ProAssurance Corp (PRA) 2007 Q1 法說會逐字稿

Good morning. And welcome to Eastern Insurance Holdings, Inc.'s First Quarter 2007 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. Following the formal remarks the call will be open to questions.

It is now my pleasure to introduce Kevin Shook, Treasurer and Chief Financial Officer for Eastern Insurance Holdings. Sir, you may begin.

Thank you and welcome to EIHI's first quarter 2007 conference call. Representing the Company today are Bruce Eckert, Chief Executive Officer; Michael Boguski, President and Chief Operating Officer; and myself, Kevin Shook, Treasurer and Chief Financial Officer. Before I turn the call over to Bruce for opening remarks, I would like to remind you that the statements made during the conference call that are not based on historical facts are forward-looking statements. These statements are made in reliance on the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to uncertainties and risks.

EIHI's future results may differ materially from those anticipated and discussed in forward-looking statements. Some of the factors that could cause or contribute to such differences have been described in the press release issued yesterday and in EIHI's filings with the SEC. Please note that EIHI filed its Form 10-Q for the quarterly period ended March 31, 2007 yesterday. We refer you to these sources for additional information. I would also like to point out that remarks made during the conference call are based on information and understanding that are believed to be accurate as of today's date, May 11, 2007. With those announcements complete, I give you Bruce Eckert.

Thank you, Kevin. And thank all of you for joining us for this morning's conference call. The first quarter was a very good start to 2007 for all of our operating segments. Our workers' compensation insurance segment continues to produce strong operating results as indicated by its 79.9% calendar year combined loss ratio for the quarter. I was very pleased with 10.1% growth in direct written premiums during the quarter, as compared to the first quarter of 2006, and with the renewal rate decreases of only 2.6%.

Both results were excellent considering the competitive pricing pressures of the current insurance marketplace. Our goal in 2007 is to profitably grow our workers' compensation insurance segment organically, as well as, to actively pursue opportunities to allocate our excess capital through strategic acquisitions with an emphasis on opportunities within the workers' compensation insurance segment. We initiated a state-licensing project and are focused on expanding our workers' compensation business in the select territories in southeastern United States that we considered to have favorable demographics and workers' compensation insurance environments.

Our group benefits insurance segment continued its recent trend of producing underwriting results. Expense saving initiatives continued to have a positive impact as indicated by expense ratio of 31.3% for the quarter. Also our loss ratio trends continue to be favorable. The continued positive indication that our re-underwriting of our book of business has worked effectively. Our segregated portfolio cell reinsurance business also continues to produce favorable results and generate fee based income for our other business segment expenses.

We added one new program to our portfolio during the quarter. I am very pleased to report that our specialty reinsurance segment returned to profitability in the first quarter after a disappointing fourth quarter of 2006. Its combined ratio before purchase accounting adjustments was 96% for this quarter.

Next, I would like to introduce Michael Boguski, our President and Chief Operating Officer to review our operating results by segments. Michael?

Thank you, Bruce and good morning everyone. After providing a brief overview of our operating results, I will turn the call back to Kevin for a review of our financial results for the three months ended March 31, 2007 and pro forma financial results for the three months ended March 31, 2006. And finally, we will open the call to your questions.

Our focus in 2007 will continue to be on individual account underwriting and adhering to our disciplined underwriting principles to profitably grow our workers' compensation book of business. Net income was $2.6 million for the three months ended March 31, 2007 in the workers' compensation insurance segment. Our pro forma direct written premium before purchase accounting adjustments increased from $31.5 million for the three months ended March 31, 2006 to $34.6 million for the same period in 2007 an increase of 10.1%.

Production in the first quarter of 2007 includes new business writings of $5.8 million and a premium renewal retention rate of 88.7%. The company's workers' compensation 2007 accident period loss ratio was 62% for the three months ended March 31, 2007.

In the group benefits insurance segment, we continue to emphasize new business production and continued expense savings initiatives. Net income in the group benefits segment was $1 million for the three months ended March 31, 2007. Direct written premium in the group benefits insurance segment was $9.3 million for the three months ended March 31, 2007, which is consistent with the same period in 2006.

Production in the first quarter of 2007 included $3.8 million in new sales. The company loss results were favorable in the first quarter of 2007 primarily due to favorable loss reserve development in the long-term disability line and lower claim frequency in our dental product line. The specialty reinsurance segment results produced net income of $331,000 including purchase accounting adjustments of $162,000. The specialty reinsurance segment's assumed premium written for the first quarter of 2007 was $3.1 million, which is consistent with the $3.2 million of assumed premium written for the same period in 2006.

As Bruce mentioned earlier, our segregated portfolio cell reinsurance segment added one new program during the first quarter of 2007, bringing the total number of programs to 12. Of the 12 programs, two are in run-off as of March 31, 2007.

I am now going to turn it over to Kevin Shook for a review of the first quarter financial results.

Thanks, Mike. One item to note as I review the first quarter results is the lessening financial impact that the amortization of the estimated fair value adjustments for the assets and liabilities acquired by EIHI from Eastern Holding on June 16, 2006, otherwise known as purchase accounting adjustments, has on the results of operations for the three months ended March 31, 2007.

For the three months ended March 31, 2007, purchase accounting adjustments decreased net income by approximately $368,000 compared to purchase accounting adjustments that decreased net income from the fourth quarter of 2006 by approximately $810,000. EIHI reported net income of $3.2 million or $0.29 per diluted share for the three months ended March 31, 2007, compared to pro forma net income of $1.6 million or $0.15 per diluted share for the three months ended March 31, 2006.

The increase in net income in 2007 compared to pro forma net income in 2006 is due primarily to after-tax favorable loss reserve development on prior accident years in our workers' compensation insurance segment of $681,000 in 2007, compared to $396,000 in 2006 and after-tax purchase accounting charges in 2007 of $368,000 compared to after-tax purchase accounting charges in 2006 of $1.2 million.

The favorable loss reserve development was driven by solid claim closure patterns during the first quarter of 2007, during which the claims department closed 87 or 17.6% of the 495 open lost time claims as of December 31, 2006. These claims were settled for amounts at or less than previously established loss reserves. Also included in the operating results for 2007 and the pro forma operating results for 2006 are intangible asset amortization charges of approximately $435,000 and $501,000 respectively.

Consolidated revenue for the first quarter of 2007 was $33 million, compared to the pro forma amount of $29.5 million for the same period in 2006. Net premiums earned increased to $29.1 million in the first quarter of 2007 from a pro forma amount of $25.8 million during the same period in 2006. The increase in earned premium was primarily driven by the increases in the workers' compensation insurance segment during the first quarter of 2007 and a decrease in the impact of purchase accounting adjustments for the three months ended March 31, 2007 compared to the same period in 2006.

Following are our combined ratios for the workers' compensation insurance, specialty reinsurance and group benefits segments for the three months ended March 31, 2007 before purchase accounting adjustments. The reason I am quoting these combined ratios to you is that they are in my opinion the best representation of our core operating results as they do not include purchase accounting adjustments.

The combined ratio in the worker's compensation insurance segment was 77.1% including a calendar period loss ratio of 54.3%, an expense ratio of 22% and a policyholder dividend ratio of 0.8%. The loss ratio for the period includes $1 million of pre-tax favorable loss reserve development, which had the impact of decreasing the workers' compensation insurance segment combined ratio by 8 points. The accident period loss ratio was 62% for the three months ended March 31, 2007. The combined ratio in the specialty reinsurance segment was 96% including a calendar period loss ratio of 61.7%.

Finally, the combined ratio in our group benefits segment was 95.8%, including a calendar period loss ratio of 64.5% and an expense ratio of 31.3%. Lastly, with respect to capital management as previously announced, we implemented a stock buyback program in the first quarter of 2007 during which we repurchased 66,413 shares for a total cost of $961,000. In April 2007, we announced that we would pay $0.05 dividend to shareholders of record on April 23, 2007, that dividend was paid on May 3, 2007.

As Bruce mentioned earlier, we are actively pursuing means to allocate our excess capital, but we will only do so if it presents the right financial opportunity for our shareholders. This concludes our formal remarks.

Thank you. Before I open the call to your questions, I would like to tell you that the Company will not be providing forward-looking earnings guidance and thus will be unable to answer questions pertaining to that subject. (OPERATOR INSTRUCTIONS).

Our first question comes from Sam Kidston with North and Webster. Please state your question.

Yes. Hi, guys. Just a couple of quick questions. The first one is that I was just wondering if you could update us on, what you guys think the excess capital position is at the company given the various activities that happened in the quarter?

Sure, Sam. The excess capital position is largely consistent at March 31, 2007 with where it was at December 31, 2006. I reported at December 31, 2006 that we actively utilized about 57% of our capital and even with the stock buyback program, we were very profitable in the first quarter of 2007. So I would say that that's going to be consistent percentage at March 31, 2007 as well.

Okay. Great. And then just a question on, sort of the interplay between the repurchase and the issuance of stock options. I guess, if you could just speak to the issuance and sort of give us the thoughts on the level of issuance going forward, I would assume -- well, I don't want to assume anything, so I'll just leave it there?

Sure. With respect to the stock repurchase program, we -- every day we look at opportunities to buy back the stock, so that will be ongoing. With respect to, I believe you were referring to the January 3 activity where we granted the restricted stock in the stock options.

Yes.

That was a one-time grant. I don't think you are going to see a lot of activity in that arena moving forward except for new higher level hires that the company would have. So, I don't think there's going be a lot of activity in that area at all.

Okay. Okay. And then just the only thing -- just a comment, we think you should buy back as much stock as you can, so. Thank you very much guys.

Thank you.

Yes.

You are welcome, Sam. Thanks.

(OPERATOR INSTRUCTIONS) Our next question comes from Bob Schwerin with Schwerin Boyle Capital Management. Please state your question.

You mentioned that the purchase accounting adjustments having a reduced impact. Do you have any projections going forward as to the level they will be over the next few quarters?

Sure, do. I am very happy to report that in the second quarter of 2007, the net impact from purchase accounting adjustments is going to about $150,000. That is the amortization of the purchase accounting adjustments. The intangible asset amortizations is going to run-off at a much slower pace and I would expect that you'd see similar numbers in the second quarter with respect to that amortization as you did in the first quarter of 2007, but the amortization of the purchase accounting adjustments will be minimal in the second quarter and then after that it goes away.

Thank you very much.

You are welcome.

The next question comes from Sam Kidston with North and Webster. Please state your question.

Yes. Obviously, we do not have a lot of people on the call. So, I will ask you couple more. Could you guys just sort of talk about the competitive environment and if anything's changed versus say a year ago in the markets you are in and then also just talk a little bit about the geographic expansion, if you would?

Yes. This is Bruce. I would be happy to speak about. We were very pleased at where we ended last year in terms of premium reductions, which was around 6% and as I said in my prepared remarks, that only going off another 2% in the first quarter. So we -- the marketplace stays, I think as price competitive as it's been but it seems to be in that annual 5 to -- we think 5% to 8% range, which given our expense ratios and given our loss ratios we think we are able to accommodate very well, if you will. The other thing I would say in terms of the competitive marketplace, we have not seen the need either last year or in the first quarter of this year to put any loss sensitive dividend plans, loss ratio plans, dividend plans on top of our guaranteed cost policies, so that remains positive for us if you will.

In terms of expansion, again we think it would be best for us to try to overlay our footprint with that of Eastern Life and Health. Their second largest state from which they get premiums is North Carolina. They also have a concentration of premiums in Maryland and Virginia, so that gives you a sense that we are looking to that Middle-Atlantic and North Southeast expansion if you will. We have as you might recall -- we have a license in Maryland. We activated that last year. We had a couple of million dollars out of Maryland and Delaware in 2006. We continue to write very profitably in those two jurisdictions and we expect to increase that level of premium. We have received a license to do business in Virginia and we are very hopeful to hear shortly about our license approval in North Carolina. So that's our focus.

Okay. And then just in terms of the business added or the educators legacy business, what's the experience in terms of the run-off there of premium? Has that slowed significantly or is it still?

Well, -- maybe two issues. Their largest product line before last year was major medical, which had been in run-off and had effectively run-off by the time of our transactions. So there is no -- there are no vestiges of that aspect of their business left. The four ancillary lines that were there at the time of the transaction remained there. As we described we re-underwrote the book over the last three quarters and continue to take a hard look at that. But there are no run-off issues if you will in these four product lines.

Yes. I apologize. I just meant by -- the premium levels. Have you seen the decrease in premium levels continue -- that was going on before you acquired it?

No. We've spent a lot of time on upgrading our efforts to retain the premium that was on the books and we moved the persistency rates up from probably low 70s to high 80s in these last three quarters. So we remain very diligent about keeping the business that we want to keep and then we have grown the entire book of business by probably $2 million to $3 million since the June -- since the transactions. So, we are headed back up if you will in that regard as well.

Okay great. Thank you very much.

And ladies and gentlemen, there are no further questions at this time. I will turn the conference back over to management for closing comments.

I really have no additional closing comments. I thank all of you for participating in our conference call and we look forward to talking to you at the end of our second quarter. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.