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M&A in MPL: What Does It All Mean?

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M&A in MPL: What Does It All Mean?

Jeff Donaldson, FCAS, MAAA

Overview

 Why are there acquisition opportunities in MPL?

 State of the marketState of the market

Underwriting cycle

Loss cost trends

Reserve evaluations

Investment markets

 Reserving considerations

 Reserving considerations

(2)

M&A Opportunities

 Fiscally challenged companies

Top line erosionp

Rising expense ratios

Report year results deteriorating

 Hard market … moved to stable … now going toward soft

Some prices hit peak levels

Sell before the market is soft

4

Sell before the market is soft

M&A Opportunities

 Changes in healthcare delivery

Consolidation across state linesC

Formation of Alternative Care Organizations (ACO’s)

Hospital employment of doctors

 Ability to gain economy of scale

 Ability to decrease volatility

(3)

M&A Opportunities

 New company formations in early 2000’s

Small companiesS p

Lack economies of scale

Limited surplus

Limited prospects

 Good acquisition targets

6

State of the Market

 Underwriting market soft in mid-90’s through early-00’s

 Calendar year combined ratios over 130% (‘00-’03)Calendar year combined ratios over 130% ( 00 03)

 Possible to

Gain economy of scale (expense ratio)

Decrease volatility

Increase geographic spread

Increase state market share

Increase state market share

Access to new markets and MPL expertise

(4)

Underwriting Cycle

 Pricing became weaker in late ‘90’s through mid 2001

Substandard market shares declinedS

Large account flexible rating tended to bend downward

Brokers provided less detailed information for large accounts

 St. Paul left the market in late 2001

 Market hardened

Standard coverage not provided to every doctor

8

Standard coverage not provided to every doctor

No coverage expansions

Large rate increases filed (mid 2001 – 2004)

Loss Cost Trends

 Doctors view prices as too high

Large rate increasesg

Pressure builds into 2003

White coat marches

 Tort Reform

2003 State of the Union speech for federal response

 States implemented tort reforms

 States implemented tort reforms

 Claim counts started dropping around 2004

 Frequency decline of about 40% - occurred in most states

(5)

Frequency Change

12.9 13.2

12.8 12.6 12.8 12

14 Claims Per 100 Doctors

9.6

8.1 7.7

7.3 7.6 7.7

7.3 7.3

2 4 6 8 10

10 0 2

Report Year

Exposures are full‐time, mature, base class.

Other Trends

 Earned price increases led to 100% combined ratios by report year 2004 p y

Manual rates started to modestly decline

Premium credits increasing

Expect price decline in 2012

Past 2012 ???

(6)

Premium Volume Changes

14 0

Medical Professional Liability  DPW ($billions)

6.0 5.9 6.2 6.1 6.4 7.6 9.6 11.1 11.9 12.2 12.3 11.7 11.2 10.8 10.6 10.3

4.0 6.0 8.0 10.0 12.0 14.0

12

0.0 2.0

Other Trends

 Unexpected frequency decline in 2004

 No immediate response to frequency declineNo immediate response to frequency decline

Financial positions still needed improvement (see AM Best)

Takes time to understand if loss costs responded like frequency

 Combined ratios well below 100%

(7)

Reserve Evaluations

 Adequate pricing by 2004

 Frequency reduction had unknown impact on lossesFrequency reduction had unknown impact on losses

 Prudent to reserve conservatively given uncertainty of changing circumstances

 Frequency decline led to a similar adjustment in loss costs

 Favorable development in 2005-2011

R d d ill

14

 Reserve redundancy will go away

Pricing declines from 2006-2011 ( … and continuing)

Stable frequency, with rising severity

MPL Loss Development

40%

Medical Professional Liability 

Loss Development Relative to Net Premium Earned

‐7%

6%

20%16%

24%

1%

‐3%

‐20% ‐12%

‐10%

0%

10%

20%

30%

%

‐21%

‐28%‐25% ‐19%

‐24%‐23%‐26%‐22%

‐40%

‐30%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

(8)

Investment Markets

 Declining benefit of investment income

Large rate increasesg

Lower interest rates

Stock market adjustments

 Investment income about 40% of premium in 1990’s

 Investment income about 20% of premium in 2000’s

 Bond yields dropped dramatically from 1990’s to 2000’s

16

 Bond yields dropped dramatically from 1990 s to 2000 s

 Significant annual gains in the stock market in the 90’s, flat from 2000-2012

Investment Markets

 Changing investment markets leads to:

Lower investment income

Lower combined ratio required

Rate increase needed to reflect

• Loss cost growth

• Reduced investment income

(9)

MPL Investment Performance

45%

50%

Investment Income as a Percent of Premium

R t i

46% 43% 43% 42% 33% 32% 30% 18% 21% 18% 6% 25% 22% 23% 29% 26%

10%

15%

20%

25%

30%

35%

40%

45% Rate increases

AND

lower investment yields

18

1 9%

0%

5%

10%

Reserving Considerations

 Need to understand the value of the company

Statement of Actuarial Opinion (SAO)S Op (S O)

• Company or consulting actuary

• Your own evaluation

– Can be employed and/or consulting actuary

 Develop an expectation for future profitability

Company rate reviewsC p y

• Reserve evaluations

• Pricing considerations

(10)

Reserving Considerations

 Review actuarial work papers from the SAO

 Discuss assumptions with the opining actuary

 Receive company input from claims and underwriting

20

Reserving Considerations

 Claims-made, Occurrence, and Pre-Paid Tail

 Tail liability

Purchased

Death, Disability, and Retirement (DD&R)

 DD&R Unearned Premium Reserve

 Other lines of business

Hospitals

Facilities

Assumed re

Dentists, Podiatrists, Chiropractors, …

(11)

Reserving Challenges

 Case Reserving

Not a simple process to determine case reserves

Adequacy can change over time

 Closing Rates

Patterns can change – watch the volume of claims

 DD&R

Age distribution

22

Probabilities of lapsing, retiring, death & disability

Probabilities need to vary by age

Reserving Information

 National Practitioner Data Bank (NPDB)

Physician data available by state

• Also has other types of providers, such as dentists

Indemnity value of claims by closure year

 Department of Insurance Data Calls (e.g. Ohio, Florida)

 Annual Statement

Value depends on the company being reviewed

 Jury Verdict Research

(12)

Where will we land?

 Underwriting

Pricing declining

Frequency flat

Severity rising

 Tort reforms maturing

 New competition

 Investment income yield is low

Loss ratios are rising

24

 Healthcare Reform?

References

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