ProAssurance Corporation

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 Pro Assurance'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 content of this call is accurate only on November 9, 2023, and is accepted 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.

Thank you, Frank. 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 our resolve to respond appropriately. Dana and I look forward to providing insights into the evolving market. I want to address the seven cents per share operating loss up front. 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. Rich 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 insurers, but as a testament to the dedication and effectiveness of our team members and distribution partners who are helping us earn new business in 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 or 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 and capacity 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 a high level, I want to highlight two 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 ruinable 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 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 two 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 one-time 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 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 costs per claim as compared to what we observed during the first two 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 to care for injured workers driven by healthcare wage inflation and medical advancements. In response to these trends, we increased our full year 2023 accident year 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 healthcare professionals assessing treatment upfront to get the injured workers appropriate medical treatment and back to productivity quickly. As with specialty PNC, 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 earned net earned premiums and the continuation of competitive market conditions. Finally, our segregated portfolio sell reinsurance segment contributed a profit of just under $1 million to operating results driven by strong underwriting results and net investment income for those sells where we take an economic interest. The combined ratio in our segregated portfolio sale 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?

Thanks, Ned. Let's go next to Dana, who will review consolidated results and provide highlights from the balance sheet and investment returns. Thanks.

Thanks, Frank. At the start, I want to call attention to two 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 from open underwriting years prior to 2024 continues to earn out as scheduled. Remember, there is a one-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 UK 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 non-cash 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 10Q, 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 7 cents 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 nine 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 are 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 one-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 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 30th. 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 59 cents to adjusted book value per share. Frank?

Thank you, Dana, Ned. Bailey, that concludes our prepared remarks, and we're ready for questions.

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star followed by one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question and please do ensure that you are unmuted locally. We will just pause briefly as questions are registered. Our first question today comes from the line of John Newsom from Piper Sandler. Please go ahead. Your line is now open.

Good morning. Thanks for the call. Morning, Paul. I want to ask you about a little bit more detail on your view about improvement of an outlook for the core specialty businesses. You look at the action year results for the specialty business and you look at the reserve development, both are deteriorated from a year-over-year basis. So that would suggest that, assuming that your core book reflects most of the market, that the environment is actually worse, not better. You know, maybe you could sort of contrast that and why you think the environment actually is better when your own results are actually worse.

Yeah, Paul, it's a good question, and it's probably partly just a matter of kind of relativity. I would start by just saying, you know, what I think hasn't changed at all in the marketplace is just the level of uncertainty. that exists and the variability kind of in claim results. And so we continue to take a very, very cautious approach in establishing reserves given the level of uncertainty that we think exists in the marketplace. What we are encouraged by is the rate gains that we are able to get on business as we renew it. And as we compete for new business, I think we are, and there are always exceptions to this, but we're seeing what I would call improved behavior on the part of competitors that aren't trying to just drive down price to clearly loss-leading levels as they compete for new business. So those are where the improvement piece is coming from. On the loss side, I think it's still a very, very challenging environment and a lot of uncertainty out there.

Great. On the workers' comp side, I wanted to just better understand that there are obviously rates. Many of them are sort of statutorily created. But there's also pricing. And my understanding is on workers' comp, there are lots of things that companies do in terms of reducing discounts and other factors that can change the pricing materially. Given that your workers' comp business, even if we exclude the reserve charge this quarter, has been less profitable than most of your peers for the last several years, could you talk about whether or not there's a disconnect there between what you're talking about with rate and price? and whether or not there's some adjustments that you're making to suggest that maybe we could see better underwriting performance in the future. Because I think the conclusion of lower rates plus inflation means that you're just going to see worse results prospectively in workers' comp, but obviously there's a lot more going on there as well.

Yeah, so there's a lot to unpack in that question, and I'll try to answer, and then Kevin can chime in as well. So, yeah, there certainly is a difference between the rate and pricing, but those promulgated rates do have an impact on the pricing in the marketplace, and we do, I think, a very, very good job of pricing to the exposure as opposed to pricing based on these promulgated rates. And if you look at the rate declines for the broader work comp industry, all justified for the industry by reduced frequency, which certainly we have seen, and then you compare that to the reduced rate over the same period of time for our book of business, you'll see that we've actually managed through that I think pretty effectively our rate declines have not been nearly as significant as the rate declines in the broader market and not as significant as certainly the compounded rate decline of what those promulgated rates would indicate. So we do combat that and we do see decreased claim frequency and so trying to balance that decreased claim frequency with those inflationary pressures is really going to be the challenge going forward. Um, but it is, it's a, it's a tough market and it is a market that by and large is gonna, is gonna overshoot on the downward side because of these promulgated rates. And, and a lot of competitors rely on those very, very heavily. Um, we are influenced by them because they influence the market. Um, but, but the inflationary trends that we're seeing, and the other thing I would add, I guess, is that, you know, we think we recognize a lot of these trends faster because we close claims faster. And so we know what the final cost is and the final resolution of the claim is within a couple of years. And I don't think that's true for the rest of the industry, or at least a lot of the rest of the industry. And so how they ultimately build that inflation into the payments that they're going to have to make in the future on claims that they hold open today, I can't speak to. I just know how we're handling that and that we're resolving claims more quickly than the industry. Kevin, is there anything you'd add to that?

No, I think that's right. I do think when the industry starts to recognize the medical inflation trends that we're seeing earlier, that is going to be a market changer. I would note that we have a three-company tiered structure from an underwriting perspective with different LCMs. Our book of business makeup is the same. Our regions are the same. And the market segments in which we write are largely the same, just to add those to Ned's comments.

Thanks Kevin.

Thank you. The next question today comes from the line of Maxwell Fritcher from Truist Securities. Please go ahead, your line is now open.

Hi, good morning. I'm calling in for Mark Hughes today. Kind of just an add-on to the last question. You'd mentioned last quarter that inflation in workers' comp was being driven more by wage inflation as opposed to medical inflation. It sounds like that's kind of flipped this quarter. What do you see in there?

Yeah, I think, yeah, certainly what we saw this quarter was the medical inflation really hit hard. That doesn't mean the wage inflation has gone away. I do think that wage inflation is probably moderating a little bit, but I don't think that's fully reflected in kind of the payment rates yet across all states. So I think there will continue to be some upward pressure on the wage piece of it. But what really was more remarkable in the quarter was the medical.

Thank you. And then for the large claims, you mentioned in the first quarter that they had a big impact relatively muted in the second quarter. Were there any impact from large claims in 3Q?

Yeah, that's a good question. I would say, first off, that the industry continues to see a higher frequency of large claims. If you follow the analysis that TransRe does, and I think they do as good a job as anybody in kind of tracking what's going on in the space, they've had to add a new chart in their most recent iteration where they're now showing the trend for claims in excess of $100 million. So that's still out there in the industry. In the quarter, we certainly had larger claims, but nothing that had an impact like those did in the first quarter. And just to remind you, in the first quarter, what we saw was the resolution of some claims at levels higher than we thought they should have been resolved. And that's higher than where we established reserve for some older accident years where there was a limited amount of IBNR.

Yep, that's helpful. Thank you.

Sure. As a reminder, if you would like to ask a question on today's call, please press star followed by one on your telephone keypad. Our next question comes from the line of Bob Farnham from Jamie Montgomery Scott. Please go ahead. Your line is now open.

Thanks. Good morning. A few questions. One is more broad for the workers' comp sector. So, Ned, you were talking about the fact that the industry is probably going to miss on the downside. So I'm just trying to get a feel for what kind of time lag is there for the rating bureaus to update their loss costs to incorporate the higher loss trend? So I'm just trying to figure out, all right, Are rates going to continue to go down for three more years before the states kind of catch up? Is that something you're having to face?

Yeah, that's a really good question, Bob. So, you know, so I would say by and large, those states have put out kind of their loss picks for 24. And by and large, those are, again, decreases over 23, which is, you know, again, I think it's a bit of a head scratcher when you know what's going on from an inflation standpoint. There's a time lag of 12 to 18 months in the data that they're utilizing. And they have been leaning pretty heavily, I think, on the frequency declines to push for these rate declines. So 24 will be a challenge. We will continue to focus on individual account underwriting and seeking to get the price commiserate with the risk we believe we're taking on. But unless something changes midstream, I wouldn't expect to see anything before 25. Kevin, anything you would add to that?

No, I think that's spot on. You know, the models are more frequency-based, and, you know, what's driving our results this quarter is certainly on the medical side, which I don't think anyone's going to be immune to. I totally agree, Ned.

Okay, and Kevin, you talked about having multiple tiers to be able to write the workers' comp business with different LCMs. So have you been seeing a shift in getting classes to kind of higher tiers? Just kind of curious what kind of movement you're seeing there to try to generate stronger performance in terms of rates.

Yeah, we are seeing shifts and, you know, things moving to the upper tier companies and And quite frankly, we have a bunch of business that's priced in the highest tier company at maximum debit. We cannot get the price any higher. So it's been a challenge. You know, lost costs, as Ned said, have been down since 2015. And having the three-tiered company structure has been incredibly helpful. But a lot of business in the higher, a fair amount of business in the mid, and then less business in the preferred company, obviously.

Okay. All right. And while you're still on the line, just a few more, maybe a bit more color on the medical inflation. Are you seeing it in particular classes of business, in particular geographies, different types of injuries? Just trying to figure out if this is a kind of a wholesale issue or if there are pockets that are showing this rather than everywhere.

So I would describe the higher medical trends as being pervasive. So we looked at our entire book of business. We looked at our regions. We looked at states. We looked at market segments. And it is pervasive across the book of business. You know, there's obviously some market segments that are being impacted more than others. You know, restaurants are one. Hospitality. We write a lot of healthcare and that was kind of right down the middle. We write a lot of education and that performed a little bit better, but pervasive across the book of business in all regions, in all market segments, which again points to medical inflation now making its way through the book. Right.

Okay. And in terms, you know, from our vantage point, we can look at medical inflation via the CPI and whatnot. So, Are you seeing what you're actually seeing in terms of medical inflation is higher than the kind of the CPI version of inflation? And if so, kind of what are the primary drivers?

Yep. So we are, you know, this is the quarter where I would say, oh, I'm sorry, go ahead.

Yeah, go ahead, Kevin.

You know, this is the quarter where I would say medical inflation is outpacing CPI and wage inflation by a pretty wide margin. So if you think about a workers' comp claim, you've got the indemnity piece, which is going to increase commensurate with payroll. And that, in theory, in a perfect world, should be in your premium. But when medical starts outpacing indemnity, that's when it has an unfavorable result to a workers' compensation carrier.

And then, Bob, to the other part of your question, it's really been driven The medical inflation has been driven by just labor costs within medicine that are now catching up. And then as new therapies come online that are life-saving and life-changing, they tend to be very, very expensive. And I think it's a combination of those two things. So just price pressure within the health care system and then the services being more expensive as well.

All right. Okay. Uh, and just, uh, just one more question. Sorry to hog the call here, but so 65% of your business is, or 65% of your losses are related to the medical side. Is that, is that typical for the industry or is that something that you're, you know, you face, you know, pro-assurance faces more medical trends because you have a higher portion of medical costs than your typical claim?

I think one thing, Bob, that probably skews that on a comparison basis is because we do have a shorter tail book of business, the wage component is resolved much faster. And so as a percent of total cost may be lower overall, but that's more about the duration of the claims than the actual dollars being spent on medicine. Kevin, what would you add to that?

No, I agree with that. I would say 65% medical is more or less in line with the industry, which is the inverse of what it was 12, 15 years ago when it was higher indemnity. So medical is the driver for pro-assurance, and medical is also the driver for the industry. I can't quote a specific number for the industry, but would certainly suggest that it's in and around the 65%, and to Ned's point, maybe a couple percentage points lower.

Okay, great. Thanks for all the color, guys. Yeah, thanks, Bob.

As a reminder, if you would like to ask a question, please do press star followed by one on your telephone keypad. The next question today comes from the line of Matt Carletti from JMP Securities. Please go ahead. Your line is now open.

Hey, thanks. Good morning. Good morning. Good morning. I was hoping I could shift focus back to the medical professional liability side of the business um can you just update us on the competitive landscape a bit i mean for a while obviously being pricing's been been moving but i think you've talked a bit about how some of the maybe larger competitors even smaller competitors that just don't have profit initiatives or mutuals so forth you know takes a while for them to kind of get the message um is anything changing um you know in that regard or if you just update us on kind of the

Good question, Matt, and I'll let Rob chime in. What I would say is that certainly from a who are the competitors and what are their motivations, nothing really is changing. The mutual companies continue to have good amounts of excess capital and they use that to leverage pricing and willingness to write at a pretty high combined ratio as a result. I do think we see, and again, this I hate to make broad generalizations. I do think we do see some better behavior out of some of those peers on individual accounts as we compete for new business, but there's always going to be the one that doesn't go that way. But, Rob, would you add anything to that?

Just a little color. Certainly the reinsurance market is putting more pressure on companies. The reinsurance rates are going up. For some of the smaller organizations that maybe don't have as much capital, the reinsurers are tightening on their business plan allowances, if you will, what those carriers can do and can't do under those reinsurance contracts. So we've seen some pullback on some of those most aggressive smaller carriers. The larger carriers, as you mentioned, continue to be a little bit more responsible overall in seeking appropriate returns. Maybe not quite the returns that we as a public company are seeking, but still appropriate returns and are acting responsibly in competition. Those mid-level mutual carriers certainly still highly capitalized, are willing, as Ned said, to ride at a higher combined ratio, and several of those right now have growth goals. They've decided to increase their relevancy in a changing world where the average account size is growing and the accounts are multi-state, and so they're pursuing that business. So we are taking a very opportunistic only approach on that type of business and focusing more on our standard business and core states where we believe there is more potential return. Thanks, Rob.

Okay, great. Very helpful. Thank you.

Thanks, Matt.

Thank you. There are no additional questions waiting at this time, so I'd like to pass the call back over to the management team for any closing remarks.

Thank you, Bailey. And I think that concludes our conference and our remarks. We look forward to speaking with you again on next quarter's calls.