Proassurance Corporation · NYSE:PRA
Proassurance — Investor Presentation (June 2010)
81 slides from Proassurance's investor presentation, Jun 15, 2010
Slide 1: Frank B. O'Neil Investor Relations Officer
Frank B. O’Neil Investor Relations Officer June 16, 2010
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: ProAssurance: Quick Facts
ProAssurance: Quick Facts Fourth largest overall writer Insuring 62,500 policyholders nationwide
Slide 4: Executive management team
W. Stancil Starnes, J.D. Chairman & Chief Executive Officer sstarnes@proassurance.com (205) 877-4400 Company Tenure: 3 Years Prior MPL Experience: 29 Years Industry & Related Experience: 32 Years Formerly in the private practice of law in MPL defense and complex corporate litigation. Victor T. Adamo
Slide 5: Recognition and Rating Highlights
Recognition and Rating Highlights Third straight year as one of the 50 top performing property casualty insurance companies Top 3% of all P&C companies Affirmed at “A” (Excellent) by A. M. Best Positive Outlook by S & P
Slide 6: Recent Business Highlights
Recent Business Highlights Maintaining our profitability and book value growth G R O W I N G the top line Three M&A transactions completed in 2009 - Provided approximately $100 million in annualized premium growth Existing markets grew modestly in 2009 Outstanding performance in a challenging financ
Slide 7: How We Define Success
How We Define Success 23% Increase in Book Value per Share in 2009 19% Increase in Revenue vs. 2008 28% Increase in Diluted EPS Top Line Growth in 2009 $28 million of new business in our historical book Outstanding performance in a challenging financial market and a demanding line of insurance
Slide 8: 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 Growth Through Q1 2010 Book Value per Share
Slide 9: Share Price Growth
Share Price Growth S| e Prices Since Incep Cumulative CAGR 10 year 166% 10% 5 year 37% 7% $5492 1 year 2% 2% Measured through Year-End 2009 2007 2009 =YTD*‘10 Share Price Through June 15, 2010 PROASSURANCE, Tre
Slide 10: Trading Below Historic BV Multiple
Trading Below Historic BV Multiple
Slide 11: PROASSURANCE.
PROASSURANCE. “rested Faly
Slide 12: Enduring Financial Strength
Enduring Financial Strength Emphasizing an appropriate balance of risk vs. return Committed to enduring balance sheet strength Responding to the low interest rate environment Stockholder’s Equity Up Over >16% Since 12/31/07
Slide 13: Investments Balance Risk vs. Return
Fixed Income: 90% Short Term: 4% Equity and Other Investments: 4% BOLI: 2% Investments Balance Risk vs. Return Key Investment Actions in Q1 10 Further reduction of cash and short- term balances Added to corporate bond holdings CUSIP-level portfolio disclosure on our website: www.proassurance.com/inv
Slide 14: Financial Highlights
Financial Highlights in millions, except per share dato Ql 12/31 2010 2009 2009 2008 Gross Premiums Written $157 ¢$ 155| $554 $471 Net Investment Income 38 35 151 158 Net Income (Includes Investment Losses) 38 28 222 178 Operating Income 40 33 215 207 Net Income/Diluted Share $1.16 $0.84] $6.70 $5.2
Slide 15: Using capital to build through M&A
Using capital to build through M&A Preserving capital for future opportunities Enhancing shareholder value by repurchasing shares at prices that build Book Value Capital Management Source: SNL Financial
Slide 16: 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 17: Maintain Profitability Through the Cycle
Maintain Profitability Through the Cycle Ensure pricing discipline Rates based on loss data across multiple years Not unduly influenced by current market conditions Using credits allows us to maintain existing rate filings
Slide 18: Rate Discussion
Rate Discussion Rates on renewing physician business down less than 12% from peak pricing in 2006 Recent rate filings are really minor adjustments Slight increases in Arkansas, Illinois and Indiana
Slide 19: Spread Risk
Spread Risk 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 Corporate Headqu
Slide 20: Differentiate In Claims Management
Differentiate In Claims Management Claims management has always set us apart We combine financial strength with deep expertise Give our insureds the option of an uncompromising defense of their claim Allows us to defend our insureds at trial more often than any other company in our line Provides lon
Slide 21: Claims Trends Remain Favorable
Claims Trends Remain Favorable Frequency trends are stable after declining since 2006 The result is fewer cases to try Severity trends also stable Trends are much the same in states with or without Tort Reform ProAssurance Claims Tried to a Verdict
Slide 22: 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 23: 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 24: 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 Verdict Source: Ohio Department of Insurance: www.insurance.ohio.gov/Legal/Reports/Documents/MedMal_Closed_Claim_2008.pdf
Slide 25: Ohio Closed Claims 2005-2008
Ohio Closed Claims 2005-2008 Source: Ohio Department of Insurance: www.insurance.ohio.gov/Legal/Reports/Documents/MedMal_Closed_Claim_2008.pdf
Slide 26: Prepare for State Changes
Prepare for State Changes We are prepared, operationally and financially, if Tort Reforms are struck down in our states We never give advance credit for untested reforms unless required by law or regulation Prices are set and reserves established as if there is no tort reform, until results reflect
Slide 27: PROASSURANCE.
PROASSURANCE. “rested Faly
Slide 28: Success 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 29: 2009 M&A Transactions
2009 M & A Transactions 2008 Premium: $98 million Significant growth in our core business Nationwide geographical expansion 2008 Healthcare Premium: $20 million Extends our core business Broadens our medically-related range Geographical expansion 2008 Premium: $5.7 million Adds to our lawyers’ book
Slide 30: 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 31: Keep an Eye on Washington
Keep an Eye on Washington Effects of Healthcare Reform No immediate effect—no Tort Reform in the bill More patients will ultimately require more physicians and ancillary providers Known: More customers for us Unknown: Effect on the medical/legal environment More frustration in the system? More unexp
Slide 32: PROASSURANCE.
PROASSURANCE. “rested Faly
Slide 33: ProAssurance: Producing sustainable shareholder value
ProAssurance Producing sustainable shareholder value Growing Book Value per Share Finding the right M & A opportunities Significant share ownership at all levels Focusing on long-term Preparing for a changing market Leveraging financial strength Protecting the balance sheet Maintain our leading mark
Slide 34: Frank B. O'Neil Investor Relations Officer
Frank B. O’Neil Investor Relations Officer June 16, 2010
Slide 35: Additional Slides for Meetings
Additional Slides for Meetings
Slide 36: PROASSURANCE.
PROASSURANCE. “rested Faly
Slide 37: Factor Status Cycle 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 38: 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 39: Reserve adequacy
Reserve adequacy Net favorable development continues We remain confident in current reserve levels Our levels compare favorably to external actuarial reviews from Tillinghast and E&Y
Slide 40: 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 41: Conservative Use of Debt
Conservative Use of Debt Low Debt to Cap Ratio No strain on cash flow
Slide 42: PROASSURANCE.
PROASSURANCE. “rested Faly
Slide 43: Investment Income Provides No Cushion
Investment Income Provides No Cushion Pricing discipline is even more critical Combined Ratio required to generate a 13% after-tax ROE
Slide 44: The Importance of Investment Income
The Importance of Investment Income Typical Claims Payout Pattern
Slide 45: Trial and Appeals
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 46: No Change to Investment Strategy
No Change to Investment Strategy Our focus is on protecting the balance sheet and growing book value We are not extending duration for yield Main pressures in investments are declining yield and lower cash balances Cash put to work in 2009 as we gained confidence 2009 net realized investment gains:
Slide 47: 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 48: Fixed Income Breakdown
Fixed Income Breakdown 97% investment grade 3/31/10
Slide 49: Equities & Other: $160 Million
Equities & Other: $160 Million 3/31/10
Slide 50: Return by Quarter: Equities & Other
Return by Quarter: Equities & Other By Quarter Q1, 2005 - Q1, 2010 (in millions) $5.0 $4.0 $3.0 $2.0 $1.0 $0.0 “$1.0 $2.0 -$3.0 7 $40 Tie lae [os |ae low low low lam lan loo [olan an] aisle [oie] an [am [ao [om [ow [Fotanatrn] su.sus [sions [soao.0 [suton | 2.756 | su.aaz| suave | si235| s3.7s0]| sa
Slide 51: Growth in Investment vs. Reserves
Growth in Investment vs. Reserves = Cash and m= P&C Loss and Investments LAE Reserves Millions 7 a $4.0 $3 $2.4 $2 $1 $- zoai | —a052 [9008 | 2064 [005 | a008 | a0e7 [2008 [2008 [giana ean ard _ | $1,356,130 | $1,545,408 | $1,823,729 | $2,166,208 | $2,048,205 | $3,521,244 | $3,609,680 | $3,579,400 |
Slide 52: Cumulative Return: Equities & Other
Cumulative Return: Equities & Other By Quarter Q1, 2005 — Q4, 2009 {in millions) $25 s20 $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 53: Municipals: $1.5 Billion
Municipals: $1.5 Billion 3/31/10 Investment policy has always required investment grade rating prior to applying the effect of insurance
Slide 54: Asset Backed: $693 Million
Asset Backed: $693 Million % Weighted average rating: “AA+” Prime MBS LTV 57% Further Details Provided on Sub-Prime and CMBS on following pages 3 bias ek 8 PROASSURANCE. 3/31/10
Slide 55: Sub-Prime Detail
At 3/31/10 Vintage $5.1 Mln 2004 & Prior $3.0 Mln 2005 Sub-Prime Detail $8.1 million market value in AFS portfolio $2.5 million unrealized loss $15.8 million market value in high-yield LP rated “A” LP’s focus is distressed ABS Quality & Vintage information only on direct holdings at 3/31/10
Slide 56: CMBS Detail
CMBS Detail Vintages 2005 & Prior- $65 million 2006- $23 million Top Property Types Office: 58% of CMBS portfolio Retail Anchored: 29% of CMBS portfolio Mixed Use: 8% of CMBS portfolio Other: 5% of CMBS Portfolio
Slide 57: CMBS Detail
At 3/31/2010 Quality $ 83.0 Mln AAA $ 3.0 Mln AA $ 0.7 Mln A $ 0.9 Mln BB+ At 3/31/2010 Wtd Avg LTV 14% <65% 46% =65-70% 21% <70-75% 19% =75-85% At 3/31/2010 Credit Support 35% >30% 47% 20% - 30% 12% 10% - 20% 6% Less than 10% At 3/31/2010 Deal Cumulative Delinquencies 18% 0.0% - 1.0% 22% 1.0% - 3.0
Slide 58: Corporates: $1.2 Billion
Corporates: $1.2 Billion % Weighted Average Rating: A 8 28% of Total Investments Financials 26% Industrials AT% Banks 6% 57 12/31/2009
Slide 59: Corporate: Detail on Financials
BA $40 ($22) Eurohypo $8 BP Cap $26 Boeing Cap $7 JPM $23 ($14) US Bank $7 GECC $22 ($4) Credit Suisse $7 MS $20 ($6) PNC $6 ($2) Wells $20 Natl Rural $6 GS $18 ($2) Deutsche Bank $5 Amex $16 Depfa ACS -Covered $5 Citi $13 ($5) FMCC $5 BNY $10 John Deere Cap $5 ($2) FDIC backed amounts listed in par
Slide 60: Treasury/GSE: $206 Million
Treasury/GSE: $206Million 3/31/2010
Slide 61: Portfolio Overview: Short Term
Portfolio Overview: Short Term $152 Million Rated A1/P1 or better Money Markets: Moody’s: Aaa S & P: AAA 3/31/2010
Slide 62: BOLI: $65 Million
BOLI: $65 Million Weighted average rating Moody’s: AA3 S&P: AA- A. M. Best: A+ 3/31/2010
Slide 63: PROASSURANCE.
PROASSURANCE. “rested Faly
Slide 64: 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 65: Moody's Top Ranking Data
Moody’s Top 100 Ranking Data Return on Premium Rank: #1
Slide 66: Sales & Marketing Highlights
Sales & Marketing Highlights
Slide 67: Distribution Sources
Distribution Sources We remain primarily agent-driven Direct in Alabama, Florida and in all states for Podiatric business Dual distribution working in DC and parts of Missouri
Slide 68: New Business Acquisition Trends
New Business Acquisition Trends Profitable new business can be found New business added in a number of states Retention is at historical highs The market is equal parts pricing sanity and insanity
Slide 69: Retention trends
Retention trends Retention was 88% in Q1 2010 Retention was 88% overall in 2009 Despite competitors' pricing we are retaining business
Slide 70: Competition
Competition We have see no new large scale competitors Greatest competition is physicians moving into hospital captives and large clinic alternative risk transfer programs We will address these issues through new products and new approaches to our business partners Some consolidation among start-ups
Slide 71: Terms and Conditions
Terms and Conditions One-off concessions by many carriers Tail coverage Prior acts Slot rating
Slide 72: Lawyers Professional Liability
Lawyers Professional Liability Historical book performing as expected MGA’s producing new business as expected in market previously unserved Primarily western US (Greyhawk) and mid-Atlantic (ProLawyer)
Slide 73: PROASSURANCE.
PROASSURANCE. “rested Faly
Slide 74: Reinsurance Overview
Reinsurance Overview No real change in pricing Somewhat surprising to us Interest remains high in our program Aspen, Hannover and Transatlantic lead our program Solid mix of London, US and Bermudan companies
Slide 75: Additional Claims Highlights
Additional Claims Highlights
Slide 76: Loss Trends
Loss Trends Frequency remains at historically low levels No longer declining Some signs of frequency returning Severity is manageable Fewer cases for us to try We are trying the same percentage of our claims inventory
Slide 77: Claims are level from 2008 to 2009
Claims are level from 2008 to 2009 New Claims Opened Each Year New Claims Opened Each Year 6,577 5,340 4,729 4,382 3,880 3,890
Slide 78: No Emerging Claim Hotspots
No Emerging Claim Hotspots No unexpected claims trends are emerging by specialty Greater public access to claims outcome data should fuel renewed attention to claims defense
Slide 79: Risk Management Highlights
Risk Management Highlights
Slide 80: We Are a Doctor-Focused Company
We Are a Doctor-Focused Company We value physician input and seek partnerships with organized medicine Endorsed in Alabama, D.C., Indiana and Wisconsin Physician involvement at all levels of the organization Led by Hayes Whiteside, M.D., SVP and Chief Medical Officer We actively participate in natio
Slide 81: Risk Management Scope
Risk Management Scope Approximately 80% of insureds are “touched” by risk management programs each year Risk management publications provide specialty-specific advice State-specific publications target current event issues Risk Resource center provides immediate access to risk management advice in d