ProAssurance Corp

NYSE:PRA

Earnings Call Analysis

Challenges Ahead in 2024 with Market Pressures

The year 2024 presents hurdles with efforts focused on matching prices with assumed risks, expecting no significant progress before 2025. Despite a tiered pricing strategy, many accounts are at maximum rates, with loss costs on the decline since 2015. The enterprise faces widespread medical inflation affecting various segments, notably restaurants and hospitality, which is outstripping both CPI and wage inflation, leading to unfavorable results for workers' compensation carriers. Medical costs accounting for 65% of losses align with industry averages, slightly skewed by the firm's shorter-tail business and swift wage claim resolutions. Competitive pressures are also evident from mutual companies leveraging excess capital to influence pricing, although some are showing restraint due to reinsurance market challenges and growth initiatives focusing on large, multistate accounts.

Financial and Operational Performance

The latest quarterly earnings call illuminated key financial aspects of the company's performance. The company faced a $3.7 million operating loss, or $0.07 per diluted share, primarily due to a significant goodwill impairment. However, the investment landscape provided a silver lining, with net investment income jumping 32% to $33 million, benefiting from rising interest rates that increased the average book yields on the fixed income portfolio. The practical implications of these contrasting results highlight the company's resilience through difficult operating conditions and its capability to harness the favorable investment climate.

Strategic Capital Management

The company's strategic financial maneuvers reflect its commitment to shareholder value. Reinforcement rates have been optimized by lowering reinvestment to bolster operational cash reserves and enhance shareholder returns through stock repurchases. The company repurchased 3 million shares at a cost of $51 million, indicating a decisive action toward capital return with a remaining share repurchase authorization of around $56 million. The strength of the firm's capital management strategy is evident through these actions, designed to enhance shareholder equity amidst turbulent market forces.

Valuation Metrics

The valuation metric, book value per share, stood at $19.85 at quarter end, a decline of 3% from year-end, attributable to the goodwill impairment. Nonetheless, this figure does not impact the company's tangible book value. The adjusted book value per share, which counters accumulated other comprehensive loss, mostly from unrealized losses on fixed maturities, was recorded at $25.67, reflecting the company's long-term investment strategy and the positive impact of share repurchases, which contributed $0.59 to the adjusted book value per share. Investors should interpret these metrics cautiously, acknowledging the temporary nature of unrealized losses and the strategic emphasis on tangible value realization.

Medical and Workers' Compensation Trends

An in-depth analysis revealed widespread medical inflation across all regions and market segments, indicating a pervasive challenge rather than isolated incidents. Factors contributing to this inflation include both the considerable labor costs within the medical field and expensive new therapies that are life-saving but costly. The medical inflation rates notably outpaced both the CPI and wage inflation by a substantial margin, causing particular strain on workers' compensation claims where the medical component exceeds indemnity in claim costs. This issue poses a real concern for the industry, highlighting the need for insurers to adjust their pricing and underwriting strategies to contend with these escalating costs.

Market Positioning and Competitive Strategy

The company's approach to the medical professional liability space is strategic and focused. Amid a competitive landscape with some peers not immediately adapting to changing market dynamics, the company remains selective, taking an 'opportunistic-only' stance for certain types of businesses, especially within its core states that are anticipated to offer higher returns. The nuanced strategy underscores the company's goal of balancing aggressive growth with a sustainable profit margin, ensuring the longevity and health of its financial position.

Earnings Call Transcript 2023-Q3

[Frank O'Neil, executive]

Good morning, everyone. We reported on third quarter results in a news release issued November 8, 2023, and on our quarterly report on Form 10-Q, which was also filed on November 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 carefully.

This morning, our management team will discuss selected aspects of their quarterly results on this call, and investors should review the filing on Form 10-Q and accompanying press 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 call of this -- the content of this call is accurate only on November 9, 2023, 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. 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, our Chief Financial Officer. Also joining are the executive leadership team members, Rob Francis, Kevin Shook, Ross Taubman and Karen Murphy.

Now I'm going to turn the call over to Ned.

[Edward Rand, executive]

Thank you, Frank. And it's nice to have you back. Thanks for coming out of retirement briefly while we try to fill a vacancy in our IR role. I really appreciate that. And good morning to everybody. In reporting our results for the third quarter, we note both the realities of current market conditions and are resolved to respond appropriately. Dana and I look forward to providing insights into the evolving market.

I want to address the $0.07 operating loss upfront. Unfavorable development in our Workers' Compensation book of business is the primary reason for the loss. And while disappointing, our actions are consistent with our historical practice of recognizing negative trends as they present themselves. While that reserve development resulted in the headline loss number, it also masked positive trends that I think point to better results ahead.

Gross written premiums were up 4% quarter-over-quarter and new business was significantly higher, while retention remained strong. This signals not only an appreciation for the quality of the service and strength we provide to our insureds, but is a testament to the dedication and effectiveness of our team members and distribution partners who are helping us earn new business and retaining insureds in these extremely competitive market conditions.

I suppose the legitimate question would be why are we growing given current market conditions. Our strategy in both lines of business relies on individual underwriting and pricing, and we strive to only write and retain business we believe will meet our profitability goals. Thus, we believe we can grow our book profitably as long as we remain disciplined in pricing and underwriting.

Inflationary trends continue to affect the market conditions in which we operate, and we continue to see higher-than-anticipated loss severity trends as well. Those trends seem to be affecting insurers active in the Specialty P&C lines we write, which we believe will hasten a return to more rational pricing.

Within work comp, because of our proactive claims handling, we believe we are seeing these inflationary trends earlier than others. And while some work comp writers have begun to talk about it, it's not being universally recognized. But it's coming and should have a profound effect on pricing in a in the work comp market.

We have been decreasing our participation at Lloyd's over the past several years. And as we look forward to 2024, have made the decision to discontinue any further participation. In addition, we entered into an agreement to sell our remaining ownership interest in the underwriting and operations entity associated with Syndicate 1729 to an unrelated third party, which is contingent upon certain approvals. This decision also led us to reorganize our segment reporting beginning this quarter, which Dana will discuss later.

Now looking at each segment at high level, I want to highlight 2 important items in Specialty P&C. First, even in this competitive environment, we wrote $24 million in new business that we believe meets our pricing and underwriting standards. This speaks volumes about our ability to write business based on our quality of coverage and our service and [ defense ] commitment.

A further positive sign was the overall increase in renewal pricing of 7% in the quarter, amplifying those premium gains with strong retention in the segment of 87%, led by retention of 89% in our Standard Physician business, again, being renewed at prices we believe support our return to profitability goals and meet our strict underwriting standards. Overall, a good result given the competitive market conditions we face.

We continue to monitor increased severity trends in a handful of our legacy jurisdictions. As I mentioned, we'll see both social and medical inflation as key drivers here, and we are wary of the increased severity of judgments and settlements in large complex cases and the downstream impact this can have on settlement values for all claims.

Total underwriting expenses in the segment were down $4 million, resulting in an underwriting expense ratio of 25%, down just under 2 points quarter-over-quarter. The expense ratio decrease compared to last year was driven by a decrease in amounts accrued for performance-related incentive compensation plans in the current quarter as well as the impact of onetime expenses in the prior year quarter, partially offset by lower levels of earned premium.

Moving now to our Workers' Compensation Insurance segment, gross written premium was essentially level with the third quarter 2022 at $63.6 million. During the third quarter, audit premium decreased by approximately $1 million quarter-over-quarter. To the upside, new business was $5 million, $1.3 million higher than last year's third quarter, and our premium renewal retention was 87%. However, renewal rates were down 3% over the same period, driven by continued rate pressure from prescribed state loss cost adjustments.

While Workers' Compensation rates continue to be pressured, the third quarter rate change was an improvement over the quarter -- second quarter decrease, which we believe offers some encouragement. As I mentioned, we are seeing the impacts of inflationary trends in our Workers' Comp book. During the third quarter, we observed higher-than-anticipated loss trends in our average medical cost per claim as compared to what we observed during the first 2 quarters of the year.

While we continue to experience reductions in claim frequency, our average medical cost per claim is higher in both the 2023 and 2022 accident years. With medical expenses representing approximately 65% of our total claims costs, we attribute this trend to an increased cost care for injured workers, driven by health care wage inflation and medical advancements.

In response to these trends, we increased our full year 2023 accident year net loss ratio to 76%, and recorded $8 million of unfavorable loss of reserve development, primarily in the 2022 accident year. Our short-tailed claim strategies that we've discussed in the past result in compensable injuries being reported real time, with health care professionals assessing treatment upfront to get the injured workers appropriate medical treatment and back to productivity quickly.

As with Specialty P&C, underwriting expenses were down quarter-over-quarter. The 34% underwriting expense ratio was just slightly higher than the prior quarter as a result of lower net earned premiums and the continuation of competitive market conditions.

Finally, our Segregated Portfolio Cell Reinsurance segment contributed a profit of just under $1 million to operating results, driven by strong underwriting results and net investment income for those cells where we take an economic interest. The combined ratio in our Segregated Portfolio Cell Reinsurance segment increased approximately 33 points to 128.2%, with 26 points of that increase due to the cancellation of the tail coverage related to a program in which we do not participate in the underwriting results, and therefore, had no impact on operating results in the quarter. Frank?

[Frank O'Neil, executive]

Thanks, Ned. Let's go next to Dana who will review consolidated results and provide highlights from the balance sheet and investment returns. Dana?

[Dana Shannon Hendricks, executive]

Thanks, Frank. At the start, I want to call attention to 2 items. First, let me expand a bit on the segment reorganization Ned mentioned. Given our decision to no longer participate in Syndicate 1729, our participation will essentially be in runoff after this year as activity for open underwriting years prior to 2024 continues to earn out as scheduled. Remember, there is 1 quarter reporting lag, so our participation will not be reflected in our results until the second quarter of next year.

As a result of these changes, beginning this quarter, we reorganized our segment reporting. We are now reporting the underwriting results from the syndicate in our Specialty P&C segment and the investment results of allocated assets as well as U.K. income tax in our Corporate segment. More detail on these segment changes can be found in our current Form 10-Q.

Secondly, during the quarter, we recognized a $44 million noncash goodwill impairment related to our Workers' Compensation Insurance reporting unit, which had the largest impact to our net results, however, had no impact to our operating results. We review our goodwill for potential impairment at least annually and more frequently if circumstances arise that indicate impairment may exist.

As we reported in our second quarter 10-Q, we performed an interim goodwill impairment assessment on our Workers' Compensation Insurance reporting unit during the previous quarter, and that analysis then indicated goodwill was not impaired by a margin of approximately 3%. Given the actions taken in the current quarter in our Workers' Compensation Insurance segment in response to inflationary trends as outlined in Ned's remarks, we performed an updated assessment which indicated full impairment of goodwill. And accordingly, we recorded a goodwill charge in the current quarter.

Now moving to operating results. Our operating loss in the quarter was $3.7 million or $0.07 per diluted share, with the difference between the net and operating loss being almost entirely due to the goodwill impairment. In terms of underwriting results, our consolidated combined ratio increased almost 9 points from the year ago quarter, primarily due to the unfavorable loss development in our Workers' Compensation Insurance business coupled with a higher current accident year loss ratio in both of our core lines of business, the drivers of which Ned covered in his remarks.

The consolidated expense ratio decreased again in the quarter driven mostly by a reduction in amounts accrued for performance-related incentive compensation plans. Our investment results continue to be a highlight as net investment income increased 32% to $33 million due to rising interest rates, which drove higher average book yields on our fixed income portfolio.

Our new purchase yields in the quarter were 5.3% or 210 basis points higher than the average book yield in the quarter. Our average investment balances were down approximately 1.5% since year end, as we have reduced the rate of reinvestment in order to provide more cash for operating needs and to return capital to shareholders through the repurchase of our stock.

Equity and earnings from our investments in LPs and LLCs, which are typically reported to us on a 1-quarter lag, reflected a small gain of about $400,000 in the quarter, yet a significant improvement over the almost $5 million loss in the third quarter of 2022. In total, earnings generated from our LPs and LLCs did not exceed the tax deductible partnership operating losses, leading to a small loss of $60,000 from unconsolidated subsidiaries for the quarter.

Other income was $3 million in the quarter, down $2 million from the third quarter of last year, with $1.4 million of the decrease due to lower foreign currency exchange rate gains related to euro-denominated loss reserves in our Specialty P&C segment.

Since resuming share repurchases in late May, we have repurchased 3 million shares at a cost of $51 million, including 2 million shares at a total cost of $31 million during the third quarter. We have not repurchased any shares since the end of the quarter. And as of today, our remaining share repurchase authorization is around $56 million. Our book value per share at quarter end was $19.85, down 3% from year-end, driven by the goodwill impairment which had no effect on tangible book value.

Adjusted book value per share, which excludes $5.82 of accumulated other comprehensive loss, primarily from unrealized holding losses on our fixed maturity portfolio, is $25.67 as of September 30. We continue to consider these unrealized losses to be temporary as we have both the intent and ability to hold to maturity. Our share repurchases year-to-date have contributed $0.59 to adjusted book value per share. Frank?

[Frank O'Neil, executive]

Thank you, Dana and Ned. Bailey, that concludes our prepared remarks, and we're ready for questions.

[Operator]

[Operator Instructions] Our first question today comes from the line of Jon Newsome from Piper Sandler.

[Jon Paul Newsome, analyst]

I want to ask you about a little bit more detail on your view about improvement in the -- of an outlook for this core Specialty businesses. And you look at the accident year results for the Specialty business and you look at the reserve development, both are deteriorated from a year-over-year basis. So that would suggest that, assuming that your core book reflects most of the market, that the environment is actually worse not better. Maybe you could sort of contrast that and why you think the environment actually is better when your own results are actually worse?

[Edward Rand, executive]

Yes. Paul, it's a good question, and it's partly just a matter of kind of relativity. I would start by just saying what I think hasn't changed at all in the marketplace is just the level of uncertainty that exists and the variability kind of in claim results. And so we continue to take a very, very cautious approach in establishing reserves given the level of uncertainty that we think exists in the marketplace.

What we are encouraged by is the rate gains that we're able to get on business as we renew it. And as we compete for new business, I think we are -- and there are always exceptions to this, but we're seeing what I would call improved behavior on the part of competitors that aren't trying to just drive down price to clearly loss-leading levels as they compete for new business. So those are where the improvement piece is coming from. On the loss side, I think it's still a very, very challenging environment and a lot of uncertainty out there.

[Jon Paul Newsome, analyst]

Great. On the Workers' Comp side, I want to just better understand it. There are obviously rates, many of them are sort of statutorily created. But there's also pricing. And my understanding is, at Workers' Comp, there are lots of things that companies do in terms of reducing discounts and other factors that can change the pricing materially.

Given that your Workers' Comp business, even if we exclude the reserve charge this quarter, has been less profitable than most of your peers for the last several years, could you talk about whether or not there's a disconnect there between what you're talking about with rate and price, and whether or not there's some adjustments that you're making to suggest that maybe we could see better underwriting performance in the future? Because I mean, I think the conclusion of lower rates plus inflation means that you're just going to see worse results prospectively on Workers' Comp. But obviously, there's a lot more going on there as well.

[Edward Rand, executive]

Yes. So there's a lot to unpack in that question, Paul, and I'll try to answer and then Kevin can chime in as well. So yes, there certainly is a difference between the rate and pricing. But those promulgated rates do have an impact on the pricing in the marketplace. And we do, I think, a very, very good job of pricing to the exposure as opposed to pricing based on these promulgated rates.

And if you look at the rate declines for the broader work comp industry, I'll justify for the industry by reduced frequency, which certainly we have seen, and then you compare that to the reduced rate over the same period of time for our book of business, you'll see that we've actually managed through that, I think, pretty effectively. Our rate declines have not been nearly as significant as the rate declines in the broader market, and not as significant as certainly a compounded rate decline of what those promulgated rates would indicate.

So we do combat that, and we do see decreased claim frequency. And so trying to balance that decreased claim frequency with those inflationary pressures is really going to be the challenge going forward. And -- but it's a tough market and it is a market that, by and large, is going to overshoot on the downward side because of these promulgated rates. And a lot of competitors rely on those very, very heavily. We are influenced by them because they influence the market.

But the inflationary trends that we're seeing -- and the other thing I would add, I guess, is that we think we recognize a lot of these trends faster because we close claims faster. And so we know what the final cost is and the final resolution of a claim is within a couple of years. And I don't think that's true for the rest of the industry or at least a lot of the rest of the industry. And so how they ultimately build that inflation into the payments that they're going to have to make in the future on claims that they hold open today, I can't speak to. I just know how we're handling that and that we're resolving claims more quickly than the industry. Kevin, is there anything you'd add to that?

[Kevin Shook, executive]

No, I think that's right. I do think when the industry starts to recognize the medical inflation trends that we're seeing earlier, that is going to be a market changer. I would note that we have a 3-company tiered structure from an underwriting perspective with different LCMs. Our book of business makeup is the same, our regions are the same and the market segments in which we write are largely the same, just to add those to Ned's comments.

[Operator]

The next question today comes from the line of Maxwell Fritscher from Truist Securities.

[Maxwell Fritscher, analyst]

Good morning. I'm calling in for Mark Hughes today. Kind of just an add-on to the last question. You had mentioned last quarter that inflation in Workers' Comp was being driven more by wage inflation as opposed to medical inflation. It sounds like that's kind of flipped this quarter. What are you seeing there?

[Edward Rand, executive]

Yes. I think certainly, what we saw this quarter was the medical inflation really hit hard. That doesn't mean the wage inflation has gone away. I do think the wage inflation is probably moderating a little bit, but I don't think that's fully reflected in kind of the payment rates across all states. So I think there will be -- continue to be some upward pressure on the wage piece of it. But what really was more remarkable in the quarter was the medical.

[Maxwell Fritscher, analyst]

And then for the large claims, you'd mentioned in the first quarter that it had a big impact, relatively muted in the second quarter. Were there any impact from large claims in 3Q?

[Edward Rand, executive]

Yes, it's a good question. I mean we continue -- I would say, first off, the industry continues to see a higher frequency of large claims. If you follow the analysis that TransRe does, and I think they do as good a job as anybody in kind of tracking what's going on in the space, they've had to add a new chart in their most recent iteration where they're now showing the trend for claims in excess of $100 million. So that's still out there in the industry.

In the quarter, we certainly -- we had larger claims, but nothing that had an impact like those did in the first quarter. And just to remind you, in the first quarter, what we saw was the resolution of some claims at levels higher than we thought they should have been resolved, and that's higher than where we established reserves for some older accident years where there was a limited amount of IBNR.

[Operator]

[Operator Instructions] Our next question comes from the line of Bob Farnam from Janney Montgomery Scott.

[Robert Farnam, analyst]

A few questions. One is more broad for the workers' comp sector. So Ned, you're talking about the fact that the industry is probably going to miss on the downside. So I'm just trying to get a feel for what kind of time lag is there for the rating bureaus to update their loss costs to incorporate the higher loss trend. I'm just trying to figure out, all right, are rates going to continue to go down for 3 more years before the states kind of catch up? Is that something you're having to face?

[Edward Rand, executive]

Yes, it's a really good question, Bob. So I would say, by and large, those states have put out kind of their loss picks for '24. And by and large, those are, again, decreases over $23 million. Which is, again, I think it's a bit of a head scratcher when you know what's going on from an inflation standpoint. There's a time lag of 12 to 18 months in the data that they're utilizing, and they have been leaning pretty heavily, I think, on the frequency decline to push for these rate declines.

So '24 will be a challenge. We will continue to focus on individual account underwriting and seeking to get the price commensurate with the risk we believe we're taking on. But if -- unless something changes midstream, I wouldn't expect to see anything before '25. Kevin, anything you would add to that?

[Kevin Shook, executive]

No, I think that's spot on. The models are more frequency-based, and what's driving our results quarter is certainly on the medical side, which I don't think anyone is going to be immune to. But totally agree, Ned. .

[Robert Farnam, analyst]

Okay. And Kevin, have you -- you talked about having multiple tiers to be able to write the Workers' Comp business with different LCMs. So have you been seeing a shift in and getting classes to kind of higher tiers? Just kind of curious what kind of movement you're seeing there to try to generate stronger performance in terms of rates?

[Kevin Shook, executive]

Yes. We are seeing shifts and things moving to the upper tier companies. And quite frankly, we have a bunch of business that's priced in the highest tier company at maximum debit. We cannot get the price any higher. So it's been a challenge. Loss costs, as Ned said, have been down since 2015. And having the 3-tier company structure has been incredibly helpful, but a lot of business in the higher, a fair amount of business in the mid and then less business in the preferred company, obviously.

[Robert Farnam, analyst]

Okay. All right. And while you're still on the line, just a few more -- maybe a bit more color on the medical inflation. Are you seeing it in particular classes of business, in particularly geographies, different types of injuries? Just trying to figure out if this is a kind of a wholesale issue or if there are pockets that are showing this rather than everywhere?

[Kevin Shook, executive]

So I would describe the higher medical trends as being pervasive. So we looked at our entire book of business, we looked at our regions, we looked at states, we looked at market segments, and it is pervasive across the book of business. There's obviously some market segments that are being impacted more than others. Restaurants are one. Hospitality. We write a lot of health care, and that was kind of right down the middle. We really write a lot of education, and that performed a little bit better. But pervasive across the book of business in all regions, in all market segments, which, again, points to medical inflation now making its way through the book.

[Robert Farnam, analyst]

Right. Okay. And in terms -- from our vantage point, we can look at medical inflation via the CPI and whatnot. So are you seeing -- what you're actually seeing in terms of medical inflation is higher than the kind of the CPI version of inflation. And if so, kind of what are the primary drivers?

[Kevin Shook, executive]

Yes. So we are -- this is a quarter where I would -- I'm sorry, Ned. Go ahead.

[Edward Rand, executive]

Yes. Go ahead, Kevin.

[Kevin Shook, executive]

This is the quarter where I would say medical inflation is outpacing CPI and wage inflation by a pretty wide margin. So if you think about a workers' comp claim, you've got the indemnity piece, which is going to increase commensurate with payroll. And that, in theory, in a perfect world should be in your premium. But when medical starts outpacing indemnity, that's when it has an unfavorable result to a workers' compensation carrier.

[Edward Rand, executive]

And then, Bob, the other part of your question, it's really been driven by -- the medical inflation, I think, has been driven by just labor costs within medicine that are now catching up. And then as new therapies come online that are life-saving and life-changing, they tend to very, very expensive. And I think it's a combination of those 2 things. So just price pressure within the health care system and then the services being more expensive as well.

[Robert Farnam, analyst]

All right. Okay. And just one more question, Ned. Sorry to hog the call here. But -- so 65% of your business is -- or 65% of your losses are related to the medical side. Is that typical for the industry? Or is there something that you face -- insurance faces more medical trends because you have a higher portion of medical cost in your typical claim?

[Edward Rand, executive]

I think one thing, Bob, that probably skews that on a comparison basis is because we do have a shorter tail book of business. The wage component is resolved much faster, and so as a percent of total cost may be lower overall. That's more about the duration of the clients than the actual dollars being spent on medicine. Kevin, what would you add to that?

[Kevin Shook, executive]

No, I agree with that. I would say 65% medical is more or less in line with the industry, which is the inverse of what it was 12, 15 years ago when it was higher indemnity. So medical is the driver. For ProAssurance, Medical is also the driver for the industry. I can't quote a specific number for the industry, but would certainly suggest that it's in and around the 65%. And to Ned's point, maybe a couple of percentage points lower.

[Operator]

[Operator Instructions] The next question today comes from the line of Matt Carletti from JMP Securities.

[Matthew Carletti, analyst]

Ned, I was hoping to kind of shift focus back to the medical professional liability side of the business. Can you just update us on the competitive landscape a bit? I mean for a while, obviously, pricing has been moving, but I think you've talked a bit about how some of the maybe larger competitors -- even smaller competitors that just don't have profit initiatives or mutual and so forth, it takes a while for them to kind of get the message. Is anything changing in that regard? Or if you could just update us on kind of the [ state ] of the market right now.

[Edward Rand, executive]

Yes. Good question, Matt, and then I'll let Rob chime in. What I would say is that certainly from a -- who are the competitors and what are their motivations, nothing is really changing. The mutual companies continue to have good amounts of excess capital and they use that to leverage pricing and willingness to write at a pretty high combined ratio as a result. I do think we see -- and again, this -- I hate to make broad generalizations. I do think we do see some type of behavior out of some of those peers on individual accounts as we compete for new business, but there's always going to be the one that doesn't go that way. But Rob, would you add anything to that?

[Robert Francis, executive]

Just a little color. The -- certainly, the reinsurance market is putting more pressure on companies. The reinsurance rates are going up. For some of the smaller organizations that maybe don't have as much capital, the reinsurers are tightening on their business plan allowances, if you will, what those carriers can do and can't do under those reinsurance contracts. So we've seen some pullback on some of those most aggressive smaller carriers. The larger carriers, as you mentioned, continue to be a little bit more responsible overall, seeking appropriate returns. Maybe not quite the returns that we as a public company are seeking, but still appropriate returns and are acting responsibly against competition.

Those mid-level mutual carriers, certainly still highly capitalized, are willing, as Ned said, to write at a higher combined ratio. And several of those right now have growth goals. They've decided to increase their relevancy in a changing world where the average account size is growing and the accounts are multistate. And so they're pursuing that business. So we are taking a very opportunistic-only approach on that type of business and focusing more on our standard business in core states where we believe there is more potential return.

[Operator]

There are no additional questions waiting at this time. So I'd like to pass the call back over to the management team for any closing remarks.

[Frank O'Neil, executive]

Thank you, Bailey. And I think that concludes our conference and our remarks. We look forward to speaking with you again on next quarter's call.

[Operator]

This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.