ProAssurance Corporation (NYSE:PRA) Q3 2023 Earnings Call Transcript
ProAssurance Corporation (NYSE:PRA) Q3 2023 Earnings Call Transcript November 11, 2023
Frank O'Neil: Good morning, everyone. We reported on third quarter results in a news release issued November 8, 2023, and on our quarterly report on Form 10-Q, which was also filed on November 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 carefully. This morning, our management team will discuss selected aspects of their quarterly results on this call, and investors should review the filing on Form 10-Q and accompanying press 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 U.S. federal securities laws and subject to applicable safe harbor protections.
The call of this -- the content of this call is accurate only on November 9, 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. Our management team 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. On the call with me today will be Ned Rand, President and CEO; Dana Hendricks, our Chief Financial Officer. Also joining are the executive leadership team members, Rob Francis, Kevin Shook, Ross Taubman and Karen Murphy. Now I'm going to turn the call over to Ned.
Edward Rand: Thank you, Frank. And it's nice to have you back. Thanks for coming out of retirement briefly while we try to fill a vacancy in our IR role. I really appreciate that. And good morning to everybody. In reporting our results for the third quarter, we note both the realities of current market conditions and are resolved to respond appropriately. Dana and I look forward to providing insights into the evolving market. I want to address the $0.07 operating loss upfront. Unfavorable development in our Workers' Compensation book of business is the primary reason for the loss. And while disappointing, our actions are consistent with our historical practice of recognizing negative trends as they present themselves. While that reserve development resulted in the headline loss number, it also masked positive trends that I think point to better results ahead.
Gross written premiums were up 4% quarter-over-quarter and new business was significantly higher, while retention remained strong. This signals not only an appreciation for the quality of the service and strength we provide to our insureds, but is a testament to the dedication and effectiveness of our team members and distribution partners who are helping us earn new business and retaining insureds in these extremely competitive market conditions. I suppose the legitimate question would be why are we growing given current market conditions. Our strategy in both lines of business relies on individual underwriting and pricing, and we strive to only write and retain business we believe will meet our profitability goals. Thus, we believe we can grow our book profitably as long as we remain disciplined in pricing and underwriting.
Inflationary trends continue to affect the market conditions in which we operate, and we continue to see higher-than-anticipated loss severity trends as well. Those trends seem to be affecting insurers active in the Specialty P&C lines we write, which we believe will hasten a return to more rational pricing. Within work comp, because of our proactive claims handling, we believe we are seeing these inflationary trends earlier than others. And while some work comp writers have begun to talk about it, it's not being universally recognized. But it's coming and should have a profound effect on pricing in a in the work comp market. We have been decreasing our participation at Lloyd's over the past several years. And as we look forward to 2024, have made the decision to discontinue any further participation.
In addition, we entered into an agreement to sell our remaining ownership interest in the underwriting and operations entity associated with Syndicate 1729 to an unrelated third party, which is contingent upon certain approvals. This decision also led us to reorganize our segment reporting beginning this quarter, which Dana will discuss later. Now looking at each segment at high level, I want to highlight 2 important items in Specialty P&C. First, even in this competitive environment, we wrote $24 million in new business that we believe meets our pricing and underwriting standards. This speaks volumes about our ability to write business based on our quality of coverage and our service and defense commitment. A further positive sign was the overall increase in renewal pricing of 7% in the quarter, amplifying those premium gains with strong retention in the segment of 87%, led by retention of 89% in our Standard Physician business, again, being renewed at prices we believe support our return to profitability goals and meet our strict underwriting standards.
Overall, a good result given the competitive market conditions we face. We continue to monitor increased severity trends in a handful of our legacy jurisdictions. As I mentioned, we'll see both social and medical inflation as key drivers here, and we are wary of the increased severity of judgments and settlements in large complex cases and the downstream impact this can have on settlement values for all claims. Total underwriting expenses in the segment were down $4 million, resulting in an underwriting expense ratio of 25%, down just under 2 points quarter-over-quarter. The expense ratio decrease compared to last year was driven by a decrease in amounts accrued for performance-related incentive compensation plans in the current quarter as well as the impact of onetime expenses in the prior year quarter, partially offset by lower levels of earned premium.
Moving now to our Workers' Compensation Insurance segment, gross written premium was essentially level with the third quarter 2022 at $63.6 million. During the third quarter, audit premium decreased by approximately $1 million quarter-over-quarter. To the upside, new business was $5 million, $1.3 million higher than last year's third quarter, and our premium renewal retention was 87%. However, renewal rates were down 3% over the same period, driven by continued rate pressure from prescribed state loss cost adjustments. While Workers' Compensation rates continue to be pressured, the third quarter rate change was an improvement over the quarter -- second quarter decrease, which we believe offers some encouragement. As I mentioned, we are seeing the impacts of inflationary trends in our Workers' Comp book.
During the third quarter, we observed higher-than-anticipated loss trends in our average medical cost per claim as compared to what we observed during the first 2 quarters of the year. While we continue to experience reductions in claim frequency, our average medical cost per claim is higher in both the 2023 and 2022 accident years. With medical expenses representing approximately 65% of our total claims costs, we attribute this trend to an increased cost care for injured workers, driven by health care wage inflation and medical advancements. In response to these trends, we increased our full year 2023 accident year net loss ratio to 76%, and recorded $8 million of unfavorable loss of reserve development, primarily in the 2022 accident year.
Our short-tailed claim strategies that we've discussed in the past result in compensable injuries being reported real time, with health care professionals assessing treatment upfront to get the injured workers appropriate medical treatment and back to productivity quickly. As with Specialty P&C, underwriting expenses were down quarter-over-quarter. The 34% underwriting expense ratio was just slightly higher than the prior quarter as a result of lower net earned premiums and the continuation of competitive market conditions. Finally, our Segregated Portfolio Cell Reinsurance segment contributed a profit of just under $1 million to operating results, driven by strong underwriting results and net investment income for those cells where we take an economic interest.
The combined ratio in our Segregated Portfolio Cell Reinsurance segment increased approximately 33 points to 128.2%, with 26 points of that increase due to the cancellation of the tail coverage related to a program in which we do not participate in the underwriting results, and therefore, had no impact on operating results in the quarter. Frank?
Frank O'Neil: Thanks, Ned. Let's go next to Dana who will review consolidated results and provide highlights from the balance sheet and investment returns. Dana?
Dana Hendricks: Thanks, Frank. At the start, I want to call attention to 2 items. First, let me expand a bit on the segment reorganization Ned mentioned. Given our decision to no longer participate in Syndicate 1729, our participation will essentially be in runoff after this year as activity for open underwriting years prior to 2024 continues to earn out as scheduled. Remember, there is 1 quarter reporting lag, so our participation will not be reflected in our results until the second quarter of next year. As a result of these changes, beginning this quarter, we reorganized our segment reporting. We are now reporting the underwriting results from the syndicate in our Specialty P&C segment and the investment results of allocated assets as well as U.K. income tax in our Corporate segment.
More detail on these segment changes can be found in our current Form 10-Q. Secondly, during the quarter, we recognized a $44 million noncash goodwill impairment related to our Workers' Compensation Insurance reporting unit, which had the largest impact to our net results, however, had no impact to our operating results. We review our goodwill for potential impairment at least annually and more frequently if circumstances arise that indicate impairment may exist. As we reported in our second quarter 10-Q, we performed an interim goodwill impairment assessment on our Workers' Compensation Insurance reporting unit during the previous quarter, and that analysis then indicated goodwill was not impaired by a margin of approximately 3%. Given the actions taken in the current quarter in our Workers' Compensation Insurance segment in response to inflationary trends as outlined in Ned's remarks, we performed an updated assessment which indicated full impairment of goodwill.
And accordingly, we recorded a goodwill charge in the current quarter. Now moving to operating results. Our operating loss in the quarter was $3.7 million or $0.07 per diluted share, with the difference between the net and operating loss being almost entirely due to the goodwill impairment. In terms of underwriting results, our consolidated combined ratio increased almost 9 points from the year ago quarter, primarily due to the unfavorable loss development in our Workers' Compensation Insurance business coupled with a higher current accident year loss ratio in both of our core lines of business, the drivers of which Ned covered in his remarks. The consolidated expense ratio decreased again in the quarter driven mostly by a reduction in amounts accrued for performance-related incentive compensation plans.
Our investment results continue to be a highlight as net investment income increased 32% to $33 million due to rising interest rates, which drove higher average book yields on our fixed income portfolio. Our new purchase yields in the quarter were 5.3% or 210 basis points higher than the average book yield in the quarter. Our average investment balances were down approximately 1.5% since year end, as we have reduced the rate of reinvestment in order to provide more cash for operating needs and to return capital to shareholders through the repurchase of our stock. Equity and earnings from our investments in LPs and LLCs, which are typically reported to us on a 1-quarter lag, reflected a small gain of about $400,000 in the quarter, yet a significant improvement over the almost $5 million loss in the third quarter of 2022.
In total, earnings generated from our LPs and LLCs did not exceed the tax deductible partnership operating losses, leading to a small loss of $60,000 from unconsolidated subsidiaries for the quarter. Other income was $3 million in the quarter, down $2 million from the third quarter of last year, with $1.4 million of the decrease due to lower foreign currency exchange rate gains related to euro-denominated loss reserves in our Specialty P&C segment. Since resuming share repurchases in late May, we have repurchased 3 million shares at a cost of $51 million, including 2 million shares at a total cost of $31 million during the third quarter. We have not repurchased any shares since the end of the quarter. And as of today, our remaining share repurchase authorization is around $56 million.
Our book value per share at quarter end was $19.85, down 3% from year-end, driven by the goodwill impairment which had no effect on tangible book value. Adjusted book value per share, which excludes $5.82 of accumulated other comprehensive loss, primarily from unrealized holding losses on our fixed maturity portfolio, is $25.67 as of September 30. We continue to consider these unrealized losses to be temporary as we have both the intent and ability to hold to maturity. Our share repurchases year-to-date have contributed $0.59 to adjusted book value per share. Frank?
Frank O'Neil: Thank you, Dana and Ned. Bailey, that concludes our prepared remarks, and we're ready for questions.
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