Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

FPIC Insurance Group, Inc. (NASDAQ:FPIC)

Q3 2008 Earnings Call Transcript

October 30, 2008, 11:00 am ET

Executives

John Byers – President & CEO

Charles Divita – CFO

Robert White – President, First Professionals Insurance Company, Inc.

Analysts

David Lewis – Raymond James

Mike Grasher – Piper Jaffray

Paul Newsome – Sandler O'Neill

Mark Hughes – SunTrust Robinson Humphrey

Michael Nannizzi – Oppenheimer & Co. Inc.

Operator

Good morning. My name is Mindy, and I will be your conference operator today. At this time, I would like to welcome everyone to the FPIC Insurance Group Third Quarter 2008 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator instructions). As a reminder, ladies and gentlemen, this conference is being recorded today. We're now ready to begin the call.

Unidentified Company Speaker

Good morning, everyone, and thank you for joining the FPIC Insurance Group Quarterly Conference Call. The call this morning will include a brief presentation followed by an opportunity for questions and answers. Please be reminded that the call today is being recorded, and a replay will be available this afternoon at 2:30 p.m. A webcast replay will also be available.

Today's presentation and the discussion that follows may include statements about expected future events and future financial results that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance, and actual results may differ materially as a result of risks and uncertainties that we describe more fully in our earnings release and in documents that we file with the Securities and Exchange Commission.

Our earnings release can be found in the Investor Relations section of our Web site at fpic.com. We do not undertake to revise forward-looking statements whether as a result of new information, future events or otherwise, except as required by law.

Today's presentation may also include certain non-GAAP financial measures, which we explain more fully in our earnings release, including a reconciliation of reported non-GAAP measures to the most directly comparable GAAP measure.

Now, let me introduce our participants this morning. We have John Byers, President and Chief Executive Officer; Chuck Divita, Chief Financial Officer; and Bob White, President of our Insurance Subsidiaries.

We are now ready for our presentation. Here is John Byers.

John Byers

Thanks. Good morning, everyone. The third quarter was another solid quarter for us, operationally and financially. Throughout the quarter, we achieved strong operating earnings of $1.20 per diluted share. We grew our policyholder count by 3% over the second quarter, which reflects our ongoing and systematic growth initiatives. And we continue to achieve a very attractive return on our average equity, which was in excess of 15% for the trailing four quarters.

Our conservative investment philosophy for our investment portfolio has served us well during the recent turmoil in the financial markets. As reported, our net realized investment losses for the quarter represented less than 1% of our total cash and investments. While investment portfolio valuations generally are under pressure from the current volatility and uncertainties in the financial markets, we continue to take comfort in the quality and diversification of our investment portfolio.

Our net written premiums declined 8% for the quarter, primarily as a result of lower premium rates in our Florida market arising from several years of strong claims trends. Due to our policyholder growth during the quarter, this decline was less than in recent quarters.

In addition to our policyholder growth, our retention of existing business remained excellent during the quarter, at 96% for both our core Florida book of business and overall. We secured several new endorsements during the quarter, including our recently announced endorsement by the Ohio Osteopathic Association.

Finally, we remain comfortable with our overall claims trends and results for the quarter. These overall strong results reflect the consistent application of our business strategies, which are designed to create sustainable shareholder value.

Looking ahead, we'll continue to apply these strategies, which have served us well over the years and which we're confident will continue to do so going forward. In particular, we'll continue to focus on our core disciplines of strict underwriting, disciplined pricing and aggressive effective claims management.

We'll also continue our diligent focus on prudent management of our investment portfolio and effective utilization of our capital. And we'll systematically focus on and take advantage of additional growth opportunities that make sense for our organization and our shareholders.

With that, I'll now turn the discussion over to Chuck to review our third quarter financial results in detail.

Charles Divita

Thanks, John, and good morning, everyone. Our third quarter results reflect the continued strength of our business against a backdrop of global financial market volatility. I'll provide some highlights of the quarter compared to the third quarter 2007, unless otherwise noted, and also comment on our investment portfolio given the events that we've all witnessed.

As John mentioned, our operating earnings per diluted common share was $1.20, a 40% increase over third quarter 2007. Underwriting performance and effective capital management both contributed to the increase as well as the non-recurrence of a Florida Insurance Guarantee Association assessment in the prior year's quarter.

Lower rates in our Florida market primarily contributed to an 8% decline in net premiums written. This represents an improvement from the comparable measures in the first and second quarters of 2008 of 16% and 10% respectively. This is the result of our ongoing focus on new business and retaining our existing business at a consistently high level.

In fact, our national and Florida policyholder counts, excluding policyholders under alternative risk arrangements reached their highest level since the first quarter 2006 and the third quarter 2006 respectively. We also continue to progress in our management services initiative.

Total revenues for the quarter declined 21%, primarily as a result of lower net premiums earned and higher realized net investment losses. I'll comment more about the performance of our investment portfolio in a moment.

Claims results for the first nine months of the year continue to be good overall and remained within our expectations. While higher in 2008, frequency remains in historically low levels and follows 2006 and 2007, the two lowest frequency years in the Company's history. Payment severity through the first nine months of 2008 was essentially level with the prior year period, as were net paid losses and loss adjustment expenses overall.

Excluding incidents, our CWIP ratio, which is the percentage of claims resolved with an indemnity payment, was higher on a rolling four quarters basis than the comparable prior year period but remains within our expectations. The dramatic decline in our inventory of open claims and incidents in recent years as well as the claim resolution process itself were both contributing factors. Including incidents, our CWIP ratio on a rolling four quarters basis declined slightly.

Our third quarter reserve review reflected continued downward indications across multiple accident years. Accordingly, we recognized $4 million of favorable prior year reserve development during the quarter. We remain committed to maintaining appropriately conservative reserves that reflect the inherent risks and uncertainties in a reserving process itself and of our live business.

We continue to have an efficient underlying cost structure. Excluding the impact of FIGA assessments and related recoveries, our expense ratio was 24% for the quarter compared to 22% for the third quarter of 2007. The higher ratio was primarily the result of lower net premiums earned.

We remain financially strong and have a substantial capital position. Our insurance subsidiaries have provided $31 million in dividend to the holding company through the third quarter in furtherance of our capital management initiatives and are currently writing at a net premiums written to statutory surplus level of less than 0.7 to 1 on a trailing four quarters basis.

With our strong capital position, we repurchased approximately 194,000 shares of our common stock during the quarter at an average price per share of $46.35 and have subsequently repurchased approximately 233,000 shares at an average price per share of $46.33 through October 24, 2008. As of that date, our then remaining share repurchase authority from our board of directors under our current program was just under 198,000 shares.

Turning to our investment portfolio, we've closely monitored developments of the financial markets and we continue to take comfort in the diversification and quality of our portfolio. Our investment approach is to maintain significant diversification across asset classes, industries, geographies and maturities, and to maintain a high level of overall quality. We also seek to minimize significant concentration in any single issuer.

As investors everywhere have experienced, turbulence in the financial markets has negatively impacted the performance of our portfolio. During the quarter, we realized $5.4 million in net investment losses, primarily related to financial service companies with $4.8 million being in the form of other-than-temporary impairment charges.

The after-tax impact of net realized investment losses on diluted earnings per common share for the quarter was $0.44. Additionally, widening spreads in various asset classes in the quarter largely contributed to a lower overall market value of our investment portfolio. This had a $1.84 after-tax impact on our book value per common share or 5%.

We continuously evaluate our portfolio and we remain comfortable with the quality of our holdings. Book value per common share was $32.90 and was $34.74 excluding net unrealized investment losses. Again, we're pleased with the performance of our business and our continued financial strength.

With that, we're now ready for questions.

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from David Lewis from Raymond James. Your line is open.

David Lewis – Raymond James

Thank you, and good morning.

John Byers

Good morning, David. How are you?

David Lewis – Raymond James

Just fine. Bob, I'll start with you since you've been quiet in the background there. First, Bob, can you talk about any changes you're potentially seeing from a competitive standpoint maybe over the past six months and where are you seeing some of the policyholder growth opportunities? My guess is probably more so in Georgia and Arkansas, but probably some opportunities still left in Florida as well.

Robert White

David, virtually unchanged over the last six months in terms of the competitive landscape. Same players, basically the same approach to marketing, same relative pricing. We expect with the New Year that we'll see some price changes from some of our competitors. We're watching the filings come in to the OIR. In terms of policyholder growth, we're seeing growth in Georgia and Arkansas as well as Florida. The Georgia and Arkansas growth really reflect ongoing initiatives that we've had working in those states over the past 12 months to 18 months. In Florida, it's basically just a continuation of pushing and pushing in the market to develop new avenues of business.

David Lewis – Raymond James

That's helpful. And given the elections coming up here, are there any concerns that could have some further pressure on Tort Reform or any other issues that we might – should be aware about particularly in the Florida market?

Robert White

I don't really see the elections as impacting Tort Reform in Florida or on a national basis. I mean I don't think there was a chance for National Tort Reform and I don't see the constitution of Congress changing in such a way after this election as to make it more or less likely than it was before. In terms of Florida, I don't see anything on the political landscape in Florida that would affect Tort Reform in the short run.

David Lewis – Raymond James

That's helpful. And finally for Bob, what's the outlook for pricing when you put your December 2008 rates in?

Robert White

Well, the outlook for pricing with respect to us we filed for a 6.8% decrease effective December 1st for First Professionals and a 6% rate decrease for APAC effective December 1st in Florida.

David Lewis – Raymond James

That's helpful. Chuck, for you, it appears the claims frequency trends are stabilizing after more than a 40% probably decline over the past four years, which really doesn't come as a surprise. But how is this impacting your loss picks, and it appears that those loss picks have moved up modestly over the past couple of quarters?

Charles Divita

Sure, David. What you're seeing in the current year loss ratio isn't a change in our loss picks at all. We've kept those same target loss ratios. What you're seeing is we pick a target loss ratio for various books of business, and in this quarter it happens to be that the earned premium that are rolling through, the mix has changed a bit relative to prior quarters. So you're seeing the loss ratio tick up a bit because of that. But the underlying target loss ratios have not changed neither the loss picks.

David Lewis – Raymond James

That's helpful. Thank you very much.

John Byers

Thanks, David.

Operator

Your next question comes from Mike Grasher from Piper Jaffray. Your line is open.

Mike Grasher – Piper Jaffray

Thank you. Good morning, gentlemen. Bob, if you could expand a little bit more on John's comments about the retention being an all-time high, what is driving that or in your own estimation how are you able to have such high retention rates?

Robert White

It's the service we give, Mike, and our approach to servicing an account is we have two customers. Then so much of our business is driven by agents and brokers. We treat the agent or broker as if they were a customer also. And we have a very strong reputation for service with respect to insurance agents and brokers and we also have a very strong reputation for service as respects our policyholder base. We operate on the insurance company level very much like a mutual in terms of the way we interface with our policyholders, and that's what serves us well in terms of our retention.

Mike Grasher – Piper Jaffray

Okay. Fair enough. And then you spoke for briefly there to David's question around pricing and the trends that are – that may occur there and you're keeping an eye. What indicators are there – are out there that maybe you're looking at that maybe would raise your eyebrow?

Robert White

Well, right now, we've seen a very small uptick in claims frequency. To put it in perspective, 2008 frequency looks like 2005, and at that time, 2005 was the lowest during the Company's history. We were surprised to see it go as low as we did in 2006 and 2007. So we are watching frequency, very closely. That's something that we're monitoring in terms of how that change could effect our pricing going forward. We also watch severity very closely. And severity, in terms of the everyday resolution of claims is pretty stable at the present time. There have been some big verdicts in Florida over the course of the past eight months or nine months. And while they concern us that hasn't worked its way through the severity part of the equation to really impact on our pricing. But those are the two things that we monitor closely. That small uptick in frequency has our attention, but not anything past the level of our attention at this point.

Mike Grasher – Piper Jaffray

And I guess what would it take to sort of get the pricing moving in the other direction?

Robert White

I think –

Mike Grasher – Piper Jaffray

How much more of an uptick would we need to see?

Robert White

Well, we need to see certainly more of an uptick on a consistent basis quarter after quarter. That would definitely be a signal to us. Quarters tend to vary from one company to next, especially, when you're looking at one state's claims frequency and we would have to see a sustained uptick over three quarters or four quarters for it to really cause us to be concerned and it would have to be more dramatic than we're seeing now.

Mike Grasher – Piper Jaffray

Okay. And then just one final question in this regard is that is there anything that your competition is doing that again maybe causes you to pause and think that this isn't going to last very much longer, there – really the underwriting that's occurring right now is perhaps a response of just mix price risk that we think 12 months down the road this pricing is going to go in the other direction?

Robert White

Really nothing on the horizon that gives us cause for concern along those lines, everybody behaving themselves in terms of their approach to underwriting and pricing at the present time. There is certainly a lot of competition in Florida, particularly, when you consider the start-ups that have come on line. But the start-ups are the most aggressive in terms of their pricing and the legacy players in the market in terms of their approach to underwriting and their approach to pricing are clearly behaving themselves.

Mike Grasher – Piper Jaffray

Okay. And final question I'll get back in the queue. I think the Florida Supreme Court recently nullified limitation on attorney fees for indemnity claims, and I think this was with regard to workers' comp, but is there any exposure for you with such a decision?

Robert White

Absolutely none, Mike. That comp is a creature of statute. All of their factors involving comp claims are inside that statute. Finding that statute unconstitutional doesn't carry over to any aspect of our businesses soft and find into the workers' comp statute.

Mike Grasher – Piper Jaffray

Okay. Thanks for clarifying. Good to know.

Operator

Your next question comes from Paul Newsome from Sandler O'Neill. Your line is open.

Paul Newsome – Sandler O’Neill

I guess with my – those peers, most of the questions were asked. Maybe you could just give us a question – just a little update on your M&A thoughts?

John Byers

Sure, Paul. This is John. I will do that. Well, I guess as I spoke of last quarter, there continues to be a lot of commentary about M&A. Since last quarter, we've seen at least one deal. I mean just a few days ago the (inaudible) proposed acquisition (inaudible). I think you're going to continue to see a lot of talk and analysis on potential M&A deals. In terms of acquisitions by companies like ours, the public companies, I think you'll – there are some opportunities. I think there are private companies out there that see themselves as being at the top in terms of their capital position, perhaps their earnings, and are looking to position themselves for the future perhaps a more flexible and perhaps a stronger platform. And so I think you're going to continue to see that and you'll see people assess that and you may see some more deals there.

On the other – flip side of that, I guess in terms of interest in this sector by others potentially of making acquisitions of the public companies in fact I think you'll continue to see some commentary on that in terms of – that even though the financial crisis generally in the market probably diverted people's attention to some extent, you still have companies out there with excess capital. Their markets are softening, and so they're looking for places to deploy that capital. ROIs have continued to be more profitable than most other lines, and so an obvious place to look is their line. So I think you'll continue to see interest on that front as well. As I always say, it remains to be seen how much will happen, but there is certainly continuing discussions.

Paul Newsome – Sandler O’Neill

Interesting times. Thanks for the call.

John Byers

Thank you, Paul.

Operator

Your next question comes from Mark Hughes from SunTrust Robinson Humphrey. Your line is open.

Mark Hughes – SunTrust Robinson Humphrey

Thank you very much. File [ph] for down 6.8 in Florida, what's your sense on pricing in the rest of your markets?

Robert White

Mark, we address each market separately, and annually, we look at each state in terms of our position vis-à-vis our loss experience. And we have experienced a rather dramatic decline in claims frequency in Florida that's been sustained. And therefore, the greatest impact on our rates has really been in the Florida market. We do expect our rates to be stable to down in other states as we look at them coming up, but I would tend to believe that it will be more likely to be stable than down in the current environment we're seeing on the states that we're writing in for First Professionals.

Mark Hughes – SunTrust Robinson Humphrey

Right. And again that's likely to be stable as opposed to down?

Robert White

Yes.

Mark Hughes – SunTrust Robinson Humphrey

Okay. Thank you.

Operator

(Operator instructions). Your next question comes from Michael Nannizzi from Oppenheimer. Your line is open.

Michael Nannizzi – Oppenheimer

Hi, thanks for taking the call. One question, looks like you sold about – if my math is right, about $75 million in securities in the third quarter. Was that a result of redemptions or just some maturities or rebalancing of the portfolio? And I just have one follow-up. Thanks.

Charles Divita

Really, in terms of our portfolio there is nothing out of the ordinary with respect to activity. It's – be maturities and maybe some repositioning. Obviously, there were a few sales that we did, but nothing out of the ordinary.

Michael Nannizzi – Oppenheimer

Okay, okay. And as far as the reserve releases, do you disclose what years – I know you said from '04 forward, do you disclose what years or could you – those reserve releases came from?

Charles Divita

Well, I think that the way to look at it is we've seen dramatic declines in frequency really for five years now, about 80 plus percent of our reserves in the most current four accident years. So that will give you a sense of where the reserve – favorable reserve development is coming from. We do in our 10-K and obviously in our statutory filings, show where those particular years sit.

Michael Nannizzi – Oppenheimer

Okay. Great. And last question on share purchases. So at this rate, I mean you're going to exhaust this current authorization pretty soon. Do you – can you give us just some guidance in terms of how you look at repurchase activity for kind of the remainder of the year given where things are right now?

John Byers

Chuck, you want to take that one too?

Charles Divita

Sure. I mean we certainly have substantial capital just about on every measure you look at. We have been active with share repurchases. In terms of the rest of the year, what we've typically done is go back and get additional board authorizations when we need them. If we were to continue share purchases, that's what we would do if we exhausted this. We do have substantial capital available to us. We've taken $31 million in dividends from our insurance subsidiaries through 9/30. We're able to take a total of $48.2 million without additional authorizations from the states. So, we certainly have the wherewithal to continue repurchases.

Michael Nannizzi – Oppenheimer

Okay. Thanks, Chuck.

Operator

(Operator instructions). Your next question comes from Andrew Terry [ph] from Fox-Pitt Kelton. Your line is open.

We will go on to the next question. (Operator instructions). Since there are no further questions, I'll turn the call back over to John for his closing remarks.

John Byers

Thanks. As I said earlier, we are pleased with our third quarter results and how we are positioned for the future. Going forward, we'll adhere to the business strategies that have served our organization and our shareholders well over the past several years and have positioned us well for the future. We continue to be excited about our prospects and very much appreciate your support. We look forward to speaking with you again on our next call.

Operator

Our conference will be available for replay beginning at 2:30 p.m. today and will run through Thursday, November 6th. Callers in the U.S. and Canada may access the replay by dialing 800-642-1687 and international callers may dial 706-645-9291. The access code for both U.S. and international callers is 67215668. A replay of the conference call webcast will also be available on our corporate Web site, fpic.com, beginning at 2:30 p.m. today.

This concludes our call for today. Thank you for joining us. We hope you'll join us again next quarter. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: FPIC Insurance Group, Inc. Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts