ProAssurance Corp (PRA) 2004 Q2 法說會逐字稿

Good morning. Welcome to the ProAssurance Corporation second quarter earnings conference call. At this time all participants are in a listen-only mode. Our brief and question answer session will follow the formal presentation. If anyone should require assistance during the conference, press star, zero on your telephone keypad. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Mr. Frank O'Neil, Senior Vice President, Corporate Communications and Investor Relations. Thank you, Mr. O'Niel, you may begin.

Thank you, Dan. Good morning everyone. Thank you for joining us. In just a minute we'll have a prepared statement about what we think is another quarter of steady progress and promise in both of our lines of business. First, we have to take care of the legal side of things. We'll be discussing historical information today, and making forward-looking statements and projections based on our estimates and anticipation of future results an events. We expect our statement today to be reasonable, but you should review the contents of this call in conjunction with the caution regarding forward-looking statements in the news release we issued this morning, August 9th. Further discussion of risk factors and uncertainties about our business are contained in forms 10K, 10Q and other publicly available documents, which we make available through our website or upon 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.

We are webcasting this call and we're making it available for replay as described in our news release and 8K. The content of the call and the webcast are time sensitive. They're accurate only on August 9, 2004, the date of first broadcast. This call is the property of ProAssurance and you must obtain our express written consent to disseminate its contents in any form. This specifically prohibits transcription of the call. If you are obtaining a transcript of this call, you should know that ProAssurance has not reviewed it for accuracy. Participating with me on today's conference call are Dr. Derrill Crowe, our Chairman; Mr. Victor Adamo, the President of ProAssurance; Mr. Howard Friedman, our Chief Financial Officer; and Mr. Jim Morello, our Treasurer and Chief Accounting Officer. Howard is going to start us off with a brief numbers review. Howard.

Thanks, Frank. As you said, we think the headline for today is the steady progress that was made toward our combined ratio and ROE goals. Our consolidated combined ratio is the primary goal we focussed on for the past two years. As it drops, which it has continued to do this quarter, we can clearly see that we made the right decisions on prior business, and that guides our decision on current and future business as well. This quarter our consolidated combined ratio reached 100.1%, a 6 1/2 point improvement over last year's second quarter. Our consolidated combined ratio stands at 100.7% for the year to date, a improvement of a little more than 6 1/2 points year over year. As has been the case for almost two years, Professional Liabilities combined ratio showed the greatest improvement, dropping almost 9 1/2 points in the quarter to 105.4, and it is down approximately 8 1/2 points for the year. Over the past two years, this quarterly combined ratio has been reduced by 24 points. This remarkable and steady progress is the result of the price increases and underwriting actions that we've taken, and that we continue to implement while maintaining what believe to be the best claims defense in our industry.

Focusing on personal lines for a moment, we simply can't say enough good things about the results from our subsidiary MEEMIC. As you may recall, there was a concentrated outbreak of severe thunderstorms in Michigan early in the second quarter. While we did see a small increase in losses attributable to those storms, which did not qualify as a CAT event, there was a small downturn in auto collision claims in the quarter, and the two cancelled each other out. So the combined ratio in Personal Lines was at 86.3%, roughly the same as the year ago quarter, and at 84.5% for the year to date, which is more than 3 1/2 points better than last year. These are terrific results in anyone's books. Let me remind you that MEEMIC's results can be affected by the weather, so make your assumptions accordingly.

The bottom line, which is where we focus or attention, showed marked improvement in the quarter, with net income almost doubling. Net income per share rose from 30 cents to 54 cents. Now, I know that's in the news release, but I want to highlight the extent of that improvement. The same goes for net income and net income per share for the year to date. But they are double what they were this time last year. Like the improvements in our consolidated combined ratio, this tells us that the stages we've put in place are working.

While our main focus is always the bottom line, I do want to comment on the top line. As many of you know, the second quarter normally is one of the smaller quarters of the year in terms of written premiums, since the peak renewal seasons in professional liability are in January and July. In terms of comparison to last year, overall written premiums were up, although the increase came from Personal Lines. In Professional Liability, our gross premiums were essentially flat. Dr. Crowe will go into the reasons for that in detail during his remarks. Our average weighted renewal wait increase in Professional Liability has been 18% year to date, which is moving into line with our yearly forecast from our last conference call. In the second quarter, our retention rate in Professional Liability crept up a bit to 85%. We continue to highlight the cash flow from operations, which was $76.9 million in the quarter, pushing the year to date up to 171.6 million. On the balance sheet side, book value is lower than last quarter as the unrealized gains in our portfolio have decreased with the rising interest rate environment, which is expected. The flip said side that have is our -- is that our investment income is rising, and maturities are being reinvested at higher rates. Remember that we had shortened our fixed income maturities over the past few years in anticipation of rising rates.

Before I turn it over to Dr. Crowe, I want to focus on a more strategic question, that of the effect of proposed FASB regulations on the beneficial accounting treatment for convertible bonds with a contingent conversion feature. This is a major issue for many public companies today and we're waiting to see what the FASB will do with the issue. In case you haven't been following it, the proposed change in EPS calculation will remove the interest expense, thus increasing the numerator, but at the same time, companies will be required to take the full number of to be issued shares into consideration. Thus increasing the denominator. We believe that right now, the effect would be an EPS reduction of 9 cents per share on a yearly basis for ProAssurance. Despite this potential effect, we still believe that our convertible bonds provide an economical source of funds to support our growth. Now we know that many of you look at operating income and have your own calculation methods, but we don't know where that will fit, so when we open this up for questions, you might want to weigh in on how you will treat this adjustment. Frank.

Thank you, Howard. Dr. Crowe has some brief remarks to add a bit of color to Howard's numbers. Dr. Crowe.

Thank you, Frank. Howard mentioned a few things that I want to focus on and I'm going to concentrate on Professional Liability. Vic will touch on MEEMIC and the Personal Lines when I'm finished. First, Howard noted that we are 100.7% for the year to date consolidated combined ratio. That's well within striking distance of our goal this year of a consolidated combined ratio of approximately 100%. Obviously, not much of stretch for us to get below a hundred percent and we believe that will happen barring any unforeseen events or losses. Although it's a small change, those of you who are familiar with our conservative approach recognize the significance of this update. But the question is how far under 100% and I can't answer that because three, there continues to be too many uncertainties in the market. We can't control factors such as the regulatory climate, the pricing by competitors an the awards handed down by juries.

I'll get to those topics in a minute, but let me tell you what we can control, our pricing, our underwriting and our handling of claims. You all know that we were the first to implement higher pricing in the earlier part of this decade, and we did not shy away from the rising prices as loss severity increased. But in the past few quarters we have explained that our rates are at adequate levels given our pricing discipline and the moderation of the loss trends. So while we have seen some moderation of rate increases, that is because we believe those rates which we now are charging achieve the margins that we need to reach our return on equity goals. You'll be making a mistake if you equate the slowing of rate increases with diminishing margins.

At the same time, I would acknowledge the flat year over year gross written premiums in Profession Liability. That may seem like a disappointment, but I would like to dissect that for just a moment. There are five main reasons for this result. Underwriting decisions, mix of business, rate increases, the claims made conversion, and what we call tail coverage and let me address each of those.

We continue to be a disciplined underwriter. That's one of the things I mentioned that we can control. That means we've continued to shed our risks that didn't meet our standards and minimize our presence in certain states. We believe we are at the end of the period when our underwriting will be culling out significant numbers of position, not that we plan to loosen underwriting, but because we have scrubbed the book of business over the course of two renewal cycles. We have seen retention begin to creep up again to 85%.

While we cut back in some states, we have grown in others. Where we believe the loss environment is more favorable, because of the loss environment is more favorable in these states, in general they also have lower cost or average costs, and therefore lower average premiums. So as we replace the number of positions that we've lost, they have come on the books at somewhat lower average premium. That's acceptable. Since we expect that they will have lower and more predictable losses.

We have mentioned that rate increases are moderating to some extent, which has the effect of slowing up the top line as compared to last year. Again, it's not this slowing the growth of our bottom line.

The final stage of our conversion to an all claims made Professional Liability insurer has temporarily slowed premium growth for over a year now. Those of you who have been following this 24-month conversion process through our various states know that some insurance want occurrence coverage no matter what and we expect to lose them. Frankly, we've lost fewer than we expected for that reason. Those what renew pay a lower premium for claims made coverage at the outset due to the lower loss exposure but then the premiums begin to grow again. We're still on track to finish the conversion by September the 30th, when the last Michigan occurrence policy is non-renewed. We did complete Indiana as promised June the 30th.

The final item, tail coverage. Also called reporting endorsement coverage requires an explanation for those of you who not intimately familiar with the Professional Liability insurance. A tail provide permanent coverage for unreported claims when a claims made policy is terminated. When a physician dies, retires or becomes disabled, total coverage is usually provided at no additional cost and is previously been in the charges that he has paid. However, when a physician changes insurance companies, he or she must either arrange for the new insurer to pick up these exposures, or must buy tail from the old insurer. By their Nature, tail purchases are unpredictable as to timing with our retention rate up a bit, fewer doctors left the company and we sold less tail coverage then this quarter than we did in the quarter last year. This is good in our opinion since the tail creates a permanent obligation, somewhat equivalent to occurrence coverage and is more unpredictable from a pricing and reserving standpoint because of the length of that tail.

I believe that on the whole, the hard market persists in medical liability and will continue to be with us for the next 12 to 18 months. Start ups are having some effect, but their capital base doesn't allow them to have much of an effect yet. In fact, I will submit that the reinsurance participation in that market causes as much influence as their capital structure does or more. On the pricing fronts there are pockets of price-based competition. However, we are seeing substantial rate increases as well. So there's no single trend that we can identify. It's a state by state phenomena. For example, one of our major national competitors that we've focused on on the market share last year has taken an increase as high as 50 to 60% in some states this year. The fact that they're asking for these types of rate increases tells us us that they were under pricing the book in prior years and has given us an advantage in the marketplace, because the rates which they are now charging, which are catch up rates and are often higher than ours. We wrote several flagship accounts as a result of this movement.

As to the whole subject of growth, let me say that we believe there is growth to be had in this market and we are adding insurers as we said, in states where we are comfortable with the medical liability environment. We are in a risky business and we do everything we can to mitigate that risk through sound operations. We believe that approach has made us successful, but we acknowledge that it may not be what people looking for an overnight success story wants to hear. We focus on the bottom line. We believe we will have the greatest success through protecting our balance sheet. That means putting up adequate reserves and preparing for the worst. But enough on that topic. I thought I-- I suspect we will have some questions. Frank.

Thank you, Dr. Crowe. We're going to move to Vic Adamo now for some comments on MEEMIC and their operations in the quarter.

Thanks, Frank. Dr. Crowe, and Howard have highlighted the successful quarter at MEEMIC and I would just like to add a little bit to that. The severe weather event that produced sizeable losses for other Michigan insurerers did not hit MEEMIC's CAT level, and the results were offset by a reduction in reported auto collision claims. Hence, we had a very good loss ratio this quarter at MEEMIC. MEEMIC continues to grow both policyholder count and premiums in Michigan. As well as with all ProAssurance companies, MEEMIC has maintained its underwriting discipline in the process. The Personal Lines premiums at MEEMIC are up 11% year over year and policy count grew at well. The number of vehicles insured was up 5% and the number of homes insured by MEEMIC was up 11% year over year. We also continue to see an increase in the value of cars and homes that MEEMIC insures and this also contributes to our premium growth. We view this as a validation of our belief that there is still plenty of room to grow in the Michigan market.

As you know, we're also on track to begin selling policies in Wisconsin. Our entry in Wisconsin will be gradual. Limited to some extent by the preservation of our peer to peer selling model. Again, let us caution that Wisconsin will not be an immediate contributors to MEEMIC's earnings and certainly will not be a contributor this year. All in all, in all of our sectors, this has been a sound quarter for us. One in which we have exceed virtually all of our targets. We're pleased with the results. With that I turn it back to you, Frank.

Thank you, Vic and Dr. Crowe and Howard. Dan, we're ready to take questions from the folks on the line today.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. If you would like to ask a question, press star one on your telephone keypad. A confirmation tone will indicate your line is in the question cue. You may press star, two, if you would like to remove your question from the cue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is coming from Mike Dion of Sandler O'Neil. Please proceed with your question.

Good morning everyone.

Hi, Mike.

A couple of questions. First, Howard, if you could just comment on frequency and severity trends you're seeing out there in the marketplace. And secondly, for Dr. Crowe, as you commented in your remarks about price base competition occurring in some states, if you could just elaborate on that a bit, and maybe indicate where some of that competition is most fierce and then lastly, in terms of the premium growth, you know, with the conversion to claims made being complete by the end of September, would we expect, you know, to see more top line growth going forward? Thank you.

Mike, this is Howard. Frequency and severity is -- I know it gets kind of repetitive, but it really is the same thing that we've been saying for the past year or more now. With a we see is continued variation from state to state, but generally if you look our book of business, we see the frequency not really changing. We see a little bit up in some areas, a little down in others, but nothing that would be considered consistent our what I would consider to be significant. There is some variation from quarter to quarter by state. On severity, we continue to see the more or less constant upward pressure on severity coming from both judgments and settlements. And we're still seeing that to be approximately 6% per year.

Mike, on price-based competition, I will not address a specific state but I will refer to you that the fact that if I will look at where the start up, small, mutual risk retention groups, et cetera, et cetera, you will properly identify the locations. It's interesting to watch this phenomena. We've got the same people names showing up helping start these, that started them in past cycles. Many of them had problems. It's interesting to note that there's very little capital. These companies would not be significant if they did not have the backing of the reinsurance industry. I really don't understand why the reinsurance would back someone who obviously is under pricing a product and is subsequently going to have problems in the marketplace. It's not significant right now, but it will become significant. There certainly influencing the new business that we're writing. Retention rate is going up, but we're getting down to where we got a basic loyal bunch of insureds. I want to emphasize something, and that is the market is not softening. The market is not hardening as much as it was. We still have prices increasing, but you're not seeing the 15 and 20% a year growth with the15 and 20% price increases, is what's not happening. But there again, we don't need it because the margins are adequate. Due to this pricing competition, we are not seeing the new business that we should be seeing in a good, firm, hard market. And then you had a third question, Mike, and I --

On the premium growth, going forward, you know, is September 30th is the end of the conversion in Michigan to claim space policies. Will we expect that to --

I'll let Howard address that, Mike.

Yes, Mike, we would -- at this point, we have approximately $3 million of occurrence premium left on the book. So it's not -- you know, even that Michigan portion is not going to be a major factor although we -- based on historical patterns we would expect to lose some that have in the quarter, but then the business that we converted last year in Indiana for example, will be entering its second year claims made, the business that we began to convert -- or that we had converted in other states are progressing through their claims made progression. So I would expect that we would see growth out of that. Now, of course, we -- we always have the offsetting factors of growth in new insureds and the loss of business due to either price competition or other factors, our own underwriting. But I think generally the answer would be yes, we should see some growth going forward.

Great. Thank you very much.

Our next question is coming from David Lewis of Suntrust, Robinson, Humphrey. Please proceed with your question.

Good morning. Thank you.

Good morning.

Regarding Mike's question on kind of the pricing outlook, you indicated that, you know, price something starting to slow a little bit, which we have continually heard. If I recall correctly, Dr. Crowe, I thought you were looking for 15% plus kind of price increase this is year. Is there a change in that outlook? Can you give us any guidance? Do you think it will still be double digit next year?

No, we haven't had any change in the price increases that we have submitted and been approved. Next year I -- I can't say, but no, I don't have -- I really don't have a feel for it. The problem, David, is that our return on equity and our margins are where they should be. So it's basically going to be a function of the increase in severity or frequency that Howard picks up. And right now, we're not seeing an increase in frequency. In fact, you know, a couple of the insureds have reported marked decreases in frequency. Well, that was, I think, due to not very good underwriting in the past. Now, we're seeing a lit bit maybe flattening, maybe a decrease, but we've had some pretty tough underwriting going on for three or four years now and I don't look for anymore of that to come about. So it's going to be jury awards and judges and how they handle these excessive jury awards is going to be the driving force.

That's helpful. Howard, can you talk about kind of any potential favorable reserve development out of Professional Liability side? I know we talked about it first quarter, and I know time will tell. But are you feeling a little more comfortable with your reserves, do you think the industry, at least the higher quality companies, might start to see some favorable development following the positive pricing trends?

Well, David, we're always, and still are, quite comfortable where we stand on reserves and certainly without any favorable development being recognized on our part up to now, I think it would say that, you know, in the future there''s the potential there. We're just not at this point in time making any decisions in that. We'll be looking at at it again as we get to the end of the year when we do the full reserve analysis and that's typically when we would make any adjustments. But certainly, I think as more time goes on, as our rates continue to increase and as we see the overall loss trends being stable, severity increasing but at a stable level, frequency being flat, we could get a lot more comfortable with reserves in the future.

So if you were to do your year end study, would that mean that if you were to take a favorable reserve development in the period, would it more likely be fourth quarter or first quarter?

I would say that if we were to do that, again as a result of the year-end study, it would be fourth quarter.

Okay. And two short questions. Can you give us a general idea of what overall insured counts have done in the second quarter versus the year ago period? And what's the new outlook for tax rate?

I'll address the insured count, David. It's essentially flat in the important areas such as physicians and facilities, hospitals. We continue to price upwards our Allied Health book and those are very small price policies under $1,000 and as we've taken those to realistic levels, we've seen a lot of that business go to more program-based competitors, but again, that's not a significant number. It would be far less than with 1% of overall premiums.

And on a tax rate, we would expect that if the second half of the year is similar to the first six months, we -- which we believe it will be, we don't have any reasons right to say that it wouldn't, we would expect that the tax rate would stay in that mid 20s range, you know the 24, 25% range. We have said in the past and we have set about to increase our tax exempt income as we become more profitable. So the more that we're able to do that, the more that the tax rate will increase. But we don't see that happening dramatically in terms of a major reduction in the tax rate.

Great. Thank you very much.

Our next question is coming from Mark Sarfin from Banc of America Securities. Please proceed with your question.

Thanks. Good morning, guys. Just a question, what were paid losses in the quarter? And then if you could just give me a little bit more color on, you know, if you have seen any changes in the acquisition pipeline, if there's been anything from your -- from your perspective.

Addressing that one first, while they're looking up the number, no, acquisition pipeline, we see no great activity out there right now. There's always some things around that you look at but nothing of -- that we can talk about or would talk about or nothing major going on.

Okay.

And the paid losses in the quarter were $79.2 million on a consolidated basis.

Great. Nothing else further from here. Thank you.

Thank you, Mark.

Our next question is coming from Adam Klauber of Cochran Coronia. Please proceed with your question.

Good morning.

Good morning.

Dr. Crowe, you mentioned that you feel comfortable -- the loss -- the combined ratio should move under a hundred, potentially in the future, given obviously weather and potential changes in units and loss patterns. To me that's pretty significant. When we look going out a couple of years, historically when you have hit peak profitability in your professional liability book, you've actually had loss ratios below 80%. Given the high level of rate increases you've had over the last couple of years, is it possible in several years to get to that level again?

Yes. If the marketplace let's us.

Okay. Okay.

And that is it a function of what, in my opinion, the reinsurers do. They control it.

Okay. Along those lines, have you seen new reinsurers come into the market?

I'm going to let these guys who deal with them answer that question. Have you?

There is quite a bit of activity at the reinsurance level in the European, Bermuda, and domestic market. Say its a combination of new reinsurers as well as some renewed appetite by the longer-term players. In the last couple of years they've been hesitant to quote and hesitant to really get involved with Professional Liability, but our sense of it on a sort of anecdotal basis in dealing with folks over the last year has been that the momentum has switched more to being interested in this line of business.

I think that may be a function of decreased interest in other lines of business. The water sort of flows to the low spots.

Right. Are the newer entrants lowering rates to get into the game?

Not that we see, not that we've seen so far. The reinsurance marketplace at least for the medical malpractice part of it seems to be very focused on the return on equity and we don't see, you know, price cutting. We don't see what I would consider to be any kind of return to what existed in the mid 90s. There is definitely more interest and I think there are more reinsurers to choose from now in terms of putting together a syndicated program, but we really don't see price competition yet.

Thank you. And one follow up. On MEEMIC, we've seen favorable development in a number of past quarters now. Unless there is a material change in the environment, is that something we could see going forward on a sporadic basis?

I think you can look at MEEMIC over the long-term, Adam, and they've been successful in doing what companies should do, which is be careful when you post the initial reserves and as time shows that those reservants aren't needed to take them down, and we don't see anything out there on the horizon that would generally change the pattern, absent weather and other developments aren't predictable.

Okay. Also, in MEEMIC, are you seeing favorable frequency trends in the auto book similar to what we've seen in the rest of the market?

Yes, yes. I can't speak with specificity but the general answer is yes.

Okay. Thank you very much.

Our next question is coming from John Gwynn of Morgan Keegan. Please proceed with your question.

Dr., Crowe, I know that hospitals are a small part of your overall book, but are these alternative market facilities having an impact on what's left of your hospital book?

John, restate that question.

The alternative market facilities, the RRGs and captives, I assume they're continuing to impact your hospital book.

That's correct.

And was that a significant item in terms of --

Not yet. We've seen it -- it was a significant item for instance in Indiana. You remember when the FICO went down, we picked up 40 hospitals or so, some big number of hospitals. We've seen these chip off over the last couple of years, going into some risk retention groups, or some captives and that type of thing. Those captives also and some occasions are beginning to ensure some of their doctors, especially the ones that are having trouble getting coverage, or getting coverage but maybe at a very high price from your excessive surplus lines carriers. These are the facilities, John, that are bothering me that the reinsurers are just backing them to the hilt with a minimum amount of capital. These are the ones that are really holding the situation -- keeping the situation of where people can get a decent return on equity or reach their objective. I find this ultimately is not going to be a problem because these will eventually go by the way side, and hopefully most of them are risk retention groups and we don't have the guaranty fund behind them, and these entities will have to pay their own losses. But again, the regulators and the reinsurance market are the ones that are allowing this to take place.

Right. You didn't talk about [Docsgul and Berez] as an impact.

It's a big impact in Florida.

Right.

It's not a big impact anywhere else to speak of that I know of , but in Florida, you know, they have some very peculiar bankruptcy laws and they can protect their assets. And I -- when I say peculiar, I mean it's only located in Florida.

And Texas.

And Texas, yeah. And there is some -- there's a significant number of physicians going bare in Florida. The importance of this, not only is the market share that's going -- or the market potential that's going away, but we also see the [inaudible] actually go after the doctors who are insured, because they've got -- they know pocket, a deep pocket behind them with a policy. Consequently, we're seeing some of the doctors that are going bare being dropped or not -- suits not filed against them to start with and the other doctors basically having to pick up the expense. So what this is doing is driving the rates even faster against the doctors that are -- carry -- that have coverage -- that are carrying coverage. Its begun to become more and more of a problem.

Right. Is your Florida book about the same as it was at year-end?

I'm a going to say close to it, yeah.

Down a little bit.

Down a little bit.

Yeah.

Okay. And Howard, you took duration out a bit in the first quarter. Is that continued in the second quarter?

Actually, in the first quarter we shortened it a bit. The second quarter it's gone back out a bit. It's about 3.8 years now.

Okay.

That's really just a -- you know, as different instruments mature and new securities are purchased, we're doing more in the municipal bond area now and of portfolio as we become more profitable and we've acquired some medium to longer-term municipals, probably in the 10-year range, and that's pushed the duration up a tenth of a point or so.

Right. Howard, something near and deer to your heart, I have to ask, anything unusual in the recoverable portfolio during the quarter?

No, nothing at all. In fact, we received very large payment from Girling in the quarter and we're completely up-to-date with them and, you know, that's -- that was one of the areas that we have mentioned in the past, one of the companies. But right now there is no -- no issues that we see. We're continuing to monitor it, but we're getting payments and on all of the other reinsurers, we're in good shape as well.

Right. In -- Howard, has -- did Hurly review these loss picks for this quarter?

On an interim basis, what we do is -- we -- in conjunction, or in consultation with [Tillingcast], we establish loss ratios to be used for the year and the, sort of, the pattern of the loss ratios that will be applied to earned premium, and then [Tillingcast] does the semiannual reserve review. So for the interim quarters, I guess you could say there is no certification as such, but everything is essential reviewed or done in consultation with [Tillingcast].

Okay. I'm only asking because his nickname is Darth you know.

Just for clarification, for those on the call, who may not be aware, Jim Hurly, that John Gwynn just mentioned, Jim Hurley is our independent actuary at [Tillingcast].

And Dr. Crowe, the excess in surplus influences you were talking about, is that having an impact on your plans for Red Mountain?

Yes. There's no doubt about it. That excess is something you shouldn't fall in love with. You should be willing to let it go. And yes, we've seen some of these startup companies, these captives and risk retention groups, that's the first market that they go after, with standard rates, and that's why they won't make it, John, but the reinsurers insure them, give them the capacity. But yes, the market is still pretty good for that company, but it's because it's such a small base. But the rate of increase that we saw last 18 months is, yes, it's beginning to slow.

Okay. Thanks a lot.

As a reminder, if you do have a question, you may press star, one on your telephone keypad at this time. Our next question is coming from Mike Paison of Leg Mason. Please proceed with your question.

Good morning, everybody. Just a quick question, actually most of my questions were answered. But I was just wonder, Dr. Crowe, if you could just, sort of funnel down a little bit. You had mentioned that jury awards and the judges is really going to be a driving force going forward in terms of the level of profitability. And just in light of all the tort reform we've seen over the past --

Wait, a minute. Can I interrupt you for just a minute. I didn't say that. It wouldn't be an indication for profitability. It's going to be an indication of what rates are are going to be.

Okay.

We're determined that we're going to keep the rates that will us our margins and our profitability. Then it gets to be can the doctors afford what's going to have to be paid. Now, go ahead.

No, that's answers my question. Thank you.

Thanks.

Thank you ladies and gentlemen, there are no further questions at this time. I would like it turn the floor back over to management for any closing comments.

Dan, we don't have any comments. We'll wait just a second to see if there's another question and if not, then we will sign off for quarter and invite everybody to join us for the results of quarter three.

As a final reminder, you if you do have a question, you may press star one on your telephone keypad at this time. Gentlemen, there are no questions in the cue at this time.

Okay. We have no further comments thanks.

Ladies and Gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation.