Proassurance Corporation · NYSE:PRA
Proassurance — Investor Presentation (May 2012)
64 slides from Proassurance's investor presentation, May 21, 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: ProAssurance Overview
ProAssurance Overview We are the only pure-play, publicly-traded healthcare professional liability (HCPL) insurance company in America.
Slide 3: ProAssurance Corporate Profile
ProAssurance Corporate Profile Specialty writer of professional liability insurance Primarily Healthcare Professional Liability (HCPL) Only pure play public company writing predominately HCPL Market Cap: ~$2.7 billion Shareholders’ Equity: $2.2 billion Total Assets: $5 billion Annualized dividend yi
Slide 4: ProAssurance Corporate Profile
Q1 2011 Policyholders: ~71,000 2011 Gross Written Premium: $566 million ProAssurance Corporate Profile Evolving strategy is successfully adding business across the risk spectrum as the delivery of healthcare changes Distribution is Independent Agent (62%) and Direct (38%) Direct in Alabama, Florida
Slide 5: 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 (Birmingham) 2010 Market Share: Six-Ten 2010 Mark
Slide 6: This is What Differentiates our Company
This is What Differentiates our Company 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 A
Slide 7: Historical Book Value Per Share
Historical Book Value Per Share Success Throughout the Insurance Cycle Inception to 3/31/12 CAGR: 16% Cumulative:1872% 10 Year Summary (2002 -2011) CAGR: 16% Cumulative: 342% Inception to 5/15/12 CAGR: 15% Cumulative:1606% 10 Year Summary (2002 -2011) CAGR: 16% Cumulative: 280%
Slide 8: Healthcare Professional Liability is Unique
Healthcare Professional Liability is Unique Differs greatly from personal lines and commercial lines insurance. Understanding the tale of the “tail.”
Slide 9: 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 provide a false sense of sec
Slide 10: The HCPL Industry Cycle
The HCPL Industry Cycle (Estimated) (Actual) Premium in millions Industry Data 1976 Through 2009 Source: A. M. Best Aggregates and Averages Medical Malpractice Industry, Net Basis Occurrence and Claims-Made Combined
Slide 11: 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 manned Significant barriers to entry i
Slide 12: 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 13: 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 14: ProAssurance in the Marketplace
ProAssurance in the Marketplace We ensure that we deliver an unparalleled level of service and financial stability that truly differentiates our coverage and our Company.
Slide 15: Local Knowledge and National Reach
Local Knowledge and National Reach Medical/Legal environment varies by state Often varies within states Regulatory environment differs greatly May limit the ability to ensure that rates accurately reflect loss trends Can affect the ability to introduce policy or procedural changes Overall business c
Slide 16: ProAssurance Operational Philosophy
ProAssurance Operational Philosophy Maintain our profitability and grow book value Ensure outstanding performance in a challenging financial market and a demanding line of insurance Focus on long-term Maintaining balance sheet strength and institutional expertise to prepare for a changing market Lev
Slide 17: 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 18: MD/DO Rate Change History
MD/DO Rate Change History ProAssurance and Today’s Market 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 ch
Slide 19: ProAssurance and Today's Market
ProAssurance and Today’s Market ProAssurance’s retention remains at historically high levels Continued underwriting vigilance is being used today to ensure future success
Slide 20: 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 21: 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 22: ProAssurance Business Outlook
ProAssurance Business Outlook We ARE writing new business that we believe will meet our profitability goals $68 million in new physician business in 2011 Approximately $48 million due to AMPH Includes approximately $6.5 million in first year claims- made premium in the Certitudetm program Major comp
Slide 23: Calendar Year Combined Ratio: ProAssurance Consistently Outperforms
Calendar Year Combined Ratio: ProAssurance Consistently Outperforms ProAssurance Outperforms the Industry Five Years: ProAssurance Average: 73.5% / Industry Average: 83.3% Ten Years: ProAssurance Average: 94.2% / Industry Average: 106.3% All Years: ProAssurance Average: 93.6% / Industry Average: 109
Slide 24: 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 25: Differentiate Through Claims Defense
ProAssurance: 79% 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 26: The Ohio Example: 2005-2010 Data
Fewer Claims Closed With 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/Leg
Slide 27: The Bottom Line Benefits of Strong Defense
Loss Payments 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 ProAssurance vs. Industry Average Loss Ratio (2006-2010) Legal
Slide 28: Malpractice Made Public
Malpractice Made Public Malpractice judgments/settlements now disclosed in 26 states Disciplinary actions now disclosed in all states Board / Discipline / Med-Mal Med-Mal disclosure legislation proposed P Source: Federation of State Medical Boards National Clearinghouse and ProAssurance research
Slide 29: 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 30: Effective Risk Management
Effective Risk Management Allows us to touch even those insureds not currently involved in a claim Over 70% of insured physicians were touched by risk management in 2011 Over 84,000 specialty-specific risk management publications delivered each year
Slide 31: Involving Insureds
Involving Insureds Claims & Underwriting Committees in key states 45 meetings in 15 states for 2012 Representation by specialty and geography Regional Advisory Boards Hundreds of meetings each year involve our insureds at the county level in key states Ensures that we stay close to our risk and know
Slide 32: The Reform Discussions
The Reform Discussions We prepare for the worst case legal or legislative outcome.
Slide 33: 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 34: Tort Reform
Tort Reform No meaningful Tort Reform in healthcare reform laws No prospect for Federal Tort Reform despite recent positive action on H.R. 5 State Tort Reform battles now being fought in the courts with mixed results We do not depend on Tort Reform for success Our results are solid in states with an
Slide 35: ProAssurance's Growth Strategy
ProAssurance’s Growth Strategy We are confident that our deep expertise and solid financial strength have prepared us for the challenges of the evolving healthcare market
Slide 36: Driving ProAssurance's Growth
Driving ProAssurance’s Growth Growth opportunities will be shaped by a healthcare landscape that will see enormous changes—with or without federal healthcare reform We are expanding our hospital capabilities and commitment Building on two decades of hospital experience We continue to enhance our com
Slide 37: ProAssurance's Growth Strategy
ProAssurance’s Growth Strategy Leverage our reach, expertise and financial strength with larger accounts Example: The Certitude tm program with Ascension Health Largest non-profit healthcare system in the US Now in Michigan, Florida, Indiana and Texas Expanding into other states throughout 2012 Insu
Slide 38: ProAssurance's Growth Strategy
ProAssurance’s Growth Strategy Joint physician/hospital insurance products to addresses the unique risk tolerance and claims- handling expectation of each insured Already creating broad interest in the market with several policies in force Providing sophisticated alternative risk programs for organi
Slide 39: M & A and the Insurance Cycle
M & A and the Insurance Cycle ProAssurance’s 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/regulatory env
Slide 40: Successful M&A History
Physicians Ins. Co. of Michigan Completed 11/30/10 Successful M&A History 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
Slide 41: ProAssurance Performs
ProAssurance Performs Delivering meaningful value for our shareholders
Slide 42: Share Repurchase History
Share Repurchase History Committed to Effective Capital Management Balancing future needs with current market reality Dividend is current $1.00/share/year Complements our prudent share repurchase program $321 million spent to repurchase 6.1 million shares since 2005 Enhancing shareholder value by re
Slide 43: Steady Returns
Steady Returns Long-term ROE target: 12% -14%
Slide 44: Focused on Book Value
Focused on Book Value Book Value per Share captures our focus on long-term excellence Increased every year we have been public Inception to 3/31/12 CAGR: 16% Cumulative:1872% 10 Year Summary (2002 -2011) CAGR: 16% Cumulative: 342% Historical Book Value Per Share
Slide 45: Driving Share Prices Higher
Driving Share Prices Higher Share price reflects investor confidence in our business decisions and long-term strategy Historical Share Price Inception to 5/15/12 CAGR: 15% Cumulative:1606% 10 Year Summary (2002 -2011) CAGR: 16% Cumulative: 280%
Slide 46: Current Prices Continue to Offer a Compelling Buying Opportunity
Current Prices Continue to Offer a Compelling Buying Opportunity Driven to Excel / Focused on Shareholder Value Maintaining profitability Sustaining book value growth Producing sustainable shareholder value Focusing on long-term—ready for the market turn
Slide 47: 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 President Company Tenure:
Slide 48: Further Discussion Materials
Further Discussion Materials 1. Investment Portfolio Detail 2. Additional Financial Data
Slide 49: Investment Portfolio Detail
Investment Portfolio Detail ProAssurance remains conservatively invested, to ensure our ability to keep our long-term promise of insurance protection
Slide 50: ProAssurance: Investment Profile
$4.1 Billion Overall Portfolio $3.7 Billion Fixed Income Portfolio ProAssurance: Investment Profile Average duration: 4.1 years Average tax-equivalent Income yield: 4.4% Investment grade: 96% Weighted average: AA- 3/31/12 Key portfolio actions in Q1 2012 Added dividend-paying equities Added to high
Slide 51: Portfolio Detail: Asset Backed
Asset Backed: $687 Million Weighted Average Rating: “AA+” Breakdown of Agency MBS Holdings Sub-Prime: $8.1 mil Market Value (AFS) $0.9 mil net unrealized loss ProAssurance Portfolio Detail: Asset Backed 03/31/12 Subject to Rounding Key CMBS Details Provided on Following Page
Slide 52: Portfolio Detail: CMBS
ProAssurance Portfolio Detail: CMBS $77.8 million Fair Value in non-agency CMBS Book Value: $72.3 million (2% of fixed income portfolio) We have experienced no losses on our CMBS positions 03/31/12
Slide 53: 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 03/31/12
Slide 54: Portfolio Detail: Equities & Other
Equities & Other: $276 Million ProAssurance Portfolio Detail: Equities & Other 3/31/12
Slide 55: Portfolio Detail: Corporate
Corporates: $1.4 Billion ProAssurance Portfolio Detail: Corporate Weighted Average Rating: A- 12/31/11
Slide 56: Portfolio Detail: Various
Treasury / GSE: $319 Million Short Term: $133 Million BOLI: $53 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+ 03/31/12
Slide 57: Additional Financial Data
Additional Financial Data ProAssurance remains conservatively invested, to ensure our ability to keep our long-term promise of insurance protection
Slide 58: 2011 Financial Highlights
Year Ended December 31, 2011 2010 Gross Premiums Written $ 565,895 $ 533,205 Net Premiums Earned $ 565,415 $ 519,107 Net Investment Income $ 140,956 $ 146,380 Net Income (Includes Investment Losses) $ 287,096 $ 231,598 Operating Income $ 278,514 $ 219,457 Net Income per Diluted Share $ 9.31 $ 7.20 O
Slide 59: Q1 2012 Financial Highlights
Quarter Ended, 3/31/2012 3/31/2011 Gross Premiums Written $ 170,448 $ 160,813 Net Premiums Earned $ 136,659 $ 132,077 Net Investment Income $ 33,492 $ 36,161 Net Income (Includes Investment Losses) $ 55,645 $ 47,693 Operating Income $ 48,226 $ 44,984 Net Income per Diluted Share $ 1.80 $ 1.55 Operat
Slide 60: Debt to Equity Strong Capital Position
Debt to Equity Strong Capital Position Conservative Use of Debt / Low Leverage Low Debt to Cap Ratio No strain on cash flow No Debt Prior to 2001 Prepared for an improving market * Annualized 2012 premium for presentation purposes only. Specifically disclaimed as a projection of premiums
Slide 61: Long-Term ROE Target is 13%: The Yield Trap
Long-Term ROE Target is 13% The Yield Trap 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 Investment Returns Assumes a 1:1 premium to surplus ratio for physicians professional liability clai
Slide 62: Shareholders' Equity Total Assets
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 63: Net Investment Income, Net Premiums Written, Net 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
Slide 64: Capital Growth: 2007-2011
Capital Growth: 2007-2011 in $000’s except total equity (000,000’s)