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Forward
Looking Statements
This
presentation contains Forward Looking Statements and other information
designed
to convey our projections and expectations regarding future results. There are a number
of factors which could cause our actual results to vary materially from those projected in
this presentation. The principal risk factors that may cause these differences are
described in various documents we file with the Securities and Exchange Commission,
such as our current reports on Form 8-K, and our regular reports on Forms 10-Q and 10-
K, particularly in “Item 1A, Risk Factors.” Please review this presentation in
conjunction with a thorough reading and understanding of these risk factors.
to convey our projections and expectations regarding future results. There are a number
of factors which could cause our actual results to vary materially from those projected in
this presentation. The principal risk factors that may cause these differences are
described in various documents we file with the Securities and Exchange Commission,
such as our current reports on Form 8-K, and our regular reports on Forms 10-Q and 10-
K, particularly in “Item 1A, Risk Factors.” Please review this presentation in
conjunction with a thorough reading and understanding of these risk factors.
This
presentation contains Non-GAAP measures, and we may reference
Non-GAAP measures in our remarks. A reconciliation of these measures to GAAP
measures is available in our latest quarterly news release, which is available in the
Investor Relations section of our website, www.ProAssurance.com, and in
the related Current Reports on Form 8K disclosing that release.
Non-GAAP measures in our remarks. A reconciliation of these measures to GAAP
measures is available in our latest quarterly news release, which is available in the
Investor Relations section of our website, www.ProAssurance.com, and in
the related Current Reports on Form 8K disclosing that release.
1
Non-GAAP
Measures
ProAssurance:
Quick Facts
2
1 9/30/2009
Statutory Filings
2009
Highlights
Three
M&A transactions completed
Provides
potential premium growth of
approximately $100 million on an annualized basis
approximately $100 million on an annualized basis
GROWING the top
line
Existing
markets grew modestly through Q3 2009
Maintaining
our profitability
Outstanding
performance in a challenging
financial market and a demanding line of
insurance
financial market and a demanding line of
insurance
3
Outstanding
Performance: Stock Price
|
Share
Price Growth
|
||
|
|
Cumulative
|
CAGR
|
|
10
year
|
149%
|
10%
|
|
5
year
|
35%
|
7%
|
|
1
year
|
2%
|
2%
|
|
Measured
through Year-End 2009
|
||
4
Share
Price at Year End Since Inception
Outstanding
Performance: Book Value
|
Book
Value Growth
|
||
|
|
Cumulative
|
CAGR
|
|
10
year
|
222%
|
12%
|
|
5
year
|
127%
|
18%
|
|
1
year
|
10%
|
10%
|
|
Measured
through Q3 2009
|
||
Outstanding
Performance vs Industry
Moody’s
rankings of the top 100 P&C
insurance companies by premium volume
insurance companies by premium volume
6
1 by Direct Written
Premium Source:
2008 Data from Moody’s
Statistical Handbook
October
2009
2009
|
Category
|
Ranking
|
|
Direct
Written Premiums
|
95
|
|
Operating
Ratio
|
1
|
|
Combined
Ratio
|
2
|
|
Loss
Ratio
|
5
|
|
ROE
|
5
|
Recent
Business Highlights
Third
straight year as one of the
50 top performing property casualty
insurance companies
50 top performing property casualty
insurance companies
Top 3% of
all P&C companies
Upgrade to
“A” (Excellent)
by A. M. Best
by A. M. Best
Positive
outlook
assigned by S & P
assigned by S & P
7
2009:
Consolidation of:
Mid-Continent General Agency
Mid-Continent General Agency
2009:
Consolidation of:
Mid-Continent General Agency
Mid-Continent General Agency
Georgia
Lawyers Insurance Co.
Georgia
Lawyers Insurance Co.
2004: Purchased
Selected Renewal Rights from:
OHIC Insurance Company
OHIC Insurance Company
2004: Purchased
Selected Renewal Rights from:
OHIC Insurance Company
OHIC Insurance Company
Success
Through M&A
We’ve
built a leading platform through M&A
8
1994: Consolidation
of:
West Virginia Hosp. Ins Co.
West Virginia Hosp. Ins Co.
1994: Consolidation
of:
West Virginia Hosp. Ins Co.
West Virginia Hosp. Ins Co.
1995: Consolidation
of;
1995: Consolidation
of;
Physicians
Ins Co of Indiana
Physicians
Ins Co of Indiana
Assumed
business of:
Physicians Ins Co of Ohio
Physicians Ins Co of Ohio
Assumed
business of:
Physicians Ins Co of Ohio
Physicians Ins Co of Ohio
1996:
Consolidation
of:
1996:
Consolidation
of:
Missouri
Medical Ins Co
Missouri
Medical Ins Co
1995: Assumed
business of:
Associated Physicians Ins Co. (IL)
Associated Physicians Ins Co. (IL)
1995: Assumed
business of:
Associated Physicians Ins Co. (IL)
Associated Physicians Ins Co. (IL)
1998: Consolidation
of:
Physicians Protective Trust Fund (FL)
Physicians Protective Trust Fund (FL)
1998: Consolidation
of:
Physicians Protective Trust Fund (FL)
Physicians Protective Trust Fund (FL)
1996: Assumed
business of:
American Medical Ins Exchange (IN)
American Medical Ins Exchange (IN)
1996: Assumed
business of:
American Medical Ins Exchange (IN)
American Medical Ins Exchange (IN)
Founding
in the
1970’s
Founding
in the
1970’s
1999: Assumed
business of:
Medical Defense Associates (MO)
Medical Defense Associates (MO)
1999: Assumed
business of:
Medical Defense Associates (MO)
Medical Defense Associates (MO)
Mutual
Assurance
Physicians
Ins. Co. of
Michigan
Professionals
Group
Creation
of:
Creation
of:
2005: Consolidation
of:
NCRIC Group
NCRIC Group
2005: Consolidation
of:
NCRIC Group
NCRIC Group
2006:
Consolidation of:
PIC Wisconsin Group
PIC Wisconsin Group
2006:
Consolidation of:
PIC Wisconsin Group
PIC Wisconsin Group
2007: PRI
renewal rights deal
2002: SERTA
renewal rights deal
2001: OUM
renewal rights deal
2000: DPM
Merger
1999: PACO
Acquisition
2009
M
& A
Transactions
9
2008
Premium: $98 million
Significant growth
in our core business
Nationwide
geographical expansion
2008
Healthcare Premium: $20 million
Extends our core
business
Broadens our medically-related range
Geographical expansion
Broadens our medically-related range
Geographical expansion
2008
Premium: $5.7 million
Adds
to our lawyers’ book
Geographical
expansion
Affirms our
interest in this line
Responding
to Changes in HealthCare
Projected
sector growth through 20181
Podiatrists 9%
Physician’s
Assistants 39%
Physicians
and Surgeons 22%
Chiropractors 31%
Medical
Assistants 36%
Licensed
Nurses 34%
1Bureau of Labor
Statistics 2008 to 2018 Projections
Our
Focus in 2010
Maintain
Profitability
Ensure
pricing discipline
Rates
based on loss data across multiple years
Not unduly
influenced by current market
conditions
conditions
Using
credits allows us to maintain existing
rate filings
rate filings
Rates on
renewing physician business down
less than 12% from peak pricing in 2006
less than 12% from peak pricing in 2006
12
Spread
Risk
Broad
geographic diversification provides an
unmatched spread of risk
unmatched spread of risk
13
Our spread
of risk provides
better market awareness and
more data points to gauge
loss trends
better market awareness and
more data points to gauge
loss trends
Our
internal
actuarial
depth
allows us to assess emerging
trends and respond quickly
allows us to assess emerging
trends and respond quickly
Corporate
Headquarters
Corporate
Headquarters
Claims
Offices
Claims
Offices
Claims
/ Underwriting Offices
Claims
/ Underwriting Offices
PICA
and/or E&S States
PICA
and/or E&S States
(Birmingham)
Claims
Trends Drive the Business
Frequency
Stabilized in
2009
After
Three Years of Decline
Our
operational plans leverage our financial strength,
spread of risk and expertise to address potential changes
spread of risk and expertise to address potential changes
Severity
Rising at 4%-5%
per Year
An Expected, Manageable Level
An Expected, Manageable Level
Driven
by:
Unexpected
outcomes
Patient
frustration
Influenced
by:
Tort
reform
Driven
by:
Medical
Costs
Jury
Awards
Tort
Reform
Damage
Caps
Differentiate
In Claims Management
Claims
management has always set us apart
We combine
financial strength with deep expertise
Give our
insureds the option of an uncompromising
defense of their claim
defense of their claim
Allows us
to defend our insureds at trial more often
than any other company in our line
than any other company in our line
Provides
long-term financial and marketing
advantages
advantages
A key
differentiating factor in the market
as claims data becomes public
as claims data becomes public
15
Keep
an Eye on Washington
Health
care reform is in limbo
We expect
no major changes in the tort system
Demonstration
projects do not provide meaningful
reform or immediate data
reform or immediate data
Signals a
desire to leave the tort system in
the hands of each state
the hands of each state
16
Prepare
for State Changes
Tort
reforms under attack in many states
We are
prepared, operationally and financially,
if reforms are struck down in our states
if reforms are struck down in our states
We set
prices and reserves as if there is no tort
reform, until results reflect otherwise
reform, until results reflect otherwise
17
Financial
Highlights
2009
YTD Income Statement Highlights
19
in
millions, except per share data
Gross
Premiums Written $ 435
$ 374 $ 472
Net
Investment Income 113 122 158
Total
Revenue
489 431 567
Total
Expenses
295 294 470
Operating
Income $ 136 $ 127 207
Net
Income (Includes Investment Losses) $ 137 $ 101 178
Operating
Income/Diluted Share $ 4.08 $ 3.73 $ 6.07
September
30,
Year-End
2009 2008
2008
Premium is growing
with new business from
PICA, Mid-Continent and Georgia Lawyers
PICA, Mid-Continent and Georgia Lawyers
Strategy:
Enduring Financial Strength
20
Emphasizing
an appropriate balance of risk vs. return
Committed
to enduring balance sheet strength
Responding
to the low interest rate environment
Stockholder’s
Equity Up
Over 16% Since 12/31/07
Over 16% Since 12/31/07
Strategy:
Use Capital Prudently
Using
capital to build through M&A
Preserving
capital for future opportunities
Enhancing
shareholder value by repurchasing shares
at prices that build Book Value
at prices that build Book Value
21
Source: SNL
Financial
Our
Strong Capital/Low Leverage Position
22
(in
millions)
Prepared
for an
improving market
improving market
Prudent
capital
management
management
Premiums to
Surplus
for Each year
for Each year
$567
$
96 (PICA
pro
forma)
$471
Excess
Capital vs. Excess Capacity
23
Conceptual
Model of Projected
A. M. Best BCAR Scores if
A. M. Best BCAR Scores if
Premiums
Increase
Surplus
is Reduced
Strategy:
Balance Risk vs. Return
Key
Investment Actions in Q3 09
Reduced
cash and short-term
balances
balances
Added to
corporate bonds
CUSIP-level
portfolio disclosure
on our website:
www.proassurance.com/investorrelations/supplemental.aspx
on our website:
www.proassurance.com/investorrelations/supplemental.aspx
$3.9
Billion
Portfolio
Portfolio
$3.9
Billion
Portfolio
Portfolio
Fixed
Income: 91%
Short
Term: 4%
Short
Term: 4%
Equity
and Other Investments: 3%
Equity
and Other Investments: 3%
BOLI:
2%
BOLI:
2%
24
9/30/09
25
Little
Dependence on Debt
Low Debt
to Cap Ratio
Little
strain on cash flow
9/30/2009
The
Importance of Investment Income
Pricing
discipline is even more critical
Combined
Ratio
required to generate
a 13% after-tax ROE
required to generate
a 13% after-tax ROE
The
Importance of Investment Income
Year
1
1
Year
2
2
Year
3
3
Year
4
4
Year
5
5
Year
6
6
Year
7
7
Year
8
8
Incident
Occurs
Occurs
Discovery
and
Preparation
and
Preparation
Claim
Reported
Reported
Trial
and
Appeals
Appeals
Resolution
5-6
Years
After
Claim
Reported
After
Claim
Reported
Life
Cycle of a Typical Claim
The
Importance of Investment Income
Typical
Claims Payout Pattern
Fixed
Income: $3.6 Billion
29
9/30/09
Summary
ProAssurance
Producing
sustainable shareholder value
Growing
Book Value per Share
Finding
the right M & A opportunities
Significant
share ownership at all levels
Focusing
on long-term
Preparing
for a changing market
Leveraging
financial strength
Protecting
the balance sheet
Maintain
our leading market position
Building
strength for the next cycle turn
31
Appendix:
Market Conditions
The
State of the Market
Prices
have been falling yet profitability remains high
Continued
low interest rates must enforce discipline
sooner or later
sooner or later
Frequency
is no longer declining
Only a
matter of time before frequency moves higher
But
when?
Severity
is trending upward at expected, manageable
rates (4%-5%) in most states
rates (4%-5%) in most states
The
State of the Market
34
Appendix:
Claims
Claims
Trends Remain Favorable
Frequency
trends are
stable after declining
since 2005/2006
stable after declining
since 2005/2006
The result
is fewer
cases to try
cases to try
Severity
trends also
stable
stable
Trends are
much the
same in states with or
without Tort Reform
same in states with or
without Tort Reform
36
ProAssurance
Claims Tried
to a Verdict
to a Verdict
Why
Claims Strategy Matters
Favorable
Outcomes:
84.0%
Outcomes:
84.0%
Favorable
Outcomes:
84.0%
Outcomes:
84.0%
Five
Year Average
2004 - 2008
2004 - 2008
Favorable
Outcomes:
75.4%
Outcomes:
75.4%
Favorable
Outcomes:
75.4%
Outcomes:
75.4%
Why
Claims Strategy Matters
Our
ability and willingness to defend claims
allows us to achieve better results
allows us to achieve better results
ProAssurance
vs. Industry
Average Statutory Loss Ratio
Average Statutory Loss Ratio
2003-2008
Legal
Payments
Payments
Loss
Payments
Payments
Trend
for ProAssurance
Stand Alone Statutory Loss Ratio
Stand Alone Statutory Loss Ratio
2006
- 2008
76.0%
*Source: A. M. Best
Aggregates & Averages, Medical Malpractice Predominating
64.3%
80.8%
76.9%
44.2%
Appendix:
Underwriting/Actuarial
Enforce
Actuarial Conservatism
|
$
2.4
|
|
|
$
2.6
|
|
|
$
2.6
|
|
|
$
2.2
|
|
|
$
1.8
|
|
Rate
Change History
41
Appendix:
Moody’s Rankings
Moody’s
Top 100 Ranking Data
Appendix:
Investments
Equities
& Other: $136 Million
45
9/30/09
Represents
3.5% of our Total Investments
Return
by Quarter: Equities & Other
46
Growth
in Investment vs. Reserves
47
Cumulative
Return: Equities & Other
48
Strategy:
Investment Discipline
The
choice: Chase yield or extend duration
We are
maintaining duration, looking for opportunities
49
Loss
in value assuming a 100 basis point shift in the yield curve
Yields based on
Single A composite corporate debt
Municipals:
$1.5 Billion
50
9/30/09
Investment
policy has always
required
investment grade rating prior to applying the
effect of insurance
investment grade rating prior to applying the
effect of insurance
Asset
Backed: $805 Million
Weighted
average rating: “AAA”
Bloomberg
Data
9/30/09
9/30/09
Alt-A
LTV 63%
LTV 63%
Prime
MBS
LTV 56%
LTV 56%
Further Details
Provided
on Sub-Prime and CMBS
on following pages
on Sub-Prime and CMBS
on following pages
51
Sub-Prime
Detail
52
$6.7
million market value in AFS portfolio
$4.2
million unrealized loss
$9.6
million market value in
high-yield LP rated B
high-yield LP rated B
LP’s focus
is distressed ABS
|
At
9/30/09
|
Vintage
|
|
$4.8
Mln
|
2004 &
Prior
|
|
$1.9
Mln
|
2005
|
Quality &
Vintage information only on direct holdings at 9/30/09
|
At
9/30/09
|
Type
|
Quality
|
|
$2.9
Mln
|
Mortgage-Backed
|
AA avg -
LTV 68%
|
|
$3.8
Mln
|
Home
Equity
|
A+
avg
|
CMBS
Detail
Vintages
2005 &
Prior- $136 million
2006- $23
million
2007- $3
million
Top
Property Types
Retail-Anchored:
45% of CMBS portfolio
Exposure:
19% - 44% of underlying occupancies
Office:
44% of CMBS portfolio
Exposure:
23% - 49% of
underlying occupancies
Multi
Family: 4% of CMBS portfolio
Mixed Use:
3% of CMBS portfolio
Other: 4%
of CMBS Portfolio
53
CMBS
Detail
$162
million Fair Value in non-agency CMBS
Book
Value: $164 million
5% of
fixed income portfolio
54
|
At
9/30/09
|
Quality
|
|
$160
Mln
|
AAA
|
|
$ 2.0
Mln |
AA
|
|
At
9/30/09
|
Wtd
Avg LTV
|
|
24%
|
<65%
|
|
43%
|
=65-70%
|
|
21%
|
<70-75%
|
|
12%
|
=75-85%
|
|
At
9/30/09
|
Credit
Support
|
|
26%
|
>30%
|
|
52%
|
20% -
30%
|
|
20%
|
10% -
20%
|
|
2%
|
Less than
10%
|
|
At
9/30/09
|
Deal
Cumulative Delinquencies
|
|
27%
|
0.0% - 0.5%
|
|
3%
|
0.5%
- 1.0%
|
|
32%
|
1.0% - 2.0%
|
|
4%
|
2.0% - 3.0%
|
|
22%
|
3.0% - 5.0%
|
|
12%
|
5.0% - 9.0%
|
|
At 9/30/09
|
Debt
Service Coverage
|
|
69%
|
=>1.5x
|
|
25%
|
1.4x-1.5x
|
|
6%
|
1.3x-1.4x
|
AT
9/30/09
9/30/09
CMBS
Since September 30, 2009
Since
9/30/09:
Sold $50.0
million CMBS
Paydowns
of $8.0 million
As of
November 30, 2009 CMBS:
Market
value: $108
million
Book
value: $110
million
Expecting
pay down of $19 million
by year-end 2009
by year-end 2009
Projecting
~$90 million exposure at year-end
55
Corporates:
$1.0 Billion
56
9/30/09
Corporate:
Detail on Financials
Top 20
Largest Banks/Financials: $ 294 million
$75 mm
FDIC backing
|
BA $44
($23)
|
BNY Mellon
$10
|
|
MS $27
($6)
|
Credit
Suisse $9
|
|
BP Cap
$25
|
Eurohypo
$8
|
|
GECC $25
($8)
|
KEY $6
($6)
|
|
JPM $24
($14)
|
NRUC
$6
|
|
CITI $20
($7)
|
Deutsche
Bank $5
|
|
Wells
$20
|
FMCC
$5
|
|
GS $16
($2)
|
NY Commt’y
Bank $5 ($5)
|
|
PNC $15
($2)
|
Depfa ACS
Covered $5
|
|
Amex
$14
|
John Deere
Cap $5 ($2)
|
|
FDIC backed
amounts listed in parentheses
|
|
57
9/30/2009
Treasury/GSE:
$228 Million
9/30/09
59
9/30/09
Portfolio
Overview: Short Term
$138
Million
Rated
A1/P1 or better
Money
Markets:
Moody’s:
Aaa
S&P:
AAA
60
BOLI:
$65 Million
Weighted
average rating
Moody’s:
AA3
S&P:
AA
A. M.
Best: A+
61