ProAssurance Corp (PRA) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to today's ProAssurance first quarter 2012 earnings conference call. As a reminder, today's conference is being recorded. At this time I would like to turn the conference over to Mr. Frank O'Neil. Please go ahead, sir.

Thank you, Mindy. Good morning, everyone. Thanks for joining us as we discuss our first quarter 2012 results. Please bear with me for just a second while I handle some of our important legal statements. On Monday, May 7, 2012, we issued a news release and filed an 8-K reporting our results for the quarter ended March 31, 2012, along with our SEC filings including the 10-Q, which we also filed on Monday the 7th. These documents provide you important detailed information about our Company and our industry.

These documents discuss in detail many important factors that could affect the outcome of future events and thus could cause our actual results to differ materially from current projections or expectations. Please read and understand these cautions and be aware that statements we make on this call dealing with projections, estimates and expectations are explicitly identified as forward-looking statements subject to these and other risks. Except as required by law or regulation, we will not undertake and in fact expressly disclaim any obligation to update or alter information disclosed as part of these forward-looking statements.

The content of this call is accurate only on Tuesday, May 8, 2012. We do not authorize or review any transcripts you may obtain, so please know that transcripts may contain factual or are transcription errors that could materially alter the intent or meaning of our statements. One final reminder, we are going to reference non-GAAP items in our call today. Please refer to our recent filing on Form 10-Q and our recent news release for a reconciliation of these non-GAAP numbers to their GAAP counterparts.

Participating in today's call are our Chairman and CEO Stan Starnes, Chief Financial Officer Ned Rand, and Howard Friedman, our Chief Underwriting Officer and Actuary. Vic Adamo is away representing ProAssurance at an industry conference, so we are going to start with Stan for a few opening remarks.

Thanks, Frank. The first quarter of 2012 was another solid quarter for ProAssurance. When you combine our long-term focus on building financial strength and protecting our policyholders with our ability to leverage that financial strength and our insurance expertise, the results are quite positive.

In short, we are benefiting today from our past discipline and execution, as well as paying attention today to the details that produce excellence in service and financial results. In the quarter, our top line increased as we added new business and retained more than 90% of our expiring premium. Book value per share continued its steady increase, and we generated a bottom line result we are very pleased to report to you today. Frank?

Thanks, Stan. Now, let's turn to Ned and Howard to kick it off.

(Inaudible -- technical difficulties) quarter over quarter to $170 million an increase of $10 million. I think it is worth noting that approximately $1.2 million of that increase was in hospitals, lawyers professional, and in our excess and surplus lines. Three areas in which we continue to leverage our expertise in responding to the unique insurance challenges of those markets. The remainder of the increase was due to reporting endorsement coverage. Howard, can you give us greater detail on these policies?

Sure, Ned. We continue to see consolidation in the healthcare market, ranging from hospitals merging or acquiring physician groups to medical practices combining into large independent multispecialty clinics. While this consolidation sometimes results in the loss of policyholders, it also presents new opportunities for us. Of the $8 million in tail coverage, $6.2 million was a reporting endorsement written for a hospital that was terminating its self-insurance arrangements as it merged into another hospital.

Situations such as this are not all that common but will likely arise more frequently as healthcare organizations come together or seek to wind down their captives to self-insurance trust funds to free trapped capital. It is going to be sporadic, and while there will be lots of competition for that business, we believe our claims handling expertise and our ability to understand large complex risks makes it a natural market for us.

Thanks, Howard. One other quick note. Premiums from these reporting endorsements were fully earned during the quarter. Be mindful of the sporadic nature of the policies as you refine your model for future quarters.

Moving on to another key item. We recognized $48 million in net favorable loss reserve development in the quarter, an increase of $8 million over the same period last year. Howard, can you provide some color on the favorable developments?

Sure, we continue to see loss severity at levels below those which were expected when we established our reserves, and this led to the favorable development, which was primarily from accident years 2004 through 2009. While we are pleased with the outcomes that result from the current loss environment, we are also mindful of the painful lessons of the early 2000s when we saw industry-wide loss ratios above 100%. That is why we are so focused on prudent underwriting and appropriate reserving that reflects our view of the historical volatility in medical professional liability.

Looking forward, we are still cautious given the picture painted by 35 years of MPL data, and we are just as careful in considering today's evolving loss environment as we set 2012 accident year loss [fix]. Ned?

Thanks again, Howard. Let me cover a few other items. Our net investment result continues to reflect the low interest rate environment, although the quarter over quarter decrease is not as large as the decrease from 2010 to 2011, because we have had interest rates at this level for some time now. The primary component of our net investment result is net investment income, which was $33.5 million in the quarter, down 7% over last year's first quarter.

The other component is our earnings or losses from unconsolidated subsidiaries. We had a loss of $2 million, primarily the result of the amortization of tax credit limited partnerships. As we have discussed before, these losses are expected and more than offset by a reduction in our federal tax liability. Expenses were essentially level quarter over quarter.

Operating income was up 7% to $48.2 million or $1.56 per diluted share. Net income was $55.6 million, or $1.80 per diluted share. Return on equity, which we calculate by dividing annualized net income by the average of beginning and ending shareholders' equity, was 10.2%, unchanged from last year's first quarter. Book value per share continued to increase, as Stan mentioned, and now stands at $72.33. Tangible book value is $65.41 per share.

And I want to highlight another milestone. Our total assets have now topped $5 billion for the first time in our history. Frank?

Thanks, Ned. One more time to Howard for a little commentary on trends and general business. Howard?

This won't take too long, Frank, because we have seen no change in overall trends. Frequency is flat, as it has been for the past three and a half years. And as I mentioned earlier, the rise in severity is coming in around 3% or 4%, which is below our prior expectations. Average renewal pricing was unchanged quarter over quarter, and we retained 92% of renewing premium in our physician MPL book of business. That is two points higher than the same quarter a year ago.

Here is what we read into it that. We believe it says that even in this time of intense competition for new business, our insureds find value in a ProAssurance policy because they recognize that the superior product we provide is unlike that provided by our lower priced competitors.

Thanks, Howard. Just a word on the tort climate or legal and legislative fronts. There has been no real change. We are still expecting a ruling this year from the Florida Supreme Court on that state's tort reforms, but no new challenges have been launched. Legislatively there is no definitive state action to report.

From Washington, we can report the passage of H.R. 5 by the House of Representatives. That was in late March. That bill consists of a number of reforms patterned after California's effective Supreme Court tested and decades old tort reform package. That legislation is now in front of the Senate, where we believe it will likely be defeated as it has been in past Senate votes.

Stan, final thoughts before we take questions?

Frank, I will highlight our continued progress with our Ascension program, now about a year old, in Michigan where our results continue to meet our expectations. We launched in Indiana late in the first quarter and have seen good results so far. The program has just launched in Florida, where Jacksonville and Pensacola are the ministry centers, and while it is too early to report results there, I am pleased with the reception which has been positive and that the ministry leaders are very supportive.

We expect to launch in Texas before the end of the second quarter. We continue to be excited about that relationship and a whole host of opportunities on the horizon, where our financial strength and operational expertise will stand us in good stead. Frank?

Thank you, Stan. Mindy, that concludes our prepared remarks. We are ready for questions.

Thank you. (Operator Instructions). We will take our first question from Mark Hughes from SunTrust.

Thank you very much. Your comment on severity, could you say that again? Was it a little lower than you had seen previously or increasing at about the same pace?

Mark, it is increasing at about the same pace. We have been saying 3% to 4% now for several quarters at least. So we really don't see much difference right now.

Okay. And then you may not be able to gauge this, but to what extent is healthcare reform driving the consolidation of the small doctor groups, the smaller practices? Has that been something that you have understood as been the catalyst for that? I guess I will throw out if reform is slowed or tossed out, do you think that influences the pace of consolidation?

No, I think the -- there are number of factors, the confluence of which are driving physicians at increasing numbers into hospitals or hospital affiliated groups. The Accountable Care Act and the uncertainty that it creates is certainly one of those factors. The demographics of medicine is changing. The bureaucratization of medicine is proceeding apace with lots of bureaucratic regulatory efforts that are coming at both the state and the federal level. All of these things serve to push a certain number of physicians and physician groups into larger and larger groups.

Now, the solo practitioners and the small groups are not going to disappear. They will always be a very, very important part of ProAssurance and our commitment to physicians. But the fact remains that an increasing number of physicians are moving into hospitals and hospital groups, and the Accountable Care Act is part of the reason for that.

Now, should the Supreme Court overturn the Accountable Care Act, I don't think you can turn back the clock. Healthcare in this country is on an unsustainable course in terms of the increase in the amount of our gross domestic product we are spending on healthcare, and there are changes that are going to continue regardless of whether the Accountable Care Act is upheld or it is not upheld. We simply cannot afford all the healthcare we are capable of delivering.

Great. Thank you.

We will go next to Ray Iardella from Macquarie.

Thanks, and good morning. A couple of quick ones I think, maybe for Howard or Ned. Can you talk about the accident year loss ratio in the first quarter, and maybe any uptick you might have seen from the tail policies or even the legal liabilities side?

Hi, Ray. Yes, the uptick in the quarter was primarily due to the tail coverage. We establish initial reserves for tail coverage at a higher expected loss level simply because it is permanent coverage, and it has a higher degree of risk variation to it because we are dealing with the unreported claims, not the typical claims made coverage where we know about the claims reported, we are just dealing with the amounts. So that is the reason for the increase in the loss ratio.

Okay. And then on the core, I guess medical professional liability book that you are writing, is that -- is the accident loss ratio somewhere around 85%? I believe that is what the Q I think pointed out?

Well, the core book -- yes, that would be about I think where we are. We're just checking it now to make sure we are all talking about the same thing, but that is about the rate that we have been running, 84%, 85%.

Okay. And then any noise in the quarters in terms of development from the lawyers' professional liability book?

No. No changes there.

Okay.

Just going back to that 86.1% in the Q. That does include the tail coverage in it. So it would have -- what I was saying before is that the 86.1% is higher than what we have had in several prior quarters, mainly because of the effect of that tail.

Okay. That's helpful. And then lastly maybe touching on capital management. Certainly, I wouldn't expect you guys to buy back shares at current valuation, but maybe you can talk about the dividend, and maybe talk about when does the Board discuss potential dividend increases? And I will requeue.

Hey, Ray, it's Ned. The Board looks at capital on a quarterly basis. We look at it a lot more frequently than that from a management perspective. Every quarter we have a discussion with the Board regarding capital, and that includes the dividend, and that is something that we will continue to do. I don't know that I can be more specific than that other than it is just an ongoing dialogue.

Any specific metrics you guys look at, payout ratio? Or is it just kind of how you think about the stability of the business?

There are a lot of different factor that's go on. We look at the dividend yield, we look at the payout ratio, we look at our projections of earnings, our projections of cash flows. A lot of different things go into it.

Okay. Thanks. I will requeue.

At this time there are no other questions. (Operator Instructions). We will go back to Ray Iardella from Macquarie.

That didn't take you long, did it?

That was pretty quick. Maybe just touching on the M&A environment. I know, Howard, you were -- I think you took part in a panel last week, and I think one of the commentaries was some of the smaller competitors may be at a disadvantage in the medical professional liability market. Maybe could you give us an update on what the M&A environment looks like right now?

I will go back to my comments from that, and maybe somebody else has comments is as well. The point I was trying to make in the A.M. Best call was that as the competition remains pretty intense in our marketplace, a number of the smaller companies due to the effective rate decreases and the loss environment, as well as competition itself, have continued to decline in premium. And one of the side effects of that, of course, is the higher and higher expense ratio and more difficulty in just providing the basic services that any one of our companies would try to provide.

So my point there was that as the market remains competitive there will be more pressure on some of the smaller competitors. They might be experiencing good results on the loss side, but just continue to shrink in terms of premium volume and may well be looking for consolidation opportunities. I wasn't pointing to anybody in particular or anything that we're specifically looking at.

Okay. Thanks for all your answers.

We will go next to Mark Hughes from SunTrust.

A question, what would be the highest underwriting leverage that you would be comfortable with at this point that would be consistent with your current ratings? How high could you go?

That's really, Mark, a better question for the rating agencies (laughter).

Since you guys [do] more than I do, I'll --

No, no, I'm just kidding. It as balancing act with the rating agencies. And one of the (inaudible) is -- with that question is it depends on how you get that growth. So I think realistically we could probably double the amount of premium we are writing and in a theoretical basis that should not jeopardize our ratings. However, if we were to actually double our writings, the rating agencies would probably react adversely to that, not because of the capital component, just -- but because of the growth and the quickness of that growth. So there are a lot of factors that go in, but from a pure leverage standpoint I think you could probably come close to doubling what we write.

Right. Now you were substantially higher than that in times past (multiple speakers).

In times past we have written in excess of one-to-one on a premium to surplus basis. I do not think that the rating agencies would allow us to maintain our ratings these days with those sorts of leverage.

Right. Okay, thank you.

And at this time there are no other questions.

Thank you, Mindy. We appreciate everyone's attention. We look forward to speaking with you in August when we report second quarter results.

This does conclude today's conference. We thank you for your participation.