ProAssurance Corp (PRA) 2003 Q2 法說會逐字稿

Good morning. My name is Shala, (ph) and I will be your conference facilitator today. At this time I would like to welcome everyone to the ProAssurance second-quarter earnings release 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. (CALLER INSTRUCTIONS) Thank you. Mr. O'Neil, you may begin your conference.

Thank you, Shala. Good morning, everyone. We appreciate your interest in ProAssurance, and our discussion of results for the second quarter and first six months of 2003, and our current view of the industry. In this call we're going to discuss historical information. We're going to make some forward-looking statements and projections based on ProAssurance's estimates and anticipation of future results and events. We expect that all the statements we make today will be reasonable; but I want to remind you to review the contents of the call in conjunction with the caution recording forward-looking statements in the company's August 11 news release, as well as its Forms 10-K and 10-Q and other publicly available information. You can obtain that information from our website or from our office here at the company.

We will not undertake and expressly disclaim any obligation to update or alter the forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. This call is being webcast and will be available for replay in various forms as described in the news release and 8-K. I want to emphasize the changing nature of the business and the financial markets, and in that vein remind you that the contents of this call and the webcast is time-sensitive and accurate only on August 12, 2003, the date of first broadcast. The call is property ProAssurance and may not be redistributed, retransmitted, or rebroadcast in any form without our express written consent.

Finally, we expect to discuss operating income and operating earnings, which are non-GAAP financial terms, that exclude the after-tax aspects of guaranty fund assessments, capital gains and losses, and the results of accounting changes. There is a specific discussion in our news release and 8-K about why we think operating income and earnings are useful financial measures. But in summary, we believe operating income and earnings help both the company and investors better understand our performance by providing a better measure of day to day activities in core insurance businesses.

Participating with me on today's conference call are Dr. Derrill Crowe, our Chairman; Mr. Vic Adamo, the President of ProAssurance; Mr. Howard Friedman, ProAssurance's Chief Financial Officer and Chief Actuary; and Jim Morello, our Treasurer and Chief Accounting Officer. Howard will start our call with financial highlights and background. Howard.

Thanks, Frank. Six months into 2003, we can say we are pleased with the results of our operations so far this year, and we believe that we're progressing according to our plans for the year in both our professional liability and personal line segments. By virtually every measure, the second quarter of 2003 was our most successful since ProAssurance was formed two years ago.

Professional liability was profitable again in the second quarter. We have been raising prices to balance increasing loss cost since the spring of 2000; and the results so far this year are the first real fruits of those increases. We expect to see further improvement in our results as our rate increases continue to roll through to the bottom line. Consolidated gross written premiums grew by 28 percent in the quarter, as compared to last year; and are up 19 percent for the first half of the year. Our professional liability premiums increased by 37 percent over the second quarter of 2002, and are up 21 percent for the first half. Personal lines premiums are up 13 percent in both the quarter and six months.

Our professional liability retention rate is about 81 percent now. We are sticking with our program of reunderwriting our risks on a continual basis; and that means we are nonrenewing some insureds because of loss history. There is also undoubtedly some loss of business because of our determination to charge an adequate rate and not undermine our balance sheet with aggressive discounting. In spite of the attrition, our overall risk count is basically unchanged, meaning that we are able to write quality new insureds at rates we deem appropriate, to replace those that are being nonrenewed or who choose to leave.

Competitors are by and large behaving more rationally, with isolated pockets of price-focused business. As an example, in Ohio, which is now our largest state, all three of the other top companies have taken rate increases. One has taken two this year. It is hard to know how disciplined they will be be about sticking to those rates, however. Rate increases of 25 percent or more continue to be the norm in professional liability, and we are somewhat surprised at the strength of the rate changes we've seen this year.

We continue to file for appropriate increases given the loss indications in individual states. But we believe that we might have seen some moderation in the marketplace by now. The upshot of this is that we believe the hard market conditions may extend out past 2004. As other companies contract their business due to capacity concerns, we will be able to utilize the capital we raised last year and the excess capital from our debenture offering to support additional premiums.

Our sense is that regulators by and large understand the need for insurers to obtain adequate premium levels. We've had discussions with regulators about rate adequacy and to date we have received reasonable responses. The market realities often place insurance regulators in a difficult position. They are conscious of a real need for rate adequacy, despite the fact that rates have already increased in remarkable fashion. For the most part, our consumers, the hospitals, understand the need for us to charge an adequate rate and have been largely supportive in the process. That may be because of the company failures and retrenchments which have reinforced the need for insurers to receive a fair rate of return and remain strong.

Within professional liability, our excess and surplus carrier, Red Mountain Casualty, has written about $11 million of premium in 2003 and approximately 14 million since its inception last fall. We are pleased and somewhat surprised by the amount of premium and the number of applications involved. For the year, Red Mountain's premiums could approach $20 million, and could double that in 2004. We first believed that Red Mountain's business would largely come from within ProAssurance, those physicians who fell outside our tightened underwriting criteria. However, while there is business coming into Red Mountain from within ProAssurance, that amount is somewhat limited by our reunderwriting prior to the formation of Red Mountain. Most of the premium that has been written in Red Mountain is from risks that our new business to us, meaning net new premium growth. We do understand that there are new excess and surplus lines competitors entering the sector and that could have some effect on future writings. But given the surprisingly strong demand for coverage, we believe growth in the higher risk market will continue.

In personal lines, the number of policies written continues to increase as MEEMIC expands further into underserved areas of Michigan. MEEMIC is also doing more to expand in parochial and private schools, and two and four-year colleges. As we have demonstrated, the margins in this business remain high because of our ability to underwrite selectively in an already advantageous segment of the Michigan market.

At June 30, the number of automobile policies is up 2 percent compared to a year ago, and up 4 percent since year-end. Homeowners policies are up 5 percent compared to a year ago, and up 12 percent since year-end. This is strictly growth in policies and is important, given the rate increases put in place in both lines over the past 12 months.

Turning now to the loss and expense side, our consolidated loss ratio was down 5 points for the quarter, as compared to last year, and 6 points year-over-year. Our professional liability loss ratios are down significantly; down 11 points quarter over quarter, and the year-over-year improvement is 9 points. There has been no perceived change in the loss trends in professional liability. Severity trend continues to range on average between 5 and 6 percent; frequency remains flat. In personal lines we saw a small increase in the loss ratio in the quarter; up 4 points compared to last year, but it is still down 3 points year-over-year.

Higher premiums generally translate into higher expense dollars because commissions and premium taxes increase. Commission dollars did rise in the quarter, but with internal fixed expense controls in place, premium increases generally outpaced in commissions, and guaranty fund assessments down year-over-year, our consolidated expense ratio is 3 points lower compared to the same quarter last year, and is down 2 points year-over-year. In professional liability, we lowered the expense ratio a little more than 1 point, quarter over quarter; and year over year the expense ratio is down half a point. The expense ratio in personal lines was 1 point lower than the year-ago quarter, and is flat year-over-year.

We are also seeing the improvement we expected in a combined ratio, both consolidated and in the professional liability segment. The consolidated combined ratio improved 8 percentage points, both year-over-year and quarter over quarter. We will believe we can see consolidated combined at our target range of around 103 for the fourth quarter. The professional liability combined needed to improve, and did, dropping 15 points for the quarter compared to last year, and down 12 points for the year-to-date. The slight rise in the loss ratio in personal lines moved the personal lines combined up in the quarter; but at 86.5 percent, it is still a great result; and the year to date number is down as compared to last year.

We do pay a lot of attention to cash flow from operations, and this was another good quarter, with cash flow of $67.5 million, bringing us to $140 million for the first half. Recall that the full-year 2000 cash flow from operations was $177 million.

In the quarter, we invested approximately $50 million in business owned life insurance, primarily designed to offset future employee benefit costs. These policies on our executives and vice presidential level employees are placed with highly rated companies and are earning a rate of return in excess of 5 percent for the company.

Finally, we had $1.3 million in favorable prior-year loss reserve development in the quarter. By segment, that was 2.1 million favorable development in personal lines, and $750,000 of strengthening in professional liability. For the year-to-date, prior year reserve development is favorable at $2.75 million, which is composed of $3.5 million of favorable development in personal lines, again offset by this quarter's $750,000 addition to (technical difficulty) professional liability. We are confident that we are reserving at prudent levels. As most of you know, we have our independent consulting actuaries perform semi-annual reserve evaluations, in addition to the analysis we do in-house. That helps us to respond to trends as they emerge. Given the deserved attention paid to reserves these days, I expect that you will be seeing both from our company and the industry more frequent, smaller reserve adjustments, as we all try to provide more information, broader disclosure, and respond to the evolving financial reporting regulations. Frank?

Thanks, Howard. Now I'm going to ask Vic Adamo and Dr. Crowe to talk about ProAssurance's performance and opportunities in the industry. First, we are going to go to Dr. Crowe for his comments.

Thanks, Frank. I will make a few general comments and try to keep them brief. But really the numbers speak for themselves and tell our story. Our results are improving, as we see the results of several years of sound business operations. ProAssurance stands for balance sheet strength, excellent customer service, a commitment to defending nonmeritorious claims, underwriting discipline, and rate adequacy. It's really simple in theory, but apparently very hard to execute. Our management team has executed on our plan, and our investors and insureds clearly have benefited.

Where other companies have been forced to abandon business, we have had the capital to commit so that we (technical difficulty) and write business for those who pass our underwriting criteria, and those that understand we collect an adequate premium, so that we can be there to pay those losses in the future.

We have used $68 million from the proceeds of the fixed-rate debt offering to pay off the floating rate bank debt, at what appears to be an advantageous time and given rising interest rates. And we have 40 million in additional capital we can commit to new states or existing states where we think the return will be good. Including in our offering this past November, we have now raised $150 million during the past year to support the growth of our medical malpractice business and repay the bank loan. We believe it is important point of differentiation that we have the credibility in the market to raise capital on a stand-alone basis, without resorting to the higher-priced options of trust preferred pools or other shared arrangements.

Barring another competitor's collapse, and that's definitely a possibility, or the availability of a significant book of business, and that's another possibility, we should be set on our capital needs for the rest of the year. We believe that our earnings will carry us once we get to next year. Again barring anything unexpected, that we feel that we should take advantage of in the marketplace.

As Howard said, we still believe we will achieve our intermediate goal this year, which will have us reaching a point of the combined ratio of 102 to 103 percent in the fourth quarter. That will put us well on our way to achieving the profitability goals we set out of 12 to 14 percent return on equity. We have maintained our market share in key states, especially being the largest states that we write in, Alabama and Michigan, our home states; and in Indiana. In Michigan and Indiana that's especially encouraging, because we are in competition with two of our largest and main competitors. Data from 2002 shows that we maintained a strong number two or three position in Florida and Ohio, two states in which we have large books of business. I do not want anybody to interpret this as a change in our preference for bottom-line results over the top-line. I mention in only because it shows that in this market we can achieve good results at both the top and bottom of the income statement. We believe our commitment to our customers and our willingness to defend claims plays a large part in convincing existing insureds to stay with us, and in giving potential insureds a reason to choose us to be their insurance carrier. And they have been willing to pay what is often a higher price to remain with us for those services.

Last quarter we alerted you to the fact that we are transitioning all of our remaining occurrence business to claims made. That transition is going remarkably well. This change has affected a small number of insureds in New Jersey and Pennsylvania, a large number of insureds in Ohio and Michigan, and we are in the process of changing completely in Indiana, which has been predominately an occurrence-based state. We have lost some insureds over this change, but we have been unable to identify a pattern of business existing solely because of the conversion. The current market conditions receive some of the credit for that fact, of course; but again I think our agents and our internal salespeople deserve a pat on the back for the diligent efforts in explaining the claims made advantage to our insureds.

I am asked quite often now about the M&A climate in the medical malpractice companies. I can only tell you that the landscape is changing and is more active than any time in the past few years. My sense is that there may be some pieces of business sold before entire companies are sold. That's because most companies have a core area in which they are successful, and they have some troubled areas where they've expanded too fast in the past. It's these expansion areas or books of business acquired in an acquisition that may come on the market. After that, I would not be surprised to see some of the mutuals recognizing their capital constraints and seeking a suitor. How that would play out is anyone's guess. But the longer we go without meaningful tort reform, the more likely it will be that marginally performing companies will be in trouble. In any event, and you will hear more from Vic on this matter in a few moments, we believe that we have fully integrated our two companies and that ProAssurance is in a position to take advantage of any M&A opportunities in the future. Certainly where the most experienced consolidators in the industry, and we're in the best position to raise capital that may be needed to accomplish this transaction.

Now let's talk just briefly on the subject of tort reform, which we are receiving numerous inquiries. The national effort failed, as we all feared it would; but the closeness of the vote indicates that the federal tort reform could make it back into the national agenda if the Democrats and the Republicans get to the point where they are bargaining over the legislation in Washington in the future. If it doesn't resurface as a bargaining chip this year, it is sure to be a major campaign issue next year and will remain in the national spotlight.

On a state level, we have tort reform enacted in seven states so far this year. Several of those are in our coverage footprint. To be honest, some of that reform is meaningful. However, tort reform legislation at the state level needs to be upheld by those state courts. Ohio is a good example of meaningful tort reform legislation in the past; but they have a historically poor record of upholding those reforms at the appellate level. Is is yet to be seen what will happen there this time. Other states have passed tort reform that seemed to be riddled with loopholes or even with provisions that step backwards a bit. We frankly don't believe those laws will be of much use in changing the medical malpractice climate; but at least it is a start.

I'm going to take two closing comments on tort reform. First is Florida. This has generated a lot of headlines, and we understand that there has now been a compromise agreed to by the legislature and Governor Bush. I don't think we will be able to give you a definite comment on any reaction to the legislation, because nothing has passed yet; and our experience shows that there is a very contentious issue in Florida. Anything that happens between the start of the legislative session and what winds up on the governors desk is very very different. While we will not speculate on outcomes, I do want to emphasize that we have examined very closely the regulatory and legal climate of each state in which we do business, and we are very selective as where we deploy our capital.

Finally, I want to make it very clear about this. We are not running our business with the expectation that tort reform will occur. Our plan is to drive us to success without tort reform. If it's enacted, and if it affects losses in the course of time, our rates will reflect the new loss trends. But we will be prudent in giving any significant prospective credit for tort reform that may or may not pass constitutional review. I am going to ask Vic to take a few moments and talk about operational items in the quarter; and then we will take questions. Vic, go ahead.

Thanks, Derrill. The real changes in our business are in operations, not in philosophy or in overall direction. To that end, I thought it would be appropriate to review the ProAssurance merger in light of our two-year anniversary that we celebrated during the second quarter.

Let me start by saying we believe our merger is now fully integrated. From a business point of view, the merger has definitely been a success. By any measure our constituencies are better off today than they were when we closed the merger in June 2001. Our policyholders are now backed by one of the strongest, most stable companies in the field. Based on 2002 data, ProAssurance is now in the top 100 property casualty groups when measured by written premium. We have grown to become the fourth-largest writer of medical professional liability insurance, and the leading medical malpractice carrier in our states of operation. Because of our stable financial situation, we now are able to serve over 30,000 professional liability clients through Medical Assurance, ProNational, and most recently Red Mountain Casualty. In addition, MEEMIC has maintained its position as the top-ten writer in Michigan, steadily growing its policy count, that now stands at over 160,000.

There is no question that the medical malpractice rate increases have been difficult for our customers and for doctors throughout the United States. We have not lost sight of the fact, but we are guided by our bedrock requirement to be there in the future to pay claims. Unfortunately, the recent history of medical malpractice insurance has been witness to a number of companies that lost sight of their mission and are no longer here to serve their customers.

ProAssurance has distinguished itself as an organization willing to confront and solve the problem. In fact, as I look back to 2000, the first significant rate increase taken in the medical malpractice industry was the ProNational January 1, 2000, rate increase of 18 percent in Florida. In the spring of 2000, both ProNational and Medical Assurance independently reduced and then stopped reserve releases, and started the rebuilding process. Amazingly, most of the competition took at least another year, if not longer, to begin these same types of actions.

We continue to be able to offer our insureds a full range of insurance products, including the limits they need to protect their assets in this turbulent legal environment. Because we have maintained our commitment to a strong balance sheet, we have not had to resort to reducing available limits or, for that matter, withdrawing from states or abandoning certain areas in key states. When we hear our competitors talk about limiting coverage, we believe we're hearing about additional business opportunities for us, because we know that many physicians want to purchase higher limits and will seek a stronger company that can and will offer those limits, and has shown the ability to make a profit in doing so.

Notably, since our merger, we have actually been able to raise our reinsurance retention to $1 million per claim in all states. This reduces the effect of reinsurance price increases on our insureds, lessens our dependence on reinsurance, and translates into a bottom-line benefit for ProAssurance. We are confident of our pricing in the $1 million layer, and we want to retain the benefit of this pricing at ProAssurance; and we have the available capital that allows us to do so.

An important part of the credit for our position in the business goes to our internal and external actuaries. Our reserves are continually evaluated by our outside consulting actuary, who we believe is the most experienced medical malpractice actuary in the United States. And the same can be said on the personal lines side. Our rates are set by our internal staff that is diligent and focused on our company and our specific states. I don't think that any other company in our niche can boast the same quality and depth of actuarial insight as we have available to us at ProAssurance.

Another part of the credit goes to our level of customer service, both up front, writing the business, and most importantly when a claim comes in. We are now on one data processing system, that allows us to approach the professional liability business in a consistent manner and facilitates better management decision-making. The strength of our claim service continues to be what we are most known for. The merger has allowed us to build on the foundation established by Dr. Crowe of Medical Assurance, and complemented by the experience of the ProNational organization.

Our rating agencies share our confidence in the financial strength of the ProAssurance group. Both A.M. Best and S&P recently affirmed the A- rating for our insurance companies, including Medical Assurance, ProNational, Red Mountain and MEEMIC. The rating agencies cited our overall capital position and our ability to raise capital to support growth, as well as our geographic and product diversification, as factors supporting the rating.

As a public company we work to increase the value of the investment made by our shareholders. Our shareholders have clearly benefited from the merger. On our first day of trading in June 2001, our stock closed at 15.95; our close yesterday was 28.15, or an increase of 76 percent over this two-year timeframe. The success of the merger has positioned us to take advantage of future M&A opportunities, and we have the demonstrated ability to quickly raise the capital needed to support such an opportunity.

In addition to being good for our policyholders and shareholders, the strength and stability we have achieved has also benefited our employees. Our larger size and scope of operations has opened new opportunities; and our performance has allowed us to pay competitive salaries and offer meaningful incentives to our staff, as the organization grows and prospers.

Finally, we believe that the merger has been good for those who represent our products in the field, our independent agents, as well as our internal sales staff. I would like to congratulate them on a job well done. At a time when medical liability is consuming an even greater portion of physicians' income, we need to spend more time with each account as we explain why ProAssurance is the insurer of choice. The fact that we're adding new insurers, often in environments where we have rates higher than the competition, is an indicator of both our quality as a company and the ability of our sales force to convey that message.

I have spent most of my time on the professional liability segment because it's the largest segment of our insurance operation. But I would be remiss if I didn't highlight the superior results of MEEMIC during the past two years. MEEMIC is larger, more profitable, and stronger as an insurance company than it was at the time of the merger. MEEMIC has continued to fulfill its important role as a part of ProAssurance. It has been a stellar performer and has continued to (technical difficulty) to our group. Most importantly, MEEMIC's bottom-line contribution for 2001 and 2002 allowed ProAssurance to show a profit when the peer group companies were all reporting losses. MEEMIC's string of consecutive quarters of underwriting profitability is quite remarkable, and continued during the second quarter. While the possibility of a bad weather quarter always hangs over MEEMIC, absent something out of the ordinary, MEEMIC will continue to provide good balance to our earnings. As you heard Howard relate, our continued growth in policyholder count at MEEMIC results from the effort to broaden our market share in Michigan. While growth in Michigan is our current focus, we do believe that the MEEMIC experience can be duplicated in other states as we move down the road. Frank, back to you.

Thank you, gentlemen. Before we take questions I want to head off the expected question on guidance. We don't expect to provide guidance on this call because of what we see as very real uncertainties regarding our competitors and their survival, trends in the legal environment, and the possibility that regulators may change their view of our industry. We just don't think it's prudent given those uncertainties to make any forecasts. Though we did issue guidance range, or a guidance range, for this quarter, that came at the end of the quarter and was largely driven by our willingness to signal to potential debt buyers that we believed we achieved results within the range expected by the Street. So we well end our prepared remarks and ask for any questions.

(CALLER INSTRUCTIONS) Eric Sexton (ph), Robinson Humphrey.

Congratulations on a fine quarter. I just have a few questions. I am calling in for David Lewis who is in a meeting. Maybe you can elaborate on outlook for MEEMIC and the possible expansion outside of Michigan, which you briefly spoke of before? Also, do you have a number of the cases you have taken to arbitration resolution or final jury, in 1-H-03? I know you are expecting over 400 this year. And 3, your thoughts on a Florida competitor stating that they would be willing to slash rates by 20 percent if tort reform is passed?

Let me take the last question first. We are not going to comment on what any of our competitors say they may or may not do. Our actions are going to be prudent, based on what we expect our company to achieve and our data. Vic, you want to take the Michigan question?

Sure. MEEMIC is going about now the licensure process in surrounding states, surrounding midwestern states. And we're developing the plan that would allow us to move into those states. One of the very unique areas about MEEMIC is its distribution system, which is a peer selling by teachers to teachers. So we do have to recruit teachers, train them to be insurance agents; and so that process is not a rapid process. As we move into other states, we definitely will pursue that same distribution model. So I would say it's on our consciousness and we're working towards it. But it is not in the executable form at this point in time.

As far as the number of cases, I don't think we've got that in front of us. But I do believe we are still on track for the range we had expected. About 400.

Mike Dean (ph), Sandler O'Neill.

Good morning, everyone. My question concerns the excess capital that you raised in the recent debt offering. Approximately 40 million or so that was not used to pay down the bank facility is available. I was just trying to get your appetite as to how you might deploy that capital. Given that you are number one and number two in many of the states you are currently operating in, in medical professional liability, would you look to grow in those states? Or possibly go into new states there? And also if you could address capital as it pertains to a MEEMIC expansion?

Let's take it in reverse again. MEEMIC is at the present time self-generating capital. MEEMIC can write at a broader ration than the med and mal side; can write at approximately 2 to 1 as a rule of thumb. And MEEMIC's earnings are really supporting its growth. So the capital at this point in time is really focused on the professional liability side.

We do plan to grow. Our goals are to grow within our footprint states. So to fill out our footprint. As you know we recently filed in Delaware; we looking at some other states in our footprint. And we definitely want to grow in those states. Our core states, Alabama and Michigan, our top of our list; and our remaining states that we do business in, we are very prepared to grow. Assuming that we can obtain the rating that we feel is appropriate to get the overall return for the organization.

I think that the other comment on that is that we will take the growth where it comes, at rates we think are attractive and where we can get good business. I don't think we have specific targets to say that we are going to use the capital to grow in one state or another. I think it is very dependent on what we see in the marketplace.

Beth Malone, Advest.

Thank you. Good morning. Congratulations on the quarter. As far as Red Mountain is concerned, I understand it is growing very rapidly. Is the plan for Red Mountain, do you see it being the insurance company you will use in some of the states where the environment has been more difficult? Like West Virginia or in Florida, for example. Is that the strategy?

Let me start that. Right now the plan with Red Mountain is really to write that subset of the medical malpractice market in almost any of the states within our footprint that represent higher than average, but not uninsurable, risk. We see it as a complement to our existing standard and preferred business, not really as an alternative to that.

Any do you see anything that would allow you to go not necessarily beyond your own footprint, but go back into states where there have been a lot of challenges? Like say, West Virginia? Is there business to be written there that you can get the right price for; or is your growth going to continue to be in those core states where the legal and regulatory environment is more favorable? Is there enough business in those states to satisfy what you want?

You are absolutely right. We are going to very carefully pick where we use Red Mountain. And those areas that the states just have a bad legal environment or regulatory environment, we probably will not be there in any form, be it ProNational Red Mountain, or Medical Assurance. There seems to be enough demand for the capital that we can raise to write good business with in good environments; and that's what we will use it for.

John Gwynn, Morgan Keegan.

Good morning. Congratulations on staying solvent for one more quarter.

Thanks, John.

That doesn't sound like a very high bar you have set for us, John.

Well, here we go. Howard, your reinsurance renews, I believe in October. Can you give us any indication what you're seeing in that front?

We partially -- we started the renewal discussions. Typically they start three to four months before the renewal date. So we are underway right now, providing information to the underwriters, having meetings with them. No indications right now as to any terms or anything that we are seeing. There certainly is a little bit more interest this year, I think, that some of the reinsurers who had diverted their capacity to property lines during 2002, with some softening in the property markets have reallocated a portion of their capital to the casualty business. So we are seeing some markets that said last year they did not have enough reinsurance capacity to look at our business, now interested in at least taking a look at it. That is all we really can say right now. We will certainly have more to report at the next call.

Are you seeing any moderation in rate increases at that level?

The reinsurance level?

Right. No?

Not at this point. We don't have indications yet from the reinsurers on the renewal, so we really couldn't say whether we are seeing any change in their attitudes. They are all saying and continue to say that they are pricing to a return on equity that is at least similar if not higher than ours; in the 15 percent range.

Howard, you were kind enough to give us some more detail on reserve development for the quarter and the half. Can you, just to prove that I am a lazy sell-side analyst now, can you recall what the third and fourth quarter of last year were in terms of development? Roughly.

I believe, and this is from memory right now, John; but I believe the third quarter of last year we did not have any changes in the professional liability side. We are checking right now on the personal line side. In fourth quarter we did have (multiple speakers) -- Last year, in the third quarter of 2002 we had no change. We had a mid-year change last year. At six months we had added $2.4 million to professional liability reserves. In the third quarter last year we did not have any. And for the full-year last year, we had an $18 million increase in professional liability; and if I recall about a $9 million decrease in personal lines.

So you had a pretty heady charge in the fourth quarter?

About a $10 million decrease. The net, the overall consolidated increase for the year was approximately $8.5 million; 2.4 million of that came in the second quarter; and the remainder came in the fourth quarter.

Thank you. Dr. Crowe, I know you said you didn't want to go into a lot of detail, but it looks to me what they did in Florida is not even a step in the right direction. It's practically nothing. Particularly if they leave bad faith untouched. I'm not asking you for your commitment to the state of Florida, but is that a block of business that I can talk about getting stop loss on and doing a deal?

I don't know if we could carry it that far. As a said in my statement, we are very carefully looking at the legal and the regulatory environment. As you know the medical association down in Florida came out with a statement that said that they could not support that tort reform as it was suggested. We don't know exactly what the regulatory people are going to do. We do know when they looked at the first suggested legislation that was to be passed, they asked the insurance department for their opinion as to what it would do to rates. And the insurance department gave an opinion that probably would not change rates.

The legislation that they passed or are talking about passing this week, is much different from that first legislation that was suggested and it was passed by the Florida House. Obviously, we think the department again would come back and say it will not change rates now. Rates are going to become a political football in Florida. That's a possibility.

The nice thing about being as large as we are, we can move from one place to another without having too much of a detriment on our top and our bottom line. But we have to deploy our capital, as scarce as it is, to states in which there are good environments. I'm not going to say whether we support or don't support the tort reform that is supposed this week. But we will just say we think it will have very little effect one way or the other on the trends in Florida in the long-term.

Thank you. Frank, you got the annual statutories on your website; are the quarterlies going to be put up there, too?

If we get enough demand for them, we will be happy to do that. We did that to enhance disclosure and try to continue to maintain transparency about our business. A lot of people asked for it, and it sounds like you are; then we can certainly add them.

Okay. That's all I have.

Adam Klopper (ph), Cochran Caronia.

Good morning. Could you talk a bit about loss trends? What is the inflation rate on severity and frequency, if we look over the last year, on a year-over-year basis?

What we've been seeing is pretty much the same for the recent past. Frequency has continued basically flat. And severity at 5 to 6 percent at our level of interest, meaning up to $1 million. Certainly, if you look at the claims above $1 million, the severity trend varies dramatically from year-to-year, from place to place. Because you are dealing with much fewer in terms of number of cases and much more volatile results. But within our $1 million retention the 5 to 6 percent severity trend has been what we've been seeing for a year or more now.

As far as professional liability premiums, obviously a very strong quarter at the gross level. Is this a little stronger than we can expect on a quarterly basis going forward?

Hard to say. In the first quarter, to be honest, we were answering the question the other way, because the growth was a little less. I think we had 12 percent. Some of that was due to the timing of renewals and conversion from occurrence to claims made. This quarter may have seen a little less of that. We have also seen some additional premium in Red Mountain, which gets into that number. It's difficult to say. I think we have always said in the past that a year-to-date number is a better way to look at things; or looking at historical year-to-dates, or in quarter over quarter. But I think that's probably the most we can say about that.

Okay. As far as your reserve reviews, you mentioned that you have some semiannual reviews; I take it that is at the end of the second and the fourth quarter. Is the fourth quarter more important as far as setting your loss picks (ph ) for the year going forward?

Yes, definitely. We actually -- the way that they are done, just as a matter of interest, we use data as of March 31st and September 30th. By the time all that gets analyzed, it turns into a year-end and a midyear review. But the year-end obviously gives us the much better picture of the full year and revolves not only around this (technical difficulty) our full detailed statutory reporting. So I would say it is more important in the detail sense.

Okay. A question on MEEMIC. Could you talk about the competitive landscape? Obviously, MEEMIC has their dedicated sales force. But the customers obviously have a choice of going to other carriers, whether it is State Farm or an Allstate. Can you talk about, has competition increased particularly in the auto line?

Just looking at the five-year comparative data through the end of 2002 that Best puts out, it has been relatively steady. The three large carriers or the couple large carriers, the Michigan State Farm and the Auto Club there, State Farm has been seemingly having a difficult time; the Auto Club has been steady. Other companies in the market, certainly Auto-Owners, Allstate. But MEEMIC has held its market position; has gained some market share over this time; definitely has gained a number of insureds. So we've been confident. MEEMIC has been steady, slow profitable -- not slow actually, high single-digit, steady growth in Michigan. And doing it in a profitable manner. So the other companies really have not made inroads on MEEMIC's book of business in Michigan. Our retention rate in that business is in the very high 90s on a consistent basis.

Erin Autra (ph), of Raymond James.

Good morning and congratulations on a great quarter. I have a couple questions. You talked about increasing your retention. I would like to know some of the thought process behind that, given the continued difficult market environment. And maybe you can relate that to some of the pricing trends and changes in capacity you are seeing in the med-mal reinsurance market?

We made the decision last October 1, with policies effective October 1, to increase our retention to $1 million. In other words we reinsure all losses in excess of $1 million dollars. The rationale for that was twofold. Number one, with the rate increases that we have been able to implement, we think that, overall, our business is profitable and will be profitable in the long run. So we want to retain more of that. We have the capital to do so. We have generated, as Dr. Crowe mentioned, $150 million in capital over the past nine months now. And that allows us to take a higher retention.

We have a much broader spread of risk geographically than we did before. Certainly prior to the consolidation created ProAssurance, the companies were more geographically isolated; now we are covering a much larger portion of territory. And the reinsurance market has gotten more expensive. After September 11th and ongoing, the reinsurers have seen the need to generate more profits at their end in order to offset some of the losses that they face. So with reinsurance more expensive and our prices better, we see the opportunity to retain more and have a much better financial result on a net basis.

All right.

The other question that you asked is, will we expand our retention? And I think the answer to that is, we would base our decision on the same kinds of factors that Howard just mentioned.

Of course. I guess the underlying question to that is, there has been some new capital and uninitiated capital moving in on both the insurance and the reinsurance side; especially in the excess and surplus lines market. I was wondering if you are seeing any irrational pricing on either end, in any of your markets, from some of those new entrants?

The new entrants really have not, at least at this point, been offering a large amount of insurance. So although we see them, it hasn't been in any organized fashion to date. We are certainly trying to monitor it. Missouri may be an exception there, where there have been a number of startups. Historically all I can say is that the new entrants generally have tried to obtain insureds by offering lower prices. And I think that is not going to help in these markets. But when you look at the available capital of all these startups put together, it's really not a dent in the overall medical malpractice reinsurance need at this point in time. I don't think it's going to influence what we do as a leading carrier.

Great. Thank you and congratulations. Brian Meredith, Banc of America Securities. Good morning, everybody. Just a couple of quick questions; most have been answered. The first one, Howard, can we get a sense of what the impact on the growth year-over-year was, from the switch from occurrence to claims made was?

Not specifically right now. In the quarter last year, hold on one second, in the second quarter 2002, and these are approximate numbers, we had approximately $31 million of occurrence. This is our year-to-date basis 2002, $31 million of occurrence premium through 6/30; and we had 23 million in 2003. In the quarter, we had 8 million last year; and we still have about 8 million this year. That is a result of a decline in the occurrence business in states outside of Indiana. Indiana's conversion actually began on July 1.

And also the fact that we had raised rates. And we have raised rates on occurrence business percentagewise higher than on claims made business. So even though we had taken business off the books, that which remained was paying much higher prices.

The next question is can you give us a sense of how much of your premium this quarter was new versus renewal?

In a rough sense 81 percent; we had an 81 percent retention ratio. Now that doesn't translate directly into premium dollars, because there may be some difference in mix. But that's roughly what it was.

And can you give us also a sense of what you are booking new business at versus renewal business? What is the difference? Typically you book new business at a much higher loss ratio, right?

That gets into the average. While that concept is very predominant, prevalent in personal lines, in our business and over the years, we haven't made a specific distinction. We have tended to look at the business as a whole and make adjustments in it as we see ourselves going through the year. Particularly when we get to year end and look at the overall result.

The renewal percentage has been pretty steady, ranging -- this quarter is 81, we have talked about 83, 84 in the past, percent. So over the course of the past couple of years you build up pretty much a steady-state situation. So when we are booking at a given loss ratio, it is taking that into account. But I can not give you a specific distinction of new business at one loss ratio and renewal at another.

Okay, great. Next quick question. Any sense what the impact of the rising rates post June 30 was on your investment portfolio? I know you had some pretty good unrealized gains in the quarter from, obviously, the decline in rates. And I know a lot of companies have been providing what cap, and then like the last month.

The rates have gone up and then they came down a little bit. I think you probably are going to have to just make an estimate on that. I don't have a number to give you right now. I think clearly the number at the end of the second quarter in unrealized was, I would say, a good bit higher than it was July 30. And now that we are into almost the middle of August, it probably has come back up a little bit. But I don't have a specific number.

Okay. The last less question is, Howard or Dr. Crowe, could you give us a sense of what you're feeling is on reserve adequacy for the industry right now? And particularly as it pertains to potential M&A. I know you said that you think first renewal rights deals, and then potentially some companies will be willing to sell. But what would the appetite be, given what the landscape is right now, with respect to reserve adequacy?

I think we probably agree with the people who have studied this issue. And that is, there is still a lot of reserve deficiency out there. I think that is driving some of the activities that are going to take place. One of the problems we're going to see is that, is there anything there that you can acquire or merge with, that you can fill the hole? I don't have a feel for that yet. But as we are looking at some pieces, it's obvious that there is still a lot of deficiencies. I don't know that I can say for the industry as a whole, but I do know there are a few companies out there that seem to have good reserves and don't have deficiencies. Howard, you may have a comment more specific than that, but I don't.

I don't really, either. Just primarily, we all read the same things from A.M. Best and other organizations about the perceived deficiencies and the fact that many of the companies in the industry had substantial reserve charges at the end of 2002, and more were predicted for 2003.

My last question. Are there any states out there that you would like to be in or would like to get into, although you'd be uncomfortable growing organically right now, because they are outside of your footprint?

I don't think we are going to comment about expansion plans, just to avoid giving advance notice to our competitors.

I think we can say what we said before, that we are comfortable with our footprint at this point in our development as an organization. We want to make sure that our infrastructure, especially on the claims side, supports any expansion. And we are content with our current footprint.

Are there any states out there that you'd say, regulatory-wise, look pretty attractive right now? And rate-wise?

I don't think we are willing to get pinned down on that.

Okay. Thanks.

Rod Maden (ph), Schneider Capital.

Good morning. I just had a question about the 103 target for the fourth quarter that you have been talking about for a while. I guess if I normalize for the favorable development in the personal lines, I get something in the low 90s on the combined ratio. Is that what you view as a run rate at this point, that would be the personal lines component of that 103?

I would say so, yes. What we have seen thus far this year.

Okay. My second question is, if you have the tax rate for the quarter? And related to that is, whether you have been making any changes on the investment portfolio in terms of the muni allocation?

Tax rate for the quarter was consolidated 20.8 percent. And repeat the last question; I'm sorry.

Whether on the investment portfolio, whether you have made any changes in terms of the municipal bond allocation?

Not major changes, but I would say that we are moving a little bit more back into the municipal sector, due to some what appear to be good opportunities there rate-wise; as well as our expected results over the next few years.

I would like to comment, Howard. I think the only real trend that we can point out in the first six months is we have used this opportunity to shorten the portfolio, just because we think there's a possibility of increasing rates pretty substantial.

Okay. Do you have that duration number as of the end of the quarter?

Pardon us while we look that up; you can probably hear the pages turning.

3.7 years.

Okay. Thanks a lot.

Chip Mahan (ph), Water Street Capital.

Good morning. Most of my questions have been answered. A couple of mundane questions or suggestions; and then maybe one more significant. As I was trying to figure out and back into what the P&L numbers were, it occurred to me to just ask if you all would please consider releasing a complete P&L. I was just checking on EDGAR, and I don't see a 10-Q. That would be real helpful if you could do that. Figuring out what the numbers mean is hard enough, without having to back into what they actually are.

On a more significant issue, I hear some wariness about the tort reform that is going on in the various states. As the rate increases get talked about by the politicians, in Alabama and Florida, for two large states, are there differences between the rates that are filed and talked about and the rates that actually get charged? Could you talk about how that pricing dynamic works on the ground?

Let me start with the question about wariness about tore reform. I don't think our attitude about tort reform has changed. We have always said that we have to wait and see the results of tort reform as it shows up in various locales. There has been an example already this year of one of the states in the west, I believe it was Oregon, where the Supreme Court came back in I think eight years later and struck down tort reform. It bankrupted I believe the company out there. It completely changed the climate. So we have to wait and see what happens to the environment, to the loss environmental before we can implement any rate changes.

From a political point of view, we as an organization support the tort reform activities of the medical societies and the hospital associations. But from an insurance point of view, it simply has to work through the numbers. So we are supportive on the one end, but cautious on the other. And I will turn it Howard.

Howard will address the last part of your question.

When rates are filed, when we make rates (technical difficulty) companies there are a certain set of rate discounts that are contemplated. Things -- in our field, things like part-time practice, deductibles, risk management, seminar credits, claims-free experience or adverse claims experience on the surcharge side. And we build in an expected level of discount into the filed rate. And that level of discount is monitored. So as long as the company is working within that expected level of discount, we are still collecting what we deem to be an adequate premium for the loss. The problem comes if discounts exceed that level and we are moving below the target. And that's what we saw in the industry during most of the late 1990s, where companies were very aggressively discounting well beyond anything that had been contemplated in the rates.

Is that still occurring? In terms of what is being talked about and what's you see actually being charged?

I think what we have seen over the past year or two, for the most part, is that has really diminished and is not taking place very frequently. We do see it in certain segments of the market. I think we've commented on a state or two in the past. It's probably becoming less of an issue right now than it was even a year ago. I think that there is a lot more pricing discipline in the market, for the most.

And the numbers you quote are your net realized, your net yielded increases? Yes. The real numbers. Great. Very good. Let me just add my vote. A, thanks for the statutory information that is already there on an annual basis. I would find useful the quarterlies as well. Thanks guys. I am fairly new to this story, but I like what I am hearing.

John Gwynn, Morgan Keegan.

Howard, when is the Q going to be out?

This afternoon, we are planning to have it on line.

Beth Malone, Advest.

Just a follow-up. Talking about the portfolio, two questions. On the book value that you all reported, what is the dollar amount for it? If we excluded the 115, what would the book value be?

we are looking, hold on.

I have another question if I may ask that. When you talk about your duration in your portfolio of 3.7 years, maybe this is not important, but is there a mismatch then, between your duration and the duration of your liabilities? Is that an issue? And also you shortened it up because you believe interest rates may move higher, which they have already started to do. Was there a targeted interest rate? Or how do you manage that, when you determine, okay, now we are going to go longer, because this is where we think interest rates should be? How do you figure that out?

I will take the first part; I don't know if Dr. Crowe wants to start, comment on the second. In terms of any mismatch, remember first that that duration is overall. It contemplates both professional liability and personal lines. So it may be that what you'd think of as our average liability might be a little shorter than if you were just thinking about professional liability. Nevertheless, that really does approximate the duration on our liabilities. And remember duration, if you calculated it on the liabilities, would be less than the average payment lag. So we think it does reasonably well approximate our actual average duration on liabilities.

I want to make a comment on that. As you have heard us talk about our cash flow being so strong, with the length of the tails that we have, I don't think there is a real strong correlation between the portfolio and our exposures. Like it would be, though, in the automobile business. MEEMIC does have pretty close correlation, because the tail is so short.

When we get into a neutral or negative cash flow position, though, then you have to be much more aware of it. But I don't think we have had a negative cash flow but one year since we have been in business, since 1977. So that's really not an issue.

We just tend to shorten and lengthen according to what we believe. And gosh, we have no idea what interest rates are really going to do. The Feds are going to determine those and so is the economy. But as of earlier this year, we very definitely felt the chances of rates going back up were much greater than rates going down more. So that is when we started to shorten the portfolio; and we will stay in that position until we feel differently. But we don't have any magic numbers and equations that tell us what to do. And certainly even our investment portfolio managers don't seem to understand that. It's not a real scientific game.

Thanks.

To get back to your first question, I remember now why that number isn't in there. I think you recall, in the past that we had that book value per share excluding 115. We are not real clear, to be honest, whether that's a non-GAAP measurement. So what we've provided on the bottom of page 2 of the press release is the dollar amount of the change or the unrealized gain in the portfolio. And we're leaving it to you all to calculate that number as you see fit.

Thank you.

Chip Mahan, Water Street Capital.

I'm back again. I forgot to ask a moment ago if each subsidiary has a positive cash flow? And does each subsidiary have a positive statutory cash flow from underwriting at this point in time? I see the consolidated number.

Hold on a second. I can tell you that each of the segments' professional liability and personal lines, each have a positive operating cash flow. I don't have the underwriting cash flow numbers here at this point. I think we have to wait till we got a look at our statutory lines for that.

But each segment is positive in its own right?

Yes.

From operations. Thank you.

At this time, there are no further questions.

Thank you very much and we will speak to everyone next quarter.

This concludes today's conference call. You may now disconnect.

(CONFERENCE CALL CONCLUDED)