Proassurance Corporation · NYSE:PRA
Proassurance — Investor Presentation (December 2012)
77 slides from Proassurance's investor presentation, Dec 5, 2012
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: Capital Management Announcement
Capital Management Announcement Two-for-one stock split effective December 27, 2012 Record date is December 17, 2012 POST-SPLIT dividend payments Special Dividend: $2.50/share $154 million to shareholders Regular Dividend: $0.25/share Accelerated from Q1 2013 Annualized yield of 2.2% based on 12/4/1
Slide 3: Transaction Update
Transaction Update Medmarc policyholders approved the transaction on December 4, 2012 Expected closing effective January 1, 2013 Medmarc is a leader writer of liability insurance for medical technology and life sciences Transaction closed November 30, 2012 IND is the leading medical professional lia
Slide 4: ProAssurance General Update
ProAssurance General Update We are the only pure-play, publicly-traded healthcare professional liability (HCPL) insurance company in America.
Slide 5: ProAssurance Corporate Profile
ProAssurance Corporate Profile Specialty liability insurance writer Primarily Healthcare Professional Liability (HCPL) Only pure play public company writing predominately HCPL Market Cap: ~$2.8 billion Shareholders’ Equity: $2.3 billion Total Assets: $5.0 billion Rated “A” by Fitch and A. M. Best
Slide 6: ProAssurance Corporate Profile
Q3 2012 Policyholders: ~66,250 2012 YTD Gross Written Premium: $429 mln ProAssurance Corporate Profile Successfully adding business across the risk spectrum as the delivery of healthcare changes Distribution is Independent Agent (61%) and Direct (39%) Direct in Alabama, Florida and in all states for
Slide 7: ProAssurance Footprint
ProAssurance Footprint ProAssurance Geographic Profile Broad geographic diversification Locally-based decision-making differentiates ProAssurance by addressing each state’s unique medical/legal challenges Corporate Headquarters Corporate Headquarters Claims Offices Claims Offices (Birmingham) 2011 M
Slide 8: Success Throughout the Insurance Cycle
Historical Book Value Per Share Historical Stock Price to 11/30/12 Success Throughout the Insurance Cycle Inception to 9/30/12 CAGR: 16% Cumulative:1985% 10 Year Summary (2002-2011) CAGR: 16% Cumulative: 342% Charts do not reflect 2:1 stock split and dividends announced 12/5/12
Slide 9: Our Commitment to Treated Fairly
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 An unsurpassed level of customer service
Slide 10: Today's Healthcare Professional Liability Market
Today’s Healthcare Professional Liability Market ProAssurance delivers an unparalleled level of service and financial stability that truly differentiates our coverage and our Company in an evolving, competitive market
Slide 11: HCPL Stands Apart in Insurance
HCPL Stands Apart in Insurance HCPL claims may not be filed for years after an incident and may take years to resolve: Long-tail Personal lines are short tail Introduces long periods of uncertainty Loss trends may change expected severity from time of initial pricing Can be mitigated by the use of t
Slide 12: The HCPL Market Today
The HCPL Market Today Prolonged period of “benign profitability” Premiums levels remain well above levels of 2000 Significant policyholder retention by all companies despite fierce competition No large commercial carriers have entered the market in a meaningful manner Significant barriers to entry i
Slide 13: Market cycle factors
Factor Frequency Severity Investment Returns Capital Cash Flow Reserves Reinsurance Status Stabilized Some Upward Indications Moderate Low Excess Capacity Becoming Strained Modestly Redundant Sufficient Capacity Cycle Impact Neutral — Harden Neutral Harden Soften Neutral — Harden Soften Neutral
Slide 14: The HCPL Market Today
The HCPL Market Today Changes in healthcare delivery are changing the underlying dynamics Physicians are combining into larger groups Physician practices are being brought into hospitals through purchase or affiliation Hospitals are combining into large networks requiring greater insurance expertise
Slide 15: The HCPL Market Today
The HCPL Market Today Market remains fragmented even after two decades of consolidation More than 100 writers Largest market share is <8% 100 companies have <1%
Slide 16: ProAssurance's Standing in the Market
ProAssurance’s Standing in the Market ProAssurance is the largest independent publicly traded writer of HCPL insurance Fourth largest overall writer DPW: SNL Data 2011
Slide 17: The Evolution of Healthcare and the HCPL Market
The Evolution of Healthcare and the HCPL Market Our successful experience and deep expertise uniquely qualify ProAssurance to insure the widest range of healthcare risks
Slide 18: Healthcare Reform
Healthcare Reform No meaningful change after the election Known: More customers for us May accelerate the growth of hospital-owned practices and consolidation into larger groups Provides an opportunity for us due to our geographic reach, long-term experience in hospitals and our financial strength W
Slide 19: ProAssurance's Evolving Strategy
ProAssurance’s Evolving Strategy Shaped by a healthcare landscape that will change—with or without federal healthcare reform Enhancing our commitment to individual providers and small groups Expanding our hospital capabilities and commitment Building on two decades of hospital experience
Slide 20: ProAssurance's Evolving Strategy
ProAssurance’s Evolving Strategy Leverage our reach, expertise and financial strength with larger accounts Largest non-profit healthcare system in the US Now in Michigan, Florida, Illinois, Indiana and Texas Insuring Ascension-affiliated physicians through coordinated, jointly insured programs Finan
Slide 21: ProAssurance's Evolving Strategy
ProAssurance’s Evolving 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
Slide 22: ProAssurance's Evolving Strategy
ProAssurance’s Evolving Strategy Ongoing interest in alternative risk and self- insurance mechanisms Captive insurance and sophisticated risk sharing programs Risk Retention Groups for specific specialties or regions
Slide 23: M & A and the Insurance Cycle
M & A and the Insurance Cycle ProAssurance’s Successful 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/reg
Slide 24: ProAssurance's Successful M&A History
ProAssurance’s Successful M&A History Original Companies Purchased Company Demutualization OHIC HOSPITALS ONLY Renewal Rights Assumed Business Proposed † SERTA Expected Close 1/1/13 Expected Close 11/30/12
Slide 25: ProAssurance Operational Review
ProAssurance Operational Review ProAssurance delivers an unparalleled level of service and financial stability that truly differentiates our coverage and our Company in an evolving, competitive market
Slide 26: Underwriting for Profitability Not Market Share
Underwriting for Profitability Not Market Share Underwriting process driven by individual risk selection and assessment of loss history, areas of practice, and location Rates contemplate specific ROE expectations Frequent rate/loss reviews ensure adequate prices Rate filings consider the results of
Slide 27: ProAssurance Business Outlook
ProAssurance Business Outlook We ARE writing new business that we believe will meet our profitability goals Major competitors continue to be largely disciplined in pricing
Slide 28: Key State Rate Comparison
Key State Rate Comparison Annual Premium for a $1M / $3M Policy Filed or Approved at 1/01/12
Slide 29: Calendar Year Combined Ratio: ProAssurance Consistently Outperforms in MPL
Calendar Year Combined Ratio: ProAssurance Consistently Outperforms in MPL ProAssurance Outperforms the Industry Five Years: ProAssurance Average: 64.1% / Industry Average: 82.5% Ten Years: ProAssurance Average: 84.4% / Industry Average: 99.5% All Years: ProAssurance Average: 91.3% / Industry Averag
Slide 30: MD/DO Rate Change History
MD/DO Rate Change History ProAssurance Pricing History Peak pricing was in 2006 Improved frequency trends are reflected in recent rate declines Improvement in frequency has outweighed the steady, manageable rise in severity Loss trends have improved in states with and without tort reforms Rate chang
Slide 31: ProAssurance Retention Remains High
ProAssurance Retention Remains High Continued underwriting vigilance is being used today to ensure future success Market share is important, but NOT as important as profitability
Slide 32: Consistent Approach to Reserves
Net Favorable Reserve Development Net Reserve per Open MPL Claim 1 Consistent Approach to Reserves Consistent reserving practices provide protection against a loss trend reversal and capital erosion 1 Statutory basis; Loss & LAE Acquired company data included at end of acquiring year
Slide 33: 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 34: Claims Trends Remain Favorable
New Claims Opened Each Year ProAssurance Claims Tried to a Verdict Claims Trends Remain Favorable Fewer cases to try following significant decline in frequency Severity trends steady and manageable No observed effect from the economic downturn Trends are much the same in states with or without Tort
Slide 35: Differentiate Through Claims Defense
ProAssurance: 78% No Paid Losses Industry: 72% No Paid Losses Differentiate Through Claims Defense We leverage our financial strength to gives our insureds the opportunity for an uncompromising defense of their claim Differentiates our product Provides long-term financial and marketing advantages Re
Slide 36: The Ohio Example: 2005-2010 Data
More Claims Closed With No Indemnity More Claims Defended in Court Lower Average Indemnity Payment per Closed Claim The Ohio Example: 2005 - 2010 Data Comprehensive, reliable data provided by the Ohio Department of Insurance Broad range of competitors and business approaches www.insurance.ohio.gov/L
Slide 37: The Bottom Line Benefits of Strong Defense
Loss Payments as a Percentage of Total Loss Ratio 19% 21% 32% 48% 42% 44% The Bottom Line 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 Pro
Slide 38: Malpractice Made Public
Malpractice Made Public Malpractice judgments/settlements now disclosed in 26 states Next: Public access to the National Practitioner Data Bank (NPDB)? Disciplinary actions now disclosed in all states Board / Discipline Board / Discipline / Med-Mal Source: Federation of State Medical Boards National
Slide 39: 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 40: ProAssurance Performs
ProAssurance Performs Delivering meaningful value for our shareholders
Slide 41: Share Repurchase History
Share Repurchase History Committed to Effective Capital Management Balancing future needs with current market reality Regular dividend to be $1.00/share/year post 2:1 split ~2.2% yield based on 12/4/12 closing price Q1 2013 dividend accelerated to 2012 Payable December 27, 2012 Special Dividend of $
Slide 42: Capital Growth: 2007-2012 YTD
Capital Growth: 2007-2012 YTD in $000’s except total equity (000,000’s) * Includes economic cost of holding treasury shares
Slide 43: Q3 2012 Financial Highlights
Quarter Ended, Six Months Ended, 9/30/2012 9./30/2011 9/30/2012 9/30/2011 Gross Premiums Written $ 156,547 $ 174,680 $ 429,223 $ 450,795 Net Premiums Earned $ 127,125 $ 134,627 $ 395,050 $ 403,766 Net Investment Income $ 33,910 $ 34,116 $ 101,912 $ 106,573 Net Income (Includes Investment Losses) $ 6
Slide 44: Inside ProAssurance's Balance Sheet
Inside ProAssurance’s Balance Sheet
Slide 45: Inside ProAssurance's Income Statement
Inside ProAssurance’s Income Statement
Slide 46: Steady Return in an Unfavorable Environment
Steady Return in an Unfavorable Environment Long-term ROE target: 12% -14%
Slide 47: Book Value per Share captures our focus on long-term excellence
Book Value per Share captures our focus on long-term excellence Increased every year we have been public Focused on Book Value Inception to 9/30/12 CAGR: 16% Cumulative:1985% 10 Year Summary (2002 -2011) CAGR: 16% Cumulative: 342% Historical Book Value Per Share Does not reflect 2:1 stock split and
Slide 48: Book Value per Share History
Book Value per Share History Does not reflect 2:1 stock split and dividends announced 12/5/12
Slide 49: Driving Share Prices Higher
Driving Share Prices Higher Historical Share Price Inception to 11/30/2012 CAGR: 15% Cumulative: 1684% 10 Year Summary (2002 -2011) CAGR: 14% Cumulative: 280% Does not reflect 2:1 stock split and dividends announced 12/5/12
Slide 50: Current Prices Continue to Offer a Compelling Buying Opportunity
Current Prices Continue to Offer a Compelling Buying Opportunity Current Price to Q3 2012 Book: 1.2x Average Since Inception: 1.4x Driven to Excel / Focused on Shareholder Value Maintaining profitability Sustaining book value growth Producing sustainable shareholder value Focusing on long-term—ready
Slide 51: ProAssurance Transaction Discussion
ProAssurance Transaction Discussion Medmarc will broaden our product offerings and capabilities in protecting the delivery of healthcare Independent Nevada Doctors Insurance Exchange (IND) will make ProAssurance the leading medical professional liability writer in Nevada
Slide 52: Transaction Update
Transaction Update A leading products liability writer in medical technology and life sciences Meaningful legal professional liability book Merger into ProAssurance solidifies IND’s position as the leading medical professional liability writer in Nevada
Slide 53: Pro Forma Premiums / Policyholders
2011 Actual PRA GPW: $566 million 2011 ProForma GPW: $619 million 2011 Actual Policyholders: ~71,500 2011 ProForma Policyholders: ~75,500 ProForma Premiums / Policyholders ProForma: ProAssurance + Medmarc + IND
Slide 54: IND Details
IND Details Founded in 2006 by Nevada physicians Proven history Gained market leadership without competing on price Solid customer service philosophy mirrors ProAssurance ProAssurance and IND will combine offices in Las Vegas Transaction value not material to ProAssurance
Slide 55: IND Metrics and Pro Forma Nevada Market Share
Pro Forma Nevada Market Share ProAssurance + IND $21.8 mil NORCAL Mutual $10.8 mil Nevada Mutual $10.5 mil Premier Physicians $7.2 mil Fairfax Financial $6.6 mil Total Market $85.6 mil 2011 Direct Written Premium 12/31/2011 12/31/2010 12/31/2009 Total Assets $ 51.8 $ 50.6 $ 47.2 Loss & LAE Reserves
Slide 56: IND Strengths and Advantages
IND Strengths Advantages ProAssurance Gains from IND ProAssurance Answers Challenges for IND Recognized leader in Nevada Conservative operating philosophy Physician-founded Corporate culture values high levels of customer service Strong brand recognition Strong surplus position relative to business
Slide 57: Medmarc Update
Medmarc Update Regulatory approval granted Approved by policyholders on December 4 th Expected closing effective January 1, 2013
Slide 58: Medmarc Details
Medmarc Details Founded in 1979 by the medical technology and life science industry Proven legal professional liability book Management will remain in place at corporate offices in Virginia Transaction value: $154 million in cash $146.2 direct payments to eligible members $7.5 million in future prem
Slide 59: Medmarc Financial Metrics
Top Five States by Direct Written Premium (2011) California $5.8 mil (14%) Florida $5.3 mil (13%) Texas $4.4 mil (10%) Massachusetts $3.8 mil (6%) New Jersey $2.0 mil (5%) 3/31/2012 12/31/2011 12/31/2010 12/31/2009 Total Assets $ 319.9 $ 325.2 $ 335.5 $ 339.1 Loss & LAE Reserves $ 139.6 $ 146.8 $ 16
Slide 60: Medmarc Strengths
Medmarc Strengths ProAssurance Answers Challenges for Medmarc Experienced board of directors and management team Strong surplus position relative to business written Profita ble operations Conservative business philosophy Strategic relationship with AdvaMed Leading medical technology trade associati
Slide 61: Advantages ProAssurance Gains from Medmarc
Advantages ProAssurance Gains from Medmarc Medmarc Transaction Analysis Buying at a discount to tangible book value Will increase ProAssurance book value per share Experienced management team has committed to ProAssurance ProAssurance adds Broader product offerings and capabilities in protecting the
Slide 62: Medmarc Profitability Drives Surplus Growth
Medmarc Profitability Drives Surplus Growth Surplus at highest level in company history
Slide 63: Recent Events at Medmarc
Significantly reduced exposure to accounts with sales greater than $100 million (2011) Recent Events at Medmarc
Slide 64: Investment Portfolio Detail
Investment Portfolio Detail ProAssurance remains conservatively invested, to ensure our ability to keep our long-term promise of insurance protection
Slide 65: ProAssurance: Investment Profile
$4.1 Billion Overall Portfolio $3.6 Billion Fixed Income Portfolio ProAssurance: Investment Profile Average duration: 3.8 years Average tax-equivalent Income yield: 4.5% Investment grade: 94% Weighted average: AA- 9/30/12 Key portfolio actions in Q3 2012 Added dividend-paying equities Added to high
Slide 66: Portfolio Detail: Asset Backed
Asset Backed: $599 Million Weighted Average Rating: “AA+” Breakdown of Agency MBS/CMBS Holdings Sub-Prime: $7.3 mil Market Value (AFS) $0.8 mil net unrealized loss ProAssurance Portfolio Detail: Asset Backed 9/30/12 Subject to Rounding Key CMBS Details Provided on Following Page
Slide 67: Portfolio Detail: Non-Agency CMBS
ProAssurance Portfolio Detail: Non-Agency CMBS $76.7 million Fair Value in non-agency CMBS Book Value: $70.3 million (2% of fixed income portfolio) We have experienced no losses on our CMBS positions 9/30/12
Slide 68: 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 9/30/12
Slide 69: Portfolio Detail: Equities & Other
Equities & Other: $336 Million ProAssurance Portfolio Detail: Equities & Other 9/30/12
Slide 70: Portfolio Detail: Corporate
Corporates: $1.4 Billion ProAssurance Portfolio Detail: Corporate Weighted Average Rating: A- 9/30/12
Slide 71: Portfolio Detail: Various
Treasury / GSE: $281 Million Short Term: $168 Million BOLI: $52 Million ProAssurance Portfolio Detail: Various Rated A1/P1 or better Money Markets: Moody’s: Aaa S&P: AAA Weighted average rating Moody’s: AA3 S&P: AA- A. M. Best: A+ 9/30/12
Slide 72: ProAssurance. Treated Fairly
PROASSURANCE. “Treated Faily
Slide 73: Management team
W. Stancil Starnes, JD Chairman & Chief Executive Officer Company Tenure: 5 Years Prior MPL Experience: 29 Years Total Industry & Related Experience: 34 Years Formerly in the private practice of law in MPL defense and complex corporate litigation. Victor T. Adamo, JD, CPCU Vice-Chairman Company Tenu
Slide 74: Debt to Equity Strong Capital Position
Debt to Equity Strong Capital Position Prepared for an improving market Conservative Use of Debt / Low Leverage No debt as of September 20, 2012 No Debt Prior to 2001 * Annualized 2012 premium for presentation purposes only. Specifically disclaimed as a projection of premiums
Slide 75: Long-Term ROE Target is 13% The Yield Trap
Long-Term ROE Target is 13% The Yield Trap The choice: chase yield or extend duration We are maintaining duration, looking for opportunities Pricing discipline becomes even more critical in a low interest rate environment Lack of investment yield may be a hard market catalyst Return on Equity and In
Slide 76: Long-Term Financial Strength Sets Us Apart
Shareholders’ Equity Total Assets Long-Term Financial Strength Sets Us Apart Ensuring the strength of our balance sheet is our top financial priority Financial strength differentiates us in the market The claims defense philosophy that differentiates us in the market leverages our financial strength
Slide 77: Net Investment Income, Premiums Written, Net Income, Operating Income
Net Investment Income Net Premiums Written Net Income Operating Income 1 ($ in millions. Excludes discontinued operations) 1 Excludes the after-tax effects of net realized gains or losses, and, in 2012, the effect of $714,000 in confidential settlements that do not reflect normal operating results Y