Proassurance Corporation · NYSE:PRA
Proassurance — Raymond James & Associates 31st Annual Institutional Investors Conference (March 2010)
66 slides from Proassurance's conference presentation, Mar 10, 2010
Slide 1: Raymond James & Associates 31st Annual Institutional Investors Conference
Raymond James & Associates 31st Annual Institutional Investors Conference March 8-10, 2010 W. Stancil Starnes Chairman and Chief Executive Officer Edward L. Rand, Jr. Chief Financial Officer Frank B. O’Neil Investor Relations Officer Raymond James & Associates 31st Annual Institutional Investors Con
Slide 2: Forward Looking Statements
Forward Looking Statements 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 pres
Slide 3: Year-to-Year Success Comes From Taking a Long-Term View
Year-to-Year Success Comes From Taking a Long-Term View Year-to-Year Success Comes From Taking a Long-Term View Edward L. Rand, Jr. Chief Financial Officer
Slide 4: Fourth largest writer of medical professional liability insurance
% Fourth largest writer of medical professional ees ‘u liability insurance poncteny . Providers % Insuring 57,000 5% % Att policyholders J . . : Physicians nationwide against and claims of Dentists professional liability vega 1% % “A” rated by A. M. Best and Fitch PROASSURANCE. Tread Fa
Slide 5: Success Continued in 2009
Success Continued in 2009 23% Increase in Book Value per Share in 2009 19% Increase in Revenue vs. 2008 28% Increase in Diluted EPS Top Line Growth $28 million of new business in our historical book $95 million from completed M&A transactions Three transactions completed in 2009 Outstanding performa
Slide 6: Book Value Growth Every Year Since Inception
Book Value Growth EVERY Year Since Inception Cumulative CAGR 10 year 278% 14% 5 year 151% 20% 1 year 23% 23% Measured through Year-End 2009 Book Value per Share at Year End
Slide 7: Share Prices Since Inception
Share Prices Since Inception Cumulative CAGR 10 year 166% 10% 5 year 37% 7% 1 year 2% 2% Measured through Year-End 2009 Share Price at Year End
Slide 8: Prime Time to Invest in PRA
Prime Time to Invest in PRA Price to Book Multiple by Month
Slide 9: Outstanding Performance vs Industry
Category Ranking Direct Written Premiums 95 Operating Ratio 1 Combined Ratio 2 Loss Ratio 5 ROE 5 Outstanding Performance vs Industry Moody’s rankings of the top 100 P&C insurance companies by premium volume 1 by Direct Written Premium Source: 2008 Data from Moody’s Statistical Handbook October
Slide 10: 2009 Financial Highlights
2009 Financial Highlights in millions, except per share data Year-End All data includes acquired entities since date of acquisition only. PICA was acquired on April 1, 2009. 1 Excludes discontinued operations. 2 Includes a loss on extinguishment of debt of $2.8 million for the year ended December 31
Slide 11: Conservative Use of Debt
Conservative Use of Debt Low Debt to Cap Ratio No strain on cash flow
Slide 12: Capital Management
Capital Management Active in prudent share repurchase 1.1 million shares in 2009 Board examination of capital management alternatives
Slide 13: Investments Balance Risk vs. Return
Fixed Income: 90% Short Term: 5% Equity and Other Investments: 3% BOLI: 2% Investments Balance Risk vs. Return Key Investment Actions in Q4 09 Reduced cash and short-term balances Added to corporate and municipal bond holdings CUSIP-level portfolio disclosure on our website: www.proassurance.com/inv
Slide 14: Fixed Income Breakdown
Fixed Income Breakdown 12/31/09
Slide 15: Our Disciplined Approach Produces Operational Excellence
Our Disciplined Approach Produces Operational Excellence Our Disciplined Approach Produces Operational Excellence W. Stancil Starnes, Esq. Chairman & CEO
Slide 16: Producing Sustainable Results
Producing Sustainable Results Building on growth opportunities Using our unparalleled market knowledge Leveraging our unique claims expertise Employing our not so secret weapon
Slide 17: We Are a National Company
We Are a National Company Broad geographic diversification provides an unmatched spread of risk Corporate Headquarters Corporate Headquarters Claims Offices Claims Offices Claims / Underwriting Offices Claims / Underwriting Offices PICA and/or E&S States PICA and/or E&S States (Birmingham)
Slide 18: 2009 M & A Transactions
2009 M & A Transactions 2009 Premium: $77 million Significant growth in our core business Nationwide geographical expansion Extends our core business Broadens our medically-related range Geographical expansion 2009 Premium: $4.0 million Adds to our lawyers’ book Geographical expansion Affirms our in
Slide 19: Growth Through M&A
Physicians Ins. Co. of Michigan 2009: Consolidation of: Mid-Continent General Agency 2009: Consolidation of: Mid-Continent General Agency Georgia Lawyers Insurance Co. Georgia Lawyers Insurance Co. 2004: Purchased Selected Renewal Rights from: OHIC Insurance Company 2004: Purchased Selected Renewal
Slide 20: Growth Brings Size and Scope
Growth Brings Size and Scope Broad geographic diversification provides an unmatched spread of risk Our spread of risk provides better market awareness and more data points to gauge loss trends Our internal actuarial depth allows us to assess emerging trends and respond quickly Corporate Headquarters
Slide 21: Claims Handling Sets Us Apart
Claims Handling Sets Us Apart Our effective approach to handling claims sets us apart We price our product to offered an unfettered defense of claims to the extent permitted by law Claims handling is a key to policyholder loyalty and long-term financial success
Slide 22: Claims Trends Remain Favorable
Claims Trends Remain Favorable ProAssurance Claims Tried to a Verdict (includes PICA) We try cases Frequency trends are stable after declining since 2005/2006 The result is fewer cases to try Severity trends also stable Trends are much the same in states with or without Tort Reform
Slide 23: The Ohio Example
The Ohio Example Exhaustive, reliable data provided by the Ohio Department of Insurance Broad range of competitors and business approaches Pricing Underwriting Claims handling www.insurance.ohio.gov/Legal/Reports/Documents/MedMal_Closed_Claim_2008.pdf
Slide 24: ProAssurance closes more claims with no indemnity payments
ProAssurance closes more claims with NO indemnity payments Ohio Closed Claims 2005-2008 Source: Ohio Department of Insurance: www.insurance.ohio.gov/Legal/Reports/Documents/MedMal_Closed_Claim_2008.pdf
Slide 25: ProAssurance spends more, on average, to defend cases
ProAssurance spends more, on average, to defend cases—leveraging our strength Ohio Closed Claims 2005-2008 Source: Ohio Department of Insurance: www.insurance.ohio.gov/Legal/Reports/Documents/MedMal_Closed_Claim_2008.pdf
Slide 26: ProAssurance closes more claims at trial
ProAssurance closes more claims at trial, offering our insureds the chance for vindication Ohio Closed Claims 2005-2008 Excludes Trials that Ended with a Directed Verdicts Source: Ohio Department of Insurance: www.insurance.ohio.gov/Legal/Reports/Documents/MedMal_Closed_Claim_2008.pdf
Slide 27: ProAssurance spends far less in average indemnity payments
ProAssurance spends far less in average indemnity payments Ohio Closed Claims 2005-2008 Source: Ohio Department of Insurance: www.insurance.ohio.gov/Legal/Reports/Documents/MedMal_Closed_Claim_2008.pdf
Slide 28: The Importance of Treated Fairly
The Importance of Treated Fairly ® Treated Fairly ® affirms our existing, enduring commitment to every stakeholder Insureds Agents Investors The public Provides a touchstone that guides every interaction Helps ensure that we run our business as owners who are rewarded for long-term success
Slide 29: Producing Sustainable Results
Producing Sustainable Results Building on growth opportunities Using our unparalleled market knowledge Leveraging our unique claims expertise Employing our not so secret weapon
Slide 30: Supplemental Discussion Slides
SUPPLEMENTAL DISCUSSION SLIDES SUPPLEMENTAL DISCUSSION SLIDES
Slide 31: ProAssurance
PROASSURANCE. “rested Faly
Slide 32: The Importance of Investment Income
The Importance of Investment Income Pricing discipline is even more critical Combined Ratio required to generate a 13% after-tax ROE
Slide 33: Life Cycle of a Typical Claim
Trial and Appeals The Importance of Investment Income Year Year Year Year Year Year Year Year Incident Occurs Discovery and Preparation Claim Reported Resolution 5-6 Years After Claim Reported Life Cycle of a Typical Claim
Slide 34: Typical Claims Payout Pattern
The Importance of Investment Income Typical Claims Payout Pattern
Slide 35: Using Capital Prudently
Using Capital Prudently Using capital to build through M&A
Slide 36: Our Strong Capital/Low Leverage Position
$471 Our Strong Capital/Low Leverage Position ( in millions) Prepared for an improving market Prudent capital management Premiums to Surplus for Each year $567 $ 96 ($96 mil PICA pro forma in 2008)
Slide 37: Excess Capital vs. Excess Capacity
Excess Capital vs. Excess Capacity Conceptual Model of Projected A. M. Best BCAR Scores if Premiums Increase Surplus is Reduced
Slide 38: ProAssurance
PROASSURANCE. “rested Faly
Slide 39: The State of the Market
The State of the Market Prices have been falling yet profitability remains high Continued low interest rates must enforce discipline sooner or later Frequency is no longer declining Only a matter of time before frequency moves higher But when? Severity is trending upward at expected, manageable rate
Slide 40: Market Cycle Factors, Status and Impact
ctor Status Cycle Impact Frequency Stabilizing Neutral Severity Moderate Neutral — Harden Investment Returns Low Harden Capital Excess Capacity Soften Cash Flow Becoming Strained Neutral — Harden Reserves Modestly Redundant Soften Reinsurance Sufficient Capacity Neutral PROASSURANCE,
Slide 41: Responding to Changes in HealthCare
Responding to Changes in HealthCare Projected sector growth through 2018 1 Physician’s Assistants 39% Medical Assistants 36% Licensed Nurses 34% Chiropractors 31% Physicians and Surgeons 22% Podiatrists 9% 1 Bureau of Labor Statistics 2008 to 2018 Projections
Slide 42: ProAssurance
PROASSURANCE. “rested Faly
Slide 43: Why Claims Strategy Matters
Favorable Outcomes: 84.0% Favorable Outcomes: 75.4% Why Claims Strategy Matters Favorable Outcomes: 84.0% Five Year Average 2004 - 2008 Favorable Outcomes: 75.4%
Slide 44: Why Claims Strategy Matters
Why Claims Strategy Matters Our ability and willingness to defend claims allows us to achieve better results ProAssurance vs. Industry Average Statutory Loss Ratio 2003-2008 Legal Payments Loss Payments Trend for ProAssurance Stand Alone Statutory Loss Ratio 2006 - 2008 76.0% *Source: A. M. Best Agg
Slide 45: Appendix: Underwriting/Actuarial
Appendix: Underwriting/Actuarial
Slide 46: Enforce Actuarial Conservatism
$ 2.4 $ 2.6 $ 2.6 $ 2.2 $ 1.8 Enforce Actuarial Conservatism
Slide 47: Annual and Cumulative Returns
170% 150% 130% ; Annual @ Cumulative 110% 90% 70% 50% 30% 10% -10% 2001 2002 2003 2004 2005 2006 2007 2008 2009 @ Annual 23% 28% 28% 19% 11% 3% -2% ~6% ~4% Cumulative) 23% 57% 102% 140% 166% 174% 169% 153% 142% PROASSURANCE, Tres
Slide 48: Appendix: Moody's Rankings
Appendix: Moody’s Rankings
Slide 49: Fourth largest P&C insurance company in the US
ry gsth largest P&C insurance company in the US' Operating Ratio . . Rank: #1 Combined Ratio Rank: #2 Average Average 89.2% 99.7% Return on Core Premium Loss Ratio Rank: #4 Rank: #5 Average Return on Equity sre. Rank: #5 Average Averag 4% 49 1 by Direct Written Premium 2009 Py PROASSURANCE, “tbh
Slide 50: ProAssurance
PROASSURANCE. “rested Faly
Slide 51: Equities & Other: $43 Million
Equities & Other: $43 Million 12/31/09 Represents 3% of our Total Investments
Slide 52: Return by Quarter: Equities & Other
52 $5 $4 3 $2 $1 4 $0 $1 “$2 “$3 4 By Quarter Q1, 2005 - Q4, 2009 (in millions) Return by Quarter: Equities & Other $1.8 PROASSURANCE, Treated Fac
Slide 53: Growth in Investment vs. Reserves
Growth in Investment vs. Reserves = Cash and m= P&C Loss and Investments LAE Reserves Millions $4 $3.8 $3 $2.4 $2 $- 2001 2002 2003 2004 2006 2007 20038 2003 froasnand | si.aze.i5e | $1,505,068 | $1.823760 | $286,508 wasorau | sccoees | sare | #3038202 S274) ¢1,317,560 | $1,492,140 | $1,634,749 | $1
Slide 54: Cumulative Return: Equities & Other
Cumulative Return: Equities & Other By Quarter Q1, 2005 — Q4, 2009 {in millions) $25 $20 $17.5 $15 $10 $8 $0 ‘0105 | 4205].0305 [405] a106| 0206] 0306] 0406 | 01 07] a7 [a307 |a407| a108|a208 308 [ass] a109| 0209 | 0309] 0409 Maun] sus | s30 | sas | sso | s78 | s90| ssa |s104|s1a4|s183] sigs) sa09 s
Slide 55: Strategy: Investment Discipline
Strategy: Investment Discipline The choice: Chase yield or extend duration We are maintaining duration, looking for opportunities Loss in value assuming a 100 basis point shift in the yield curve Yields based on Single A composite corporate debt
Slide 56: Municipals: $1.5 Billion
Municipals: $1.5 Billion 12/31/09 Investment policy has always required investment grade rating prior to applying the effect of insurance
Slide 57: Asset Backed: $700 Million
Asset Backed: $700 Million Weighted average rating: “AA+” Bloomberg Data 12/31/09 Alt-A LTV 61% Prime MBS LTV 57% Further Details Provided on Sub-Prime and CMBS on following pages
Slide 58: Sub-Prime Detail
At 12/31/09 Vintage $4.7 Mln 2004 & Prior $2.5 Mln 2005 At 12/31/09 Type Quality $3.4 Mln Mortgage-Backed AA- avg - LTV 71% $3.8 Mln Home Equity A+ avg Sub-Prime Detail $7.2 million market value in AFS portfolio $3.5 million unrealized loss $13.3 million market value in high-yield LP rated “A” LP’s
Slide 59: CMBS Detail
CMBS Detail Vintages 2005 & Prior- $71 million 2006- $21 million Top Property Types Office: 56% of CMBS portfolio Retail Anchored: 34% of CMBS portfolio Mixed Use: 6% of CMBS portfolio Other: 4% of CMBS Portfolio
Slide 60: CMBS Detail
At 12/31/2009 Quality $89.3 Mln AAA $ 3.0 Mln AA $ 0.7 Mln A At 12/31/2009 Wtd Avg LTV 16% <65% 48% =65-70% 19% <70-75% 16% =75-85% 1% +85% At 12/31/2009 Credit Support 39% >30% 46% 20% - 30% 11% 10% - 20% 4% Less than 10% At 12/31/2009 Deal Cumulative Delinquencies 30% 0.0% - 1.0% 15% 1.0% - 2.0% 1
Slide 61: Corporates: $1.1 Billion
Weighted Average Rating: A 28% of Total Investments Corporates: $1.1 Billion 12/31/2009
Slide 62: Corporate: Detail on Financials
BA $41 ($23) Credit Suisse $9 MS $29 ($6) Eurohypo $8 BP Cap $25 KEY $6 ($6) GECC $25 ($8) BNY Mellon $6 JPM $23 ($14) PNC $6 ($2) GS $18( $2) US Bank $6 Amex $13 Deutsche Bank $5 Citi $13($5) Depfa ACS -Covered $5 Wells $13 FMCC $5 Natl Rural $9 John Deere Cap $5 ($2) FDIC backed amounts listed in
Slide 63: Treasury/GSE: $221 Million
Treasury/GSE: $221 Million 12/31/2009
Slide 64: FHLMC & FNMA Detail: $395 Million
FHLMC & FNMA Detail: $395 Million *® Average Rating: AAA Agency _Debentures 11% Py PROASSURANCE. pone:
Slide 65: Portfolio Overview: Short Term
Portfolio Overview: Short Term $187 Million Rated A1/P1 or better Money Markets: Moody’s: Aaa S & P: AAA
Slide 66: BOLI: $65 Million
BOLI: $65 Million Weighted average rating Moody’s: AA3 S&P: AA- A. M. Best: A+