ProAssurance Corporation (PRA)

PRA 
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ProAssurance Corporation (PRA)

Q3 2008 Earnings Call Transcript

November 4, 2008, 11:00 am ET

Executives

Frank O'Neil – SVP of Corporate Communications and IR

Stan Starnes – Chairman and CEO

Ned Rand – SVP and CFO

Howard Friedman – Chief Underwriting Officer, Chief Actuary, SVP and Co-President of Professional Liability Group

Darryl Thomas – SVP and Chief Claims Officer, Co-President of Professional Liability Group

Vic Adamo – President

Analysts

Ben Iyer [ph] – Raymond James

Mark Hughes – SunTrust

Mike Grasher – Piper Jaffray

Beth Malone – KeyBanc

Michael Nannizzi – Oppenheimer

Presentation

Operator

Good day, everyone and welcome to today’s ProAssurance third quarter earnings release conference call. As a reminder, today’s conference is being recorded. For opening remarks and introductions, I will now turn the call over to Mr. Frank O'Neil; please go ahead, sir.

Frank O'Neil

Thank you, Lacey. Thanks everyone for joining us. Excited about this quarter, the news release we issued this morning and our SEC filings include disclosures with respect to forward-looking statements. In that regard, please understand that statements we make today are likely to deal with projections, estimates, expectations and are thus explicitly identified as forward-looking statements subject to various risks.

Our actual results could vary materially from current projections or expectations. Our SEC filings have a full listing of the risks, you should understand about ProAssurance. We will not undertake and expressly disclaim any obligation to update or alter forward-looking statements, whether as a result of new information or future events except as required by law or regulation.

The content of this call is accurate only on election date Tuesday, November 4, 2008, the date of first broadcast. If you are reading a transcript of this call, please note we did not authorize it and we have not reviewed it for accuracy. Thus it may contain errors that could alter the intent or meaning of our statements.

On the call today with us is our Chairman and Chief Executive Officer, Stan Starnes; our President, Vic Adamo; Chief Financial Officer, Ned Rand; Chief Underwriting Officer, Howard Friedman; and our Chief Claims Officer, Darryl Thomas.

Stan will open our remarks today. Stan

Stan Starnes

Thanks, Frank. Welcome everyone and thanks for your interest. Operationally, this was a strong quarter and our disciplined approach to the business allowed us to continue to drive profitability and shareholder value in a tough pricing environment. On a net basis the quarter was profitable, despite our disappointing investment results. Our losses are less than 1% of our $3.5 billion highly rated portfolio and while no one likes to report even a dollar of investment loss we believe we’ve managed the risk appropriately.

Looking ahead we are being patient and searching for opportunities that will allow us to maintain the balance sheet strength that is our hallmark. That financial strength is one of things that make us attractive to PICA, our partner in our most recently announced transaction and to Georgia Lawyers Insurance Company, the subject to the other transactions we announced last month.

Frankly, I think the opportunities ahead for us should be the main area of focus, but I understand you want some commentary on the quarter, nothing has really changed. I could probably rewind my remarks about pricing and loss trends from the first to second quarter and play them again for you.

Premiums are declining inline with what we expect to see at this point in the market. However, severity is lower than we expected, when we booked initial reserves and frequency trend remain stable at historically low levels, all of which results in a favorable reserve development and enhanced profitability. Frank.

Frank O'Neil

Thank you Starnes, Ned is next to focus on financial results. Ned

Ned Rand

Thanks, Frank. Let me touch on the operational metrics first and then I’ll mention investment results. I’m going to focus my comments on the quarter, in comparison with the last year’s third quarter because the trends for the year-to-date are similar. Comparisons for the year-to-date numbers are in the 10-Q which we filed a short time ago.

The top-line was down 15% in the quarter as a result of lower premiums, inline with our expectations given in the current market. As you know our focuses is grow through acquisition and our two recently announced acquisitions will certainly change this premium trend. That being said, we are in a challenging marketplace, which I am sure Howard will comment on.

Our loss ratio was 57.5%, which is a 7.5 point improvement over last year’s third quarter; reflecting the current loss environment and net favorable reserve development of $30 million. On the expense side, actual dollars were down somewhat inline with the decline of premiums, but the same decline in premium also resulted in an increase with expense ratio, which is up almost a point and a half to 21.6%.

Overall, our combined ratio dipped below 80% and our operating ratio went below 45%, both reflecting the strength of our overall operations. We reported our bottom line results on both in operating and net income basis this quarter because of the effect that realize the investment losses had on the income statement. On an operating basis, our bottom line was up 3% and operating earnings with a $1.31 per diluted share were 6.5% over last year. It helps by the shares we’ve repurchased, as well as operational success.

Our net realized investment loss of $34.2 million was painful, but manageable given the size and quality of our portfolio. That’s the main reason that net income was down 48%. As Stan mentioned, we continued to be cautious about new investments and that’s leading us to conserve cash until the investment climate becomes less storm.

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