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FPIC Insurance Group Inc. (NASDAQ:FPIC)

Q1 2010 Earnings Call

May 06, 2010 11.03 a.m. ET

Executives

John Byers - President and CEO

Chuck Divita - CFO

Bob White - President of our Insurance Subsidiaries

Analysts

Joe DeMarino - Piper Jaffray

Paul Newsome - Sandler O'Neill

Amit Kumar - Macquarie

Michael Nannizzi - Oppenheimer

Operator

Good morning. My name is, Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the FPIC Insurance Group first quarter 2010 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remark there will be a question-and-answer period. (Operator Instructions). As a reminder ladies and gentlemen, this conference is being recorded today, May 6, 2010. We're now ready to begin the call.

Unidentified Company Speaker

Good morning, everyone, and thank you for joining the FPIC Insurance Group quarterly conference call. The call this morning will include a brief presentation, followed by an opportunity for questions-and-answers. Please be reminded that the call today is being recorded and a replay will be available this afternoon at 2:30 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 a result of risk 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 fpic.com. We do not undertake to revise forward-looking statements, whether as a result of new information, future events or otherwise except as required by law.

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

Now let me introduce our participants this morning. We have John Byers, President and Chief Executive Officer, Chuck Divita, Chief Financial Officer and Bob White, President of our Insurance subsidiaries. We are now ready for our presentation. Here is John Byers.

John Byers

Thanks, and good morning. The first quarter was another solid quarter for us. We achieved operating earnings per diluted share of $0.69 for the quarter, which reflects the continuation of overall favorable claims trends, as a success of our business developments and capital management initiatives.

We also maintained our excellent retention of existing business and continue to grow our policyholder base, reflecting a strong market positions, and close relationship for our customer base and agents.

Our net rate of premiums increased 8% for the quarter, compared to the first quarter of 2009, primarily as a result of our acquisition of Advocate, MD, which is performing in line with our expectations, which added to our overall first quarter results. Another matters of note, we continue to achieve solid book value for fair growth during first quarter, which increased 3% from year end.

Also our overall claims trends remained solid, highlighted by continued low claims frequencies. Finally, you may have previously seen AM Best recently reaffirmed A minus or excellent financial strength ratings of our insurance subsidiaries, starting a number of factors, including among other things, our excellent capitalizations, our specialty expertise and our extensive understanding of the Florida markets and regulatory and judicial environment.

In addition, we were recently named in the Forbes article as one of the 100 most trustworthy companies out of the universe of more than 8,000 public companies, based on, among other things, transparent and conservative accounting policy, and prudent management. We’re obviously very happy to receive this recognition that reflects the culture we’ve worked in and still within our organization.

Looking ahead, we will maintain our focus on the business strategy for the service well over the years. This includes prudently and profitability operating our businesses, adjusting to evolving market conditions and taking advantage of our growth and other opportunities.

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

Chuck Divita

Thanks and good morning everyone. As John said, we reported another quarter of solid results and continue to build on past successes. For the quarter, we reported operating earnings per diluted share of $0.69, compared to $0.72 for the prior year’s quarter. And we achieved 12% return on average equity for the trailing 12 months. These results reflected the underlying profitability of our business, and the effectiveness of our capital management strategy.

Our business potential and growth initiatives continue to progress well, highlighted by a high retention of existing business, which has been on the mid-90s for several years, and by the Advocate, MD acquisition.

Our policyholder base, excluding policyholders under alternative risk arrangements, increased 31% from the prior year’s quarter, as a result of the Advocate, MD acquisition, and from our organic growth of 3%.

In terms of business composition, Texas now represents approximately 22% of total policyholders, excluding alternative risk arrangements and our Florida concentration, compared to the prior year’s quarter, declined by nearly 20 points from approximately 83% to 65% of total policyholders.

As John said, net premiums written for the quarter, increased 8% overall, as result of the Advocate MD acquisition. Excluding Advocate MD, net premium written declined 3%, primarily as a result of the lower Florida rates environment, compared to the prior year’s, quarter offset to some extend by organic policyholder growth.

Similarly, net premiums earned increased 9% and largely drove a 7% increase in consolidated revenues, compared to the prior year’s quarter. Net investment income decreased 9%, mostly reflecting lower prevailing interest rates, particularly related to cash and shorter maturity fixed income securities. As with others, we continue to operate in lower yield environments, and we’ll continue to look for appropriately ways to maximized investment performance consistent with risk profile.

Our under writing results continue to be good with our reported combined ratio at 89% for the quarter. Based on our year-end actuarial study, and reserve work completed for the first quarter, we’ve established current accident-year loss ratios for our various books of business, which overall resulted in a 70% current accident-year loss ratio for the quarter.

We continue to experienced favorable overall results, relative to our previous reserve estimates and recognized $4 million of favorable prior year result development in the quarter. As a result, our reported loss ratio was 61%.

We remained comfortable with our reserves and with our overall claim results. Our expense ratio for the quarter was 28%, compared to 24% for the same period in 2009. A higher ratio in 2010 was primarily due to lower net premiums earned, lower recoveries on insurance guarantee fund assessment and also lower-than normal employee benefit costs, during the first quarter of 2009.

Turning to claims results, frequency continues to be near historically low levels, and overall payment severity measures remained within our expectations. Since our prior year results was not include Advocate MD. I’ll focus my comments on our pre acquisition business, with that said, claims results for Advocate MD will also consists with our expectations.

Reported claims and incidents were 2% higher than the prior year period, with higher reported claims, partially offset by lower reported incidents. When adjusted for the composition on our book, overall frequency was essentially level with 2009. Net paid losses and loss adjustment expenses for the quarter, included the resolution of two large related claims from the 2002 accident year, which have been fully reflected in previously established reserves.

Excluding the amount paid for this two claims in excess of the respective policy amendments and a flexible reinsurance, net paid losses and loss adjustment expenses, excluding assumed business and runoff and committed reinsurance agreements have reached 14% from the prior year's period, and the average net paid indemnity per claim was 8% lower

The percentage of claims of within indemnity payment was level with the prior year's period and remains within expectation. Let me comment on our continued financial strength before concluding my remarks. We remained a very strong organization as evidence throughout our balance sheet.

We have a high quality, well-diversified investment portfolio. At quarter end our fixed income portfolio had an average overall quality rating of AA minus and duration of 3.4, and within a meaningful net unrealized gain position. Our loss reserves remained appropriately conservative and continue to develop favorably.

We are well-capitalized and have been effective in capital, consistent with our commitment to drive a sustainable shareholder value. Our book value per share has increased 3 percentage at year end to $28.49 as of the end of the first quarter.

Our insurance subsidiaries have substantial statutory surplus and are currently riding at 0.6 to 1 net premiums written as surplus ratio, and we repurchased 303, 000 share of our common stock during the quarter and an average price of $25.52 per share and this quarter end to April 30 in 2010, we repurchased an additional 125,000 shares at an average price of $27 13 per share. As of that date, we had approximately 727,000 shares remaining at our current board authorize share repurchase program.

Finally we completed the three for two stock split of our common stock for March 8, 2010. We pleased with the first quarter results and look forward to building further on our success.

With that we’re now ready for questions.

Question-and-Answer Session

Operator

(Operator Instruction) Your first question is from the line of Joe DeMarino with Piper Jaffray.

Joe DeMarino – Piper Jaffray

Thank you, and good morning.

John Byers

Hi. Joe.

Joe DeMarino – Piper Jaffray

A couple of questions, the growth in your net premiums written, excluding the acquisition, I think, pretty much were down about 2.9%. And/or obviously part of that is due to rate decreases, but didn’t you also file significant amount of rate increases within Florida. So you can maybe reconcile that difference, or may be I don’t understand how the rate increase, or how the filing of rate increases works and how that needs to be actually accepted. May be if you can reconcile that for me? Thank you?

John Byers

Joe, I’ll do that and we’ll take the second question. Actually in Florida, we filed to leave our rate level, which is now effective. And so we did not or you maybe referring to, because we have contemplated leveling rates in Florida and no rate change for this year, which is actually what happened for our physicians and surgeons book. We did take a 10% increase in our dental book, which is obviously much smaller book, but now the rate we didn’t take significant increases that we kept them level.

Joe DeMarino – Piper Jaffray

Okay. I must have been thinking of something else. So then policyholder growth is makes up the difference there? What was policyholder growth in Florida?

Chuck Divit

Well, Joe our policyholder growth in Florida, it's up slightly for the year. The issue is for us in a first quarter, which usually our slowest quarter of the year. We tend to grow our book more in the middle of the year and in the third quarter. So, we are up a little bit for the year in terms of total policyholder growth in Florida, and what you are seeing is the effect of basically just the rate changes that occur year-over-year.

Joe DeMarino – Piper Jaffray

Okay. All right. Let me move on to my next question. The year-over-year increase in claims, I think, was 30% year-over-year not incidents, but just claims themselves, reported claims. If you could maybe comment on that and whether you think that's an indication of things to come or not? Thank you.

John Byers

Chuck, do you want to take that?

Chuck Divita

Well, yeah, again we are talking about one quarter versus one quarter last year from an overall claims and incidents reported standpoint. Its pretty level with what we’ve seen for the past several quarters. It's been around anywhere from 435 to 482. So it's bounced around from quarter-to-quarter. I think that in the first quarter, we had a bit more of multi-dependant claims come through than we had in the last year's quarter, that we see any trend there. But again as one quarter worth of result, but I think it was in line with expectations. And again when we normalize for our composition about book of business, we think its pretty level with 2009.

John Byers

Yeah, Chuck. This is John, just to reiterate what he’s really said is, these numbers do bounce around quarter-to-quarter. And the difference you saw in this quarter was resulted from the, just we saw more than usual multi-dependent claims, not separate claims that they were off set. But again I would caution you that these numbers bounce around from quarter-to-quarter.

Joe DeMarino – Piper Jaffray

Okay, great. That’s all, folks. Is there any type of claims frequency in terms of reported claims that you guys reserve for?

John Byers

We’ve reserve for, we’re clearly -- claims may right or so. We pretty much know the population of claims once the year concludes. And we build in some factors for incidence to claims conversion, as well. Heading into a year, we make assumptions obviously about what we think the claims activity will be and in the first quarter was in line with what we would have thought. And again we’ve grown our book a bit over the past few years and so when you normalize claims for that; it looks to be in level with 2009 this quarter.

Joe DeMarino – Piper Jaffray

Okay, so no changes there in terms of looking forward. And may be just, third question I guess, my last question now. Can you maybe give us your thoughts on the health care reform and how that might or might not impact you?

John Byers

Sure, Joe. Thanks, Bob would you take that?

Bob White

Our view is we don’t think its going to impact us at all. We actually bill itself just contain some language about demonstration projects, and we don’t think the demonstration projects are going to have any effect on our business, because there’s two caveats about the demonstration project. One is, if the patient enters a demonstration project, they can opt at any time during the process and go back into the tort system and the second thing is they can approve any demonstration project that takes way in existing legal rights. So with that conditions there won’t be a demonstration project that will represent a significant departure from what already exists in the network system. We don’t see it having much of an impact on our business. We are concerned a little bit about how the influx of patients when the bill really kicks in and about three years, four years might impact on claims frequency and that may affect our business so we’ll be watching that with great concern as we get closer and closed to the date when these new folks will be rolling in to the healthcare system.

Joe DeMarino – Piper Jaffray

Okay thank you and then how long within quarters have any legislation there -- you can update us on?

Bob White

Joe there’s legislative session for us was extremely quiet we proactively pursued the extension of the exclusion of our line of business from assessment for the Florida Hurricane capacity funds. We’ve start of with couple of bill to that would have impacted our business in a negative way but aside from extending the exclusion for Florida Hurricane capacity fund assessments are alone legislative was just to work with our alise to further there agenda with respect to tort firm on broader range outside of our line.

Joe DeMarino – Piper Jaffray

Hey, great, thank you, thanks Guys.

Operator

Your next question is from the line of Paul Newsome of Sandler O'Neill.

Paul Newsome – Sandler O'Neill

Good morning thanks for the call.

John Byers

Hey, Paul, thank you.

Paul Newsome – Sandler O'Neil & Partners

Could you, review just how you think about capital at present time both from an adequacy perspective as well as from how you allocate usage over the year next year or two?

John Byers

Sure, Paul. Well, we have substantial capital as you know our net rate premium to surplus ratio is only about 0.6 to 1. So we have substantial capital, we've been profitable. We've been growing that capital. In terms of – so we feel very good about where our capital stands as you have seen in the recent A. M. Best reaffirmation, one of the main things that they focus on is our strong capital position.

In terms of use of that always the highest and best use for our capital is writing good business and that’s what our operating focus is and that’s what we do everyday. We look for opportunities for reason growth to the extend we need capital to support our management services initiatives we certainly would use the capital for that as well.

When I speak of this, we certainly are talking about internal growth but as you know, we are always on the lookout for acquisition opportunities, so we continue to look at both of those. At the end of the day, if we asses our capital position and our need for capital in the ensuing couple of years looking out we have excess capital we think to return that the shareholders as we done through share repurchases over the last several years.

Paul Newsome – Sandler O'Neil & Partners

In terms of M&A what is your current preference, do you still looking in other states, do you want to do something in the service area, could may be a prioritize what your thinking?

John Byers

Well, we look at both, because of the beneficial and good use of our capital, our preference would be good acquisition opportunities such as we saw with solid Advocate. And so we continually look for those, we're very prudent about the way we go about it, I mean, we’ve looked at them hard and we’ll always continue to do so. That'd be our preference. In terms of say, certainly if a good acquisition opportunity came up on one of our core states that we have now we’d look hard in that and then we’ll look at selective other states too it’s opportunistic. And so, we're looking all of those opportunities but that’s not for the side of the management services acquisitions to, to the extent we find good opportunities there, we’re looking those too.

Paul Newsome – Sandler O'Neil & Partners

Thank you.

John Byers

Thanks, Paul.

Operator

Your next question is come from the line of Amit Kumar of Macquarie.

Amit Kumar – Macquarie

Thanks and congrats on the quarter. Just two questions, and I’ll make this quick. In terms of you know, the two claims you mentioned in the 10-Q-2. Can you just expand on that a bit, and is that signaling any specific trend or was that one off?

John Byers

Well. I won’t – no, it’s not a trend. I mean, we’ve – as we’ve always talked about, in the MPL line, these access verdict are just a part of doing business in our line of business and over the years, in Florida and other states for the matter. We and other carriers see them from time-to-time. That’s just part of doing business. So, we don’t see it as a trend in fact over the last couple of year we’ve seen improvement. I think in that area, certainly here in Florida because, the tort reform the bad faith reforms, and really our risk management that we have put around. So, I think and mentioning this trend has been through an improvement in that regard. In terms of the two claims, as we’ve said, in the 10Q, they were two related claims, relates to accident year 2002. So they have been around along time. We had fully reserved for them and we settle those, as since they were fully reflected in our reserves there was no effect on the quarter and so really beyond that we typically as this normal in our other industries, we don’t talk about specific where the parties where its time to second I think because of privacy issues related to that, but we don’t see a trend it just part of doing business here, we contemplate those sorts of claims as we've talked about before and setting our pricing levels in our reserving approach the main part of our reinsurance program is to cover the source of risk. And as we said we put enough lot of risk management around it over the last few years that have been benefited from by that allows the forward formal thing in our employee.

Amit Kumar – Macquarie Research Equities

That’s very helpful. And I guess final question. Can you just touch upon Advocate reserves and how do you feel about then going forward?

John Byers

Sure, we were very comfortable with there reserves when we get the acquisitions, we establish conservative provisions for them since with the business that they've been writing and their reserves continue to look strong in fact the results for the quarter look very good. We did not recognize any favorable reserve development from them since the acquisition I we'd like to see a bit more passage of time as we worked together but all of the claims and metrics and reserve metrics for Advocate continued to look very good.

Amit Kumar – Macquarie Research Equities

Thanks, that’s very helpful. That’s all I have. Thanks.

John Byers

Thanks, Amit.

Operator

(Operator Instructions) Your next question is from the line of Michael Nannizzi with Oppenheimer.

Michael Nannizzi – Oppenheimer

Thank you, most of my questions have been answered. But one question, can you talk a little bit about the alternative business and kind of how that’s progressing and if your book of business after Advocate absent of the risk for the alternative business is changing in profile? That will be great, thanks.

John Byers

Okay Michael, let me just take the first one on the high level in terms of how the alternative business progressing heavily. We continued our measure the growth in that initiative. We did have a large group here in Florida that we'd been, that we’ve been provide management services -- for that actually decided to come back in as ensured, which is a good thing and part of the reasons that we did the initiative to start with -- to keep in touch sort of growth and when I want to come back into the regular market to do so, when you take that out you continue to see solid growth in the initiatives. So it’s again its going to be opportunistic too, it’s going to depend on where the market cycle is. But we're happy with where we are and we continue to look for opportunities in that. In terms of our composition of our book of business, absent that and absent Advocate Bob why don't you take now.

Bob White

Mike, the book is primarily changed over the last ten years to become much more of the class one position type book as one might expect in Florida the doctors who are in the upper risk categories that pay the highest premiums. Lot of those books have dropped out of the insurance system. Don’t buy insurance, they’re going there and as a consequence to that phenomenon our book today is much more class one remainder of state book when it was say ten years ago.

Michael Nannizzi – Oppenheimer

Okay that’s great. Rest on the quarter. Thanks again.

Bob White

Thank you, Mike

Operator

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

John Byers

As I said earlier the first quarter was another solid quarter for us and will comfortable with where things stand. As we move forward we remain focused on delivering the best possible products and services to our customers, taking advantages of our opportunities and delivering value to our shareholders.

With that we'll close. Thanks for participating in today's call. We look forward to speaking with you again on our next call.

Operator

Our conference will be available for replay beginning at 2:30 pm today and will run through Thursday, May 13th. 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 69334376. A replay of the conference call Webcast will also be available on our corporate website fpic.com beginning at 2:30 pm today.

That concludes our call for today. Thank you for joining us. We hope you'll join us again next quarter.

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Source: FPIC Insurance Group Inc. Q1 2010 Earnings Call Transcript
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