ProAssurance Corporation (PRA)

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ProAssurance Corporation (PRA)

Q3 2010 Earnings Call

November 4, 2010 10:00 AM EST

Executives

Frank O'Neil – SVP, Corporate Communications and IR

Stan Starnes – Chairman and CEO

Ned Rand – CFO

Howard Friedman – Chief Underwriting Officer and Actuary

Vic Adamo – President

Analysts

Mark Hughes – SunTrust

Matt Rohrmann – KBW

Beth Malone – Wunderlich Securities

Amit Kumar – Macquarie

Raymond Iardella – Oppenheimer

John Grimstad – Piper Jaffray

Paul Newsome – Sandler O'Neill

Presentation

Operator

Good day and welcome to today’s ProAssurance Third Quarter Earnings Conference Call. As a reminder, today’s call is being recorded.

For opening remarks and introductions, I would like to turn the call over to Mr. Frank O'Neil. Please go ahead, sir.

Frank O’Neil

Thank you, Jennifer. Good morning, everyone. Thanks for being with us to discuss another solid quarter that extends our strong results through 2010.

We issued a news release Wednesday afternoon reporting our results for third quarter and nine months ended September 30, 2010 that release along with our SEC filings, including the 10-Q filed this morning, are designed to provide you with important detailed information about our company as well as disclosures regarding forward-looking statements.

We’re explicitly identifying statements we make today dealing with projections, estimates, expectations as forward-looking statements subject to various risks. This is especially true for any discussion of our proposed transaction with American Physician Service Group. These risks could cause our actual results to differ materially from current projections or expectations.

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 unless required by law or regulation.

The content of the call is accurate only on Thursday, November 4th, 2010 the date of first broadcast. If you are reading a transcript of this call, please note we did not authorize it and have not reviewed it for accuracy. Thus, it may contain factual or transcription errors that could materially alter the intent or meaning of our statements.

A final reminder, we’re 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 those non-GAAP numbers to their GAAP counterparts.

On the call today is our Chairman and CEO, Stan Starnes; our President, Vic Adamo; Chief Financial Officer, Ned Rand; and Chief Underwriting Officer and Actuary, Howard Friedman.

We’ll start with Stan.

Stan Starnes

Thanks, Frank. The results we reported yesterday were again quite positive. The long-term approach we take to our operations and investments continues to serve our shareholders and policy holders well, and our discussion today will underscore that.

Our comments on the state of our industry and our strategy to enhance our leadership position through careful growth and the disciplined use of our capital will showcase our ability to create value for our shareholders and security for our policy holders.

Frank.

Frank O’Neil

Thanks Stan. Ned will you give us a brief financial discussion?

Ned Rand

Thanks Frank. Based on some of the questions we received after last quarter’s call, I’ll start again with the top line and work my way down.

Gross premium written was $159 million in the quarter, a decline of $9.6 million from the prior year quarter. $6.9 million or 72% of that decline is due to the continued selective offering of two-year policies.

Gross written premium was $415 million for the nine months ended September, a decline of $20 million period-over-period. But of that $20 million decline, $16.6 million or 83% was due to the effect of two-year policies. That’s why we suggest you also focus on net earned premium, where we can see the effect of the two-year policies coming into our income stream.

Comparing Q3 2010 to Q3 2009, the decline was $1.7 million, just 1%. For the year-to-date, net earned premium was up $15.5 million or 4% when compared against the prior year-to-date due to the addition of PICA. If you exclude the effect of PICA, year-to-date net earned premium was down 2.6%.

Moving on to investments, our net investment result in the third quarter was $34.4 million, down 15% compared to last year. Within the net investment result, net investment income was down $2.9 million quarter-over-quarter, due to lower interest rates, despite having more money to invest.

You’ll note a $1.3 million loss in the equity and unconsolidated subsidiaries in the quarter, a $2.9 million change from last year’s $1.6 million gain. As we have discussed in the past, this line could be quite volatile, but we remain confident that the investments we are making here will provide excess returns over the long term.

As we mentioned last quarter, we have also begun investing in Federal tax credits, and these do have an impact on our reported results. The benefit from the tax credit comes in the form of a reduction in our current tax liability and thus flows through the tax line on the income statement, not the investment line.

The tax benefit recognized for the quarter, related to these credit was approximately $750,000. We did have a net realized investment gain of $14.7 million in the quarter as we pair down our exposure to municipal bonds and built up cash in preparation for the completion of the APS transaction.

Once again this quarter, our total expenses are up, and again this quarter, the majority of the increase relates to PICA and the purchase accounting impact of the PICA transaction.

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