ProAssurance Corporation Q1 FY2024 earnings call

• Operating earnings in first quarter were $0.08 per share, benefiting from 6-point improvement in calendar year loss ratio and 12% increase in investment income. Focused on driving underwriting improvement with 3-point improvement in current accident year loss ratio.
• Markets are challenging; cautious about risks underwritten and loss cost trends. Focused on achieving pricing levels for long-term profitability, seeing solid progress in strong retention of existing insurers and forgoing business not meeting underwriting criteria.
• Medical professional liability market has challenging loss environment with resumption of social inflation and severity trends; monitoring impact on open case reserves. Workers' comp market has higher medical cost per claim due to health care wage inflation, higher utilization, etc.
• Specialty P&C segment showed progress in underwriting, pricing, and reserve development. Workers' Compensation segment continued disciplined strategy with state loss cost reductions driving premium rate decreases.
• Investment income increased due to rising rate environment, with new purchase yields higher than average book yield and gains from LP/LLC investments.

Specialty P&C Segment

• Gross premiums written declined $3.6 million quarter-over-quarter due to nonrenewal of a large account. Retained 86% of eligible renewals with an average 7% rate increase. Generated $10.4 million of new business. Current accident year net loss ratio improved almost 5 points compared to first quarter of last year. Recognized net favorable prior accident year reserve development of $1.3 million, primarily from purchase accounting amortization related to the NORCAL transaction. Expense ratio increase was due to beneficial items in 2023 and participation in Lloyd's with a reporting lag; business will be in runoff from second quarter.

Workers' Compensation Segment

• Slight decline in top line premiums (~$800,000). Retained 87% of existing policies at rates moving toward long-term rate adequacy goals. Added $8.2 million of new business selectively. Accident year loss ratio below full year 2023 but higher than last year's first quarter due to medical cost trends. No change in prior accident year reserve estimates. Underwriting expense ratio higher than prior year quarter due to compensation-related costs and EBUB estimate impact.

Investment Results

• Net investment income rose $4 million or 12% quarter-over-quarter. New purchase yields were 5.6%, 220 basis points higher than average book yield. Recorded a $3 million gain in equity and earnings from LP/LLC investments compared to $800,000 loss in year-ago quarter. Book value per share was $21.82 with $4 per share of embedded unrealized holding losses, but intent and ability to hold securities until maturity means losses will accrete back to book value as portfolio matures.

• Focused on achieving pricing levels to move toward long-term profitability goals. Will continue to be cautious about market risks and loss cost trends. Intention to continue capital management. Signs of pricing levels meeting objectives are being seen.

• Challenging market conditions for the sectors operated in. Social inflation and higher severity trends in medical professional liability that could impact open case reserves. Higher medical cost per claim in workers' comp that the broader market must address. Mutual carriers with excess capital affecting competitive environment by being able to write at lower combined ratios due to investment income.

Q: How has the competitive environment changed over the past year or so?

A: Competitive environment is inconsistent. Many mutuals have accumulated capital and investment income, willing to write at levels not considered appropriate. Some competitors are more rational in pricing now but mutual carriers still operate in a less predictable way compared to before.

Q: How do you see the rate environment playing out in workers' comp over the next year or 2?

A: Rate environment needs an inflection point. Decline in pricing has been frequency-driven, but severity trends in medical care are unquestionable. Severity trend will be more meaningful, and the point where severity crosses frequency is what to watch for.

Q: What can be done to address social inflation in the Specialty P&C segment besides raising rates?

A: Can control claims by choosing which claims to settle, influence through underwriting by choosing risks and territories. Also, industry needs to inform public about product, value provided, and work on tort reform including disclosure of litigation funding, parameters around life care planners, etc. Some geographic areas are more stable than others but delineation is harder now than 10 years ago.

Q: Thoughts on mutuals doing cash flow underwriting and Fed rate turn?

A: Mutuals are investment income driven, can write to higher combined ratios and still have operating profit. Consistently underpricing year-over-year compounds the gap to good pricing, and when they need to get back to adequate pricing, the jump can be considerable. But currently, they use investment income to offset underwriting losses.

Q: Components of improvement in current accident year loss ratio in health care business?

A: Driven in part by earned premium with limited claim detail, pricing gains from 12 months ago where pricing is in excess of severity trends, and analysis of non-renewed business and current business mix.