ProAssurance Corporation

Good morning, everyone. Welcome to ProAssurance's conference call to discuss the company's third quarter 2024 results. I would like to remind you all that the call is being recorded and there will be time for questions after the conclusion of prepared remarks. Now I will turn the call over to Heather Wetzel. Heather, please go ahead.

Good morning, everyone. ProAssurance issued its news release, investor presentation, and report on Form 10-Q on third quarter results yesterday, November 7th, 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 selected aspects of the results on this call An investor 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 protections. The content of this call is accurate only on November 8th, and except as required by law or regulation, Pro Assurance will not undertake and expressly disclaims any obligation 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 are executive leadership team members Rob Francis, Kevin Shook, and Karen Murphy. Now I'll turn the call over to Ned.

Thank you, and I'd like to start by welcoming everyone to our call. Yesterday, we reported operating earnings for the third quarter of $17.3 million, or 34 cents per share, reflecting the 99.5% combined ratio for our specialty P&C segment, which is predominantly made up of our medical professional liability business. The segment's combined ratio benefited from 10.5 points of favorable prior accident year reserve development as we saw claims close favorably relative to our expectations for accident years 2018 and prior in the ProAssurance legacy business, as well as for accident year 2021 for our NorCal book. In addition, the current accident year net loss ratio improved by almost one point from last year, but that gives only a glimpse of the progress we're making. Since 2019, the accident year loss and LAE ratio has improved more than 20 points, reflecting the impact of the re-underwriting efforts and renewal premium increases we have obtained, plus the benefits of other strategic initiatives. We're pleased to be seeing actions we have taken over the past several years generate positive outcomes. As we previously noted, about five years ago, we recognized and began responding to rising medical professional liability severity, driven by social inflation and eroding tort reforms that were affecting the loss environment. We believe we have stayed ahead of many in the space in achieving rate levels in NPL that outpace severity trends that continue to be challenging. We also continue to forego renewal and new business opportunities that we believe do not meet our expectation of rate adequacy in the current loss environment. Since 2018, we have increased renewal premiums within our NPL lines of business by over 65% cumulatively, with renewal premium increases this quarter of 14%, for our standard business and 18% for our specialty business. We are encouraged that retention of existing insureds remained a solid 84% in the quarter, with strong retention of the more profitable small to midsize accounts, reinforcing our relevance in the market. New business continues to be impacted by our focus on rate adequacy and was below last year at $8 million. Along with our pricing actions, we remain intently focused on disciplined underwriting, and managing claims to address market conditions. Innovation tools also continue to enhance our risk selection, pricing decisions, and workflows. Work is ongoing to maximize the use of predictive analytics to leverage our extensive data and to identify geographic markets and specialty subsectors where there are opportunities to write business that we believe will meet our profitability objectives. We're also committed to ensuring that our insured and distribution partners find us easy to do business with. helping distinguish us in the marketplace. In the next six weeks, we'll be launching a new web portal on an AI-ready platform that delivers a variety of enhanced self-service options for policyholders and agents, such as real-time credentialing. Next year, workflows across the group will be enhanced by using the new system functionality, and we'll start revising forms and manuals to improve engagement and efficiency. Turning to our workers' compensation segment, we continue to observe and to address the higher medical loss trends that we initially saw in mid-2023, although they have begun to moderate this year. In addition, we believe our focus on operational discipline is having a positive impact. For the quarter, the segment's current accident year loss ratio was about four points below the four-year 2023 ratio, and it was six points below last year's third quarter. We continue to carefully manage our underwriting appetite as we work to obtain the necessary rate, with net written premiums up only $2 million due to higher audit premiums. New business was below last year at $3 million. We also continue to leverage our investment in a new integrated policy claims risk management and billing system implemented earlier in 2024. Not only is that system working well, it is paving the way for innovation initiatives that will help us address the challenging market conditions where we will be using AI along with underwriting and claims data analytics to enhance profitability, productivity, and efficiency. Last quarter, I mentioned one innovation project, our partnership with workers' comp claims specialist Clara Analytics. Clara is ramping up with our systems and will be on board this quarter to help us enhance medical outcomes for injured workers, improve our case reserve estimation capabilities, and lighten the administrative burdens of our claims professionals. We will be leveraging their platform to address aspects of escalating medical costs, including the medical document intelligence platform that will assist us with directing care to the best performing providers. and their tool to help identify high-severity claims early in the claims lifecycle. And that's just one example of what's underway in this segment. We're also making innovation investments in proprietary underwriting tools that expand the use of data analytics to guide and support operational decisions, improving penetration in a more profitable small account market segment. Across the organization, our attention remains intently focused on our long-term objectives and the results that we need to achieve. We are pleased with our progress this quarter, and we are continuing 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. We will not compromise to achieve a short-term fix at the expense of protecting our balance sheet and our insureds over the long term. Our long history in both medical professional liability and workers' compensation has taught us that these cyclical lines will respond to our focused efforts, as demonstrated this quarter. We remain confident in our ability to ultimately achieve sustained underwriting profitability in both businesses, despite market headwinds. We know that maintaining our discipline is a 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?

Thanks, Dan. 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 expected, net written premiums for the specialty P&C segment declined, in part because of our decision to discontinue participation in Lloyds. Ned talked about the factors that contributed to lower medical professional liability premiums, as well as the strategic initiatives that are leading to an improved net loss ratio. For workers' compensation, the trend in renewal rate change remains favorable. rising about two points for the quarter because of a large account that renewed at a higher level than last year. The increase in net written premiums was largely due to higher audit premiums that reflect continued wage inflation. The segment's combined ratio was 111%, with the current accident year net loss ratio at 77%, or four points below full year 2023. With the improvement in the loss ratios across all lines of business, And in consolidated operating earnings, we are seeing higher incentive-based compensation costs compared to last year. This is leading to an increase in the expense ratio, despite an overall reduction in headcount. Turning to investment results, we had another solid quarter. Net investment income rose by $5 million, or 14%, as we continue to take advantage of this rate environment. New purchase yields in the quarter were 5.2% or 160 basis points higher than our average book yield of 3.6%. The fixed maturity portfolio remains high quality with 93% in investment grade bonds with an average duration of 3.2 years. We continue to manage our asset duration to largely match that of our liabilities and to optimize our portfolio to generate yield. Our investments in limited partnerships and LLCs reported as equity and earnings of unconsolidated subsidiaries, added another $5 million to earnings. These typically report on a one-quarter lag, and they are continuing to produce strong results. As we previously discussed, our tax credit partnership investments are nearing the end of their life cycle, and the associated operating losses and related tax benefits are generally expected to be nominal. Reported book value per share has risen by over $2 since year end to $24.07, driven by earnings per share of 71 cents and the change in accumulated other comprehensive income of $1.56, largely due to after-tax holding gains of $77 million on our fixed maturity portfolio, which flows directly to equity. Adjusted book value per share has also increased, to $26.52. Our portfolio still includes a number of fixed maturity securities in an unrealized loss position. We have both the intent and ability to hold these securities until maturity, so should bond yields decline or as our portfolio matures, those unrealized losses will accrete back to book value. Further, there is upside because our current investment leverage is three times GAAP equity. To close, let me reiterate that we remain committed to protecting our balance sheet and our insureds over the long term. We are seeing signs that our actions are delivering positive results and that pricing levels are meeting our objectives. We will continue to be intentional on capital management.

Ned. Thanks, Dana. I just want to remind everyone that we know there is more to be done to achieve our long-term profitability objectives, but we are encouraged by the progress we are making. with nine-month operating earnings of 64 cents per share. We expect continued progress and look forward to sharing results in coming quarters.

Thanks, Ned. That concludes our prepared remarks. Operator, we're ready for questions.

Thank you. Of course, if you'd like to ask a question, please press star followed by 1 on your telephone keypads. 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 keypads now. Our first question comes from Maxwell Fritcher of Truist. Maxwell, your line is open. Please go ahead.

Hey, good morning. I'm on from Mark Hughes. You've mentioned the improved renewal pricing in the workers' comp. I'm not sure if you quantified that, but can you give a figure for that pricing?

Yeah. Kevin, could you give some details around that? Because I know there's some pieces to it.

Yes. So in our workers' comp insurance segment, the rate for the quarter was positive 2.3%. It was driven by one large renewal, and without that renewal, the rate for the quarter was minus 0.5%. Okay, perfect.

Thank you. And then just a question about the competitive environment you're seeing in the physician's business. Have you noticed any change in the behavior from the mutual companies?

No, I would not say any significant changes in the marketplace in the last quarter or so.

And then just a little more color on what you're seeing in the same line, the medical professional liability back book that's driving these reserve gains.

James Meeker- And I think it's just essentially what we laid out in our comments, which is as we as we've been closing claims in those older years. James Meeker- we're closing them at levels kind of that exceed our reserves and our expectations of where those claims might close so is as that happens, we gain greater and greater confidence and kind of how that book is ultimately going to mature and that's really what's driven on.

James Meeker- Okay understood, thank you.

Thank you. As a reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad. Our next question comes from Paul Newson of Piper Sandler. Paul, your line is open. Please go ahead. Paul, your line is open. Please proceed with your question.

Good morning. Thank you for the call. I got a couple of bigger picture kind of questions. The first one is this. If you look at both your specialty business and the workers' comp business, I would imagine that you have order rank the business basically policy by policy based upon the technical rate versus what you're actually getting. And my question is, you know, if you do that kind of analysis, you know, what kind of percentage of the business is sitting in a place where it's not really achieving your targeted returns versus what is, you know, the kind of the core business that really is. And I'm trying to get at whether or not we're still looking at a business or we've all ever been looking at a product portfolio where it's a fairly small part of the business that's driving the underperformance versus if it's something that's more broad-based?

There's a lot to unpack in that question, Paul. So maybe we'll take it in kind of three big chunks and ask my team to jump in where I go astray. If we think about the physician business, I would say that is the best performing of the specialty business. And kind of breaking it down probably more at a state by state level as opposed to order ranking of individual policy level. There are certainly states where we feel very comfortable with the rates. But there are still a number of states where we believe more rate is needed. And as we work to complete the year and as we look forward to 2025, we will continue to be driving rate in particular in those states where we think more rate is needed. James Rattling Leafs, Within the specialty healthcare side of the book, I would say that you know that's the area where where we continue to push rate 18% in this last quarter, but more rate is still needed there. James Rattling Leafs, I think what's really important for our book of business within that it's not just the rate, but it's the underwriting decisions we're making. James Rattling Leafs, And the and the classes of business and the individual risks that we're willing to ensure, and that is a. I would say there's more re-underwriting of that business that happens on an annual basis than there is in the physician book, just because it's a more dynamic part of the business that changes more frequently, but definitely more rates there. And then in the work comp space, and we've looked hard at this and it's really not an individual state. You know, the challenge in work comp is the decline in frequency over the last 10 years has led to this push down. James Pfeiffer- Pretty dramatic and certain marketplaces of lost cost multipliers and lost cost factors. James Pfeiffer- We think, by and large, the industry is overshot the mark on that, and there is a need to push rate up in the marketplace and that's certainly the efforts that we're undergoing I would, I would say that that that's broad across the whole work comp space in our view.

James Pfeiffer- And then. Is there more you want to add to that, or I have a second question?

No, go ahead, Paul.

Sorry. My second question, different, looking at the expense ratio, if you look at 24 versus 23, and obviously 24 is not completely over, it looks like you're increasing the expense ratio by, you know, a little bit under two points. I would assume that most of that, if we look at the nine months, may be just a higher compensation as the business recovers its profitability. So my second question is that if, let's call it when, ProAssurance reaches its targets, how much of that expense ratio could, how much could the expense ratio rise? if you hit, you know, the kind of ROE targets that you will do in the future.

A lot there as well. So let me just touch on two things about the kind of the current expense ratio. I remind you that last year we had the benefit of employee credits coming out of COVID, I believe, and that had an impact in bringing down the expense ratio in 2023. In 2024, we do have higher compensation costs that are tied to our short-term incentive plans. But those plans are designed to ensure that the vast majority of any increase in profitability goes to our policy or shareholders, excuse me, but that our employees do benefit as we improve our results. I don't know that I have a great answer for you kind of looking out. You know, it's a challenge when you're shrinking your top line through discipline underwriting and the pressures that puts on the expense ratio, especially as you want to kind of keep the talent within the organization whole. So we're very focused on that and then looking at other places where we can bring that expense ratio down over time. It doesn't happen overnight. I don't know, Dana, if you've got any more detail to provide on that. I don't think we would anticipate a significant increase in the expense ratio in the fourth quarter, certainly, kind of based on what we know today. And then looking out into 2025, I think it's going to be kind of that tug of inflationary trends on payroll and the efforts we have underway to manage headcount and other expenses. But I don't have a specific number for you, Paul. I'm sorry.

No, I think you've directionally.

Sorry, Paul. I believe we lost connection with your line there.

No, I was just thanking them for the answers.

Thanks, Paul.

Perfect. Thank you. We currently have no further questions registered on the telephone lines. Apologies, we've had a late question registered from Bob Barnum of Cheney. Bob, your line is open. Please proceed with your question.

Yeah, hi there. Question for Kevin. I know you spoke about medical trend, medical cost inflation moderating this year, but it's still remaining high. asking if maybe you can provide a little bit more color as to what you saw last year, what you see this year, how much has it come down, maybe just, you know, numbers, what inflationary trends are you assuming in the business right now?

Sure, Bob. So, you know, Ned mentioned that it's moderating. So when we look at average medical, it's down about 3%. And look, workers comp medical is made up of its unit cost, its mix of injury, its utilization. We are seeing increases in unit costs, notably in Pennsylvania, where the fee schedule is based off of average weekly wages, which, you know, is a multiple of a state where the fee schedule is based off of Medicare. Mix of injuries, average severity is up slightly, but in line with the industry. And we are seeing increases in utilization, notably in Pennsylvania through vertical integration. There was a study that we referenced a couple quarters ago on vertical integration, and Pennsylvania is listed as one of the top companies or top states, excuse me, with respect to healthcare being very vertically integrated, which naturally increases utilization. And then, you know, All of that is exacerbated by an aging workforce where older workers get injured more frequently and more severely. So, you know, those are hopefully some helpful points for you.

Yeah, no, that's that's good color. Thanks. So I don't want to just blame Pennsylvania, but it's Pennsylvania like I would say it's a key state for you. So is that one of the key drivers of kind of where you're seeing higher inflationary changes than maybe peers are. I understand you have a, you know, your, your, your book has a shorter tail. Maybe others haven't seen it yet, but we're always trying to, trying to figure out how your book is different than others. And, uh, it could be, you know, Pennsylvania could be one, one of the big factors.

Yeah. I mean, there's two things. It's the short tail and certainly the fee schedule, the medical fee schedules. if you were to look them up in Pennsylvania is, is, is definitely having an impact. When I look at the last three years of increases in Pennsylvania, the fee schedules are up about 14, 15 points and, and look, we're underwriting for it. Um, so it's, as Ned said, it's not a state that we don't want to do business in. It's just a state that we gotta be very, very careful around. And it is a large piece of our, of our book of business.

But thanks, Kevin. I do want to say, well, we are seeing that in Pennsylvania, and it is not exclusive to Pennsylvania. The trends, the overall trends that we talk about, we're seeing across the entire footprint.

Yeah, totally agree. I didn't mean to just blame Pennsylvania for it, but like I said, we're trying to dig around and trying to figure out what's going on. Great. Thanks, guys.

Thank you. We have no further questions registered by the telephone line. So I'll hand back over to Heather Wetzel for any closing remarks.

Thank you. And thank you to everyone who joined us today. Feel free to reach out if you'd like to arrange for additional conversation. And I would flag we're scheduled to be part of several virtual events in the coming weeks. So if you'd like to know any details on those, reach out. And of course, we look forward to speaking to you again on the year-end call. So thank you. Appreciate it.

Ladies and gentlemen, this concludes today's call. Thank you for joining me on Disconnect Your Lines.