ProAssurance Corp (PRA) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to today's ProAssurance First Quarter 2011 Conference Call. As a reminder, today's conference is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Frank O'Neil. Please go ahead, sir.

Thank you, Alan. And good morning, everyone. Thanks for joining us. We'll discuss our first quarter 2011 results after I handle a big of legal housekeeping here.

On Wednesday May 4, 2011, we reported our results for first quarter of 2011 in a news release and an 8K along with our SEC filings, including the 10Q. These documents provide you important detailed information about the Company as well as some disclosures regarding forward-looking statements.

We are explicitly identifying statements we make today dealing with projections, estimates, and expectations as forward-looking statements subject to various risks. This is especially true for any discussion of our transaction with American Physician Service Group. These risks could cause our actual results to differ materially from current projections or expectations. Except as required by law or regulation we will not undertake and expressly disclaim any obligation to update or alter information we disclose as a result of these forward-looking statements.

I also want you to know that the content of this call is accurate only on Thursday, May 5, 2011. If you are reading a transcript of this call, please note we did not authorize it nor have we reviewed it for accuracy. Thus, it may contain factual or transcription errors that could materially alter the intent or meaning of our statements.

One final reminder, we're going to reference non-GAAP items in our call today. Please refer to our recent filing on form 10Q and our recent news release for a reconciliation of these non-GAAP numbers to their GAAP counterparts.

Commenting on today's call will be our Chairman and CEO, Stan Starnes, our President, Vic Adamo, Chief Financial Officer, Ned Rand, and our Chief Underwriting Officer and Actuary, Howard Friedman.

Stan, will you start things off?

Thank you, Frank.Before We begin I want to take an opportunity to thank everyone who has called to check on the safety of our employees after the tragic tornado outbreak of last week. None of our employees suffered serious injuries although several did lose close relatives in the storms and sadly as the recovery effort continues, it is expect that even more deaths will be announced. A few of our employees did sustain significant property damage which is not surprising given the widespread devastation in Northern and Central Alabama. The havoc that is wreaked by even a 30 second exposure to storms of this size is beyond imagination. A lot of lives have been changed and changed forever. Our thoughts and prayers are with the tens of thousands of people effected by storms here in Alabama and through the Southeast.

Turning our attention to the quarter, I'm pleased to report that we continue to produce solid results by being very disciplined in executing the strategy that emphasizes sustained long-term growth designed to build financial strength so that we're able to respond to the challenges and opportunities presented by the evolving world of healthcare while continuing to deliver value for our shareholders. Frank?

Thanks, Stan. Ned? Would you take a minute to review financial results for the quarter?

Happy to, Frank. Gross written premium was $161 million, a 2% increase over the first quarter of 2010. Our increased top line is a direct result of our acquisition of American Physician Services which added $20 million in new premiums in Texas, Arkansas, and Oklahoma, markets we find very attractive. That $20 million of well underwritten business more than offset the decline in our non-APS business, a decline primarily due to lower rates which reflect the improved loss trends of the past few years and the current competitive market. Net premiums earned increased 7% year over year to $132 million in the quarter. The low interest rate environment continues to provide a challenge for all insurers and we are no exception. Net investment income the first quarter of 2011 was $36 million, down 4% compared to the first quarter of last year. Our net investment result which is net investment income and any earnings or losses in our unconsolidated subsidiaries was down $6 million or 14% year over year. There are several components to our portfolio that produced this result. As we had mentioned previously, we see a real opportunity in federal income tax credits. However, these credits have a negative effect on investment income. This quarter that negative effect was $1.1 million. That is more than offset by the favorable effect the tax credits have on our current tax liability which was a benefit of $1.3 million in this quarter. And keep in mind this is essentially an after-tax number.

In addition to this change, we liquidated one of the investments in this category during 2010. So, we do not have a comparable return this quarter. During the first quarter of 2010 that investment had a positive return of $1.9 million. We have mentioned in the past that these investments tend to be more volatile and with the addition of the tax credits, a bit more complex. Total expenses were down 3% due to the effect of net favorable reserve development. Net underwriting expenses were higher by 14%, primarily due to the addition of expenses attributable to APS which are not in last year's comparable number. Absent the addition of APS our underwriting expenses would've been essentially unchanged. Net favorable loss reserve development was $40 million in the quarter, compared to $25 million last year. Howard will be going into more detail on this shortly.

Operating income for the quarter was $45 million or $1.46 per diluted share compared to $40 million or $1.21 per diluted share in Q1 of 2010. Net income was $48 million for the quarter which is $1.55 per diluted share. Our share repurchase in the quarter was 259,000 shares at a cost of $15 million leaving us with about $194 million in the Board authorization from November 2010. We continue to evaluate the most effective use of our capital to enhance shareholder value and we are considering all of the viable alternatives given the often conflicting demands of the rating agencies and shareholders. In the end, we believe that our ability to consistently grow book value, our ability to put capital to work in effective M&A, and our willingness to buy our shares in the open market has been the right balance. We are continually considering all meaningful alternatives of capital deployment.

Book value was up 2% in the quarter and is now $61.64. Compounded annual growth rate and book per share is over 16% since inception. Our tangible book value per share is $54.49, a 2.5% increase over yearend and finally, return on equity on an annualized basis was 10.2%, an improvement of almost 1.5 points over last year's first quarter.

Frank?

Thanks, Ned. Howard, I know you have some comments to make on development and on the loss and rate climate in general?

Thanks, Frank, just a couple of additional comments on the net favorable reserve development in the quarter which is principally due to accident years 2004 to 2008 in our non-APS business. Approximately $5 million of the development is from APS, principally for the 2010 accident year. That's based on first quarter 2011 claims activity which indicated that claims severity had declined below our December 31, 2010 estimates. I want to reiterate that we continue to reserve today in the same manner that we have for years. So, it's to protect our policy holders and the Company from the kind of sudden change in loss trends that has occurred regularly in our industry.

Addressing current loss trends the overall frequency trend is flat as it has been since approximately the end of 2008 and we see no change in the manageable long-term trend in severity up about 4% annually. Rate levels reflect the continued averaging of these loss trends into our rate making process. Overall pricing on renewing business was down about 4% in the quarter compared to a 1% overall decline in average pricing on renewals in the first quarter of 2010.

Let me go into a bit of detail on that 4% decline in pricing on renewal business and use that as an example of rates reflecting loss trends. In November we implemented a 14% overall rate reduction in Ohio, the result of several years of improving loss trend. Ohio is one of our largest states and makes up a large portion of our first quarter premium. Thus, there was an amplified effect on overall renewal pricing. We see no major changes ahead as we evaluate rate adequacy. Recent filings have been in the low single digits with few exceptions. Some have been adjusting upwards, some downward, and I believe that will remain the case for the year absent some major change in the loss climate. Our retention rate in the quarter was 90% which means we renewed 90% of our expiring premium, a point better than last year's first quarter. The market remains competitive as Ned has already mentioned but I say we see no notable changes in behavior or market entrants.

I will reiterate Ned's point about new business. With the APS transaction we were able to grow our top line which we believe will also enhance the bottom line as the business written this quarter matures. Outside of APS we wrote about $5 million of new premium in the quarter.

Thanks, Howard. Stan? Any final comments before we take questions?

Frank, I think the solid results speak for themselves. We have been very transparent in our statements about how we will approach this business, doing everything we can to grow the business while protecting a pristine balance sheet to ensure future success. The transition at APS is going well. There's nothing unexpected there and we're very encouraged with the excitement our agents are showing with regard to new initiatives for growth in the APS markets. We bring some capabilities with hospitals and other alternative risk programs that are not available from other leading carriers in Texas and we think those will help drive growth.

On the subject of new initiatives I can now report widespread acceptance of our new pilot program with Ascension Healthcare in Michigan. We've written the vast majority of the physicians formerly insured under the Ascension insurance plan which is now terminated. The new joint program kicked off on April 1 and our preliminary estimate is that we've written approximately $5 million of premium. About a quarter of this is on a first year claims made basis so there is built in growth on premium volume over the next several years. Our next step is to broaden our jointly marketed program to include other Michigan physicians who practice in Ascension hospitals but were not previously insured by the Ascension program. As a result of our agreements with Ascension we will reinsure a portion of this business with Ascension's [captive] so you will likely see [c degree] insurance increase when we report second quarter results.

Remember, this is a pilot program. The real payoff will come as we demonstrate our abilities to Ascension and their physicians and hopefully begin to move out of Michigan. In fact, we've been meeting with the Ascension executives in Birmingham yesterday and today about this project. I would like to personally and publically thank them for their confidence in ProAssurance and their assistance in getting this program off the ground in such a dynamic fashion.

April 1 also kicked off another new program, one targeted at obstetrical physicians in carefully selected states using a select group of agents. One of the founding executives of mutual assurance, one of the historical antecedents of today's ProAssurance, is leading that program. His name is Dow Walker, a name you may recognize from his days as the practice leader for MPO reinsurance at Willis for two decade. We're delighted to welcome Dow back to the family.

Frank?

Thank you, Stan. Alan, if you'll open the line for questions, we'd be glad to answer those at this time.

Certainly, sir. (Operator Instructions) We'll take our first question from Amit Kumar at Macquarie.

Thanks and good morning and congrats on another strong quarter. Just going back on the topic of capital management and you said you were looking at all options, recently you also had a new credit facility of I think $150 million. Can you sort of refresh us on your thoughts on your premium to equity ratios, your excess capacity, and how do you feel about a special dividend? Do you think it's a compelling time to revisit that or is that at some point forward? Thanks.

Hi, Amit. It's Ned. We did put a $150 million credit facility in place. We have had liquidity facilities available at our insurance subsidiaries for quite a while. We've never had what I would call a liquidity facility available at the holding Company and that credit facility would just gives us a lot more flexibility to implement whatever capital management measures we do put into place.

From a premium to surplus ratio, I think if you look back at us and at the industry historically, we've written as high as a 1.1, 1.2 to one. I think in today's environment with where the rating agencies are, that would be very difficult to do. I think we can write it at 0.9 to one or close to one to one, recognizing that we couldn't get there overnight. The rating agencies don't like sudden changes. We do have a lot of capacity in the system. I think at the end of the quarter we had just north of $1.4 billion in capital in our statutory companies. So, we do have a lot of capacity there.

In regards to special dividend, I think what I said in my comments is we do regularly evaluate all alternatives and certainly special dividend is an alternative that we look t. I don't know that we have any comment on that in particular as of right now but it certainly is in the mix of what we'd consider.

Okay. That's helpful. The only other question I had for now was on the rate outlook. Rates were down 4% and I know we've discussed the cumulative rate change which is still up 136%. So, it's still good. Do you expect additional pressure on rates going forward just based on the profitability of the market? Or do you think you're closer to the bottom? Is there a lot more pressure based on the competition out there? Thanks.

Hi, Amit. It's Howard. It's certainly competitive out there. I wouldn't say the pressure is resulting from the competition mentioned in the earlier remarks. A big part of the renewal reduction this quarter was actually our own proactive action to reduce rates in a state where we felt that the loss experience clearly justified it after a long period of time. So, while it's competitive I would say that's not driving what we're doing. What we're always focused on is what makes sense in the pricing and that's what we're going to continue to do. If you look back over the last few quarters you see that our changes were much closer to actually renewing as expiring and I wouldn't be surprised if as we moved through the year that it continues in that vein. But as we do different rate reviews and we see indications we take them up or down.

Got it. Just to the last question, I was going through an older transcript, can you remind me what have you said about your buyback and up to what multiples of book you'd be [okay]? What's sort of the threshold in terms of the buyback at a premium to book?

I don't think we put a threshold out there. What we have said in the past and continues to be the thought process that we go through, if it's below book value, we'll be aggressive buyers of our stock. That's stated book, not tangible book, but stated book is kind of the benchmark there. Above stated book value, a lot of factors come into play -- competing uses of capital, our outlook for growth in book value, and our perception of our ability to replace that capital in the market if we needed to.

Got it. Thanks for the answers and congrats on the results.

Next we'll go to Matt Rohrmannwith KBW.

Gentlemen, good morning. Just had a couple questions on changes in torte reform. There's been some discussion, seen some headlines regarding some bills in Florida and Tennessee. I'd love to hear your thoughts. Do you think any of those have real momentum to go somewhere?

Matt, this is Vic Adamo. I think as a general statement we're encouraged that there's a good torte reform dialog out there in the states and at the federal level. That's unique because usually when the market is softer as it is now, those die away and come back in the hard markets. So, we're very encouraged to see the torte reform dialog going on and it's certainly needed in an era of healthcare cost containment.

Having said that, none of our key states except for Florida are really involved in activity at the moment. The Florida legislature yesterday passed a bill that makes minor changes but nothing that's really going to move the needle for us. The governor is expected to sign it but it requires out of state doctors to apply for a certificate to testify in malpractice cases in Florida and the state will have the right to discipline them if they're found to have offered deceptive or fraudulent testimony. The bill also gives certain exemptions from physicians liability for treating high school students and college athletes in sports activities. So, again, we're pleased to see that there's momentum for torte reform but specifically there's nothing changing the needle for us at the moment.

Great. Thanks, Vic. And then also just on the new business that you guys brought in, was that primarily Texas or any other states that stand out there?

I think it's distributed across the board, Matt. No states I would say particularly stand out in that number.

Great. Thanks very much, guys.

(Operator Instructions) We'll take our next question from Jack Sherck at SunTrust.

Thank you very much. Going back to Ohio, what percentage of your book premium does Ohio currently represent?

In total, it's about 10% on an annual basis.

Great. That was the only question I had. Thank you very much.

(Operator Instructions) We'll take our next question from Beth Malone at Wunderlich Securities.

Thank you. Good morning. A couple questions. On the Ascension relationship, is that a model that you anticipate you can duplicate with other hospital programs? Or was that a unique kind of situation?

Beth, it's Stan. We sort of regard each opportunity as unique and evaluate it on itself. I think speaking generally the evolving world of healthcare will present companies with challenges and opportunities in conjunction with hospitals. I think in order to meet those challenges and take advantage of those opportunities, the underwriter has to be of sufficient mass, weight, size, and have sufficient ratings to enable it to perform in that arena. As you know and we've talked about on other calls, we've developed products which appeal across the spectrum to the different needs of different size hospitals. I don't think you can say we can take exactly what we've done with Ascension and put it in place somewhere else because Ascension is a very unique opportunity. I do think that we will have other opportunities with other hospitals to explore arrangements for the provision of professional liability coverage to the physicians on their staffs.

Does your assessment that it's going to take more capital and more resources in the future to compete, does that lead into the possibility of more consolidation among the smaller mutuals as the circumstances continue?

I think that depends on the outlook of the mutual. I think it will in some states present opportunities to partner with the mutuals. I think in other states the mutual may simply retract and say even though our market universe has been diminished, we're going to stay here and continue to provide coverage for the physicians in the state who remain in private practice. I think it will be highly variable state to state. I think overall the changes that are coming will present additional partnership opportunities for smaller carriers larger carriers like ProAssurance.

Just the healthcare reform act, where do you think that stands? Is that starting to have more of an impact on decision making in the industry?

I think it's easier to say that the evolution that will take place in the next number of years in healthcare will have a clear impact on the industry. I'd be a little more reluctant to attribute it to any one piece of legislation or change but healthcare in this country has to change. We cannot afford the system as it exists and it cannot sustain itself. As those changes take place, they will create opportunities and challenges for everybody in the industry. And we spend a lot of time here at ProAssurance thinking and talking about what those changes might look like, what those opportunities might look like and how we might best respond to the challenges. But I think the world of healthcare is going to change more in the next ten than it has in the last 50.

Okay. And could you give us an update? Florida? Does that remain one of the more challenging states in terms of legislation and environment?

We look at every state differently. We say if you're in 50 states, you're in 50 different businesses in medical professional liability. Florida is a unique state. It has a set of challenges that different from those presented by most states. Our job is to try to provide products that protect our shareholders and we have to accommodate ourselves to the way a particular state wants its judicial system to look like it might not be the system I would devise but it's the system the people of Florida apparently want and they're entitled to that and we'll accommodate that.

Okay. Finally on the Texas acquisition, have you found that -- it sounds like you've -- there haven't been any real challenges on renewals. Do you see any new competition hoping to displace ProAssurance as the new insurer?

There's competition in every state. Clearly when you increase your presence in the state as we have in Texas, it presents opportunities for others to come in and seek to displace you. And that happens in every state, everywhere we go. But the important thing I think is that we don't take any renewal for granted. It's an opportunity for us to have an encounter with our insureds and we think those opportunities benefit us in a lot of different ways. We don't renew every policy that comes along and I'll remind you that our retention number is a very pure number. It's all expiring premium even including premium that is not available for renewal such as that premium attributable to the physician that's died or retired. We don't take any renewal for granted. We work on each one of them and we know we're going to get competition in every state for every renewal.

Okay. Thank you.

Thank you.

(Operator Instructions) We'll take a follow-up question from Amit Kumar at Macquarie.

Thanks. One quick follow-up. Obviously there's been this great debate on reinsurance rates and how things will change going forward. Your reinsurance program renews at October 1. I'm just wondering either do you expect any changes in that program and also do you expect any changes in the rates? That's the only question. Thanks.

Amit, it's Howard. We were actually in the early stages now of working on the reinsurance renewal. As you pointed out, it's an October 1 anniversary date. So, at this point in time we're evaluating. We're not necessarily looking to make any significant changes in the structure of our program but as we talk to reinsurers over the next two or three months, we'll see if there's anything there that is so-called new in the market that would provide us an opportunities and at the same time we'll be getting their feedback in terms of how they view our program and how they view the industry. Right now I think our opinion is that there is no significant change taking place either in the availability or the interest on the part of the reinsurers and medical professional liability. While there's been a lot of property loss activity around the world and here in the US, at least at this point the general consensus in the industry is that it's an earnings event, not a capital impairment event and therefore we currently don't see a ripple effect. Of course we'll see what the summer storm season brings.

Got it. Thanks for the clarification. That's it. Thank you.

We do have one question remaining. We'll take that question from Howard Flinker at Flinker and Company.

Hello, everybody.

Good morning, Howie.

I have a technical question that's going educate me. On your balance sheet your small amount of long-term debt on the books is $51 million. But the verbiage next to it says $15.6 million at fair value. What is that?

Howie, this is Ned. There is a component of our debt that is carried at fair value and a component that's carried at amortized cost and I'm sorry, if you look at the total caption under long-term debt, if we're looking at the current quarter, there's $35,494,000 that's carried at amortized cost and $15,555,000 that's carried at fair value.

Yes. I know. You put the two together you get $51.049 million.

Yes. When we acquired our PICA subsidiary, they had some outstanding debt and they also had an interest rate swap in place. From an accounting perspective we thought it was important to match those two together and how we accounted for them and when you acquire a new asset or liability you have the option of fair valuing it. So, we had the option at that time of fair valuing the debt associated with that PICA debt and since there was the interest rate swap that existed which we were going to have to fair value regardless, we made the decision to fair value the PICA debt and that interest rate swap together. That's why a component of our debt is carried at fair value.

Now is the interest rate swap debited on the liability side of the balance sheet or is it some kind of separate essay?

It's another. It shows up as other liability. Right now it's in a credit position. So, it shows up as other liabilities. Were it ever to be in a debit position or to our benefit it would show up in other assets.

I see. Okay. Thanks, guys.

(Operator Instructions) And there are no questions at this time. Mr. O'Neil I'd like to turn the call back over to you for any additional or closing remarks.

Thank you, Alan. And we will speak to everybody in early August. Enjoy your summer.

That does conclude today's conference. We thank everyone for their participation.