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Executives

Dana Mullins - Investor Relations

John Byers - President and Chief Executive Officer

Charles Divita, III - Chief Financial Officer

Robert E. White Jr. - President of First Professionals

Analysts

David Lewis - Raymond James

Joseph DeMarino - Piper Jaffray

Amit Kumar - Fox Pit Kelton

Michael Nannizzi - Oppenheimer & Co.

FPIC Insurance Group Inc. (FPIC) Q1 2009 Earnings Call May 4, 2009 11:00 AM ET

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 First Quarter 2009 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's 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 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 the result of risks and uncertainties that we describe more fully in our earnings release and in documents that we filed with the Securities and Exchange Commission.

Our earnings release can be found in the Investor Relations section of our website 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 Subsidiary.

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

John Byers

Thanks and good morning. We are very pleased to report continued strong financial and operating performance for the first quarter. We achieved operating earnings per diluted share for the quarter of $1.8, which is inline with our analysts' consensus estimate and reflects the continuation of our overall favorable claim's trend, together with the success of our business development in capital management initiatives.

One of the highlights of the quarter was our 97% retention rate for existing business, both in Florida and nationally, which is an all time high for us. And which reflects the strong market position, and the loyalty and sustained support of our customer base. We also continue to achieve policyholder growth and growth under our management services initiatives during the quarter.

Our core policyholder count as of the end of the quarter was up approximately 450 policyholders or 3% compared to first quarter 2008.

As those of you, who follow the medical professional liability expect to know premium rates in Florida have decreased over the past few years as the results obtained very strong claim's trend strength over the past five to six years. This has in turn decreased written premium and as expected, this trend continued for us in the first quarter.

Premium levels will inevitably vary overtime based on prevalent claim's trends and the result in pricing. Consequently, our primary focus is not on specific premium levels at a given point in time but rather on sound underwriting and pricing and retaining and prudently growing our business. On these important measures, we're having success.

This focus on writing good business at appropriate prices to serve our organization and shareholders wealth over the past number of years, and we believe will continue to service well going forward.

And other matters of note. We achieved solid book value for share growth during the first quarter, which includes 4% from year-end. Also considering the current economic environment, our investment portfolio continues to perform well during the quarter.

Finally, as you may have read A.M. Best recently reaffirmed the A- or Excellent financial translating of our insurance subsidiaries fighting a number of factors, including our excellent capitalization, our expertise and leading market position, and the medical professional liability insurance factor, and our solid operating prospects going forward.

In addition, Fitch also recently reaffirmed our A- or Strong financial strength rating and the stable outlook.

As we move forward, we remain our focus on the business strategies that have served us well, and brought us to this point. Our strong capitalization positions us well to take advantage of growth opportunity. We'll pursue our opportunities in our current market as well as in selected other markets. We looked to both organic growth and seek acquisition opportunities that make sense for us and our shareholders.

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

Charles Divita, III

Thanks and good morning everyone. As John said, the company reported another quarter of strong operating performance.

I'll briefly comment on the highlights of the quarter. Operating earnings per diluted share was $1.8 driven by continued solid underwriting results and effective utilization of capital.

As John also discussed, rates in Florida, our largest market have decreased over the past few years from the dramatic improvement in claims results. These lower rates primarily resulting in a 12% decline in net written premiums for the quarter and were also the primary driver of the 12% decline in total revenues for the quarter.

As our premium rates are driven by our claims results, we remain comfortable with our rates and the margins we're achieving. Our attention of existing business remains very high and reached a record 97% in the quarter. Our business development initiatives also continue to gain traction, evidenced by a net 3 % growth in policyholders over the prior year's quarter and good progress on our management services initiatives.

Overall, claims results for the quarter were also favorable. When adjusted for the composition of our book, claim frequency remains near historically low level and payment facility measures remained within our expectations.

We continue to see downward indications on prior year reserves resulting in a recognition of $4 million in favorable reserve development during the quarter. Excluding this favorable development, our loss ratio for the quarter was 71% compared to the prior year's quarter of 57%.

The increase reflects the impact of lower quarter Florida rates as well our commitment to establishing a properly conservative current year loss provision.

We're an officially run company with a stable underlying costs structure. Our expense ratio was 24% for the quarter compared to 22% for the prior year's quarter, reflecting the lower level of net earned premium as apposed to higher underlying cost.

Additionally, recoveries of the prior guarantee fund investments continue to wind down and had a lesser positive impact on the ratio compared to previous quarter.

Our financial strength is also evidenced throughout our balance sheet. Our diversified fixed income investment portfolio has an average quality rating of AA and is performed well in light of the financial market turbulence.

Net realized investment losses were less than a $100,000 in total on a pretax basis, and impairments were less than one half of 1% of our total investment portfolio.

As I mentioned earlier, our loss in LOE reserves continue to develop favorably and our overall claims results remain at historically good level. We remain committed to maintaining appropriately conservative reserves.

And finally, our capital position remains very strong. Our net premiums written to surplus ratio is a conservative 0.71, our book value per share has increased 4% from the year-end 2008, and then we continue to be active on a capital management front through purchasing approximately 315,000 shares of our common stock during the quarter.

We're pleased with our results for the quarter and look forward to continued success in 2009.

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.

David Lewis - Raymond James

Congratulations on the solid quarter.

John Byers

Thank you. We are happy rather.

David Lewis - Raymond James

Let's start off with a couple of questions for you. First, can you talk about any changes in the Florida competitive environment, and if you see any potential trend for self-insured groups to move to portfolio insured programs?

John Byers

David, the landscape competitively remains exactly as it was at the end of last year. I think you can see from our retention that stability is really the hallmark of the market right now. We are a bit surprised that we haven't seen more bare position turn to insurance or come back into the market. And we thought we'd see that trend start last year and it really didn't.

We are seeing some interest on bare doctors, we've picked up a couple of doctors that had been bare previously, but not anywhere near the numbers we expect to see.

David Lewis - Raymond James

And just talking about the 97% retention rate, which is quite impressive, how do you see your pricing relative to others have 30, you think you're still kind of a little ahead of those, and so therefore people are willing to stick with you just because of the fact of your strong service and knowledge of the market place or do you think there are some other factors driving that?

John Byers

Well, we are constantly up against competitors both legacy competitors and start-up competitors, who are bidding for our better groups and individual physicians with lower quotes than we've got out there for renewals. And we're seen as having value; we have tremendous brand recognition and a lot of loyalties to establish through the service we give our physicians, both from an underwriting and claims perspective. And you can't underestimate the impact of our ability to treat an independent insurance agent as another customer of the company. And that fact that we give such good service to the agents is another reason they like to keep their groups with us because we make their jobs easier.

David Lewis - Raymond James

And Chuck, changing over to you. Can you give a sense of where some of your new cash flows are being invested?

Charles Divita, III

Sure, we continue to be cautious on the investment front. But of late, we've put some money to work in some of the FPIC Insurance programs looking at some opportunities in some longer-term duties, some selected corporate names. So, we're being opportunistic about it, but we're starting to see some opportunities open up to us.

David Lewis - Raymond James

And assuming short-term rates can hold where they are at as well as long-term, do you see any material change in the overall portfolio, year-on-year in the coming quarters?

Charles Divita, III

I don't we've now for several quarters overall for the portfolio been sort of flattish on yields. Obviously, we've had a dramatic drop in short-term and cash yields. But the fixed income yields have come up, so overall it stayed pretty much level. I would expect that for the next few quarters and then we'll just see beyond that.

David Lewis - Raymond James

Very good. Thank you.

John Byers

Thanks, Dave.

Operator

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

Joseph DeMarino - Piper Jaffray

Thank you. Good morning.

John Byers

Good morning Joe.

Joseph DeMarino - Piper Jaffray

Can you -- did you already say what exactly what the premium rate decline was in Florida?

John Byers

Chuck, you want to...

Joseph DeMarino - Piper Jaffray

The pricing decline?

Charles Divita, III

Yeah, we actually, we had filed for and got approval for a 12% rate decrease effective December 1st of 2008.

Joseph DeMarino - Piper Jaffray

12%, okay. And how does this compared to some of your other states?

John Byers

Bob, do you want to take that?

Robert White, Jr.

Some of the other competitors in the market?

John Byers

Joe, I'm sorry, did you say...

Joseph DeMarino - Piper Jaffray

No, your other states of operations.

Robert White, Jr.

Well, we haven't taken quite as an aggressive premium decrease in our states. The loss metrics there particularly in Arkansas and Georgia haven't changed this radically as Florida loss metrics had.

We have decreased rates in the couple of the other states. But I think it was 8% in Georgia last year, Arkansas rates have been stable essentially because of the change in loss metric has been as dramatic in those states as they have been in Florida.

Joseph DeMarino - Piper Jaffray

Okay. Thanks. And then what states is the policyholder growth primarily coming from?

Robert White, Jr.

Well, it's pretty evenly distributed between on a physician basis between Florida, Georgia and Arkansas. A little more of the policyholder growth is coming from our ancillary personnel policies particularly optometry here in Florida. But on the physician side, it's pretty evenly distributed amongst those two states.

Joseph DeMarino - Piper Jaffray

Okay. Thank you. And then on your comment you said earlier, you were getting less physicians than you anticipated coming over from practices, I guess physicians, who had no coverage or less coverage overall what are you -- who do you attributed that shortfall to or what do you think is causing that lower number relative to what you expected?

Robert White, Jr.

There is belief amongst long time bare physicians that carrying insurance makes them a target for a loss. And some of them say they won't come back into the market because they don't want that target on their back.

Joseph DeMarino - Piper Jaffray

Okay. Why did you think it was going to be more than what it has been, I guess?

Robert White, Jr.

Because pricing has changed dramatically over the course of last three years or so. We look back at the number of bare physicians we had when prices were at these levels stayed back in 2002

And the number was much smaller and we kind of thought that as prices approximated the levels backed in, we'd see the number of doctors, bare doctors fall off. And primarily because most doctors want to carry insurance, most doctors are responsible and they feel like they would like to have insurance, the issue for the middle part of this decade is been, it was just unaffordable. Well, now affordability is less of an issue and we just thought that we will see more of them come back to the market at this point.

Joseph DeMarino - Piper Jaffray

All right. That's helpful. Thank you. And then one other question, have you changed your reserving at all with in light of what maybe higher inflation going forward? Can you talk about how you I guess build that into your reserving?

Charles Divita III

Well, we look at the severity of our losses. That's the only kind of inflation that affects those losses and what you have to remember about our company is the book of our business, over 80% of our business is written here in Florida. It's written at premium levels, excuse me, it's written at policy limits, where 83% of our insurers have $500,000 or less per claim policy limit.

So, when you have a high average severity per loss and a low average policy limit per insured, you see a pretty flat trend line in terms of loss inflation. And that's what we are experiencing.

Robert White, Jr.

Having said that I would add that we're comfortable that we are being appropriate like conservatives with our trending in our reserves. Notwithstanding that the trends that we're actually seeing are pretty flat. We trend down severity into our pricing and reserves. So, I think the bottom-line is we're just comfortable with the trends that we're putting in there right at this point.

Joseph DeMarino - Piper Jaffray

Okay. So, no changes or anything like that and as to how you're viewing, I guess medical cost inflationary or anything?

Charles Divita III

No, it really isn't affecting our losses. And you have to realize that our loss, our average reserve per opened file is going up. We're not changing the way we're reserving. The money is out there. But the number of cases that are coming in and the open case volume continues to shrink. And as a consequence to that, our average reserve per open file has been trending upward, not through any effort on our part to increase the reserves, but just as a natural consequence as the claims metrics we're experiencing.

Joseph DeMarino - Piper Jaffray

All right. Got it. Thank you. And congrats on the quarter.

John Byers

Thank you, Joe.

Operator

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

Amit Kumar - Fox Pit Kelton

Thanks, and congrats on the results. I guess just staying on the discussion on rates, if loss cost trends seem to be even better than what you expected, as you look towards 2010, is it fair to say that the rate filings might be -- maybe in the mid-single-digit declines for 2010?

John Byers

Let me take that first and I'll let Bob add to that. In terms of loss cost trends have been denied here in Florida, they've been the lowest in the history of our company a couple of years ago, very, very strong last year. Our view was we didn't see material downturn in this trend this year. We thought the trends would continue to be in demand and pretty good.

We've also, I think we've said in our prior calls, at this point we think most if not all of the benefits or reform are reflected in array. So, our view is without any change, it will see the rates without loss. Bob, you want to add to that?

Robert White, Jr.

John, I think you've answered the question a 100% correctly, absent any change in loss metrics, we shouldn't have rate change in 2010.

Amit Kumar - Fox Pit Kelton

Okay. That's helpful. And I guess just talking about the challenges, is there any update on the previous sort of -- we've talked about the challenges to the caps, is there any update to that?

John Byers

Bob?

Robert White, Jr.

Well, there are two cases in net that are moving through the courts in Florida. There's one in the fourth district court of the field, its now been fully briefed last month, the parties filed a request for world argument, which the court has not yet taken up.

And I suspect that if they take it up in the near future even this month for example, you won't see world argument discussion till the fall. And that's the first case that the one that's as far as along if you will court winding up in the 16 court, it actually is an emergency room cap case, where the cap is a $150,000 per claim.

But whatever the courts do with the cap regard of specific $150,000 cap to $500,000 cap or the $1 million, you can pretty much suspect to see that same rational regardless of what cap is under-challenged. And the $501 million cap is under-challenged in the third district court of appeal, but that case hasn't any eventfully briefed yet. And it's probably at least a year away from having a decision made on it, whereas the fourth district court of appeals case, if it's argued in the fall, and it is solved, you may see a decision either in November or December or perhaps January of next year, which will get the case in the hands to encore one way or the other regardless of how they go.

Amit Kumar - Fox Pit Kelton

Okay. That's very helpful. So, nothing on the horizon right now?

Robert White, Jr.

No, I think we're about a year away or almost a year away from having a district court of appeal decision, which just becomes the catalyst for the arguments we made in front of the Supreme Court.

Amit Kumar - Fox Pit Kelton

And in terms of the current economic conditions are some of the other commercial writers have been talking about how they are actually beginning to see a meaningful impact from the economic conditions, in your lines, do you think that Med-Mal continues to be such an inelastic good that the impact would be sort of materially different than other commercial lines?

Robert White, Jr.

Right. I do think it's been the last to come in doctors, except on the very margin will purchase the insurance. So, we don't see the direct impact there. The behavior comes back to the last position, when there is bad economic time. Again, that's on the margin. The pick-up or the benefits that we might see and I think we are starting to see times up just with investment portfolios.

So, any unrealized loss there begins to come back and we're seeing some of those trends. But I think the basic question is we do see it as pretty much inelastic and it's really not as much. We're not directly correlated to...

Amit Kumar - Fox Pit Kelton

That's very helpful. And finally, just going back to your comment on the management services, could you just maybe just expand a bit more as to what these initiatives are and what is the sort of goal for 2009?

John Byers

Well Amit, what we do is we look for opportunities in the alternative risk area, where we can use our insurance company experience and our expertise to help people, who are self insured in some cases or bearing a portion of the risk, manage their exposures either by claims handling, that's the most prevalent way we do it. But we can provide an array of activities including risk management activities, credentialing activities, other kinds of things that can assist someone who is self insured in particular.

And we have a couple of relationships that we have established, a few not quite as many as we hoped, but we are still seeing opportunities and still hopeful that we can grow that into the business. We like the fact that its non-risk bearing income and it's strictly based on percentages of the premium that folks are paying in to these self insurance funds that they've created.

And we don't have specific targets for 2009. We're just committed to try to expand that initiative and looking for opportunities to do that.

Amit Kumar - Fox Pit Kelton

Got it. And maybe if I could just sneak one more, in terms of capital management and the buyback, if you look at your reserves obviously the stock is trading at, if you adjust the book value the stock is at a meaningful discount to book. In these times and where the stock is would it be fair to say that you would continue to buyback stock or your sense is that maybe we should try to look at the other states and maybe put some money in that direction? Or is it that one should continue to see these levels of buybacks in the next few quarters?

Charles Divita III

Now, I'll take that. What we've all -- I mean, I think, you should expect to see what we've seen in the past, which is obviously the highest and best use of our capital is to drove with the business. And we have had some growth; we had tremendous growth for few quarters. And we are starting to see a bit of acceleration I think on that. So, that's our first-end use of capital.

But our insurance operations do continue to be profitable. We are very highly capitalized now. So, I think certainly, it surprises you're seeing the shares now, you should expect to see additional share repurchases.

It's actually incredible estimate to be able to buy them back at levels, where recently have been that. But I think you're going to see sort of all of the above. You're going to see us new with our initiatives, looking out for the work on business. But because of that we're so highly capitalized and we're possible, I think you should expect the most share repurchases there. Bob?

Robert White, Jr.

Amit, just one point, we are writing in South Carolina now beginning in the second quarter. That's a new state we've entered into. We do look at other states, but our focus is not on the top line as we've said many times before, we have to see the ability to make the profit not five years down the road, but we need to make a profit with bottom-line focus and that's why we just won't go into another state. The opportunity has to be right for us. We see that opportunity in South Carolina and we take it.

Amit Kumar - Fox Pit Kelton

Got it. Okay. Thanks so much for your answer and congrats on the results.

Robert White, Jr.

Thank you Amit.

Operator

Your next question comes from Michael Nannizzi from Oppenheimer. Your line is open.

Michael Nannizzi - Oppenheimer & Co.

Thank you. Just really -- most of my questions have been answered, but on the reserves development, can you talk about where that came from, was that the '04 and more recent books? Was there any development for '08? Thanks.

John Byers

Chuck?

Charles Divita III

What we actually were saying and as we've reported in prior quarters, we're seeing very good development from the years 2004 and forward. With respect to what we've recognized, it primarily relates to '05 and '06, but all of those years continue to trend very well. So, again in terms of what we recognized, none of that related to 2008.

Michael Nannizzi - Oppenheimer & Co.

Okay. Great. And then just one question about the repurchase authorizations, if I could? So is that something that you have approval from the board or pre-approval from the board at specific point in times to re-up the $500,000 -- 500,000 units repurchase authorization like you did in the court and is that something you'll continue to look at as you go forward? Thanks.

Charles Divita III

Sure, Michael. We are I think consistently since we stated repurchase few years ago, we have gone to the board and 500,000 share increments authorization, and that works well for us. So, none of that has changed.

We continue to do that. The board has been supportive of that, we certainly have gone to them, it makes sense. We're prudent about when we buyback, we look at our outlook going forward, we look at the share price, and we look at our capital position. And so, none of that has changed, and I think you can expect this similar or same really going forward in the way we've gone about that.

Michael Nannizzi - Oppenheimer & Co.

Okay. And do you use 10b5 10b15, 10b51 plans, or whatever that acronym is? Also are they mostly discretionary repurchase programs?

Charles Divita III

No, we do about, I mean we do 10b5-1 plan

Michael Nannizzi - Oppenheimer & Co.

Great. Thank you.

Charles Divita III

Thanks, Michael.

Operator

Since there are no further questions, I'll turn our call back over to John for his closing remark.

John Byers

Thanks. As I said earlier, the first quarter was another solid quarter for us and we're well positioned for the future.

We're well capitalized and profitable. We have strong long standing market positions and substantial customer loyalty. Our business strategies are designed to create sustainable shareholder value. And lastly and most importantly, we have an experienced, capable and dedicated staff and management team and a board fully focused on creating shareholder value.

With that we'll close the call. Thanks for your support and we look forward to speaking with you again our next call.

Operator

Our conference will be available for replay beginning at 2:30 PM today and will run through Thursday, May 14. 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 95427919. A replay of the conference call webcast will also be available on our corporate website fpic.com beginning at 2:30 PM 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.

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