but the desire to go to trial.
Across the entire book I'd say is less today than it was 10 years ago.
Okay fair enough. Thank you very much.
Thanks, Matt.
This concludes our Q&A I'll now hand back to Dana Hendricks CFO for closing remarks.
Okay, well. Thank you to everyone that joined US today, we look forward to speaking with you again on next quarter's conference call.
Ladies and gentlemen, today's call is now concluded. Thank you for your participation you may now disconnect your lines.
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