Q1 2024 ProAssurance Corp Earnings Call

Participants

Heather Wietzel; SVP, Investor Relations; ProAssurance Crop

Edward Rand; President, Chief Executive Officer, Director; ProAssurance Corp

Dana Hendricks; Chief Financial Officer, Executive Vice President, Treasurer; ProAssurance Corp

Robert Francis; President of Healthcare Professional Liability; ProAssurance Corp

Kevin Shook; President, Workers Compensation Insurance and Eastern Subsidiary; ProAssurance Corp

Matt Carletti; Analyst; JMP Securities LLC

Bob Farnam; Analyst; Janney Montgomery Scott LLC

Mark Hughes; Analyst; Truist Securities, Inc.

Presentation

Operator

Good morning, everyone, and welcome to ProAssurance's conference call to discuss the company's first quarter 2024 results. 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. Now I will turn the call over to Heather Westel.

Heather Wietzel

Morning, everyone. It's a pleasure to be here today. Proassurance issued both its news release and report on Form 10-Q and first quarter results yesterday, May 6, 2024. 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 this morning.
Our management team will discuss select selected aspects of the results on this call and investors should review the 10-Q and news release for full and complete information. We expect 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 US federal securities laws and subject to applicable safe harbor protections. Content of this call is accurate only on May 7, 2024, and if And except as required by law or regulation, ProAssurance will not undertake and expressly disclaims any obligation to update or alter information disclosed as part of these forward-looking statements. 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.
On the call with me today are Edward Rand, President and CEO; and Dana Hendricks, Chief Financial Officer. Also joining on the call today are Executive Leadership Team Members Rob Francis, Kevin Shook and Karen Murphy now I'll turn the call over to Ned.

Edward Rand

Thank you. And I'd like to start by welcoming everyone to our call in welcoming Heather to ProAssurance, we reported operating earnings in the first quarter of $0.08 per share, benefiting from a 6 point improvement in the calendar year loss ratio at a 12% increase in investment income. We remain focused on driving underwriting improvements, which can be seen in the three point improvement in our current accident year loss ratio. The markets we operate in continue to be challenging and we remain cautious about both the risks we underwrite and loss cost trends.
We are focused on achieving pricing levels that help move us toward our long-term profitability goals. And believe we are continuing to get rate beyond loss cost trends. We saw solid progress toward our objectives in the quarter with strong retention of existing insurance. We continue to forego new and non-renew existing business that does not meet our underwriting criteria.
Loss environment in the medical professional liability market continues to be challenging in many jurisdictions with the resumption in the fourth quarter of 2022 of the pressure on claims costs from social inflation and higher than anticipated severity trends had initially emerged in 2019 and 2020, but abated during the pandemic. We continue to monitor the impact that these trends could have on our open case reserves and prior year development, but are confident in the actions we're taking to address market conditions, reinforcing the importance of our underwriting stance, we are continuing to see the impact of higher medical cost per claim in current workers' compensation claims trends, a trend we believe the broader workers' comp market must ultimately address.
Despite continued moderation of claim frequency. The average medical cost per claim is still rising due to health care wage inflation, higher utilization and rising costs as new treatments and technologies are applied to patient care, confirming our view in a study published in December 2023, the Workers' Compensation Research Institute described the impact on payments per claim of vertically integrated providers, which represents an ever-growing share of the market.
The study noted that workers treated by these providers received more medical care and saw more providers increasing payments per client by more than 10% at 12-months of maturity without meaningful, meaningfully changing outcomes. Since we closed cases on average, 40% faster than the industry, we can observe and respond to trends more quickly in our book of business.
We're using the insights we've gained under. We've gained.
We're gaining to underwrite accordingly. We're convinced the impact of higher medical utilization will be seen industry-wide in the coming quarters. The bottom line is that our long history in both medical professional liability and workers' compensation has taught us that these cyclical lines of insurance will respond to our focused efforts. We remain confident in our ability to ultimately achieve underwriting profitability in both businesses.
However, as I said last quarter, the current market conditions are a headwind, keeping us from achieving that goal as quickly as we would like. These conditions will likely require us to shrink our book in some markets while we wait for conditions to improve and begin to turn our focus to growth, but we will not compromise to achieve the short term fix at the expense of protecting our balance sheet and our insured's over the long term, we know that maintaining our discipline will be key to delivering the positive long-term results we believe we can achieve. I think you'll see signs of our progress and Dennis' remarks as she takes a closer look at the segments.

Dana Hendricks

Thanks. Then let me start with the Specialty P&C segment. The segment's top line is a good example of the progress. Ned mentioned gross premiums written declined $3.6 million quarter over quarter, driven by our non-renewal of a large account. We retained 86% of policies eligible for renewal, maintaining our disciplined underwriting and pricing criteria to achieve an average rate increase of 7%.
We were able to generate $10.4 million of new business priced at rates that move us toward our long-term profitability goals. We're also seeing the benefit of our risk selection, where we're leveraging our expertise in this sector to identify segments of the medical professional liability market that could yield opportunities for greater profitability.
Another example is the segment's current accident year net loss ratio, which improved almost five points as compared to last year's first quarter. This also demonstrates the positive effects of our ongoing application of our underwriting and pricing guidelines as well as our effective claims management strategies in the quarter we recognized net favorable prior accident year reserve development of $1.3 million, primarily attributable to purchase accounting amortization related to the NorCal transaction. Last year's first quarter included $7.4 million of unfavorable development, primarily the result of several large verdicts. As a reminder, we performed a more in-depth review of prior year reserves on a semiannual basis in the second and fourth quarters.
The increase in the quarter's expense ratio was primarily due to the impact of beneficial items in 2023, including a $3.8 million payroll tax refund from the employee retention credit programs and a decrease in the fair value of the contingent consideration liability related to the Nortel acquisition.
First quarter segment results also reflect our participation in Lloyd's with the one quarter reporting lag. This business will be in runoff beginning in the second quarter with activity for open underwriting years prior to 2024, earning out over the next few years.
The theme of disciplined operational strategy continues in our Worker's Compensation segment. For state loss cost reductions are continuing to drive compounded premium rate decreases. We continue to believe the current market conditions require extraordinary dedication to premium adequacy and risk selection. We saw a small decline in top line premiums for the segment of approximately $800,000 despite a slight reduction in policy count. Premiums in the traditional book were approximately $3 million higher for several reasons.
First, we're seeing higher reported insured payrolls and positive mid term policy endorsements, plus we renewed several policies as traditional business that were previously written in a captive program. In the Segregated Portfolio Cell Reinsurance segment, we retained 87% of existing policies at rates that we believe move us toward our long-term rate adequacy goals. The $8.2 million of new business was added selectively The segment's first quarter accident year loss ratio was below full year 2023, although higher than last year's first quarter due to the medical cost trends that Ned discussed. We believe our caution around the current claims environment and our focus on operational discipline is beginning to be reflected in results. There was no change in prior accident year reserve estimates in the first quarter of 2024 for this segment. The underwriting expense ratio was higher than the prior year quarter, primarily reflecting an increase in compensation related costs in the current quarter and the impact of an increase in our above estimate in last year's first quarter.
Turning to investment results, net investment income rose by $4 million or 12% quarter over quarter as we took advantage of the rising rate environment. New purchase yields in the quarter were 5.6% or 220 basis points higher than our average book yield. We also recorded a $3 million gain in equity and earnings from our investment in LPs and LLCs compared to an $800,000 loss in the year ago quarter. Book value per share was $21.82 with approximately [4 million] excuse me -- $4 per share of embedded unrealized holding losses. We have both the intent and ability to hold the related securities until maturity. So those unrealized losses will accrete back to book value as the portfolio matures.
As Ned said, we are committed to protecting our balance sheet and our insurance over the long term, we are seeing signs that our actions are beginning to achieve pricing levels that meet our objectives, and we will continue to be intentional on capital management. Heather?

Heather Wietzel

Thank you, Dana, Ned, any final comments?

Edward Rand

Thanks, Joe. I'd simply like to reiterate that we're pleased to report profitability in the quarter that we know there's more to be done and that we understand the urgency of achieving that goal. But I'll say again, we will not take shortcuts to get their.

Heather Wietzel

Thank you. That concludes our prepared remarks. Carrie, we're ready for question.

Question and Answer Session

Operator

(Operator Instructions) Matt Carletti, JMP.

Matt Carletti

Thanks. Good morning and Ned, you talked a bit about your morning. Maybe talk a bit about how about a year ago, you kind of saw kind of social inflation and severity really kind of spike back up coming out of that pandemic and some of the actions you guys took Can you update us on how the competitive environment might have changed kind of over the past year or so kind of over that timeframe?

Edward Rand

Yeah, happy to Matt. And to jump in as well. But what I would say is that it that it is inconsistent and from a competitive environment, a lot of our competitors, as you know, are mutuals that have accumulated a lot of capital as a consequence, generate a lot of investment income and as a consequence of that are willing to write at levels that we think are not appropriate. But we do, I think and market scenarios See what I would call more rational pricing decisions. And then we maybe were saying 12-months ago, it's kind of territory by territory and segment-by-segment. Robert, anything you might add to that?

Robert Francis

Thanks, Ned. I would concur with that overall. And generally speaking, what we saw was coming out of the pandemic, there was some some small rate increases, I won't say universally, but many companies were taking small rate increases and certainly taking a little bit harder look at their larger accounts, which were which were more underperforming. Unfortunately, they're taking rate increases that were probably half or a third of what they actually needed so on because they didn't want to lose that business. But it was moving in the right direction that softened a little bit in '23. We think because of the additional investment income, as Ned mentioned, they did and they don't have the same underwriting profit goal. They have an overall operating profit goal. And so that softened a little bit in '23. We do believe that the larger carriers are maintaining a better level of discipline, but the mutual carriers are still living in. It's sort of a world of a few years ago.

Matt Carletti

Right. Some very helpful color. Thank you.

Operator

(Operator Instructions) Greg Peters, Raymond James.

Hey, good morning.
This is Sid on for Greg. On you called out being ahead of recognizing some of the severity and the workers' comp line and with the rate decreases, I'm just curious how you see the rate environment playing out.
If you think the market could get to an inflection sometime?
No, over the next year or two?

Edward Rand

It's a great question Sid we do think it needs to get to that inflection point. The decline in pricing has really been frequency driven. And I'm fairly certain frequency is not going to zero. And so it's really when that severity trend kind of crosses over that frequency trend that you have to watch for. In our view, while we continue to see frequency improvements and benefit from that frequency trend, we kind of think we're at a point where that severity trend is being more meaningful, and we don't see that reflected in a lot of the market yet. And we think that we think that point is coming regardless of your view on frequency and the impact that it's having, I think the severity trends and and medical care are unquestionable and something that everybody has been the Phase.

Great.
Thank you.

Operator

(Operator Instructions) Dan Fannon, Janney.

Bob Farnam

Thanks. It's [Bob Farnam]. I had a question about the Specialty P&C segment and in regards to social inflation, and then I'm just curious if there are things you can do to address social inflation that are not just raising rates?

Edward Rand

It's a good question, Bob. And it's probably a long answer. So yes, there certainly are things. I think there are things that we can do and how we approach claims. So there's things that we very, very directly can control and kind of finding that balance and refining that balance between claims, you take the distance and claims that you choose to settle and that can have an impact obviously on the ultimate cost of the claim from an underwriting standpoint down price, obviously the risks we choose to write the territories we choose to write and to make a difference as well. I think then the question really then goes to what can be done about kind of social inflation and how can you perhaps turn the tide of social inflation and that's a much more complicated question.
A lot of in my view, a lot of what happens or is happening right now is just driven by kind of societal views of what [$1] worth of societal views of the need to compensate injured parties, regardless of who might be at fault. And so there are a number of those sorts of issues where I think as an industry better, better end forming and the public about what our product is and what we do and how doctors practice and the safety focus that doctors do have to trying to turn some of that tide is important.
I think as an industry, the insurance industry also could do a better job of communicating the value that we provide to society because we're often made the bad guys.
And I think the fact that we are kind of the grease that allows commerce to happen gets lost. And so I think there's a narrative that we need to trying to recapture both as a healthcare industry as an insurance industry that can help improve that.
And then there's tort reform, right? And there's a there's a whole narrative things within tort reform. When we talk about tort reform, I think people minds automatically go to caps, but there's so much more involved there on some of it is around disclosure of litigation funding. Some of it is around putting parameters around life care planners and the plans and how they develop the plans and making sure that what they're putting forth is rational and realistic. And so yes, there are a lot of things that we, as an industry are looking at and that we are working to address and then there's things within the organization that we can do as well.

Bob Farnam

Are there other geographic areas that you're in that you'll see some progress in those in those regards?

Edward Rand

I would say that there are there geographic areas that we think are more stable and predictable. And there are those that are less stable and predictable yet. But I think that that delineation is harder to see today than it was 10 years ago, 10 years ago. I think you could say here the 10 really bad jurisdictions. And if you were to kind of see where large verdicts were coming from. That was highly probable that they were coming from one of those 10 jurisdictions. And that's not the case today. There's it's a little more haphazard and a little more unpredictable. But there certainly are markets that we feel better about. We feel better about where our pricing goes and better about the litigation environment and there are others that we are much more cautious about.

Bob Farnam

Okay. Great. That's good color.
Thank.

Operator

(Operator Instructions) Mark Hughes, Truist Securities.

Mark Hughes

Yes, thank you. Good morning. Ned, do you think the new tools are they are doing cash flow underwriting just I think with their positions generally overcapitalized, are they just taking advantage of the higher interest rates and maybe we need to turn in the Fed in order for them to be less competitive? What do you think about them?

Edward Rand

Yes, I think it's really investment income driven. As Rob mentioned, they can write to a higher combined ratio and still turn on underwriting for an operating profit and they're very focused on that operating profit. I think a challenge, though, for them will come in that if you consistently underprice the market year over year over year, that gap to good pricing compounds every year. And so if you're not keeping up with trends and if you're running well below trends, when you finally have to get back to adequate pricing, the jump you have to make can be quite considerable. And I think that will present a challenge for them at some point. But for right now, yes, they are able to generate a lot of investment income, it offset underwriting losses.

Mark Hughes

And then I'm sorry if I missed this in the earlier commentary, but when you think about the improvement in the current accident year loss ratio in the of the healthcare business. Will you kind of break apart what were the components of that improvement in price terms and conditions of claims experience?

Edward Rand

Yes, I would say it's so for us when you're when you're looking at kind of earned premium in the quarter that you don't have a lot of claims there detail, you know, the number of claims that you've received, but you don't have a lot of detail around those claims. So this is more driven has been driven in part by that rate. So the experience we're seeing in the first quarter, but it's also driven by the pricing gains that we made when we wrote that business 12-months ago. And our belief is that pricing trend, the pricing gains we've got are in excess of the severity trends that we're seeing. And so we give ourselves credit for that and the loss pick that we're making for the current year. We also take a look at the business that we've non-renewed and kind of the mix of business that we currently have when establishing that loss ratio.

Mark Hughes

Yes. And again, I apologize if you've already touched on this, but the INCCI. loss cost trajectory still sensing, it continues to be down and not abating, but are you seeing any kind of a sign that there might be some stabilization there just in terms of the industry loss experience or the NCCI. is analysis, are there on have you lost cost recommendations?

Edward Rand

Yes, I'm Kevin, you can you can jump in when I'm done, I would say that our focus right now is not so much on what NCC, I think that's what we think and focus on how we drive rate as an individual account underwriter and a pretty challenging market where the whole market seems to want to drive drive price down. And again, as I said earlier, I think the frequency trends can't continue forever and the severity trends are very, very real. And so I think there has to be a response. And CCI. is backwards looking and and often with the delay in that kind of backwards look, and we think that perhaps is influencing where they are where they should be. But we think as we think the tide does needs to turn just can't I can't say when it well for the industry. So we're going to control it on our own.
Anything you'd add to that, Kevin?

Kevin Shook

No, I agree with everything you said. I will say that NCCI. is acknowledging that industry leaders are extremely worried about medical inflation. And I think generally people were surprised to see continued loss cost decreases. And so I do think on the part of work comp company executives and working with NCC., I tried to build the medical more And instead of having it be largely frequency based on is something that we want to look forward to and and 2025.

Mark Hughes

Understood. Thank you.

Operator

Thank you. This will conclude our Q&A session for today, and I'd like to hand back at this time.
Heather Westel.

Heather Wietzel

Thank you, everyone. Who joined us today and please feel free to reach out if you would like to talk further. We look forward to speaking with you again on next quarter's conference call.
At least. So thank you correct.

Operator

This will conclude today's conference call and thank you all for joining. You may now disconnect your lines.