ProAssurance Corporation Q3 FY2023 earnings call

Management Statement and Operational Highlights

• Operating Loss: $0.07 operating loss due to unfavorable Workers' Compensation reserve development, but gross written premiums were up 4% quarter-over-quarter, new business was significantly higher, and retention remained strong.
• Strategy: Relies on individual underwriting and pricing, aiming to grow profitably if disciplined in pricing and underwriting. Inflationary trends and higher loss severity affecting Specialty P&C, with proactive claims handling in Workers' Comp.
• Segment Reorganization: Discontinued participation in Syndicate 1729, reorganized segment reporting with underwriting results from the syndicate in Specialty P&C and investment results in Corporate. Recognized $44 million noncash goodwill impairment in Workers' Compensation Insurance, no impact on operating results.
• Investment Results: Net investment income increased 32% to $33 million due to rising interest rates. Repurchased 3 million shares in Q3 at a cost of $51 million, with remaining share repurchase authorization around $56 million.

Segment Performance

• Specialty P&C: Wrote $24 million in new business meeting pricing and underwriting standards. Renewal pricing increased 7% quarter-over-quarter, with retention in the segment at 87% (89% in Standard Physician). Underwriting expenses decreased by $4 million, resulting in an underwriting expense ratio of 25% (down nearly 2 points quarter-over-quarter).
• Workers' Compensation Insurance: Gross written premium was $63.6 million, flat quarter-over-quarter with 2022 Q3. New business was $5 million, $1.3 million higher than last year's Q3. Renewal retention was 87% but renewal rates were down 3%. Observed higher-than-anticipated loss trends in average medical cost per claim. Underwriting expense ratio was 34% (slightly higher than prior quarter).
• Segregated Portfolio Cell Reinsurance: Contributed a profit of just under $1 million. The combined ratio increased approximately 33 points to 128.2%, with 26 points due to tail coverage cancellation related to a program not affecting operating results.

Guidance

• Workers' Comp: Need to balance decreased claim frequency with inflationary pressures. Rate declines in the broader market not as significant as ProAssurance's, with medical inflation being a key challenge.
• Specialty P&C: Rate gains on renewal and new business, but loss side remains challenging with uncertainty. Inflationary trends and loss severity expected to impact pricing.
• Segment Changes: Syndicate 1729 participation will be in runoff, with impact on results to be seen in next year's Q2.

Risks

• Inflationary Trends: Affecting loss severity in both Specialty P&C and Workers' Comp, leading to higher-than-anticipated loss trends.
• Market Competition: Intense competition in Specialty P&C and Workers' Comp, impacting pricing and underwriting discipline.
• Goodwill Impairment: Noncash goodwill impairment in Workers' Compensation Insurance, though not affecting operating results.

Question and Answer

Q: View on Specialty business outlook despite worse results?

A: Edward Rand stated there's uncertainty in claims, but rate gains on renewal and improved competitor behavior are seen as positive signs.

Q: Workers' Comp rate vs pricing disconnect?

A: Edward Rand explained the difference between promulgated rates and actual pricing, noting ProAssurance is better at pricing to exposure, with medical inflation being a key challenge.

Q: Medical inflation in Workers' Comp?

A: Kevin Shook said medical inflation is pervasive, outpacing CPI and wage inflation by a wide margin, driven by labor costs in medicine and new therapies.

Q: Medical inflation in Specialty P&C?

A: Kevin Shook described higher medical trends as pervasive across the book of business, affecting various classes, geographies, and injuries.

Q: Competitive landscape in Medical Professional Liability?

A: Robert Francis mentioned mutual companies with excess capital, reinsurance market pressure on smaller carriers, and ProAssurance focusing on standard business in core states.