ProAssurance Corporation (NYSE:PRA) Q1 2024 Earnings Call Transcript May 11, 2024

ProAssurance Corporation isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, everyone. Welcome to ProAssurance's conference call to discuss the company's first quarter 2024 results. I would like to remind you that the call is being recorded and there will be a time for questions after the conclusion of prepared remarks. Now I will turn the call over to Heather Wietzel.

Heather Wietzel: Good morning, everyone. It's a pleasure to be here today. ProAssurance issued both its news release and report on Form 10Q and first quarter results yesterday, May 6, 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, and investors should review the 10-Q 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 laws and subject to applicable safe harbor protections.

The content of this call is accurate only on May 7, 2024, and is 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. 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, Robert Francis, Kevin Shook and Karen Murphy. Now I'll turn the call over to Ned.

Edward Rand: Thank you. And I'd like to start by welcoming everyone to our call and welcoming Heather to ProAssurance. We reported operating earnings in the first quarter of $0.08 per share, benefiting from a 6-point improvement in the calendar year loss ratio and a 12% increase in investment income. We remain focused on driving underwriting improvement which can be seen in the 3-point improvement in our current accident year loss ratio. The markets we operate in continue to be challenging, and we remain cautious about both the risks we underwrite and loss cost trends. We are focused on achieving pricing levels that help move us toward our long-term profitability goals and believe we are continuing to get rate beyond loss cost trends.

We saw solid progress toward our objectives in the quarter with strong retention of existing insurers. We continue to forgo new and non-renew existing business that does not meet our underwriting criteria. The loss environment in the medical professional liability market continues to be challenging in many jurisdictions, with the resumption in the fourth quarter of 2022 of the pressure on claims costs from social inflation and higher-than-anticipated severity trends. These had initially emerged in 2019 and 2020, but abated during the pandemic. We continue to monitor the impact that these trends could have on our open case reserves and prior year development, but are confident in the actions we're taking to address market conditions. Reinforcing the importance of our underwriting stance, we are continuing to see the impact of higher medical cost per claim in current workers' compensation claims trends, a trend we believe the broader workers' comp market must ultimately address.

Despite continued moderation of claim frequency, the average medical cost per claim is still rising due to health care wage inflation, higher utilization and rising costs as new treatments and technologies are applied to patient care. Confirming our view in a study published in December 2023, the Workers' Compensation Research Institute described the impact on payments per claim of vertically-integrated providers, which represents an ever-growing share of the market. The study noted that workers treated by these providers received more medical care and saw more providers, increasing payments per claim by more than 10% at 12 months of maturity without meaningfully changing outcomes. Since we closed cases on average 40% faster than the industry, we can observe and respond to trends more quickly in our book of business.

We're using the insights we're gaining to underwrite accordingly. We're convinced the impact of higher medical utilization will be seen industry-wide in the coming quarters. The bottom line is that our long history in both medical professional liability and workers' compensation has taught us that these cyclical lines of insurance will respond to our focused efforts. We remain confident in our ability to ultimately achieve underwriting profitability in both businesses. However, as I said last quarter, the current market conditions are a headwind, keeping us from achieving that goal as quickly as we would like. These conditions will likely require us to shrink our book in some markets, while we wait for conditions to improve and we can 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 insureds over the long term. We know that maintaining our discipline will be key to delivering the positive long-term results we believe we can achieve. I think you'll see signs of our progress in Dana's remarks as she takes a closer look at the segments.

Dana Hendricks: Thanks, Ned. Let me start with the Specialty P&C segment. The segment's top line is a good example of the progress Ned mentioned. Gross premiums written declined $3.6 million quarter-over-quarter driven by our nonrenewal of a large account. We retained 86% of policies eligible for renewal, maintaining our disciplined underwriting and pricing criteria to achieve an average rate increase of 7%. We were able to generate $10.4 million of new business priced at rates that move us toward our long-term profitability goals. We're also seeing the benefit of our risk selection where we're leveraging our expertise in the sector to identify segments of the medical professional liability market that could yield opportunities for greater profitability.

Another example is the segment's current accident year net loss ratio, which improved almost five points as compared to last year's first quarter. This also demonstrates the positive effects of our ongoing application of our underwriting and pricing guidelines as well as our effective claims management strategy. In the quarter, we recognized net favorable prior accident year reserve development of $1.3 million, primarily attributable to purchase accounting amortization related to the NORCAL transaction. Last year's first quarter included $7.4 million of unfavorable development, primarily the result of several large verdicts. As a reminder, we perform a more in-depth review of prior year reserves on a semiannual basis in the second and fourth quarters.

The increase in the quarter's expense ratio was primarily due to the impact of beneficial items in 2023, including a $3.8 million payroll tax refund from the Employee Retention Credit program and a decrease in the fair value of the contingent consideration liability related to the NORCAL acquisition. First quarter segment results also reflect our participation in Lloyd's with the one quarter reporting lag. This business will be in runoff beginning in the second quarter, with activity for open underwriting years prior to 2024, earning out over the next few years. The theme of disciplined operational strategy continues in our Workers' Compensation segment where state loss cost reductions are continuing to drive compounded premium rate decreases.

We continue to believe the current market conditions require extraordinary dedication to premium adequacy and risk selection. We saw a small decline in top line premiums for the segment of approximately $800,000. Despite a slight reduction in policy count, premiums in the traditional book were approximately $3 million higher for several reasons. First, we're seeing higher reported insured payrolls and positive midterm policy endorsement. Plus, we renewed several policies as traditional business that were previously written in a captive program in the Segregated Portfolio Cell Reinsurance segment. We retained 87% of existing policies at rates that we believe move us toward our long-term rate adequacy goals. The $8.2 million of new business was added selectively.

The segment's first quarter accident year loss ratio was below full year 2023, although higher than last year's first quarter due to the medical cost trends that Ned discussed. We believe our caution around the current claims environment and our focus on operational discipline is beginning to be reflected in results. There was no change in prior accident year reserve estimates in the first quarter of 2024 for this segment. The underwriting expense ratio was higher than the prior year quarter, primarily reflecting an increase in compensation-related costs in the current quarter and the impact of an increase in our EBUB estimate in last year's first quarter. Turning to investment results. Net investment income rose by $4 million or 12% quarter-over-quarter as we took advantage of the rising rate environment.

New purchase yields in the quarter were 5.6% or 220 basis points higher than our average book yield. We also recorded a $3 million gain in equity and earnings from our investment in LPs and LLCs compared to an $800,000 loss in the year ago quarter. Book value per share was $21.82 with approximately $4 million -- excuse me, $4 per share of embedded unrealized holding losses. We have both the intent and ability to hold the related securities until maturity, so those unrealized losses will accrete back to book value as the portfolio matures. As Ned said, we are committed to protecting our balance sheet and our insureds over the long term. We are seeing signs that our actions are beginning to achieve pricing levels that meet our objectives, and we will continue to be intentional on capital management.

Heather?

Heather Wietzel: Thank you, Dana. Ned, any final comments?

Edward Rand: Thanks, Heather. I'd simply like to reiterate that we're pleased to report profitability in the quarter, that we know there is more to be done and that we understand the urgency of achieving that goal. But I'll say again, we will not take shortcuts to get there.

Heather Wietzel: Thank you. That concludes our prepared remarks. Harry, we're ready for questions.

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