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Executives

John Byers - President and CEO

Chuck Divita - CFO

Bob White - President of Insurance Subsidiaries

Analysts

David Lewis - Raymond James

Mark Hughes - SunTrust Robinson Humphrey

Paul Newsome - Sandler O'Neill

FPIC Insurance Group Inc. (FPIC) Q1 2008 Earnings Call May 1, 2008 11:00 AM ET

Operator

Good morning. My name is Berlese and I will be your conference operator today. At this time, I would like to welcome everyone to the FPIC Insurance Group first quarter 2008 conference call. All lines have been placed on mute, to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions)

As a reminder, ladies and gentleman, this conference is being recorded today. We're now ready to begin the call.

Unidentified Company Representative

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 p.m. 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 described 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, and Chuck Divita, Chief Financial Officer. Also joining us this morning is Bob White, President of our Insurance Subsidiaries.

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

John Byers

Thanks. Good morning, everyone. The first quarter was another solid quarter for us. We achieved operating earnings per diluted share of $1.20, which, excluding the non-recurring first quarter 2007 gain from reinsurance commutations was up significantly over first quarter 2007 results.

Our return on average equity from continuing operations for the four quarters ending with the first quarter was 15%. We continued our book value per share growth during the quarter, which moved up to $33.91 per share, an all time high.

We also grew the statutory surplus of our insurers, even though we dividended up $6 million from our insurance operations to the holding company during the quarter to support our capital management initiatives.

Not unexpectedly, revenues for the quarter were down 13% compared to first quarter 2007, primarily driven by decreasing premium rates in response to several years of improved claims trends.

Our retention of existing business remained excellent during the quarter at 96% in Florida and 95.5% overall. And our overall policyholder count grew by 175 policyholders over our March 31, 2007 policyholder count. We also picked up 81 positions during the quarter under alternative risk arrangements that we manage pursuant to our management services initiative. Finally, overall claims trends during the quarter remain strong.

On one other note, as you may have read, A.M. Best recently reaffirmed the A minus or excellent financial strength ratings for our insurers, citing a number of factors, including our strong capitalization, our expertise and leading position in the medical professional liability insurance sector, and our solid operating prospects going forward.

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

Chuck Divita

Thanks, John, and good morning, everyone. Our business continued to perform well during the quarter, generating $1.20 in operating earnings per diluted share. This represents a 52% increase over the first quarter of 2007, excluding the PRI commutation that occurred in that quarter.

As John mentioned, total revenues declined 13% primarily due to lower rates in our Florida market, and to a lesser extent, changes in business specs. These factors also largely contributed to an overall 14% decline in direct written premiums for the quarter.

Our initiative to provide management services to alternative risk arrangements resulted in $1.3 million in direct written premiums for the quarter. These programs did not impact net premiums written since they are 100% ceded under our reinsurance arrangements.

As John also said, we continued to have excellent policyholder retention and saw net growth in overall policyholder count over the first quarter 2007.

Our first quarter reserve and claims review resulted in establishing a 2008 accident year loss ratio of 57% and the recognition of $4.5 million in favorable prior year reserve development. We remain committed to maintaining appropriately conservative reserves, and will assess them further as the year progresses.

Our expense ratio was 22.4%, which was relatively level with the prior year's quarter, excluding the PRI commutation. This reflects our efficient cost structure, as well as ongoing recoveries of a special guaranty fund assessment from 2006. The level of net premiums earned also continues to be a key driver of the ratio.

We continued to see the overall good claim trends continue in the quarter. Net paid losses and loss adjustment expenses, excluding commuted reinsurance agreements were 22% lower, largely due to a lower number of claims with an indemnity payment in the quarter.

The percentage of claims with an indemnity payment on a rolling four-quarter basis was relatively level with the prior year, and average payment severity remained within our expectations. And finally, frequency remained at historically low levels.

Our financial strength is evidenced throughout our balance sheet with a high quality investment portfolio, appropriately conservative reserves, and a strong capital position.

Book value per common share grew 3% from year-end 2007 to $33.91, and the statutory surplus of our insurance subsidiaries grew to $265 million. On the capital management front, we repurchased approximately 315,000 shares at an average price per share of $42.80 during the quarter.

With that, we're ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of David Lewis with Raymond James. Your line is open.

David Lewis - Raymond James

Good morning. Thank you. I've got a number of questions. Let me just ask a couple and I'll re-queue. First, Bob, has there been any changes in the competitive environment over the past six months in Florida, as well as some of the other markets? And in MAG Mutual still as aggressive as they've been in Florida in the first quarter, or is that slowing down possibly because of their limited capital position?

Bob White

David, in terms of the competitive environment overall in the states we're in, the only change that we've seen is the aggressive reentry of AIG into almost all the markets that we're active in. Their presence wasn't felt as strongly in the past as it has been during the time since the first quarter started, so that's a change, and otherwise things pretty much remain the same.

MAG Mutual is still fairly aggressive. We do detect a little bit of less aggressiveness on their part, but they're still very active and still somewhat aggressive.

David Lewis - Raymond James

That's helpful. Just back to AIG, I mean, AIG is traditionally focused on the hospital side of the business. Does that mean they're coming into individual practitioners?

Bob White

Not individual practitioners, David, as much as we're talking about large groups. In the last year or so, pretty much for the last two years, they've been very quiet on that front and just since the first of the year, actually, it began at the end of 2007, we began to see them quoting larger groups. In fact, we had a shot at a very, very large group in Arkansas during the first quarter that really would have been a nice gain for us, and they came in and undercut us by 30%. That's how aggressive they are.

David Lewis - Raymond James

Wow. Bob, maybe talk a little bit about opportunities to potentially gain market share outside of Florida, if you would, please.

Bob White

Well, we continue to focus on areas outside of Florida for First Professionals and also APAC. APAC, we think is a good opportunity for growth. The platform is in more states than First Professionals is. It's underserving a number of the states that it's in, so for the past four or five months, we've been embarked very heavily on a campaign to heighten folk's awareness with APAC's presence in the markets that have served that side of Florida. We're beginning to see some small returns there. And we also still like Georgia a great deal for both APAC and First Professionals, and are working hard there to try to grow the book.

David Lewis - Raymond James

That's helpful. Thank you very much.

Bob White

Thanks, David.

Operator

Your next question comes from the line of Mark Hughes with SunTrust Robinson Humphrey. Your line is open.

Mark Hughes - SunTrust Robinson Humphrey

Retention is up nicely in the quarter. Any particular strategies you've been using to help support that?

John Byers

Thanks, Mark. In terms of retention, Bob, why don't you take that one as well?

Bob White

Sure, John, I'd be happy to. Mark, we are big believers in trying to hold onto our existing customers. We think that it's easier than going out and finding new customers plus the knowledge you have of their past history enables you to better predict the future with those accounts, and so we've been focusing on keeping our best business by selling the value that FPIC represents in the marketplace.

And with rates, trends and media rating and stabilizing and declining to the extent they have, it's become easier for us to tie in that value argument that we have, the value proposition that we can advance with our customers and hold onto the business.

Mark Hughes - SunTrust Robinson Humphrey

Got you. How about, in Florida, any regulatory or legal developments we ought to be aware of?

Bob White

Well, at the present time, we're in a very difficult regulatory environment that's been created by the property insurance issues. Those really haven't spilled over to affect us in any way at all. We're lucky for that because the environment is a very difficult one for insurance companies at the present time. And as far as the legislature goes, we're one day away from the session being over and all is quiet on the med mal front.

Mark Hughes - SunTrust Robinson Humphrey

Got you. All right, that's sounds good. Thank you.

Bob White

Thanks.

Operator

(Operator Instructions) Your next question comes from the line of Paul Newsome with Sandler O'Neill. Your line is open.

Paul Newsome - Sandler O'Neill

Good morning, gentlemen.

John Byers

Hi, Paul. How are you?

Paul Newsome - Sandler O'Neill

I'm very good. I was noticing in the queue a comment about the reserve releases that referenced that the releases were both due to frequency and severity declines. And I think the frequency trend is pretty well understood. At least, I think it is. But I was surprised at the severity trend. Are we actually seeing claims coming in at a lower amount than you expected, as well as the fewer numbers of them?

John Byers

Chuck, why don't you take that?

Chuck Divita

No, I mean what we're seeing and this has been consistent, is dramatic reductions in frequency and severity continuing to be within our expectations. Those two factors together are what have resulted in the downward indications.

Paul Newsome - Sandler O'Neill

Okay. I must have misunderstood the queue, which wouldn't be the first time. Any update on the M&A front?

John Byers

Paul, this is John. Really not. I mean, I think my answer this quarter is similar to what it was last quarter, which is there's certainly a lot of discussion of M&A and specifically to our sector. Without going into details of specific companies, there are certainly companies out there that are aggressively assessing potential being acquired. So we continue to see that. I continue to see articles that discuss the fact that there are certainly a lot of insurance companies and a lot of lines have excess capital. They, by and large, are seeing their markets soften, so they're having difficulties putting that capital to use. And so, they're focused more on acquisition.

It's natural that med mal would be a focus of that, I think, right now because generally the med mal line seems to be performing better than most other property and casualty lines. And so it's similar to what it was last quarter. I think I said last quarter that, generally I think, while I do think we'll probably see some med mal acquisitions and we have seen some, it's going to be opportunistic. I don't see a wave of those acquisitions, but it's pretty much where it was three months ago.

Paul Newsome - Sandler O'Neill

Excellent. Thank you very much for the call.

John Byers

Thank you, Paul.

Operator

(Operator Instructions) Your next question comes from the line of David Lewis with Raymond James. Your line is open.

David Lewis - Raymond James

Thanks. John, to follow up on Paul's last question on M&A, do you get a sense that some of the national carriers may want to come back into this business, given the favorable profitability levels. And if so, do you get a sense that they want to do it de novo, or through buying some platforms?

John Byers

Well, my sense is this, and then maybe I'll ask Bob to follow up on it. But my sense is there's more interest, generally, in the sector both, I mean, there's always been some interest at looking at acquisitions from within the sector. And over the last eight years ago, to date, most of the acquisitions have been in the sector. I do think there's more general interest in the sector because of the results. So since that, there's more discipline and perhaps more expertise in the sector than there was several years ago, making it all in a more attractive sector.

I think there's more interest there. I think there's more interest from foreign buyers, all in. And in terms of the way that I see it at least, generally, I don't think you're going to see so much de novo start up. I've always thought that you'll see more of trying to acquire platforms than you will de novo activities. Bob, would you like to follow up?

Bob White

Yes, David, you raise an interesting point. I was involved in a debate with several other folks in the business about whether or not we'd see the commercial carriers because that's usually a sign that the market has got the seed before it actually bottoms off in a soft market cycle. And my argument was pretty much what you just said, that the return on equity would attract the national players.

The other folks that I was discussing this with took the position that because investment income was down compared to where it was the last time we went through this cycle that the commercial carriers wouldn't be attracted to the marketplace because they can't get the same return on investment income. And they took issue with my position because it says their position was it takes talent to produce the return on equity that we see in terms of claims handling and underwriting. And even though they may be attracted by these high rates of return, they don't have the staff, since they aren't already in the line underwriting the business and handling the claims to produce this kind of return.

So, I think John's thoughts that they'll have to buy a platform in order to make a successful entry, is probably accurate.

David Lewis - Raymond James

That's helpful. Chuck, a couple questions for you. First of all, given the reduction in rates, should we assume that the expense ratio is going to climb up toward the 24% range as we kind of end 2008 and going into 2009?

Chuck Divita

Well, I think the short answer is the level of earned premiums declining is going to drive the ratio, could drive it up a bit from here. I think the important thing for us is that we have a very efficient and stable cost structure, and so we're very pleased with where that stands. But just the level of earned premiums in terms of the ratio, probably could see it pick up a bit.

David Lewis - Raymond James

Okay. And the tax rate was a little lower than I would have expected in the first quarter. Any outlook for the balance of the year?

Chuck Divita

No, I think the tax rate, again, it's going to depend on the mix of taxable income versus the tax exempt income we have. But I think right now, somewhere in the neighborhood of the first quarter number is probably where we'll continue.

David Lewis - Raymond James

Well, the last couple years you've been running closer to the 33% range, and if I calculate it correctly, it's 31.8% in the first quarter.

Chuck Divita

Well, if you look at last year, for example, 2007, we had the large PRI commutation gain and so forth, so that is all taxable income. So the mix of taxable income was driving some of that higher. Again, I think somewhere in that 32% neighborhood, as I figure today, probably is where we'll be.

David Lewis - Raymond James

Okay. And I know historically you've been well above the midpoint of the actuarial range. Can you give us an idea of where you are relative to the midpoint from a reserve level standpoint?

Chuck Divita

Well, we ended last year above the actuary's midpoint and nothing really has changed on that front since the end of the year. We still continue to be up in the range and we're comfortable with our reserve position.

David Lewis - Raymond James

A couple years ago you actually gave us how far you were above the midpoint. Care to share that with us this year?

Chuck Divita

No, actually, that was actually several years ago, but the reason for that was just to give some added comfort to people as to what we were seeing. Since then, we think its better; we published a range last year. We continue to be conservative and we talk about being above the actuary's midpoint. That's about as far as I go.

David Lewis - Raymond James

All right. Final question, Chuck. Where does excess capital stand at the holding company at the end of the quarter?

Chuck Divita

At the end of the year, 2007, we had about $20 million in cash at the holding company. It really hasn't changed much since then in that $15 million to $20 million range. And then at the insurance subsidiaries, obviously, we have a very strong capital position and are probably where we were at the end of the year and maybe slightly better.

David Lewis - Raymond James

So, the $6 million that you dividended up were basically offsetting what the repurchase program took out of the holding company?

Chuck Divita

That's right.

David Lewis - Raymond James

Okay. Great. Thanks very much. Congratulations on a solid quarter.

Chuck Divita

Thank you, David.

Operator

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

John Byers

Thanks. As I said earlier in the call, the first quarter was another solid quarter for us. Looking ahead, we remain focused on our core disciplines of disciplined underwriting, reasoned pricing, aggressive, effective claims handling, and appropriately conservative reserving. We also remain focused on maintaining and growing our strong book of business, and taking advantage of opportunities that make sense for us and our shareholders.

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

Operator

The conference will be available for replay beginning at 2:30 p.m. today, and will run through Thursday, May 8. 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 43247384. A replay of the conference call webcast will also be available on our corporate website fpic.com beginning at 2:30 p.m. today.

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

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Source: FPIC Insurance Group Inc. Q1 2008 Earnings Call Transcript
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