Yahoo Finance ProAssurance Corporation (NYSE:PRA) Q4 2023 Earnings Call Transcript
ProAssurance Corporation (NYSE:PRA) Q4 2023 Earnings Call Transcript February 28, 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 fourth quarter 2023 results. I'd like to remind you that the call is being recorded. [Operator Instructions] Now I will turn the call over to Frank O'Neil. Please go ahead.
Frank O'Neil: Good morning, everyone. We reported on fourth quarter results in the news release issued February 27, 2024, and in our report on Form 10-K, which was also filed yesterday on February 27, 2024. Included in those documents were cautionary statements about 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 be discussing selected aspects of the quarterly results on this call and investors should review the filing on Form 10-K and accompanying press releases for full and complete information. We expect to make statements on this call dealing with projections, estimates and expectations, and we 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 February 28, 2024. 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. Our management team also expects 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 will be Ned Rand, President and CEO; Dana Hendricks, the Chief Financial Officer. Also joining today our executive leadership team members, Rob Francis, Kevin Shook and Karen Murphy. Now I'm going to turn the call over to Ned.
Ned Rand : Thank you, Frank, and good morning, everyone. I want to address the headline number upfront. Our per share operating loss was $0.05 in the quarter, primarily reflecting the continuation of significant increases in losses in our Workers' Compensation book of business. The results are disappointing, but are a direct result of our commitment to protecting our balance sheet and our insurers. ProAssurance remains committed to a long-term strategy that we believe will ultimately create sustained profitability. At the same time, we have to recognize the headwinds presented by the current difficult market conditions and a very challenging litigation climate. Our experience has shown us that responding with pricing actions and a focus on underwriting discipline, while adapting to the evolution of our target markets will propel us on a positive trajectory.
While we remain confident that the strategies we have implemented will return ProAssurance to acceptable levels of profitability, we have to acknowledge that it is taking longer than we anticipated. The reality on the ground today is a loss environment that continues to worsen and has prevented us from making as much progress as we would like. Our financial performance, unfortunately, masks the tremendous progress we have made within our organization to streamline operations, refocus our business and make the organization more cohesive and effective. We remain confident this progress will make a difference over time. The competitive environment in both our Specialty P&C and Workers' Compensation Insurance segments continues to present a challenge.
However, in both lines of business, we saw gains in new business that we believe to be well priced, while renewal retention remains strong. Our operating decisions in light of competitive pressures resulted in an overall drop in gross premiums. A substantial amount of lost business was the result of our disciplined underwriting, our pursuit of rate adequacy and our decisions to walk away from business that could not be written profitably. The new business we do write and the policies we renew are rates we believe will ultimately perform better than the business we are non-renewing. When we add or retain business at these rates, it confirms our ability to present the market with an option to select high-quality coverage and superior service, both attributes, which have been the bedrock of our profitability in the past, and we believe will be so in the future.
Now I want to make some general comments regarding our operating segments. First, Specialty P&C where social and medical inflation continue to drive judgments and settlements higher, and we're reflecting that in our underwriting, pricing and reserving. Given the substantial deterioration in the litigation climate in recent years, our drive for additional rate will continue for the foreseeable future. In Workers' Compensation, we continue to be cautious about claims costs as the trends noted last quarter are unabated. Despite the fact that we are seeing continued reductions in claim frequency, the average medical cost per claim continues to rise as we see the dual effects of wage inflation for health care workers and increasing costs tied to the introduction of new medical treatments and technologies.
We believe we are ahead of the industry in recognizing these trends because of the short-tailed nature of our book. As a reminder, we closed cases approximately 40% faster than the industry, leaving us with fewer open claims at any one time compared to other companies in this line of business. And in our industry, the longer a claim is open, the more costly it becomes, which is why we focus on getting injured workers back to productivity as quickly as possible through early intervention and in-depth case management. Frank?
Frank O'Neil : Thank you, Ned. We'll next go to Dana, who will review some specific segment results and provide highlights from the balance sheet and investment returns. Dana?
Dana Hendricks : Thanks, Frank. Our operating loss in the quarter was $2.5 million or $0.05 per diluted share, with the difference between net income of $6 million and the operating loss primarily reflecting the exclusion of $11 million of net investment gains, $5 million resulting from the sale of our remaining ownership interest in an entity associated with our Lloyd's syndicate and $3.5 million of foreign currency exchange losses. In terms of underwriting results, our consolidated combined ratio rose almost 8 points compared to the fourth quarter of 2022, which results in the Workers' Compensation Insurance segment being the primary driver of that increase. While our consolidated expense ratio was higher than the fourth quarter of last year, this was largely driven by current quarter adjustment to our full year estimate of ULAE in our Specialty P&C segment, which unfavorably impacted our consolidated expense ratio by almost 2 points and had an equal and offsetting favorable impact to our consolidated loss ratio.
The remaining increase in our consolidated expense ratio primarily reflected the pressure of lower earned premium, which we expect to continue into 2024 as we maintain our drive for higher rates. Turning now to our operating segments. In Specialty P&C, premiums were $15 million less than fourth quarter last year with about $8 million of the reduction driven by our focus on getting adequate rates for the risks we're underwriting and walking away when we cannot do so, and the remaining difference being due to timing differences. Even as we are focused on rate adequacy, we are able to write new business and renew policies that meet our underwriting standards. New business was $18 million, essentially double last year's fourth quarter and renewal pricing was 6% higher, with premium retention at 83%.
Those results tell us that insurers find value in ProAssurance and are willing to pay for the insurance promises we make and the service we deliver. In our Workers' Compensation Insurance segment, gross written premiums decreased $800,000. That decline was primarily the result of lower renewal and audit premium in our alternative market business ceded to the segregated portfolio sale reinsurance segment. In our traditional book, new business writings and renewal premiums each increased approximately $1 million compared to last year. Retention was 85%, 11 points higher than the fourth quarter last year. At the same time, renewal rates declined 3% as we continue to see intense competition and face rate pressure from prescribed state loss cost adjustments.
In fact, some states have approved additional loss cost decreases for 2024, which flies in the face of the loss cost trends we're seeing. In response to the loss trends in our Workers' Compensation book, we increased our full year current accident year loss ratio to 81%. Underwriting expenses in our Workers' Compensation segment were essentially unchanged from last year's fourth quarter. However, the underwriting expense ratio increased 4 points primarily reflecting lower net premiums earned. Our investment results continue to be a highlight as net investment income increased by almost $5 million to $34 million due to higher average book yields as we continue to reinvest at higher rates as securities within our portfolio mature. New purchase yields in the quarter were 5.2% or 200 basis points higher than our average book yield.
Our average investment balances are down approximately 1.7% since the end of last year as we've reduced the rate of reinvestment in order to provide more cash for operating needs. Book value per share at year-end was $21.82, up 7% from the end of last year driven by after-tax unrealized holding gains of $88 million on our fixed maturity portfolio. That said, there is still approximately $4 per share of embedded unrealized holding losses in book value per share, which will accrete back to book value as the portfolio matures as we have both the intent and ability to hold until maturity. And before I conclude, there are a couple of items I'd like to highlight. First, on November 15, we refinanced our $250 million senior notes with a $125 million draw on our revolver and a $125 million term loan.
Additionally, we entered into 2 interest rate swaps that were effective December 29, which results in a total interest rate on the revolver and term loan of 5.3% and 5.5%, respectively, going into 2024 as compared to the 5.3% interest on our retired senior notes. We're very pleased with the result of this refinance given the current lending environment. Second, in our call last quarter, we mentioned that we would be ending our participation at Lloyd's, beginning with the 2024 underwriting year. That's done, and we will begin to see that impact in our financial results in the second quarter of 2024 due to the quarter lag. As a reminder, the results from our participation in open underwriting years prior to 2024 will continue to earn out pro rata over the remaining policy period.
And as I mentioned earlier, we completed the sale of our interest in an entity associated with our Lloyd's syndicates prior to year-end. Frank?
Frank O'Neil : Thank you, Dana. Ned, I think you wanted to make 1 more comment before we open it for questions.
Ned Rand : Yes. Thanks, Frank. Before we open it for questions, I want to congratulate Dr. Ross Taubman, who leads our unit -- our small business unit. Ross is retiring, and I want to thank him publicly for the work he's done for our company and for our insurers. His leadership in our podiatric business and in the realignment of our small business unit has been invaluable. Thank you, Ross.
Frank O'Neil: Thank you, Ned. And Alex, that concludes our prepared remarks. We are ready for questions if you'll open the lines.
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