Proassurance Corporation · NYSE:PRA
Proassurance — Non-Deal Roadshow (December 2013)
75 slides from Proassurance's roadshow presentation, Dec 4, 2013
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: Hot Topics for Investors
Hot Topics for Investors Our commentary on recent announcements and transactions
Slide 3: Capital Management Thoughts
Capital Management Thoughts Dividend increase to $1.20/year 20% increase over dividend paid in 2013 Demonstrates our commitment to a steady return of capital via a regular dividend $100 million increase in share buyback authorization—now at $227 million To be deployed prudently in the near term Demo
Slide 4: Debt to Equity
Debt to Equity Debt Issuance $250 million long-term debt 10-year notes due 11/15/2023 at a coupon of 5.30% $125 million borrowed from our credit facility in Q4 2012 repaid prior to debt issuance No Debt Prior to 2001 2013 Premium is annualized
Slide 5: Returning Capital to Shareholders
Returning Capital to Shareholders Prudent Capital Management Balancing our future needs vs. expectations from rating agencies and investors Preferred use is to support growth through M&A or new business Regular dividend now $1.20/share ~2.5% yield based on current share price Share repurchase progra
Slide 6: Eastern Insurance Transaction Details
Eastern Insurance Transaction Details All cash transaction Aggregate value: $205 million 1.38x Book Value per Share at September 30, 2013 Regulatory approvals expected Pennsylvania DOI and HSR Shareholder vote forthcoming Projected closing by January 1, 2014 No financing contingency Modestly accreti
Slide 7: Eastern Insurance Transaction Rationale
Eastern Insurance Transaction Rationale Continues building the platform to serve the needs of larger integrated health systems healthcare delivery organizations Workers’ compensation represents one of the single largest liability expenditures for healthcare entities Eastern’s business is 20% healthc
Slide 8: Eastern Insurance Transaction Operations
Eastern Insurance Transaction Operations Management will remain in place to provide operational expertise and ensure continuity Eastern will have access to greater capital to support growth Cross-selling opportunities exist Insureds Agents
Slide 9: Eastern Insurance Performance: Combined Ratio
Eastern Insurance Performance: Combined Ratio Source: Eastern Insurance Holdings Investor Presentation 6/30/13 and Q3 2013 10 Q Combined Ratio YTD at 9/30/13: 89.7% vs 92.3% At 9/30/12
Slide 10: Eastern Insurance Performance: Premium Growth
Eastern Insurance Performance: Premium Growth Source: Eastern Insurance Holdings Investor Presentation 6/30/13
Slide 11: Eastern Insurance Performance: Book Value
Eastern Insurance Performance: Book Value Source: Eastern Insurance Holdings Investor Presentation 6/30/13 and Q3 2013 10 Q Fully-Diluted Book Value 9/30/13: $17.66
Slide 12: Eastern Insurance Transaction ProForma
ProForma Written Premium (GAAP at 12/31/12 in million s) Product line Direct Assumed Ceded Net Medical Professional Liability $ 529 $ - $ 7 $ 521 Lawyers Professional Liability $ 27 $ - $ 3 $ 24 Products Liability $ 32 $ - $ 11 $ 21 Workers' Compensation $ 183 $ 3 $ 16 $ 170 Other $ 2 $ - $ - $ 2 $
Slide 13: Eastern Insurance Footprint
Eastern Insurance Footprint Source: Eastern Insurance Holdings Investor Presentation 6/30/13
Slide 14: Lloyd's Syndicate Transaction Details
Lloyd’s Syndicate Transaction Details Inception approved for January 1, 2014 Primarily an investment Some anticipated insurance benefits ProAssurance providing approximately 51% of underwriting capital Remaining capital contributed by other corporates and private names ProAssurance Capital Commitmen
Slide 15: Lloyd's Syndicate Transaction Rationale
Lloyd’s Syndicate Transaction Rationale Provides access to international medical professional liability opportunities Increases flexibility for ProAssurance when working with complex risks Primary and excess business can be written
Slide 16: Lloyd's Syndicate Transaction Operations
Lloyd’s Syndicate Transaction Operations Led by Duncan Dale Thirty-years experience in the London market Preeminent MPL underwriter Start-up assisted by Asta Managing Agency Ltd. ProAssurance executives are assisting in start-up operations
Slide 17: Strategies for Future Success
Strategies for Future Success Our successful experience and deep expertise uniquely qualify ProAssurance to insure the widest range of healthcare risks
Slide 18: Building a Bridge to the Future
Building a Bridge to the Future We are uniquely positioned to succeed by serving both the emerging, complex healthcare market and the legacy business that will remain Smaller competitors with less experience and capacity have decisions to make about their future in this new healthcare environment Le
Slide 19: Building a Bridge to the Future
Building a Bridge to the Future Larger risks demand sophisticated coverages that span the continuum of healthcare Broad healthcare liability experience is our foundation Adding capacity & capability through M&A Eastern Insurance, Medmarc, PICA & Mid-Continent Home Healthcare Non-Traditional Delivery
Slide 20: ProAssurance Will Grow Prudently
ProAssurance Will Grow Prudently We are building the platform that will allow us to serve the broad spectrum of healthcare Prudent leverage of our success and experience with the addition of specialized expertise Healthcare and related coverages that compliment our MPL line ProAssurance is a demonst
Slide 21: ProAssurance's Successful M&A History
ProAssurance’s Successful M&A History Original Companies Purchased Company Demutualization OHIC HOSPITALS ONLY Renewal Rights Assumed Business † SERTA In Progress
Slide 22: Strategy for an Evolving Market
Strategy for an Evolving Market Shaped by a healthcare landscape that will change—with or without federal healthcare reform Expanding our capabilities and commitment across the continuum of healthcare Building on two decades of hospital experience Recent expansion into products liability for life sc
Slide 23: Positioned to Succeed
Positioned to Succeed ProAssurance has the right combination of geographic scope, broad experience, and financial strength for success in the new world of healthcare liability SNL 2012 Statutory Data, MPL Writers with Direct Written Premiums >$80 million
Slide 24: Strategy for an Evolving Market
Strategy for an Evolving Market 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 Financ
Slide 25: Strategy for an Evolving Market
Strategy for an Evolving Market Joint physician/hospital insurance products to address the unique risk tolerance and claims- handling expectation of each insured Partnerships with existing physician-focused companies to leverage hospital expertise Recently announced California venture with CAP-MPT:
Slide 26: Healthcare Reform
Healthcare Reform 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 We have enhanced our ability to write new
Slide 27: Sound Strategy = Consistent Profitability
Sound Strategy = Consistent Profitability
Slide 28: The Payoff: Consistent Book Value Growth
Captures our focus on long-term excellence Increased every year we have been public The Payoff: Consistent Book Value Growth Inception to 9/30/13 CAGR: 16% Cumulative: 2,222% 10 Year Summary (2003 -2012) CAGR: 16% Cumulative: 360% Historical Book Value Per Share Split Adjusted Dividends Shown in the
Slide 29: The Payoff: Steady Share Price Increase
Share price reflects investor confidence in our business decisions and long-term strategy The Payoff: Steady Share Price Increase Historical Share Price Reflects all stock splits 2012 excludes $2.50/share special dividend Inception to 11/30/13 CAGR: 14% Cumulative: 1,735% 10 Year Summary (2003-2012)
Slide 30: Current Prices Reflect the Solid Value of ProAssurance
Current Prices Reflect the Solid Value of ProAssurance Current Price to Q3 2013 Book: 1.2x Average Since Inception: 1.4x Driven to Excel / Focused on Shareholder Value Maintaining profitability Continuing growth in book value per share Producing sustainable shareholder value Focusing on long-term—re
Slide 31: ProAssurance
PROASSURANCE. “Treated Faily
Slide 32: Management Team
W. Stancil Starnes, JD Chairman & Chief Executive Officer Company Tenure: 6 Years Prior MPL Experience: 29 Years Total Industry & Related Experience: 35 Years Formerly in the private practice of law in MPL defense and complex corporate litigation Jeffrey L. Bowlby, ARM Sr. Vice-President & Chief Mar
Slide 33: ProAssurance Corporate Profile
ProAssurance Corporate Profile Specialty liability insurance writer Healthcare Professional Liability (HCPL) Only public company writing predominately HCPL Life sciences and medical devices Attorney’s professional liability Market Cap: ~$2.9 billion Shareholders’ Equity: $2.4 billion Total Assets: $
Slide 34: ProAssurance Business Profile
YTD Q3 2013 Policyholders: ~70,000 YTD Q3 2013 Premium: $452 mln Distribution Channels (by premium) HCPL LPL Life Sciences Agent / Broker 63% 76% 100% Direct 37% 24% -- ProAssurance Business Profile September 30, 2013 Includes Acquisitions Tail Premium Allocated by Line
Slide 35: National Footprint
National Footprint ProAssurance Geographic Profile Broad geographic diversification Locally-based decision-making differentiates ProAssurance by addressing each state’s unique medical/legal challenges (Birmingham) Corporate Headquarters Corporate Headquarters Claims Offices Claims Offices Claims / U
Slide 36: Seeking Increased Yield But Balancing Risk
$3.9 Billion Portfolio Fixed Income: 83% Short Term: 3% Equity and Equity Substitutes: 12% BOLI: 1% Seeking Increased Yield But Balancing Risk We continue to focus on maintaining a high quality, well diversified fixed income portfolio We have made incremental changes to obtain higher yields in blue
Slide 37: Consistent Approach to Reserves
Consistent Approach to Reserves Recognizing loss trends as they appear No change in long-term results but potential volatility quarter-to-quarter No change in reserving philosophy or process $ in millions
Slide 38: 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 39: ProAssurance Outperforms the Industry
ProAssurance Outperforms the Industry
Slide 40: A.M. Best Aggregates and Averages Comparison
Source: 1991-2012 A.M. Best Aggregates and Averages, Medical Malpractice Lines of Business 89.7% 107.9% 77.5% 94.6% 58.1% 84.3%
Slide 41: ProAssurance Outperforms the Industry
ProAssurance Outperforms the Industry 1991-2012 A.M. Best Aggregates and Averages, Medical Malpractice Lines of Business Weighted Average High/Low Industry Average
Slide 42: 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 43: 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 Retention remains in line with recent quarters
Slide 44: ProAssurance's Standing in HCPL
ProAssurance’s Standing in HCPL ProAssurance is the largest independent publicly-traded writer of HCPL insurance Fourth largest overall writer DPW: SNL Data 2012
Slide 45: 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% 87% of top 100 companies have <2% 76% of top 100 companies have <1%
Slide 46: Key State Rate Comparison
Key State Rate Comparison Annual Premium for a $1M / $3M Policy Filed or Approved at 1/01/13
Slide 47: 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 48: 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 49: Differentiate Through Claims Defense
ProAssurance: 78% No Paid Losses Industry: 73% No Paid Losses Differentiate Through Claims Defense We leverage our financial strength to give our insureds the opportunity for an uncompromising defense of each claim Differentiates our product Provides long-term financial and marketing advantages Reta
Slide 50: The Ohio Example: 2005-2011 Data
More Claims Closed With No Indemnity More Claims Defended in Court Lower Average Indemnity Payment per Closed Claim The Ohio Example: 2005 - 2011 Data Comprehensive, reliable data provided by the Ohio Department of Insurance Broad range of competitors and business approaches 2x
Slide 51: The Bottom Line Benefits of Strong Defense
Loss Payments as a Percentage of Total Loss Ratio 18% 21% 32% 48% 42% 44% 45% The Bottom Line Benefits of Strong Defense Source: Statutory Basis, A.M. Best Aggregates & Averages Some totals may not agree due to rounding ProAssurance vs. Industry Average Loss Ratio (2006-2012) Legal Payments as a Per
Slide 52: 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 53: 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 54: ProAssurance
PROASSURANCE. “Treated Faily
Slide 55: Historical Financial Performance
Net Income 1 Operating Income 2 Historical Financial Performance Our disciplined, long-term approach drives consistent profitability $ in millions 1 Includes a gain of $36.0 million in 2013 in connection with our acquisition of Medmarc as a result of the value of the net assets acquired vs. our purc
Slide 56: YTD 2013 Income Statement Highlights
September 30, Y-OVER-Y Change 2013 2012 Gross Premiums Written $ 452 $ 429 +5% Net Investment Result $ 96 $ 98 -2% Total Revenues $ 547 $ 520 +5% Total Expenses (Includes Loss Costs) $ 297 $ 282 +5% Net Income (Includes Realized Investment Gains & Losses and Gain on Acquisition) $ 227 $ 174 +30% Ope
Slide 57: Q3 2013 Income Statement Highlights
September 30, Y-OVER-Y Change 2013 2012 Gross Premiums Written $ 166 $ 157 +6% Net Investment Result $ 34 $ 34 -2% Total Revenues $ 181 $ 176 +3% Total Expenses (Includes Loss Costs) $ 95 $ 92 +3% Net Income (Includes Realized Investment Gains & Losses and Gain on Acquisition) $ 63 $ 60 +5% Operatin
Slide 58: Five Year Premium History
Five Year Premium History Consistently writing profitable business to ensure long- term success Premium driven by competition, physician consolidation Loss trends remains favorable Disciplined Underwriting Gross Premiums Written Net Premiums Earned
Slide 59: Shareholders' Equity
Shareholders’ Equity YTD 2013 Balance Sheet Highlights Split adjusted, in billions, except Book Value per share Shareholders’ Equity $ 2.4 $ 2.3 +5% Total Investments 3.9 3.9 -2% Total Assets 5.0 4.9 +2% Policy Liabilities 2.5 2.3 +6% 9/30/13 12/31/12 CHANGE 67% increase since 2008 Book Value per Sh
Slide 60: Total Assets
Total Assets Long-Term Financial Strength 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 61: Capital Growth: 2008-Q3 2013
Capital Growth: 2008-Q3 2013 in $000’s except total equity (000,000’s)
Slide 62: Inside ProAssurance's Balance Sheet
Inside ProAssurance’s Balance Sheet 9/30/13
Slide 63: Inside ProAssurance's Income Statement
Inside ProAssurance’s Income Statement 9/30/13 $36.0 Non-Taxable Gain on Acquisition
Slide 64: Book Value per Share
$35.00 $30.00 $25.00 $20.00 $15.00 — © » ss ny & ° £ —Book Value per Share ——Tangible Book Value per Share — = +Tangible Book Value per Share excl. Unrealized Gains / Losses PROASSURANCE. “Treated Fairy
Slide 65: Steady Return in an Unfavorable Environment
Steady Return in an Unfavorable Environment Long-term ROE target: 12% -14%
Slide 66: Producing Sustained Return on Equity
Producing Sustained Return on Equity Targeting a long-term ROE of 12% - 14% Eight-year average is 13% (2005-2012)
Slide 67: Long-Term ROE Target and The Yield Trap
Long-Term ROE Target is 12%-14% 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 an
Slide 68: Excess Capital vs. Excess Capacity
Excess Capital vs. Excess Capacity Premiums to Surplus Strong capital positions us for a firming market We recognize the effect on ROE The manner in which capital is used has an effect on financial ratings Capital Management Priorities Conceptual Model of Projected A. M. Best BCAR Scores if 9/30/13
Slide 69: Investment Portfolio Detail
Investment Portfolio Detail ProAssurance remains conservatively invested, to ensure our ability to keep our long-term promise of insurance protection
Slide 70: ProAssurance: Investment Profile
$3.9 Billion Overall Portfolio $3.2 Billion Fixed Income Portfolio ProAssurance: Investment Profile Average duration: 3.9 years Average tax-equivalent income yield Q313: 4.3% Q312: 4.5% Investment grade: 93% Weighted average: A+ 09/30/13 Tax credit portfolio not reflected in investment income Provid
Slide 71: Asset Backed: $429 Million
Asset Backed: $429 Million ProAssurance Portfolio Detail: Asset Backed 09/30/13 Subject to Rounding Weighted Average Rating: “AAA”
Slide 72: Corporates: $1.4 Billion
Corporates: $1.4 Billion ProAssurance Portfolio Detail: Corporate Weighted Average Rating: BBB+ 9/30/13
Slide 73: Municipals: $1.2 Billion
Municipals: $1.2 Billion ProAssurance Portfolio Detail: Municipals Investment policy has always required investment grade rating prior to applying the effect of insurance Weighted Average Rating: AA 06/30/13
Slide 74: Equities & Other: $476 Million
Equities & Other: $476 Million 5.4% TE Book Yield ProAssurance Portfolio Detail: Equities & Other 09/30/13 13% TE IRR
Slide 75: Treasury / GSE, Short Term and BOLI
Treasury / GSE: $271 Million Short Term: $87 Million BOLI: $54 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+ 09/30/13