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

ProAssurance Corporation (NYSE:PRA)

Q1 2009 Earnings Call

May 5, 2009 10:00 am ET

Executives

Frank O'Neil - SVP Corporate Communications IR

Stan Starnes - Chairman, CEO

Vic Adamo - President

Ned Rand - CFO

Hayes Whiteside - Medical Director

Howard Friedman - Chief Underwriting Officer

Analysts

David Lewis - Raymond James

Mark Hughes - SunTrust Robinson Humphrey

Mike Grasher - Piper Jaffray

Michael Nannizzi - Oppenheimer

Mary Schafer - Morgan Stanley

Operator

Good day everyone and welcome to today's ProAssurance first quarter 2009 earnings release and conference call. As a reminder, this call is being recorded. Now, I would like to turn the conference over to Mr. Frank O'Neil. Please go ahead sir.

Frank O'Neil

Thank you, Jennifer, and thanks everyone for joining us. The news release we issued yesterday afternoon and our SEC filings including this morning's 10-Q filing include disclosures with respect to forward-looking statements. In that regard, please understand that many of the statements we make today will deal with projections, estimates and expectations. We explicitly identify these as forward-looking statements subject to various risks. Our actual results could differ 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 we 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 Tuesday, May 5, 2009, the date of first broadcast. If you are reading a transcript of this call, please note that we did not authorize it nor have we reviewed it for accuracy, thus it may contain errors that could alter the intent or meaning of our statements.

On the call today is our Chairman and CEO, Stan Starnes; our President, Vic Adamo; Chief Financial Officer, Ned Rand; Chief Claims Officer, Darryl Thomas; our Medical Director, Dr. Hayes Whiteside; and our Chief Underwriting Officer, Howard Friedman who is attending an industry conference and has dialed in from the road.

Stan will open our remarks today.

Stan Starnes

Thanks, Frank. Welcome everyone and thanks for joining us. Let me set the tone for today's call by highlighting our profitability in the quarter and underscoring the growth in book value despite the challenging environment in which we operate, both as providers of insurance and as investors in a troubled economy.

On the insurance side of the enterprise, we continued to see moderate loss trends. We renewed policies at historically high retention levels, and we have seen the rate of decline in renewal pricing slow for the first time in many quarters. On top of that our pricing is such that we are able to write business we believe will be profitable in today's market and still maintain our historically conservative reserving pattern, which insures our ability to respond to any change in the loss environment.

On the investment side, our cautious approach to investing help limit losses caused by impairments. Like everyone else, we face lower interest rates and ongoing dislocations in the financial markets, but we nevertheless have maintained the discipline required to maintain profitability in our core business.

With that as an overview, let us hear about the number, Frank.

Frank O'Neil

Okay. Thanks, Stan. Ned, numbers from you?

Ned Rand

Sure, Frank. Since Stan ended with the balance sheet and investment picture, that's where I will start. We were able to grow our book value per share by 4% and stockholders equity by 3% in the quarter. We think that is a notable accomplishment in a challenging operating environment. Book value stands at $44.19 per share. We believe our stock continues to represent a solid value given our historical price to book ratios.

On the subject of our stock, in the quarter, we bought back approximately 443,000 shares at a cost of $18.6 million. We have approximately $55.8 million available to repurchase our common stock or retire debt and we expect to continue purchasing shares if the price again falls below book value.

As we focus on building shareholder value, I can think of few, if any, investments that are as strong as our stock right now. We earned $0.99 per diluted share on an operating basis, down about 7% from last year's first quarter, but that decline is primarily due to investment related items.

From a balance sheet perspective, we are taking a somewhat defensive posture. While that is helping to preserve our capital and protect our book value, it is impacting our investment return. Two such defensive actions are an increase in our cash and short-term holdings and our investment in Inflation Protected Securities, TIPS. The increase in cash and short-term investments led to lower returns on our core fixed income portfolio due to lower balances.

In addition, while we held more in short-term investments during the quarter on a comparative basis, we are still impacted by the decline in short-term rates that began during the second half of 2008. Our return on short-term funds is down an average of approximately 300 basis points.

Our inflation protected securities, where the coupon on the security is tied to the change in CPI, actually produced a negative coupon for the quarter because of the decline in the CPI during the period. However, because there continues to be an expectation of significant inflation into the future, the value of these securities increased during the quarter resulting in a total return of 5%.

With that as a backdrop, we continue to search for ways to put our money to work under more advantageous terms, but at the same time we are being careful on how we deploy our cash. We continue to see volatility on pricing pressure in the asset backed investment universe and we continue to take a conservative approach in dealing with other than temporary impairment concerns.

Net realized investment losses were $7.5 million, a small fraction of 1% of our investment portfolio. The writedowns were primarily in our non-agency mortgage backed securities, $2.5 million and in the reserve fund $3 million. We also have $1.5 million in other than temporary impairments and various corporate credits. As always, our entire investment portfolio updated through quarter end is available on the Investor Relations section of our website.

Turning to our insurance operations, we saw a slowing of the decline in the top line that we have experienced due to the soft market and moderating loss trends. Where we saw renewing premiums down 6% on average in 2008, the overall decline in renewing premiums was 4% in the first quarter of 2009.

Our ability to add new business in our core physician line is a positive here and we began to see growth from our acquisitions of Mid-Continent General Agency and Georgia Lawyers.

Our net loss ratio was down a bit more than one point quarter-over-quarter and we recognized net favorable reserve development of $18.5 million in the quarter. Howard will go into more detail next.

Expense management in a soft insurance environment can be a challenge and the decline in premium resulted in an increase in the expense ratio, up 1.3 points over last year's first quarter. We are being very attentive to the expense line and we look for ways to reduce expenses where we think it does not weaken the organization. As a result, we were able to hold operational expenses even with last year and our variable expenses were $2.1 million below the same quarter last year.

It is more of a challenge with the operational or infrastructure related expenses. We are very conscious of holding all these expenses in check, but we are also mindful of keeping the infrastructure strong and in place so that we are able to grow as opportunities present themselves. Our goal is not to produce the lowest expense ratio in a given quarter; rather, it is to grow a company that operates successfully in all market cycles. To do this, we need to invest in our people and systems.

In summary, we strengthened the balance sheet in the quarter growing shareholders equity and book value. In the face of challenging insurance market conditions, our long-term strategy allowed us to maintain a combined ratio in line with last year's first quarter, and although we were affected by the investment climate, our conservative portfolio helped us limit the negative effects. Frank?

Frank O'Neil

Thanks, Ned. Can I get you to talk for a minute about where we're investing now? I know that is going to be a question we will probably get.

Ned Rand

Sure. Right now, we are at our desired limit on muni exposures and we have not been adding the mortgage backed securities, either agency mortgage backed or commercial mortgage backed. We have been adding to industrial exposures, because our external managers believe there is value in that space right now. We have one manager who thinks TIPS are attractive at these levels and we have been adding to our TIPS position. We have also purchased some of the FDIC insured corporate paper.

Our duration is approximately four years right now and we're comfortable there. We're not extending duration to stretch for yield. Our last presentation which we filed is an 8-K on April 15 contains a graph that shows why we don't see the advantage of that. Our exposure to credit is manageable relative to our capital. We see opportunities right now to add to it.

Frank O'Neil

Okay. Thanks, Ned. Howard, can you give us a review of reserves and overall trends to tell us where it might be a hit in 2009?

Howard Friedman

Sure, Frank. As you heard from Ned, there was $18.5 million of net favorable reserve development in the quarter. This is primarily from accident years 2004, 2005 and 2006 with a small contribution beginning to show up from 2007.

Because of the critical lens through which reserve development is viewed, I want to again emphasize the rigorous attention we pay to the subject. Much of the favorable development comes from our cautious approach to establishing initial reserves coupled with the clear improvement in the loss environment over the last few years.

Our reserve development also represents the result of disciplined pricing and operations at a time when our view of lost cost indications was quite different than today. No matter what the lost cost indications are we always adhere to a strict policy of reserving in order to ensure that we will be able to respond to adverse claim trends in the future just as we have in the past.

I think that it is important for both our investors and our policyholders to understand that the process of setting reserves and the process of pricing our business are separate. While we do take a cautious approach to reserving we do not let this caution unduly influence how we price our businesses. Our pricing is based upon historical claims activity that is incurred and paid losses and not on how we set reserves.

On the subject of the current loss climate and pricing, there are some encouraging signs. Our retention of existing business was 89%, which is especially important because first quarter is one of our heavier renewal quarters, and importantly, that business was retained, as you heard Ned report, with an overall premium reduction of 4%. That compares favorably with the 6% overall reduction in 2008.

Because we drive pricing from our ongoing actuarial studies, we see this as an indication that we could begin to see some light at the end of the pricing tunnel. That is not to say the soft market is over, but we see the pricing environment as having reached a trough.

To be sure there are still areas in which competition remains fierce, but on balance, we're seeing some reasons to be optimistic. Another reason for cautious optimism is our ability to bring on new business in our core physicians line and the premium coming from our acquisitions.

Frank O'Neil

Thanks, Howard. Vic, Howard had mentioned some acquisitions. Will you give us an update on where we stand there?

Vic Adamo

Sure, Frank. I will briefly mention Mid-Continent and Georgia Lawyers, which were closed during the first quarter then I will focus on PICA.

As we mentioned in prior calls, Mid-Continent was placing some business with ProAssurance prior to our acquisition. Now, we're seeing the added benefits of the transaction as more and more of the medical liability premium comes directly into ProAssurance.

Mid-Continent contributed an additional $4 million to top line premium in this quarter and Mid-Continent is giving us greater access and ability to grow premium in the ancillary healthcare provider market that will likely expand under the Obama administration's healthcare plans. We feel like we're ahead of the curve here.

In total, Mid-Continent placed approximately $26 million of premium in 2008, of which, $20 million was healthcare related. We're confident we will get a chance to directly write the majority of the healthcare related premiums during 2009.

Legal professional liability also grew quarter-over-quarter. The merger of Georgia Lawyers into ProAssurance is complete and renewals are coming in as expected. We are adding new lawyers professional business as well. We are confident that over the course of the next year, we will meet and exceed the $5.5 million of premium that Georgia Lawyers wrote in 2008.

Moving on to PICA. The PICA transaction closed in April, so there is no effect on first quarter. To help understand the expected premium contribution from PICA, we note that PICA wrote $96 million of premium in 2008. In terms of premium booking by quarter, it was approximately first quarter 20%, second quarter 10%, third quarter 50%, and fourth quarter 20%. So, to go over that briefly, in 2008, PICA did $96 million of premium, which was booked by quarter; 20%, 10%, 50% and 20%. PICA renewals are continuing to track last year. They're coming in as expected above 90% overall with 94% in the core podiatry business.

Integration is going very well, but it is not a significant issue since PICA will continue to run its insurance operations as a standalone subsidiary. We have combined our respective investment activities and we're looking for ways to tap into the unique knowledge of both organizations, especially in the data processing area.

Finally, Frank, we can report that the judgment in the Columbia Hospital for women case was paid last week. As a reminder, we fully reserved for that loss when we acquired NCRIC, so there is no impact, but we can now put this matter behind us.

Frank O'Neil

Thanks, Vic. We have gotten some interesting questions the last couple of days about swine flu and how it might affect the liability climate, so I thought you might like to hear from Dr. Hayes Whiteside, our Medical Officer and a key member of senior management. Hayes, will the swine flu situation have an effect on medical liability in your judgment?

Hayes Whiteside

Frank, we have been monitoring the situation closely since the news broke about 10 days ago. Right now, it is hard to see how this would have any effect on the medical liability climate. Obviously, physicians don't have a role in the H1N1 virus coming into this country, so they can be blamed for this and as long as we manage patients appropriately, there should be no claims impact. Treating patients appropriately is always the issue, so we just don't see this as a claims accelerating event.

We will continue to monitor the situation as we do every emerging medical trend and if warranted we will make swine flu a part of our ongoing risk management activities. We devote significant manpower to reaching as many of our insureds as possible with our risk management seminars, both in person and now online.

Last year, for example, we had personal contact with more than 55% of our insureds in 535 seminars. So, we're confident that if there is a liability aspect to swine flu we will be able to address it with our insureds, but again, we don't expect this to be a liability issue.

I think it is worth noting, however, that we have updated our pandemic planning in the company, which was completed and tested in 2007 and we have taken preliminary steps called for in the plan and we are encouraging our employees to pay close attention to such things as hand washing, work space disinfection, things the CDC is advocating. Frank?

Frank O'Neil

Thanks, Hayes. Interesting update. Stan, any final remarks before we take questions?

Stan Starnes

Frank, I don't want the call to end before I comment again on Treated Fairly. We continue to hear from our stakeholders that they get it. On our recent visits to Boston, for example, we heard from a number of investors who were appreciative of our decision to promote transparency by placing our investment portfolio on the Internet. We continue to hear from insureds in the renewal process that it means something and our insureds who have claims were mentioning it as we received their reviews of our handling of their claims.

I am pleased with all of this because it shows Treated Fairly is renewing the commitment that we have always had in place, but I am perhaps most proud that treated fairly was woven into our employee review process so well this spring. This tells me that the commitment is solidly entrenched here and will be for years to come. Frank?

Frank O'Neil

Thank you, Stan. Jennifer, we're going to open the line for questions right now. I am sure you will instruct everybody and then we will hear from the questions.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions). We will hear first from David Lewis of Raymond James.

David Lewis - Raymond James

I have got a couple of questions. First I will start with you, Stan; kind of high level question. I guess it was last week when President Obama held a press conference, but in response to one of the press questions he mentioned that trying to reduce medical liability insurance would be a major part of getting overall healthcare costs down. Have you heard any plans out of the administration on how he might go about that?

Stan Starnes

David, I heard the press conference. I heard him make that remark, which so far as I know was the first time a Democratic president has mentioned medical liability insurance in a national press conference. It could have happened before, but I have no recollection of it.

To answer your question, I have not seen any specifics of it. We, of course, are watching it very carefully and we as a country need to be cognizant that anything that we do with respect to healthcare reform will have implications in the professional liability arena and we need to be careful to understand what those pretend and what those mean, but I have seen no specifics.

David Lewis - Raymond James

That is helpful. I now want shift gears to Vic. First of all on the PICA modeling guidance, I appreciate the top line perspective, but how are the combined ratios on that business relative to your current book?

Vic Adamo

I am going to let Ned...

Ned Rand

I don't have that information in front of me. We can certainly get it based on what they have historically done. The statutory statements are the best place. I don't know, Frank, if we can actually post their year end stats statement on our website.

Frank O'Neil

We can do that and the other thing that I can refer folks back to and I will try to pull it up here and I will come back with it, but in our announcement news release back in September-October, we had some of their historical combined ratios. So, that might be a reference point as well immediately, but I will see if we can get those statutory statements and get them put up.

David Lewis - Raymond James

All right. Ned, while I have got you, the alternative investment losses in the quarter. Can you give us the magnitude versus what they did a year ago?

Ned Rand

On the alternatives? Yes, just one second. Let me pull that out. I don't believe it was that drastically different quarter-over-quarter.

David Lewis - Raymond James

I will just throw out one other question while you're looking that up. Should we anticipate any reserve release out of the Columbia Hospital resolution?

Ned Rand

Nothing really significant. It will be maybe a modest amount based on the totality of expenses we had accrued for, but we will in addition kind of offsetting that we will have some transaction costs from the PICA transaction that will probably offset anything that comes out of it.

David Lewis - Raymond James

Okay.

Ned Rand

On our unconsolidated subs, in the first quarter of 2008, we had a loss of about $1.9 million. In the first quarter of this year, it was a loss of about $1.4 million. So, an improvement of about $500,000.

Operator

Our next question will come from Mark Hughes of SunTrust.

Mark Hughes - SunTrust Robinson Humphrey

The contribution from Mid-Continent in the quarter, was that at the gross line, earned line?

Ned Rand

That was $4 million in written premium.

Mark Hughes - SunTrust Robinson Humphrey

In written premium, okay. Do you have the earned number?

Ned Rand

Not in front of me. It would roughly be a little less than a quarter of that; probably somewhere under $1 million; $600,000 to $1 million, somewhere in that range.

Mark Hughes - SunTrust Robinson Humphrey

Okay. Then the distribution of business by quarters for PICA; has that been fairly steady historically if you go back the last couple of years?

Ned Rand

It has. That is our understanding that that coincides with their client base getting out of school and going into private practice.

Mark Hughes - SunTrust Robinson Humphrey

Right, I understand. Then in terms of the competitive environment, not quite as competitive on renewals; is there any way to characterize where you're seeing a little bit of easing? Are some of the smaller players not as aggressive? What accounts for that?

Stan Starnes

I am going to ask Howard to answer that, but I will remind you generally we don't review on a state by state basis, but I think Howard can give you some generalities.

Howard Friedman

Sure. I think what I would say is that we're seeing it from a variety of different competitors and on any given account on any given day, you can see different reactions. So, I would not say it is an overall trend or a universal trend by any means, but it is just this, I guess you could say a sense that we're getting and I think that others are getting in the marketplace that there is a little less intense pressure on some of the renewal business right now. A little less maybe on the part of the policyholders, a little less emphasis on shopping some of that. They have seen reductions both from us and other competitors over the past couple of years and I think they are relatively comfortable now in many instances with what their options are and what they're paying for coverage.

Frank O'Neil

Howard, you're at an industry conference. Can you give us a sense of the mood there? Is it, again, echoing what you're saying?

Howard Friedman

Certainly. I think very much what I just described, the discussions in general about the marketplace and competition; just hallway conversation to some extent, but also a couple of panel discussions on client frequency and this is the same issue that everybody has been dealing with for the past five years now is to why frequency is down, what is happening at the moment and where is it headed.

I think in general, I would say that there are signs that frequency may be starting to turn upwards. Certainly, a number of companies while they saw very low claim counts reported in the fourth quarter of 2008 saw higher claim counts reported in the first quarter of 2009.

If you average the two, it is not that much different than what we have seen over the past four quarters, but if that increase in the first quarter of 2009 is the beginning of some kind of a trend, I think everybody is going to be watching it quite closely.

I think there is also some expectation, general discussion again, about the effect of the economy and is that starting to have some pressure on claim frequency. So, no revelations, but concern nonetheless about whether the environment is going to stay as favorable as it has been.

Stan Starnes

Companies that have been conservative and better prepared may fare a little better in that environment. Jennifer, further questions?

Operator

Yes. Piper Jaffray's Mike Grasher has our next question.

Mike Grasher - Piper Jaffray

Ned, I had missed the contribution for Mid-Continent and Georgia Lawyers. Do you have those numbers again?

Ned Rand

Mid-Continent added around $4 million in premium in the quarter on a written basis and somewhat less than $1 million on an earned basis. Georgia Lawyers added about $500,000 on a written basis.

Mike Grasher - Piper Jaffray

Okay. Thanks. Then just noticing paid loss ratio was, I think, in the neighborhood of 80%. Was there anything in particular going on there in the quarter or is there any seasonality actually associated with that?

Ned Rand

No, I don't think there is any seasonality. It is obviously impacted; there is a lagged effect of the payments versus the premium you're earning and so I think we have been seeing that pick up a little bit just as we reached the peak in earned premium about six quarters, eight quarters ago.

Mike Grasher - Piper Jaffray

Okay. Understood. Then in your commentary from the press release talking about first signs of an end of the market softening and Howard, I think, was just commenting on less intense pressure on renewals and less shopping going on. I am wondering if there is any discussion around M&A occurring, maybe an uptick in chatter?

Stan Starnes

There really has not been. We heard a lot of M&A chatter this time a year ago. We heard a fair amount, obviously, through the summer in the third quarter. It was like the whole world became muted, but it dropped off the cliff and it has not resumed. I think until you have some normalization in the credit markets and the equity markets, you are not likely to hear a pickup in the M&A chatter.

I would also say that the world is a very different place than it was a year ago and the landscape is markedly different. The realities are markedly different and I am not sure that expectations have yet been appropriately tempered by those differences, but we will see in the weeks and months ahead how that changes.

Mike Grasher - Piper Jaffray

Stan, just to follow up on that do you have a sense that maybe some balance sheets out there are a bit stressed?

Stan Starnes

No, it is just hard to say. We don't have enough data to know that yet. If one is running a company such as ours as one should, which is for the long-term and to provide policyholders and investors with long-term strength, then you stay away from the gimmicks like extending duration to chase yield and all those sorts of things and you preserve your capital at all cost and you make certain that you're around for your policyholders and your shareholders. So, I think our balance sheet continues to strengthen and grow and time will tell what happens to others.

Operator

Michael Nannizzi of Oppenheimer has our next question.

Michael Nannizzi - Oppenheimer

Ned, could you walk through the impact of the TIPS adjustment in the quarter and how that rolled into income and also into the principle balance?

Ned Rand

Sure. I kind of look at TIPS as kind of having two components one that is backwards looking and that is the coupon on the TIPS, and one that is forward-looking and that is really an inflation expectation and so in any given period the coupon in the TIPS is determined largely by a reference period CPI and that is backwards looking.

So, what did CPI do in those three months proceeding the quarter and based on what that CPI is or what the change in the CPI is that determines what the coupon for the quarter is. We saw negative inflation in that reference period for the first quarter. So, the coupon returned by the TIPS security is negative and basically what happens is that the par value of your investment actually accretes down and reduces.

At the same time, there is obviously an active market. They're very liquid securities and there is an expectation of inflation into the future. So, the value of the TIPS including that decline, that negative income yield did increase 5% in the quarter. So, the market value went up 5%. The par value went down. It is a little bit counterintuitive, I know.

Michael Nannizzi - Oppenheimer

Got it. If I wanted to look at the portfolio yield, so for the quarter, your $35 million in that investment income, so assuming that we don't see a similar TIPS transaction a similar adjustment in TIPS because already the lower inflation is now reflected, I am sorry, the higher inflation is now reflected, what should we what sort of run rate would that be about?

Ned Rand

Sure. The TIPS had a negative $2.2 million investment impact this quarter. The TIPS the negative income from the TIPS was $2.2 million. What the future run rate is going to be is really going to be determined by what inflation is in the coming days, but if you want to kind of figure out what impact did it had this quarter, it was a reduction of investment income of $2.2 million, I am sorry, versus last year. So, it is hard to give you some kind of a run rate into the future because it is variable.

Michael Nannizzi - Oppenheimer

Oh, no, I understand. I know I can find this in your detailed disclosure, but what is the notional, what is the par value of the TIPS at the end of the quarter?

Ned Rand

$65 million.

Michael Nannizzi - Oppenheimer

Okay. Just one other quick question on the portfolio if I could is on average, what was the change in the mark on the non-agency prime and CMBS during the quarter?

Ned Rand

One second. We're looking.

Michael Nannizzi - Oppenheimer

Okay. Let me hop to a different question. Maybe that might take a little bit.

Ned Rand

That is a little detailed. If we don't get it we will get back to you on it.

Michael Nannizzi - Oppenheimer

Okay. That is great. Then you mentioned that the case that was settled or paid in the quarter would offset some of the acquisition costs in the second quarter. Is that that $4 million number that you guys have guided to before in terms of acquisition costs?

Ned Rand

$4 million in acquisition cost? I am not sure. I would have to look back at what you're referring to. That doesn't come up, but what we will have in the way of acquisition costs are just a lot of the legal costs, the investment banker costs and then there is some compensation costs and severance costs.

Michael Nannizzi - Oppenheimer

Got it. Okay. As far as PICA is concerned, Vic, I don't know if I could ask. What was PICA writing on a premium to surplus basis when you made the acquisition? Is that a run rate you expect to maintain, increase or kind of pull back in line with the parent company?

Vic Adamo

I will turn it over to Ned specifically, but generally, PICA was A rated by A.M. Best, still is, running an appropriate capital ratio, probably a little closer than ProAssurance

Ned Rand

They were a little more than one to one and we have immediately following the close we did add $15 million to their capital.

Michael Nannizzi - Oppenheimer

Okay. Then just one last question if I could. Sorry, I am asking so many here. Can you talk about what the impact of like a Michigan autoworkers with Chrysler bankruptcy and all of these sorts of things, what sort of impact do you think that could have short run, long run kind of hypothetically, I guess? Is it maybe short run some claim benefit if you see lower payrolls or long run, et cetera, if you might? Thanks.

Stan Starnes

No, it is difficult to predict with any certainty what those sorts of circumstances can cause. You generally read that healthcare is as recession proof as most industries. People still get sick. They still seek treatment for their illnesses. They still go to physicians. That is not to say that it is the general economy doesn't touch healthcare providers. It does.

There is sort of an intuitive notion among folks that when the economy gets worse you see a rise in claims. We deal with such small numbers that is not always easy to actually visualize in the numbers. I think if you look at the workmen's comp numbers, you will see some relationship between unemployment and rise in various sorts of workmen's comp unemployment related claims. So, it is hard to predict.

I think that to the extent people are spending discretionary dollars on healthcare then the providers of healthcare will secure fewer of those dollars. That would impact, for example, just to give you one example, much of what cosmetic surgeons do today is done with discretionary consumer dollars and one would expect those to go down. On the other hand, general surgeons who do appendectomies, for example, they're going to continue to do those at the same rate.

One strength that we have in dealing with the various geographic differences and the impact of the anomaly is that we're not a one state or a two state or a three state operation that we cut a wide swath throughout the country and we have balance that enables us to navigate the different economic regional challenges better than most.

Michael Nannizzi - Oppenheimer

Okay. Great. Thank you.

Ned Rand

Mike, the easiest way for anyone that wants to follow-up on Mike's question is just we have posted the entire investment portfolio on the website. It shows current market values and the prior quarter is out there. So, I don't have that information here, but I would point you there and then we can follow-up.

Michael Nannizzi - Oppenheimer

Right. Okay. It is a very detailed question. I will take a look at the disclosure and then follow up if I have any questions. Thanks, Ned.

Operator

(Operator Instructions). We will hear next from Mary Schafer with Morgan Stanley.

Mary Schafer - Morgan Stanley

This is just a quick follow-up on some of the other questions that have been asked. You said you have seen the first signs of what you think are the end of the market softening and I was hoping you could share with us what you see as the drivers of that end and then what is your outlook for the rest of the year for those drivers? Thank you.

Stan Starnes

Okay. We're going to get to Howard with that.

Howard Friedman

Okay. In terms of the drivers, I think I guess I would probably categorize it maybe in a few different ways. First, as we have said, I think the frequency that had been coming down and had come down over the past several years even during 2008 seemed to plateau and yet claim severity in other words, the cost of payments has constantly increased.

Severity has never decreased. I don't think it has ever decreased if you look at it historically over the industry for the past 30 years. It goes up at a greater rate. It goes up at a lesser rate, but it pretty much consistently goes up. So, the decline or the end of the decline in frequency and the ever increasing claim severity puts pressure on rates.

I think you mentioned in a prior call that those lines cross at some point and whether they have crossed yet is the question. I think it depends on each individual company and what they have done on their rates and how far they have come down, but that is one, I think, one component of it.

The other component, I think, is the investment climate. Some companies have taken some pretty significant losses and have very large proportions of their investments relatively speaking in equities. It had an effect on their surplus. Even companies who have not had all that significant investment in losses certainly see a much reduced opportunity to earn investment income. So, you have to price at a more responsible level in order to generate an underwriting profit if you're going to come out with any profitability at all. So, I think those are the main drivers as I would see them.

In terms of the indications, we see it is really the day to day just as the example. We had a higher retention rate and a lower average rate decrease on renewals than before. So, I think that is the evidence that we see or that points us to believe that there might be some change in the market environment right now.

Operator

We will move next to a follow-up question from Mark Hughes.

Mark Hughes - SunTrust Robinson Humphrey

Thank you. You had mentioned the $2.2 million negative effect to net investment income from the TIPS in the quarter. Do you have a comparable number for the fourth quarter?

Ned Rand

For the fourth quarter, I don't. Mark, the $2.2 million is a comparative number versus first quarter last year. Fourth quarter, we will have to follow up on that. I don't have that at my fingertips.

Mark Hughes - SunTrust Robinson Humphrey

Was the amount outstanding, the $65 million, was it similar?

Ned Rand

We added to the TIPS portfolio during the quarter.

Mark Hughes - SunTrust Robinson Humphrey

Right, and even so it had a negative effect?

Ned Rand

That is correct.

Mark Hughes - SunTrust Robinson Humphrey

Okay. Thank you.

Ned Rand

Again, the negative income effect, it had a positive total return effect.

Mark Hughes - SunTrust Robinson Humphrey

Right, and the gain came through the other comprehensive?

Ned Rand

Other comprehensive income; it is an unrealized gain.

Operator

There are no other questions in the queue at this point. (Operator Instructions).

Frank O'Neil

If there are no further questions, we will thank everyone again for their interest and look forward to speaking with you next in August for second quarter results.

Operator

We have no further questions. With that, we will conclude today's conference. Thank you all for your participation and have a great day.

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: ProAssurance Corporation Q1 2009 Earnings Call Transcript
This Transcript
All Transcripts