Good morning, everyone. Welcome to ProAssurance's Conference Call to discuss the company's second quarter 2023 results. These results were reported in a news release issued August 8, 2023, and in the company's quarterly report on Form 10-Q, which was also filed on August 8, 2023. 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, management will discuss selected aspects of their quarterly results on this call. Investors should review the filing on Form 10-Q and accompanying press release for full and complete information.
Management expects to make statements on this call dealing with projections, estimates, and expectations, explicitly identifies 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 August 9th, 2023, 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. The management team of ProAssurance 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. I'd like to remind you that the call is being recorded, and there'll be time for questions after the conclusion of prepared remarks.
Speakers on the call today will be Ned Rand, President and CEO, and Dana Hendricks, Chief Financial Officer. Also joining on the call today are executive leadership team members Rob Francis, Kevin Shook, Ross Taubman, and Karen Murphy. Now I will turn the call over to Ned.
Thank you, Elliot. Good morning. Today, Dana and I are looking forward to giving you some insight into the second quarter numbers that we released last night and discussing the drivers we're seeing in the medical professional liability and Workers' Compensation markets. I will provide some commentary regarding the market conditions we're seeing, and then Dana will provide the consolidated results and key drivers of our investment returns and book value. The results we released last night represent a solid quarter and highlight both the challenges and opportunities in the markets in which we operate. At a high level, there has been relative stability in the current accident year loss ratio, albeit at higher, a higher level than in 2022, and a decline in favorable prior accident year reserve development. Underwriting expenses are stable for the quarter relative to the prior year, and investment results have improved significantly.
The competitive market and challenging claims environment that are impacting our current and prior accident year loss ratios have been persistent within our industry for some time now, and we expect these to continue, providing us some indication of what we can expect in coming quarters. With that background, I'll walk you through the results reported in our key segments. The lower underwriting result in our Specialty P&C segment was driven primarily by a reduction in favorable prior accident year reserve adjustments. We have historically experienced considerable favorable development in this segment, though the amount of development in recent years has been lower than the average for the past decade. While we still booked favorable development in the quarter, our assessment of the claims environment has made us cautious about reducing the level of outstanding reserves. We continue to monitor increased severity trends in a handful of our legacy jurisdictions.
We also have responded to the difficult environment by setting higher initial case reserves on reported claims. We booked a current accident year loss ratio of 84.7%, up slightly from last year. We recognized net favorable prior accident year reserve development of $7 million in the quarter, primarily in our medical technology liability business. The claims environment that I described in detail on last quarter's call remains with us for the foreseeable future, and we continue working diligently to manage losses and mitigate the impact of social inflation. Given the current environment, the impact of any change may not be obvious in a single quarter. Instead, we expect the results of our efforts to be evident over time. Our gross written premium increased by 1% from a year ago, with new business from our specialty line exceeding expectations and contributing to the top-line growth.
Our strategy in the E&S and specialty market is to retain the business we like, reduce limits where we can, and walk away when we cannot achieve our targeted price, and to be opportunistic on new accounts. Consistent with that strategy, we wrote $12 million of new business in the quarter, up from $8 million last year. The medical technology liability new business production increased year-over-year, despite a very competitive environment. Premium retention for the segment overall was 83%, a point below last year's as we continue to focus on price over volume. Price competition is the largest driver of business not renewing with us. We also continue to see healthcare consolidation and practice changes affecting retention levels and leading to the loss of some policyholder accounts in both the standard and specialty books.
Overall, pricing in the Specialty P&C segment increased by 6% in the quarter, continuing to compound upon last year's 6% increase. Underwriting expenses were down slightly from last year as we continue to focus on efficiencies and process improvements, systems integration, and statutory consolidation. An increase in ceding commission, which reduces underwriting expenses, contributed to the decline in expenses in this quarter. Compensation and related costs have increased in the quarter compared to the prior year, as a number of open positions have been filled. The expense ratio of 26.5% was slightly higher as a result of lower earned premium this quarter compared to 2022. Turning to the Workers' Compensation Insurance segment, gross written premium decreased by $1 million in the quarter, with a challenging and competitive market impacting both retention and renewal pricing.
In our traditional business, renewal pricing was down 7% and retention was 80% for the quarter. We saw an increase in audit premium for the quarter and increased our estimate of carried EBUB premium, both of which helped to offset the decrease in retention and pricing. We also saw growth in new business in our traditional book, adding nearly $6 million of new accounts in the quarter. The current accident year loss ratio of 72.6% remained consistent with our Q1 loss ratio and was approximately a point higher than the second quarter of 2022. A portion of this increase was due to higher headcount in our claims department and the associated compensation costs, which flow into our loss ratio through unallocated loss adjustment expense.
We also saw an increase in estimated losses recognized under our reinsurance contract's annual aggregate deductible, which contributed to the increase in loss ratio. We booked no change in the prior accident year reserves compared to favorable development of $2 million last year. This led to an increase in the calendar year loss ratio. Expenses increased compared to last year, with compensation costs, travel expenses, and IT costs driving the increase. The increase in compensation costs primarily reflected a higher headcount in the segment as we filled open positions. The segment expense ratio was 35% for the quarter. I'll finish with the Segregated Portfolio Cell Reinsurance segment, which posted a profit of just under $1 million for the quarter, and the Lloyd's Syndicate segment, which generated a small profit.
I'd like to turn the call over to Dana to share our consolidated results and some highlights from the balance sheet and investment returns. Dana?
Thanks, Ned. Good morning, everyone. For the second quarter, we reported net income of $10.6 million or $0.20 per share, and operating income of $8.6 million or $0.16 per share. The main difference between the two is the impact of net investment gains. The operating gain in the quarter reflected improved loss and combined ratios compared to the first quarter of this year, coupled with strong performance from our fixed income investments and LPs and LLCs investments. Our consolidated combined ratio increased 5 points from the second quarter of 2022, with lower favorable development on prior accident years driving the change. Improved investment results provided a 4-point benefit to the consolidated operating ratio. Therefore, the operating ratio increased 1 point from last year.
Our consolidated current accident year net loss ratio was essentially unchanged from the second quarter of 2022 after excluding the impact of purchase accounting and prior year ceded premium adjustments. The primary driver behind the change in the consolidated net loss ratio for the quarter was the reduction in favorable prior year reserve development. In the second quarter, in the second quarter of 2022, we recognized $19 million of favorable development. In 2023, we recognized favorable development of $6 million. The consolidated expense ratio decreased slightly to 31.1% and was aided by an increase in tail premium earned this quarter as compared to last year's second quarter. The ratio also benefited from a decline in transaction-related costs, which were in our 2022 expenses, but not in 2023.
Excluding those beneficial effects and the impact of changes in DPAC amortization and net premiums earned, the expense ratio increased by half a percentage point due to higher compensation and travel costs. Net investment income grew by 44% to $32 million in the quarter, as our reinvestment rate has exceeded that of the maturing assets in each of the last eight quarters, and our floating rate securities reset to higher yields as well. As noted earlier, the increased investment income had a positive impact on operating performance, as it largely mitigated the increase in the combined ratio when comparing to last year. In the second quarter, we reinvested maturing bonds at yields approximately 180 basis points higher than the portfolio's average book yield.
Equity and earnings from our investment in LPs and LLCs, which are typically reported to us on a one-quarter lag, increased to $8 million in the quarter. The results in the quarter include the fourth quarter results of eight funds due to the timing of when those funds report to us. As we noted in our last earnings call, we expected positive marks on the eight funds. Net investment gains, which are excluded from operating income and drive the difference between operating and net income, were $3 million in the quarter, driven by $2 million in gains from the change in fair value of the contingent consideration liability associated with the NORCAL transaction.
Other income decreased to $2.7 million in the quarter from $5.3 million in the same quarter of 2022, due to changes in foreign currency exchange rates and the impact of foreign currency-denominated loss reserves in our Specialty P&C segment. This quarter, the effect of foreign currency movements was a loss of $400,000 due to strengthening of the euro in the quarter, compared to a gain of $2.5 million in the prior year period. Our book value per share at quarter end was $21.24, up 4% from year-end, driven by after-tax holding gains of $24 million on our fixed maturity portfolio, which flows directly to equity. Our share repurchase contributed $0.32 to the increase in book value.
Adjusted book value per share, which excludes $5.07 of accumulated other comprehensive loss, primarily from unrealized holding losses, is $26.31 as of June 30th. We consider these unrealized losses to be temporary, as we have both the intent and ability to hold to maturity. We're pleased to report a solid quarter, which included increasing investment income, an uptick in new business, and a stable current accident year loss ratio. That concludes our prepared remarks. Elliot, we're ready for questions.
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question today comes from Mark Hughes with Truist. Your line is open.
Yeah, thank you. Good morning.
Morning, Mark.
Ned, you talked about the kind of relative stability, I think, in the environment. Any experience in 2Q around the large claims? I think the Q1 experience was a pretty meaningful. Of how has that extended through the rest of the year?
It's a nice question, Mark. Yeah, I in the first quarter, we had a couple of, I would call, very large claims that impacted the quarter. We continue across the market to see those sorts of claims occurring, although we didn't have any that occurred in our book during the quarter. We remain cautious in that regard. I would say, as an observation, that while we're not necessarily seeing the environment get better, we're not seeing it get worse, but have our eyes wide open as to what may come.
What, when you think about the new business, your new business seem to be up, up pretty strongly, pricing up, 6%, pretty consistent with prior quarters. I, I guess it's the same question: Do you want to be pursuing new business with, in this kind of environment with, current accident year loss picks, you know, up in the mid-80s?
Yeah, it's a good question, I mean, the short answer for us is yes, if you're, if you're doing it in a way that's, that is smart. I'm going to ask Rob Francis maybe to, to chime in on that a little bit. Rob?
Sure. Hi, Mark. Rob Francis. Pursuing new business, obviously in a market where we don't think pricing is firm can be tricky, but that's what underwriting, of course, is all about. You know, we think our success in new business over the past really six months has been largely driven by our execution of our strategy, which, following our integration of NORCAL, was really to reconfirm our relationships with our elite and larger agency partners, and we think that's bearing fruit. We are seeing some of the larger carriers express a little bit more price discipline. They're filing for some single-digit rate increases and sticking to those rate increases, even as some of the smaller mutual companies, regional companies are happy to undercut business.
It's a, it's a pick-and-choose situation, but we do think there are a few opportunities out there.
Thanks, Rob.
Yeah. Appreciate that. Then, on the workers' comp, no, prior year development, current accident year loss picks up a little bit. I'm just looking year-over-year. Can you give us a sense of what you see there? Particularly, is there any kind of medical inflation that's been emerging?
Yeah, maybe I'll make a, a, a brief comment, and then we'll get Kevin Shook to, to chime in. I, I believe, yeah, we are beginning to see inflation work its way into kind of the work comp claims costs. I think as we talked about previously, you, you get a nice tailwind in the beginning, as compensation costs go up, they drive premium up, and then you're going to catch that a little bit later as a headwind, as it works its way into claims costs, and we're beginning to see that inflation creep in. Kevin, what would you add to that?
No, Ned, I think that's exactly right. You know, we've been cautious in releasing prior year reserves because we are starting to see inflation come through the book, both on policies written later in 2022 and into 2023. You know, 2022 benefited from the top-line audit premium, the industry was saying there's a tailwind. If our policyholders are paying workers more, it'll eventually go through indemnity inflation and healthcare workers, you know, where wage inflation is very prevalent, is ultimately going to increase the cost to care. Just lastly, with our claims tail being about half of the industry, we're certainly going to see inflation before a lot of our peers. While frequency is down, the average cost per claim is up, and it is being driven largely by indemnity and a little bit by medical.
Thanks, Kevin. I, I want to emphasize two things that, that Kevin or one thing that Kevin referred to, and the impact I think it has in two different places. We do have a, a shorter tail business than most of the work comp industry, and I think that causes us and allows us to recognize trends faster than a lot of the industry. The other thing that it does, though, by closing claims in, in a, a high inflation environment, is that we avoid the compounding impact of inflation over a long period of time because we've been able to close the claims. I think those are both really important factors as we look at our business.
Thank you very much.
Thanks, Mark.
Our next question comes from Paul Newsome with Piper Sandler. Your line is open.
Good morning. Thanks for the call. I was wanting to ask a little bit about the core price increases on your medical malpractice or your workers' compensation business. You know, 6% seemed a little low given what you've described as a pretty high inflationary rate. You know, is that enough to get you to a place where you can move the effective, you know, technical margins into better, or are you just sort of holding still from a margin perspective in your core business?
Yeah, Paul, thanks for the question. You know, I, I think one of the things that, that doesn't just get reflected in that rate increase is the other actions we're taking as an organization around just the re-underwriting in the book, the business that we're walking away from. And especially in our Specialty P&C business, kind of the restructuring of some of the terms and conditions on the E&S business in particular. You know, when you put all of that together, and then you compound the rate increases that we've been achieving over the last three-four years, we, we, we feel like we are getting beyond trend and, and, you know, making incremental improvement in the underwriting results.
It's not gonna, you know, turn as fast as it did in the early 2000s, where we were getting 30% and 40% rate increases. That's just not the market we live in today.
Is that same true on your Workers' Comp business? Do you think you are raising rates faster than the underlying claims inflation rate as well, or?
Well, I think we are-
There's not much in terms of tradition.
Yeah, maybe Kevin can chime in, but Paul, we're not raising rates in comp right now. Rates are coming down in comp, but we think we're controlling the way they're coming down and have been controlling the way they've been coming down over the last number of years. I think when you look at kind of rating bureau indications, Kevin will correct me when I go astray here, but, you know, we're on eight or something years of rate reductions in, in the work comp market. If you just took those indications, you know, rates in the ProAssurance book would be far lower than where they are today. As an individual account underwriter using a lot of underwrite adjustment, we've held against a lot of that decline in trend.
We do recognize that the decline in loss cost justifies the decline in rate, but we're holding where we think we need to hold. Kevin, I may have misstated some of that. Anything you'd add?
No, nothing to add, Ned.
All right, thanks.
Great. Thank you for the help, as always. Appreciate it.
Thanks, Paul.
Our next question comes from Robert Farnam with Janney. Your line is open.
Hey there, good morning. A couple questions, one on the Workers' Comp segment. It's more of a, more of a broad view. The Workers' Comp line, for the industry has done pretty well over the last decade or so, but it seems like you guys have had a hard time generating any meaningful underwriting profit for several years now. I'm just curious, what's the primary difference between your book and maybe the overall book? Is it, is it just the shorter-tailed aspect of it, and you're recognizing the severity trends, or is there something else that's going on that's, that's creating a, a less profitable, less profitable book than the industry?
Yeah, Bob, it's a, it's a great question, and I think it is essentially what you said, which is we are closing claims faster, which I think means that we are kind of owning up to some of the things that are happening in, in the loss environment and costs in the loss environment, perhaps faster than some of the industry will ultimately recognize them. As to the mix of business, I don't think there's anything particular to our mix of business that's, that's vastly different. In, in fact, you know, because we write, you know, largely more suburban and rural risks and smaller employers, that generally has, has favored the loss environment, where you've kind of got a, a more wholehearted effort to get injured workers, you know, back to the wellness and the dignity of work.
Kevin, what would you add to that?
Yeah, absolutely. Bob, it's really all how we have recognized prior year development and booked our accident year loss ratios more precisely because of that shorter claims tail. If you think about the industry, depending upon the research that you read, you know, calendar year combined or 91, 92 estimates for 2023, there's 15 points, 14 points of favorable development, which means the accident year combined are, you know, 104 to 108. When we look at our book of business and did this at the end of 2022, we compare our accident year loss ratios over the last five years to the industry, we're still several points better.
I think it's the acceleration of the development that we've already taken in the past, more precise accident year loss ratios, and the industry being slower from a claims perspective when it comes to favorable development.
Okay, when you're saying... So the, the 72.5 or so that you're booking thus far this year, you're saying, and, for an accident year loss ratio, you're thinking that's, that's actually decent relative to the industry, or at least the, the peers that you go against?
... No, that's correct. Keep in mind, when the industry historically has booked, and again, lately, 14 or 15 points, historically, Eastern has booked 3 or 4 points. I do think that is the biggest difference.
Okay, great. Thanks for that color. The second question I had was on the Segregated Portfolio Cell Reinsurance. This may be something better taken offline, but I was just curious, you know, like that the underwriting performance of the Portfolio Cell segment has done really well for as long as I can go back. Just curious, what makes, what makes the underwriting results in that segment much stronger than in the Specialty P&C, in the Workers' Compensation segments?
I, I think it's the way that we share risk, right? I mean, there's more skin in the game for all the participants, be it a, a company on captive where they're taking risk, or an agency on captive where we're, we're sharing risk alongside an agency partner. Because everyone is, is sharing more fully in that risk, I think that leads to, to better results.
Okay. All right. Now, that makes sense. All right. That's it for me. Thanks for the color, guys.
Thanks, Bob.
As a reminder, if you'd like to ask any further questions, please press star one on your telephone keypad now. I'll turn to Matt Carletti with JMP. Your line is open.
Hi, thanks. Good morning.
Morning, Matt.
I was, I was hoping you could just give us a little more color around the, the competitive environment. Just trying to get a feel for, for two things. You know, one is, you know, when, when you guys are competing for business, is it one or two kind of, you know, aggressive outliers that, that are kind of, you know, garnering market share? Or are you guys the outlier on the high end, and it's most of the rest of the market that, that is less interested in making a profit? And then when you do win business, you know, you, you guys are obviously very well known for kind of your reputation of, of standing by your insureds and, and, you know, defending them.
You know, in the past, I think you've talked about how there's a some amount, you know, people are willing to pay for that. Did you find that's the same now or, or better or worse?
Yeah. I guess on the, on the first question around the competitive environment, I, I don't think the, the environment is kind of symmetrical as, as you're, you're hoping to make it. It, it really is almost down to a risk-by-risk difference and, and who competes on a particular risk. It can be driven by geography, it can be driven by the type of risk that it is. To kind of echo what Rob Francis said earlier, you know, we are beginning to see kind of larger carriers that are showing greater price discipline, but we continue to have a, a number of very well-capitalized mutual companies that, that are willing to chase price down to levels that we think don't make a lot of sense. It...
kind of who is, is getting involved in any one risk, is going to vary. You know, I- sometimes we are going to be the outlier because we're going to be the higher price. We, we do see that frequently. I think that's in part why you see an 83% retention in the quarter. And other times, we are going to find risk where our service model allows us to charge a higher price and sell. You know, the, the insureds that, that we are selling to today are different in, in, in a lot of ways from the insureds of 10+ years ago, and so the value proposition can and does change for, for larger, more complicated insureds, be they hospital systems or very, very large groups of physicians.
That defense, while very valuable, especially, in just our ability to work up claims, even if they're not going to go to trial, just the diligence that our claims team puts into, understanding and researching and finding experts around claims continues to add value, even if you don't plan to go to trial. But the desire to go to trial, across the entire book, I'd say, is less today than it was 10 years ago.
Okay, fair enough. Thank you very much.
Yeah, thanks, Matt.
This concludes our Q&A. I'm going to hand back to Dana Hendricks, CFO, for closing remarks.
All right. Well, thank you to everyone that joined us today. We look forward to speaking to with you again on next quarter's conference call.
Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.