Q3 2024 ProAssurance Corp Earnings Call
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Speaker Change: Good morning everyone, welcome to ProAssurance's conference call to discuss the company's third quarter 2024 results. I would like to remind you all that the call is being recorded and there will be time for questions after the conclusion of prepared remarks.
Speaker Change: Now I will turn the call over to Heather Wetzel. Heather, please go ahead.
Heather Wetzel: Good morning, everyone. ProAssurance issued its news release, investor presentation, and report on Form 10-Q on third quarter results yesterday, November 7, 2024.
Heather Wetzel: 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 ProAssurance's business and alter expected results. Please review those statements.
Heather Wetzel: This morning, our management team will discuss selected aspects of the results on this call, and investors should review the 10 Q&A news release for full and complete information.
Heather Wetzel: We expect to make statements on this call dealing with projections, estimates, and expectations, and exclusively identify these as forward-looking statements within the meaning of the U.S. federal securities law and subject to applicable safe harbor protections.
Heather Wetzel: The content of this call is accurate only on November 8th, and except as required by law or regulation, ProAssurance will not undertake and expressly disclaim any obligation to update or alter information disclosed as part of these forward-looking statements.
Heather Wetzel: We also expect 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.
Heather Wetzel: On the call with me today are Ned Rand, President and CEO, and Dana Hendricks, Chief Financial Officer. Also joining on the call are Executive Leadership Team members Rob Francis, Kevin Shook, and Karen Murphy. Now, I'll turn the call over to Ned.
Ned Rand: Thank you, and I'd like to start by welcoming everyone to our call.
Ned Rand: Yesterday, we reported operating earnings for the third quarter of 17.3 million dollars with 34 cents per share, reflecting the 99.5% combined ratio for our specialty P&C segment, which is predominantly made up of our medical professional liability business.
Ned Rand: The segment's combined ratio benefited from 10.5 points of favorable prior accident year reserve development as we saw claims closed favorably relative to our expectations for accident years 2018 and prior in the ProAssurance legacy business.
Ned Rand: as well as for accident year 2021 for our NorCal book.
Ned Rand: In addition, the current accident year net loss ratio improved by almost one point from last year. But that gives only a glimpse of the progress we are making.
Ned Rand: Since 2019, the accident-year loss and LAE ratio has improved more than 20 points, reflecting the impact of the re-underwriting efforts and renewal premium increases we have obtained, plus the benefits of other strategic initiatives.
Ned Rand: We're pleased to be seeing actions we have taken over the past several years generate positive outcomes.
Ned Rand: As we previously noted, about five years ago, we recognized and began responding to rising medical professional liability severity, driven by social inflation and eroding tort reforms that were affecting the loss environment.
Ned Rand: We believe we have stayed ahead of many in the space in achieving rate levels in NPL that outpace severity trends that continue to be challenging.
Ned Rand: We also continue to forego renewal and new business opportunities that we believe do not meet our expectation of rate adequacy in the current loss environment.
Ned Rand: We are encouraged that retention of existing insureds remained a solid 84% in the quarter, with strong retention of the more profitable small to mid-sized accounts, reinforcing our relevance in the market.
Ned Rand: New business continues to be impacted by our focus on rate adequacy, and was below last year at $8 million.
Ned Rand: Along with our pricing actions, we remain intently focused on disciplined underwriting in managing claims to address market conditions.
Ned Rand: Innovation tools also continue to enhance our risk selection, pricing decisions, and workflows.
Ned Rand: Work is ongoing to maximize the use of predictive analytics to leverage our extensive data and to identify geographic markets and specialty subsectors where there are opportunities to write business that we believe will meet our profitability objectives.
Ned Rand: We're also committed to ensuring that our insured and distribution partners find us easy to do business with, helping distinguish us in the marketplace.
Ned Rand: In the next six weeks, we'll be launching a new web portal on an AI-ready platform that delivers a variety of enhanced self-service options for policyholders and agents, such as real-time credentialing.
Ned Rand: Next year workflows across the group will be enhanced by using the new system functionality and we'll start revising forms and manuals to improve engagement and efficiency.
Ned Rand: Turning to our workers' compensation segment, we continue to observe and to address the higher medical loss trends that we initially saw in mid-2023, although they have begun to moderate this year.
Ned Rand: In addition, we believe our focus on operational discipline is having a positive impact. For the quarter, the segment's current action-to-year loss ratio was about 4 points below the full-year 2023 ratio, and it was 6 points below last year's third quarter.
Ned Rand: We continue to carefully manage our underwriting appetite as we work to obtain the necessary rate, with net written premiums up only $2 million due to higher audit premiums.
New business was below last year at $3 million.
Ned Rand: We also continue to leverage our investment in a new integrated policy, claims, risk management, and billing system implemented earlier in 2024.
Ned Rand: Not only is that system working well, it is paving the way for innovation initiatives that will help us address the challenging market conditions.
Ned Rand: where we will be using AI along with underwriting and claims data analytics to enhance profitability, productivity, and efficiency.
Ned Rand: Last quarter I mentioned one innovation project, our partnership with Workers' Comp Claims Specialist Clara Analytics.
Ned Rand: Claire is ramping up with our systems and will be on board this quarter to help us enhance medical outcomes for injured workers, improve our case reserve estimation capabilities, and lighten the administrative burdens of our claims professionals.
Ned Rand: And that's just one example of what's underway in this segment. We're also making innovation investments in proprietary underwriting tools that expand the use of data analytics to guide and support operational decisions, improving penetration in a more profitable small account market segment.
Ned Rand: Across the organization, our attention remains intently focused on our long-term objectives and the results that we need to achieve. We are pleased with our progress this quarter, and we are continuing to choose to shrink our book in some markets while we wait for conditions to improve so that we can then turn our focus to growth.
Ned Rand: We will not compromise to achieve a short-term fix at the expense of protecting our balance sheet and our insureds over the long term.
Ned Rand: Our long history in both medical professional liability and workers' compensation has taught us that these cyclical lines will respond to our focused efforts, as demonstrated this quarter. We remain confident in our ability to ultimately achieve sustained underwriting profitability in both businesses, despite market headwinds.
Speaker Change: We know that maintaining our discipline is key to delivering positive long-term results. I think you'll see more signs of our progress as Dana looks further into the results. Dana?
Dana Hendricks: Thanks, Dan. I'm going to dive a bit deeper into aspects of the specialty P&C and workers' compensation segments and overall results before turning to investment.
Dana Hendricks: As expected, net written premiums for the specialty P&C segment declined, in part because of our decision to discontinue participation in Lloyds.
Dana Hendricks: Ned talked about the factors that contributed to lower medical professional liability premiums as well as the strategic initiatives that are leading to an improved net loss ratio.
Dana Hendricks: For workers' compensation, the trend in renewal rate change remains favorable, rising about two points for the quarter because of a large account that renewed at a higher level than last year.
Dana Hendricks: The increase in net written premiums was largely due to higher audit premiums that reflect continued wage inflation.
Dana Hendricks: The segment's combined ratio is 111%, with the current accident year net loss ratio at 77%, or four points below full year 2023.
Dana Hendricks: With the improvement in the loss ratios across all lines of business and in consolidated operating earnings, we are seeing higher incentive-based compensation costs compared to last year. This is leading to an increase in the expense ratio, despite an overall reduction in headcount.
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Dana Hendricks: Turning to investment results, we had another solid quarter. Net investment income rose by $5 million, or 14%, as we continue to take advantage of this rate environment.
Dana Hendricks: The Fixed Maturity Portfolio remains high quality, with 93% in investment grade bonds, with an average duration of 3.2 years. We continue to manage our asset duration to largely match that of our liabilities and to optimize our portfolio to generate yield.
Dana Hendricks: Our investments in limited partnerships and LLCs, reported as equity in earnings of unconsolidated subsidiaries, added another $5 million to earnings. These typically report on a one-quarter lag, and they are continuing to produce strong results.
Dana Hendricks: As we previously discussed, our tax credit partnership investments are nearing the end of their life cycle, and the associated operating losses and related tax benefits are generally expected to be nominal.
Dana Hendricks: Reported book value per share has risen by over $2 since year-end to $24.07 driven by earnings per share of $0.71 and the change in accumulated other comprehensive income of $1.56
Dana Hendricks: largely due to after-tax holding gains of 77 million dollars on our fixed maturity portfolio, which flows directly to equity. Adjusted book value per share has also increased to $26.52.
Dana Hendricks: Our portfolio still includes a number of fixed maturity securities in an unreliable position.
Dana Hendricks: We have both the intent and ability to hold these securities until maturity, so should bond yields decline, or as our portfolio matures, those unrealized losses will accrete back to book value.
Dana Hendricks: Further, there is upside because our current investment leverage is three times GAAP equity.
Dana Hendricks: To close, let me reiterate that we remain committed to protecting our balance sheet and our insureds over the long term.
Dana Hendricks: We are seeing signs that our actions are delivering positive results and that pricing levels are meeting our objectives. We will continue to be intentional on capital management.
Thank you.
Thanks, Tana.
Speaker Change: I just want to remind everyone that we know there is more to be done to achieve our long-term profitability objectives, but we are encouraged by the progress we are making, with nine-month operating earnings of 64 cents per share. We expect continued progress and look forward to sharing results in coming quarters.
Speaker Change: Thanks, Ned. That concludes our prepared remarks. Operator, we're ready for questions.
Speaker Change: Thank you. Of course, if you'd like to ask a question, please press star followed by one on your telephone keypad.
Speaker Change: If you'd like to withdraw your question, please press star followed by 2. When preparing to ask your question, please ensure you're unmuted locally. As a reminder, that's star followed by 1 on your telephone keypads now.
Speaker Change: Our first question comes from Maxwell Pritchard of Truist. Maxwell, your line is open, please go ahead.
Thank you.
Speaker Change: Yeah, Kevin, could you give some details around that? Because I know there's some pieces to it.
Speaker Change: Yes, so in our workers comp insurance segment the rate for the quarter was positive 2.3 percent. It was driven by one large renewal and without that renewal the rate for the quarter was minus 0.5 percent.
Speaker Change: Okay, perfect. Thank you. And then just a question about the competitive environment you're seeing in the physician's business. Have you noticed any change in the behavior from the mutual companies?
Speaker Change: No, I would not say any significant changes in the marketplace in the last quarter or so.
Speaker Change: And then, just a little more color on what you're seeing in the same line, the medical professional liability back book that's driving these reserve games.
Speaker Change: So, yeah, I think it's essentially what we laid out in our comments, which is as we've been closing claims in those older years, we're closing them at levels kind of that exceed our
Speaker Change: reserves and our expectations of where those claims might close. So as that happens, we gain greater and greater confidence in kind of how that book is ultimately going to mature.
and that's really what it's driven on.
Okay, understood. Thank you.
Speaker Change: Thank you as a reminder if you'd like to ask a question please press star followed by one on your telephone keypad
Speaker Change: Our next question comes from Paul Newson of Piper Sandler. Paul, your line is open, please go ahead.
Paul, your line is open, please proceed with your question.
Good morning. Thank you for the call.
Speaker Change: I've got a couple of bigger picture kind of questions. The first one is this. If you look at both your specialty business and the workers' comp business, I would imagine that you have order rate.
Speaker Change: the business basically policy by policy based upon the technical rate of versus what you're actually getting.
Speaker Change: And my question is, you know, if you do that kind of analysis, you know, what kind of percentage of the business?
Speaker Change: is sitting in a place where it's not really achieving your targeted returns versus what is, you know, the kind of core business it really is.
Speaker Change: and I'm trying to get at whether or not we're still looking at a business or we've all ever been looking at a product portfolio where it's a fairly small part of the business that's driving the underperformance versus if it's something that's more broad-based.
There's a lot to unpack in that question, Paul.
Speaker Change: So, maybe we'll take it in kind of three big chunks and ask my team to jump in where I go astray.
If we think about the physician business,
the specialty business.
Speaker Change: And kind of breaking it down probably more at a state-by-state level as opposed to order ranking of individual policy level. There are certainly states where we feel very comfortable with the rates.
Speaker Change: But there are still a number of states where we believe more rate is needed.
Speaker Change: And as we work to complete the year and as we look forward to 2025, we will continue to be driving rate, in particular in those states where we think more rate is needed.
Speaker Change: Within the specialty health care side of the book, I would say that you know that's the area where where we continue to push rate 18% in this last quarter but more rate is still needed there.
Speaker Change: I think what's really important for our book of business within that is not just the rate, but it's the underwriting decisions. We're making
Speaker Change: and the classes of business and the individual risks that we're willing to ensure. And that is, I would say there's more re-underwriting of that business that happens on an annual basis than there is in the physician book, just because it's a more dynamic.
Speaker Change: part of the business that changes more frequently, but definitely more right there. And then in the work comp space,
Speaker Change: We've looked hard at this, and it's really not an individual state. The challenge in work comp is the decline in frequency over the last 10 years has led to this push down.
Speaker Change: pretty dramatic in certain marketplaces of lost cost multipliers and lost cost factors.
Speaker Change: We think, by and large, the industry's overshot the mark on that, and there is a need to push rate up in the marketplace, and that's certainly the efforts that we're undergoing. I would say that that's broad across the whole work comp space, in our view.
Speaker Change: And then, I'm sorry, do you have more you want to add to that, or do I have a second question?
No, go ahead, Paul.
Paul Newson: My second question is different. Looking at the expense ratio, if you look at 24 versus 23, and obviously 24 is not completely over, it looks like you're increasing the expense ratio by, you know, a little bit under two points.
Paul Newson: And I would assume that most of that, if we look at the nine months, may be just a higher compensation as the business recovers its profitability.
Paul Newson: So, my second question is that if, let's call it when, ProAssurance reaches its targets,
Paul Newson: How much of that expense ratio could, how much could the expense ratio rise if you hit, you know, the kind of ROE targets that you will do in the future?
Speaker Change: A lot there as well. So let me just touch on two things about the kind of the current expense ratio. I remind you that last year we had the benefit of employee credits coming out of COVID, I believe, and that had an impact in bringing down
The expense ratio in 2023.
Speaker Change: In 2024, we do have higher compensation costs that are tied to our short-term incentive plans.
Speaker Change: But those plans are designed to ensure that the vast majority of any increase in profitability goes to our shareholders, but that our employees do benefit as we improve our results.
Speaker Change: I don't know that I have a great answer for you kind of looking out.
You know, it's a challenge when
Speaker Change: I don't know, Dana, if you've got any more detail to provide on that. I don't think we would anticipate a significant increase in the expense ratio in the fourth quarter.
Speaker Change: certainly, kind of based on what we know today. And then looking at into 2025, I think it's going to be kind of that tug of inflationary trends on payroll and the efforts we have underway to
Speaker Change: to manage headcount and other expenses. But I don't have a specific number for you, Paul. I'm sorry.
No, I think you're actually...
Edward Hendricks, Edward Rand, Edward Hendricks, Edward Hendricks, Edward Hendricks,
Speaker Change: Sorry Paul, I believe we lost connection with your line there.
No, I was just thanking them for the answers.
Thanks, Bob.
Speaker Change: Perfect, thank you. We currently have no further questions registered on the telephone lines. Apologies, we've had a late question registered from Bob Barnum of the Cheney. Bob, your line is open, please proceed with your question.
Speaker Change: Question for Kevin, I know you spoke about medical trend, medical cost inflation moderating this year, but it's still remaining high.
Speaker Change: Asking if maybe you can provide a little bit more color as to what you saw last year, what you see this year, how much has it come down?
Speaker Change: Maybe just numbers, what inflationary trends are you assuming in the business right now?
Speaker Change: You know, it's a multiple of a state where the fee schedule is based off of Medicare.
Speaker Change: A mix of injuries, average severities up slightly, but in line with the industry.
Speaker Change: And we are seeing increases in utilization, notably in Pennsylvania through vertical integration. There was a study that we referenced a couple quarters ago on vertical integration.
Speaker Change: Pennsylvania is listed as one of the top companies or top states excuse me with respect to health care being very vertically integrated which naturally increases utilization and then you know
Speaker Change: All of that is exacerbated by an aging workforce where older workers get injured more frequently and more severely. So, you know, those are hopefully some helpful points for you.
Speaker Change: Yeah, no, that's good color. Thanks. So I don't want to just blame Pennsylvania, but it's Pennsylvania, like I would say it's a key state for you. So is that one of the the key drivers of kind of where you're seeing?
Speaker Change: higher inflationary changes than maybe peers are. I understand you have a, you know, your book has a shorter tail.
Speaker Change: Maybe others haven't seen it yet, but we're always trying to try to figure out how your book is different than others And it could be you know Pennsylvania could be one one of the big factors
Speaker Change: If you were to look them up in Pennsylvania, it is definitely having an impact. When I look at the last three years of increases in Pennsylvania, the fee schedules are up about 14, 15 points.
Speaker Change: and and look we're underwriting for it so it's as Ned said it's not a state that we don't want to do business in it's just a state that we got to be very very careful around and it is a large piece of our of our book of business
Speaker Change: Thanks Kevin, I do want to say, while we are seeing that in Pennsylvania, and it is not exclusive to Pennsylvania, the overall trends that we talk about we're seeing across the entire footprint.
Speaker Change: Yeah, totally agree. I didn't mean to just blame Pennsylvania for it, but like you said, we're trying to dig around, trying to figure out what's going on.
Great. Thank you, Edward.
Speaker Change: Thank you. We have no further questions registered via the telephone line so hand back over to Heather Wetzel for any closing remarks.
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Heather Wetzel: Thank you and thank you to everyone who joined us today.
Heather Wetzel: Feel free to reach out if you'd like to arrange for additional conversation. And I would flag we're scheduled to be part of several virtual events in the coming weeks. So if you'd like to know any details on those, reach out. And of course, we look forward to speaking to you again on the year-end call. So thank you. Appreciate it.
Speaker Change: Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.