ProAssurance Corp (PRA) 2010 Q3 法說會逐字稿

Ladies and gentlemen, and welcome to Eastern Insurance Holdings, Inc. third-quarter 2010 earnings conference call. At this time all participants have been placed in a listen-only mode. Please note that this conference is being recorded. Following the formal remarks, the call will be open for 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 third-quarter 2010 earnings 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, 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 fillings with the SEC. Please note that EIHI filed its form 10-Q for the quarterly period ended September 30, 2010 yesterday. We refer you to these sources for additional information.

I would also like to point out that the remarks made during the conference call are based on information and understanding that are believed to be accurate as of today's date, November 5, 2010.

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. I am pleased to report another quarter of sustained solid growth in our workers compensation insurance segment, despite continuing soft market conditions and a challenging economic landscape.

Third-quarter year-over-year direct written premium increased by 16.1% to $34.5 million as a result of strong premium renewal retention ratios and significant new business production in all of our operating regions. A smaller, but very welcome contributor to our topline during the quarter was additional premium received as a result of payroll audits, the first quarter this has occurred in over a year.

Year-to-date direct written premiums are 10.1% ahead of September 30, 2009. Given the closing and the sale of Eastern Life and Health Insurance Company last quarter, it is important to achieve our strategic workers compensation growth targets and I'm gratified that we have done so year to date.

Our direct written premium growth, combined with improved reinsurance terms, controlled expense management, and disciplined underwriting produced a workers' compensation combined ratio of 95.1% for the third quarter. Given our views of the current and near term workers compensation marketplace and in recognition of an increase in 2010 severity-related claims, we adjusted our current accident near loss ratio upward by 1 percentage point for all of 2010.

Furthermore, we did not record loss reserve development on prior accident years during the quarter nor have we recorded any loss reserve development on accident years 2008 and 2009, since recording our initial ultimate loss estimate at the end of each of those respective accident years.

I am likewise pleased with the increase of our diluted book value per share to $16.28 during the third quarter of 2010. This represents an increase of 2.1% over the second quarter of 2010. Kevin will later discuss the specific components of this per share pickup in value.

We continued the implementation of our strategic initiatives during the third quarter. Our new offices in Western Pennsylvania, Tennessee have already become significant contributors to new business generation. The Midwest and Southeast regional offices continued to meet and exceed their business plans. We added a new segregated portfolio cell program during the quarter.

ParallelPay has posted an impressive $18.9 million in direct written premiums since its inception in the second quarter of 2009. We also remain committed to explore divestiture opportunities with respect to our specialty reinsurance segment.

A final word about our workers compensation premium growth before I turn the call over to Mike Boguski, our President, and Chief Operating Officer. The month of October recorded a very good start to the fourth quarter. Across all of our operating territories renewals were solid, submissions were up, and new business writings succeeded plan.

I would now like to introduce Michael Boguski to review operating results.

Thank you, Bruce. As Bruce noted earlier during the third quarter, direct written premiums increased by 16.1%, compared to the same period of 2009, and the year-to-date increase was 10.1% over the first nine months of 2009.

Importantly, our geographic expansion strategy continues to play an increasingly important role in that premium growth. Premium production in the Midwest and Southeast regional offices recorded year-over-year increases of 26% and 96% respectively, while maintaining underwriting discipline.

The Company has appointed 25 new agency partners across our operating territories during 2010, which has been instrumental in growing our in-force customer base to 7,000 policyholders.

During the third quarter, net premiums earned increased to $22.4 million compared with $17.8 million for the third quarter of 2009, an increase of 26%. The increase in net premiums earns relates primarily to third-quarter 2010 production increases and more favorable reinsurance terms in 2010 compared to 2009, partially offset by continued renewal rate decreases.

Our renewal rate decreases remained relatively stable during the third quarter and have decreased 2.4% through September 30, 2010. Likewise, our premium retention results were excellent during the quarter and remained at 87% on our profitable book of workers compensation business.

Audit premium, which results from an examination of the policy holders payroll and other records, resulted in the Company recording a modest but welcome amount of additional premium. Audit increased net premiums earned by $127,000 with three months ended September 30, 2010 compared to returned premium to policyholders, which decreased net premiums earned by $79,000 for the same period in 2009, an increase of $206,000. Importantly, these additional audit premiums were in striking contrast to the $810,000 of premiums which were returned to our policyholders during the second quarter of 2010.

The workers compensation combined ratio was 95.1% for the third quarter of 2010 compared to 89% for the same period last year. The calendar period loss and loss adjustment expense ratio was 67.3% and 61.3% for the three months ended September 30, 2010 and 2009 respectively. The increase in the calendar period loss and loss adjustment expense ratio is due to an increase in the 2010 accident year, driven by severity-related claims and a decrease in favorable loss reserve development on prior accident years in 2010 compared to 2009.

For the three months ended September 30, 2009, $350,000 of favorable loss reserve development on prior accident years was recorded which decreased the 2009 loss ratio by 2 percentage points compared to loss reserve development recorded for the same period in 2010.

The expense ratio was 26.3% for the three months ended September 30, 2010 compared to 27% for the same period of 2009. The decrease in the expense ratio is due to the increase in net premiums earned and the reversal of the more recent trend of returning audit premiums to customers.

A few brief comments about some 2010 strategic initiatives. We opened two new offices in the second quarter of 2010; one in Western Pennsylvania and the other in Nashville, Tennessee. Both offices have been very well received by agents and policyholders. Production and loss ratio results in these office have met their established business plans.

Lastly ParallelPay, our pay-as-you-go workers compensation initiative continues to exceed expectations in premium volume loss ratio and policy retention results.

And now I'm going to turn it over to Kevin Shook for a review of third-quarter financial results.

Thank you, Mike. EIHI reported net income of $2.2 million or $0.25 per diluted share for the third quarter of 2010 compared to net income of $3.3 million or $0.36 per diluted share for the same period in 2009. EIHI's net income from continuing operations was $2.3 million or $0.26 per diluted share for the third quarter of 2010, compared to net income from continuing operations of $2.3 million or $0.25 per diluted share for the same period of 2009.

Diluted earnings per share includes income of $0.23 per diluted share in the workers' compensation insurance segment, income of $0.14 per diluted share in the runoff specialty reinsurance segment, a loss of $0.11 per diluted share in our corporate and other segment, and a loss of $0.1 per diluted share in our discontinued operations.

Mike previously commented on our calendar period loss and loss adjustment expense ratios of 67.3% and 61.3% for the three months ended September 30, 2010 and 2009 respectively. I am very pleased to report that as of September 30, 2010 the Company has closed 270 or 39.8% of the 678 open loss time claims as of December 31, 2009.

Revenue from continuing operations for the third quarter of 2010 increased to $32.8 million compared to $27.1 million for the same period in 2009. The increase in revenue is due primarily to an increase in net premiums earned and net realized investment gains; partially offset by a decrease in net investment income and income from limited partnerships.

Net premiums earned from continuing operations were $28.8 million for the third quarter of 2010 compared to $24.2 million for the same period in 2009. The increase in net premiums earned is due primarily to an increase in direct written premium production and more favorable reinsurance terms in 2010 compared to 2009, partially offset by continued renewal rate decreases.

Net investment income from continuing operations was $1.2 million for the three months ended September 30, 2010 compared to $1.6 million for the same period in 2009. The decrease in net investment income is due primarily to the current lower interest rate environment.

The change in equity interest in limited partnerships from continuing operations decreased $196,000 to income of $266,000 for the three months ended September 30, 2010 compared to income over $462,000 for the same period in 2009. Net realized investment gains from containing operations excluding the Segregated Portfolio Cell Reinsurance segment, were $2.2 million or $1.7 million after-tax for the three months ended September 30, 2010 compared to $1.4 million or $1.0 million after-tax for the same period in 2009.

Included in net realized investment gains from continuing operations excluding the Segregated Portfolio Cell Reinsurance segment were after-tax net realized investment gains on EIHI's convertible bond investment portfolio of $690,000 and $328,000 for the three months ended September 30, 2010 and 2009 respectively. The Company accounts for changes in the estimated fair value of its convertible bond portfolio as a realized gain or loss.

Total assets were $368.7 million as of September 30, 2010. Shareholders' equity was $152.4 million as of September 30, 2010. And as of September 30, 2010 EIHI's book value and diluted book value per share were $16.55 and $16.28 respectively.

I am pleased with the quarterly increase in diluted book value per share of 2.1% which was driven by net income, increases in the fair value of EIHI's fixed income portfolio, and accretive stock repurchases.

EIHI repurchased 163,939 common shares during the third quarter of 2010 for $1.8 million, representing a weighted average price of $10.83 per share.

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 your call to your questions. (Operator Instructions). Bob Farnam, KBW.

Hi there, good morning. So you've got a lot of organic growth coming on the books, are still looking for M&A opportunities or are you just focused on the organic growth right now?

Bob, hi, this is Bruce, good morning.

Well I think you know we are rather conservative and it seems to us in this protracted soft cycle, particularly relative to a workers' compensation company, which is of course what we'd be interested in, we really would be very concerned for the state of balance sheets out there. And so realistically, I don't see much happening for us in the acquisition segment in the near term. So I think we're really focused more -- I mean, we certainly open and available to acquisition opportunities, but I think we're probably more focused on the organic growth.

Okay, and going along with the organic growth, obviously in the soft market organic growths may give some people some pause, wondering how you are getting the growth, so can you go into how are you writing this business and why we should be comfortable that it's going to perform well as expected?

Bob, it's Mike. Good morning. I'll actually take that question.

Yes, first of all on that front, a lot of our growth has come from geographic expansion in Southeast, Midwest, and more recently in Tennessee, and Western Pennsylvania, and the performance on these books of business since we started those initiative has been very solid and are meeting our loss ratio objectives.

We are really selective on the underwriting side; we declined 6 out or 10 accounts that are submitted to the Company. I think our agents have a good understanding of what we're looking from a risk-quality standpoint and will remain disciplined on the underwriting side. And overall exclusive of some severity we had in the third quarter, the book has really continued to perform as expected.

Okay, and I assume the tail in this business is similar to your core Pennsylvania book?

That's correct.

Okay. And do you have any idea who you are taking this business from generally?

Bob, its various competitors from different geographic territories.

Okay.

Look Bob, we are starting to see a little pullback from some of the package carriers that as you know in the soft cycle tend to become interested in the workers compensation line. And we are seeing a little pullback in their appetite for workers comp.

As you might expect with the rest of the industry reporting results of anywhere from a 110 to 120 combined, I would hope to they'd start revisiting those issues and we think we are going to continue to be strong relative to that kind of industry-wide performance.

Okay. And one last question for me before I re-queue, you spoke a couple of times about more favorable reinsurance terms, can explain what the new terms are?

The new terms, Bob -- it's Kevin -- were effective May 1 and just in terms of looking at the change in the gross rate from May 1 of this year prospectively for the contract year, it's a saving to the Company of about $650,000 to $700,000 on a contract year basis, pre-tax.

Okay, and then any change in coverage?

The coverage is exactly the same as it's been, and as we've disclosed in our SEC filings.

Great. Thank you.

Bijan Moazami, FBR Capital Markets.

Good morning, everyone. Just a very question on the capitalization, what is your BCAR ratio right now, and what do you need to maintain your rating from your conversation with the rating agencies, and what kind of a dividend paying ability you have from the [cells] back to the Parent?

Sure, I'll take that. Bijan, it's Kevin. The BCAR score is right around the 240 range. In terms of maintaining an A rating that they can range anywhere from 185 upwards to something greater than 240.

We continue to be comfortable with net written premium-to-surplus ratios in the 1.25 to 1.5 range, and I have discussed those type of things with A.M. Best.

So I think if you were to look at the dividend-paying ability from the subsidiaries up, and if you were to use a rolling 12-month net written premium production number, I would use a 125 net written premium-to-surplus ratio, and comparing that to our GAAP equity we certainly have $10 million to $15 million in our workers' comp companies. We've got money down in the specialty reinsurance company, and of course right now we've got about $25 million still sitting at our holding company.

When was the last time you guys had a conversation with A.M. Best, and are they allowing you to take money out?

We have -- we're in constant communication with A.M. Best on different things. They have allowed us to take money out in past, as they did in the first quarter of 2009 after the specialty reinsurance charge. Because of the money at the holding company we have not had to have any recent conversations with them further about taking money out because we've got the $24 million sitting at the holding company.

Okay. And if you guys get rid of that specialty reinsurance segment, how much capital would that free up?

It's tough to say at this point in time until we'd get final terms on some sort of a deal, to be able to understand what the deal proceeds are going to be versus what we have done there, but I will say that our expectation is it will free up some capital down there.

Okay. Also, you guys talked a little bit in the press release about the severity of the claims and the main reason for increasing the accident-year loss ratio. Could you expand a little bit on the frequency and exactly is it State-specific, is it across the entire workers comp book that you have?

Yes, the severity -- the frequency of claims has been relatively consistent on our book of business over the last five years, Bijan. The severity of claims, just to comment on those, we had that -- from a geographical perspective, we had two in the Midwest, and we had three in our mid-Atlantic region. Basically as you compare 9/30/2010 results to August 30, 2009 we had five incurred losses above $300,000. Three of those were into the reinsurance retention, compared to only one in through the third quarter of 2009 in our traditional workers comp book.

You know, importantly, our book of business has not changed from a hazard group perspective; if anything it's less hazardous by a couple of points due our healthcare writings to date. And we didn't indicate in the press release, there are two of the claims, there is potential availability of subrogation on those as well.

Okay. And then finally, could you talk a little bit about that program that you put together in the Segregate Portfolio Cell?

Sure, it's in an agency captive program, a Segregated Portfolio Cell program with representation from an agency consortium across all of our operating territories. And it was effective September 1 and we're projecting very solid production in that particular cell over the next 12 months; we started with about 100,000 in new production in the first month.

Thank you.

[Bill Rummel], Macquarie.

Great. Thank you very much. Just going back to the severity and the increase in your accident-year loss ratio, was that -- I understand now from the geography why the severities are going up, but the increase in the accident-year loss ratio, is that more a function of what happened in this quarter, or has it been a trend over the year to date, I guess?

Bill, it's Kevin. It is certainly based on circumstances that took place in the third quarter.

Okay, perfect. And then on the audit premium -- that was a big swing, how should we book at that and maybe going forward?

Here is what I would tell you. It was negative for the first six months of the year. It was positive in the third-quarter and for all three months, but I by no means think three months of positive for one quarter, is indicative of a specific trend moving forward. And given the economic circumstances that we are in, I think it's pretty difficult to say that it's going to continue to be positive based on what we saw just for one quarter.

Okay, great. Thanks. And then just my last one on the specialty reinsurance, I know you're still looking. Is it more -- have you received any interest and its more function of maybe price is a little bit different, or has there not been a lot of interest from outside parties for that business?

No, there is a market for this Company and we are being conservative about pursuing those opportunities but there is a market there, and we are diligently pursuing it.

Great. Thank you very much.

(Operator Instructions). Bob Schwerin, Schwerin Boyle Capital Management.

Most of my questions have been answered, but one last question. Kevin, what's the fully diluted tangible book?

Fully diluted tangible book, Bob, is $14.79.

Thank you.

Sam Kidston, North and Webster.

Hey guys, just going to get on and ask my questions that I've been asking since the day you went public. Number one is, obviously good buyback activities this quarter, but if you could just talk about your view on the buyback going forward here?

Yes, Sam. We've been very pleased with the pickup to our book value from the buybacks, I think we'd picked up $0.08 in the quarter and I think something like $0.25 year to date. We still have availability of about $4.5 million, I think, on our repurchase authorization from the Board. So when we're able to buy, we certainly intend to do so, and at the current share price we'd like to buy everything we can, frankly.

Great. And then any thought to any sort of an accelerated buyback, maybe a Dutch auction or anything like that?

Well I know you have asked that in the past.

We look at our capital position every quarter. I guess my preference -- and I think a good many people on the Board would still prefer to use the capital to repurchase shares.

I will say that also that our organic growth strategies do have us starting to eat into that excess capital, Sam, and hopefully I think we are nearing the end of the soft cycle. And if we get some rate increases in '11 and we start seeing some payroll exposure pickups, I really think we'll start to use up that excess capital rather nicely in the next couple of years. So we'll keep looking at it as we do, but those would be my thoughts on the use of capital at the moment.

And Kevin, what is the excess capital position?

We are still in the $3 to $5-a-share range. Although in the last three months just with organic growth, we've -- my number's come down about $0.50. So if you are at $0.5 at the upper end, you'd be at $4.50 right now.

And then I think you've talked just very briefly earlier about M&A versus organic growth. I mean now that you're really focused just on workers comp, is there a shift now more towards organic growth from M&A, or are you still active in that market?

We are still active in the market, but you've heard my comments. I just -- given our conservative nature I suspect -- and we have looked at some opportunities and we're just a little concerned about the state of the balance sheets of some of those companies. So I think realistically in the near term -- well, as I've said, while we are open to looking at opportunities, I think realistically we would focus on the organic growth.

Where we are seeing, as Mike described, we really couldn't be more pleased with our geographic expansion and our appointment of new but very good, select, professional agencies that we're really early on getting very, very nice submission activity from.

Okay. And then I didn't hear much of an update on the runoff book, could you just give us an update on some of the key statistics there?

Sam, it's Kevin. We did receive the most recent bordereau information from the primary insurance company. We went through every single claim and how that claim changed during the quarter, and we compared that information to the claim audit that we had talked about last quarter that we had performed. And all of the changes that took place in the quarter were within the realm of what we had come up with from a claim audit perspective.

There were a few claim closures, probably about fifty during the quarter, so we were pleased to see that. So it was business as usual this quarter in terms of the runoff.

And what are the open claims there?

Just bear with me, it's right around 500. 550.

Okay, great. I will go back into the queue. Thanks, guys.

Thank you.

Thank you.

Brant Root, Firethorn Capital.

Hi, good morning. Just want to know, you guys have a current duration of your bond portfolio?

The bond portfolio duration in our workers comp segment is about 2.7 years.

You know what it was -- roughly what it was last year?

Right about the same. Because we settle claims quicker, I think you'll see -- a lot of workers comp companies will have durations of four to five years -- because we settle claims quicker and we are at 96% to ultimate, two years after the end of an accident year, our duration tends to be into 2.5 to 3 range pretty consistently, Brant.

Okay, thanks.

(Operator Instructions). And at this time I'm showing no additional questions. I would like to turn the conference call back over to management for any closing remarks.

Well, thank you all for being on our call. And I wish you a great end to your years and a happy Thanksgiving and a good holiday season. We look forward to talking to you in the New Year. Thank you.

The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your telephone lines. (Operator Instructions).