ProAssurance Corp (PRA) 2004 Q1 法說會逐字稿

Good morning. My name is Omar, and I will be your conference facilitator today. At this time I would like to welcome everyone to the first quarter earnings release for ProAssurance 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. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. O'Neil, Senior Vice President of ProAssurance, you may begin your conference.

Thank you very much, Omar. Good morning, everyone. Thanks for joining us for this review of the first quarter 2004 results. The headline today is another quarter of steady progress in Professional Liability and a standout quarter in Personal Lines. We're going to be discussing historical information today and making forward-looking statements and projections based on our estimates and anticipation of future results and events. We expect our statements to be reasonable, but you should review the contents of the call in conjunction with the caution regarding forward-looking statements in the news release we issued this morning.

We're also going to discuss risk factors and uncertainties about our business related to our forms 10-K and 10-Q and other publicly available documents. These documents are on our website or you may obtain them directly from us. We will not undertake and we 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. We are webcasting this call and making it available for replay as described in our news release and 8-K. The content of the call and the webcast are time-sensitive and accurate only on May 10th, 2004, the date of first broadcast. The call is the property of ProAssurance and you must obtain our express written consent before redistributing it in any way.

Participating with me today are Dr. Derrill Crowe, our Chairman; is Mr. Vic Adamo, the President of ProAssurance; Mr. Howard Freidman, ProAssurance's Chief Financial Officer; and Jim Morello, our Treasurer and Chief Accounting Officer. Howard will start the call with a brief overview of the numbers. Howard?

Thank you, Frank. The numbers themselves are in the news release so I won't recite them for you, but I want to give you our analysis of what they say about the success of our strategy and what they tell us about trends going forward. As regular participants in our call will remember, we focus on our consolidated combined ratio as the best overall measure of our success. In the quarter we saw that combined ratio improve to 101.3%, that's a 7-point improvement over the year-ago quarter and a steady improvement over the last quarter. I also want to point out that 101.3 is an improvement of almost 4 points in the consolidated combined ratio when you compare it to the full year of 2003. That continuing improvement tells us we're making progress in returning to the levels of profitability we seek, 12 to 15% ROE.

Now, it's no secret that Professional Liability had the greatest room for improvement and that segment has made great strides as our price increases are earned into the income statement. The Professional Liability combined ratio improved by roughly 8 points year over year and was also lower than the final quarter of 2003 by almost a point. Again, we see that as evidence that our plans are on track.

Our Personal Lines segment represented by MEEMIC is primarily weather-driven and the first quarter is normally punctuated by adverse winter weather in Michigan. This year the bad weather was concentrated and somewhat isolated and the result was an unusually good quarter in our automobile coverages. Personal Lines reported a combined ratio of 82.5 which is 7 points better than last year, 2 points better than last quarter and 5 points lower than our 2003 overall number.

We're pleased with these numbers and I'm sure some of you will want us to comment on our expectations for the year. As we said last quarter we expect to get to a consolidated combined ratio of approximately 100% for the full year. Obviously that will require continuous incremental improvement each quarter. Longtime ProAssurance investors will know that we tend to look at a time horizon of at least a year and we don't worry about quarter-to-quarter variations. I know that's foreign to many Wall Street folks but this is long-tail insurance business and we can't run it like we were making wishes.

Let me focus on premiums for a minute. As part of our long-term strategy we are committed to maintaining adequate premiums in both segments. In the last two years we've had Professional Liability premium increases of 28% overall in each year. In our last call and in subsequent presentations, we said that we expect our overall rate increase this year to be ultimately in the mid to upper teens. So far this year our weighted average increase is approximately 20%, which is a bit higher than we had forecast, but there has been and will be state-by-state variables.

Our understanding of local loss trends and legal environments is one of our distinguishing factors. For example, in states such as New Jersey and Pennsylvania, where we are very wary and write only a small amount of very clean business, our rate increases have been above 40% this year, which reflect the loss costs in those states. On the other hand, our need for higher rates has moderated in Ohio. As a result, our most recent rate request was for an average 8.6% increase this year. But to put that in perspective the total effect of our rate hike since 2000 has been 154% in Ohio.

The message is that we are sensitive to the effects our rates have on our customers, but we will not hesitate to request the rates that we need. Also remember that because we started raising rates before other companies did, the dynamics driving our rates are different from other companies. That could give us a competitive advantage in the coming months because other companies are still taking significant rate increases just to catch up.

Our retention rate crept up a bit in the quarter to 82% and our overall policy holder count, especially in physicians and surgeons, remains essentially flat. We still believe that we'll add insureds this year, but many of the states we have targeted for growth are not among the states with large first quarter renewal populations. States such as Ohio, Missouri, Arkansas and Virginia where we would like to grow, have yet to hit their peak renewal season.

We are in the home stretch of our company-wide project to convert our current coverage to claims made. That has resulted in some reduction in renewals in Michigan and Indiana, the two states where there are still occurrence policies on our books. We estimate the monetary effect of the conversion was about $7 million in the quarter. That's our estimate of premium loss due to business that went elsewhere or converted to claims made which carries a lower first-year rate than an occurrence policy.

But the resistance has been less than we anticipated and we've retained more insureds than we projected, that's in part due to the diligent effort of our agents and marking staff, but also the switch from occurrence to claims made save for the physicians some premium dollars at the outset, and in this day and time premium savings are important. We'll talk in a minute how that dynamic will change going forward. We will complete Indiana claims made conversion in June and will wrap up Michigan by the end of September.

In Personal Lines premiums were up 10% year-over-year. Premium increases are just a small part of this. Most of it comes from growth in the number of policies and the increasing value of the cars and homes we insure. Comparing year-over-year MEEMIC growth in automobiles insured was 5%, and the number of homes insured grew almost 11%. The value of autos insured was up 3% and value of homes insured was up 4%.

We sell boat and umbrella insurance as a an accommodation to our insureds, and we saw a 14% growth in the number of umbrella policies we issue and almost a 25% gain in the number of boat policies issued. These are not high-dollar policies. The total premium for the quarter for both lines was just $115,000, but that increase does help demonstrate that there is room for growth within Michigan.

On the loss and expense side of the ledger, we note significant reductions in the loss ratio on a consolidated basis and in each segment. That's on a year-over-year and sequential basis. We continue to keep watch over loss trends. In Professional Liability we have seen no real changes, but it's hard for us to understand how anyone can see any really dramatic changes quarter to quarter in a long-tail business such as Professional Liability.

Frequency has not changed, and severity continues to increase in the 5 to 6% range in most states. I mentioned earlier that we now believe our rates are adequate for current loss trends, but we're not being complacent, we're monitoring losses continually to be sure we're not surprised. In short, we've made considerable strides through disciplined underwriting and pricing and we're not going to give up those gains by taking our eye off the ball.

Frequency in Personal Lines was down in the quarter, but the Personal Lines business is the opposite of Professional Liability in that there is sometimes great variability from one quarter to the next. Unless there's a new underwriting or claims process involved, those changes are random. We saw improvement in the expense ratio on a consolidated basis. In Personal Lines the improvement was fractional, but the current expense level is about as low as we can take it and maintain current operations. The improvement in the Professional Liability expense ratio was mainly driven by the higher premiums we're earning into the income statement.

Cash flow continues to be a highlight for us. In the quarter, our operating activities produced $95 million of operating cash flow. You may have noted that goodwill decreased by $2.6 million in the quarter. This is not a result of impairment, and is actually a positive for us.

In the quarter, we were able to conclude our research into the amount of money that we had on deposit with the Internal Revenue Service in connection with a tax provision known as a Section 847 Election. This relates to the discounting of loss reserves for federal income tax purposes. The conclusion was that the Company has $2.6 million more on account with the IRS related to premerger years than is required. This additional money will be available to us in future tax years.

Because this deposit occurred prior to the merger, the accounting pronouncements related to income taxes required us to increase our deferred tax assets and decrease the adjustment of goodwill rather than recording income. Our net balance sheet remains the same, but an intangible asset has been converted to one that will be collected in cash.

On the subject of reserves, there was no prior-year net reserve developments, either favorable or unfavorable in Professional Liability in the quarter. We did have $2.5 million of favorable net reserve development in the Personal Lines business. Frank?

Thank you, Howard. Now we're going to look to Vic for some comments on our operational highlights in the quarter. Vic?

Thank you, Frank. I'll be brief because our operations are continuing to be managed as we have described in prior calls. In Professional Liability the unique event in the quarter was a completion of the renewal rights agreement with OHIC Insurance Company. This was a smaller transaction but one that will incrementally assist us in growing our book of physician and hospital risks. We benefited from this transaction in several ways. First, we're likely to expand our business in Illinois, Indiana, and Kentucky, which are states in which we currently have a solid presence. Second, we've moved into Kansas over the past few years and we like that environment, so we're excited about the opportunity to add more insurers in Kansas. Third, we get an instant foothold in Wisconsin which fits neatly into our footprint in the upper Midwest and has been identified internally as an expansion state.

While we're excited about the opportunity, I must caution you that OHIC rates are generally lower than ours in those states involved and the renewal rates transaction, and a good deal of business was written on the occurrence form which we no longer use at ProAssurance. We intend to underwrite and price this business to our standards so I can't predict how much of the business we'll retain. And because the inception date for the transaction is May 1, it's too early now to give you a sense of how the transaction is going, but we believe that the transaction makes good business sense for us even if the premium written turns out to be less than the $17 million in premium written by OHIC.

On another front in Florida we've decided to be a bit more aggressive in our pursuit of new business in the northern part of Florida. We believe it's a good area in which to prospect so we're adopting a dual-distribution method in that section of the state. We're going to retain our direct sales force which we use throughout Florida. However, in Orlando and north we're also appointing agents to help us go after good business that meets our underwriting and pricing targets. Many Florida agents have told us that they're interested in having our quality product to sell.

In order to support the growth we see in Professional Liability, we recently raised an additional $13 million in capital through participation in a pool of trust-preferred securities. This was an opportunistic financing for us and we found the terms to be quite favorable and the costs relatively low. We anticipate participating in at least one other pool later this month and expect to raise a total of at least $25 million and could go as high as $45 million from the trust preferreds. While we believe we are well capitalized, we saw the trust preferreds as a way to increase our cushion so that we can absorb opportunities as they arise, whether through organic growth or through a transaction like the one we just did with OHIC.

On the Personal Lines side, we mentioned in our release that MEEMIC won't use any of the trust-preferred financing because MEEMIC is essentially self-funding its own growth through its internal capital generation. Frank, it was in summary a solid quarter from an operational standpoint. We continue to enhance our solid foundation while focusing on growth opportunities.

Thank you, Vic. Before I go to Dr. Crowe, Omar, we're beginning to hear a little bit of crosstalk, so if you could pay attention to that, and if you're listening to our call, if you could be sure to put your telephone on mute, in case the conference provider is unable to fix that, we'd appreciate it. Make it a little bit clearer for everybody else on the call. With that, I'll turn it over to Dr. Crowe for a bit of perspective on outlook and going forward concerns.

Thank you, Frank. As I look ahead I continue to be excited about the opportunities before us. As we've shown in the OHIC deal, we'll be at the center of any meaningful M&A activity in our sector and we're able to focus on that with our headquarters staff while our operational folks are excelling in the field. Vic mentioned that this was a pretty quiet quarter, and I want to emphasize there's nothing wrong with that. We continue to be very conservative in our assumptions. We've learned from the mistakes of others and our own and I think the market is confident in our ability to accomplish our objectives as reflected in our stock price.

Let me echo what Howard mentioned a few minutes ago. We do focus on the long term here at ProAssurance. We've proven the value of careful operations. Our assumptions aren't going to change as markedly as other companies' assumptions might. This business has a tail that is too long for anything to turn around in one quarter. With 75% of our business in the most challenging line of insurance, our shareholders and insured deserve the assurance that we're not going to play quarter-to-quarter games.

I think our results over the past few years speak for themselves. We have not had to make massive reserve adjustments. We've continued to build our reserves and surplus and we've been able to respond when other companies have run into trouble. I think the long-term tenure of our management team and the experience of our employees stands us in good stead. We've seen the cycles and we've seen the mistakes that many companies have made. I do believe we'll get to our ultimate goal of a consolidated combined ratio of under 100, and I'm confident we'll get to about 100 sometimes this year.

In this business you're responsible for your own destiny and we've created strong trends that will keep the wind at our back. We believe the hard market in Professional Liability will be with us through this year and next and may be with us longer than that, but forecasting that far out with as many moving parts as we have is an exercise in futility. I do feel that we will reach our objective, though, and continue to reach our objective at 12 to 15% return on equity.

Competition continues to be something we monitor. We don't let it dictate our strategy. The Company's failures of the past few years prove that there's always someone willing to charge too little. That said, I know you want to know how that affects our market. We're seeing new companies form, but so far we've not seen any of the commercial carriers reenter our marketplace. I may be wrong, but I don't think we'll see them come back in any meaningful way because of their past problems with this particular line.

We do see start-ups being formed, primarily in Missouri, Ohio, and Florida. The Missouri companies are permitted under a special state law that allows them to start up with comparatively little capital. We've seen them charging inadequate rates and while they've grown in the past year we've also seen added policyholders in Missouri so they have not had a great deal of effect on us. The 383 laws in Missouri have some special effects and it would be worthwhile for people interested to study the laws of Missouri on that issue.

The new companies in Florida and Ohio simply don't have the capital yet to be a real force in the overall market. Several of them have written some of our high-risk Red Mountain business at standard rates. We know that they are markedly underpriced their underwriting. Frankly, I'm far more worried about the phenomenon of physicians going bare in south Florida that am about a major competitor springing up from the grass roots.

My worry is not that we can't compete, but that physicians going bare will be involved as co-defendant in cases making our defendants or our insureds the deep pockets. I have also worried that a plaintiff who truly deserves compensation won't be able to recover what he should be able to recover, and if that happens often enough on a case with high profile, we see public opinion swing drastically on this issue in Florida. We do see more physicians going bare, but given the bankruptcy and creditor protection laws in Florida we'll see this happening for awhile. That said, we're holding our own in Florida and taking some steps as you've heard to add some new business.

Among the major competitors we still see some price competition in Michigan and Illinois, but our main competitor nationwide has been Medical Protective. Seems to have gotten religion, and they have filed major rate increases almost across the board, they have stuck to their pricing. It has brought them more rationality to the market place.

On the tort reform front, the state-by-state efforts have produced some wins and some losses. Missouri's governor vetoed a bill of tort reform this past week, for example, but the legislature is attempting to override that veto. But the bottom line is still wait and see while cases make their way to the Supreme Courts in the various states. We are not giving perspective credit for tort reform and will resist any pressure to artificially change our rates based on wishes and wants instead of actual data.

One of the key advantages that we, as opposed to some of our competitors, have seen is that we're not beholden to a single state or even a single region or single line of business, so we can reallocate our capital to more favorable areas if we so desire. We may not like it, and it could be painful, but we'll severely curtail business in a state where we're forced to give credit for laws that may or may not be proven constitutional.

On the Federal level, you have seen the House has taken up tort reform again this week. Tort reform has no trouble passing the House but invariably goes to the Senate to die. We see no reason why anything should change this go-around. We've said for some time, the Republicans will make tort reform a key battle area in these elections coming up.

Finally, we have given a great deal of credit to our turnaround over the past few quarters to external forces such as price increases and the financial problems of some of our competitors. But I want to recognize the role that our employees have played in this profitability. I am really proud of the MEEMIC employees. They continue to accomplish for us what they said they would do and provide excellent returns for us. They're executing their plan very well. I'm equally proud of the Professional Liability employees. They have worked hard to integrate our two merged companies and have really been an asset to us as we've turned the corner in profitability in that line.

I said in February that I believe this is going to be a very interesting and profitable year for us and I still think that's the case. Frank?

Thank you, gentlemen. Omar, we'll now end our prepared remarks and ask for any questions.

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

Good morning. Thank you. Could I ask a couple questions about MEEMIC? The loss ratio, despite favorable weather is clearly the best that we've seen as far back as I can recall. And I think you said there was a $2.5 million redundant reserve release which would have accounted for about 5.6 percentage points on the loss ratio. Can you give us any direction if we have fairly normal weather where you think that loss ratio could run moving forward?

David, I think typically if you look at the full-year 2003 loss ratio, that would be a good indicator of what that number would be. I'm trying to find it. Normally --.

That was 65.8%, I believe.

On the loss ratio itself?

Correct.

Yeah, when you average out over a series of quarters like that, I think that's what we would be looking at over the next sequential number of quarters on an average basis as well.

Does that assume additional reserve redundancies? Because you've had redundancies the last couple of quarters I believe, or last few anyway.

I think MEEMIC has had fairly consistent favorable reserve releases over the past at least six quarters or so, and that's just part of the normal process of reevaluating the prior years and because it's a little shorter-tail business that can be done more quickly. So I think we would expect to see some reserve releases, maybe not exactly the same amounts from quarter to quarter, but continued in that direction.

Howard, just overall for the company, what's the capital and surplus now with that $13 million funding? And where do you guys think you can go on a total company basis on a price to capital and surplus, or, excuse me, premiums to capital and surplus?

At the end of 2003, the combined statutory surplus was $437 million. That does not include any of the new trust preferred money, of course, nor the first quarter earnings. So it's somewhere above -- if you wanted to look at the trust preferred funds being available and contributed to the insurance companies, which they have not been yet, but would it say that we'd be somewhere above $450 million at this point. And going back to the other part of the question, last year we wrote at approximately 1.2 times surplus, and we think that is a reasonable level which the rating agencies seem to be comfortable with at this point. We wouldn't want to get much above that I don't think.

Okay. Just a final question on kind of pricing in Florida. With the rollback that they've had there can you tell us what kind of rate increases you received in Florida and whether you think that's adequate under your plan?

Yeah, I think we may have commented on that last quarter, too, because the Florida rates were effective January 1. We received a rate increase of 17.2% and we were comfortable with that. We factored in what they call the presumed factor to take into consideration tort reform at a relatively low level. It affected our rate by a little over 4% and we did not think that was unreasonable.

Okay. Great. Thanks very much.

David, if you'll recall, the law in Florida allowed companies to deviate from that presumed factor if they could demonstrate a different effect by line of business or mix of business and limits levels.

Great. Thank you.

Your next question comes from Mike Dion from Sandler O'Neill.

Good morning, everyone.

Good morning.

My question is on the top-line growth and the Professional Liability segment primarily. You had indicated at the outset of the call that policy holder count was relatively flat and although rate increases were higher than expected. Given that some of the trend that you outlined earlier in the call and what you've said on prior calls, which is that you're expecting to increase policy holder count in '04, maybe you could just elaborate a bit on that. And also, with rate increases higher, do you think that as you look out for '04 that mid-teen growth rate for rate increases, you might move that up a bit, and also if you could talk a little bit about Red Mountain and where the expectations are for '04 and where you're kind of at year to date.

Okay, Mike. This is Vic Adamo. I'll take the first stab at it, then we'll see how others chimes in. It's always a balancing as you appreciate between getting our proper pricing and desires to grow. We've been growing the top line of premiums very dramatically over the last couple of years, primarily through rate increases. We certainly have the willingness and the desire to add units and we're doing things in that regard, as we've mentioned a couple of them here, the OHIC transaction agents in northern Florida, and we're looking for what we consider more people coming on the market later in the year, the renewals in the first quarter were primarily focused on states where we weren't as focused, for example, say Illinois, in terms of adding new accounts, so certainly we'd add good risk in those states. So we see it happening throughout the later part of the year, but again, we're very committed as we've always been to keep the rates proper so there is a little bit of a tension between those two.

I'll just add, it's funny, I just got through looking at that about an hour ago, because I got a quarterly report, it came in the e-mail. The states where we are down the most, or the two states, of course, where we are converting to claims made, and that has effected the written premiums significantly, but if you go look at a lot of the other states, for instance Ohio, Alabama, we're up in the 15-20% range. Looking at the renewals of old business that has renewed this year, number one, we have renewed about 83% and the overall increase I think is around 20% year over year for the business that renewed. I'll say that we probably would like to write a little bit more business in certain states, but at the same time, our primary objective as you know to meet our pricing. We've got to meet our profit margins, we've got to get our return on equity, so if push came to shove, I'm sure we would sacrifice a little on the top line.

Does that answer your question?

Yeah, that's helpful. And maybe just a brief update on Red Mountain.

Red Mountain is -- we've issued some numbers that we thought that they might achieve this year, we're certainly on track to do that. We may and have reevaluating whether or not we want to continue to give out the numbers on Red Mountain on the top line, but it has been a very good piece of business for us, and it is growing exactly where we intended for it to grow this year, so far. However, having said that, the interesting thing that we have seen is we have seen Red Mountain pick up, or potentially pick up some pieces of business that are not exactly what we would call substandard, but yet in different venues are requiring less than our standard policy, that type of underwriting. And we have seen some of Red Mountain's past customers, this past year, returning to the standard market, especially in the start-up companies in some of our states. This indicates, again, to us that the start-up companies are probably going to have trouble quicker than even we anticipated.

Okay. That's helpful. Thank you.

Your next question comes from Beth Malone from Advest.

Thank you. Good morning.

Good morning.

This morning I was just curious, when you talk about a 100% combined ratio, consolidated combined ratio for this year, that would indicate that the following three quarters would have to be less than 100% if the first quarter was 101, if my math serves me. My question is, is that what you're anticipating, and do you anticipate any reserve releases in the Professional Liability division to get you to that combined?

Well, yes, your math is correct, to start with. And we have seen a sequential improvement in the combined ratio quarter to quarter, so starting out the year above 100 certainly does not mean that we won't end the year with an average of 100, which is our target. We have not commented on any Professional Liability reserve releases at this point we're not willing to make comments on that. We did say, though, that we would expect to see some continued reserve releases on the Personal Lines segment. I think in short we believe we can achieve that target for the year, and that's probably all that we should say about it.

Okay. Also, could you tell us, what's the interest rate you're expecting to pay on the $13 million that you just raised?

On the trust preferred?

Right, the trust preferred.

The interest rate is 3.85% above 90-day LIBOR on a floating basis quarter to quarter.

Okay. And the additional funding you said could be anywhere between $25 to $40 million. What factors would you consider whether to take $25 million or $40 million. What are you looking at to make that decision?

Well, primarily a factor of can we put the capital to proper use, which we think the answer is yes, and secondly, since there is some timing in these, we wouldn't see any undue movement in the interest rates for the pools that have not yet been put together, so there's a little timing involved also. For the $25 million, the pricing is -- the interest rates are as Howard has described for the additional $20 million. They're yet to be done, and although we believe they're going to go up at the same pricing, that's certainly not a fact to what happens.

Okay. And I guess the idea for this additional funding is to fuel. Are you anticipating having more opportunities like the OHIC? Are you anticipating that kind of transaction, or is this just for organic growth from your existing book of business that could use the funding?

We've signaled -- the last few years, last couple of years at ProAssurance, obviously the focus has been on getting everything back into professional liability where it should be, watching MEEMIC continue to perform very well, the theme in 2004 is mind-set towards growth opportunity. So we certainly don't want to be in a position where we see the growth opportunity and can't fund it. The benefit of the trust preferred is that they get equity credit from the rating agencies so we're able to raise the -- and debt financing on the GAAP point of view so we're able to deduct the interest, get equity credit to maintain our rating and take advantage of growth opportunities as they present themselves. So there is a little bit of being prepared in there, but we think it's at a very reasonable cost given our overall capital structure.

Finally, on MEEMIC, you had mentioned, I guess, in the last conference call, and maybe you went over this and I missed it, but about expanding your opportunities in MEEMIC to other states or other areas, because, obviously, the success of that company is outstanding, and I was just wondering how much do you think could you duplicate this kind of success in other areas, and is that going to be a cost that you're going to incur over the next year or two in setting that up, or is it just part of -- more of an organic mark share expansion?

We don't believe there will be a very significant cost component to it, but the flip side of that is that the growth will be paced. We're very committed to maintaining MEEMIC's distribution model which is essentially teachers selling to teachers so the slowness involved is getting that distribution force built up. The MEEMIC management, as we've commented before, is working to deploy that to the state of Wisconsin, although that is -- we're licensed there but don't have any agents on the ground yet.

So unlike where you go, I guess, broad-brush into a market and absorb a lot of costs, we don't expect that but, on the other hand the growth won't be as dramatic because it's a measured pace growth that reflects MEEMIC's success in Michigan. I would go back to point out for Personal Lines MEEMIC's 10% plus growth rate is certainly good as Personal Lines goes even without going outside of Michigan.

Okay. Thank you.

Your next question comes from John Gwynn from Morgan Keegan.

Good morning. Howard, the effect of the switch from occurrence to claims made, I want to be sure I got that number right. Did you say was $7.9 million in the first quarter?

No, I said $7 million.

$7 million, Okay. And is that calculated on the same basis as the disclosure in the K, 13.5 for the full year last year?

Yes, it is.

Okay. Was last year's number back-ended, in terms of effect on the full year?

Well, it was because really what happened last year, the significant blocks of occurrence business that remained were Indiana and Michigan. The Indiana conversion started July 1, and the Michigan conversion started October 1.

Okay. Howard, again, any significant change in terms of duration, quality, et cetera on your vested assets?

We've allowed the duration to move up a little bit by going out a little longer. The duration at the end of the quarter is 3.9 years, so we went out a little bit longer on some of the new investments. As far as quality, no, it's still 99.9 investment grade and AA rating.

Okay. And in investment income growth for the quarter you had pretty good growth in Med Mal and down a touch in MEEMIC. I realize one is short-tailed one is long-tailed. Is there any comment there?

No. Really I think part of that is just the effect of some of the maturities and rebalancing some things in the portfolios. We're also looking at the tax position of the portfolios, but nothing that we'd call a strategy shift.

I have to say that the cash flow has been a part of it. Cash flow is still strong, John.

Right. Vic, on the Michigan cat fund, is there going to be any impact on your business on the recent changes there? And also could you comment on what appears to be sort of politicization of Michigan by the department?

Good question. Actually, let me take the second one first. MEEMIC had been careful not to rush into credit-based scoring of insureds. As I think we've mentioned before, they did some internal studies and found out that given the way in which they underwrite the preferred book of teachers there was already a fairly high correlation with use of credit scoring, so rather than get into the political quagmire they just decided not to use it, the MEEMIC management. It turned out to be a very good decision given the fact that Michigan is neither cramming down or vacillating given whatever day it is, on the use of credit for underwriting purposes. So that's not really going to affect MEEMIC's operation because we don't choose it, we have a better proxy in our own underwriting system.

In terms of the Michigan MCCA, Michigan Catastrophic Claims Association for others on the call, it's basically a state-run reinsurance mechanism on the personal injury side. That historically has gone up and down. It probably will have some very minor effect, but the up-shot is every car driven in Michigan, that's insured in Michigan has to buy the coverage at essentially the same price, so it's pretty much standard across the industry, so really, if anything, MCCA gives a company like Michigan somewhat of a competitive advantage because the larger companies, AAA, State Farm, auto owners, really have to buy the product at essentially the same price that MEEMIC does, so we don't expect those changes to have any dramatic increase on MEEMIC's book of business.

Howard, one last question. Do you have a recent mark to market on your invested portfolio?

You're looking for the unrealized gain in the portfolio at the end of the quarter?

No, not at the end of the quarter.

Oh, recently. No, afraid not.

Okay.

I think with rates moving up it's less unrealized than we had at the end of the quarter, but I don't have a number for you.

Okay. Thanks a lot.

Your next question comes from Erin Archer from Raymond James.

Good morning, gentlemen.

Good morning, Erin.

I have a couple of questions. Picking up on where Mike left off, on your top-line growth I'm a little confused as to why it was a little lower than what we expected, particularly in the Professional Liability line. I may be missing something, but I'm wondering if with rates renewing at about 28% last year and at about 20% this year, but growth premiums written coming in high-single digits, is the difference because we've lost several of the hospital accounts the end of last year, or is there something else going on? Is part of your book not renewing in the first quarter or more of it renewing later in the year?

I think there's a couple things there. The $7 million or so of loss premium resulting from the occurrence to claims made conversion that we mentioned, there was about a $2.5 million drop in hospital premium, written premium in the first quarter and that is a result, we talked about last call, of some of the competitive effect in the hospital environment, hospitals moving to captive programs, and other types of self-insurance mechanisms. So I think between those two that would be about -- close to $10 million in premiums there alone. That would have brought it, I think, a lot closer to the percentage increase that you might have expected.

Okay.

Other than that, nothing notable.

Okay. Great. You did mention earlier, Howard, that smaller percentage of the book in your growth states was renewed in the first quarter. Is there a particular quarter we should be looking for, for an uptick in top-line growth for that reason?

I think at least in some of the states that we see as the opportunities, Ohio Missouri, Virginia, Arkansas, there are still -- the traditional renewal time for medical malpractice historically had been July 1, sometimes August 1, which is when physicians went into practice after leaving medical school and residency programs. So in many states that's still a much heavier renewal period, so I would think that third quarter is for those states a more significant opportunity for us.

Okay. Great. And then just two quick questions. Your return on equity target, are you basing that on beginning or on an average basis?

That's an average ROE.

Okay. And finally, are you filing your Q this afternoon?

Yes, we are.

Okay. Great. Thank you very much, and congratulations on the quarter.

Thank you.

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

Good morning. Can y'all hear me?

Yeah.

Great. Just a couple quick questions. Howard, is it possible to give us what percentage of your book of business right now is claims made versus occurrence, or what's still left is occurrence? And then kind of looking forward, what's the kind of average decrease that somebody will get when they change from an occurrence to claims made form?

Yeah, I think at this point in time, at the end of the quarter, the amount of in-force premium on an occurrence basis was in the -- about $6 million range, $7 million range, I believe, so really not that much left.

So there's not much left, so we shouldn't see the variability, ex, the obviously, OHIC, but that really won't affect us going forward, we shouldn't see the variability like we saw in this quarter?

I believe that should be correct.

Okay.

And then as far as the rate upon conversion, typically it's in the absence of a rate increase that may have gone into effect between the time of the last renewal and the new renewal, if the rates were the same the first-year claims made premium in most states would be about 30 to 35% of the occurrence expiring premiums.

Okay, terrific. Second question, could you have an underwriting year combined ratio for your professional lines business?

You mean historically?

Just your first quarter underwriting year combined ratio.

Well, we didn't have any reserve development, so I guess it's the same answer as the calendar quarter.

Not accident year, underwriting year, so the businesses you originated in the first quarter.

Don't really have that offhand, no.

Okay. And then last question would be, could you comment a little bit about how it's going in Texas so far for y'all? I know last call you said you're thinking about moving in there a little bit more, particularly with some of the tort reform actions.

Yes, we've talked about that and we are encouraged by that, and we have been moving cautiously. We're starting to see a pickup in the underwriting there, but I'll have to tell you we strongly believe that the plaintiff bar out there will make every effort to get around that law, those laws, any way they can, probably won't be checked constitutionally, but loopholes will be found. We still consider certain parts of Texas a very difficult venue. Then, of course, you've got the situation there with TMLT [ph], rates are so low that we just don't want to write against them in certain situations.

Gotcha. Have you seen any situations so far, any cases pop up in Texas that would concern you?

No, not yet, but it's too early.

Okay. Thank you.

Yeah.

Once again, in order to ask a question, please press star then the number one on your telephone keypad. Your next question comes from Adam Klauber from Cochran, Caronia & Company.

Good morning. My question revolves around accident-year profitability. It obviously takes a couple of years in your business just to get an inkling of where an accident year is going to develop at. Can you give us an idea if there is differences emerging from 2000, 2001, and 2002 accident-year profitability, even though I realize it's early, but given what you've seen to date ?

Differences between those three years?

Right. In other words is 2002 looking more profitable than 2000?

Certainly. 2002 looks more profitable and 2003 looks more profitable than 2002 at this point in time, but that's based to some extent on our own assumptions because we've increased rates, we had a consistent set of rate increases over that three-year period really starting in 2000, so each year from our perspective at this point, looks inherently better than the one preceding it. What we don't know at this point is how some of those more recent, particularly 2003 they and even 2002, start to develop in terms of claim dispositions and what the cost will be so. At this point in time, the working assumption is that each year gets progressively better, but we really don't have enough closing information to provide that yet.

Right. That makes sense.

When you say the years get progressively better, that means in our loss ratios. But when you start looking at the actual paid losses, we're still seeing some trends, especially in severity. It's not increasing at a higher rate. In fact, it may be a tad lower than it was a year or two ago, but nevertheless you're still seeing severity increasing at 6, 7%. So, times are not getting better. It's just relatively better. It's not absolute better.

Okay. Are those, on 2000 and 2001 where you have a little more visibility, are those developing in line with your expectations better or worse?

I think at this point they're just, I'd say, developing in line with our expectations.

Okay. Also, can you give us a paid loss figure for the quarter and do you break that down -- can you break that down Professional Liability versus MEEMIC?

Sure. Hold on one second. I have it here. The consolidated net paid loss was $87 million, and that comes from $58 million of that was Professional Liability, $29 million was MEEMIC.

Thank you. Also, the expense ratio in Professional Liability was up moderately. Is that more seasonal?

I think that's to some extent a function of the -- I guess could you say it's seasonal, it's a function of the business that renews by state because the expense ratio by state varies depending on whether the business is produced by agency or direct means, and we're going to have some variation from quarter to quarter. It was down over last year by almost a point, but up compared to the most recent quarter. So it's going to vary. I think that we're looking at the expense ratio overall to be in the 14.5 to 15% range.

Thank you very much.

Your next question comes from Rob Meton from Schneider Capital.

Actually, my questions were already answered. Thanks a lot.

Thank you.

Your next question comes from Howard Flinker from Flinker & Company.

Good morning, everybody.

Good morning, Howard.

I look at the combined ratio in MEEMIC at 82.5 and I ask how soon is it going to be before that attracts competition? Are you seeing any? More competition, I should say. You're always seeing some.

MEEMIC has weathered the competitive storm and achieved that combined ratio really in a very competitive environment to begin with. MEEMIC is the 10th largest writer of personal auto in Michigan, so it certainly doesn't dominate Michigan, and some of the other companies there, the All America Company, auto owners, do have programs that at least seek to target teachers, so I will tell you that that number was achieved in an already competitive environment.

And you don't think that the competitive environment will get warmer?

Well, one never knows, but part of MEEMIC's success has been its ability to have an extremely high retention ratio, up in the high 90s, and we don't have any sign that that's diminishing, so I would not see competition as changing the landscape in the foreseeable future.

I wouldn't hang my hat on that 82.5% that much. Remember, there were a lot of extenuating circumstances that caused it. As Howard stated earlier, we expect that loss ratio and combined ratio to go more back to where the normal is, something around 90%.

Okay. Thanks.

At this time there are no further questions.

Okay, Omar. We'll give everybody a second to punch in if they'd like to ask one. And if we still have no questions, we'll sign off. Thank you very much, and we will speak with you in three months.