Proassurance Corporation · NYSE:PRA
Proassurance — Investor Presentation (September 2010)
74 slides from Proassurance's investor presentation, Sep 7, 2010
Slide 1: September 7, 2010
September 7, 2010 W. Stancil Starnes Chief Executive Officer Edward L. Rand, Jr. Chief Financial Officer Frank B. O’Neil Investor Relations Officer
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
Fourth largest overall writer ProAssurance: Quick Facts 6/30/10
Slide 4: M & A Update
M & A Update Our acquisition of AMPH announced on September 1 st Expected closing by year-end Form A documents already filed in Texas Values AMPH at $32.50/share 1.3x Book Value or 11x First Call EPS estimate Modestly accretive to earnings in 2011, after one-time charges and restructuring costs
Slide 5: M & A Update
M & A Update AMPH in Austin will become our regional office We will preserve critical local claims and underwriting We offer additional balance sheet strength and services Claims Offices Claims Offices Claims / Underwriting Offices Claims / Underwriting Offices PICA and/or E&S States PICA and/or E&S
Slide 6: M & A Update
Company 2009 Premium (in millions) Texas Oklahoma Arkansas $ 60 $ 4 $ 2 6 1 7 ProForma Premium $ 70 $ 5 $ 9 M & A Update Adding high quality premium in attractive states Significant growth and opportunity in a difficult growth environment
Slide 7: M & A Update
M & A Update Medical/Legal climate in Texas is among the most stable in the nation AMPH has benefited greatly from improved loss trends 6,700 policyholders in three states with a retention rate of over 90% All ratings affirmed upon transaction announcement
Slide 8: Continued 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 9: Continuing Capital Management
Proven discipline in prudently deploying capital Building the company and enhancing return through M&A Continuing Capital Management
Slide 10: 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% Tables Values Through Year-End 2009 Book Value Growth Through Q2 2010 Book Value per Share
Slide 11: Share Prices
Share Prices Since Inception Cumulative CAGR 10 year 166% 10% 5 year 37% 7% 1 year 2% 2% Table Values Through Year-End 2009 Share Prices Book Value per Share
Slide 12: Trading Below Historic BV Multiple
Trading Below Historic BV Multiple Price to Book Multiple Inception Through September 2, 2010
Slide 13: 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 >60% Since 12/31/06 $ amounts in Billions
Slide 14: Investments Balance Risk vs. Return
Fixed Income: 87% Short Term: 7% Equity and Other Investments: 4% BOLI: 2% Investments Balance Risk vs. Return Key Investment Actions in Q2 10 Increasing allocation to short-term securities as we seek opportunities for better returns CUSIP-level portfolio disclosure on our website: www.proassurance.
Slide 15: ProAssurance
PROASSURANCE. “rested Faly
Slide 16: 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 17: 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 18: 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 19: Ohio Closed Claims 2005-2008
Ohio Closed Claims 2005-2008
Slide 20: Ohio Closed Claims 2005-2008
Ohio Closed Claims 2005-2008
Slide 21: Ohio Closed Claims 2005-2008
Ohio Closed Claims 2005-2008
Slide 22: Rates Reflect Loss Trends
Rates Reflect Loss Trends Rates on renewing physician business down less than 12% from peak pricing in 2006 Recent rate filings are really minor adjustments
Slide 23: 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 24: The Effect of Healthcare Reform
The Effect of Healthcare Reform No immediate effect—no meaningful Tort Reform in the bill Demonstration projects do not provide meaningful reform or immediate data More patients will ultimately require more physicians and ancillary providers Known: More customers for us Unknown: Effect on the medica
Slide 25: 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% We have enhanced our ability to write these classes of business through the acquisition of PIC
Slide 26: Preparing for State Changes
Preparing for State Changes We are prepared, operationally and financially, if Tort Reforms are struck down in our states Too soon to see changes connected to decisions in Illinois and Georgia We never give advance credit for untested reforms unless required by law or regulation Prices are set and r
Slide 27: ProAssurance
PROASSURANCE. “rested Faly
Slide 28: Driven by Operational Excellence
Driven by Operational Excellence Fourth straight year as one of the 50 top performing property casualty insurance companies Top 3% of all P&C companies
Slide 29: Focused on Shareholder Value
Focused on Shareholder Value Producing sustainable shareholder value Finding the right M & A opportunities Growing Book Value per Share Significant share ownership at all levels Focusing on long-term Preparing for a changing market Leveraging financial strength Protecting the balance sheet Maintain
Slide 30: September 7, 2010
September 7, 2010 W. Stancil Starnes Chief Executive Officer Edward L. Rand, Jr. Chief Financial Officer Frank B. O’Neil Investor Relations Officer
Slide 31: Discussion Materials for Meetings
Discussion Materials for Meetings
Slide 32: 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 33: ProAssurance
PROASSURANCE. “rested Faly
Slide 34: Conservative Use of Debt
Conservative Use of Debt * Low Debt to Cap Ratio ® No strain on cash flow Millions $1.8 $1.5 $1.2 $0.9 $0.6 $0.3 = Debt = Equity 2009 34 Py PROASSURANCE. Tesi Fi
Slide 35: Financial Highlights
Financial Highlights in millions, except per share data Q2 12/31 2010 2009 2009 2008 Gross Premiums Written $ 256 $ 266 $ 554 $ 471 N et Investment Income 75 74 151 158 Net Income (Includes Investment Losses) 78 82 222 178 Operating Income 82 84 215 207 Net Income/Diluted Share $2.40 $ 2.46 $6.70 $
Slide 36: Excess Capital vs. Excess Capacity
Excess Capital vs. Excess Capacity “A” Rating Threshold Conceptual Model of Projected A. M. Best BCAR Scores if Premiums Increase Surplus is Reduced
Slide 37: Investment Income Provides No Cushion
Investment Income Provides No Cushion Assumes a 1:1 premium to surplus ratio for physicians professional liability claims-made coverages Combined Ratio required to generate a 13% after-tax ROE
Slide 38: 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 39: The Importance of Investment Income
The Importance of Investment Income
Slide 40: 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 41: 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 42: Fixed Income Breakdown
Fixed Income Breakdown $3.5 Billion in Fixed Income Average fixed maturity duration: 4.1 years Average tax-equivalent yield: 5.0% 97% investment grade Weighted average: AA- 6/30/10
Slide 43: Asset Backed: $719 Million
Asset Backed: $719 Million Weighted average rating: “AA+” Bloomberg Data 6/30/10 Further Details Provided on Sub-Prime and CMBS on following pages
Slide 44: Sub-Prime Detail
At 6/30/10 Vintage $5.3 Mln 2004 & Prior $2.8 Mln 2005 Sub-Prime Detail $8.1 million market value in AFS portfolio $2.2 million unrealized loss $3.6 million market value in high-yield LP rated “B” LP’s focus is distressed ABS Quality & Vintage information only on direct holdings at 6/30/10
Slide 45: CMBS Detail
CMBS Detail Vintages 2005 & Prior- $69 million 2006- $39 million 2007- $0.4 million Top Property Types Office: 50% of CMBS portfolio Retail Anchored: 38% of CMBS portfolio Mixed Use: 7% of CMBS portfolio Other: 5% of CMBS Portfolio 6/30/10
Slide 46: CMBS Detail
At 6/30/2010 Quality $ 103.0 Mln AAA $ 3.1Mln AA $ 0.8 Mln A $ 0.9 Mln BB+ At 6/30/2010 Wtd Avg LTV 21% <65% 23% =65-70% 40% <70-75% 16% =75-85% At 36/30/2010 Credit Support 42% >30% 41% 20% - 30% 12% 10% - 20% 5% Less than 10% At 6/30/2010 Deal Cumulative Delinquencies 14% 0.0% - 1.0% 17% 1.0% - 3.
Slide 47: Municipals: $1.3 Billion
Municipals: $1.3 Billion 6/30/10
Slide 48: Corporates: $1.1 Billion
Corporates: $1.1 Billion Weighted Average Rating: A 29% of Total Investments 6/30/2010
Slide 49: Corporate: Detail on Financials
BA $41 ($22) Boeing Cap $7 JPM $23 ($14) BNY $6 GECC $23 ($4) US Bank $6 MS $19 ($6) FMCC $5 Amex $16 National Rural $5 GS $14 ($2) Deutsche Bank $5 Citi $13 ($5) Depfa ACS -Covered $5 Wells $12 John Deere Cap $5 ($2) Eurohypo $8 NY Commercial Bank $5 ($5) Credit Suisse $8 BlackRock $4 FDIC backed a
Slide 50: Treasury/GSE: $274 Million
Treasury/GSE: $274 Million Average Rating: AAA 6/30/2010
Slide 51: Equities & Other: $154 Million
Equities & Other: $154 Million 6/30/10
Slide 52: Return by Quarter: Equities & Other
Return by Quarter: Equities & Other
Slide 53: Cumulative Return: Equities & Other
Cumulative Return: Equities & Other
Slide 54: Growth in Investment vs. Reserves
Growth in Investment vs. Reserves
Slide 55: Portfolio Overview: Short Term
Portfolio Overview: Short Term % $289 Million ® Rated Al/P1 or better ® Money Markets: ® Moody’s: Aaa & S&P: AAA Tax Exempt MMF 18% Prime MMF_ Wj 4% Tax Exempt_—_—_ Commercial Paper Hi 55 8% . PROASSURANCE, Tread Fa 6/30/2010
Slide 56: BOLI: $66 Million
Moody’s: AA3 S&P: AA- A. M. Best: A+ BOLI: $66 Million 6/30/10
Slide 57: Sales & Marketing Highlights
Sales & Marketing Highlights
Slide 58: Market cycle factors
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 59: 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 60: 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 61: 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 62: Retention trends
Retention trends Retention was 88% in Q1 2010 Retention was 88% overall in 2009 Despite competitors' pricing we are retaining business
Slide 63: 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 64: Terms and Conditions
Terms and Conditions One-off concessions by many carriers Tail coverage Prior acts Slot rating
Slide 65: 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 66: ProAssurance
PROASSURANCE. “rested Faly
Slide 67: 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 68: Additional Claims Highlights
Additional Claims Highlights
Slide 69: 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 70: 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 71: 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 72: Risk Management Highlights
Risk Management Highlights
Slide 73: 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 74: 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
ProAssurance — Investor Presentation (September 2010) on 6ix