ProAssurance Corp (PRA) 2002 Q1 法說會逐字稿

Good morning. My name is Jody, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the ProAssurance conference call to discuss first quarter results. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. O'Neil, you may begin your conference.

Thanks, Jody. Good morning, everyone. Thanks for participating in ProAssurance's conference call, the focus on the financial results of the first quarter of 2002. We're going to be discussing historical information today, as you would expect, and we'll likely make forward-looking statements based on our estimates and anticipation of future results and events. The content of the call and the Webcast are time-sensitive and accurate only on May 14, 2002, the date of first broadcast. The call is the of property ProAssurance and any redistribution, retransmission or rebroadcast of the call without the express written consent of ProAssurance is prohibited. While we expect that all statements today will be reasonable, please review all the remarks made on this call in conjunction with the caution regarding forward-looking statements in the Company's May 13, 2002 news release, as well as on forms 10K and 10Q and other publicly available information. These publicly available documents set forth many risks and uncertainties related to the Company's business and they're available from the Company on request or on our Website. We will not undertake and expressly disclaim any obligation to update or alter forward-looking statements, whether as a result of new information, future events or otherwise except as required by law. Participating with me on the call today are Mr. Vic Adamo, the President of ProAssurance, Mr. Howard Friedman, ProAssurance's Chief Financial Officer, and Mr. Jim Morello, our Treasurer and Chief Accounting Officer. We'll start the call with Howard Friedman, who's going to review some data items, then we're going to ask Vic Adamo to come in on business and industry trends, then we'll take questions. We'll start with Howard.

Thanks, Frank. Our regular participants will remember this, but I want to be sure everyone understands our limited comparison of current results to the prior year. Due to the timing of last June's merger, and the required accounting treatments, which specifies that the results of Professionals Group be consolidated with Medical Assurance only after the June 27, 2001 date of combination, the Company believes prior-year comparison data presented on an "as if" basis would not have been meaningful. I'll be talking about our two business segments: professional liability, made up the Medical Assurance Company, Medical Assurance of West Virginia, and ProNational Insurance Company, and the personal line segment, which is MEEMIC Insurance Company. Here's a brief overview of the first quarter 2002 numbers. First we'll talk about written premiums. Gross written premiums were $181 million. Our professional liability segment was $142 million. In professional liability, core premiums, those covering physicians, dentists, hospitals, facilities and others engaged in the delivery of healthcare, were $138 million. The first quarter of the year is a relatively heavy renewal period for professional liability coverage in many states, leading to the relatively large volume of written premiums. Our overall retention rate was 89% in the quarter. And the retention rate in states where we find the business climate to be favorable is about 94%. This reflects the fact that our response to difficult markets, whether through tighter underwriting or higher pricing, means that we are losing some insureds to competitors willing to write at lower prices or accept, what we believe to be, unacceptable risks. The converse that we believe that we have been able to retain desirable risks in desirable venues, giving us a cleaner book of business, paying, what we believe to be an adequate rate in areas where the legal and regulatory systems are acceptable. Surprisingly, we are still seeing carriers compete with low prices, despite the recent reminders of the dangers of that type of business practice. We seem to encounter this mostly in the states where the responsible carriers have instituted several rounds of rate increases. Because our goal is profitability, not market share, we are prepared to let business go if we can't get an adequate rate. We only had $517,000 dollars of the student medical, liability reinsurance premiums on the quarter, as we are in the final phases of the our planned exit from this business. I said before, if we didn't feel many comparisons would be valid but since this is at program that existed solely within Medical Assurance prior to the merger, the comparison is meaningful and we can tell we were down $1 million year over year in this line. For several quarters we've also been highlighting our exit from, what we referred to as other coverages, the fronted accident and health, workers compensation and multi-line business unrelated to our core healthcare provider lines. This quarter, we wrote $2.4 million of this business, which is a decrease of $13.4 million year over year. The windup of this business is proceeding smoothly. In the personal line segment, gross written premiums were $39 million. We continue to be pleased with MEEMIC's above average result in Michigan and the contribution to our bottom line. Let me highlight a few ratios for the quarter. In the professional liability segment, or expense ratio was 18%. While our focus on internal operating expenses played some part in the 5-point reduction since last quarter, most of this is a result of our exit from the fronted and assumed business that I just mentioned. It carries a proportionly higher expense mode and this quarter's expense ratio was more typical of what we expect going forward from our core business. Net losses incurred were $80.7 million for professional liability, that that loss ration in professional liability was 106%, the combined ratio was 124%. You'll note the loss ratio is slightly higher than last quarter, and again, the reason is the exit from the fronted and assumed business. While the expense ratio on these lines is higher than our core business, a loss ratio is somewhat lower. The current quarter's loss ratio is almost entirely the result of our core business. In the current environment, we're not yet reflecting an improvement loss ratio despite our substantially higher premium per risk. Furthermore, we reflected no prior year of lost reserve development in the quarter. In personal lines, net losses incurred were $26.5 million, the net loss ratio was 77%, the combined ratio was 99%. Book value per share was $15.87 at March 31st, and with $16.03 excluding the FASBY adjustment for unrealized market value changes on investments. Speaking of FASBY adjustments, this is a good time to address our adoption of SFAS 141 and 142, which provide direction in handling the transition of goodwill accounting. You'll note we recognized the one-time gain of $1.7 million, as a result of adopting these standards. This represents negative goodwill, which in the sometimes confusing world of accounting terminology was a good thing. We do not expect any impairment of remaining goodwill, which is $18.8 million. $18.2 million of that relating to our merger last summer. The effect of eliminating the amortization of that goodwill is an annual benefit of approximately $500,000 annually. Finally, ProAssurance had net realized capital losses of $1.1 million in the quarter. That's a brief overview of the numbers. I'll be available to answer any questions later on. Turn it back to Frank now.

Thanks, Howard. We're going to ask Vic Adamo to step in now and talk about the industry and ProAssurance and more general terms. Vic.

Thank you, Frank. Our industry and especially the medical malpractice segment has had it's share of interesting news of late. We're thankful at ProAssurance Corporation that we're not part of that news. It's been less than three months since we last spoke about our results and the industry's trend, and frankly little has changed at the macro level. We continue to see a difficult difficulty environment and the need for rate adequacy. We have being heed to that trend. Last year we saw the average rate per unit of risk at ProAssurance increase by about 23%. Given our filed rate increases in underwriting actions, we foresee another double-digit rise this year. So far this year, we have taken rate increases in nine states with three rate increases pending. Our staffed up actuarial department continues to allow us to pay greater attention to rate levels in our State, facilitate rate studies in markets where we are considering expansion and new opportunities. We are definitely seeing ample opportunities to expand as the healthcare community looks for companies with geographical reach, financial stability and a commitment to quality service. Our ability to deliver all three makes us an important player in the market. Our approach to expansion helps insure that the commitment we make to markets and insureds will be a commitment we can keep. We believe that is especially important in the eyes of potential customers, be they physicians, hospitals or the agent community. We continue to see and read about more large verdicts and we belief that we are pricing adequately to account for the rising tide of losses, and we're confident in the ability and the financial stability of our reinsurers to pay up when it's necessary. Interestingly, the increased attention being paid to large verdicts appears to be elevating ProAssurance in the eyes of many people because they realize that we have the commitment, financial size, and desire to weather the storm and remain engaged in the marketplace. With respect to MEEMIC, I would refer you to the news release and 10Q that MEEMIC publishes for more detail, but I want to reiterate Howard's comment that MEEMIC continues to make an important contribution to the bottom line of ProAssurance Corporation, even in this first quarter, which is MEEMIC's traditionally weakest time of the year. Frank.

Thanks, Vic, Howard. Before we take questions, I'll answer the one that I know someone's going to ask. And that is - We again this quarter don't plan to offer any guidance on future earnings. We do believe that our operations are properly focused and that we've made the right decisions to return the Company to a level of profitability that we all expect. But given the raft of uncertainty, such as how competitors are gonna act or react, what regulators will do with future rate requests, et cetera , we believe there are just too many uncertainties to offer comments on future earnings right now. We'll repeat our theme from last quarter, we're cautiously optimistic given our early actions to address trends in the industry. Jody, with that we'll end our prepared remarks and we'll open the floor up for questions.

At this time, I would like to remind everyone in order to ask a question, please press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q & A roster. Your first question comes from David Lewis of Suntrust Robinson Humphries.

Good morning.

Good morning, David.

Few questions. First, someone discuss what you're seeing out there on the claim trends. You just indicated you took roughly 23% average rate increase last year. Apparently not enough to break down the loss ratio, yet so what are kind the claim trends, one, and two, how much longer to do you think you need to see double-digit rate increases before we can get the combined ratio back close to 100% ?

Hi, David, this is Howard. We -- first I'll answer the question about what we're seeing with the trends, and then talk to you about the loss ratios. Again, we're still seeing frequency flat, remaining at levels we've seen over the past year to year and a half, higher than in previous years prior to that. But still fairly flat. And severity trends about 7%, compared to 4 to 5% in past years. And particularly large verdicts in the randomness, but larger verdicts than we had seen in the past continue to be a problem, especially in certain jurisdictions. We're still taking a pretty conservative view with respect to loss ratios, and basically booking loss ratios for the professional liability area that are quite similar to what we booked in 2001. Until we start to get a better sense that the rate increases that we're taking are actually bringing us ahead of the cumulative trend line. The experience over the past year and a half, almost two years now, has made us fairly uncertain, I think, as the rest of the industry is, with respect to just where the severity side in particular is heading. And we don't want to go out and recognize the effect of these rate increases before we have a good handle on that. We hope that we're being conservative and building a solid base, but we don't want to anticipate reductions that we haven't verified yet.

Once again, taking a little more comfort that the severity trends are leveling off versus what we saw in -- in the '97, '99 period.

Leveling off, I guess you can say leveling off but at a higher annual rate of change, I guess is the way I would describe it now.The real issue, though, is not what I would call the core severity. That again is at a higher percentage rate, but probably level over the past year. The real issue is the randomness and increasing size of the very large verdicts that can cause us problems in particular areas.

But it's also fair to say your problem areas are really outside of Alabama, is that accurate?

Yeah, I think that's definitely accurate. And something we said for a good while, yes.

And when do you think will the 10Q be filed, will that be tonight or tomorrow night.

By the end of the day today.

Okay. And do you have policyholder accounts to give us an idea of what has happened there? I know you're not willing to chase price, but --.

We're looking at some numbers right now.[JAMES MORELLO] It's roughly $31,600.

31,600. Do you have any idea what that compared to at year-end?

Oh, about a thousand less.

Okay.

About a thousand less, at March 31.

Okay. I've got more questions. I'll come back though.

David, most of that change came out of what we called allied health, which are not physicians, but physicians were up 92 for the year-to-date so our physician book is very stable. We've had change allied health, which would represent nurses and other lower policy cost insured.

Good. Thank you.

Your next question comes from Michael Dion of Sandler O'Neil.

Good morning, everyone.

Good morning, Michael.

Just kind of furthering on the last question, in terms of the problem markets, you mentioned that Alabama's is certainly not one the -- necessarily the problem markets, but if you could elaborate a little bit on where those problem markets are and, you know, what your strategy is to address that. Obviously rate increases, but then how long before you decide that the market's just not worthwhile to be in and exiting out of the certain problem markets?

Vic, you want to handle that one?

Yes,please. Mike. As you know, we are committed to write in the Eastern part of the United States that primarily the Midwest and Southeast, and within that there's been historically difficult markets for either the Medical Assurance side or ProNational. West Virginia, Florida come to mind. In each case, I mean, in each market we're clearly looking at the underwriting, the pricing, what is appropriate for that market. I think the bottom line today in medical malpractice is there are no particularly easy markets. Some are more difficult than others. And our goal as an organization is to get all markets properly priced and to go about it a way that makes for a long-term commitment to those markets.

And in terms of the rate increases in the problem markets, are those significantly higher, I would assume, than some of other markets? And if you could, maybe quantify that a little bit.[VICTOR ADAMO]: Absolutely. We take the rate increases as we see them and where we think we need them. We've had rate increases this year of up to 95% in one instance, typically our rate increases have been running I'd say on average in the 20 to 40% range. In some cases, maybe as low as 15%. And again, we have certainly had some well above 40. As a matter of course, we really haven't talked specifically about states or rates, our rate filings are public information in various states and give you some examples. But again, we're running the gambit between 15 and 95% this year. Depending on the jurisdiction.

Okay. Great. Thank you.

I think the other thing to note is that we're paying greater deal of attention to the elimination of discounts and to bringing the charged rates, the rates that are seen in the market, closer to the manual rate, and that may not be something that a lot of companies are doing in the market. But we believe that if we file them, we need to collect them.

I see. Okay. Thank you very much.

Your next question comes from harvey Hennerfelled of Westcreek Capital.

Good morning.

Good morning, Harvey.

How are you?

Fine.

I understand -- I mean, I listened to the beginning of the call and I can under even all the vague reason the professional liability lines, why you're not going to give any guidance. Are you, however, going to give any guidance for MEEMIC this year?

Our basic overall corporate decision was not to give guidance, and MEEMIC is a component. So there wouldn't be a separate guidance provided on that part. But I think, you can go back, if you want to - look at MEEMIC's 10K, of course, they give you quarterly breakdowns over the last couple of years and you can see how MEEMIC has played out during the course of the year, which is not guidance from us but certainly historicals you can look at.

I see. So it should operate somewhat at least in line with the way it played out last year, maybe slightly better?

Well ,MEEMIC is very dependent as all personal life companies on the weather. And as we try to get a handle on the medical liability climate and the way in which we can better served our in insured in the personal line, fine - we can't control the weather. So as you go back, two years, MEEMIC had a exceptional year because the weather was extremely good in Michigan last year. INAUDIBLE] benign. Results were not as good. So a lot of ways you have to do with the weather. We expect MEEMIC to perform better than the industry at large. They have consistently over the last five years. But again, so much of it has to do with the -- what happens in the Michigan climate environment.

Can you update us on the process for buying the minority interest of MEEMIC in. Where you stand in the process?

Yes, definitely. We'll we're in the process -- I guess that's the best way to put it. As you know, we have no sooner put our our press release than we had one of these lawsuits. I guess I probably shouldn't put an adjective on it, but a suit that we weren't too happy to receive. We had not even put the papers together in the MEEMIC process, we have an independent committee of two directors who are not affiliated with PproAssurance who are part of the negotiation. If the buy back were to be finalized, it would require the absolute majority vote of the minority shares. So we thought we were were doing things properly and still do things to protect minority rights. Nonetheless, this lawsuit has now gotten in the way the last two days in my personal case I've been spending time working on discovery rather than on papers to get the transaction done. So we are going forward, definitely, but we still have to work, do paperwork and we have to -- going forward with the paperwork. We haven't even signed the actual merger agreement that would be used to buy back the shares. Because the parties involved have been distracted by the litigation. But we're certainly plowing ahead and look for probably the end of summer or early fall to get it out to the shareholders.

Is the -- are there still negotiations going on between the independent committee of the board and the board of directors, or are the price and terms set?

The price and terms are set, but the paperwork -- I mean , there's documentation that the details have to be agreed to, and those have been circulated -- I'm not aware of any major differences, but yet they're not completed at this time. And again, because all the parties, including the minority committee, the Board, ProAssurance, have had to basically stop working on the paperwork to get discovery done on this lawsuit. And it's just slowing down the process.

I understand.

And, I would also add that in that initial news release where we announced the deal, we set forth a number of contingencies and conditions that we had to satisfy, such as rating agency approval and a number of things like that, and those contingencies still exist.

Yes.

Okay. Well, I just have one comment, then I'll let get on. You know, we are intending, certainly at the current level to vote our shares against the merger. By think that -- and I think that given the operations of the Company and the value of the Company, and I understand it's minority interest, I think the price that you proposed is not fair. And I think it probably would be in everyone's interest and move the process along and have a higher probable -- probability of getting done if you contemplate raising the price.

That's certainly any shareholders right, and we put out the proxy statement, we'll do our best disclosure and people can make their judgments. I think one of the factors that was very much looked at was where MEEMIC was trading in the market and the price does reflect good multiple of that price. But each shareholder has to make their own decision. I can't comment beyond that.

I understand.

Your next question comes from David Lewis of Suntrust Robinson Humphries.

Couple follow-up questions. Vic, I think you had mentioned that you were losing business to a number of still fairly competitive players out in certain markets. Are you finding that those are mutuals for the most part, or other public companies? What is your sense or combination of all the above?

Combination of all the above, it really depends on the markets, in the North they would be more public companies, in the South we're seeing combination mutual and public companies. It really depends on the market. And, as you see, we actually have increased our tradition count by a hundred in the first quarter of the year. It's more as we're looking at opportunities and looking at the way in which we would seek to attract business, we're still finding folks at different pricing mind set than we are.

I mean, given that many companies private and public have used up a lot of their redundant reserves, I would think everyone has to get a little more honest on the reserving side, and therefore pricing the products adequately. And in addition to that, I would think that the lack of reinsurance capacity relative to 12 or 18 months ago puts some pressure on the individual carriers as well. What are your thoughts?

Well, we would agree with you. We'd agree with you, of course. In this business, people can look at their results and make judgmental determinations of where they are. We're trying to be careful and conservative in our judgments. I can't comment on other folks. There are some, if you look at some of the year-end statutory numbers, and loss picks that people are using, there are some differences in opinion as to where the market is now. In our opinion, we want to be careful about where we believe the market is until we know otherwise. We don't at this point in time.

I understand. We appreciate your conservatism. Can you discuss the opportunities out there for additional acquisitions, whether it's something that you would even consider, seems like to like there's a lot of difficulties within the industry today, which could provide some opportunities if you could end up with any confidence on the reserves of those other companies. What is your thought process there?

Let me preface it by saying ProAssurance Corporation, as we know it today, is made up of 10 prior provider-started companies from Medical Assurance, or Mutual Insurance in Alabama to the old [PCom] of Michigan and a variety of others. So this organization has certainly the most distinguished track record in this segment of mergers and [INAUDIBLE] and acquisitions. Having said that, I mean, we're careful now about how we'd use capital we certainly look at something but it would need to be the right opportunity, and we have nothing currently pending at this point in time. Other than, of course, the desire of MEEMIC to repurchase its shares.

Okay. Switching gears a little bit, just to the investment portfolio, the Company saw a decline in investment income to $18.1 million on a consolidated basis versus $19.6 in the fourth quarter. Is that strictly as a result of lower investment yields or was there anything else that either propped up the fourth quarter or depressed the first quarter.

I think, it's strictly yield based, David.

Can you give us detail, then be on new money rates versus the average yield, and if that 18 is probably a better run rate, assuming that rates stay fairly flat?

Probably not here on the call.

Okay. I think that's all I have for now. Thank you.

David, it's just -- not here -- that data is not here in the room. We didn't bring it in with us.

I understand. That'll be fine. Thanks.

Your next question comes from Michael Dion of Sandler O'Neal.

Yes, just one follow-up. You know, in terms of the share repurchase and the MEEMIC offering, are there any restrictions on your purchasing ProAssurance shares, vis-a-vis waiting for the MEEMIC transaction to take place?

No. No. There are not.

And notice if there wasn't any share repurchase activity in the first quarter, is that something that you're just not looking to do here in the near term? Waiting for the stock price to maybe come in a little bit or maybe just kind of go over your strategy with share repurchases.

The ability to repurchase shares remains, and certainly the organization looks at it, The -- one of issues that we're dealing with now though is certainly given the increased rates. We're certainly looking to conserve capacity to be able to provide our insurance services. So that is probably the higher calling at this point in time. That doesn't mean there wouldn't be share repurchases but they are not top of the priority list at this moment.

Ok, great. Thanks, Vic.

Your next question comes from Blair Sanford of Cochran Caronia.

Hi, everybody, how are you?

Morning, Blair.

Hey, a couple questions here. I'm not sure if you talked about it earlier, I might have missed it, but what is going on with prior period reserves and any development therein?

No, there was really no development in the quarter.

Okay. Talk about any kind of expense savings that we're seeing now, any savings we're seeing now with regard to the merger. This latest manifestation that ProAssurance, the tense consolidation, shall we say.

I think over the past three-quarters, since the consolidation, we certainly continue to keep our focus on expenses, and we have made some expense reductions. The whole basis of the merger, if you go back to our earlier statements, was not driven by expense savings, as that wasn't the primary focus. We thought that both companies had operated pretty efficiently and really had been in an expense-reduction mode for probably a year or two prior to the consolidation date. So what we would see and what we have seen, really, is relatively small things. We've consolidated some of our, what we call, back-office functions and accounting and information systems. We're making other changes with -- in terms of the overall expense structure of the companies, though, we didn't anticipate major reductions or changes as a result. And again, the expense ratio change that we saw this quarter was primarily driven by the mix of business, moving away from that fronted and assumed business and really seeing what the core business will produce, and that's what we expect to have going forward, something in the range that we have in this quarter.

Blair, let me add, from an integration point of view, we have now at the end of the first quarter successfully integrated financial operations and information services operations and that part is completely done now, which I think, is a good track record being about less than a year out from the original closing date.

Right. No, we didn't expect a lot in the way of saving. I just wanted to see where you were and those comments are helpful. One last question. On reinsurance, are there any developments since the Q4 release with regard to reinsurance, do you have any renewals that are coming up in the next few months that we should be thinking about?

No. The reinsurance programs typically renew once a year. Now, in the past, Medical Assurance reinsurance program renewed October 1st, and the Professionals Group and ProNational program on January 1st. We're intending to put the two programs together, the professional liability aspects of the program together for a combined October 1st program going forward. So those discussions will be starting in the next month or so but there's no change since the last time. Everything is in place and moving forward.

Can you refresh me, as to what happened at Jan 1, then, with the ProAssurance? The professionals?

Both programs, the October 1st 2001 Medical Assurance renewal and the January 1 ProNational renewal roughly had 10% increases in reinsurance costs, which was not unexpected and actually better than we anticipated in terms -- given the market post September 11th. And the terms of the programs stayed primarily the same. I guess, the most notable difference in the programs on the Medical Assurance side, we chose to reduce the overall capacity within the treaty program from $26 million to $16 million dollars, since -- and that's on a per claim or per risk basis, because we really didn't have the need for the higher limits and we could obtain those higher limits on a case-by-case basis [INAUDIBLE] if we need to. Given the tightening in the reinsurance market, reducing that limit on the upper end made the program somewhat easier to place.

Okay. Thanks so much.

Your next question comes from Greg Peters of Raymond James.

Good morning, everyone.

Good morning, Greg.

I don't know if Dr. Crowe is in the room, but we certainly miss his candor and insights. I -- two questions, believe it or not, after -- theres been a lot of questions here. First, I was curious, Vic, how you are defining rate adequacy and how should we be thinking about this business in the long run in terms of financial measures such as return on equity, especially as it relates to medical malpractice. And then the second question, was, and I know you've provided some limited comments regarding profitability on a State by State basis, but I was wondering if you could remind us which states remain very difficult for ProAssurance, and specifically if you might also throw in a comment on how Michigan is developing as well. That would be helpful.

Let me see if I can respond to this in a general terms. The dimensions of the medical malpractice business are the same as the dimensions of the insurance business, which is, the combined ratio. And if you get a combined ratio, where one wants to be, you get a good return on equity. It seems to me you're deploying your capital effectively. So we're -- we are taking the approach that our expenses are pretty much -- always can be improved, but they're in that range where they're not going to dramatically change results. So the loss ratio is the driver of result. So rate adequacy, in our minds means getting the premiums up so it's covering losses and that has been a - somewhat of a stair step problem as well as the environment moving. We believe, we, being the now consolidated group kicked off the whole market, becoming aware of what was going on in the middle of the summer of '99, when ProNational started to file rate increases for the Florida market. Having said that, it's still difficult to catch up with those trends, the trends move as the pricing moves. But we are committed to price adequately from our point of view, which means getting enough dollars to pay the losses, bring the combined ratio down to under 100. That's not going to happen this year but it's certainly our goal over the next number of years. And Howard's spoken of that in the past. To get, and these are certain industry figures to get a return on equity of around 15% and today, 12 to 15%, and today's investment environment you have to look at a combined ratio in the mid-90s, if you're deploying your capital at one to one. So those are our longer terms goals. In terms of States, I don't think anything has dramatically changed. There are States that had very dynamic liability climates, we read about them in the paper every day, the West Virginias, the Mississippis, the Texases, it's a combination of changing environment laws that are not as benign towards getting a case resolved. So we are looking, Pennsylvania certainly, so we happen to be in some of those States, the larger greater degrees, and we're continuing to evaluate how much business we write there, what the pricing is. States like Alabama and Michigan have been more stable for this organization. We certainly consider to be our better States. But I'd say our experience probably reflects what you read in the industry at large, and I'll leave it at that.

Perfect. Thanks a lot.

Your next question comes from Beth Malone of [Add Vest].

Good morning. Thank you. Just a couple questions about the market in general for the medical malpractice. Could you give us an update as to where you all are in terms of West Virginia? Are you completely out of that State. Are you writing significantly less?And what is the environment there is. And also, could you comment on any opportunities that might be there or maybe there aren't any, related to the exiting of mixed group and FICO and St. Paul from the marketplace. What has that done to the competitive environment and has that offered any opportunities for you to expand?

Beth, I think you really asked two questions there. Let me try to go over what we've said about West Virginia. We continue to operate very cautiously in West Virginia. We recognize the difficulty in that environment. Our insured count from the first of the year is level to slightly up. We have seen a number of applications there. But again it's a very difficult state and our underwriting there has been correspondingly tight. As far as the opportunities that have been created by the exit of FICO and the retrenchment of other companies, we evaluate that much the way we evaluate the business that Vic just spoke about, that it needs to give us a reasonable confidence that we're going to be able to price it. We look at how the regulatory environment sits. How the pricing environment and the actions of competitors flow out. We talked about it in one of our presentations, an opportunity that presented itself in Indiana. When FICO left, we picked up a number of hospitals there. It made sense to do that for us. We have been in the market. We knew the -- we knew the venues. We knew the lawyers. And we felt comfortable at the rates we were charging. So it has helped us in a number of -- number of environments.

Let me say this, Beth, that our marketing and sales department has been very busy, the focus of these last months. We're certainly going out and talking to agents, looking at states in which St. Paul had a substantial amount of business in our core areas. We're basically again consider ours Midwest and Southeast. We want to be able to service business we sell and serve it effectively especially at a claims level. But certainly states like New Jersey, which you mentioned, are within that area. There are opportunities. We're talking to folks there. We have a book of business now, and certainly would expand it under the correct terms. We've talked to the department there. So I think these issues are favorable. But it all depends upon getting our rate out there and having the insured accept what we consider to be an adequate rate. So much of the story on mix depends on how the new -- gets created, evolves and what it will be pricing at and issues that are still to be determined. But we're very conscious of the fact that there are business opportunities. We do want to take advantage of the correct ones. But we don't want to get into a rapid growth spiral that we can't service or price properly.

Okay. Thank you.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad. Your next question comes from David Cohen of Athena Capital Management.

Good morning.

Good morning, David.

With regard to the previous question about mix, leaving the market, there's a note in the "New York Times" the other day about GenStar targeting New Jersey at the new market in terms of med mal. Do you expect to see either GenStar or any other new entrants into the market having a significant effect on your market position over the next several years?

We feel I guess -- proper way to stay, we have positioned of longstanding tenure with our - with the companies in our organization. And then there's always going to be new market entrants, so we'd expect -- there are more players in market that would have some impact. But over time, both Medical Assurance and ProNational have had very high retention rates. We would expect that to continue in the future, provided we continue to give good level of service. Where the certainly new companies can have the greatest impact is in areas where there's absolutely no ability to buy new insurance. If a Company wants to go into a State, for example, West Virginia, where there's Companies that don't want to - are not able to sell, or Georgia, Nevada, they can certainly make head roads into those States because there's just a plain lack of capacity. In our core markets, I guess certainly we have dealt with competitors for years. We've lived in a competitive environment. We don't expect it to change the face of our core markets.

I would assume that of potential marketing entrants, somebody like GenStar would be a relatively more desirable competitor than some of the other possibilities, correct?

Certainly, we -- I think it's unfortunate for the market when companies come in and can't meet their commitment. So a Company that has a financial backing that can meet its commitments in the long-term will be good -in that regard, even St. Paul here, we compliment St. Paul, they've made a tough decision to get out of the market, which is unfortunate, but they're doing it in a very responsible way, where their insureds certainly have the recognition that their claims will be paid over the long run. They're not dumping folks wholesale on the market. So - Certainly competitors that can bring stabilities to the market are better than those who get in, go insolvent and leave everyone, the insured, the other companies, the regulators in a quandary.

Thanks very much.

Your next question comes from David Lewis of Suntrust Robinson Humphries.

Dick or Dr. Crowe, you can talk about what probably needs to happen out there in the environment to -- we need some kind of tort reform some quasi tort reform? Do you think you'll see that develop in Nevada, West Virginia, Pennsylvania markets? I mean, you continue to see as where the doctors are screaming they can't afford the rate increases, the insurance companies can't afford not to put the rate increases in there. Many markets are gonna lose medical care capacity. Where does this end up over the next several years and what do you think needs to happen?

David, this is Vic here. I hate to disappoint you but I'll respond. Unfortunately, Dr. Crowe can not be here today. He actually is not in the room. We had a commitment in our Florida office which he is down today. In terms of that answer, I'll give you my personal view, and I think the views are as diverse as the organizations. Probably, best spokesperson that I can tell you to turn to is Larry Smar at the Physician's Insurance Association. But, I will give you my view. Traditionally, tort reform has been a State by State activity, and I think we're increasingly coming to view that is not being very functional. It's difficult to get implemented -- trial lawyers are very effective at the State level. It's erratic, the tort reform is not the same State to State, and in State supreme courts can go all over the places from Alabama and Michigan, where they have upheld it, to places like Illinois and Ohio, where they have thrown it out before even getting a case in controversy. In the long run, I think, to be effective it's probably has to be done at the National level. There were inroads into the original drafts of the Patient Bill of Rights. There's a bipartisan bill now, I think it's House Bill 4600, which is being advanced to look at some of these issues. It's going to be a difficult fight on the National level. But once in place, probably have better long-term results at the Federal courts looking at it in the dispassionate manner. So that's my personal view, which somewhat reflects the views of the organization. We do think that tort reform is important, has benefited markets for the benefit of the insureds, the medical community, and derivatively the insurance companies. But to be successful in tort reform, tort reforms have to be the product of the medical association, hospital association, the other providers working with community constituencies who understand that they need tort reform for the better and most cost-effective delivery of healthcare.

If we go back to California's retort -- tort reform, do you think that if something were to be put in on a National level and any type of fashion, generally what would happen? Would rates come down because the risk has left? Do you think increased competition would come in the market? Now that we have got less uncertainty. Kinda, what is your gut feel on the impact on the market, if have you some kind of quasi-tort reform.

If you looked at what MICRA in California has done over the long-term, it's brought stability. I can't really comment -- I'm not that familiar intimately with the California experience, but, I think, if you look at the long-term experience in California, you see the rates have been stable, maybe adjusted at a CPI type level, over a 10-plus year period and that would be the expectation. Whether rates would come down, I think, is a little harder to say. That depends upon whether rates are adequate now, and where the climate goes.

The big effect [INAUDIBLE] is not dealing with these shock verdicts, you're not dealing with unanticipated results and it's bringing the system more to a place where you're paying actual out of pocket damages, which a victim of a malpractice certainly deserves, but you're avoiding the unquantifiable pain and suffering verdicts, the punitive damages, things tha can escalate costs both on the mico level and the macro level with no tangible ability to predict them nor to reserve for them ahead of time or to do those things that make the insurance mechanism very difficult.

Thank you for your thoughts. That's helpful.

At this time, there are no further questions. Mr. O'Neil do you have any closing remarks?

Just a word of thanks to everybody for participating. And we'll talk to you in August. Thank you.

This concludes today's ProAssurance conference call.