Proassurance Corporation · NYSE:PRA
Proassurance — Morgan Keegan 2008 Equity Conference
52 slides from Proassurance's conference presentation, Sep 4, 2008
Slide 1: Morgan Keegan 2008 Equity Conference
September 4, 2008 Morgan Keegan 2008 Equity Conference W. Stancil Starnes Chief Executive Officer Edward L. Rand, Jr. Chief Financial Officer
Slide 2: Caution Regarding Forward Looking Statements
Caution Regarding Forward Looking Statements 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 specifically identified
Slide 3: ProAssurance: The Basics
ProAssurance: The Basics Market Cap: $1.6 Billion Equity: $1.3 Billion Fifth largest writer of medical liability Approximately 34,000 policyholders Approximately 33,000 physicians & dentists Majority in small or solo practice Writing business in 28 jurisdictions Highly rated by A. M. Best and Fitch
Slide 4: A Brief History of ProAssurance
7 A Brief History of ProAssurance Created in 2001 When Medical Assurance Merged with Professionals Group We are the product of 13 M&A transactions Continued Growth by acquisition NCRIC (Washington, DC & surrounding states) PIC Wisconsin (upper Midwest and Nevada) Continued Organic Growth Kentucky Ok
Slide 5: National Scale...Local Focus
National Scale...Local Focus Corporate strategy applied locally to underwriting & claims Local knowledge is crucial to understanding legal environment Local presence enhances long-term customer relationships Efficiencies gained from consolidated "back- room" operations Corporate Headquarters States
Slide 6: A Market Leader
? ? Leading Market Share Top 5 Market Share Top 10 Market Share Growing Market Share A Market Leader Market leaders in AL, DE, DC, OH, & WI Continuing to grow within our market footprint but not "forcing" top line growth Criteria: 2006 DPW ProAssurance is the foremost writer in its states of operati
Slide 7: The Medical Liability Market Today
The Medical Liability Market Today
Slide 8: Market Overview
Market Overview Frequency appears to have stabilized - no longer declining, severity manageable Large verdicts remain a reality Companies view loss trends differently Market pricing remains soft Not to the low levels of 1999 or 2000 Optimists see a "new" environment Realists know the cycle always sw
Slide 9: ProAssurance Overview
ProAssurance Overview Applying an overall corporate strategy that recognizes state-by-state differences Loss trends allowing more aggressive strategies in long-term markets Spreading risk through geographical diversification Maintaining margin remains more important than top-line volume
Slide 10: Understand The Cycle
Understand The Cycle Loss trends will turn around The turn will come quickly History tells us many insurers will not be prepared Experience IS the best teacher Average industry/related experience is 20 years, 12 years at ProAssurance Our share ownership means we are owners, not just managers Directo
Slide 11: Steady Book Value Growth
Book Value '91 3.67 '92 4.58 '93 6.27 '94 6.63 '95 8.56 '96 9.81 '96 11.57 '98 13.24 '99 13.92 '00 15.22 '01 16.02 '02 17.49 '03 18.77 '04 20.92 '05 24.59 '06 33.61 '07 38.69 '08 Q1 39.8 Steady Book Value Growth Book Value CAGR: 15.9% Inception- 2007 Book Value Each Year End for ProAssurance and Pre
Slide 12: Consistent Share Price Increase
Share Price '91 4.12 '92 7.7 '93 7.43 '94 9.27 '95 13.22 '96 13.97 '96 23.2 '98 28.69 '99 21.19 '00 16.69 '01 17.58 '02 21 '03 32.15 '04 39.11 '05 48.64 '06 49.92 '07 55.67 '08 Q1 53.83 All returns measured through 12/31/07 Consistent Share Price Increase CAGR Stock Price: 17.7% Total Stock Return:
Slide 13: Combined Ratio Leadership
Combined Ratio Leadership PRA All Med Mal '91 0.804 1.037 '92 0.966 1.279 '93 0.943 1.081 '94 0.876 0.976 '95 0.984 0.997 '96 0.944 1.06 '97 0.926 1.079 '98 0.864 1.157 '99 0.883 1.295 '00 1.108 1.335 '01 1.444 1.533 '02 1.232 1.409 '03 1.102 1.369 '04 1.007 1.123 '05 0.961 1.002 '06 0.935 0.912 Net
Slide 14: ProAssurance's Strategy: Remain disciplined
ProAssurance's Strategy Remain disciplined Price based on ROE and margin targets No market share or top line goals/incentives Focus on profitable business Grow through intelligent expansion or M&A Deliver an unequalled level of service
Slide 15: ProAssurance's Strategy: Leverage our strengths
ProAssurance's Strategy Leverage our strengths Defense of non-meritorious claims Risk management expertise Physician-involvement Balance sheet
Slide 16: Maintaining Historical Reserving
Maintaining Historical Reserving Reserves Insureds 2002 1.49 28852 2003 1.63 27586 2004 1.82 27353 2005 2.22 29125 2006 2.61 35659 2007 2.91 33743 YTD 2008 2.84 32852 Insureds Reserves in millions Strict Underwriting as Claims Peaked. The Hard Market NCRIC Policyholders PIC Wis Policyholders Market
Slide 17: Claims Defense Is Our Core
Claims Defense Is Our Core We offer our insureds the option of an unfettered defense of their claim Provides a long-term financial and marketing advantage A key differentiating factor in the market as claims data becomes public 2002 2003 2004 2005 2006 2007 ProAssurance 360 391 528 473 720 733 We tr
Slide 18: The Age of Transparency
The Age of Transparency Malpractice judgments/settlements disclosed in 16 states Public access to the National Practitioner Data Bank is the next step Disciplinary actions disclosed in almost every state Board / Discipline / Med Mal Med Mal disclosure legislation proposed P P P P
Slide 19: The Age of Transparency: Tennessee database
The Age of Transparency From the Tennessee database http://health.state.tn.us/licensure/index.htm
Slide 20: The Age of Transparency: Florida database
The Age of Transparency From the Florida database http://ww2.doh.state.fl.us/IRM00PRAES/PRASLIST.asp
Slide 21: The Age of Transparency: NJ database
The Age of Transparency From the NJ database http://12.150.185.184/dca/simple_search.jsp
Slide 22: Why Claims Strategy Matters
Why Claims Strategy Matters Percetage of Closed Claims Dropped or Dismissed 0.68 Defense Verdict 0.15 Plaintiff Verdict 0.05 Settled 0.13 Percetage of Closed Claims Dropped or Dismissed: 0.69 Settled: 0.25 Plaintiff Verdict: 0.01 Defense Verdict: 0.05 Favorable Outcomes: 83% Favorable Outcomes: 74%
Slide 23: Why Claims Strategy Matters
Why Claims Strategy Matters Our ability and willingness to defend claims allows us to achieve better results Incurred Losses Loss Adjustment Expenses Total ProAssurance 0.156 0.507 ProAssurance 0.249 0.566 0.815 ProAssurance 0.34 0.543 0.95000000013148 ACAP/FPIC/SKP 0.683 0.398 1.081 Industry 0.64 0
Slide 24: Physician Heritage: Our Edge
Physician Heritage: Our Edge 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 management Provides cla
Slide 25: Financial Overview
Financial Overview
Slide 26: Balance Sheet Progression
Balance Sheet Progression 2005 2006 2007 YTD 2008 Total Assets 3.9 4.3 4.4 4.5 Total Investments 2.6 3.5 3.6 3.7 Total Policy Liabilities 2.6 3 2.9 2.9 Stockholders' Equity 0.8 1.1 1.3 1.3 All $ amounts in billions At Each Year-End
Slide 27: Y-T-D 2008 Income Statement Highlights
Y-T-D 2008 Income Statement Highlights in millions, except per share data Gross Premiums Written $ 248 $ 291 -15% Net Investment Income 82 87 -5% Total Revenue 313 359 -13% Total Expenses 203 256 - 5% Net Income $ 79 $ 74 7% Net Income/Diluted Share $ 2.31 $ 2.08 11% Operating Cash Flow $ 99 $ 95 5%
Slide 28: Insurance Leverage
Insurance Leverage Premium to Surplus Premiums (GPW) Stockholders' Equity Gross Reserves 2002 0.9149 462 505 1492 2003 1 543 546 1635 2004 0.93 574 611 1819 2005 0.749 573 765 2224 2006 0.5174 579 1119 2607 2007 0.4897 549 1255 2560 YTD 2008 180 1276 2558 (in millions) 0.9:1 Premiums to Surplus 0.9:
Slide 29: Capital Structure Proforma
Capital Structure Proforma Convertible debt exchanged for 2.6 million shares in early July 450,000 shares were newly issued Conversion adds $112 million to shareholders' equity and approximately $0.28/share to book value in Q3, 2008 Stockholders' Equity Convertible Debt Other Debt 9/30/2006 1366607
Slide 30: Portfolio Overview
Portfolio Overview Conservative portfolio offsets liability risk Invested Assets Fixed Income 0.89 Short Term & Cash 0.06 Equities & Equity Substitutes 0.03 BOLI 0.02 $3.7 Billion Portfolio Fixed Income: 87% Short Term: 8% Equity and Other Investments: 3% BOLI: 2% AT 6/30/2008
Slide 31: Portfolio: Fixed Income
Portfolio: Fixed Income $3.2 Billion is Fixed Income Average fixed maturity duration: 4.3 years Average tax-equivalent yield: 5.47% 97.8% investment grade Weighted average: AA Fixed Income State/Muni 0.44 Asset Backed 0.28 Corporate 0.2 BOLI 0.02 Govt/Agcy 0.07 Asset Backed: 28% State/Muni: 44% Corp
Slide 32: Portfolio Overview: Equities
Portfolio Overview: Equities $132 million in Equities & Other Investments Asset Backed Equities 0.18 Long/Short Equity LP 0.15 High Yield Asset Backed 0.34 Distressed Debt LP 0.19 Misc Other 0.01 Private Equity 0.021 FHLB Stock 0.04 Agency Pfds 0.07 Long/Short Equity LP 15% High Yield Asset Backed 1
Slide 33: Portfolio: Municipals
Portfolio: Municipals $1.4B Current investment policy requires investment grade rating prior to applying the effect of insurance Municipal Insured w/Stand Alone 0.610013148 Stand Alone Rate 0.36 Collateral or Other 0.01 No Rating 0.01 AT 6/30/2008
Slide 34: Portfolio: Asset Backed
Portfolio: Asset Backed $895 million Asset Backed Securities Weighted Average Rating: AAA Asset Backed Agency MBS: 59% 0.58 CMBS: 23% 0.23 Credit Card: 5% 0.05 Sub-Prime: 2% 0.02 Auto: 3% 0.03 Whole Loans: 6% 0.06 Alt-A: 2% 0.02 Other: 1% 0.01 Alt-A LTV: 64% Whole Loan LTV: 60% Further Details Provi
Slide 35: Portfolio: Corporate
Portfolio: Corporate $663 million Weighted Average Rating: A Asset Backed Financials 0.53 Telcom 0.09 Tech 0.02 Utilities 0.06 Energy 0.04 Industrials 0.07 Basic Materials 0.04 Consumer 0.12 Other 0.03 Cyclical: 4% Non Cyclical: 8% Details on Following Slides AT 6/30/2008 Top 20 Holdings in Banks an
Slide 36: Portfolio: Corporate-Financials
Portfolio: Corporate-Financials $350 million Weighted Average Rating: A+ Tax Credit Notes are private placements guaranteed by banks and secured by Section 42 tax credits Top 10 Banks (AA) 0.21 All Other Banks [42] (AA-) 0.14 Top 10 Financials (A+) 0.31 All Other Financials [55] (A-) 0.2 Tax Credit
Slide 37: Portfolio: Govt/Agency
Portfolio: Govt/Agency $721 million Average Rating: AAA Agency MBS 0.68 TIPS 0.08 Treasuries 0.07 Agency Debentures 0.14 Agency Preferreds 0.009 AT 6/30/2008
Slide 38: Portfolio: FRE and FNM
Portfolio: FRE and FNM $605 million Average Rating: AAA Agency MBS 0.82 Agency Debentures 0.17 Agency Preferreds 0.009 AT 6/30/2008
Slide 39: Portfolio: Short-Term
Portfolio: Short-Term $304 million Rated A1/P1 or better Government 0.23 Commercial Paper 0.37 Prime 0.15 Tax Exempt 0.25 AT 6/30/2008 Money Market Funds 67% Rated Aaa by Moody's Rated AAA by S&P
Slide 40: Portfolio Overview: BOLI
Portfolio Overview: BOLI $62.3 million Weighted average rating Moody's: AA2 A. M. Best: A+ BOLI Best Rating: A++ 0.33 Best Rating: A+ 0.67 AT 6/30/2008
Slide 41: Summary
Pro\ssurance’ Summary NYSE
Slide 42: ProAssurance: Concentrating on shareholder value
ProAssurance Concentrating on shareholder value Growing Book Value per Share Focused on the long-term Maintaining leading market position Protecting the balance sheet Building strength for the next cycle turn Evaluating all M & A opportunities
Slide 43: ProAssurance: Proven success throughout the cycles
ProAssurance Proven success throughout the cycles Disciplined pricing and underwriting Consistent reserving policy Proven claims strategy Balance sheet strength Significant share ownership throughout the company Demonstrated commitment to a long-term view of a complicated business
Slide 44: Appendix
Appendix
Slide 45: Balance Sheet Highlights
Balance Sheet Highlights Continuing growth in Book Value/Share Conservative investment strategy Seeking incremental additional return Prudent use of capital for share repurchase and debt reduction Repurchased 1.5 mln shares for $77.8 mln $56.7 million remaining in our authorization $16 million used
Slide 46: Equities & Other Investments
Equities & Other Investments Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q 07 Q3 07 Q4 07 Q1 08 Q2 08 $ in 000's Performance Q1, 2005 - Q2, 2008 AT 6/30/2008
Slide 47: Portfolio Overview: Sub-Prime
Portfolio Overview: Sub-Prime $15.5 million market value in AFS portfolio $2.6 million market value in high-yield LP At 6/30/08 Type Quality $ 9.5Mln Mortgage-Backed AA+ avg - LTV 72% $ 6 Mln Home Equity A- avg At 12/31/07 Vintage $7 Mln 2004 & Prior $5 Mln 2005 $3.5 Mln 2006
Slide 48: Portfolio Overview: CMBS
Portfolio Overview: CMBS $206 million in non-agency CMBS 6% of fixed income portfolio At 6/30/08 Quality $203 Mln AAA $ 3 Mln AA At 6/30/08 Wtd Avg LTV 95% <70% 5% <72% At 6/30/08 Credit Support 77% >20% 18% 15% - 20% 13% 10% - 15% 2% Less than 10% At 6/30/08 Deal Cumulative Delinquencies 45% None 3
Slide 49: Portfolio: Corporate-Financials
Portfolio: Corporate-Financials AT 6/30/2008 20 Largest Banks & Financials ($ 207 million) 20 Largest Banks & Financials ($ 207 million) 20 Largest Banks & Financials ($ 207 million) 20 Largest Banks & Financials ($ 207 million) 20 Largest Banks & Financials ($ 207 million) $10-$24 million $10-$24 m
Slide 50: Rate Change History
Rate Change History Average Rate Change 2001 0.23 2002 0.28 2003 0.28 2004 0.12 2005 0.11 2006 0.03 2007 -0.02 Effective Rate Change on All Renewing Policies
Slide 51: Reinsurance Overview
Reinsurance Overview Renewed for 2007-2008 with no meaningful change in terms or conditions Good spread of risk Europe, Lloyds/London, Bermuda, Domestic We participate in the excess layers Continual evaluation of retention levels Risk pricing vs. our capacity and willingness to accept risk
Slide 52: We Created a Leader Through Consolidation
103 2004: Purchased Selected Renewal Rights from: OHIC Insurance Company 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: Missouri