Proassurance Corporation · NYSE:PRA
Proassurance — Investor Presentation (March 2013)
68 slides from Proassurance's investor presentation, Mar 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: 2012 Highlights
2012 Highlights ROE of 12.4% Total Return of 13.5% Increased Book Value per Share for the 21 st straight year Significant capital management actions $2.50 per share Special Dividend, post 2:1 split Dividend payout ratio doubled, now ~2.1% 1 Two transactions that extend our insurance scope and deepen
Slide 3: ProAssurance Corporate Profile
ProAssurance Corporate Profile Specialty liability insurance writer Healthcare Professional Liability (HCPL) Only “pure play” public company writing predominately HCPL Life sciences and medical devices Attorney’s professional liability Market Cap: ~$2.8 billion Shareholders’ Equity: $2.3 billion Tot
Slide 4: ProAssurance Corporate Profile
Policyholders at 12/31/12: ~65,600 2012 Gross Written Premium: $536.4 mln ProAssurance Corporate Profile 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 and in all states f
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 (Birmingham) Corporate Headquarters Corporate Headquarters Claims Offices Claims Offices Claims
Slide 6: Seeking Increased Yield But Balancing Risk
$3.9 Billion Portfolio Fixed Income: 88% Short Term: 2% Equity and Equity Substitutes: 9% BOLI: 1% Seeking Increased Yield But Balancing Risk We continue to focus on maintaining a high quality well diversified fixed income portfolio We are making incremental changes to obtain higher yields in blue c
Slide 7: 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 Victor T. Adamo, JD, CPCU Vice-Chairman Company Tenur
Slide 8: 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 9: 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 10: Building a Bridge to the Future
Building a Bridge to the Future Our core business is at a pivot point We are uniquely positioned to serve the emerging market and remaining legacy business Smaller competitors with less experience and capacity have decisions to make Legacy business is largely single-state, solo and small groups. A s
Slide 11: Building a Bridge to the Future
Building a Bridge to the Future Larger risks will demand sophisticated coverages that span the continuum of healthcare Broad healthcare liability experience is our foundation We added capacity & capability through M&A Example: Medmarc, PICA and Mid-Continent Home Healthcare Non-Traditional Delivery
Slide 12: 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 13: 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
Slide 14: ProAssurance Will Grow Prudently
ProAssurance Will Grow Prudently ProAssurance is a demonstrated leader in M&A We will broaden our lines of coverage as needed Healthcare-related Through prudent leverage of our expertise and the addition of specialized expertise The market will firm and we are prepared to grow organically Past histo
Slide 15: 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 16: 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 17: 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 Alternative risk and self-insurance mechanisms Captive insurance and sophisticated risk sharing programs Risk Retention Groups for specifi
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: 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 20: 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 21: 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 22: Market Factors and Cycle Impact
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 23: 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 24: 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 25: 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 26: Sound Strategy = Consistent Profitability
Sound Strategy = Consistent Profitability
Slide 27: 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 12/31/12 CAGR: 16% Cumulative: 2,092% 10 Year Summary (2002 -2012) CAGR: 17% Cumulative: 360% Historical Book Value Per Share Split Adjusted Dividends Shown in th
Slide 28: 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 12/31/12 CAGR: 14% Cumulative: 1,510% 10 Year Summary (2002 -2012
Slide 29: Historical Financial Performance
Net Income Operating Income 1 Historical Financial Performance Our disciplined, long-term approach drives consistent profitability $ in millions. Excludes discontinued operations 1 Excludes the after-tax effects of net realized gains or losses in all periods, the effect of confidential settlements t
Slide 30: 2012 Income Statement Highlights
2012 Income Statement Highlights in millions, except per share data Gross Premiums Written $ 536 $ 566 -5% Net Investment Result 129 132 -2% Total Expenses (Includes Loss Costs) 320 302 +6% Operating Income $ 257 $ 279 - 8% Net Income (Includes Realized Investment Gain & Losses) $ 275 $ 287 - 4% Dec
Slide 31: Reserve Development Drove Our Results
Reserve Development Drove Our Results Our 2012 loss ratio was again decreased by favorable reserve development Calendar Year Combined Ratio Calendar Year Combined Ratio 57.1% 52.5%
Slide 32: Net Favorable Reserve Development
Net Favorable Reserve Development Consistent Approach to Reserves Consistent reserving practices provide protection against a loss trend reversal and capital erosion
Slide 33: Five Year Premium History
Five year Premium History Disciplined Underwriting Consistently writing profitable business to ensure long-term success Premium decline driven by competition and a benign loss environment that is unprecedented in our line of business Gross Premiums Written Net Premiums Earned
Slide 34: 2012 Balance Sheet Highlights
Shareholders’ Equity 2012 Balance Sheet Highlights Split adjusted, in billions, except per share Shareholders’ Equity $ 2.3 $ 2.2 +5% Total Investments 3.9 4.1 -4% Total Assets 4.9 5.0 -2% Policy Liabilities 2.3 2.6 -10% December 31, Y-OVER-Y 2012 2011 CHANGE 81% increase since 2007 Book Value per S
Slide 35: Long-Term Financial Strength
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 36: Capital Management Priorities
Share Repurchase History Capital Management Priorities Preferred use is to support growth through M&A or new business We balance future needs with current market reality Regular dividend is $1.00/share ~2.1% yield based on 2/26/13 closing price Prudent share repurchase program $321 million spent to
Slide 37: 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 38: ProAssurance Pricing 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 39: 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 40: 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 41: 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 42: Key State Rate Comparison
Key State Rate Comparison Annual Premium for a $1M / $3M Policy Filed or Approved at 1/01/12
Slide 43: 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 44: 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 45: Differentiate Through Claims Defense
ProAssurance: 78% No Paid Losses Industry: 72% 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 46: 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 47: 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 48: ProAssurance: Treated Fairly
PROASSURANCE. “Treated Faily
Slide 49: Capital Growth: 2007-2012
Capital Growth: 2007-2012 in $000’s except total equity (000,000’s) * Includes economic cost of holding treasury shares
Slide 50: Inside ProAssurance's Balance Sheet
Inside ProAssurance’s Balance Sheet 12/31/12
Slide 51: Inside ProAssurance's Income Statement
Inside ProAssurance’s Income Statement 12/31/12
Slide 52: Components of Return on Equity
Components of Return on Equity (in millions) Long-Term ROE Target: 12% - 14%
Slide 53: Book Value per Share and Tangible Book Value
$40.00 $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 = $24.97 $25.29 S S S <) Sy FF HF FHF FF PHP FP HH HM _ SH y Sy wd ay y Yi > a LY 2 sy a ua > s fos lo e e cos oO oe e oe eo oe e fo oO © e Book Value per Share Tangible Book Value per Share = = Tangible Book Value per Share (Excluding Dividends) (Exc
Slide 54: Current Prices Continue to Offer a Buying Opportunity
Current Prices Continue to Offer a Compelling Buying Opportunity Current Price to Unadjusted YE 2012 Book: 1.3x 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 Foc
Slide 55: ProAssurance Transaction Discussion
ProAssurance Transaction Discussion Medmarc is broadening our product offerings and capabilities in protecting the delivery of healthcare With the acquisition of Independent Nevada Doctors Insurance Exchange (IND), ProAssurance becomes the leading medical professional liability writer in Nevada
Slide 56: Medmarc Transaction Update
Medmarc Transaction Update A leading products liability writer in medical technology and life sciences Meaningful legal professional liability book Acquisition completed effective January 1, 2013 Functioning as an operationally independent subsidiary Broad acceptance in Medmarc’s target markets Coor
Slide 57: IND Transaction Update
IND Transaction Update Leading MPL writer in Nevada Acquisition completed in late November 2012 Integration well underway and proceeding smoothly New business opportunities evolving as agents understand the scope and capability of the combined organizations
Slide 58: ProForma 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 2011 YE
Slide 59: Investment Portfolio Detail
Investment Portfolio Detail ProAssurance remains conservatively invested, to ensure our ability to keep our long-term promise of insurance protection
Slide 60: ProAssurance: Investment Profile
$3.9 Billion Overall Portfolio $3.4 Billion Fixed Income Portfolio ProAssurance: Investment Profile Average duration: 3.8 years Average tax-equivalent income yield: Q4: 4.6% / 2012: 4.5% Investment grade: 93% Weighted average: A+ 12/31/12 Tax credit portfolio not reflected in investment income—provi
Slide 61: Portfolio Detail: Asset Backed
Asset Backed: $495 Million ProAssurance Portfolio Detail: Asset Backed 12/31/12 Subject to Rounding Weighted Average Rating: “AA+”
Slide 62: Portfolio Detail: Corporates
Corporates: $1.5 Billion ProAssurance Portfolio Detail: Corporate Weighted Average Rating: A- 12/31/12
Slide 63: 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 12/31/12
Slide 64: Portfolio Detail: Equities & Other
Equities & Other: $335 Million ProAssurance Portfolio Detail: Equities & Other 12/31/12
Slide 65: Portfolio Detail: Various
Treasury / GSE: $263 Million Short Term: $72 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+ 12/31/12
Slide 66: ProAssurance: Treated Fairly
PROASSURANCE. “Treated Faily
Slide 67: Debt to Equity Strong Capital Position
Debt to Equity Strong Capital Position Prepared for an improving market Conservative Use of Debt / Low Leverage Credit facility accessed for $125 million in short-term borrowing (December 2012) No Debt Prior to 2001
Slide 68: Long-Term ROE Target is 12%-14% 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