ProAssurance Corp (PRA) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Eastern Insurance Holdings, Inc.'s First Quarter 2009 Earnings Conference Call. At this time, all participants have been placed in listen-only mode. Following the formal remarks, the call will be opened 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 2009 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, 31st, 2009, 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 8th, 2009. With those announcements complete, I give you Bruce Eckert.

Thank you, Kevin, and thank you all for joining us for this morning's conference call. In a business environment where levels of unemployment continue to rise, manufacturing continues to erode, construction projects, both residential and commercial are delayed, and even the heretofore stable healthcare sector shows some signs of weakness, I am pleased to report that Eastern Insurance Holdings increased both direct written and net earned premiums and recorded a combined ratio of 91.2% in its core workers' compensation insurance segment for the three months ended March 31st, 2009.

First quarter year-over-year workers' compensation revenues increased by 5.9% to $36.2 million as a result of favorable premium renewal retention ratios, new business sales in the Southeast, moderated premium rate reductions, and the acquisition of Employers Security Insurance Company in September, 2008. Additional premium received as a result of payroll audits remained positive during the quarter and aggregated approximately $283,000.

Competitive pressures remain strong across all our geographic sectors. However, again during the quarter, we were able to place 90% of our policies into non-dividend paying plans. These pressures were most evident in North Carolina and Indiana, the states at the core of our Southeast and Midwest expansion initiatives, respectively. Both of those states also experienced significant increases in their rates of unemployment during the quarter.

Reported workers' compensation claims were in line with the previous year's first quarter claims as were open lost-time claims, particularly in comparison to the increase of year-over-year in-force payroll exposure. Our extensive claims management and cost containment initiatives continue to manage medical inflation to negligible trends. We did experience favorable loss reserve development from accident years prior to 2009 in the amount of $549,000.

Investment results continue to be negatively impacted by the current economic environment, but to a lesser extent compared to prior quarters. For the three months ended March 31st, 2009, we recorded $1.6 million of realized losses primarily related to other-than-temporary impairments on our equity portfolio for certain investments that have been underwater for a continuous period of one year. Importantly, we have not sold any of these equity securities, but have written them down in accordance with our investment policy.

Lastly, we have always been a prudent manager of expenses as indicated by our historically low workers' compensation expense ratio and year-over-year reductions in our Group benefits insurance segment's expense ratio from 39.1% in 2005 to 32.4% in this first quarter of 2009. We have intentionally and aggressively revisited all our areas of expenses this past quarter, including reinsurance and other significant corporate expenses.

I'd now like to introduce Michael Boguskid, our President and Chief Operating Officer to review operating segment results. Michael?

Thank you, Bruce. After providing a brief overview of our operating results, I will turn the call back to Kevin Shook for a review of our financial results for the three months ended March 31st, 2009, and 2008. And, finally, we will open the call to your questions.

The focus in the workers' compensation insurance segment continues to be on individual account underwriting and adhering to disciplined underwriting principles to profitably expand our workers' compensation insurance products. The combined ratio in our workers' compensation insurance segment for the three months ended March, 31st, 2009, was 91.2% compared to 76.1% for the same period in 2008.

The increase in our combined ratio from 2008 to 2009 was primarily driven by the Company recording favorable loss reserve development on prior accident years of $549,000 for the three months ended March 31st, 2009, which reduced the 2009 workers' compensation insurance combined ratio by 3.1 points, compared to $1.5 million of favorable loss reserve development on prior accident years for the first quarter of 2008, which reduced the 2008 workers' compensation insurance combined ratio by 10.2 points.

The Company's direct written premium increased from $34.1 million for the three months ended March, 31st, 2008, to $36.2 million for the same period in 2009, an increase of 5.9%. Production highlights for 2009 include renewal rate decreases of 1.9% on our profitable book of business with a premium renewal retention rate of 84.1%, an excellent result in an environment where competition for business is intense. Our underwriters continue to manage our policyholder dividend liability exposure with 90% of our 2009 book of business written on a guaranteed cost basis.

The first quarter of 2009 includes new business writings of $6.9 million compared to $4.3 million for the same period in 2008. Our strategy of building a highly diverse book of business by job classifications continues to mitigate the down draft of a difficult economy. We also added new state licenses for a current total of 21, which has helped maintain and grow our book of business across all regions, including our segregated portfolio cell business.

The integration of our newly acquired workers' compensation insurance company, Employers Security Insurance Company, is substantially complete. Integration has been achieved in the areas of systems, finance, staffing, product filings, contiguous state license approvals, and Company branding initiatives. We have also appointed six new agencies in this territory.

We are excited to recently announce the introduction of ParallelPay, a pay-as-you-go program that allows policyholders to pay their workers' compensation premiums as they pay their employees. Through ParallelPay, our workers' compensation policyholders pay their premium one payroll period at a time. Premium payments are calculated based on payroll census information and then are debited via an electronic fund transfer from the policyholder's bank account.

ParallelPay is a unique pay-as-you-go program due to the ability of the policyholder to choose multiple reporting options for their payroll census information. Importantly, policyholders can either work with one of EAIG's preferred payroll system providers or maintain their current payroll system and submit the information electronically via the Web-based ParallelPay system.

We have consistently heard from our agency distribution network that in this economy their customers, our policyholders, are continually looking for innovative means to maximize their cash flow. ParallelPay allows those policyholders to avoid large upfront premium payments and installment fees, and to mitigate large premium audit adjustments due to fluctuating payrolls.

The cash management benefit and reporting flexibility positions ParallelPay as an attractive choice for employers of various size and scope of operations. During the brief pilot stage of this product's introduction, we secured 13 new policyholders with annualized premium of approximately $400,000.

The Group benefits insurance segment experienced an abnormal quarter of claims with higher benefit levels in the Group life insurance line of business. We do not view this result as emblematic of any trend or cause for changed underwriting guidelines, but combined with dental insurance reported claims, which traditionally are higher in the first quarter, the quarterly combined ratio for 2009 was 107.2%. This compared to last year's combined ratio of 101.5% for the first quarter.

In the Group benefits insurance segment, we continue to emphasize profitable new sales opportunities, premium retention initiatives, and expanded product offerings. The Company produced new sales of $2.3 million for the first quarter of 2009, and ended the quarter with annualized premium volume of $38.1 million. I am now going to turn it over to Kevin Shook for a review of our first quarter financial results.

Thanks, Mike. In spite of income before taxes of $578,000, EIHI reported a net loss of $555,000, or $0.06 per diluted share, for the first quarter of 2009, compared to net income of $2.6 million, or $0.26 per diluted share, for the same period in 2008.

The net loss of $0.06 per diluted share for 2009 includes net realized investment losses predominantly related to other-than-temporary impairments of $0.10 per diluted share, limited partnership investment losses of $0.01 per diluted share, and a tax adjustment of $0.08 per diluted share, which represents a deferred tax valuation allowance on realized and unrealized capital losses, which in total reduced EIHI's diluted earnings per share by $0.19.

The calendar year loss ratio in our workers' compensation insurance segment was 62.0% for the three months ended March 31st, 2009, compared to 50.9% for the same period in 2008. The increase in the calendar period loss and LAE ratio primarily reflects an increase in the accident period loss ratio and a decrease in favorable loss reserve development on prior accident periods.

The accident period loss ratio was 66.0% and 62.0% for the three months ended March 31st, 2009, and 2008, respectively. The current quarter's accident period loss ratio reflects our views of the current economic conditions.

Favorable loss reserve development in workers' compensation totaled $549,000 and $1.5 million for the three months ended March 31st, 2009, and 2008, respectively. The favorable loss reserve development relates primarily to a decrease in the prior accident period loss development factors used to estimate losses and loss adjustment expense.

The decrease in prior accident period loss development factors primarily reflects significant prior year claim settlements during 2009 for amounts at or less than previously established case and IBNR reserves. This decrease had the effect of lowering loss development factors as of March, 31st, 2009.

For the three months ended March 31st, 2009, the Company closed 105, or 16.6%, of the 634 open lost-time claims as of December 31st, 2008. In the aggregate, the claims were closed at amounts lower than the provision established for IBNR claims.

Consolidated revenue for the first quarter of 2009 decreased $1.3 million to $34.2 million compared to $35.5 million for the same period in 2008. The decrease in revenue is due primarily to a decrease in net investment income and an increase in net realized investment losses and losses from limited partnerships, partially offset by an increase in earned premium.

Net premiums earned increased $700,000 to $33.7 million during the first quarter despite a $2.6 million earned premium reduction from the first quarter of 2008 compared to the same period in 2009 in the run-off specialty reinsurance segment. Consolidated net premiums earned increased 2.2% primarily due to the growth in workers' compensation premium and the acquisition of Employers Security Insurance Company, partially offset by the termination of the reinsurance treaty effective July 1st, 2008 that comprised the run-off specialty reinsurance segment.

Net investment income decreased $700,000 to $1.9 million for the three months ended March, 31st, 2009, compared to $2.6 million for the same period in 2008. The decrease in net investment income is due primarily to a decrease in overall invested assets and a higher cash balance as of March 31st, 2009, compared to March 31st, 2008.

Total assets were $385.5 million as of March 31st, 2009. Shareholders' equity was $137.2 million as of March 31st, 2009. During the first quarter of 2009, the Company repurchased 1400 common shares at a total cost of $11,242 representing a weighted average price of $8.03 per share. As of March 31st, 2009, EIHI diluted book value per share was $14.16 compared to $14.13 as of December 31st, 2008. This concludes our formal remarks.

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. At this time, I would like to open the call to your questions.

(Operator Instructions)

Our first question comes from Randy Binner of FBR Capital.

Hello, it's [Kevin Barger] filling in for Randy. Just wanted to try to reconcile here the core number from the $0.06 of net income back with the tax adjustment and the $0.10 in other-than-temporary realized losses. How should I look at the core number here on a run rate basis?

Yes, for the quarter, the normalized EPS number, if you exclude the other-than-temporary impairments and you exclude the tax adjustment, you should be coming up with a number of about $0.11 to $0.13.

Okay. And then on the investment income, down to $1.9 million this quarter, is that mostly attributable to like the cash build and the lower amount of investments and should we expect that to continue or is that something where you expect a run rate for the rest of the year close to the $1.9 million?

I would expect that the run rate is going to be higher. I think you hit the nail on the head. We had an unusually large cash balance during the first quarter of 2009. I think we all know what's going on with short term interest rates, and that's the majority of the $700,000 change and to a lesser extent -- on a rolling 12-month basis, we've repurchased $17.1 million of stock between the two quarters, and that had an impact, but at the same time it will be cash flow, so the bigger piece of it certainly is the high cash balance in short term interest rates. And we expect a lot of that cash to be invested shortly and would expect a run rate higher than what you are seeing in the first quarter.

Okay. So I will run that a little higher. And then one last question on the reinsurance, I noticed you had a positive operating EPS this quarter off -- taking out the net realized investment losses. What are you expecting there? Is that -- can you provide a little more color going forward on the reinsurance run-off?

Sure. There is a couple pieces. Number one, the earned premium that you are seeing is -- still reflects the run-off from the contract that was terminated on July 1st, 2008. The most recent data that we have received from the ceding company, the losses were in line with the reserve numbers that we had put up in the prior quarter. So my expectation is that that will hopefully continue and we'll continue to see very neutral underwriting results in that business segment.

Okay, I appreciate it. Thank you.

You are welcome.

Our next question comes from [Louis Gibofsky] of [Mass Capital].

Good morning guys.

Good morning.

Good morning.

I was just wondering if you can give a little bit more color into the favorable reserve development of $549,000, specifically if you can provide a color into different years that $549,000 relates to or if it's just one year in particular, that would be really helpful.

Absolutely. As I said in the prepared remarks, we closed an awful lot of claims. We closed 105 or 106 claims on a prior year balance of 634 and the claims in a lot of cases were closed underneath the case reserves let alone the IBNR. Our reserves still are at the high end of the range, the actuarial range as of March 31st, 2009. So the $550,000 of favorable development was taken in an effort to keep those obviously within our range.

And then more specifically, here is the breakout of the $549,000. Importantly, we did not take any reserves down for '07 and '08. We think that those years are still a little too green. We want to get a little bit more information on the economic climate and the impact it may have on the more recent years. $325,000 came from '06; $99,000 came from '05; $100,000 came from '04; and $25,000 came from '03. So you could see it was not -- any huge amount in one year, but kind of systematically spread from '03 to '06 for the most part.

Okay. That's really helpful. Just kind of another question. Are you seeing any increase in claim activity in April or if you can just speak into what you are seeing now with respect to employment, specifically in Pennsylvania by sector, any color there would be really helpful?

On the claims frequency side, what we saw in the first quarter of 2009 was that frequency -- reported claims are actually down and as you relate those claims to exposure base, they were actually down a couple of points. So we really saw some good news on the claims frequency side in the first quarter. And that was consistent across all of our operating segments or operating territories.

Okay, great, thank you very much.

(Operator Instructions) We show no further questions at this time. I would like to turn the conference back over to our moderators for any closing remarks.

I just want to thank all of you for participating in this morning's call and I hope you have a good rest of the spring and early summer, and we'll see you at our next conference call. Thank you.

That does conclude today's teleconference. Thank you for participating. You many now disconnect.