Proassurance Corporation · NYSE:PRA
Proassurance — New York Society of Security Analysts (February 2008)
56 slides from Proassurance's conference presentation, Feb 11, 2008
Slide 1: New York Society of Security Analysts
February 11, 2008 SubTitle: W. Stancil Starnes, Chief Executive Officer Edward L. Rand, Jr., Chief Financial Officer Frank B. O’Neil, Investor Relations Officer New York Society of Security Analysts
Slide 2: Caution Regarding Forward Looking Statements
1 Title: Caution Regarding Forward Looking Statements Body: This presentation communicates historical information as well as forward-looking statements that are based upon our estimates and anticipation of future events; any items in this presentation that are not historical information are specific
Slide 3: ProAssurance 101
Pro(\ssurance’ ProAssurance 101 2a
Slide 4: ProAssurance: The Basics
3 Title: ProAssurance: The Basics Body: Market Cap: $1.8 Billion Equity: $1.2 Billion Fourth largest writer of medical liability Over 35,000 policyholders More than 30,000 physicians & dentists Majority in small or solo practice Writing business in 28 jurisdictions Highly rated by Best and Fitch All
Slide 5: The Brief History of ProAssurance
4 4 Title: The Brief History of ProAssurance Body: Created in 2001 When Medical Assurance Merged with Professionals Group We are the product of 13 M&A transactions(See Appendix A) Growth by acquisition NCRIC (Washington, DC & surrounding states) PIC Wisconsin (upper Midwest and Nevada) Organic Growt
Slide 6: National Scale…Local Focus
5 Title: National Scale…Local Focus Body: Corporate strategy applied locally to underwriting & claims Local knowledge crucial to understanding legal environment Local presence enhances long-term customer relationships Efficiencies gained from consolidated “back-room” operations Corporate Headquarter
Slide 7: A Market Leader
6 Leading Market Share Top 5 Market Share Top 10 Market Share Growing Market Share Title: A Market Leader Body: Market leaders in AL, DE, DC, OH, & WI Continuing to grow within our market footprint but not “forcing” top line growth Criteria: 2005 DPW ProAssurance is the foremost writer in its states
Slide 8: ProAssurance Mission
7 Title: ProAssurance Mission Body: We will be the preferred source of professional liability protection by providing unparalleled claims defense, highly responsive customer service, and innovative risk management, while maintaining our commitment to long-term financial strength
Slide 9: ProAssurance Core Values
8 Title: ProAssurance Core Values Body: Integrity in all we do Commitment to the needs of insureds, employees and shareholders Respect for those we encounter Perpetuation of doctor involvement in our core activities Collaboration and Communication throughout our organization Enthusiasm every day
Slide 10: ProAssurance
9 Title: ProAssurance Body: Recognized as one of the 50 top performing property casualty insurance companies in America by Ward’s Recognized by The Principal as one of the Ten Best Companies for Employee Financial Security
Slide 11: The Medical Liability Market Today
10 Title: The Medical Liability Market Today
Slide 12: Market Review
11 Title: Market Review Body: Frequency moderating, severity manageable “Shock losses” continue to occur so claims management is even more important Companies view loss trends differently Market pricing has softened considerably Unrealistic pricing only in isolated areas Optimists see a “new” enviro
Slide 13: ProAssurance's Response?
12 Title: ProAssurance’s Response? Body: Maintaining margin remains more important than top-line volume Consistent strategy tailored for individual states Variation even between territories in states Loss trends allowing retention programs in long-term markets Unmatched geographical diversification
Slide 14: ProAssurance's Response? Shareholder Value
13 Title: ProAssurance’s Response? Body: Concentrating on shareholder value Growing Book Value per Share Average increase of $2.92/year in last ten years Average increase of $1.95/year since inception Focused on the long-term Maintaining leading market position Protecting the balance sheet Building
Slide 15: You Can't Hide from The Market Cycle But You Can Survive
14 Title: You Can’t Hide from The Market Cycle But You Can Survive
Slide 16: The Insurance Cycle in Med Mal
15 Title: The Insurance Cycle in Med Mal Millions Source: A. M. Best Aggregates and Averages 1976 – 2001Medical Malpractice Industry, Net Basis Occurrence and Claims-Made Combined (Estimated) (Actual) Industry Data 1976 Through 2006 See Appendix B INDUSTRY PROFIT INDUSTRY LOSS
Slide 17: ProAssurance vs. The Cycle: Book Value
16 Title: ProAssurance vs. The Cycle Book Value CAGR: 15.7% Through Q3, 2007 Book Value Each Year End and Through Q3, 2007for ProAssurance and Predecessor Companies
Slide 18: ProAssurance vs. The Cycle: Net Combined Ratio
17 Title: ProAssurance vs. The Cycle Net Combined Ratio Source: A. M. Best Aggregates and Averages
Slide 19: ProAssurance vs. The Cycle: Stock Return
18 Title: ProAssurance vs. The Cycle Annualized Stock Return: 17.9% Total Stock Return: 1,233% Closing Price at Each Year End for ProAssurance and Predecessor Companies
Slide 20: Navigating The Cycle
19 Title: Navigating The Cycle Body: Experience IS the best teacher We have managed through several cycles and understand the pitfalls Average industry/related experience is 22 years Executives and VP’s average tenure is 12 years We are owners, not just managers Directors, officers and employees own
Slide 21: Claims Defense Is Our Core
20 Title: Claims Defense Is Our Core Body: We offer our insureds an unfettered defense of their claim A key differentiating factor in the market as claims data becomes public Provides a long-term financial and marketing advantage We try more claims than any company in our line of business
Slide 22: Our Competitive Advantage
21 Title: Our Competitive Advantage
Slide 23: Closed Claim Outcome Comparison
22 Title: Closed Claim Outcome Comparison Favorable Outcomes: 86% Favorable Outcomes: 70% ProAssurance, 2006 Industry Data, 2006* *Latest Available Industry Data, The PIAA
Slide 24: Five-Year Loss Ratio Comparisons
23 Title: Five-Year Loss Ratio Comparisons Body: Our ability and willingness to defend claims allows us to achieve better results Average Statutory Loss Ratio 2001-2005 Industry 108.4% Legal Payments Loss Payments PRA: 95.0% PRA in 2005 81.5% ProAssurance Stand Alone 2005 & 2006 PRA in 2006 66.3% *S
Slide 25: Underwriting Discipline
24 Title: Underwriting Discipline Body: Pricing based on ROE and margin targets No market share or top line goals/incentives Focused on profitable business Selling from strength Balance sheet Defense of non-meritorious claims Risk management expertise Physician-connections
Slide 26: Physician Heritage: Our Real Edge
25 Title: Physician Heritage: Our Real Edge Body: Physician involvement throughout promotes a direct relationship with our insureds Regional Advisory Boards involve more than 500 leadership physicians Physician Claims/Underwriting Committees in 16 key states Quarterly meetings, attended by senior ma
Slide 27: Financial Overview
26 Title: Financial Overview
Slide 28: Income Statement Highlights
27 Title: Income Statement Highlights Body: Premiums now trending down Growth from PIC Wisconsin offset declining premiums until Q3 Favorable Net Reserve Development continues to drive earnings Q3: $25.0 mln YTD: $60.6 mln Investment Income continues to be a plus Cash flow is strong, but has slowed
Slide 29: Balance Sheet Highlights
28 Title: Balance Sheet Highlights Body: Continuing growth in Book Value/Share Conservative investment strategy Seeking incremental additional return Using capital for share repurchase and debt reduction Repurchased 764,330 shares YTD for $41.3 ml $108.7 million remaining in our authorization $16 mi
Slide 30: Insurance Leverage
29 Title: Insurance Leverage (in millions) 0.9:1 Premiums to Surplus 0.9:1 1:1 0.7:1 0.5:1 0.5:1
Slide 31: Reinsurance Overview
30 Title: Reinsurance Overview Body: Renewal for 2007-2008 with no meaningful change in terms or conditions PIC Wisconsin now in our “corporate” treaty Interest in our slip remains high Good spread of risk Europe, Lloyds/London, Bermuda, Domestic We now participate in the excess risk Continual evalu
Slide 32: Reinsurance Overview: Per Claim Retained
31 Title: Reinsurance Overview: Per Claim Retained First Layer $5 Mil $16 Mil Second Layer We retain 5% in the first layer We retain 2% in the second layer We retain the first $1 Mil of each claim
Slide 33: Capital Structure
32 Title: Capital Structure Body: Debt to Equity Ratio: 15% Debt to Capitalization: 13% Convertible debt exchangeable for 2.6 million shares Stockholder’s Equity 87% Convertible Debt 8% Other Debt 5% AT 9/30/2007
Slide 34: Portfolio Overview
33 Title: Portfolio Overview Body: Conservative portfolio offsets liability risk $3.6 Billion Portfolio AT 12/31/2007 Fixed Income: 89% Short Term: 6% Equity and Equity Substitutes: 3% BOLI: 2%
Slide 35: Portfolio: Fixed Income
34 Title: Portfolio: Fixed Income Body: $3.2 Billion is Fixed Income Average fixed maturity duration: 4.1 years Average tax-equivalent yield: 5.4% 98.4% investment grade Weighted average: AA+ AT 12/31/2007
Slide 36: Portfolio: Municipals
35 Title: Portfolio: Municipals Body: Current investment policy requires investment grade rating prior to apply the effect of insurance AT 12/31/2007
Slide 37: Portfolio: Asset Backed
36 Title: Portfolio: Asset Backed Body: $955 million Asset Backed Securities Weighted Average Rating: AAA AT 12/31/2007 (Bloomberg Data) Alt-A LTV: 66% Whole Loan LTV: 58% See Appendix for Details on the CMBS and Sub-Prime Components
Slide 38: Portfolio: Corporate
37 Title: Portfolio: Corporate Body: $656 million Weighted Average Rating: A AT 12/31/2007
Slide 39: Portfolio: Government/Agency
38 Title: Portfolio: Government/Agency Body: $856 million Average Rating: AAA AT 12/31/2007
Slide 40: Portfolio Overview: Equities
39 Title: Portfolio Overview: Equities Body: $103 million in Equities & Equity Substitutes AT 12/31/2007
Slide 41: Portfolio Overview: Short Term
40 Title: Portfolio Overview: Short Term Body: $220 Million Rated A1/P1 or better Money Market rated Aaa by Moody’s & AAA by S&P AT12/31/2007
Slide 42: Portfolio Overview: BOLI
41 Title: Portfolio Overview: BOLI Body: $61.5 million Weighted average rating Moody’s: AA2 A. M. Best: A+ AT12/31/2007
Slide 43: Appendix
42 Title: Appendix A. Acquisition History B. Full Market Cycle Data C. Growth Strategy Highlights D. Further Investment Disclosure
Slide 44: We Created a Leader Through Consolidation
43 43 2004: Purchased Selected Renewal Rights from: OHIC Insurance Company Title: We Created a Leader Through Consolidation 1994: Consolidation of: West Virginia Hosp. Ins Co. 1995: Consolidation of; Physicians Ins Co of Indiana Assumed business of: Physicians Ins Co of Ohio 1996: Consolidation of:
Slide 45: The Insurance Cycle in Med Mal
44 Title: The Insurance Cycle in Med Mal Millions Source: A. M. Best Aggregates and Averages 1976 – 2001 Medical Malpractice Industry, Net Basis Occurrence and Claims-Made Combined (Estimated) (Actual) Industry Data 1976 Through 2000
Slide 46: The Insurance Cycle in Med Mal
45 Title: The Insurance Cycle in Med Mal Millions Source: A. M. Best Aggregates and Averages 1976 – 2001 Medical Malpractice Industry, Net Basis Occurrence and Claims-Made Combined (Estimated) (Actual) Industry Data 1976 Through 2001
Slide 47: The Insurance Cycle in Med Mal
46 Title: The Insurance Cycle in Med Mal Millions Source: A. M. Best Aggregates and Averages 1976 – 2001 Medical Malpractice Industry, Net Basis Occurrence and Claims-Made Combined (Estimated) Industry Data 1976 Through 2002 (Actual)
Slide 48: The Insurance Cycle in Med Mal
47 Title: The Insurance Cycle in Med Mal Millions Source: A. M. Best Aggregates and Averages 1976 – 2001 Medical Malpractice Industry, Net Basis Occurrence and Claims-Made Combined (Estimated) Industry Data 1976 Through 2003 (Actual)
Slide 49: The Insurance Cycle in Med Mal
48 Title: The Insurance Cycle in Med Mal Millions Source: A. M. Best Aggregates and Averages 1976 – 2001 Medical Malpractice Industry, Net Basis Occurrence and Claims-Made Combined (Estimated) (Actual) Industry Data 1976 Through 2004
Slide 50: The Insurance Cycle in Med Mal
49 Title: The Insurance Cycle in Med Mal Millions Source: A. M. Best Aggregates and Averages 1976 – 2001 Medical Malpractice Industry, Net Basis Occurrence and Claims-Made Combined (Estimated) (Actual) Industry Data 1976 Through 2005
Slide 51: The Insurance Cycle in Med Mal
50 Title: The Insurance Cycle in Med Mal Millions Source: A. M. Best Aggregates and Averages 1976 – 2001 Medical Malpractice Industry, Net Basis Occurrence and Claims-Made Combined (Estimated) (Actual) Industry Data 1976 Through 2006
Slide 52: ProAssurance Growth Strategy
51 Title: ProAssurance Growth Strategy Body: We grow only when opportunities arise for profitable growth Hard Market Soft Market M & A de novo Expansion Internal Growth (Gp:) M & A is preferable because of pricing pressure All avenues open because of pricing power
Slide 53: ProAssurance Growth Strategy: Growth by Acquisition
52 Title: ProAssurance Growth Strategy Body: The current market environment favors growth by acquisition DE NOVO GROWTH vs. GROWTH BY ACQUISITION - Must price your way into the market + Pricing can be adjusted - No prior history + Prior history available - Lack of experienced personnel + Local exper
Slide 54: ProAssurance Growth Strategy: Strategic Fit
53 Title: ProAssurance Growth Strategy Body: We must have a strategic fit in medical liability Doctor-founded companies with similar culture The legal and regulatory environment must be favorable Understanding why companies are available Not all M&A opportunities should be pursed We don’t “bet the f
Slide 55: Portfolio Overview: Sub-Prime
54 Title: Portfolio Overview: Sub-Prime Body: $21.3 million market value in AFS portfolio One downgrade, from A to BBB $4.0 million market value in high-yield LP
Slide 56: Portfolio Overview: CMBS
55 Title: Portfolio Overview: CMBS Body: $228 million in non-agency CMBS 7% of fixed income portfolio
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