ProAssurance Corporation (NYSE:PRA) Q2 2023 Earnings Call Transcript

ProAssurance Corporation (NYSE:PRA) Q2 2023 Earnings Call Transcript August 9, 2023

Operator: Good morning, everyone, and welcome to ProAssurance's Conference Call to discuss the company's Second Quarter 2023 Results. These results were reported in a news release issued August 8, 2023, and in the company's quarterly report on Form 10-Q, which was also filed on August 8, 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 ProAssurance's business and alter expected results, please review those statements. This morning, management will discuss selected aspects of the quarterly results on this call and investors should review the filing on Form 10-Q and the accompanying press release for full and complete information.

Management expects to make statements on this call dealing with projections, estimates, and expectations and explicitly identifies these as forward-looking statements within the meaning of the U.S. Federal Securities Laws and subject to applicable Safe Harbor protections. The content of this call is accurate only on August 9 of 2023 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. The management team of ProAssurance also expects to reference non-GAAP items during today's call. The company's recent news release provides a reconciliation of these non-GAAP numbers to their GAAP counterparts. And I'd like to remind you that the call is being recorded and there will be time for questions after the conclusion of prepared remarks.

Speakers on the call today will be Ned 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, Ross Taubman, and Karen Murphy. Now, I will turn the call over to Ned.

Ned Rand: Thank you, Elliott, and good morning. Today, 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 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 investment results have improved significantly. The competitive market and challenging claims environment that are impacting our current and prior accident year loss ratios have been persistent within our industry for some time now, and we expect these to continue, providing us 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. The lower underwriting 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, though the amount of development in recent years has been lower than the average for 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 in 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%, up slightly from last year. We recognized net favorable prior accident year reserve development of $7 million in the quarter, primarily in our Medical Technology Liability business. 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 from 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 top-line growth. Our strategy in the E&S and specialty market is to retain the business we like, reduce 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 year's, 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 healthcare consolidation and practice changes affecting retention levels and leading to the loss of some policyholder accounts in both the standard and specialty books. Overall, pricing in the 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 consolidation. An increase in ceding commission, which reduces underwriting expenses contributed to the decline in expenses in this quarter. Compensation and related costs have increased in the quarter compared to the prior year, there's 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. In our traditional business, renewal pricing was down 7% and retention was 80% for the quarter. We saw an increase in audit premium for the quarter and increased our estimate of carried EBUB premium, both of which helped to 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 headcount in 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 the 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 the higher headcount in this segment as we filled open positions.

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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 Syndicates 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?

Dana Hendricks: Thanks, Ned, and good morning, everyone. For the second quarter, we reported net income of $10.6 million or $0.20 per share and operating income of $8.6 million or $0.16 per share. The main 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 LP LLC investments. Our consolidated combined ratio increased 5 points from the second quarter of 2022 with lower favorable development on prior accident years driving the change. Improved investment results provided a 4 point benefit to the consolidated operating ratio, therefore the operating ratio increased 1 point from last year.

Our consolidated current accident year net loss ratio was essentially unchanged from the second quarter of 2022 after excluding the impact of purchase accounting and prior year ceded premium adjustments. The 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 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 DPAC amortization in net premiums earned, the expense ratio increased by 0.5 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 in 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 bonds that yield approximately 180 basis points higher than the portfolio's average book yield.

Equity in earnings from our investment in LPs and LLCs, 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 results 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 of 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 $400,000 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 aftertax holding gains of $24 million on our fixed maturity portfolio which flows directly to equity. Our share repurchase contributed $0.32 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 30. We consider these unrealized losses to be temporary as we have both the intent and ability to hold to maturity. We are 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.

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