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
Market Cap: $1.7 Billion / Equity: $1.5 Billion
Fifth largest1 writer of medical liability
Writing business in 491 jurisdictions
More than 60,0002 policyholders
45,000 physicians and dentists
7,000 ancillary and other healthcare professionals
8,100 attorneys
Majority in small or solo practice
Highly rated by A. M. Best and Fitch
2
1 Includes PICA 2 Includes PICA and Georgia Lawyers
Recent Highlights
Completion of three significant transactions
Again recognized as one of the
50 top performing property
casualty insurance companies
by The Ward Group
50 top performing property
casualty insurance companies
by The Ward Group
Our third straight year
3
ProAssurance: Long-Term Success
Successful performance in a challenging financial
market and a demanding line of insurance
market and a demanding line of insurance
Maintaining profitability
Completion of three M&A transactions in 2009
that will allow us to grow the top line
that will allow us to grow the top line
4
ProAssurance: Long-Term Success
Our Balance Sheet remains strong
Conservative investments
Little debt
Low leverage
Solid stock performance over time
Growing organically and through M & A
Adding over $100 million in annualized premium
to our top line through M & A
to our top line through M & A
Diversifying our risk profile
5
ProAssurance: Long-Term Success
Book Value Growth | ||
Cumulative | CAGR | |
10 year | 222% | 12% |
5 year | 127% | 18% |
1 year | 10% | 10% |
Measured through Year-End 2008 |
Opportunities & Strategies
Key Opportunities
New insurance buyers will emerge as
healthcare reform evolves
healthcare reform evolves
The outcome of medical liability claims will
become more transparent
become more transparent
Financial issues will highlight the need for
successful, long-term companies with superior
balance sheets strength and outstanding ratings
successful, long-term companies with superior
balance sheets strength and outstanding ratings
8
Strategy: Targeted M & A
9
Significant growth in our core business
Geographical expansion
Extends our core business
Broadens our medically-related range
Geographical expansion
Broadens our medically-related range
Geographical expansion
Adds to our lawyers’ book
Geographical expansion
Affirms our interest in this line
Strategy: Targeted M & A
Podiatry Insurance Company of America (PICA)
Dominant (70%), profitable, national company
~$96 million Direct Premium in 2008
Renewals at expected levels in 2009
$13.7 million added to PRA premium in Q2 2009
Podiatry is growing in importance as a specialty
Involved in treating complications in a population with an
increasing prevalence of diabetes
increasing prevalence of diabetes
Increases our understanding of policies that are
higher volume, lower cost
higher volume, lower cost
10
With PICA We Are a National Carrier
Leveraging the benefits of our many M & A transactions
through long-term customer relationships and local
and specialty knowledge
through long-term customer relationships and local
and specialty knowledge
11
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
PICA Headquarters
PICA Headquarters
(Birmingham)
(Nashville)
Strategy: Targeted M & A
Mid-Continent General Agency
Large writer of ancillary healthcare
Healthcare reform will emphasize care delivery from a
larger array of lower-cost providers
larger array of lower-cost providers
Home health care
Physician-extenders
~$26 million in total premium in 2008
$20 million healthcare related
PRA will write most of this business
$3.6 million added to PRA premium in Q2 2009
Commission derived from business we choose not to write
12
Strategy: We Dare to Defend
Our balance sheet strength and deep expertise
ensures our insureds have the option of an
uncompromising defense of their claim
ensures our insureds have the option of an
uncompromising defense of their claim
We defend our insureds at trial more often
than any other company in our line
than any other company in our line
Provides a long-term financial and marketing
advantage
advantage
A key differentiating factor in the market
as claims data becomes public
as claims data becomes public
13
Claims Trends Remain Favorable
14
Frequency trends are
stable after declining
since 2005/2006
stable after declining
since 2005/2006
The results is fewer
cases to try
cases to try
Severity trends also stable
Trends are much the same
in states with or without
Tort Reform
in states with or without
Tort Reform
ProAssurance Claims Tried
Spreading Risk is Vital
Broad geographic diversification provides an
unmatched spread of risk
unmatched spread of risk
15
Our spread of risk
provides better market
awareness and more
data points to gauge loss
trends
provides better market
awareness and more
data points to gauge loss
trends
Our internal actuarial
depth allows us to assess
emerging trends and
respond quickly
depth allows us to assess
emerging trends and
respond quickly
Claims Offices
Claims Offices
Claims / Underwriting Offices
Claims / Underwriting Offices
PICA and/or E&S States
PICA and/or E&S States
PICA Headquarters
PICA Headquarters
(Birmingham)
(Nashville)
The Tort Reform Question
Obama signaled a willingness to consider limited
reforms in his recent speech to the AMA
reforms in his recent speech to the AMA
Unlikely that Washington will provide the full
reforms physicians seek
reforms physicians seek
Major decisions likely left up to each state
We set prices and reserves as if there is no tort
reform, until results reflect otherwise
reform, until results reflect otherwise
We are prepared, operationally and financially, if
reforms are struck down in our states
reforms are struck down in our states
16
Strategy: Respond to Transparency
Malpractice judgments/settlements now
disclosed in 17 states
disclosed in 17 states
Public access to the
National Practitioner
Data Bank is the
next step
National Practitioner
Data Bank is the
next step
Disciplinary actions
now disclosed in
almost every state
now disclosed in
almost every state
17
Board / Discipline / Med Mal
Med Mal disclosure
legislation proposed
legislation proposed
P
Strategy: Maintain Discipline
18
Pricing Discipline
Using credits allows us to maintain existing
rate filings
rate filings
Pricing developed using multiple years
Not unduly influenced by current market
conditions
conditions
Rates on renewing physician business down
less than 10% from peak pricing in 2006
less than 10% from peak pricing in 2006
Rate Change History
19
Strategy: Actuarial Conservatism
Consistent and conservative reserving
practices throughout the market cycle
practices throughout the market cycle
Initial Accident Year Loss Ratios
2008 Industry is
A. M. Best Data
Through Q3 2008
A. M. Best Data
Through Q3 2008
Strategy: Actuarial Conservatism
Reserve History (billions) | |
2008 | $ 2.4 |
2007 | $ 2.6 |
2006 | $ 2.6 |
2005 | $ 2.2 |
2004 | $ 1.8 |
Pricing in a Low Interest Environment
22
Assumes a 1:1 premium to surplus ratio for physicians professional
liability claims-made coverages
liability claims-made coverages
Loss ratio required
to generate a 13%
after-tax ROE
to generate a 13%
after-tax ROE
Strategy: Treated Fairly
Treated Fairly is our brand enhancement initiative
Affirms our existing, enduring commitment to
every stakeholder
every stakeholder
Insureds
Agents
Investors
The public
We run our business as owners who are
rewarded for long-term success
rewarded for long-term success
23
Financial Highlights
2009 YTD Income Statement Highlights
25
in millions, except per share data
Gross Premiums Written $ 266 $ 248 7%
Net Investment Income 74 82 - 10%
Total Revenue 306 313 - 2%
Total Expenses 192 203 -5%
Operating Income $ 86 $ 83 4%
Net Income (Includes Investment Losses) $ 82 $ 79 4%
Operating Income/Diluted Share $ 2.50 $ 2.43 3%
Operating Cash Flow $ 12 $ 101 -88%
June 30, Y-OVER-Y
2009 2008 CHANGE
We have reversed the decline in premiums with new
business from PICA, Mid-Continent and Georgia Lawyers
business from PICA, Mid-Continent and Georgia Lawyers
Strategy: Enduring Financial Strength
Emphasizing an appropriate balance of risk vs. return
Committed to enduring balance sheet strength
Responding to the low interest rate environment
$ amounts
in Billions
in Billions
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
27
Source: SNL Financial
Our Strong Capital/Low Leverage Position
28
(in millions)
Prepared for an
improving market
improving market
Prudent capital
management
management
Premiums to Surplus
for Each year
for Each year
$ 96 (PICA pro forma)
$471
$567
Excess Capital vs. Excess Capacity
29
“A” Rating
Threshold
Threshold
Projected A. M. Best BCAR Scores if
Premiums Increase
Surplus is Reduced
30
Little Dependence on Debt
Low Debt to Cap Ratio
Little strain on cash flow
$25 million debt added in
the PICA transaction
the PICA transaction
Includes $7 million in
surplus notes
surplus notes
Redemption expected in Q3
6/30/2009
Strategy: Balance Risk vs. Return
31
Reduced cash and short-term
balances in Q2
balances in Q2
Added to fixed income and equities
Equity investments added in the
PICA transaction
PICA transaction
CUSIP-level portfolio disclosure
on our website:
www.proassurance.com/investorrelations/supplemental.aspx
on our website:
www.proassurance.com/investorrelations/supplemental.aspx
$3.8 Billion
Portfolio
Portfolio
$3.8 Billion
Portfolio
Portfolio
Fixed Income: 89%
Short Term: 6%
Short Term: 6%
Equity and Other Investments: 3%
Equity and Other Investments: 3%
BOLI: 2%
BOLI: 2%
6/30/09
Fixed Income: $3.4 Billion
Average fixed maturity
duration: 4.2 years
duration: 4.2 years
Average tax-equivalent
yield: 5.5%
yield: 5.5%
97.8% investment grade
Weighted average: AA
32
6/30/09
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
34
Appendix: Market Conditions
Current Industry Status
Appendix: Claims
Why Claims Strategy Matters
Favorable
Outcomes:
82%
Outcomes:
82%
Favorable
Outcomes:
82%
Outcomes:
82%
Five Year Average
2003 - 2007
2003 - 2007
Favorable
Outcomes:
74%
Outcomes:
74%
Favorable
Outcomes:
74%
Outcomes:
74%
Why Claims Strategy Matters
Our ability and willingness to defend claims
allows us to achieve better results
allows us to achieve better results
Average Statutory Loss Ratio
81.4%
ProAssurance Stand Alone
2005 - 2007
76.0%
64.3%
Appendix: Investments
Portfolio Overview: Equities
41
$130 million in Equities & Other Investments
6/30/09
Equities & Other Investments
42
$ in 000’s
Income/Performance Q1, 2005 - Q2, 2009
Strategy: Investment Discipline
The choice: Chase yield or extend duration
We are maintaining duration, looking for opportunities
43
Loss in value assuming a 100 basis point shift in the yield curve
Yields based on Single A composite corporate debt
Portfolio: Municipals $1.4B
44
6/30/09
Portfolio: Asset Backed
$790 million Asset Backed Securities
Weighted Average Rating: AAA
45
Alt-A LTV: 62%
Whole Loan LTV: 57%
Further Details Provided
on Sub-Prime and CMBS
on following pages
on Sub-Prime and CMBS
on following pages
Bloomberg Data
6/30/09
6/30/09
Portfolio Overview: Sub-Prime
46
$6.6 million market value in AFS portfolio
$5.1 million unrealized loss
$3.4 million market value in
high-yield LP rated B
high-yield LP rated B
LP’s focus is distressed ABS)
At 6/30/09 | Vintage |
$4.5 Mln | 2004 & Prior |
$1.9 Mln | 2005 |
$0.3 Mln | 2006 |
Quality & Vintage information only on direct holdings at 6/30/09
At 6/30/09 | Type | Quality |
$3.7 Mln | Mortgage-Backed | AA- avg - LTV 72% |
$3.9 Mln | Home Equity | AA avg |
Portfolio Overview: CMBS
$178 million Fair Value in non-agency CMBS
Book Value: $191 million
5% of fixed income portfolio
47
At 6/30/09 | Quality |
$176 Mln | AAA |
$ 1.2 Mln | AA |
$ 0.6 Mln | A |
At 6/30/09 | Wtd Avg LTV |
48% | <65% |
44% | =65% |
8% | <72% |
At 6/30/09 | Credit Support |
30% | >30% |
48% | 20% - 30% |
20% | 10% - 20% |
2% | Less than 10% |
At 6/30/09 | Deal Cumulative Delinquencies |
26% | 0% - 0.5% |
13% | 0.5% - 1.0% |
26% | 1.0% - 2.0% |
18% | 2.0% - 3.0% |
17% | >3.0% |
At 6/30/09 | Debt Service Coverage |
73% | =>1.5x |
23% | 1.4x |
4% | 1.3x |
AT
6/30/09
6/30/09
Portfolio Overview: CMBS
Top Property Types
Retail-Anchored: 47% of CMBS portfolio
Exposure: 19% - 42% of individual security value
Office: 32% of CMBS portfolio
Exposure: 23% - 46% of individual security value
Retail-Unanchored: 10% of CMBS portfolio
Mixed Use: 4% of CMBS portfolio
Multi Family: 4% of CMBS portfolio
Other: 3% of CMBS Portfolio
Portfolio: Corporate
49
6/30/09
Portfolio: Corporate-Financials
Top 20 Largest Banks/Financials: $ 258 million
$75 mm FDIC backing
BOA/ML $30 ($8) | Goldman $8 ($2) |
M Stanley $27 ($6) | Eurohypo AG $8 |
JPM Chase $24 ($13) | NRUC $6 |
Amex $23 ($12) | HSBC $6 ($1) |
GECC $23 ($7) | BONY $5 |
Wells/Wach $19 | Deutsche Bank $5 |
Citi $18 ($7) | John Dear Cap $5 ($1) |
BP Capital Fin $15 | Ford Motor Credit $5 |
Key Bank $13 ($13) | NY Comm’ty Bank $5 ($5) |
Credit Suisse $8 | Depfa ACS ‘Covered’ $5 |
FDIC backed amounts listed in parentheses |
50
6/30/2009
$231 million
Portfolio: Treasury/GSE
51
6/30/09
Portfolio: FRE and FNM
52
$462 million
Average Rating: AAA
6/30/09
Portfolio Overview: Short Term
$227 Million
S&P: AAA
53
6/30/09
$64 million
Moody’s: AA3
S&P: AA
A. M. Best: A+
54
6/30/09
Appendix: Industry History
Will History Repeat Itself—Again?
56
Source: A. M. Best Aggregates and Averages 1976 - 2001
Medical Malpractice Industry, Net Basis Occurrence and Claims-Made Combined
Medical Malpractice Industry, Net Basis Occurrence and Claims-Made Combined
(Estimated)
(Actual)
Industry Data 1976 Through 2007
Appendix: Our M & A History
We Created a Leader Through Consolidation
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
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
58
Profitable Growth Through M & A
ProAssurance has been built through M & A
59
ProAssurance was formed by
the combination of two
successful companies with a
history of M & A
the combination of two
successful companies with a
history of M & A
Profitable Growth Through M & A
ProAssurance has been built through M & A
60
Each company brought
multiple transactions into
ProAssurance at our founding
in 2001
multiple transactions into
ProAssurance at our founding
in 2001
Profitable Growth Through M & A
ProAssurance has been built through M & A
61
We have continued to grow
through M & A
through M & A
NCRIC in the mid-Atlantic
PIC-Wisconsin in the upper
Midwest
Midwest
PICA Nationwide
Denovo Growth Also Plays a Role
We have added states as opportunities arose
62
We carefully evaluate the
medical and legal climate of
each state before entering
medical and legal climate of
each state before entering
We are the market leaders in
AL, DE, DC, OH, & WI
AL, DE, DC, OH, & WI