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

FPIC Insurance Group Inc. (NASDAQ:FPIC)

Q4 2008 Earnings Call

March 05, 2009; 11:00 am ET

Executives

John Byers - President & Chief Executive Officer

Chuck DeVita - Chief Financial Officer

Bob White - President of the Insurance Subsidiary

Dana Mullins - Investor Relations

Analysts

David Lewis - Raymond James

Joseph DeMarino - Piper Jaffray

Mark Hughes - SunTrust Bank

Amit Kumar - Fox-Pitt Kelton

Ed Shields - Sandler O’Neill

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 fourth quarter and year 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)

We are now ready to begin the call.

Dana Mullins

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 pm. A webcast replay will also be available.

Today’s presentation and the discussion that follows may include statements of our 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 website at www.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 DeVita, Chief Financial Officer; and Bob White, President of our Insurance Subsidiary. We are now ready for our presentation. Here is John Byers.

John Byers

Thanks. Good morning everyone. We are happy to report that we achieved strong overall financial and operating performance for the fourth quarter and the year 2008. We achieved operating earnings per share for the quarter of $1.19 and achieved operating earnings per share of $4.76 for the year. These results reflect the continuation of our overall favorable claims trend, as well as the success of our business development and capital management initiatives.

Our overall retention rate for existing business was 96% for the year, an historic high; reflecting our strong market positions and strong long-standing support from our customer base. Over and above the strong retention rate, we achieved policyholder growth during the year, including growth in our core Florida market and in our established Georgia and Arkansas markets.

We also secured business under our management services initiative during the year. As expected, net written premiums for the year declined; primarily as a result of lower rates in our Florida market based on several years of favorable claims trends. This decline was offset to some extent by our policyholder growth, particularly in the latter part of the year.

Like most others in our industry, we incurred some realized investment losses during 2008. Having said that, our aggregate realized investment losses for the year represented less than 2% of the value of our total cash and invested assets as of year end. We continue to take comfort in the overall quality and diversification of our investment portfolio.

We move into 2009 financially strong and well capitalized. We’re currently writing business at a net written premium to surplus ratio of only about 0.7:1, signifying our strong capital position and room for growth.

Looking ahead, during 2009 we’ll maintain our unyielding focus on the business strategies that have served us well and brought us to this point; including an unrelenting focus on our core disciplines, our strict underwriting, recent pricing, aggressive effective claims management and efficient capital utilization.

We also diligently pursue further growth opportunities, both in our core markets, the additional markets and with our management services initiative. We look to both organic growth and seek acquisition opportunities that make sense for us and our shareholders. All in, as we move into 2009 we are well-positioned to continue to drive shareholder value based on our strong capital and market position, our growth opportunities, and the substantial experience and dedication of our people.

With that overview, I will now turn the discussion over to Chuck to review our fourth quarter and the year 2008 financial results in detail.

Chuck Divita

Thanks John and good morning everyone. Our business performed well in 2008, demonstrated by our operating results and financial strength and progress on our business development initiatives.

We reported strong operating earnings per diluted share of $1.19 for the quarter, which included $4.5 million of favorable reserve development. This compares to operating earnings per diluted share of $1.64 for the prior year’s quarter, which included $7 million of favorable prior year reserve development, as well as the full year impact of a 2 percentage point reduction in our 2007 accident year loss ratio.

For the year we reported $4.76 of operating earnings per diluted share, compared to $5.27 in 2007. Favorable reserve development in 2008 totaled $17 million, compared to $16 million in 2007. As you may recall, our 2007 results also included a $0.99 per share benefit from a commutation of reinsurance agreements, where we had previously provided reinsurance coverage.

Excluding the commutation, our operating earnings per diluted share for the year were 11% higher than 2007. Our return on average equity was nearly 12% for the year and was over 14%, excluding the other-than-temporary impairment charges we recorded during the year on certain investment securities. I’ll comment more on our investment portfolio in a moment.

Our business development initiatives were also successful in 2008. Professional liability policyholders grew 3% for the year in 2007 and we achieved a 96% retention level in Florida and nationally for the year. These results helped offset to some extent the impact of lower rates in our Florida market. We also progressed well in our management services initiative, adding $2.9 million in direct written premiums in 2008 and ending the year with 174 policyholders under alternative risk arrangements.

Excluding the assumed reinsurance commutation I mentioned, net premiums written declined 9% in the quarter and 11% for the year. In comparison, our net premiums written in 2007 declined 18% for 2006 on the same basis. So we are pleased with the success of our business development initiatives, and we continue to feel good about our competitive position.

Excluding net realized investment losses, consolidated revenues for the quarter and the year declined 11% and 12% respectively. Lower premium rates in recent years mostly drove these declines. Including net realized investment losses, consolidated revenues were 25% lower for the quarter and 17% lower for the year.

Underwriting results continue to be very good, with our combined ratio at 79% and 80% for the quarter and year respectively. Both ratios reflect approximately 10 percentage points of benefit from favorable reserve development.

Our expense ratio was 22% for the quarter and for the year. In addition to the level of net premiums earned, our expense ratio in recent years has also been impacted by other items such as insurance guarantee fund assessments and related recoveries and the assumed reinsurance commutation in 2007. Excluding these items, our expense ratios were 22% for the quarter and 24% for the year.

As I mentioned earlier, we recorded other-than-temporary impairment charges during the year as a result of the decline in financial markets and the weakened economy. For fixed-income investments, these charges totaled $2.7 million for the quarter and $6.3 million for the year or approximately 1% of our fixed income portfolio at year end. These charges were primarily related to holdings in financial institutions, severely impacted by the credit market issues.

We also recorded other-than-temporary impairment charges on equity securities during the year, due to the magnitude of the stock market decline and the nature of equity investments. These charges totaled $5.9 million for the quarter and $6.8 million for the year.

While the financial markets continue to be challenging, we remain focused on our core investment philosophy of diversification and quality. Our fixed income portfolio, which represents nearly 90% of our total investment portfolio, has an average quality rating of AA and is diversified across multiple asset classes. Cash comprised 8% of the portfolio at year end, and the remaining 2% of the portfolio was in equities and other investment assets.

Turning to loss reserves, we confirmed our year end study and our reserves remain appropriately conservative. The favorable development we recognized this year, primarily related to accident years 2004 through 2006 and to a lesser extent 2007. These years have continued to benefit from favorable claims results compared to our earlier estimates.

Our 2008 calendar year claims results were also favorable overall, with frequency remaining near historically low levels and paid severity measures within expectations. Reported claims and incidents, while not as low as 2007, which was one of our lowest frequency years on record, continue to reflect the lower frequency levels we’ve seen since 2003.

The ratio of claims with an indemnity payment to total claims closed or the CWIP ratio was also not as low as 2008. This ratio reflects the impact of multiple years of lower frequency, as well as a relatively higher number of claims with an indemnity payment during 2008.

Average net paid severity remained essentially level with 2007. Our inventory of open claims and incidents on hand at year end was up slightly from 2007; however, the number of open claims declined 9% from year end 2007.

Our capital position remains strong, and our net premiums written to surplus ratio continue to be very conservative. Our book value per share grew slightly in 2008 and increased 4% excluding net unrealized investment losses.

We also continue to be active on the capital management front, repurchasing nearly 1.5 million shares of our stock during 2008, at an average price of $45.10 per share. Through February 27, 2009, we repurchased approximately 192,000 shares of our common stock since year end, at an average price of $39.03 per share. As of that date we had approximately 261,000 shares remaining under our existing authority from our Board of Directors. Again, we are pleased with the performance of our business in 2008.

With that, we are 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. A couple of questions to start for Bob; first Bob, can you talk a little bit about the pricing outlook for 2009 and any competitive changes that you’ve seen out there that could have a positive or negative impact?

Secondly Bob for you, I’m curious if you’re seeing any changes at all in kind of the claim trends out there right now. Chuck just indicated that severity remained fairly flat in 2008 versus 2007. Is that something that we might see given that we’ve been at favorable levels for the last couple of years, that we might start to see that tick up?

Bob White

Well David, as far as the pricing outlook is concerned, you know it’s a state-by-state issue and for Florida what we foresee is high single digits to low double digit decreases in 2009 for Florida.

As far as competitive changes are concerned, there’s really nothing different at this point in time than there was when we talked in the third quarter or at the end of the third quarter. There’s nothing that’s happened from a competitive standpoint that would positively or negatively impact our company’s position in the marketplace.

As far as your question on claims trends concern, neither from a frequency or a severity perspective do we see any big changes with frequency on the horizon, particularly when you consider the fact that our policy limits profile is so heavily weighted with policy limits at $250,000.

In a high venue state like Florida, it would take something monumental to forge any upward movement in severity, absent a change in the limits profile that would find us with more $1 million policy limits in place.

David Lewis - Raymond James

Okay Bob, finally is there any new developments or are there any new developments regarding challenges on the state’s caps reform?

Bob White

Well, there are a couple of cases that are pending, one in the Third District Court of Appeals and another in the Fourth District Court of Appeals, that don’t involve our company but involve other med-mal insurers. The one in the Fourth District has just been briefed and is going to be set for oral argument very soon, so we actually expect to see an opinion come from an appellant court on caps in 2009, possibly as late as early 2010, but I kind of expect to see it in 2009; we’ll see.

David Lewis - Raymond James

That’s helpful. Thank you.

Operator

Your next question comes from Joseph DeMarino from Piper Jaffray. Your line is open.

Joseph DeMarino - Piper Jaffray

Thank you, good afternoon. Did you release the amount that rates were down within the state of Florida?

Bob White

Our rate decrease effective December 1, 2008, is a 12% decrease.

Joseph DeMarino - Piper Jaffray

Okay, thanks. The policyholder growth, does that break evenly among Florida and other states or do you have the states that occurred in primarily?

Bob White

Yes, it kind of breaks down evenly between Florida, Georgia and Arkansas, probably a little more Arkansas growth than the other two states, but right off the top of my head, it breaks down fairly evenly.

Joseph DeMarino - Piper Jaffray

Okay and how is pricing on new accounts?

Bob White

We’re experiencing our share of new business. Actually, we’re probably hitting a little more frequently in the first part of 2009 than we did at the first part of 2008. We’re on a cliff that we were seeing in the end of 2008. I’m not sure that answers your question, but…

Joseph DeMarino - Piper Jaffray

Sure, that’s helpful. How about acquisitions; are you looking at any or seeing any possibilities?

John Byers

Well Joseph this is John, I’ll take that one. We’re constantly out looking for opportunities and if you follow the sector pretty closely, you’ll see that from time-to-time there are opportunities out there. As we’ve said before over the years, we tend to look at all of those and we’ll continue to do that.

In terms of activity, we continue to see commentary and we still have and see discussions a good bit about acquisitions. I guess I would say it’s a little less focused now than it’s been in the past; I think primarily because so many companies are inwardly focused now with the economic environment being what it is. That tends to sort of break up the systematic nature of the discussion, but discussions do go on. We continue and will continue to look at opportunities that might make sense for us.

Joseph DeMarino - Piper Jaffray

Okay, thank you and how high could your risk-to-capital go without causing issues I guess?

John Byers

Chuck, you might want to take that. As I take it your question is how high could our leverage go?

Joseph DeMarino - Piper Jaffray

No, your risk-to-capital ratio?

Chuck Divita

Well yes, I mean a common measure that people look at is your ratio of premiums written to surplus. In the past we’ve been as high as 1.3, 1.4, even 1.5 times. You’ll see some sectors of P&C operating in that area, but med-mal historically has been in that 1:1 range probably, and we’re writing at a bit less than 0.7:1 right now.

Joseph DeMarino - Piper Jaffray

Okay, great. Thank you.

Operator

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

Mark Hughes - SunTrust Bank

Yes, thank you. Your strategy for further share repurchases, you’ve obviously been buying quite a bit and you talked about the potential upside there, obviously to get more underwriting leverage. Can you talk about how much more you think you’ve got to spend, what your outlook is for the next year or so?

John Byers

Sure. I mean obviously first and foremost, we’re going to focus on maintaining a very strong capital position which we have, but we do think that going, forward share repurchases will continue to be part of our capital management strategy. I just mentioned that ratio.

If you did the math on 1:1 versus where we are now, roughly $80 million of excess capital on that basis, that’s not the only metric we look at, but we do have substantial resources, should we continue repurchases. We have about $15 million of cash at the holding company at year end.

The allowable dividend without additional approval from the insurance department is around $24 million in 2009 for us to take the insurance subsidiary, so we have good wherewithal to continue repurchases.

Mark Hughes - SunTrust Bank

Thanks for that detail. The 1-to-1, do you think that would be an acceptable ratio for the ratings agencies?

Chuck Divita

Sure yes. I mean I think again historically, even being an A minus we operated at higher leverage than that, but certainly 1:1 is very comfortable leverage.

Mark Hughes - SunTrust Bank

Okay. Then I think you said the number of open claims was down 9%, but claims and incidents are relatively flat, is that right?

Chuck Divita

That’s correct. You know, the number we publish is just our open inventory of claims and incidents, so a slight up-tick, but really that’s an incident driven number. Our claim counts continue to drop as we close out claims and we’re down 9% in ‘08.

Mark Hughes - SunTrust Bank

Thank you.

Operator

(Operator Instructions) Your next question comes from Amit Kumar from Fox-Pitt Kelton. Your line is open.

Amit Kumar - Fox-Pitt Kelton

Just going back to the commentary on rates, could you maybe comment as to where do you see the inflection point for the cycle and if loss trends are still benign, would it be fair to say that even as we look towards 2010, we might be perhaps talking about mid single digit rate declines in filings?

John Byers

Amit, this is John. Let me take that one. I think where we are is, we think if all things stayed even, if claims results didn’t change through the year, if the trends that we’ve seen continue to be benign, we actually think you’d start to see rates level out in 2010. We think the very beneficial effect of the low claims trends for the last several years are substantially reflected in the rates. For that reason, if trends stayed benign, we certainly think you’d start to see a leveling of rate in 2010.

Amit Kumar - Fox-Pitt Kelton

Okay, that’s helpful and I know you talked about the 174 policyholders, in terms of the management services business. What’s sort of the bigger game plan here with that portion? Like, where do you see that going as we head forward?

John Byers

Well, as we’ve always said, we see that as a complement to our underwriting business in terms of relative sizes. Having said that, we’ll continue to look for growth opportunities; we’re very systematic about how we’ve gone about it. I would say at year end 2008, we were virtually on top of where we thought we would be going into that year.

So we’ll continue to look at opportunities. Just like with our underwriting business, we will look for organic growth opportunities, and if there’s acquisitions that make sense, we’d look at, too, but we’re going to continue to systematically focus on it and work to continue to grow it.

Amit Kumar - Fox-Pitt Kelton

Okay, that’s helpful and I just because going back to the premium leverage point here we’re making, as to being at 0.7:1 and perhaps going as high as 1, in terms of the different states and if I look at it, if you go back, it has modestly sort of changed over the past few years. As you sort of look forward, does it remain in maybe the high 70s and the rest of the states being 30%? How do you see that evolving as you go forward?

John Byers

Sure Amit, you mean in terms of just where that premium leverage number goes?

Amit Kumar - Fox-Pitt Kelton

No, in terms of the premiums by states?

John Byers

Relative portions of…?

Amit Kumar - Fox-Pitt Kelton

Yes, does that change or does it still remain fairly constant, apart from the growth coming from some of the states, which again has modestly changed?

John Byers

Amit, this is John. For the foreseeable future, I mean things could change, certainly. If some great opportunity came along, it could change the numbers, but assuming that it’s organic growth, Florida I think will be the dominant part of our premium going forward. I say that, that’s because it’s our home state where we are domiciled and we see a lot of opportunities here; but also the premium rates are so high in Florida, relative to most other states, that both of those things tend to make Florida our dominant state. I think you’re going to see sort of directionally that be the case.

You may see Florida begin to trend down, at least on the margins and not be quite as high as it is now, but absent some acquisition that we come upon that makes a lot of sense to us when we do, Florida will continue to be the predominant state.

Amit Kumar - Fox-Pitt Kelton

Okay, and then a final question, in terms of the economic conditions and Obama administration; in terms of your segment, are you seeing sort of a noticeable change in terms of the coverage’s being purchased, based on what the economy is right now or do you feel that it’s still inelastic and hence does not impact you that much going forward?

Bob White

Well, I mean we don’t see anything changing, given the economic times and the new attitude that’s in Washington. We think it would take quite a bit more than has already happened, for something like that to happen in our sector and while it may get worse, I don’t think we’ll ever reach the point where we’ll be bad enough to where we’ll affect our policyholders ability or desire to carry coverage.

Amit Kumar - Fox-Pitt Kelton

Okay, very helpful and congrats on the quarter. Thanks.

Operator

Your next question comes from Ed Shields from Sandler O’Neill. Your line is open.

Ed Shields - Sandler O’Neill

Good morning guys, and thanks for the call. Most of my questions have actually been answered already. I do have one numbers question. I noticed the effective tax rate moved up a bit in the fourth quarter and I was just wondering what helped do that and what your thoughts are for the effective tax rate going forward.

Chuck Divita

Sure. Yes, it did jump up in the fourth quarter and what that really relates to is the realized investment losses that we had, including the other-than-temporary impairment charges. We put a valuation allowance up on the deferred tax assets associated with that.

Obviously, as we have gained in the portfolio in the future and used those losses, that valuation allowance will come back to us, but the accounting literature as you look at it, we actually put a valuation allowance up. There was about four point’s impact on the effective tax rate, which I think was around 38% for the quarter.

So in terms of a run rate going forward, we are probably going to continue to be in that 32%, 33% level we’ve been at, excluding the valuation allowance.

Ed Shields - Sandler O’Neill

Okay, great. Thank you very much.

Operator

Since there are no further questions, I’ll turn the call back over to John for his closing remarks.

John Byers

Thanks. In closing, although we’re in turbulent economic times, we take comfort that our organization has maintained profitability and is well capitalized, has strong market positions and substantial customer loyalty and has a dedicated, cohesive staff and Board of Directors.

As we move forward, we remain focused on our business strategies and committed to creating shareholder value. Thanks for your continued support. We look forward to speaking with you again on our next call.

Operator

Our conference will be available for replay beginning at 02:30 pm today and will run through Thursday, March 12. Callers in the US and Canada may access the replay by dialing 800-642-1687 and international callers may dial 706-645-9291. The access code for both US and international callers is 82518335. A replay of the conference call webcast will also be available on our corporate website www.fpic.com, beginning at 02:30 pm today.

That 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. Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts