ProAssurance Corp (PRA) 2014 Q1 法說會逐字稿

Good day and welcome to ProAssurance first-quarter conference call. 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.

Thank you, and good morning, everyone. Thanks for your interest and participation in our call to discuss ProAssurance's first quarter 2014 results. This is our first quarter of segment reporting and you will notice the news release we issued on May 6, 2014 provides un-audited holding company segment results. We provided the additional detail in the release in advance of our 10-Q which we expect to file tomorrow sometimes late in the day May 8 or early on Friday May 9.

These documents along with our latest SEC filings provides you with important information about the significant risks and other factors that could affect our business. Please read and understand these risk factors and be aware that statements we make on this call dealing with projections estimate and expectations are explicitly identified as forward-looking statements, subject to Safe Harbor protections reserved for these statements. Except as required by law or regulation, we will not undertake and expressly disclaim any obligation to update or alter information we disclosed as part of these forward-looking statements.

The content of this call is accurate only on May 7, 2014. If you are reading a transcript, please note that we have not reviewed it for accuracy thus it may contain errors that could materially alter the intent or meaning of our statements. We will be referencing non-GAAP items in our call today. Please refer to our recent news release for a reconciliation of these non-GAAP numbers to their GAAP counterparts.

We will be discussing consolidated Company results and results from four segments today. Specialty property and casualty or specialty PNC, essentially our business prior to January 1 of this year. Workers Compensation which is Eastern. Lloyds, which reflects the results from our investment in Syndicate 1729. And Corporate, which is basically our non insurance operation, such as our internal agency, our investments and taxes, excluding those related to Lloyd's. And as well our debt.

Participating in today's call are Howard Friedman, President of our Healthcare Professional Liability group; our Chief Financial Officer and Executive Vice President, Ned Rand; Mike Boguski, the President of Eastern Alliance Insurance group; and our Chairman and CEO, Stan Starnes who will start us off with some opening thoughts. Stan?

Thanks, Frank, and my thanks to everyone for joining us. With our transition to segment reporting, we are anticipating a number of questions so we'll keep our prepared remarks to a minimum. I will start by saying we are pleased with our overall results.

We added significantly to the top line through the addition of Eastern Alliance Insurance Group, which we will refer to as Eastern on this call. But more importantly, Eastern helped us maintain strong bottom-line results. Specialty PNC produced solid results in the face of a market that continues to be very competitive. And we continue to return capital to shareholders through share repurchases and dividends, all while growing book value for share. Frank?

Thank you, Stan. We will start first with Howard Friedman to touch on highlights and specialty PNC and Lloyd's. And then we will hear from Mike Boguski on workers comp, and Ned Rand will wrap up the discussion with remarks about our corporate segment and our consolidated results. First, Howard Friedman.

Thanks Frank. As in previous quarters, I can tell you that this is a highly competitive segment within all the lines of business. In Professional Liability lines, position business was approximately $111 million, a decline of about 10%. We did write $5 million of new physician business, and premium retention was 87%, level with the first quarter of 2013. Average physician renewal rates were 1 point lower than in 2013.

Premiums for professionals group into our other healthcare providers classification; mostly dentists, chiropractors, and allied health professionals, were $8.8 million, up 1.4% quarter over quarter. Premiums in our legal professional liability lines also increased to $8.8 million, up almost 9% with $1 million of new business and higher pricing on renewals. Premiums in Medical Technology and Life Sciences, the products liability line in this segment, were $7 million, a year-over-year increase of 17%.

Note that premiums for healthcare facilities were $10.8 million, up almost 6%. But that is mostly due to the timing of renewals. As we noted in the news release, loss trends remain unchanged overall. We make adjustments in our loss assumptions based on periodic actuarial evaluations but there were no major adjustments, up or down, that would signal a different loss environment.

That said we did see an increase in the current accident year net-loss ratio. This primarily reflects the effect of seeding a greater portion of our total premiums, a slightly higher accrual for internal claims adjustment expenses, and recognizing administrative claims defense costs on a quarterly basis rather than as part of the fourth quarter reserve review adjustment. An example of an administrative claim would be a billing dispute or regulatory investigation for which we provide limited defense-only coverage.

Next quarter will reflect the first session of premiums from our podiatric business to fulfill commitments we made to Lloyd's as part of the entry process. That will be $5 million for the quarter and you will see 58% of that premium come back to us through our Syndicate participation. Frank?

Thank you Howard, we will now bring in Mike Boguski to discuss the Workers Compensation line. Mike?

Thanks, Frank. All of us at Eastern are extremely pleased to join the ProAssurance organization. The first quarter was a solid start to 2014 for the Workers Compensation segment, and one in which I believe Eastern made a meaningful contribution to ProAssurance, both financially and operationally.

I was particularly pleased with the 2014 first-quarter calendar year combined ratio of 97.1%, which includes 2.9 percentage points of intangible assets amortization and 4.3 percentage points of one-time expenses, primarily related to ProAssurance's acquisition of Eastern. Workers Compensation gross written premium of $65.9 million for the quarter included $12 million of new business. We achieved 82% premium retention in our existing book, a bit lower than last year due to a variety of reasons including economic conditions, competitive pressures and absolute commitment to maintain our underwriting standards.

The Company benefited from premium renewal rate increases of 1.7%, and approximately $300,000 in audit premium. This is premium recognized as a result of auditing insured payrolls following the expiration of the policy. The Companies calendar year loss ratio was 62.8%, and includes a 2.9 percentage point reduction in prior accident-year reserves, primarily related to our alternative markets business.

We continue to be a shirttail writer of workers compensation insurance as evidenced by the fact that the Company has only 18 open claims in our traditional business, net of reinsurance for accident years 2007 and prior. The Company closed 14.8% of prior year open claims during the quarter.

The Workers Compensation expense ratio was 27.1% for the first quarter of 2014, excluding the impact of intangible asset amortization and certain one-time expenses. This was driven by solid growth in net earned premium and prudent expense management.

I would like to briefly review our alternative markets business and structure, which is provided through our wholly-owned Cayman Islands subsidiary, Eastern Re, a segregated portfolio sub Company. We offer alternative market Workers Compensation solutions to individual companies, groups, and associations which we refer to as segregated portfolio cell participants through the creation of segregated portfolio cells. The insurance coverage is underwritten through Eastern's domestic alternative market business unit and seeded 100% to the segregated portfolio cells at Eastern Re.

The pool of assets and associated liabilities of each segregated portfolio cell are solely for the benefit of the segregated portfolio cell participants of that individual cell. This segregated portfolio structure permits us to provide customers with a turnkey alternative market solution that includes program design, fronting, claims administration, risk management, segregated portfolio cell rental, asset management, and segregated portfolio management services. The segregated portfolio cell structure provides participants the opportunity to participate in the financial results derived from the respective segregated portfolio cells recognized as segregated portfolio cell dividend expense.

Eastern is a preferred shareholder in certain of the segregated portfolio cells. For those segregated portfolio cells in which we participate, Eastern shares in the financial results of those cells and recognizes its share of the segregated portfolio cell dividend. For the first quarter of 2014, we recorded a segregated portfolio cell dividend expense of approximately $1 million, which represents the expected dividend payout, less Eastern's ownership interest to those third-party segregated portfolio cell participants for the first quarter of 2014 financial results.

As both ProAssurance and Eastern expected, there is crossover product interest from healthcare entities in these segregated portfolio cell structures. For these healthcare customers, moving their medical professional liability exposure into a segregated portfolio cell provides them with greater control and access to the exceptional claims and risk-management resources of ProAssurance.

We are also seeing significant crossover interest from agent to represent Eastern in the especially P&C lines of ProAssurance. Based on pre-acquisition indications, we expected this to be a benefit of the transaction and we are pleased to see the cross-referral interest coming to fruition. In summary, we're pleased with the solid start in 2014 with respect to the Companies strategic business plan, which continues to focus on profitable organic growth initiatives and the ProAssurance Eastern integration. Frank?

Thank you, Mike. We are going to go to Ned after we circle back to Howard for a couple more remarks on the Lloyd's segment.

Thanks, Frank. Also, wanted to talk about what we're doing with our Certitude program and CAP MPT. Our Physician line continues to benefit from the Certitude program. We are already in eight states with Certitude and are on track to expand it into several more by year end.

On the subject of expansion, in the physician line we have now written our first non- podiatric physician business in New England as we continue expanding where we see opportunities to write profitably. This will add incremental premium in the segment.

Another risk sharing program that we believe holds great potential is our CAPAssurance program with CAP MPT based in California. We have now written our first hospital in CAPAssurance to go along with policies that target large physician groups, and certain non California opportunities that CAP MPT cannot accommodate.

There's not much to report this quarter on our Lloyd's segment. From an operational standpoint Syndicate 1729 began operations on January 1st as expected and is actively writing coverage.

We incurred $875,000 in expense related to the Syndicate start up in the quarter, and as we mentioned on last quarters call, we will be reporting operating results of our 58% participation in the Syndicate on a one quarter lag due to the timing of results being reported to us. One exception is that investment results from funds on deposit at Lloyd's will be reported on a current-quarter basis. These are the funds that secure our capital commitment to the Syndicate. Frank?

Thank you, Howard. Ned, if you will talk about corporate and consolidated results please.

Sure, Frank. Given the level of financial detail we provided in the news release, I'm going to concentrate on providing background information and I'm bringing together the information provided by Howard and Mike. We're certainly open to hearing from US to other information and discussion items we can provide to help you understand our segment-by-segment results.

Starting at the top of our consolidated results, the addition of Eastern to our group effective January 1 of this year was primarily responsible for the 34% increase in gross premiums written to $218 million. Eastern brought $66 million of new premiums to the group. $60 million on a net written basis.

And our specialty P&C line saw a year-over-year decline of about $11 million, with net written premium of $138 million. Howard mentioned several programs in which we are sharing risk with important business partners. This is increased seeded premiums within the specialty P&C over time. The shared risk programs accounted for $6.8 million of our seeded premiums in the quarter, with partners such as Ascension Health, CAP MPT, and one of our larger agent partners.

Our valuation and favorable development of past accident years produced a $3.7 million reduction of seeded premiums in the quarter on our swing rated reinsurance treaties, compared to a $4.8 million reduction in first quarter 2013. Our net investment result in the quarter was down slightly and there are a number of moving parts.

Investment income, which is largely derived from our fixed income portfolio was down, reflecting both lower average balances in the portfolio and the continuation of the low interest-rate environment. Our results from investment in unconsolidated subsidiaries swung from a small loss to $1.7 million gain, as the number of our private equity funds returned positive results in the quarter. The year-over-year decline in net realized investment gains is due to the significant increase in stock market valuations in the first quarter 2013.

Consolidated losses in the quarter were $89.5 million, reflecting $48.1 million of favorable reserve development for the quarter, which compared to $53 million in the first quarter last year. Of that $48.1 million, $46.8 was for specialty P&C primarily from accident years 2007 to 2011. The remaining $1.3 million was from workers compensation.

The loss ratio for the quarter was 52.1%, with the specialty P&C segment reporting a loss ratio of 48.3%, and Workers Compensation reporting a loss ratio of 62.8%. The underwriting expense ratio was up three points in the quarter, to 30.6%.

Mike mentioned the impact that certain one-time charges had on the combined ratio of our Workers Compensation segment. These had a similar impact on the consolidated combined ratio and expense ratio.

1.9 points of the expense ratio in the quarter are attributable to these items related to Eastern. This includes one-time professional fees, transaction costs and the amortization of intangibles. A half a point of expense ratio was due to start up expenses from our Lloyd's investment.

Let me make a couple of observations on the bottom line. As we mentioned in our news release, net income declined year over year due to lower net realized investment gains in this years first quarter. And the fact that last year we had the non-taxable gain from the acquisition of Medmarc.

Both of those factors are excluded from operating income. And the decline there was due to a higher effective tax rate in 2014, and a lower reserve recognition I mentioned a minute ago.

We were active in share repurchase in the quarter, buying approximately 1.8 million shares at a total cost of $84 million, bringing weighted average shares outstanding to 61.251 million shares, and on a diluted basis to 61.497 million. Year to date we have repurchased approximately 2 million shares at a total cost of $91 million. That leaves us with $112 million in our current repurchase authorization.

We believe buying at these levels is a sound investment and the future results of the Company given the value we see in our shares. At the same time, we recognize the buyback can have a dampening effect on book value per share, which is one of our primary measures of overall success. At quarter end book value per share increased to $39.51 and we estimate our share repurchase limited to grow the book value by $0.18. Tangible book value per share was $34.15 at quarter end. Frank?

Thanks, Ned. Stan, some final words before we take questions?

Thanks Frank. First, I'd like to thank everyone again for joining us on the call. I'll say that we welcome the challenges that are ahead of us as we adapt to the world which evolved in healthcare.

We continue to believe that ProAssurance is uniquely equipped to respond effectively to all that lies ahead. Our product depth and the experience and knowledge of the people behind those products is unmatched. We have the geographic reach and the capital to be wherever and whatever our customers need us to be, and we remain quite excited about the future.

And finally, Frank, as a heads-up to those on the call, there is a strong possibility that I will not be able to participate in the second quarter call. My wife and I will be celebrating our 35th wedding anniversary that week on the Baltic Sea. While I will record something before the call, logistics may not permit my live participation.

Everyone will be in capable hands with our senior leadership team and I doubt I will be missed. Questions, Frank?

Thanks. Jessica, we will open the lines now, thank you.

(Operator Instructions)

Matt Carletti with JMP Securities.

Good morning.

Good morning, Matt.

One could question on the M&A front. I was just hoping you could maybe update us on in terms of pipeline. How M&A opportunities are looking and more specifically where -- what sort of segments you are seeing the most opportunity. Is it the traditional physician segment? Should we expect more in -- more ancillary healthcare areas or med products or where are you seeing the most intrigue?

You know Matt, we see interest from some part of all of those segments. As you know, it is very sporadic, and it can't be planned or scheduled or sequenced in any sense. We look at a lot more than we conclude our actionable. We are very, very selective as you know in what we do and where we go.

My sense is that in the coming years, we will see more activity in the medical professional line than other lines. But as I have said before, I also think because of the very significant evolutionary changes in health care, we'll see significant opportunities for organic growth that we've not seen in the past.

But we are open to looking at opportunities in all of our segments and as I say, we have an awful lot of things come to us from time to time, most of them are not the right fit. But we continue to be active in that area.

And my only other question would be on Lloyd's. I know its early days. It's been four going on five months now that it has been live, but what's been the early reception and your early take on success?

Hi Matt, it's Howard. The reception in the London market to the Syndicate and to Duncan Dale, the underwriter of the Syndicate has been very good. He believes that he is getting great opportunities to see a wide range of submissions, has written some and has turned down a lot. Based on the market pricing.

But is basically pleased with what he is seeing in terms of, both the variety and the quality of, the submissions from the brokers. And in terms of the overall plan, I think we are going through the year and as the syndicate develops as some of the members who joined in the underwriting side served out there non compete periods, we will see an increasing amount of activity in the remaining quarters.

Thanks a lot, thinks for much for the answers and congrats on a very nice start to the year.

Thanks Matt.

Mark Hughes with SunTrust.

Thank you very much. Could you talk about the seasonal pattern of gross written premium in Eastern? Just a general sense of how it spreads out through the year?

I am happy to comment on that. First of all, January is by far our largest month of the year. So you're first quarter is always pretty strong.

We put roughly $45 million in premium in that month alone. So January and July are our two largest months. July our book of business is roughly $25 million to $30 million. And then all of the other months are fairly consistent as you look at it across the 12 month calendar period.

That $45 million in January, and then February and March would be more normal run rate?

Exactly.

Okay. And then the similar distribution in Q2 or 3Q.

Could you talk about the pricing trends in workers comp? I see its up about 2%. How is -- where do we stand in the cycle? Is that going to zero soon? Is it stabilizing here at 2%? What you think?

From Eastern's perspective we continue to really focus on being an individual account underwriter and we will continue to reflect that strategy. From a pricing perspective, 2011 rates were up 2.5%, 2012 3.7%, 2013 4.8%. And as you noted, the first quarter was roughly 2%.

So it is definitely -- it has definitely stabilized. I would say this. As compared to those years, 2011 to 2013, we had some larger players in the market become less attractive with workers comp. Some larger players dumped a couple billion dollars of premium out into the marketplace. And then there were some pretty good opportunity.

We have seen a re emergence of some of those stock carriers going back into workers comp, which is a pressure point. And we've also seen some trends with respect to healthcare providers starting workers compensation operations, and that particularly in Pennsylvania. But its added some competitive pressure. We believe that from the rate increases that we are chatting about in the first quarter here are sustainable throughout the remainder of the year.

Are those going to be enough to offset inflation and losses?

We are pretty fortunate on that front. From a medical inflation perspective, we've always believed that the best strategy is to have our claims closed. And as you can see, in our information, we only have 18 open claims, 2007 prior in our traditional book of business. And our five-year weighted average medical inflation is about 0.6% within our book of business.

And again, we also have a really strong stable of medical cost containment initiatives surrounding our book of business with preferred provider networks and pharmaceutical networks and such. So yes, to answer your question directly, the 2% based on our book of business will continue to be adequate for us.

Ned, of those unusual expenses in the quarter, 1.9 related to the Eastern amortization and one timers. And then half a point for Lloyd's, if I heard you correctly. How much of those continue into Q2 and beyond?

The transaction expenses with Eastern are more or less over and done with. And the amortization will continue and there's amortization, the number we referenced there is amortization related intangible assets from the transaction with Eastern. There are also some amortization of intangibles that has been on our books, related to our acquisition of API in Texas a number of years ago. And those will continue and I think the life for those is around seven years, ten years.

So I'll get you a little more information on that in just a second. We'll continue to have some start up costs around Lloyd's, as well. In just a second we'll get you a little more on the amortization expense. There will be a good bit more information when we get our Q filed. The average is 13 years. Most of the stuff on the amortization of intangibles is 15 years.

Right, so of the 1.9 points, how much of that was the amortization that will persist?

Amortization expense was $1.3 million.

Then, is it possible in the future press releases with these ceded premiums being more significant in terms of the P&L to maybe give some more of that detail in terms of gross premiums earned, ceded premiums that sort of thing.

We will take a look at that. We made a lot of changes in the structure of the press release.

One, because of the segmentation and also in recognition that our 10-Q would be coming out. Not contemporaneous with the press release as it has the last number of years. Frank will be looking at the feedback we get on the content and format of that and we'll make some adjustments.

Be sure and send me your wish list, Mark, and we'll take that into account as we format the next round.

Thank you.

Amit Kumar with Macquarie.

Thanks, and good morning and congrats, not only on a strong quarter but getting to that 35th wedding anniversary.

He's not there yet. (laughter)

Most of my questions were asked but I wanted to go back to the initial comment on the cross-selling opportunity, and you alluded to that in the opening remarks, too. Can you sort of expand on that. I know we talked about that a lot when the acquisition was happening. Maybe, is there some sort of a metrics in terms of a conversion rate or when you talk about the interest? How should we think about that going forward?

I can talk about it on the specialty C&C side, and Mike might have some comments on the workers comp side of it. I don't know if we can talk about a conversion rate. Certainly not yet.

But we do see a fair amount of interest in a number of areas. There are existing workers comp clients that are in healthcare and we have already had significant discussions with two of them about bringing the healthcare professional liability part of their exposure into their existing captive structure that they have in place with Eastern Re.

We also have a number of agents on the healthcare side that have an interest in representing Eastern. And at least a couple of them, that I'm aware of, have been appointed by Eastern that have to fit in with the Eastern's distribution model, which is very specialized and focused.

I think the cross-selling opportunities are there. They are live, but in terms of metrics we don't have anything at this point. Mike, I don't know if you have anything to add on that.

I agree with Howard's assessment. I really have no further comments.

Okay. The only other question I have I know we talked briefly about the loss-cost trends. Can you give us -- this might be for Howard, an update on -- I guess (inaudible) from challenges you might have seen recently. Thanks.

In loss-cost trends? Challenges right now are really just a matter of monitoring what is going on and potentially in certain states where there have been changes, I think we talked -- maybe we didn't talk last time -- I don't remember the timing exactly but in terms of Florida for example.

The Florida supreme court recently struck down part of the non economic caps that had been put in place. They struck down the portion of it that applies to wrongful death. Expectation is that if the pain and suffering cap, when it comes up for review by the court the same thing will happen.

So the issue there is predicting what effect that will have. We believe that will increase client frequency just from the perspective of more interest in bringing medical professional liability claims now that the cap is at least in part no longer in place.

On the whole, we are not seeing much of a change. When you look at our overall book of business frequency is very stable. And severity is also at a low and stable level. The challenge is really more in terms of interpreting what happens as a result of particular court decisions or potential legislation in given states.

None of that was unexpected.

It wasn't unexpected, it was just a matter of timing and the question is what we will see over the next six months to a year.

Got it, okay. That's all I have for now. Thanks for the answers and good luck for the future.

(Operator Instructions)

Ryan Byrnes with Janney Capital.

Great, thanks guys. Just had one question on the underlying loss ratio uptick. You know that part of it was from ceding more business.

I guess if I think from a quarter share perspective the underlying ratio shouldn't really be affected. But I'm guessing it is being affected because it is a regional issue, maybe some of the states are ceding more business, ceding some of the business away has a better profile than the average? Is that the right way to think about it?

I think there's a few things going on. One or two of them relate more to what I would call fixed component.

We have an increased amount of ceded premium but the internal cost of handling claims were up slightly, you could say relatively a small increase, but it's against a smaller base of ceded premium. We still have to perform all those functions. This is the cost internal of salaries, benefits, overhead and everything related to our claims department.

We also determined that we should be booking the administrative claims defense costs, as I mentioned. We think that its more appropriate to book that accrual quarterly now than at year end. So that again was an item of increase and against a lower premium base so it had maybe even a little bit more of an effect than you might expect.

I agree with your original comment that the session of the premium generally should not affect the loss ratio we do receive ceding commissions. We try to get those ceding commissions to match the cost of the business that we are ceding away, but some of this fixed cost versus declining net premium drove that loss ratio change.

Great. And then shifting to capital management a little bit. You guys showed a willingness clearly to buy your stock above book value. And also willingness -- you guys repurchased in the quarter more than your net income.

I guess in terms of buying more than net income, is that something that you guys are comfortable continuing to do or is that more of a one-time issue gets caught up from previous quarters? Just wanted to get your thoughts on that thought process.

We really view it more from a total capital position rather than what we have earned in a given quarter. As long as we are comfortable with where our capital position is, where we think our capital position is headed, we will continue to buy back stock until we reach a time where we think we are leveraging our capital to its fullest extent.

Okay great, that's all I had, thanks, guys.

Bob Farnam with KBW.

Hi thanks and good morning. Just one quick question for me. Are you going to use the same outside actuary to look at the workers comp and the specialty P&C books or are you going to be using the current actuarial (inaudible)?

We are changing actuaries at Eastern because the firm that was doing their actuarial work is our auditor, and so they no longer can provide that service. That service will be provided by a different firm than the firm that does our specialty P&C work.

All right, so the workers comp and the P&C will have two separate actuaries looking at the different books?

That's right. The workers comp will be done by Price Waterhouse Cooper. The specialty P&C is all done by Towers Watson.

Okay. That's it for me, thanks.

There are no further questions at this time. Mr. O'Neil, I will turn the call back over to for any closing remarks.

Thank you, Jessica, and thanks everyone for being with us. We will speak with you again in August.

This does conclude today's conference. Thank you for your participation. (End of Transcript)