Proassurance Corporation · NYSE:PRA
Proassurance — Mid-Atlantic Investor Meetings May 8-9, 2014
67 slides from Proassurance's conference presentation, May 8, 2014
Slide 1: Mid-Atlantic Investor Meetings May 8-9, 2014
Howard H. Friedman President, Healthcare Professional Liability Group Frank B. O’Neil Chief Communications Officer Mid - Atlantic Investor Meetings May 8 - 9, 2014
Slide 2: Forward Looking Statements
F ORWARD L OOKING S TATEMENTS This presentation contains Forward Looking Statements and other information designed to convey our projections and expectations regarding future results. There are a number of factors which could cause our actual results to vary materially from those projected in this p
Slide 3: ProAssurance Corporate Profile
ProAssurance Corporate Profile Specialty insurance writer Healthcare Professional Liability (HCPL) Only public company writing predominately HCPL Life sciences and medical device liability Workers' compensation Legal professional liability Market Cap: ~$2.7 billion Shareholders’ Equity: $2.4 billion
Slide 4: Hot Topics for Investors
Hot Topics for Investors Our commentary on first quarter 2014 results and updates on recent transactions and strategy
Slide 5: Strong Q1 2014 Financial Results
Strong Q1 2014 Financial Results Gross Written Premiums up 34% year - over - year Driven by new workers’ compensation premium Return on Equity: 8% Shareholders’ Equity: $2.4 billion Up 65% since 2008 Book Value: $39.51 Qtr increase: 1% Significant share repurchase ($91 mln YTD ) Cash dividend paymen
Slide 6: Q1 2014 Income Statement Highlights
Q1 2014 Income Statement Highlights in millions, except per share data March 31, Y - OVER - Y Change 2014 2013 Gross Premiums Written $ 218 $ 163 +34% Net Premiums Earned $ 172 $ 135 +28% Total Revenues $ 208 $ 195 +7% Net Losses & Loss Adjustment Expenses $ 90 $ 58 +55% Underwriting & Operating Exp
Slide 7: Segment Reporting
6 Segment Reporting • Healthcare Professional Liability • Products Liability • Lawyers’ Professional Liability Specialty P&C • Traditional • Captive Market Facility Workers’ Compensation • Syndicate 1729 (58%) (including investments & taxes) Lloyd’s • PRA Corp – parent company • Internal agency oper
Slide 8: Condensed Results by Segment Q1 2014
7 Condensed Results by Segment Q1 2014 Specialty P&C Workers' Comp Lloyd's Syndicate Corporate / Other Elimination Q1 2014 Consol. Q1 2013 Net premiums earned $ 126,236 $ 45,494 $ - $ - $ - $ 171,730 $ 134,578 Net losses and LAE 60,960 28,548 - - - 89,508 57,626 Underwriting, policy acquisition & op
Slide 9: Q1 2014 Premium Distribution
8 Q1 2014 Premium Distribution Physicians & Dentists 56.0% Ancillary Healthcare 12.8% Life Sciences & Med Tech 1.4% Hospitals & Facilities 0.7% Attorneys 15.8% Workers' Comp 12.4% Other 0.9% Physician & Dental 53.6% Ancillary Healthcare 3.5% Life Sciences & Med Tech 3.2% Hospitals & Facilities 5.1%
Slide 10: YTD 2014 Balance Sheet Highlights
YTD 2014 Balance Sheet Highlights Split adjusted, in billions, except Book Value per share Shareholders’ Equity $ 2.4 $ 2.4 - 2% Total Investments 4.1 3.9 +3% Total Assets 5.4 5.2 +5% Policy Liabilities 2.6 2.4 +11% 3/31/14 2013 CHANGE $1.42 $1.70 $1.86 $2.16 $2.27 $2.39 $2.35 2008 2009 2010 2011 20
Slide 11: Returning Capital to Shareholders
Returning Capital to Shareholders Quarterly dividend at $0.30/share, ~2.6% yield Significant share buyback continued in Q1 2014 $90.8 mln YTD in 2014 $112 mln remaining in current authorization $444 mln since 2001 $91 $32 $21 $106 $52 $88 $54 $18 $65 $192 $15 $109 $97 $192 $36 $106 $52 $88 $54 YTD 1
Slide 12: Capital Management Priorities
Capital Management Priorities Strong capital positions us for a firming market We recognize the effect on ROE The manner in which capital is used has an effect on financial ratings 1.4 1.3 1.0 0.5 0.4 0.3 0.3 0.3 0.3 0.2 0.2 0.4 $- $0.25 $0.50 $0.75 $1.00 $1.25 $1.50 $1.75 $2.00 $2.25 $2.50 YTD 2014
Slide 13: Capital Discussion
Capital Discussion $250 million long - term debt 10 - year notes due 11/15/2023 at a coupon of 5.30% Debt - to - capital at acceptable levels Our balance sheet benefits from the addition of leverage 11% 10% 6% 2% 3% 3% 2% 13% 16% 22% 25% 19% 14% 20% $- $0.5 $1.0 $1.5 $2.0 $2.5 YTD 2014 2013 2012 201
Slide 14: Strong Operational Results in Q1 2014
Strong Operational Results in Q1 2014 Combined Ratio: 82.7% ( Avg Since 2009: 66.7%) Operating Ratio: 65.4% ( Avg Since 2009: 41.7%) 69.1% 68.0% 52.5% 57.3% 70.6% 82.7% 38.8% 39.8% 27.6% 32.6% 46.1% 65.4% 2009 2010 2011 2012 2013 YTD 2014 Combined Ratio and Operating Ratio History Combined Ratio Ope
Slide 15: Q1 2014 Acquisitions and Integration
Q1 2014 Corporate Update Acquired Eastern Insurance effective 1/1/14 Integration into ProAssurance well underway Significant contributions to Q1 results Lloyd’s Syndicate 1729 opened on 1/1/14 Business on the books as planned All staffing arrangement complete Medmarc and IND fully integrated into Pr
Slide 16: Eastern Insurance Transaction Details
Eastern Insurance Transaction Details Continues building the platform to serve the needs of larger integrated health systems and healthcare delivery organizations Workers’ compensation represents one of the single largest liability expenditures for healthcare entities Eastern and ProAssurance underw
Slide 17: Lloyd's Syndicate Transaction Details
Lloyd’s Syndicate Transaction Details First policies underwritten January 1, 2014 ProAssurance is providing 58% of underwriting capital Remaining capital from other corporates and private names ProAssurance has committed $76 mln in 2014 Six - Year Commitment of up to $200 mln 16
Slide 18: The Payoff: Consistent Book Value Growth
$1.84 $3.14 $4.28 $5.79 $6.96 $8.01 $9.39 $10.46 $12.30 $16.81 $19.35 $21.35 $26.30 $30.17 $39.13 $39.51 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 YTD '14 Cumulative Dividends Book Value per Share $35.67 $44.24 $40.23 The Payoff: Consistent Book Value Growth Captures our f
Slide 19: The Payoff: Steady Share Price Increase
$2.62 $3.85 $4.77 $6.24 $11.60 $15.75 $10.09 $8.34 $10.50 $16.08 $19.56 $24.32 $24.96 $27.46 $26.39 $30.30 $39.91 $42.19 $48.48 $45.42 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 YTD 14 The Payoff: Steady Share Price Increase Share price reflects investor confidence in our b
Slide 20: Focused on Shareholder Value
Focused on Shareholder Value Maintaining profitability and bottom line focus Continuing to grow book value per share Producing sustainable shareholder value 19 0.00 0.50 1.00 1.50 2.00 2.50 $- $10.00 $20.00 $30.00 $40.00 $50.00 Sep-91 Jan-93 May-94 Sep-95 Jan-97 May-98 Sep-99 Jan-01 May-02 Sep-03 Ja
Slide 21: Management Team
W. Stancil Starnes, JD Chairman & Chief Executive Officer Company Tenure: 7 Years Prior MPL Experience: 29 Years Total Industry & Related Experience: 36 Years Formerly in the private practice of law in HCPL defense and complex corporate litigation Jeffrey P. Lisenby, JD Executive Vice - President, G
Slide 22: Segment Highlights
Segment Highlights We report results in three operational segments Specialty Property Casualty Insurance Workers’ Compensation Insurance Lloyd’s Syndicate 1729
Slide 23: Specialty P&C Financial Highlights
March 31, Y - OVER - Y Change 2014 2013 Gross Premiums Written $ 152 $ 163 - 7% Net Premiums Earned $ 126 $ 135 - 6% Total Revenues $ 128 $ 136 - 6% Net Losses & Loss Adjustment Expenses $ 61 $ 58 +6% Underwriting & Operating Expenses $ 34 $ 33 +2% Operating Result $ 33 $ 45 - 27% 22 Specialty P&C F
Slide 24: Specialty P&C Gross Written Premium
23 Specialty P&C Gross Written Premium $8.3 $10.6 $8.1 $6.8 $5.9 $8.6 $11.0 $8.8 $6.2 $6.9 Other healthcare providers Healthcare facilities Legal professionals Tail & other, professional liability Products liability 2013 2014 $5 mln new physician business $117 $104 $124 $111 2013 2014 Physician 12-m
Slide 25: Strong Retention Despite Competition
Strong Retention Despite Competition Retention remains in line with recent quarters Continued underwriting vigilance is being used today to ensure future success Market share is important, but NOT as important as profitability 24 84% 85% 87% 90% 90% 89% 90% 89% 87% 2006 2007 2008 2009 2010 2011 2012
Slide 26: No Overall Change in HCPL Loss Trends
No Overall Change in HCPL Loss Trends Current accident year loss ratio adjustments have been minor — in either direction 25 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Q1 2014 Annual 23% 28% 28% 19% 11% 3% -2% -6% -4% -2% -2% 0% -1% -1% Cumulative 23% 57% 101% 139% 165% 173% 168
Slide 27: Consistent Approach to Reserves
Consistent Approach to Reserves Recognizing loss trends as they appear No change in long - term results No change in reserving philosophy or process 26 Reserve Development History by Quarter by Year $16 $20 $19 $25 $40 $47 $53 $47 $20 $31 $37 $38 $50 $60 $39 $25 $30 $43 $33 $52 $50 $49 44 104 109 13
Slide 28: ProAssurance Outperforms in HCPL
ProAssurance Outperforms in HCPL ProAssurance consistently outperforms in a volatile line of business 40% 60% 80% 100% 120% 140% 160% 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Calendar Year Combined Ratio 1991 - 2012 ProAssurance MPL Source: 1991 - 2012 A.M. Best Aggregates and Averages
Slide 29: Segment Highlights
Segment Highlights We report results in three operational segments Specialty Property Casualty Insurance Workers’ Compensation Insurance Lloyd’s Syndicate 1729
Slide 30: Workers' Compensation Financial Highlights
March 31, Y - OVER - Y Change 2014 2013 Gross Premiums Written $ 66 ‒ - 7% Net Premiums Earned $ 45 ‒ - 6% Total Revenues $ 46 ‒ - 6% Segregated Cell Dividend Expense $ 1 ‒ Net Losses & Loss Adjustment Expenses $ 29 Underwriting & Operating Expenses $ 16 ‒ +4% Operating Results $ 0.4 ‒ - 27% Workers
Slide 31: Consistent Profitability in Workers' Comp
Consistent Profitability in Workers' Comp 79.1% 65.6% 80.2% 87.7% 96.0% 89.7% 91.8% 93.0% 97.1% 89.9% 2006 2007 2008 2009 2010 2011 2012 2013 Q1 2014 30 (1) 89.9% excluding intangible asset amortization and transaction - related and other one - time charges. Eastern 2006 - 2013 is Traditional Worker
Slide 32: How Eastern Differentiates
How Eastern Differentiates Disciplined individual account underwriting with focus on rate adequacy in rural territories Understands market dynamics and regulatory concerns Use of local knowledge that has always differentiated ProAssurance 31
Slide 33: Eastern Business Profile
Eastern Business Profile • Direct Written Premium of $198.7 Million for the Year Ended 12.31.13, and $182.9 Million for the Year Ended 12.31.12 • Direct Written Premium of $65.9 Million for the Three Months Ended 3.31.14 and $63.9 Million for the Three Months Ended 3.31.13 • Licensed – 30 states Ala
Slide 34: Workers' Compensation Risk Diversification
Top 10 Classes (Traditional) Payroll Exposure as March 31, 2014 Exposure Base: PA, DE, MD, VA, NC, SC Workers' Compensation Risk Diversification Retirement / Life Care Community 2.4% Physician / Dentists 8.9% Nursing Homes Skilled 2.7% Hospital 6.8% Clerical / Office 17.2% Colleges/Schools 8.6% Auto
Slide 35: Broad Product Spectrum
Guaranteed Cost 57.7% Alternative Markets 26.1% Policyholder Dividend 9.2% Deductible Plans 3.5% Retrospective Rating 3.5% 34 Broad Product Spectrum Guaranteed Cost Policies Loss - Sensitive Dividend Plans Deductible Plans Retrospective Rating Plans Alternative Market Programs ParallelPay – “ Pay as
Slide 36: How Eastern Differentiates
How Eastern Differentiates Extensive medical cost containment strategies Proactive claims management and strategic use of return - to - wellness initiatives Use of a proactive, unique claims approach that has always differentiated ProAssurance 35
Slide 37: Workers' Comp Claim Closing Pattern
Workers’ Comp Claim Closing Pattern 0 200 400 600 800 1,000 1,200 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Closed Claims 63 201 364 535 590 570 684 590 715 775 882 944 1,052 1,135 1
Slide 38: How Eastern Differentiates
How Eastern Differentiates Value - added risk management services cements brand loyalty Strategic partnerships with select independent agencies that share philosophies on controlling workers’ compensation costs 37
Slide 39: Segment Highlights
Segment Highlights We report results in three operational segments Specialty Property Casualty Insurance Workers’ Compensation Insurance Lloyd’s Syndicate 1729
Slide 40: Lloyd's Syndicate 1729
Lloyd’s Syndicate 1729 Writing business as of January 1, 2014 $875,000 in Q1 operating expenses Full results reported on a one - quarter lag except investments $5mln in Specialty P&C premium assumed by the Syndicate in Q1 2014 will be reported in Q2 2014 and will be subject to our 58% participation
Slide 41: Lloyd's Syndicate Transaction Rationale
Lloyd’s Syndicate Transaction Rationale Investment opportunity with knock - on benefits for international deployment of our expertise Provides access to international medical professional liability opportunities Direct benefit to Medmarc in reaching international medical technology and life sciences
Slide 42: Segment Highlights: Corporate
Segment Highlights Corporate U.S. investing activities Non - premium revenues Corporate expenses U . S. taxes
Slide 43: Corporate Segment Financial Highlights
March 31, 2014 2013 Investment income $ 29.7 $ 32.1 Equity in earnings (loss) of unconsolidated subsidiaries 1.8 (0.2) Net realized investment gains (losses) 2.7 26.7 Other income 0.5 0.5 Operating expenses 2.4 4.1 Interest expense 3.6 0.4 Gain on acquisition ‒ 35.5 Pre - tax net income $ 28.7 $ 90.
Slide 44: Corporate Segment Financial Highlights
Corporate Segment Financial Highlights Investment income down due to lower average balances Somewhat offset by a gain in the equity of unconsolidated subsidiaries. Net realized investment gains down $ 24 million D ue to gains recorded in Q1 2013 Decline in pre - tax net income O ne - time , non - ta
Slide 45: Corporate Strategy Update
Corporate Strategy Update Our vision for the future. We believe our successful experience and deep expertise uniquely qualify ProAssurance to insure the widest range of healthcare risks
Slide 46: American Healthcare Must Evolve
American Healthcare Must Evolve Current costs are unsustainable Larger, geographically - diverse systems will attempt to create new delivery models and greater efficiency They will demand a broad range of coverages from companies with significant financial size, wide geographic reach and demonstrate
Slide 47: Strategy for an Evolving Market
Strategy for an Evolving Market We are building the platform that will allow us to serve the broad spectrum of healthcare Prudently leveraging our success and experience with the addition of specialized expertise Broad capabilities to meet evolving demands Eastern, Medmarc, PICA & Mid - Continent Tr
Slide 48: Positioned to Succeed
Positioned to Succeed ProAssurance has the right combination of geographic scope, broad experience, and financial strength for success in the new world of healthcare liability 47 Medical Protective National Recent Hospital Experience $795 Doctors Co National Limited Hospital Experience $794 MLMIC NY
Slide 49: Strategic Successes
Strategic Successes Leveraging our reach, expertise and financial strength with The Certitude tm program in partnership with Ascension Health Largest non - profit healthcare system in the US Now in Michigan, Florida, Illinois, Indiana, and Texas Insuring Ascension - affiliated physicians through coo
Slide 50: Strategic Successes
Strategic Successes Partnerships with existing physician - focused companies to leverage hospital expertise California venture with CAP - MPT : CAPAssurance Now writing large groups and facilities Joint physician/hospital insurance products to address the unique risk tolerance and claims - handling
Slide 51: Strategic Opportunities
Strategic Opportunities Alternative risk and self - insurance opportunities Captive insurance programs allow large, sophisticated healthcare and workers’ compensation customers to control their own insurance programs Eastern Re brings proven experience and expertise in establishing and operating cap
Slide 52: Strategic Opportunities
Strategic Opportunities ProAssurance Risk Solutions sm Newly formed unit brings proven expertise to address complex risk financing challenges in both healthcare and workers’ compensation Run - off liabilities in M&A transactions Assumption of existing reserve liabilities for large organizations seek
Slide 53: Key Investor Points
Key Investor Points ProAssurance has always evolved ahead of the curve in our industry — we continue that trend We have proven our ability to thrive across insurance cycles and produce significant returns for long - term shareholders Our long - term focus on financial strength and sustained value cr
Slide 54: By the Numbers: Additional Financial Detail
By the Numbers: Additional Financial Detail
Slide 55: Capital Growth: 2008 - Q1 2014
Capital Growth: 2008 - Q1 2014 2008 2009 2010 2011 2012 2013 Q1 2014 Dividends (15,269) (192,466) (64,777) (17,906) Earnings 177,725 222,026 231,598 287,096 275,470 297,523 46,731 Employee Stock Transactions 11,673 7,205 6,147 6,855 7,780 9,261 1,656 Stock Issued 112,478 - - - - - - Treasury Stock (
Slide 56: Inside ProAssurance's Balance Sheet
Inside ProAssurance’s Balance Sheet Cash & Investments: 80.9% Insurance Receivables 8.9% Goodwill & Intangible Assets: 5.9% Other Assets: 4.3% Retained Earnings: 37.8% Other Equity: 5.7% Reinsurance Payable & Other Liabilities: 8.9% Unearned Premiums: 6.8% Loss Reserves: 40.8% Assets: $5.4 bln Liabi
Slide 57: Inside ProAssurance's Income Statement
Inside ProAssurance’s Income Statement Net Premiums Earned: 82.5% Net Realized Investment Gains: 1.3% Net Investment Income: 14.3% Other: 1.9% Net Income: 22.5% Provision for Income Taxes: 7.1% Underwriting, Policy Acquisitions, Operating and Interest Expenses: 27.4% Net Losses and Loss Adjustment E
Slide 58: Book Value per Share History
$21.35 $26.30 $30.17 $35.42 $36.85 $39.13 $39.51 $20.26 $24.04 $26.58 $31.93 $33.34 $35.64 $34.15 $20.80 $23.13 $25.29 $29.80 $30.98 $34.67 $32.97 $10.00 $15.00 $20.00 $25.00 $30.00 $35.00 $40.00 Book Value per Share Tangible Book Value per Share Tangible Book Value per Share excl. Unrealized Gains
Slide 59: Steady Return in an Unfavorable Environment
7.5% 5.5% 4.6% - 3.9% - 0.3% Pre-Tax Underwriting Profit $43 Pre-Tax Investment Income $32 Non-Operating Gains $27 Taxes $(22) Interest & Intangibles $(2) 2013 Return on Equity: 11.4% (excludes gain on acquisition) 58 Steady Return in an Unfavorable Environment L ong - term ROE target: 12% - 14% 5.8
Slide 60: Investment Portfolio Detail
Investment Portfolio Detail ProAssurance remains conservatively invested to ensure our ability to keep our long - term promise of insurance protection
Slide 61: 2014 Investment Developments
2014 Investment Developments Maintaining duration of approximately four years Book yield has stabilized 4.2% tax effective on a QTD and YTD basis Overall credit quality is up slightly to A+ 60 2014 Investment Strategy & Outlook Focusing on integration of Eastern Managing duration
Slide 62: ProAssurance Investment Profile
ProAssurance: Q1 2013 Investment Profile Fixed Income 80% Short Term (incl cash) 4% Equities & Equity Substitutes 15% BOLI 1% $4.1 Billion Overall Portfolio State & Muni 36% Corporate 43% Asset Backed 14% Govt & Agency 7% $ 3.3 Billion Fixed Income Portfolio Average duration: 3.7 years, down slightl
Slide 63: Portfolio Detail: Asset Backed
Sub - Prime 1% Other 4% Auto 9% Credit Cards 3% Non Agency MBS 3% Agency MBS/CMBS 66% Non Agency CMBS 14% ProAssurance Portfolio Detail: Asset Backed 3/31/14 Subject to Rounding Asset Backed: $451 Million Weighted Average Rating: “ AAA” 62
Slide 64: Portfolio Detail: Corporate
Financials 29% Industrials 29% Utilities/ Energy 20% Other 1% Consumer Oriented 21% ProAssurance Portfolio Detail: Corporate Corporates: $ 1.4 Billion Weighted Average Rating: BBB+ Top 20 Banks/Financials: $ 242 million in millions JPM Chase $26 Citi $11 Goldman Sachs $19 Natl Bank of Canada $10 GEC
Slide 65: Portfolio Detail: Municipals
General Obligation 27% Special Revenue 58% Prerefunded 15% ProAssurance Portfolio Detail: Municipals Municipals: $ 1.2 Billion Investment policy has always required investment grade rating prior to applying the effect of insurance Top 10 Municipal Holdings in millions State of Texas $14 Por t Author
Slide 66: Portfolio: Equities & Other
Equities 39% Alternative Equity & Debt 11% Real Estate LP 3% Private Equity 11% Convertible Bonds 5% USD Investment Grade Bond Fund 7% FHLB Stock 1% Tax Credits 23% ProAssurance Portfolio: Equities & Other 3/31/14 Equities & Other: $602 Million 4.8% TE Book Yield 13% TE IRR 65
Slide 67: Portfolio Detail: Various
ProAssurance Portfolio Detail: Various Govt MMF 67% Lloyd's 22% Treasury MMF/Bills 7% Other 4% Best Rating: A 7% Best Rating: A+ 58% Best Rating: A++ 35% Rated A1/P1 or better Money Markets: Moody’s: Aaa S&P: AAA Weighted average rating Moody’s: AA3 S&P: AA - A. M. Best: A+ Treasuries 45% TIPS 37% F
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