ProAssurance Corporation

Q2 2024 Earnings Conference Call

8/9/2024

spk02: Good morning everyone. Welcome to Pro Assurances conference call to discuss the company's second quarter 2024 results. I would like to remind you that the call is being recorded and there will be time for questions after the conclusion of the prepared remarks. Now I will turn the call over to Heather Wetzel to begin. Heather, please go ahead.
spk00: Good morning everyone. ProAssurance issued its news release, investor presentation, and report on Form 10Q on second quarter results yesterday, August 8th. 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 selected aspects of the results on this call, and investors should review the 10Q 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 U.S. Federal Securities Law and subject to applicable safe harbor protection. The content of this call is accurate only on August 9, 2024, and except as required by law or regulation, Pro Assurance will not undertake and expressly disclaim 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 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, and Karen Murphy. Now I will turn the call over to Ned.
spk07: Thank you. And I'd like to start by welcoming everyone to our call. We reported operating earnings in the second quarter of 23 cents per share, benefiting from a 16% increase in net investment income as we continue to take advantage of the higher interest rate environment. Our underwriting results, particularly in the specialty P&C segment, which includes our medical professional liability line of business, are beginning to reflect our actions to achieve long-term sustained profitability in the face of market conditions that remain challenging. Looking first at specialty P&C, the net loss ratio for the quarter improved both sequentially and year over year. Compared with last year, the current accident year loss ratio improved by 1.4 points with a higher level of favorable prior year reserve releases, also contributing to the two-point improvement in the net loss ratio. For some time, we have recognized and responded to the challenging medical professional liability loss environment. While frequency remains fairly flat, social inflation and eroding tort reforms are driving rising severity. We believe we are ahead of many in the space in achieving rate levels in NPL that outpace severity trends, even as we remain intently focused on segments within healthcare where there are opportunities to write business profitably. Since 2018, we have increased renewal premiums within our NPL lines of business by over 65% cumulatively, with this quarter's renewal pricing increases averaging 9%, driven by 10% for our standard business, and 12% for our specialty business. We also continue to forego renewal and new business opportunities that we believe do not meet our expectations of rate adequacy in the current loss environment. New business was below last year at $5 million. As a result, net written premiums for specialty P&C were flat, although retention of existing insureds remained a solid 84%. In parallel with our pricing actions, We are focused on discipline underwriting and managing claims to address market conditions. We are moving steadily forward with our use of innovation tools to improve risk selection, enhance pricing decisions, and improve workflows, while also focusing on ease of doing business for our insured and distribution partners. We are leveraging our extensive data on this market with predictive analytics, which is helping us in those markets and subsectors where there are opportunities to write business profitably. For example, these tools help us consider a variety of factors, including specialty and venue severity, when establishing our underwriting appetite. We're pleased to be seeing improved retention in the more profitable small to midsize accounts as a part of this effort. Turning to our workers' compensation segment, we are aggressively working to address the impact of higher loss trends related to rising medical costs per claim that we began to see in mid 2023. For the quarter, the segment's current accident year loss ratio was about four points below the full year 2023 ratio, although still above last year's second quarter. We believe our caution in the current claims environment and focus on operational discipline is having a positive impact. Further, our underwriting appetite remains intentionally cautious until we can obtain the necessary rate reflected in gross written premiums down 3%, with new business below last year at $5 million. We have seen the average cost per claim improve slightly from the elevated levels initially seen in the second half of 2023. Reported claim frequency continues to trend below historical levels, although still reflecting the impact of higher average medical costs per claim and the growing influence of vertically integrated medical systems. There is no change in prior accident year reserves for this segment in the second quarter. We are preparing to introduce tools that will help to address the challenging market conditions by using AI along with underwriting and claims data analytics to enhance profitability, productivity, and efficiency. Most recently, we entered into an agreement with Clara Analytics, a leading AI service provider with extensive workers' comp industry experience, to help us enhance medical outcomes for injured workers improve our case reserve estimation capabilities, and lighten the administrative burdens for our claims professionals. We will be leveraging their platform to address various aspects of escalating medical costs, including their medical document intelligence platform that helps direct care to the best performing providers, and their tool to help identify high severity claims early in the claims lifecycle. These new capabilities are leveraging the integrated policy, claims, risk management, and billing systems that we put in place in this segment at the beginning of 2024. We expect Clara to be contributing to our processes in the fourth quarter of 2024. As I said last quarter, our long history in both medical professional liability and workers' compensation has taught us that these cyclical lines will respond to our focused efforts. We remain confident in our ability to ultimately achieve underwriting profitability in both businesses despite current market conditions. but are a headwind keeping us from achieving our goals as quickly as we would like. We continue 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. But we will not compromise to achieve a short-term fix at the expense of protecting our balance sheet and our insurance over the long term. We know that maintaining our discipline will be 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?
spk01: Thanks, Ned. 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 investments. As Ned noted, for specialty P&C, net written premiums were essentially flat. We're pleased with the stable retention we're seeing overall, even as rates improve. The segment's net loss ratio improvement of two points was driven by the progress we're making on the current accident year loss ratio in our MPL business. In addition, net favorable prior accident year reserve development of $6 million reflected better actual loss emergence than expected from our more in-depth second quarter actuarial review. The better loss ratio is partially offset by a higher expense ratio, as last year's expense ratio benefited from higher seating commission income from a large tail policy, which is an offset to expense. For workers' compensation, gross written premiums were down just over 3%. This was due to a change in our EBOB estimate, retention losses, and renewal rate decreases, partially offset by higher audit premiums. The segments combined ratio was 113.2%, reflecting the higher current accident year net loss ratio, as well as a one-point increase in the expense ratio, largely due to higher compensation-related costs. Across all of our segments, including corporate, expenses and expense ratios are higher than last year, as we had anticipated. Full-year 2023 expenses were reduced by about $7 million by non-recurring benefits that we've talked about in the past. This year, compensation-related costs are running higher on our slightly lower overall headcount. Turning to investment results. This was an excellent quarter net investment income rose by $5 million or 16% as we continue to take advantage of the higher rate environment. New purchase yields in the quarter were 6% or 260 basis points higher than our average book yield of three and a half percent. The fixed maturity portfolio remains high quality with 92% in investment grade bonds with an average duration of just over three years. We continue to manage our asset duration to largely match that of our liabilities and to optimize our portfolio to generate yield. We recorded an $8 million gain from our investments in limited partnerships and LLCs reported as equity and earnings of unconsolidated subsidiaries. These typically report on a one-quarter lag, and they are continuing to produce strong returns. Equity and earnings also included a $400,000 benefit related to our tax credit partnership investments due to a decrease in our estimate of our allocable share of partnership operating losses. Overall, our tax credit partnership investments are nearing the end of their life cycle, and amortization of partnership operating losses and associated tax benefits are expected to be nominal going forward. I also wanted to point out that the primary difference between net income and operating income was net investment gains of $3 million, which included a final determination related to the outstanding contingent consideration associated with our 2021 acquisition of NorCal. As you may recall, we have been carrying a liability for amounts potentially owed to certain former NorCal members. In June, the final steps required to resolve the contingency were complete, resulting in no additional consideration due. The $6.5 million liability was fully reduced in the quarter and recognized through net investment gains and losses. We remain very bullish on the long-term value that NorCal brings to ProAssurance, in particular our expansion into the California market. Finally, adjusted book value per share was just over $26, Management looks at this metric as it includes about $4 per share of embedded, unrealized holding losses, primarily attributable to our fixed maturity portfolio. We have both the intent and ability to hold the related securities until maturity. Should bond yields decline or as our portfolio matures, those unrealized losses will creep back to book value. Further, with our current investment leverage at three times GAAP equity, There is upside to book value, as we believe bond yields will continue to be accretive. To close, let me reiterate that we remain committed to protecting our balance sheet and our insured over the long term. We are seeing signs that our actions are delivering pricing levels that meet our objectives, and we will continue to be intentional on capital management. Ned.
spk07: Thanks, Dana. I just want to remind everyone that we know there is much more to be done to achieve our goal of sustained profitability, but we are encouraged by the progress we are making with six-month operating earnings of 31 cents per share. We expect continued progress and look forward to sharing results in coming quarters.
spk00: Thank you, Ned. Operator, that concludes our prepared remarks. We're ready for questions.
spk02: Of course. Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure you're unmuted locally. As a reminder, that's star followed by one on your telephone keypad now. Our first question comes from Matt Carletti of JMP. Matt, your line is open. Please go ahead. Thanks. Good morning.
spk03: Dana, I just wanted to follow up on your last point there about, hey, good morning, Ned. Dana, your last point on being intentional about capital management, I'm hoping you guys can maybe expand on just kind of how you're viewing capital management at the moment. I mean, obviously, you guys are remaining very cautious on growing the business given market conditions and the stocks trading. I think whatever version of book value you want to look at, very good discounts to it. And so just if you could update us on kind of how you view kind of uses of capital or what you're holding on to capital for versus buybacks and other opportunities.
spk01: Sure, Matt. Good morning. There is an awful lot to consider when we're thinking about capital management. And for us, we're remaining committed to capital sufficiency and You know, all the while being very mindful about our AMBEST rating, risk-based capital requirements that we need at the statutory entity, as well as our liquidity needs. We're very comfortable with our capital position. However, the volatility in the marketplace does remain. So, we're considering what regulators and AMBEST may be thinking as we navigate current market conditions. which really just lead us to continue to be cautious. All that said, I don't want to leave you with the wrong impression. AMBEST has recently affirmed our ratings in late June, but that's how we're thinking about it.
spk03: Okay, great. Thank you. That's all I have today. Thanks, Matt.
spk02: Thank you. Our next question comes from Paul Newsome of Piper Sandler. Paul, your line is open. Please go ahead.
spk06: Great. Good morning. Thanks for the call. A couple of remodeling questions. One, probably a simple one. The tax credit impact going away, I think historically it's been a 10-ish percent effective tax rate. with those tax credits going away, does that put it back up to the statutory rate or is it something higher with the state taxes or any guidance that are helpful that would be useful for the effective taxes?
spk01: You know, Paul, I may need to follow up with you on this particular question. I wouldn't expect our I mean, the tax credits associated with these investments have been diminishing over time, so I don't think they've had a dramatic impact on our effective tax rate, but to answer you specifically, I'd need to do some additional follow-up.
spk06: Okay. Maybe you can give us a little sense of the Is this a good run rate for the expense ratio given all the moving parts of the last year or so?
spk01: Yeah, I thought certainly there might be a question around expenses, Paul. And so what I really wanted to make sure that listeners understood was that the year-over-year change, quarter-over-quarter change that we have in our consolidated level of expenses is largely driven by compensation-related costs. And driving that increase higher is, in part, amounts accrued for performance-related incentive plans due to improvement in the related performance metrics and, to a lesser degree, annual merit adjustments. And you heard me say in opening remarks that our employee count is slightly down in the quarter. We have been. We will continue to scrutinize positions that come open to determine the necessity, really, of filling those vacancies. That's a very important aspect of our expense management efforts, especially as our top line decreases. I would say it's as good as any run rate for expenses, but we are continuing to be mindful of expenses.
spk06: Great.
spk07: Paul, back on your first question. Back on your first question. There is a tax rate reconciliation in our queue that will probably give you more details about how we arrive at the effective rate.
spk06: Great, thank you.
spk02: Thank you. Our next question comes from Gregory Peters of Raymond James. Gregory, your line is open. Please proceed.
spk09: Good morning, everyone. Two quick questions just on broader macro environment. In the quarter, have you seen any new entrants come into the marketplace, or is the competitive pressures coming from existing players?
spk07: I think you're talking about the medical professional liability space, Greg?
spk09: Yes, yes. Sorry about that.
spk07: Yeah, no, no new entrants. It's really the competitive landscape has really not changed substantially. Every now and then we'll hear about it, you know, someone entering into the marketplace, but typically they're not making much of an impact at all.
spk09: Yeah, I seem to pick up some of the same news, and I'm just curious whether it's piercing any of your business. So that's the basis of the question.
spk07: Yeah, no, not that we're not really. Sorry, I didn't mean to talk to you. No, not to go back on that. No, we're really not seeing any new entrants make any waves in our parts of the market.
spk09: Okay. And then just another macro question. I know it's an ongoing battle, you know, dealing with severity, et cetera. It's become, as you know, quite topical for longer-tailed lines of business, liability businesses across many of the companies running that business. Any change, you know, I know it's a state-by-state thing, but any change in sort of, attorney representation rates? Are you seeing any any increase or decrease in attorney involvement in your book of business?
spk07: No, not seeing any any material changes there.
spk09: OK, and then and finally, just going to the workers comp business. You know it's. The results you're reporting are different from most of your peers and. Maybe you can just explain, and by that I mean your combined ratios seem to be higher with less favorable reserve development. Maybe you could just help us bridge the gap between what we're seeing with a lot of other peers in workers' comp and what we're seeing at your company. Thank you.
spk07: Yeah, it's a good question, Greg, and certainly we can talk about what we're seeing. I can't speak for our peers and what they may be seeing or what they may be doing. I think there's two parts to your question. On the reserve development, you'll recall that we have a relatively short-tailed workers' compensation book and close claims faster and more aggressively than a lot of the marketplace. And as a consequence of that, the absolute reserves that we hold for the workers' compensation book are pretty small. So there's less opportunity for favorable development because we've closed the claims. Now, the flip side of that is there's also a lot less potential for things to go sideways or wrong because the claims are closed. I also think that because we do close claims faster and maybe stand on top of our claims a little more quickly, we see and respond to the trends in inflation and in healthcare perhaps faster than some of our peers are doing. And so what we're responding to is elevated costs of care stemming from inflation in the medical area. And we're responding to that both as we mentioned and kind of how we're approaching claims and also as we approach individual states' markets and trying to counter the negative trend in rate that the market is being influenced by. Okay.
spk09: Makes sense. Thanks for the answers.
spk02: Sure. Thank you. Our next question comes from Mark Hughes of Truist. Mark, your line is open. Please go ahead.
spk10: Yeah, thank you. Good morning. Ned, did you give a specific rate number for workers' comp for the quarter?
spk08: Rate number? Price change number? Kevin, I'm going to go to you for that for the quarter. I think it was down 3%, but I want Kevin to confirm.
spk04: Yes, so rate this quarter was down 3%, and the prior year quarter, it was down 7%. Okay, very good.
spk10: Anything in the reserve development in the recent active year, say 2020, 2023, anything you can observe around frequency or severity that stands out? You know, aside from kind of the broader issues that you discussed around social inflation.
spk07: Yeah, no, nothing that I would point to. In those years.
spk10: Yeah. Do you think if interest rates are coming down, do you think that might have some impact on pricing? If we think about your. Some of the controls have big investment portfolios? Do you think there's some cash flow underwriting going on, and therefore lower interest rates might help to stiffen up the pricing?
spk07: Yeah, I'd like to think that would be the case, Mark. Certainly, there are a lot of companies that are benefiting from high levels of investment income allowing them to write a Combined ratio is well above 100, and so if we had some downward pressure on those returns, it certainly should result in a reaction from the pricing standpoint. I think the other challenge, though, is these companies, a lot of these mutual companies tend to be very overcapitalized, and so that mutes their response, I think, even in a downward interest rate environment.
spk10: Yeah. Okay. And then anything about the California market with NorCal acquisition, any distinct pricing competitive trends there, or is it pretty similar to the broader picture?
spk07: Pretty similar to the broader picture. They had some changes to the tort reform in California a couple years ago. I think we're beginning to see a little bit of that impact, but it's not huge. But I think the market's well positioned to respond to that from a pricing perspective. When I think about the California market, you know, it's kind of the riders in California all have pretty good scale and are generally good behaviors. And so I would say that we don't see as much irrational pricing by and large in the California market as we do some of the other markets we compute in.
spk10: Yeah.
spk02: Thank you. As a final reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad now. Our next question comes from Bob Farnham of Jenny. Bob, your line is open. Please proceed.
spk05: Tad Piper- Thanks good morning just another question on workers COMP and i'm just trying to figure out how to model going forward so you've made these ensure tech investments, including Clara analytics so i'm just trying to get a feel is there any way you can quantify. Tad Piper- How much you spent on these investments and kind of how what kind of savings you're going to see over time.
spk07: Tad Piper- Can i'll let you answer, please.
spk04: Yeah, so I would say the upfront costs on a lot of the insure tech has been minimal. Bob, it's kind of difficult to quantify the benefits of it. I think it's going to be significant. Clara scores medical providers, gets you to the right doctor, severity predictions, alerts on attorney involvement. So I think over the next couple of quarters, we'll get a better feel for it. On the Guidewire underwriting investment, where we're going to be using it predominantly for smaller business, there is a significant loss ratio advantage for accounts, say, under $50,000 versus accounts over $50,000. It's low double digits. And, you know, the goal there is to incrementally grow that small book of business that has the best loss ratio. But it's hard for me to say without these things, you know, being implemented as to exactly what it is. But expect Clara to be extremely favorable and expect to grow the small book of business using Guidewire.
spk05: Okay. Yeah, I didn't expect you to have any definites there. So I guess more broadly, With the continuing rate declines in workers' comp, are you thinking that your loss ratios may actually improve from here because of the investments, or is it still going to be under pressure because of the rate environment?
spk04: You know, I think it's going to be under – look, we're down four points from six months ago. We're doing a lot on the medical care management side from a PPO network perspective. You know, there's a lot of headwinds with vertical integration. Fee schedules are going up. So it's a difficult question to answer, but my expectation is we'll continue to improve. I realize I'm not directly answering your question because it's hard to predict the future.
spk05: Yeah, no, no. All right. I guess we'll just have to keep an eye out over the next few quarters to see how things are revolving. Just kind of curious if we can get any jump start on the impact. So, all right. Thanks.
spk04: Yep. Thanks, Bob.
spk02: Thank you. At this stage, we have no further questions via the telephone lines, so I'll hand back over to Heather Wetzel for any closing or final remarks.
spk00: Yes, thank you. And thank you, everyone, for joining us today. feel free to reach out if there are any follow-up questions you'd like addressed and of course look forward to talking to you again on next quarter's call or on some of the other investor interactions we'll have in the coming months so thank you ladies and gentlemen this concludes today's call thank you for joining email disconnect your lines
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