ProAssurance Corp (PRA) 2003 Q3 法說會逐字稿

Good morning. My name is Shayla and I'll be your conference facilitator today. At this time, I'd like to welcome everyone to the third quarter earnings release for ProAssurance conference call. (Operator’s instructions)

Thank you Mr. O'Neil, you may begin your conference.

Thank you. Good morning, everyone. Our call kicks off a busy morning, for calls on our segment. We appreciate you starting the marathon with us. We'll be brief in our comments this morning so we can get to your questions.

Today, we're going to be discussing historical information, we will also be making forward-looking statements and projections based on our estimates in anticipation of future results and events. We expect all the statements we make today will be reasonable, but I want to remind you to review the contents of this call in conjunction with the caution regarding forward-looking statements in ProAssurance's November 12, 2003, news release, as well as in its forms 10-K, 10-Q and other publicly available information.

These publicly available documents set forth many risks and uncertainties related to the company's business and are available from us on request. 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.

The call is being webcast and will be available for replay in various forms as described in the news release and 8 K. Given the events of the past week, I hardly need to remind you of the changing nature of this business and the financial markets, but I remind you the content of this call and webcast is time sensitive and accurate only on November 13, 2003, the date of first broadcast. The call is the property of ProAssurance and may not be redistributed, retransmitted or rebroadcast in any form without our express written content.

Finally, we will likely discuss operating income and operating earnings. Non-GAAP financial terms that exclude the after-tax effects of guaranty fund assessments, capital gains and losses and the results of accounting changes. There's 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 our day-to-day success in core insurance activities.

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.

Normally, we kick off our call with Howard in talking about the numbers. But today, I'm going to ask our Chairman and Chief Executive Officer, Dr. Crowe, to set the tone with some initial comments on ProAssurance. Dr. Crowe?

Thanks. Good morning, everybody. As we pass the nine-month mark in 2003, I think we all agree ProAssurance is on target to Meet our primary goals for this year, and that is to get a consolidated combined ratio of 102 to 103 by the fourth quarter.

We've focused on that goal because the majority, or all of our financial metrics fall into place as we hit those numbers. We are especially encouraged that our professional liability segment is moving according to our plans. We are building profitability as we begin to -- now to see the full effects of our focus on adequate pricing instead of market share.

On the balance sheet, we have built a level of reserves that give us a confidence in our financial strength and stability. As we stated in the earnings release, there was no prior period reserve development in professional liability reserves in the quarter. There was a $3.6 million positive development in the personal lines. To date, our prior year reserve development has been a total of $6.4 million-- That's $7.1 million of favorable development in the personal lines, offset by a $750,000 addition to the professional liability lines in the second quarter.

We're confident that we're reserving at prudent levels. We have strengthened our analysis of reserves over the past few years just as we've enhanced our ability to focus on pricing adequacy. The two items do go hand in hand. Our independent consulting actuaries perform semi annual reserve evaluations in addition to the analysis we do in house. This helps us respond to trends as they emerge, and allows us to be very confident in telling you that we believe our reserves are adequate.

Now, we'll let Howard address some of the financial and actuarial numbers. Howard?

Thank you, Dr. Crowe. Let me talk about premiums first then I will address losses.

We've raised professional liability premiums by 27.3% on a weighted average basis for the first nine months of this year. By 28% last year, and 23% two years ago. We've talked at great length about the time it takes for these increases to roll into the bottom line--as much as 24 months. But now, we're seeing the real benefits. The other side of this coin is that as we raised rates, we stuck to them. There are other companies in the marketplace that have paid lip service to rate hikes, but have then discounted to ensure that they maintain market share. That's a time bomb waiting to explode.

Another point to note is our conversion of occurrence policies to claims made. Remember that occurrence coverage is generally priced higher so as we move an insured to first year claims made, we see a drop in premium for that risk. Occurrence was a relatively small portion of our business. So this is not a major factor, but one worth mentioning. And it makes our rate increase percentage more impressive.

Written premiums continue to be higher than in the same period last year. For the third quarter, consolidated gross written premiums are up 22%, and are 20% higher for the nine month period. The professional liability component of those premiums is up 26% for the quarter, and up 23% year over year. This increase comes even as our [insured]count remains relatively flat. That's another sign that premium per risk in professional liability is rising substantially.

Personal lines premiums were up 13% in the quarter, compared to last year. And were up the same percentage in the year over year comparison. Our retention ratio in professional liability remains in the low 80s, about where we projected, given the extent of our rate increases over the past three years, and the degree to which we are re-underwriting and nonrenewing some risks. The good news is that while we're seeing business leave us for various reasons, we're adding now insurers to replace those that we're losing. Keep in mind that we are only adding risks that pass our underwriting screens and are willing to pay the rates we charge.

Our excess and surplus lines carrier, Red Mountain Casualty, ha now been in business for a year and premiums are approximately $16 million for the 12 months that began last October. We continue to think that Red Mountain could write as much as $30 million next year.

In personal lines, the number of automobile policies written by MEEMIC increased almost 5%, and the number of homeowners policies was up a little more than 11%. We're pleased to see a continuing acceleration in the number of policies being written, even as rates increase. Remember that MEEMIC's target market, educators and their families, are already considered a preferred market, and because we apply tight underwriting to an already superior target market, we're able to generate attractive margins, while maintaining very competitive pricing in these lines.

On the loss and expense side of the ledger, our consolidated loss ratio is down almost seven points over last year's third quarter and down a little more than six points year over year. As Dr. Crowe mentioned, we're on target to reach our combined ratio goal of 102 to 103 for the fourth quarter.

In the segments, professional liability loss ratios are down significantly. The year over year drop for the quarter is 14 points and the decrease for the nine-month period is almost 11 points. Importantly, we continue to see a decrease in sequential quarters, indicative of the premium increases that are earning into the equation.

We continue to closely monitor the loss trends in our book. Professional liability severity is ranging between 5% and 6% on average. Frequency remains flat. In personal lines, we saw a 4 point increase in the loss ratio in the quarter. We can trace this directly to approximately $900,000 in losses from five large fires in the quarter. And approximately $450,000 in Refrigeration losses due to the Midwestern power outage.

With this slight uptick in losses in the third quarter, the personal lines loss ratio for the year is flat. We still believe a 66.5% loss ratio [is a] great number, but it's a bit above where we were at the end of the last quarter. With higher premiums, we generally expect higher expense dollars as commissions and premium taxes increase. We did see that in the quarter, but those are variable expense dollars and make up only a part of overall expenses. Our fixed expenses remain flat. Thus, as we see premium increases rolling through the denominator in the equation changes, allowing the consolidated expense ratio to decrease.

In professional liability, the expense ratio is down two points for both the quarter and nine months, because that's where the majority of premium increases are showing up. In personal lines, the expense ratio was up about a point in the quarter, and it’s flat for the year. With both the loss ratio and expense ratio improving, our consolidated combined ratio is showing commensurate improvement as you expect. Down more than 8 points in the quarter.

As you know, we pay attention to cash flow from operations. In the third quarter, cash flow was $77.8 million, which takes us up to $217.8 million for the first nine months. So we've already surpassed last year's cash flow by $61 million, with one quarter left to go.

To conclude my remarks, I'd like to report that our medical liability reinsurance program is all but wrapped up for the 2003-2004 treaty year. As you may know, our treaties renew effective October 1 each year, and we can report no change in pricing to us on renewals, and our terms and conditions remain unchanged. We are maintaining our $1 million attachment point on all risks and continue to have the ability to offer limits up to $16 million per risk without going to the (inaudible) reinsurance marketplace. We believe that's a major plus for ProAssurance. Our reinsurers do get the benefit of our price increases, since their premiums are a percentage of ours, but as a company, we won't pay any greater proportion of our premium next year.

Importantly, we're broadening our participation this year to include a greater number of reinsurers in total. We're actually oversubscribed so we're in the process of negotiating coverage layers and participation. We expect to see more domestic reinsurers on our slip this year, and for the first time some Bermuda companies as well.

In our negotiations we didn't see any sign of price moderation in the broader market for medical liability reinsurance. We can report that reinsurers are being more selective in the business they write, and are being very disciplined in their pricing. We believe that their willingness to renew our treaty at existing terms indicates their broad belief in the rate adequacy and operational philosophy. Frank?

Thanks, Howard. That leads us into a discussion of opportunities and market conditions as we move forward. Vic Adamo, our president and Chief Operating Officer will address those areas.

Thank you, Frank. I’d first focus on the medical liability segment. A week ago, as we were preparing for this call, we were saying this appeared to be a non-eventful quarter in the industry. That certainly changed overnight, with some real concern from investors and insurers about reserve adequacy and financial strength.

Let me echo the comments of Dr. Crowe and Howard on our dedication to financial strength and our confidence in both our current reserve levels and our ability to meet the needs of our policyholders and the expectations of our investors. We're quite bullish on the coming year and believe that our philosophy of protecting the balance sheet and excelling in claims handling, underwriting, and delivering superior customer service is providing to be the best strategy in the long-term. We still feel that the hard market conditions may extend out past 2004.

We continue to see companies exit the market, farmers being the latest. (missing audio begins)

We've built capital through last year's follow-on offering and this year's debenture sale and we're generating strong cash flows. We anticipate being able to put the capital to goods use writing new business in the coming months. (missing audio ends)

With the exception of a few competitors, we are seeing signs of more rationality in pricing in a capital allocation. There are still moratoriums in place at a number of companies in our footprint, and that should work in our favor as we can deploy capital to meet unfilled needs in the marketplace. But as we do, please understand that we are sticking to the careful underwriting and attention to price adequacy that has enabled ProAssurance to return our medical liability segment to profitability.

Howard touched briefly on the conversion from occurrence coverage to claims made for. We're pleased to report that the transition is continuing to go well. The conversion is complete in Ohio, and new business has more than made up for any [insures] that we lost as a result of the conversion.

In New Jersey and Pennsylvania, we have a very small number of insurers and the process will be complete around year-end. We have a larger book of occurrence business in Michigan, and the changeover there is proceeding well.

But our largest occurrence book is in Indiana and we began the change there in July of this year. So far, we can report that we've been pleasantly surprised by the persistency of the renewals as we institute a major change in what was predominantly an occurrence based state.

We believe we've been able to effect this change because of the diligent educational efforts by our agents and our internal staff who have shown our insureds that claims made coverage provides both the Insurance Company and its insureds with several real advantages, including a more stable insurance premium.

We have continued to stay on top of price increases. As you heard from Howard, we've seen rates rise at an average of 27.3% so far this year. Our attention is now focused on rate actions for 2004. We understand that the premium increases imposed upon our customers and, indeed, on the healthcare community throughout the United States, are a heavy burden. While we are cognizant of the premium levels, we have also been freshly reminded of the consequences of charging an inadequate rate. We are hopeful that rate increases will moderate some in the coming year, but we cannot ignore the financial imperatives to be here in the future to pay claims.

On the personal lines side, we did see, as Howard mentioned, the losses due to fires and refrigeration stemming from the blackout. These were isolated events. Overall, we continue to experience very strong fundamentals at MEEMIC. Even with these losses included, MEEMIC had a combined ratio for the quarter of 90.7%. Certainly, most personal lines companies in the United States would be very envious of this result.

From an overall corporate perspective, the important news is that MEEMIC is not our sole source of profits. Now that professional liability has returned to profitability, MEEMIC continues to enhance and provide an extra kick to the earnings of ProAssurance Corporation.

With these remarks about operations, I'll turn it back to Dr. Crowe for comments on the market segment as a whole. Dr. Crowe?

Thanks, Vic. Well, let's talk about the fund part a little bit. Since I'm the oldest guy at the table and obviously the best looking, we'll talk about the future and how we fit into it.

I get quite a few questions about the emerging competition. We're mostly seeing competition at the top and the bottom of the market. At the top of that market, we see those insureds who focus on excess insurance for self-insured arrangements, or very large risks. You all saw AIG emerge in the market with a large share in 2002. But they mainly participate in the upper end of the market, where we are usually not. We have the capability to provide the excess insurance and our Bermuda protected self-captive is available for those choosing to self-insure, but that's not the meat of our market which is the small groups, the solo practitioner, small clinics and selected mid size hospitals.

The other part of the market in which we're seeing emerging competition is in the small mutual companies and risk retention groups and even some new start-ups. At first glance, you might think the emergence of these companies would parallel the formation of the (inaudible) mutuals of the 1970s, the period that gave rise to our predecessor companies. But the dynamic is different this time. Regulators are keenly aware of the cost of Insurance Company failures.

So many of these new companies are being held to very tight standards for capitalization and adequate pricing. There's a real financial burden and certainly no real cost savings when founders have to ask the insureds to pay the same rates as those that we charge, and the existing companies charge. And at the same time, they have to capitalize the company.

In some states, where the legal requirements are more lax, the financial viability of some of these companies is very questionable. We monitor these start-ups but at this point, the capital available to them is not allowing them to write a significant book of business.

Interestingly, as these companies have started, we have seen them begin to write questionable risks that have always sought coverage from our Red Mountain subsidiary, but they appear to be willing to write this risk at what we consider [a bit] sub-standard risk, at standard rates. It's the same old soft market discipline or lack of discipline we always see.

The other macro dynamics at work is tort reform. I'm asked constantly about this. The bottom line is that tort reform at least on this go-round is still at the too early to tell stage. All the reforms have passed in seven or eight states in the past year or so, we don't know if these reforms will be upheld by those courts or will prove to have meaningful effect on losses. Because the ultimate effect is unknown, there is no immediate effect on rates from tort reform. We'll take a wait and see attitude on this matter.

Two states are worth mentioning, however. In Florida, we saw tort reform pass about the last time we had a conference call. On Monday of this week, the Florida department of insurance released the so-called presumptive factor. And that is supposed to take into consideration the potential savings from the tort reform that was passed in Florida. This factor performed by consultants with the department, turns out to be 7.8%, but there's a formula provided to allow companies to submit alternative proposals.

We've evaluated the effects of the state supplied factor, and proposing a slightly modified set of factors based on our policy limits profile and the makeup of our book of business. We think the results will be Livable for us, even though we prefer not to give prospective credit for the untested tort reform, but we don't yet know how that will evolve once we enter into discussions with the department.

In Texas, voters approved a Constitutional amendment, giving the legislature the express authority to limit damages, which they have already done, or they had already done. This approach should insulate Texas tort reform from challenges in the court, and we are reevaluating our approach to Texas business in the light of these developments.

On the federal level, we continue to hear rumblings that tort reform may be brought back before the Congress and certainly President Bush is making mention of it in his speeches. But it's not something that we focus on or believe to be likely to pass this year. We urge Congress to carefully evaluate the potential saving that tort reform would bring to the federal healthcare spending. These savings could help pay for some of the other healthcare initiatives currently under debate, such as prescription drug benefits for seniors.

Next, I think I should address the M&A climate. The subjects of tort reform and M&A do tie together somewhat. The longer we go without meaningful tort reform, the more likely it will be that the marginally performing companies will have difficulties and develop financial troubles.

To borrow a term that you all heard in the news, the level of chatter is picking up. I have nothing concrete to report this morning, but as we said last quarter, we believe some pieces of business will be ultimately available to be bought and sold by some company seeking to refocus into their core areas.

Our access to capital is unparalleled, almost, among specialty medical liability insurers. Going back to last November, one year ago, we raised $153 million on a standalone basis. This total capital raising of the other companies in our sector in that time amounts to roughly the same amount. Certainly, given the ability to access capital on a standalone basis and our experience as the most acquisitive company in our segment. We are in a position to participate in any potential M&A transactions.

Frankly, I’m a little bit hard pressed to come up with other public specialty companies being in a financial position right now to look at an acquisition seriously.

Finally, I want to speak with you frankly regarding our outlook and expectations. As Vic said, we are excited about our future and remain bullish about our prospects. We will not give any guidance at this time, but let me reiterate what we've said several times on conference calls this year and in presentations, and let you draw your own conclusions.

We do expect to meet our target of consolidated combined ratio of 102 to 103 for the fourth quarter. The progress we've made on the consolidated combined speaks for itself. Remember, our consolidated combined ratio was at 113 at the end of last year and we're now slightly above 104.

At our present premium volume, every 2 points improvement in the consolidated combined ratio will add approximately 25 cents to EPS on an annual basis, and increase ROE by approximately 1.4 points. Note that this is slightly higher than the figures we've quoted in earlier calls and in previous presentations. This is due to the increase in our premium volume in the past few months. We stand by those numbers for the year.

We also stand by our long-term goal of achieving an ROE of 12% to 14%, although we know we'll have to continue to work hard to make those numbers. My pledge to you, and our shareholders is that everyone here will continue to be made aware of that goal and my expectations for meeting it. Frank?

Thank you Dr. Crowe. Vic and Howard, I appreciate that. Shayla with that, we've ended our prepared remarks and are ready for questions.

(Operator’s instructions) Your first question comes from David Lewis.

Good morning.

Good morning, David.

Couple of questions. One, can your address severity and frequency trends if we've seen any change in the past three to six months?

Two, you are still seeing obviously very good pricing in 2003. Do you think that will continue in a double digit range as we get into 2004? It appears to me, at least, the more prudent companies are starting to see some improvement in profitability. So can you continue to put in 20% rate increases? Three, maybe just discuss the persistency outside of the occurrence base change.

Howard?

Sure. On the frequency and severity, no, really have not seen any change in the past one or two quarters. As I mentioned earlier --

In our book.

That's right, in our book of business. And as mentioned earlier, what we've seen is a 5% to 6% continuing severity trend and flat frequency. Our paid losses have been consistent quarter over quarter.

On the rate increases, we've continued and are continuing to evaluate the rates on an annual cycle for most of the states, semi annually. We look at them internally for some of our larger states. We filed rate increases already in several states for January of 2004. And are generally, without getting specific because these filings are not approved yet, we're generally still seeing double digit rate increases in virtually all of our filings.

And at this point in time, we are having success with respect to the regulatory process in justifying the increases we filed for.

Can you give us more direction on double digit in those filings without specific states? Does that mean we're still in the 20-plus range, or is that 10% to 12%? Any guidance there would be helpful.

We've only made a limited number of filings at this point, so I think we probably would wind up getting too specific if I started to talk about -- Everybody knows when our anniversaries are in the different states. They know which states we have for January 1 anniversary. So right now I’d just like to say it's double digits and you'll be able to see those as those get approved.

With respect to the persistency on the coverage renewals, as we mentioned in the text, the retention rate is still in the low 80s. That does include some business that may be leaving us as it converts from occurrence to claims made. But to be honest, there aren't that many occurrence alternatives in the marketplace. So without a claims made conversion, we might be a point or two higher. It's not a significant drop-off because of converting the business to claims made.

So it would be the 83% to 84% percent range?

Possibly.

Thanks very much.

Dr. Crowe, I think, wanted to add something.

I want to make a couple of comments. Those are pretty good questions. What I'm going to say is I'm not sure I have the scientific background data that Howard has, but we're still continuing to see a little static in frequency.

One of the reasons is tort reform has passed in several of the states that we do business, and as you know when tort reform passes, there's usually a deadline that they've got to file suits under the old rules.

Consequently, the quarter before you usually see a pretty significant jump in frequency, and we see that. Usually, the next quarter or two it quiets down. So there's some static there. I'm not sure that we can say absolutely it's flat, but Howard's looking at the numbers pretty closely. We're watching that.

The other thing is even though we're seeing 5%, 6% 7% increase in the severity I want to point out that old ugly dragon of outlier mega losses--the $5 million,$10 million, $15 million losses, or verdicts, are still hanging around. We are still seeing those.

Tort reform is going to have to address those issues. I don't think they've increased in frequency or severity. Nevertheless, those problems still crop up occasionally and I think all of the insurers are seeing them.

Thank you. That's very helpful.

Your next question comes from Greg Peters of Raymond James.

Good morning, Greg.

Good morning, everyone. I have a number of questions. Why don't we begin with just a discussion on the professional liability on your accident year results from 1998 to 2000.

Obviously, given the news of last week from a number of companies, those accident years for many seem to still be questionable. I thought maybe you could provide us color on how your books are seasoning over for those periods?

They have been problems for everybody. I think we recognized them quicker, Greg. Why don't you address it, Howard?

Those are the most difficult accident years for the industry. I think that is well known and for all companies. Where we have seen development in terms of individual accident years over the past several calendar years, it has come out of those accident years. I think in our case, probably more 1997 to 2000.

We have, as you know, in the past made upward adjustments in those years, we have favorable adjustments in the other years, for the most part offsetting. And we did add reserves at the time or pre-merger, as you also recall, on the Professionals Group side in 2001. And that reserve addition, which was $25 million at the time, went into the 2000 accident year.

So we think we're, at this point well positioned on those years. We haven't seen any of the indications, we haven’t seen the upward spike in paid losses that was mentioned in one of the other articles recently.

So we believe we're adequately reserved. We started to raise rates sooner. We reserved at a higher level, we believe, than many other companies, at the time. We stopped taking reserves down sooner so we believe that we preserved the integrity of those years to a greater extent. But at the same time, those are the difficult periods for the industry.

I appreciate your comments regarding the independent review of your reserves. I guess it's done every six months. And I'm just curious why, -- Some of these other companies might say similar -- make similar types of statements that they've had independent reviews up until the bad news hits and independent reviews substantiate their reserve position. I'm just curious, what might happen between the time an independent review is done that substantiates a company's reserves, to the time the bad news is reported and why the independent review might have missed the numbers?

We don't know.

Okay. How about Florida and Ohio. Those are two states that caused one of the companies last week to really blow up. I'm curious about -- and I know you don't like to get in a state by state discussion -- but I'm wondering if you might, for the benefit of us, discuss how your experience is going in those two states.

Let me start off, this is Vic Adamo on a non-numerical basis. Florida is, indeed, a difficult state. I mean, we're the first to say Florida has been a difficult state for us.

But keep in mind that our -- we have the oldest book of business in the state of Florida. Goes back to (inaudible) 1976. And so we've worked with it along the way, made substantial rate increases. We were the first company our there making rate increases. As Howard mentioned, we took some reserve charge at the time of the merge to enhance Florida reserves – well, reserves, and primarily Florida reserves.

And then we have been monitoring Florida very carefully. We've lost some market share, knowingly and willingly, and we didn't come into the market rapidly. In tough states like Florida, you can work through them, but you have to do it in a measured and careful fashion. I think that would have distinguished us from more recent events.

I don't know if Howard has more quantifiable comments.

The book of business in both states, Florida and Ohio, with respect to ProAssurance, has much deeper roots, much more longevity and much more experience to work from. The Florida business really goes back on the Professionals Group side to 1976, and we have quite a base of experience to work from in terms of making rates and evaluating trends.

On the Ohio book of business, through acquisition, some of that business also goes back with roots into the 1970s, and is currently a very large book of business and has been for the past five or six years. So, again, we have, I think, quite a bit of data to work with there and not seeing the variation, maybe, that some other companies might on the smaller books of business that have grown rapidly.

Let me, if I may, add a couple more thoughts. The ProAssurance model is a little different. We're certainly interested in growing organically in new states. But our primary states, our core states are all states, as you know, where we can trace back M&A activity where we've had experience, where we have some of the people involved from the earlier companies.

We have 12 claims offices throughout the United States. We have two in the State of Florida two in the state of Ohio. So we are very much local in those areas, have history there and do, on a day-to-day basis, stay on top of the development. We have very senior people handling claims in those states. We underwrite on a regional basis for those states.

While no one's perfect in this business, our model is to stay as close to the action as we can. That's what we've been doing, especially in those states.

Greg, let me wrap that up in that our infrastructure was there. It's not a situation where we went into a state very quickly, piled up market share at the height of the soft market and then made a decision where we have to bail out. This was all business that was added over time with careful underwriting.

Those are fair comments. Two final questions and then I'll let everyone else ask other questions. First of all, should I infer from your comments that Florida is asking you to reduce your rates by almost eight percentage points right now and you're just going into negotiation process?

No, I don't think --

I'm not sure I understood your 7.8 point comment you were making.

The way the presumptive factor or the way the legislation works in Florida, is that the companies are entitled or actually required to make a rate filing for January 1 2004, based on their experience as we would normally make a rate filing.

And the insurance department was required to come up with what's called a presumptive factor to take into account the tort reform legislation that was passed. And they hired an outside consulting firm to do that job for them. The consultant's report said that on the surface, on a broad average basis, the effect of the tort reform legislation that was passed, in their opinion, would justify a 7.8% reduction in an otherwise acceptable rate level, meaning that once we file and approve a rate level that does not consider tort reform, then on the surface, there would be presumptive evidence of reducing that rate by 7.8 points.

We've made our filing. It's not approved yet, and therefore, we're not releasing the details of what the rate increase we asked for was and we're making a filing for a modification to the presumptive factor, that will be something less than 7.8% based on our own experience.

So, I guess you can say that the end result is tort reform will reduce our rates slightly, but it will not be, in our opinion, as much as the 7.8%. The overall effect will be, we believe that rates will increase in Florida from what they are now, because of increasing loss costs, even though tort reform was put into place.

Final question is a numbers question, Howard. If it's in here, excuse me for not catching it, but can you give us the paid losses for the quarter and year-to-date and year over year comps?

For professional liability or consolidated?

Professional liability, sir.

Yes. Paid losses for the quarter -- hold on one second. Professional liability, net paid losses for the quarter were $61 million. For a year ago quarter, they were $62 million. And for year-to-date, they are $179 million.

And you can see that by -- if you followed our paid losses so far this year in professional liability, they've been very consistent at right around $60 million to $61 million dollars per quarter.

Uh-huh. What was last year's year-to-date?

Last year's year-to-date was $189 million, actually slightly higher than this year's year-to-date.

Fair enough. Congratulations on the quarter.

Thank you.

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

Good morning, to shift gears, on the personal lines side, you took another reserve redundancy in the personal lines again. Just curious, is this largely due to the fact that you're kind of -- had indicated previously that you're reserving for a combined ratio of 94% and you've come in much lower than that through the first nine months of the year?

I think that's certainly -- I mean, if you boil it down, that may be the way to look at it. The reserving for personal lines is similar in philosophy to professional liability, in that we are reserving at least at the pricing models, if not quite slightly above, where it might be indicated. As those reserves -- as those claims mature and they mature much more quickly, we're able to generally, with a loss ratio like we've been experiencing, take down prior-year reserves. I think that's essentially the end result. The analysis isn't quite that simple, but the end result is correct.

Okay, great. And also, per doctor Crowe's comments about possibly picking up pieces of business as you look out there and you are hearing more chatter on that front. Is it possible that you might go outside your current footprint if you see good opportunity elsewhere, or would you look to keep your existing footprint in your core Midwest and southeast states?

Not likely. If we went outside -- I guess I should say we could, but that's not where we're striving to go. We believe in a very measured growth in management. To get outside of our footprint right now would, I think tax us more than I would like.

But, you always go where the opportunities are. The better the opportunity, the more risk you can take.

And is it fair to say, given some of the issues that this industry has had in the last few weeks, you're seeing more desperation now to perhaps get out of certain states or in that core footprint?

What situations are you talking about?

Well, various companies having issues with -- whether it's rate adequacy or particularly prior year development in states you've already addressed.

I'm sorry, repeat that.

Basically, what I'm asking is given some of the problems that some of your peers have had with prior year development in states within your core footprint, is there, you know, perhaps a bigger sense of desperation out there with companies looking to just kind of basically cut bait and get out of certain markets?

Mike, this is Vic. All we can say is what we read in the press. One of our competitors in the Midwest has indicated they have now, I believe, a moratorium in Kentucky, which is a state we write in. We're continuing to see these things develop, but I don’t think we want to characterize the actions of any other company.

No, we can't say that anything is desperate or et cetera. It's just an orderly way to do business.

Fair enough. Thank you very much, guys.

Your next question comes from John Quinn of Morgan Keegan.

Howard, good morning. On reinsurance recoverables, Howard, could you comment briefly on three or four different things. Dispute activity this year on your new program, rating triggers and collateral requirements, and have you been approached by [inaudible] in regard to a commutation?

On any disputes or difficulties, we really have had none. That includes any of our reinsurers or all of our reinsurers. We've been receiving reinsurance recovery payments on an orderly basis with no change, really, in the process. You have the normal questions and answers on any given individual claim where they're looking for details, but we have not seen any difficulty or slowdown in payments.

In terms of Girling (ph), Girling has made it known to all of its cedents (ph) that they are interested in looking or accepting commutation offers or -- and/or making commutation offers. We are looking at our current balances where we think the payments will ultimately be, what the payout patterns will be and so forth. We have not had a specific Offer, nor made a specific offer to them at this point in time. You had a question in the middle.

On your new program, are you employing rating triggers or change collateral requirements?

Right. We have not at this point. The rating triggers, I guess, is an interesting issue philosophically. If everybody has a rating trigger in their contract, which means if a reinsurer gets downgraded, then they'd be required to collateralize. It becomes a run on the bank type of scenario.

What we’ve been more interested in doing is looking at reinsurers that have either -- if they're an unauthorized reinsurer with a strong U.S. trust fund and/or, letters of credit collateralization as we would normally have. We have not employed any rating triggers in our contracts. We are, I think, like everybody else looking more closely at security and have rearranged both the participations on the contract to some extent, and have chosen not to have certain reinsurers on the contract based on that rating.

We were fortunate this year to have a good response to our reinsurance renewal and have the option now to pick and choose to some extent among the reinsurers. And we're finalizing that process.

Okay. Vic, on MEEMIC, the third quarter bump in the expense ratio, is that a function of commission or product change?

Certainly, commission is a part of it. Howard answered that.

There are also in the quarter some assessments that were made, not guarantee fund assessment, but what you would call industry type assessments in the state of Michigan that get assessed against all personal lines or primarily auto carriers that came through in the third quarter, amounted to approximately a million dollars.

I think that would be the -- for the most part, the cause of the slight bump in the expense ratio there.

Okay. Dr. Crowe are ISME (ph) and OVIC (ph) still pretty much on the sidelines?

What do you mean?

Moratorium?

As far as we know, yes. OPIC is mostly capacity problems and ISME is capacity problems. As far as we know, they still have moratoriums. We, of course, only pick this information up from the agents in the field. John, to tell you the truth, almost everybody has a moratorium going on now except us. Almost every carrier.

Right. Dr. Crowe for what it's worth, the Florida DOI consultants report. I assume you didn't write the E&O on the consultant. It almost looked to me like it was almost funded by the Florida trial bar.

Gee, I don't know that I would come to that conclusion, John, but thank you.

Thanks a lot.

Your next question comes from Beth Malone of Advest.

Congratulations on the quarter. Could you update us, last time you all reported results, you talked about expansions into Virginia, Arkansas and Delaware because of the opportunities you saw there with the changes that had taken place. Can you give us an update on where you are with that expansion how that's going?

Last quarter, we told you we'd filed initial rates in Delaware and we were making a new filing in North Carolina. To date, we've enjoyed some success in writing in Arkansas, primarily hospitals. We're getting a good flow of applications, we think, in Virginia, Beth.

Delaware and North Carolina are too early to comment on. Much of the Virginia business results, as you know, from the problems at Reciprocal of America which gave us opportunities in Alabama. At this point, we've written policies on a little more than 250 Alabama physicians out of the 350 we think were insured by Reciprocal in Alabama. We've also added four hospitals in Alabama as a result of their demise.

Again, I know that doesn't entirely address your Delaware and Arkansas questions, but I think they're performing as expected for us. We didn't believe that we would see an overwhelming response there, given the adequacy of our rate levels, but we're seeing business we expected there.

Let me just add a little color to that. I think I'd characterize it as being a slow grow. Certainly, there are a lot of capacity pressures on all of us, and we have -- we have plenty of places to deploy our capacity. The important things in those states, were that they were filling out our footprint, we’re learning the market, establishing relationships with agents, doing the types of things we need to do to grow in the long run.

Howard, when he and his team develop rates, they develop them based upon our understanding of the best market data and our ROE expectations. As it turns out, our rates in all those states are higher than the competition, so business is not exactly flowing to us rapidly.

But on the other hand we're, willing to be patient. We're seeing in some of those states that as the competitors begin to better understand the realities, their rates are moving up to ours and business does come our way. So we'd look at it as a long-term prospect in all those states, but we're pleased to be in all of them.

Thank you.

Your next question comes from Brian Meredith of Banc of America securities.

Good morning, everybody.

Good morning.

Most of my questions have been answered. One I want to focus on here.

With the growth prospects you have right now, in most of the states you're in with what's going on, my question is, what are you doing from an infrastructure standpoint to prepare for the growth or take the growth?

This is very specialized business, obviously, and obviously a lot of training goes on as far as new people and that kind of stuff.

Well, we've -- I think clearly, and I've been around this business for a long time on the doctor company side. I think we have the best depth of senior and middle management. We do have the local offices in the field so, for example in the regional states we're talking about, we're able to service Arkansas out of our Missouri office, Virginia either out of Birmingham or our West Virginia office.

So we have infrastructure in place. Clearly, if more market dislocations come about and we have to staff up more in other states, it will put a little strain on. We'd have to go out, perhaps recruit. But we have people in place, very strong regional vice presidents in the field in both underwriting and claims and we have the ability to add on premium in our existing market footprint with the infrastructure that we have.

That's why Dr. Crowe, when the question came up earlier about going outside of the footprint, we think about infrastructure and being able to manage it. We're not anxious to get ahead of our supply lines in the military sense. We only want to be where we can service the business.

And now that we've gotten through the ProAssurance merger entirely of Professionals Group and Medical Assurance. Everybody is on one IS platform, that is well developed. We can deploy that into other areas as they come online. So really from that type of technology infastructure, we feel it's essentially in place. We're always refining it, but we have the core of that system down and we can staff up in a new state quickly. But, again, we’d only do it with experienced people and preferably with people that know that state very well.

Right. I'm trying to understand philosophically here now. I understand your concerns about infrastructure and making sure you’ve got the appropriate infrastructure in place.

But the market we're in right now happens once every 15 years. Why aren't you trying to ramp up that infrastructure quickly and take advantage of the opportunities while they're here? I assume they’re probably going to be gone two or three years from now.

I think you're right. They may be gone here. But we do think that we're ramping up fast enough that we can take on. The other thing is, if we get opportunities to grow by M&A we always pick up good people in that endeavor.

And yet, we can consolidate the back office, the reinsurance, the informational systems and get savings there. In this footprint we're in, we're doing pretty well keeping up with it as we grow.

And you’ll notice, we're not growing at 50% or 60% a year, like one or two out of competitors have done. We're holding it in check. Our number of insureds is flat with some intent and purpose. We just, we could grow a lot faster, but we could also get in trouble a lot faster.

I think we'll be here when some other people are gone and I'm sure the soft market may start coming back in two, three, four years but we'll have a lot of market opportunity from lack of competition here in the not too distant future.

Thank you all.

Thank you.

Your next question comes from Adam Klauber of Cochran Caronia & Company.

Good morning. In 2003 a good portion of your growth has come from rate versus unit. Next year, should we see more of the growth coming from unit versus rate?

From my point of view, I don't know, but I'll let the rest answer.

We're certainly prepared to have it grow on the unit side. Really, that has to do with pricing. Though we're able to obtain the pricing we think is necessary and keep our retention ratio in the 80s, there's still a fair amount of price competition out there, at least from the point of view of us, where we think the prices are lower than they need to be.

The best way to say it is, we've raised capital, we are prepared to raise additional capital if needed. We’re willing to grow unit rate. We'd like to grow unit rate, but only if we can get it at what we feel is appropriate pricing.

Adam, this is Howard. The other thing is that rates are certainly up and going back to Brian's comments, you know, great -- seemingly great opportunity in the market now is something that doesn't come along very often.

But just because rates are up, it doesn't mean that every risk that's out there is a good risk. And there's a reason that rates are high around the country, because losses have increased in certain areas dramatically and we're still being very careful about who we take on.

I think we will see some growth, because of physicians who choose to come with ProAssurance based on financial ratings, based on stability in the market, so forth. It's not a matter of rates having increased 40%, 50% or 100% in certain states that makes everyone a profitable risk and that's what we're trying to be very careful about.

Thank you. Howard, you mentioned on the expense ratio that the expense ratio in the professional liability is benefiting from higher rate. Is there any reason the lower expense ratio should not be sustainable in 2004, given that arguably, you should have more rate in 2004 also?

I think the portion of the expense ratio that’s based on what we call fixed expenses, our operating expense ratio we expect to stay down. If rates continue to move, we'll probably see some additional reduction in that portion of the ratio, if dollars are flat or marginally increased. The variable expense portion, which is premium tax commissions and that type of thing, tends to pretty much move along.

Overall, with continued premium increases, we will see some incremental decreases in the overall expense ratio in 2004.

How does the profitability at Red Mountain compare to the other professional liability book?

It’s way too early to tell, other than our intention. And the intention is that Red Mountain is a -- an excess and surplus lines writer by nature is writing business that is not as prime or preferred business as compared to what we're writing in the standard companies. Therefore, we're pricing it at a higher level and pricing it with a higher profit margin. And that's our intention.

So the basic answer to that is that we expect that the combined ratio in Red Mountain will be lower, but right now, we're just into the first year of it. We don't know if that will ultimately be the case and depends on ultimately how many claims we get and what the severity of those are.

The terms and conditions and policies are more restrictive. The limits of liability we're issuing tend to be lower. All of the elements are in place to have a combined ratio in Red Mountain that would be lower than the standard book. Right now, that really is speculation.

Adam, let me go back and give a plug to MEEMIC. The expenses are going to run higher on the personal lines side. And keeping expenses down is a much more competitive issue than on the medical liability side. I was talking to the CFO at MEEMIC yesterday. In 1994, MEEMIC had $52 million of premium and 200 employees. This year -- let's use 2002 data, because it is in the can. It had $160 million in premium and 200 employees.

So MEEMIC has worked hard to keep their expenses down in the personal lines side to remain competitive in that business and helps keep our combined expense ratio down.

Thank you very much.

Your next question comes from Rod Maten (ph) of Schneider Capital.

My first question, I don't know if this is material or not, but with the conversion you've had in several states to claims made how much premium do you have that's now on first year claims made? And what kind of a bump do you see, aside from rate increases, next year, just going from first year to second year?

The amount of premium that converted from occurrence to claims made, really, over the past year is probably in the -- these are rough numbers, but I'd say probably in the $30 million to $40 million dollar range, On a mature or occurrence basis.

That goes into claims made at -- depending on the state, let’s say an average of about 40% of what was it was, and then plus any rate increase. So we might be talking about $20 million to $30 million dollars of premium from that source that's on first year claims made. When we have other premium that's always on first year claims made or certain amount of premium that's always on first year claims made for physicians who are new to practice, coming out of hospital programs, otherwise new to the company that we did not accept prior acts coverage on and so forth.

There's constantly a mix of premium in all different claims made years and roughly, on average, our maturity factor is somewhere around 90%, meaning that if you mixed up all the different claims made years, including mature, the average rate level would be about 90% of the mature rate.

Will that be somewhat lower next year than in 90%? Yes, but probably not more than a couple of percentage points, in my opinion.

With the maturation per year from a first or second year is about 20%.

Yeah, it moves from 40% of a mature rate to about 60%, depending upon the state of a mature rate. So you have a pickup there. We take that into account in the different numbers that we quote as far as effective rate increases and make adjustments for that.

Okay. Probably not a huge factor, then I guess. My other question is just, you've brought your combined ratio target down a little bit as interest rates declined over the last year. But I think you basically have been pricing to under 100 combined for quite a while now. You've got flat reinsurance costs, declining expense ratio, fairly stable frequency and severity, aside from the couple of items related to tort reform, I guess, that you mentioned.

I'm just wondering, what other factors are there that would affect the time it would take before you would start to see that level that you've been pricing to flow into your reported results?

Could we put you on an advertisement for us? Anybody want to answer that?

I think, well, number one, I think you have been -- we have been seeing it. It's moving down and it has moved down substantially. You can see where the combined ratio is now compared to where it was a year ago. And the consistent or sequential improvements that we talked about quarter to quarter.

We've also said, I think in the past that we take a fairly conservative approach in the sense of while we use assumptions in our pricing that we think are the most appropriate, relevant, and best that we have available to us, there is always a certain amount of uncertainty there in terms of what the loss costs are going to be. And we will tend to take a more conservative approach in establishing those loss costs initially until we see if our assumptions are correct.

If you look back throughout the 1990s, that's always been the company's approach, and some years we're right and we were able to generate reserve, favorable reserve development. In other years, we spoke about earlier, we were wrong and in those years, we either had a little bit of adverse development or were able to hold the line.

I think the approach right now, with the uncertainty that we've seen in the marketplace over the past few years, is we will and have been moving our initial loss ratios and our loss reserve estimates downwards, with the increasing rates.

But I don't think that you will see us booking out a pricing assumption anytime soon. I think it has to develop over a period of two to four years, after the policy is written, once we see how the claims are coming in.

Okay. So no -- I guess -- I think it was about this time last year when you first started talking about the 102 to 103 target for next -- for fourth quarter.

Any chance you think about updating that for fourth quarter of next year?

I don't think we've made that public before, and I don't think we'd want to comment on that right now.

Okay. Thanks a lot, and congratulations on your continued progress there.

Thank you.

Your next question comes from Stephen Gavios of [inaudible].

Good morning. I believe in your opening remarks, you were talking about a lot of the doctor-owned mutuals and how regulators in most states were watching their financial viability very carefully. But there were also some states which were more lax.

Can you talk about which are those states you were worrying about on the lax side and how you're approaching doing business in those areas?

I think -- I'd rather we did not because we've got to do business in those states and I would not want to condemn one insurance department or one state versus another. In general, I think you can see in the states that are having more problems, and that's easily ascertained by looking at the AMA publications on who is having trouble and who isn't.

The states having the most trouble are probably most of the ones that are being more lax.

Is that a fair statement, guys? Because they're interested in getting competition and capacity into the market.

More lax or maybe unreasonable regulations in keeping people from being too comfortable with those markets.

(inaudible)

And certain states have, by legislation, if not in the regulatory environment, but by legislation they have the ability for companies to start up with extremely small amounts of capital and, in some cases, totally outside of the insurance regulatory process.

There is some countervailing forces. If you look back at the soft markets in the past and then they went to hard markets, the departments in the individual states were able to shield companies in individual states. But now with ANAIC (ph) accreditation and risk based capital, there's a lot more pressure on departments to take action, at least with respect to regulated companies.

Although we'd like to see some of the regulatory pressures be a little more severe than they are, there certainly is more regulatory scrutiny than there was 10, 12 years ago.

I would agree with that, yeah.

Stephen, the overall thrust of our comment there was to let you know that we, as a company, were closely monitoring the business in an individual state so that we are aware of developments there and can respond accordingly.

I had no doubt that you were. I guess my question is, when you see state issues like that, how do you carry on your business going forward?

You'll notice the way we do business in the footprint, you'll see some blank spaces. And you will see us not doing a lot in some states. And that's usually because the pricing of some competitors there, for one reason or another, is probably inadequate and we just don't compete well against inadequate pricers.

Now, we're seeing a drip back to more quality coverage. People are looking at ratings and that type of thing, and especially as we have announcements that are coming forward, we're beginning to see especially agents wanting prices from companies that have good ratings and some stability.

So we're in a very, very fluid changing market right now. It changes almost on a weekly basis.

We're going to see more of that.

Thanks for your thoughts.

Thank you.

Your next question comes from David Lewis of SunTrust Robinson Humphrey.

I had a couple quick follow ups. Howard, how do you calculate your cash flow assumption you indicated to us. And two, do you have the pre-FAS115 book value at September 30.

I'm not sure what you mean by the first question. Cash flow assumption?

What is your calculation for cash flow? Is it free cash flow, investable cash flow? What is that number?

It's operating cash flow, a GAAP basis.

Okay.

And your second question?

Pre 115 book value?

We're looking for it. Hold on.

While you're looking at that, two final things. Do you anticipate any real change in the tax rate as we move into underwriting profit, hopefully next year?

Probably ask Jim that. Jim, are you anticipating any change in the tax rate as we move more into profitability next year?

I think, as the profitability changes, and as our mixture of tax exempt income changes, certainly that will affect the tax rate on the bottom line. But overall, we're pretty much at the upper end of the rate on the taxable income. So I think there could be some change, yes, but I can't predict.

Does that answer your question, Dave?

Yes.

On your other question, David I remember this, I think we had a similar question last time. We should have picked up on that right away when you asked. What you're asking for there is a non-GAAP number. I think we give all the items of Information, that you would need to do that yourself in the press release.

You said that unrealized gains were 41.7 in the quarter or at the end of the period?

That's correct.

And is that all fixed or is there some equity in there?

That is in the total portfolio?

Yes.

Yes.

So there is some equity gains in there as well?

Yes, there is.

Can you break that out for me?

not at this point, I think you'll be able to see that in the Q, which will be filed later today.

Final thing. Other income dropped down a little bit. Refresh my memory what's in other income and if you expect that to rebound a little bit in the fourth quarter.

Other income is a combination of various things, fees that we generate on premium installment charges for doctors and hospitals who pay over the course of the year. \ We also have some credentialing. We did some medical credentialing work in the past. We had an operation that provided that service, generated other income. We disposed of that in the second quarter. And therefore, you're seeing a small effect due to that. That's also mentioned in the Q.

More likely to run kind of in the million dollar range as we look forward?

I think that’s probably fair to say. It's never been that big of a number altogether. It's a mullion or two million rounded, I think, if you go back over the last several quarters. Probably closer to the million.

Thanks very much.

You're welcome.

Your next question comes from John Gwynn of Morgan Keegan.

Howard, your new reinsurance program is still traditional as opposed to having important elements of blended or finite aspects?

It's the same program we've had, no change in any of the terms.

Howard, could you foresee any circumstances, short of being on the brink of insolvency that a -- that the short-term accounting or presentational advantages of a finite transaction would be appealing to ProAssurance?

That's a yes or no answer.

That's a loaded question, John. The answer is no, not from an accounting perspective. I think in the world, there might be places for finite reinsurance, but not for accounting presentation benefits.

Okay. Thank you very much.

Your next question comes from Chuck Mahon (ph) of Waterstreet Capital.

Thanks for the great explanation on the pricing of the presumptive factor in Florida. I've heard input on that that wasn't very clear until this morning. Everyone else got my questions. I think I've got it. Thanks.

Thank you.

At this time, there are no further questions.

Well, I know everyone's got other conference calls that they want to listen to. And this will wrap up the earnings season for most of you. So we appreciate your interest, and we'll speak to you in when we have fourth quarter numbers to report.

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