ProAssurance's (PRA) CEO Stan Starnes on Q2 2016 Results - Earnings Call Transcript

| About: ProAssurance Corporation (PRA)

ProAssurance Corporation (NYSE:PRA)

Q2 2016 Earnings Conference Call

August 04, 2016 10:00 AM ET

Executives

Frank O'Neil - SVP & CCO

Stan Starnes - Chairman & CEO

Howard Friedman - President, Healthcare Professional Liability Group

Ned Rand - EVP & CFO

Mike Boguski - President, Eastern Insurance Alliance

Analysts

Ryan Burns - Janney Montgomery Scott

Mark Hughes - SunTrust Robinson Humphrey

Amit Kumar - Macquarie Securities

Matt Carletti - JMP Securities

Operator

Good morning, everyone. And welcome to the conference call to discuss ProAssurance’s Results for the Second Quarter of 2016. These results are reported in the news release issued on August 03, 2016 and also in the Company’s quarterly report on Form 10-Q also filed on August 03rd. These documents are intended for provide you with important information on the significant risks, uncertainties and other factors that are out of the Company’s control and could affect ProAssurance’s business and alter expected results.

Further, we caution you that management expects to make statements on this call dealing with projections, estimates, and expectations and explicitly identify these as forward-looking statements within the meaning of the U.S. federal securities law and subject to applicable Safe Harbor protection. The contents of this call is accurate only on August 04, 2016 and except as required by law or regulation, ProAssurance will not undertake and expressly disclaims any obligation to update or alter information disclosed as part of these forward-looking statements. Management team of ProAssurance expects to reference non-GAAP items during today’s call. The Company’s recent news release provides the reconciliation of these non-GAAP numbers to their GAAP counterparts.

Now, I’d like to turn the call over to Mr. Frank O'Neil. I would like to remind you that the call is being recorded and there will be time for questions after the conclusion of prepared remarks.

Frank O'Neil

Thank you, Celia. I’m joined today by Chairman and the CEO, Stan Starnes; Howard Friedman, the President of our Healthcare Professional Liability Group; our Chief Financial Officer and Executive Vice President, Ned Rand; and Mike Boguski, the President of Eastern, our Workers’ Compensation Subsidiary. This is our custom we’re going to start with Stan to kick off the call with opening thoughts.

Stan Starnes

Thanks, Frank, and my thanks to everyone on the call for taking time to join with us today. Our solid second quarter 2016 results validate the strategic vision we have laid out for you in the past. We continue to make important strides in cross-selling and in expansion of our distribution channels. Our insurance segments have been continually successful despite operating in an extremely competitive marketplace. This reinforces I believe that we can continue to deliver products and services that provide a compelling value to an evolving marketplace and help us create real value for our investors. Frank?

Frank O'Neil

Thanks Stan. We’ll go first now to Ned for an overview of our consolidated results in the quarter. Ned?

Ned Rand

Thanks Frank. Second quarter results are really straightforward, with just a couple of items that need more than a passing explanation. Starting at the top, we saw a slight increase in gross premiums written. Specialty P&C premiums were up 3.1% to $116.1 million, offsetting declines of $1.9 million and $800,000 in the Worker’s Compensation and Lloyd’s segments respectively. We’ll discuss those in detail shortly. Net earned premiums were also up, and here it is more because of the increased in prior period writings in work comp and Lloyd’s, offset by quarters in which the Specialty P&C segment saw a premium decline.

Investment values generally rebounded in the quarter and there was a significant swing in net realized investment gains, up roughly $15 million, from a $3.8 million loss in last year’s second quarter to a gain of almost $11 million in this year’s second quarter. We had no impairments and our energy focused investments did not lose further value in the quarter and in fact, many have regained value. Net investment income was down quarter-over-quarter continuing the trend that results from a sustained low interest rate environment and the impact of our capital return efforts over the past several years.

Our investment in unconsolidated subsidiaries resulted in a $376,000 gain in the second quarter, about $2 million less than the result in the second quarter of 2015. Our results from investments in limited partnerships and LLCs, while positive, were down from the comparable quarter, and were further offset by higher levels of operating losses in our tax credit partnerships.

We continue to be encouraged by the success of our cross-selling efforts. Our cross-selling and cross-appointment of agents allowed us to write $2.8 million of direct premium in the second quarter. Although due to the timing of the segregated cell reinsurance transaction, only $1.6 million is reflected in this quarter's results.

All of our operating segments saw favorable development in the quarter, which totaled $36.8 million, and which continues to reflect favorable loss severity trends compared to our initial expectations. Our consolidated calendar year net loss ratio was 60.5%, compared to 59.3% in the second quarter of 2015. The consolidated current accident year net loss ratio was 81.3% as compared to 79.3% in the second quarter of last year, primarily due to a 1.3% increase in our specialty P&C segment and a higher net loss ratio in our Lloyd segment.

Our expense ratio at 30.6% essentially unchanged compared to the prior quarter. However, I would like to mention a few of the moving parts. Amortization of policy acquisition costs was higher, primarily in the Lloyd’s segment due to the additional premium earned and the maturation of the syndicate's operations. We also saw an increase in the share-based compensation expenses. This relates to our long-term incentive plans which have a three year measurement period. As these awards vest, we accrue to the projected payout amounts over a three year period and in the quarter this expense is up giving our recent stock performance as compared to its benchmark.

Offsetting these expenses was a $1.4 million reduction resulting from a change in how we allocate some of our corporate expenses from operating expenses to losses. There's no impact to net income as there's an offsetting increase to losses in the quarter. Net income was $43.1 million, or $0.81 per diluted share. Operating income was $36 million or $0.67 per diluted share. And while not back at our target level, ROE did increase and was at 8.6% in the quarter.

Some other items of interest, our effective tax rate in the quarter was 11.2%, versus 19.2% in the second quarter of 2015. The decrease from 2015's second quarter stems from an increase in our available tax credits. This quarter was also up about 5 points from the first quarter primarily due to higher net realized investment gains versus net realized investment losses in the first quarter of the year. We bought approximately 16,800 shares of our common stock in the quarter, at a cost of approximately $800,000. And we have not bought any shares since the quarter end. Our year-to-date repurchases have been approximately 44,500 shares at a cost of approximately $2.1 million.

Recall that our repurchase activity tapers as we move above book value and we have not wavered from that strategy. I understand the implications that this has for our excess capital position and, I would point you to our past performance to reinforce our commitment to capital management. Our year is not complete by any stretch, and we understand our expectation that our fellow investors have in how we address the issue of capital. It's something management focuses on constantly and the board discusses and evaluates every meeting.

At June 30, we held $255 million in unpledged cash and liquid investments outside of our insurance subsidiaries and available for use by the holding the company. Book value increased to $38.12, an increase of $1.24 or 3.4% since year end.

Frank?

Frank O'Neil

Thanks, Ned. Now we're going to ask Howard Friedman to discuss results in specialty P&C. Howard?

Howard Friedman

Thanks Frank. I'm encouraged by the performance of the segment this quarter, despite the fact that we're operating in an extremely competitive environment as Stan mentioned. Gross written premiums in the segment increased 3.1% quarter over quarter with virtually all of the component lines of business seeing growth. The largest line in this segment is physician professional liability, which increased 3.9% overall, and that number is skewed downward a bit because of the renewal patterns of those policies that we write with a 24 month term. Premium for our 12-month policies were $9.3 million higher than the year ago quarter, a 14.3% increase, and was led by the writing of several large accounts including the multistate account mentioned in the news release. That's the single largest premium we've ever written and it represents solid evidence of our ability to succeed in an evolving world where physician consolidation is continuing, although not as rapidly as in the past.

While we're very pleased with this particular achievement, I'll caution that it is difficult to find quality new business opportunities of this magnitude on a regular basis. As always, our objective is to write profitable premiums, not just premium volume. As we mentioned in our release, physician policies with a 24-month term saw a year over year decrease of $6.4 million. This is normal for an even numbered year comparing to the prior odd number year because of the renewal cycle stemming from the inception of the majority of those policies.

We were also successful in growing premium in our hospital and facility lines. Quarter over quarter the increase was 28.1%, or $2.4 million. Medical technology and life sciences premium grew as well quarter over quarter up 4.1% compared to $9.3 million. New business writings in the segment total $21 million. Our physicians’ line was $12.4 million with $5.4 million in healthcare facilities and $1.6 million in medical technology and life sciences -- all indicative, we believe, of our ability to be successful in markets where large brokers play an increasingly important role in placing business from larger, more complex organizations.

These brokers complement a select group of skilled specialist agents who represent ProAssurance so effectively and generate an ability our non-direct business. As we've said before, creating new products and accessing new distribution channels to meet the needs of healthcare organizations, we also remain committed to the independent practitioner market. Premium retention for physicians, our largest line in the segment was 87% in the quarter and affected by the nonrenewal of a large group that was acquired by a similar group. Pricing in the physician line was up 1% compared to last year's second quarter. The specialty P&C segment saw $33 million of favorable development, essentially unchanged from the year ago quarter and no change in loss trends. The calendar year net loss ratio was up just under a point, as we booked quarterly legal defense costs and ULE at levels more representative of what we expect at year end.

Frank O'Neil

Thank you, Howard. Let's bring in Mike Boguski now for comments about the workers' compensation segment. Mike?

Mike Boguski

Thank you, Frank. The increase in the Worker's Compensation segment 2016 second quarter operating results reflect growth in net premiums earned, and a decrease in the loss ratio in our equity owned segregated cell portfolio business. Gross premiums written decreased to $56.5 million for the three months ending June 30, 2016 compared to $58.3 million for the same period in 2015 a decrease of 3.2%, reflecting increasing competitive market conditions across all operating territories, new business writings were $6.5 million during the quarter, and our other premium increased to $1.6 million in the second quarter of 2016 compared to $1.3 million for the same period in 2015, driven by improved economic conditions and strong financial underwriting.

I am pleased to report that renewal pricing increase increased 1.7% in the quarter in this very competitive Worker's Compensation marketplace. Premium retention was 81% for the second quarter of 2016 compared to 82% in 2015. The premium retention result included in the nonrenewal of two large accounts representing $1.3 million of direct written premium in the quarter for underwriting reasons. Our underwriters continue to be disciplined in an increasingly competitive market.

We were successful in renewing all five of the available alternative market programs in the second quarter. Alternative market direct premium increased 5.6% compared to the same quarter in 2015. The decrease in the accident-year loss ratio for the three months ending June 30, 2016 is driven by improved loss experience by our equity owned segregated portfolio cell business. Favorable reserve development was $1 million, in the quarter compared to $1.5 million in the second quarter of 2015, primarily related to alternative markets business but also includes $400,000 in both periods related to the amortization of purchase accounting fair value adjustments.

We successfully closed 33% of 2015 and prior claims during the first six months of 2016. The last 2001 accident year claim was closed during the quarter and we now have only 23 open claims for accident years 2008 and prior in our entire book of business. We believe this is indicative of the short tailed nature of our Workers' Compensation business model and it is in stark contrast to the broader Workers' Compensation industry. We have experienced an increase in higher valued severity related claims in recent quarters. During the second quarter of 2016, calendar year seated incurred losses in our traditional and alternative markets business were $8.3 million -- the majority, $5.5 million, in our traditional business. The expense ratio for the second quarter of 2016 was consistent with 2015. The 2016 combined ratio of 92.5% includes 2.4 percentage points of intangible asset amortization and 0.8 of a point of a corporate management fee.

Frank O'Neil

Thanks Mike. Let's swing back to Howard now for an update on Lloyd’s. Howard?

Howard Friedman

Thanks, Frank. This was a good quarter for our Lloyd’s segment, with operating results improving by 41.6% from last year's second quarter. Our 58% participation in Syndicate 1729 resulted in $25 million of gross premiums written, within about $800,000 of the year ago quarter. This has more to do with the timing of renewals of certain policies last year than with business written this year. Net earned premiums were up 48.4% to $13.5 million reflecting the growth in premium writings as the Syndicate's operations continue to mature. Underwriting expenses rose quarter over quarter, which was also expected given the maturation of the Syndicate's business and staffing. However, we continue to see a commensurate decline in the underwriting expense ratio given the strong premium writings.

The net loss ratio almost two points higher than the year ago quarter. This was due to changes in the mix of business and the timing of premiums earned, although those effects were largely offset by the recognition of $2.8 million of net favorable prior year developments versus no development in the second quarter of 2015. The Syndicate primarily utilizes Lloyd's historical data for similar risks to establish its expected loss ratios. However, as the Syndicate's loss experience continues to mature, it's giving increasing consideration to its own data. We believe the loss ratios will continue to fluctuate from quarter to quarter as business is written in a variety of risk classes.

The mix of business is dominated by casualty coverage, which is 65% of the Syndicate's premiums. Property coverage accounts for 24%, catastrophe reinsurance is 8%, and property reinsurance comprises the remaining 3%. A majority of the syndicate's business remains U.S. based.

As you would expect with that mix of business, the Syndicate does have exposure to some of the highly publicized catastrophes this year, events such as the Canadian wildfires and the hail storms in Texas. But to this point, the Syndicate's exposure is limited by its underwriting approach and further protected by reinsurance. At this time, we do not believe our net exposure will exceed the expected loss ratio used to establish initial reserve levels for the property insurance and reinsurance business.

We mentioned last quarter that the Syndicate brought a globally-focused medical underwriting team on board. While not reflected in this quarter's results because of the normal one quarter reporting lag, we know that the team has been active and written under the syndicate's pricing and underwriting guidelines much of the business they had in their prior book. The Syndicate did not assume any runoff liabilities when the team came on board.

Frank?

Frank O'Neil

Thank you, Howard. And, Stan, we'll turn to you for final thoughts and, Celia, we'll be ready for questions after that.

Stan Starnes

Thank you, Frank. This quarter gives us great confidence in the road ahead, and our strategy to navigate it. But it is also clear that that road will not be smooth or straight. We understand there will continue to be intense competition but we have shown that we can successfully compete while maintaining our underwriting and pricing discipline. The low interest rate environment will continue to provide a headwind, but since that affects all insurers, one would expect that this would ultimately work to our advantage by forcing our competitors to behave more rationally in the marketplace. In any event, we have shown that we have the horsepower to stay the course, and that augurs well for our future.

Frank?

Frank O'Neil

Thanks you, Stan. Celia, now we are ready for questions, if you will open the line, and we'll take the first one.

Question-and-Answer Session

Operator

Yes, certainly. [Operator Instructions] And we'll go first to Ryan Burns with Janney.

Ryan Burns

Yes just quickly on the Lloyd's piece, with the new medical malpractice team. I realize it's coming over from a renewal rights transaction but any help on the size of the book, any thoughts there?

Stan Starnes

The expected size of the book, and obviously as we go through the year, we'll have to see if all of the business renews and what the underwriting and pricing changes might be, but in the $15 million range is the rough size of the book.

Ryan Burns

Any seasonality, or is that just the normal book?

Stan Starnes

I think it's -- there is some seasonality to it, I am not sure I can tell you off hand. I know a portion of it was January 01st business that was rewritten on to the Syndicate's paper. I don't really have a breakdown by quarter though.

Ryan Burns

I think overtime obviously you think you are larger and broker distribution are guys -- what we would guess more [indiscernible]?

Stan Starnes

Well, it's certainly from the larger broker community. It's not from one of the big three. But it is a larger broker that we have done some business with over the years but we're doing more with now, and it's part of our overall strategy of increasing our presence and visibility in that larger broker community, those that are dealing with the larger hospital and very large physician accounts.

Operator

We will go next to Mark Hughes with SunTrust.

Mark Hughes

Sort of curious if you have any comment on the Berkshire Hathaway acquisition of MLMIC, do you think that means much for your business?

Stan Starnes

Mark, this is Stan. No, we really don't know plane of the details of that, only what we read in the popular press, and we don't see it having any impact on our business [Multiple Speakers].

Mark Hughes

Yes. Do you see any other potential transactions? I know you've -- you've talked about in the past you'll be selective on M&A but do you see more deals potentially in the market?

Stan Starnes

I think as question remain in this persistently low interest rate environment and the soft pricing market that it's inevitable that you will see more transactions. As I mentioned in the past, we're in the enviable position of not needing to do any additional transactions. We'll be alert to the opportunities that make sense to us. The difficulty today is that so many of our competitors now regard themselves as buyers. We're fearful that that will push the acquisition prices up to levels that we would not be willing to support. So I think we will see additional opportunities. I think we will be quite selective in those opportunities and respond in a very rational fashion. I do think you will see continued consolidation.

Mark Hughes

Got you. On the Workers' Comp business, just trying to make sure I understand kind of the view here, it looked like your current accident year losses were down nicely. Your loss pick was below 65 in the quarter. Your pricing was up almost 2%. But then you talked about some higher value severity-related claims, I think. You talked about competition, saw a deceleration of the top-line. How should we think about the market? It seems like some good results…

Stan Starnes

Mike?

Mark Hughes

Yes.

Mike Boguski

Yes, the -- just starting with the higher-valued claims. The number of severity-related claims quarter over quarter and through six months are fairly consistent, but the value of those claims going into reinsurance layers are higher-value claims. Are you seeing a lot more -- with the over the road exposure, higher value auto accidents and just higher value claims from less experienced employees coming into the marketplace as the growth in the economy. So when you look at that over is the long haul, we have long-term reinsurance relationships going back to 1999, strong relationships attractive terms with our reinsurance partners. So it was just something we thought we'd make sure we disclose from the standpoint that it was roughly $8.8 million this quarter and was only $2.5 million in the second quarter of 2015, as far as seated incurred losses.

As far as the top-line, we're going to continue to be an individual account underwriter. The thing to note, we have grown 0.2% through six months. We had a very strong first quarter with high 80s retentions and 3% first quarter year over year growth. The second quarter was really driven when you look at the 81% retention by some non-renewals of accounts that either had more financially strong or had some underwriting issues. So as we look at it forward, going forward, second half of the year, be we'll continue to execute our individual account underwriting strategy. A lot of -- to the degree that we retain larger accounts in our program business, will really kind of drive the retention results in the second half of year -- second half of the year. And new businesses is about adequate rate for exposure. Our new business was down this quarter, down quarter over quarter, and again we felt we wrote $6.5 million of adequately-rated high quality business.

Mark Hughes

And then on the Lloyd's business, the current accident year, moving quite a bit from Q4 to Q1 to Q2, I'm sorry if you touched on this, but what is driving that, and what should we sort of look at as the more normalized level?

Stan Starnes

It seems to be really driven more by the earned premium side than the loss side. The ultimate loss ratios and projected ultimate losses really have not changed. Premium though, particularly with the reinsurance business, comes in over an extended period of time. A reinsurance contract, for example, that is on an underwriting year basis gets reports over an eight quarter period, because as the underlying policies are written and earned, the premium flows in on an extended basis, and so do some of the finer business policies on the property insurance side. So as these premiums become reported, and then most of those late reported premiums are fully earned when reported, it can affect the base, the denominator in the loss ratio calculation. So I think we will start to see a little bit more stability once the Syndicate is in a sort of steady state mode and these premium adjustments become more regular. But with the growth over the three years of the Syndicate's operation, almost three years now, we're still in that mode where the earned premium side is more fluctuating.

Mark Hughes

And then when we think about the gross premiums written for roughly flat in the first quarter -- I think you talked about some timing issues -- I presume that Syndicate is still in meaningful growth mode, is that fair?

Stan Starnes

Yes. I think it is fair to say, and the mix of business continues to vary, not only quarter by quarter but as you go through the underwriting years. Obviously, now, we have the -- and we will see -- the medical professional liability business come on to the books, beginning in the next quarter that we report. At the same time there has been some backing away from some of the property catastrophe reinsurance business based on the overall market pricing. So there's growth in some areas. There's a little bit of retrenchment in other areas based on market conditions. And then as, again, as they get more opportunities to look at business, particularly from accounts that the various underwriters were involved with at prior places of employment, we will see development of that will business too. So it is still in a growth mode but I think we will also see some shift in the mix of business as we go forward.

Operator

We'll go next to Amit Kumar with Macquarie.

Amit Kumar

Just two questions if I may. My first question was -- I apologize, I was a bit late on the call switching from Allstate. There was a comment in the remarks that I think you talked about the short term nature of your comp book versus the industry. I was wondering if you could just flush that out a bit more in terms of how much is the duration different from your book versus a typical comp book?

Mike Boguski

Sure. Good morning, Amit. First of all, just from a results standpoint. We only have 23 claims that are open from 2008 and prior in our book of business. And that includes traditional and alternative markets. Some of the reasons for that, we have a very strong integrated model with our underwriting risk management teams and claims teams that share the philosophy that open claims do not get better as they get older. So we view items that have been helpful in claim closure patterns, we have reasonable caseloads to allow our adjustors to spend more time managing claims.

We've instituted a medical cost containment unit, which is a triage early intervention function that enable us on focusing returning employees to wellness quicker. And we have just seen general improvements in the economy that have been helpful and the availability of jobs by employees to go back to. But it's really a combination of the economy, the medical cost containment, lower caseloads, from a standpoint of we look at our tail more in terms it of three years versus five years for our competitors. We have a very strong understanding after 24 months what our ultimate exposure is and it's been a very successful model for us over the last 19 years.

Amit Kumar

Now I remember we had talked about this a lot during the time of acquisition. So I apologize for a bit of a redundant question there.

Mike Boguski

No, not at all.

Amit Kumar

The second question I had was on the Lloyd's piece and the change in the mix of business and I, I think Howard talking about, casualty was 65%, I can go back and look at the transcript. How was the business mix different previously, I guess, was what I was trying to recall, versus what it is now? And how I guess that is intertwined in your comments regarding the loss ratio going forward?

Stan Starnes

I don't remember the specific percentages. I think if you go back a couple years ago it was much higher casualty and the property teams came on gradually throughout 2014 and even into early 2015. So as they came on, the property proportion picked up a bit. Also as I mentioned, we're going to continue to see some shift as the syndicate reacts to market conditions. Frank just gave me a page from the prior quarter and at that point in time actually we had more property than casualty.

So it really goes back and forth for the seasonality of the business, when the premiums are written during the year. Property tends to be more of a January 01st effective date, casualty coverage depending on, and since a lot of it is reinsurance, just depends on the renewal rates of the underlying treaties. So I think we will -- as I mentioned earlier, just continue see fluctuation as the Syndicate matures and then gradually get to a predictable steady state in terms of what the premium mix will be and also the seasonality of it.

Amit Kumar

And the final question. I want to go back on the discussion on MedPro and MLMIC. Were you surprised by that deal -- again, we don't, none of us really know all of the mechanics of the deal? Were you surprised, or were you more like, this was supposed to happen, it should have happened a long time ago regarding the consolidation which was very active with [indiscernible] back in the day. How did you think about that? Was that shopped around at all? Did you get a look at it, or not?

Stan Starnes

As I understand it, from what I have read, Amit, MedPro did not acquire MLMIC but another unit of Berkshire Hathaway. I've been told -- and I don’t know this, but I've been told they intend to operate independently from MedPro. In terms of whether I would be surprised, just to be perfectly honest with you, it had occurred to me to acquire MLMIC. Not a matter of being surprised by it. It had just never entered my mind.

Amit Kumar

And do you think this signals, change in thought process, where perhaps foreign buyers look at med mal differently? How should we think about this? We always talk about a lot of consolidate, the Japanese money, the Chinese money, looking at strong specialty franchises, do you think this raises sort your profile and the profile of the industry a bit more? Or is this more one-off?

Stan Starnes

I would look at than is as more of a one-off sort of thing. In terms of what the foreign buyers have in mind, I don't have a clue. We're just very focused on running our business and very focused on maintaining our effectiveness and our efficiency, and I'll leave all of that to others to speculate about.

Amit Kumar

All right. Thanks for all the answers and good luck for the future for -- it's been an awesome run, so congrats on all the success.

Stan Starnes

Thank you, Amit. It sounds like my obituary. I hope it's not.

Amit Kumar

No, no. I don't mean to. All of that is just fatigue. Sorry.

Operator

[Operator Instructions] We will go to Matt Carletti with JMP Securities.

Matt Carletti

A couple questions, Stan, first one probably for you, just about the environment broadly. In the recent, year, really, we've seen very publicly, others not as publicly, some of your larger competitors run into issues in their core med mal business. What is the impact it's having on the market? Do you think you're going to look back in a few years' time and say that looks like an inflection point -- it seems like you're getting traction whether it's cross-selling or the premiums are starting to grow in your core markets. Is that having an impact on that as well?

Stan Starnes

Matt, as I mentioned last time, the commercial market is often the place where you see the first indications of perhaps the losses overtaking the pricing. I don't believe that has occurred across the entire NPL landscape. We do have the headwind of low interest rates, which I mentioned in my remarks, and we also recognized, as I mentioned in my remarks, that this road is neither straight nor downhill. It's going to remain uphill. We're going to have to continue to work very hard and be very focused. I don't think you're going to see some linear upward growth in our premium. It'll to be up and down as we go forward.

But remember, that is mitigated to the fact that we don't pay, as you know, a lot of attention to the top line, we pay much more attention to the bottom line. We will maintain our pricing discipline. We will make certain that we're receiving an adequate price for the risk we're asked to take, and we will attempt to operate the business in a way that serves both our policy holders and our insurers.

What you worry about in this market is because no one can fall back on the investment income, you would think people would be very disciplined in their underwriting or their pricing. But the long-tailed nature of what we do gives you a lot of room to hide if you are prone to delusional thoughts. So in that regard, I don't think this is an inflection point. I think it is indication that some of the commercial carriers have responded to the loss in pricing environment in a very, very mature and rational way. And I hope that rationality will take hold throughout the market, but we're not betting on it. And so we're going to come to work every day very focused on demonstrating for a fair price we provide our insureds with unmatched service, a strong financial statement, wide geographic footprint, and all the things that make ProAssurance what it is.

Matt Carletti

And then one other question, probably for Howard, since he made the comment in the prepared remarks, I caught, Howard, that you mentioned physician consolidation is not recurring as rapidly as it had in the past. Do you think it's more of just a temporary pause or something changing in in the landscape that's reached more of a plateau?

Howard Friedman

I wouldn't say it's reached a plateau for example but I think the rate of consolidation is low simply because it's been going on for five to ten years depending on which part of the country you look at. Hospitals that wanted to acquire certain physician practices, or build networks, a lot of them have done so. Others are still in the process of doing it, which is why it's not over. Physician groups that wanted to remain independent as a result of what they were seeing have, in many instances, already consolidated. They may become larger and bring on other groups but the ones that have chosen to become large have done so already. So we're not seeing it at quite the same pace as we saw several years ago simply because there's been a certain maturity reached in that area of the market. We'll continue to see more, we think, and we are seeing more in say the Southeast and in Texas than we had years ago. But we're not seeing it as much in the upper Midwest where it has already, for the most part, taken place. That's why, that's the reason for the comment.

Operator

And we'll go next to Mark Hughes of SunTrust for a follow-up.

Mark Hughes

I wondered if you could expand, you talked about the broker relationship. I know in the past you suggested that those are things that take time to develop, the relationships develop credibility with those brokers. It seems like -- I know you are avoiding the inflection point comment, but could you just give a little more detail around those broker relationships?

Stan Starnes

Yes, I'll let Howard respond to that in detail. But it's very important to us that we have relationships with people who are key components of the distribution process. Historically, when physicians practice by themselves or in one or two physician groups, member groups, the typical distribution process involves the local agents, agents that were specialized in this NPL and could represent those small group or solo practitioners very effectively. Those type agents still are very important to ProAssurance. They make a huge difference in everything we're doing, and we're very devoted to them.

As the healthcare system has changed, and the provision of medicine is now in the hands of larger and larger integrated groups, the distribution process depends increasingly on larger and larger brokers. And these are the people that we are in the process of developing and improving our relationships. We get submissions now on a regular basis from brokers, large brokers, from whom we did not receive submissions five years ago. So we regard this as progress. We are very keen to maintain the relationships we have with our traditional agents. They remain very important to us. But as we prepare for healthcare world of the future, it's very important to have ongoing mutually beneficial relationships with the larger and larger brokers. That's sort of the overview of our view of the distribution process. Howard, you might want to add to that?

Howard Friedman

Sure. As Stan said, we're looking at it really in both areas. Probably three or so years ago we made, or began to make significant effort to be represented at the larger conferences, the trade shows and so forth, where medical liability clients and brokers tend to congregate on an annual basis. We made specific efforts to get involved with the healthcare brokerage teams at say, the top ten or 15 national brokers and let them know what ProAssurance has to offer, work with them on sample accounts to give them an idea of how we would respond. And all of those efforts have made a big difference. Our submissions for the first half of 2016 are up about a little over 15% from where they were, about 15% from where they were last year. And we see that as the opportunity to have more at-bats. It's not necessarily we write everything we see, and it's far from that, but if we don't see it, we can't write it. And there is a different type of account that's represented by say a large national broker than our historical local agents. Each of them have an important place in our distribution system.

Mark Hughes

Is there a usual trajectory, you start to get submission, you respond to the submissions and then there's normally some period of time when the relationships ripen and then you start to hit more of those? You will quote, and then your binding percentages might go up? Is that the way it usually works?

Howard Friedman

I think that depends a lot on the state of the market, the areas, or the types of submissions that we're getting. The increase in submissions, as I said, is a good thing. It doesn't necessarily turn into a higher hit ratio, just dependent on what we see and the competition that's out there. The opportunity to write say larger account business is always there, but the quality of the business and the degree of competition make a lot of submissions of the type that we either can't see ourselves quoting on -- or if we do quote, we may not write. But every so often we do find the right combination of what we have to offer, what we see as the risk versus the price, and what the insurer sees as the quality and the services that we provide as well as the competitively structured program. The account that we talked about writing in this past quarter was one that we offered a structure that was very different from the expiring structure and one that no one else apparently put on the table. So the insured and the broker found it quite interesting and ultimately resulted in the sale. It really goes to the credit of the underwriter that was involved in that account and efforts that we have made over the past several years with the broker.

Operator

And we have no further questions in the queue at this time. I would like to turn the conference back over to management for any additional or closing remarks.

Frank O'Neil

We have none, Celia. We thank you for your participation today, and look forward to discussing third quarter results with you in early November.

Operator

And that concludes today's conference. We thank you for your participation.

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