Proassurance Corporation · NYSE:PRA
Proassurance — Investor Presentation (November 2011)
58 slides from Proassurance's investor presentation, Nov 28, 2011
Slide 1: Forward Looking Statements and Non-GAAP Measures
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 presentation. The principal ris
Slide 2: ProAssurance Overview
ProAssurance Overview We are the only pure-play, publicly-traded medical professional liability (MPL) insurance company in America
Slide 3: This is ProAssurance
YTD 2011 Policyholders: ~71,600 2011 YTD Premium: $451 million This is ProAssurance Specialty insurance company primarily writing medical professional liability Founded in 1976, public since 1991 Historical focus on small groups, solo practitioners and healthcare facilities Evolving strategy is succ
Slide 4: This is What Differentiates our Company
This is What Differentiates our Company Our commitment to Treated Fairly Unwavering dedication to the defense of non-meritorious lawsuits Allows our insureds the right to an unfettered defense of their claims where permitted by law Steadfast dedication to in-depth underwriting and adequate pricing A
Slide 5: Consistently Successful Throughout the Insurance Cycle
Consistently Successful Throughout the Insurance Cycle Total Assets have reached $5 billion Shareholders’ Equity has topped $2.0 billion Total Reserves have reached $3 billion Market Cap : ~$2.4 billion This is What We Have Achieved Historical Book Value Per Share Inception to 9/30/11 CAGR: 16% Cumu
Slide 6: Treated Fairly
Treated Fairly Affirms our existing, enduring commitment to every stakeholder Insureds Agents Investors The public Employees We run our business as owners who are rewarded for long-term success
Slide 7: Business Profile and Operational Strategy
Business Profile and Operational Strategy 2011 is our fifth straight year to be recognized by Ward’s as one of the 50 top performing property casualty insurance companies in America
Slide 8: ProAssurance: Business Profile
ProAssurance: Business Profile Largest independent publicly traded writer of MPL insurance Fourth largest overall writer Top 20 writers have just 65% of the market More than 100 writers with some share of the market Majority of companies are mutual or similar Few operate in more than two or three st
Slide 9: ProAssurance Footprint
ProAssurance Footprint ProAssurance: Geographic Profile Writing across the United States, ProAssurance has broad geographic diversification Each state presents unique medical and legal challenges Regional structure provides the local knowledge that differentiates ProAssurance Corporate Headquarters
Slide 10: Local Knowledge and National Reach
Local Knowledge and National Reach Medical/Legal environment varies by state Often varies within states Regulatory environment differs greatly May limit the ability to ensure that rates accurately reflect loss trends Can affect the ability to introduce policy or procedural changes Overall business c
Slide 11: ProAssurance: Investment Profile
$4 Billion Overall Portfolio $3.7 Billion Fixed Income Portfolio ProAssurance: Investment Profile Average duration: 3.9 years Average tax-equivalent Income yield: 4.6% Investment grade: 97% Weighted average: AA- 9/30/11 Key actions in Q3 Added Governments to mitigate concerns over spread widening CU
Slide 12: ProAssurance Operational Strategy
ProAssurance Operational Strategy Maintain our profitability and book value growth Ensure outstanding performance in a challenging financial market and a demanding line of insurance Focus on long-term Maintaining balance sheet strength and institutional expertise to prepare for a changing market Lev
Slide 13: ProAssurance's Growth Strategy
ProAssurance’s Growth Strategy We have consistently grown our business through M&A and opportunistic de novo expansion Future growth will be less dependent on M&A Growth opportunities will be shaped by a healthcare landscape that will see enormous changes—with or without federal healthcare reform We
Slide 14: ProAssurance's Growth Strategy: Certitude program
ProAssurance’s Growth Strategy Certitude tm program developed in conjunction with Ascension Health Largest Catholic healthcare system in the U.S. 38 ministries in 18 states, largely mirror PRA’s footprint Insurance operations performed by ProAssurance PRA policies jointly marketed Coordinated claims
Slide 15: ProAssurance's Growth Strategy: Certitude expansion
ProAssurance’s Growth Strategy Future opportunities for the Certitude tm program Expansion in Michigan to Ascension-affiliated physicians insured in the open market Expanding into Florida, Indiana, Tennessee and Texas by end of Q1 2012, with other states to follow Stimulating interest from other hos
Slide 16: ProAssurance's Growth Strategy: ProControl
ProAssurance’s Growth Strategy Joint physician/hospital insurance product: ProControl sm Addresses the unique risk tolerance and claims-handling expectation of each insured Physicians largely seek claims defense to protect their reputation Hospitals/facilities seek to protect their reputation in dif
Slide 17: ProAssurance's Growth Strategy: Alternative risk programs
ProAssurance’s Growth Strategy Providing sophisticated alternative risk programs for organizations as they increase in size and sophistication We have proven experience in facilitating self- insurance and captive insurance programs
Slide 18: ProAssurance's M&A Strategy
ProAssurance’s M&A Strategy Consolidation will continue and will remain episodic Fewer significant targets Remaining companies of size are in important strategic areas We prefer “health care centric” but will consider closely related liability lines Legal/regulatory environment must be favorable Not
Slide 19: De Novo vs. Acquisition M&A and the Insurance Cycle
De Novo vs. Acquisition M & A and the Insurance Cycle The Case for Growing Through M & A Legal and regulatory environment must be favorable Not all M & A opportunities should be pursued The key is understanding why companies are available We don’t “bet the farm” and can acquire without “breaking the
Slide 20: Healthcare Reform & Tort Reform Update
Healthcare Reform & Tort Reform Update Our long-term focus ensures that we can continue to create value in an evolving medical/legal climate
Slide 21: The Potential Effects of Healthcare Reform
The Potential Effects of Healthcare Reform More patients will ultimately require more physicians and ancillary providers Known: More customers for us We have enhanced our ability to write new classes of business through the acquisition of PICA and ProAssurance Mid-Continent General Underwriters Unkn
Slide 22: The Fate of Tort Reform: National
The Fate of Tort Reform: National No meaningful Tort Reform in healthcare reform laws No immediate effect on the medical/legal climate Demonstration projects do not provide meaningful reform or immediate data Federal Tort Reform has reappeared in Washington Lots of smoke, so far no fire in Washingto
Slide 23: The Fate of Tort Reform: States
The Fate of Tort Reform: States State Tort Reforms—where the real battles are fought Reforms enacted in 2011 $350,000 non-economic damage cap in Oklahoma $750,000 non-economic damage cap in Tennessee $500,000 non-economic damage cap in North Carolina Non-economic damage cap rejected in New York Cour
Slide 24: The Fate of Tort Reform
The Fate of Tort Reform Whether federal or state, we never give advance credit for untested reforms unless required by law or regulation We are prepared, operationally and financially, if Tort Reforms are struck down in our states Prices are set, and reserves established, as if there is no tort refo
Slide 25: Current Market Overview
Current Market Overview We retain existing business and add new, profitable business by competing on value and service, not by focusing on price alone
Slide 26: ProAssurance and Today's Market
ProAssurance and Today’s Market We are in a period of “benign profitability” Prices have been falling yet profitability remains at attractive levels We have seen no new large scale market entry from larger commercial competitors No expansion by mid-decade start-ups Consolidation beginning in that se
Slide 27: ProAssurance and Today's Market: Retention
ProAssurance and Today’s Market ProAssurance’s retention remains at historically high levels Continued underwriting vigilance is being used today to ensure future success
Slide 28: Physician Rate Change History
Physician Rate Change History 1 ProAssurance and Today’s Market Rates on renewing physician business down 14% from peak pricing in 2006 Improved frequency trends are reflected in recent rate declines Improvement in frequency has outweighed a steady, manageable rise in severity of ~4% per year Loss t
Slide 29: ProAssurance Business Outlook
ProAssurance Business Outlook We ARE writing new business that we believe will meet our profitability goals $63 million in new physician business through Q3 2011 Approximately $44 million due to AMPH Approximately $19 million, excluding AMPH Includes approximately $6.2 million from Certitude tm Majo
Slide 30: Differentiation Through Claims Handling
Differentiation Through Claims Handling Our unique approach to claims benefits our insureds and our shareholders
Slide 31: Differentiate Through Claims Defense
ProAssurance: 79% Favorable Outcomes Industry: 72% Favorable Outcomes Differentiate Through Claims Defense Our deep expertise in claims defense has always set us apart Our financial strength gives our insureds the opportunity for an uncompromising defense of their claim Our successful approach to cl
Slide 32: The Ohio Example: 2005-2009 Closed Claim Data
Fewer Claims Closed With Indemnity More Claims Defended in Court Lower Average Indemnity Payment per Closed Claim The Ohio Example: 2005 - 2009 Data Comprehensive, reliable data provided by the Ohio Department of Insurance Broad range of competitors and business approaches www.insurance.ohio.gov/Leg
Slide 33: Claims Trends Remain Favorable
ProAssurance Claims Tried to a Verdict New Claims Opened Each Year Claims Trends Remain Favorable With frequency down compared to mid-decade the result is fewer cases to try Severity trends steady and manageable No observed effect from the economic downturn Trends are much the same in states with or
Slide 34: Understanding Recent Loss Trends
Understanding Recent Loss Trends Frequency stable after historic declines Lawyers are the gatekeepers Must weigh the cost of a trial vs. chances of success Likelihood of success is affected by many factors Societal perceptions of lawsuits against physicians Effects of the overall tort reform debate
Slide 35: The Residual Cost of a Plaintiff Verdict
The Residual Cost of a Plaintiff Verdict Financial Effects Higher MPL premiums May affect quality scoring under new payment regimes Credentialing Implications Disclosure required when applying for licensing, privileges and treatment panels throughout their medical career Reputational Damage May affe
Slide 36: The Benefits of Strong Defense: Loss Payments
Loss Payments The Benefits of Strong Defense Our ability and willingness to defend claims allows us to achieve better results Source: Statutory Basis, A.M. Best Aggregates & Averages Some totals may not agree due to rounding ProAssurance vs. Industry Average Loss Ratio (2006-2010) Legal Payments 64.
Slide 37: Differentiation Through Business Discipline
Differentiation Through Business Discipline We consistently outperform our industry by ensuring our customer’s satisfaction and our business’ profitability
Slide 38: Stringent Underwriting Standards
We enforce stringent underwriting standards to maintain rate structure and enhance profitability Underwriting process driven by individual risk selection and assessment of loss history, areas of practice, and location Rate filings consider the results of the past five to seven years to ensure a sing
Slide 39: Conservative Approach to Reserves
Net Favorable Reserve Development Net Reserve per Open MPL Claim 1 Conservative Approach to Reserves Conservative reserve strategy provides protection against a loss trend reversal Reviewed at least quarterly by internal actuarial staff Regular outside reviews Independent consulting actuaries (Tower
Slide 40: Debt to Equity: Strong Capital Position
Debt to Equity Strong Capital Position Conservative Use of Debt and Low Leverage Low Debt to Cap Ratio No strain on cash flow No Debt Prior to 2001 Prepared for an improving market
Slide 41: Differentiation Through Financial Strength
Differentiation Through Financial Strength Our dedication to solid financial strength lays an unshakable foundation for every facet of our business
Slide 42: Long-Term Financial Strength Sets Us Apart
Shareholders’ Equity Total Assets Long-Term Financial Strength Sets Us Apart Ensuring the strength of our balance sheet is our top financial priority Financial strength differentiates us in the market The claims defense philosophy that differentiates us in the market leverages our financial strength
Slide 43: Net Investment Income, Premiums Written, Net Income, Operating Income
Net Investment Income Net Premiums Written Net Income Operating Income 1
Slide 44: Components of Return on Equity
Components of Return on Equity (in millions) Steady Return in an Unfavorable Environment Meeting our long-term ROE target of 12% -14%
Slide 45: Long-Term ROE Target and The Yield Trap
Long-Term ROE Target is 13% The Yield Trap Pricing discipline becomes even more critical in a low interest rate environment Lack of investment yield may be a hard market catalyst Return on Equity and Investment Returns Assumes a 1:1 premium to surplus ratio for physicians professional liability clai
Slide 46: Capital Growth: 2006-2010
Capital Growth: 2006-2010 in $000’s except total equity (000,000’s)
Slide 47: 2011 Year-to-Date Financial Highlights
Nine Months Ended September 30, 2011 2010 Gross Premiums Written $ 450,795 $ 414,697 Net Premiums Earned 403,766 379,124 Net Investment Income 106,573 110,348 Net Income (Includes Investment Losses) 146,494 129,545 Operating Income 147,007 123,392 Net Income per Diluted Share $ 4.75 $ 3.99 Operating
Slide 48: Combined Ratios Must Be Lower in Today's Investment Environment
Combined Ratios Must Be Lower in Today’s Depressed Investment Environment to Generate Risk Appropriate ROEs Investment Effect on P&C Industry ROE Combined Ratio / ROE - a 100% Combined Ratio Isn’t What It Used to Be * 2009 and 2010 figures are return on average statutory surplus. 2008 -2011 figures
Slide 49: ProAssurance Creates Value
ProAssurance Creates Value ProAssurance leverages the long-term focus of an experienced, invested management team to achieve strong, sustainable results
Slide 50: Current Prices Present a Compelling Buying Opportunity
Current Prices Present a Compelling Buying Opportunity Driven to Excel / Focused on Shareholder Value Maintaining our profitability and book value growth Outstanding performance in a challenging financial market and a demanding line of insurance Producing sustainable shareholder value Finding the ri
Slide 51: Investment Portfolio Detail
Investment Portfolio Detail ProAssurance remains conservatively invested, to ensure our ability to keep our long-term promise of insurance protection
Slide 52: Portfolio Detail: Asset Backed
Asset Backed: $733 Million Weighted Average Rating: “AA+” Breakdown of Agency MBS Holdings Sub-Prime: $8.4 mln Market Value (AFS) $1.2 mln net unrealized loss ProAssurance Portfolio Detail: Asset Backed 9/30/11 Key CMBS Details Provided on Following Page
Slide 53: Portfolio Detail: CMBS
ProAssurance Portfolio Detail: CMBS $81.7 million Fair Value in non-agency CMBS Book Value: $78 million (2% of fixed income portfolio) We have experienced no losses on our CMBS positions. 9/30/11
Slide 54: Portfolio Detail: Municipals
Municipals: $1.2 Billion / Average Rating is AA ProAssurance Portfolio Detail: Municipals Investment policy has always required investment grade rating prior to applying the effect of insurance Weighted Average Rating: AA 9/30/11
Slide 55: Portfolio Detail: Equities & Other
Equities & Other: $223 Million ProAssurance Portfolio Detail: Equities & Other 9/30/11
Slide 56: Portfolio Detail: Corporates
Corporates: $1.4 Billion ProAssurance Portfolio Detail: Corporate Weighted Average Rating: A 6/30/11
Slide 57: Portfolio Detail: Various
Treasury / GSE: $397 Million Short Term: $97 Million BOLI: $52 Million ProAssurance Portfolio Detail: Various 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+ 9/30/11
Slide 58: Effective, Experienced & Invested Management
Effective , Experienced & Invested Management All subject to share ownership requirements