ProAssurance Corp (PRA) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the ProAssurance Corporation's Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode, and a brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference call, please press star-zero on your telephone keypad. And as a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Frank O'Neil, SVP Corporate Communications and IR. Thank you. Mr. O'Neil, you may begin.

Thank you Darcy, and good morning, everyone. Thanks for joining us. I'm sure many of you are on your third straight conference call. We thank you for saving the best for last. We'll try to keep our remarks brief, as well. Our headline this quarter is the Company's return to underwriting profitability for the quarter, and our reiteration of our expectation that ProAssurance will achieve an underwriting profit for the full year.

Before we begin the call, I need to remind you that we'll be discussing historical information and making forward-looking statements and projections on this call. These will be based on our estimates and anticipation of future events and results. We expect our statements 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 that we issued this morning, November 9th.

Further discussion of risk factors and uncertainties about our business are contained in our Forms 10K, 10Q and other publicly available documents, which we make available through our website or on request. We will not undertake or / 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 making it available for replay, as described in our news release and 8K. The content of this call and the web cast are time-sensitive. They're accurate only on November 9th 2004, the date of first broadcast.

This call is the property of ProAssurance, and you may not disseminate its contents without our express written and consent. This specifically prohibits the production of written transcripts. If you obtain 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. Vic Adamo, the President of ProAssurance, Mr. Howard Friedman, ProAssurance's CFO, and Mr. Jim Morello, our Treasurer and Chief Accounting Officer.

Howard, will you lead us off with a review of the numbers?

Thanks, Frank. Our return to underwriting profitability on a consolidated basis in the quarter is big news, and we think it continues to validate our belief that our disciplined approach produces solid results that will stand out over time.

In the third quarter, we had a consolidated combined ratio of 99.6 percent -- down from 104.1 percent in the year-ago quarter. For the nine months, our consolidated combined ratio is at 100.3 -- an improvement of 6 points over the year-to-date figure in 2003.

As you know, our primary focus is our combined ratio, because as we move it below 100, we get closer to our ROE goal -- a sustainable average of 12-14 percent. We are encouraged by the strides we've made in this regard, and we continue to believe our consolidated combined ratio will be below 100 for the year, and better next year, barring anything unforeseen.

Improvement in the Professional Liability combined ratio continues to be the largest driver of our improving consolidated combined. From a high in the upper 120s in 2002, it's now down to 105.1 for the quarter, and 106.1 for the 9 months. Ultimately, our goal and belief is that it will be below 100 percent, but we cannot commit to a specific timetable for that. Those of you who have followed our progress know that we will reflect improvement as the loss experience and rate levels justify it.

In Personal Lines, we saw the benefit of another good weather quarter, with the combined ratio dropping back to 84.3 for both the quarter and the 9 months. I wanted to emphasize that as our combined ratio continues to improve, we remain dedicated to the establishment of adequate reserves. We are booking current losses as we always have, with the conservatism that our long tail line of business demands. In other words, we have not altered our loss assumptions to allow us to recognize higher current income. Our business is too unpredictable, and companies that lose sight of the need for adequate reserves may be doomed to repeat the past failures of our industry.

On that subject, I want to reiterate our confidence in our reserve level. There was no prior-year reserve development in Professional Liability reserves in the quarter, while there was $3.4 million in favorable net reserve development and Personal Lines.

A higher bottom line tracks with underwriting profitability, and that is the key goal for us. Throughout 2004, we've seen our bottom line significantly increase. The figures are in our news release, but the result is that net income more than doubled in the quarter, as compared to last year -- and has more than doubled, comparing 2004's 9-month results for last year.

We focus on the bottom line and are prepared to take what the market will give us on the top line. At this point in the market, we have been able to achieve both top and bottom line growth.

Gross premiums for both segments were up for the quarter and year-to-date. In Professional Lines, our weighted average renewal rate increase is now at 20 percent for the year-to-date, and that's a bit ahead of the mid-to-upper teens that we had expected.

On a full year, we may still see a result that is lower than this 20 percent, however a good bit of the favorable result is recognition by our Insureds that our coverage and the financial strength of our Company is worth paying for.

Our policyholder count is up slightly so far this year, and new business remains at about the same level as last year. The retention rate for the year-to-date is about 85 percent. But we saw it edge up to about 88 percent in the quarter.

While we measure our success by looking at the bottom line in combined ratio, we know that many investors focus on cash flow from operations. We're continuing to see that figure increase -- now, at $285 million for the year -- which is within $3 million of the cash flow for all of 2003. Book value rebounded in the quarter, due to the contribution of our income for the quarter. And as interest rates fell a bit, the value of our portfolio increased.

Finally, most of you know that our reinsurance treaties renew on October 1st of each year. We will be renewing those contracts for 2005 with no meaningful changes in terms, conditions, or risk-retention on our part. We believe this shows the confidence that reinsurers have in our risk selection and pricing discipline. Right now, we are working with our reinsurance brokers to determine which reinsurers will participate in the various levels of the treaties, and we are applying rigorous standards to ensure the financial stability of all the companies on our treaty.

As far as existing reinsurance recoverables, all of our reinsurers are paying as expected, and we are continuing to monitor financial strength for those that were on our slip and that are now in runoff. Frank?

Thank you, Howard. Vic Adamo is now going to add some details to flesh out Howard's report on the financials. Vic?

Thank you, Frank. Let me update a few Professional Liability operational items that expand on what Howard -- that expand on Howard's comments. First, we have now completed our occurrence-to-claims-made conversion process. The final occurrence policies in Michigan expired at the end of September.

Completing the conversion is important for several reasons. It means now that our Professional Liability book is entirely claims-made. We will be able to more accurately price our risks, and our customers will be better able to adjust their coverage needs to the current liability climate.

We retained a higher percentage of occurrence policyholders than we had projected. That goes for the last quarter in Michigan, and for the entire conversion process. We estimate that we lost less than $1 million in renewal premium in the quarter, due to the conversion.

Overall, Professional Liability premiums are up because of the natural course of year-over-year increases -- and to some extent because of the byproducts of the claims-made conversion. Remember that claims-made policies accept at a lower rate than a similar occurrence policy. But claims-made coverage steps up over a period of years, until it reaches a fully mature rate that is almost equal to the occurrence-coverage rate. This step increase is in addition to any other rate increases that apply to the risk.

I would also like to highlight a byproduct of the claims-made conversion that is important to both our operations and to our shareholders. The regulatory and rating agency formulas that evaluate our business penalize the occurrence form by requiring a higher level of capacity to support occurrence business, when compared to the same risks on a claims-made form. This is due to the historical volatility of the occurrence loss reserves, and the difficulty that the actuaries have in accurately projecting their ultimate value.

When we look back at our entire occurrence conversion effort, which has extended over the last few years, we have in fact produced approximately $50 million of additional capacity to write business and maintain our rating levels, by simply changing from occurrence to claims-made. I want to emphasize this $50 million of capacity was produced without adding to our dead load or selling new shares or diluting our shareholders. We are very pleased with this result.

On the subject of rates, I want to revisit a topic from last quarter's call to be sure that everyone understands the effect of moderating rate increases. Our rate increases have moderated so far, this year -- but that's a byproduct -- a product of our market leadership since late 2000. Because we were the first to raise rates starting in January of 2000 in the State of Florida, and we've continuously tightened our underwriting, we are on the road to profitability sooner and with greater persistence than anyone else in our segment of the market.

With that said, we now believe that we've achieved rate adequacy. Now we are able to reflect current loss trends and maintain our margins with lower rate increases. So let me reiterate. We are maintaining the margins we need to achieve our ROE goals, as Howard explained. But we -- and -- we do not equate our filing lower rate increases with the declining margins. We have built the margins into our present rates.

And with that, I'd like to turn it over to Dr. Crowe, for his thoughts on the strategic direction and market, in general.

Thank you, Vic. I'm asked a great deal of questions -- a great number of questions -- about the state of the medical liability market, and about tort reform, in particular. So here's how I see the niche, right now.

The market is still hard. There was a lot more pain in medical liability than in some other lines -- and to some extent, that hang over from failed and troubled companies still exist. We don't see any significant softening in the market for at least another year -- maybe 18 months. There has been some effect from startup companies, but so far, we've not seen them raise the kind of capital nor create the kind of geographic reach that will make them a factor in the short term.

On balance, I'd say that disciplined pricing is the rule rather than the exception. Companies competing on price have a lot of negative impressions to carry these days, given the market's knowledge of the fate of companies that tried that in past years.

There's been quite a bit of interest in tort reform and related ballot measures since last week. We're only marginally closer to federal tort reform than we were before the election. That's because the roadblock is in the Senate. I know that the republicans gained seats -- but two republicans who opposed tort reform are still there. One was re-elected from Alabama, and another from Pennsylvania.

Now it may be that a stronger Senate leadership and the support from second-term president may be enough to hammer federal tort reform through. But it's not the slam-dunk that many people are looking for. That means we're still focused on the States.

Actual tort reform such as non-economic damage caps were not on the ballot in any of the states where we do business. So we focus on the Supreme Courts. Notably, there were Supreme Court selections in West Virginia, Ohio and Illinois that we watched closely. We are more hopeful in Ohio, now that a more balanced judiciary is in place after the elections. And the elections in West Virginia and Illinois placed more moderate voices on those Supreme Courts.

Which brings us to Florida. While voters there did not vote on actual tort reform, they did pass three constitutional amendments that bear on our business. All three have been challenged in court, already. So it's not clear if any of them will ever see the light of day, or what their final form will look like. But for those of you who may not have followed these issues closely, the first [backbite] positions there place limits on plaintiffs' attorneys' fees, in which they may collect on medical liability cases.

The second and third amendments were backed by the trial lawyers. One would take away the license of a physician who has had three medical malpractice judgments -- and listen to that carefully. Judgments. Or an adverse finding by a license or review organization. That would have a strike, and again would count toward the three.

We believe it was designed by the plaintiffs' bond to cause physicians to demand settlements of the cases, for fear of obtaining an adverse judgment from a trial or a jury. If the physicians in Florida follow this course, we are convinced that they will breed more suits, drive up costs or quotes and drive out doctors.

The third amendment gives the public a greater right to see previously confidential State complaints against doctors and institutions. Incident reports filed after medical errors, and documents from errors reviewed by -- done by the hospitals. This could chill the peer-review activities that are designed to improve the quality of care, and thus hurt consumers more than it would help. As I said, they are all three going to be tied up in court, and we'll monitor the outcome.

Finally, a word about MEEMIC. And that word would be "terrific." The weather was good, and that's always good. And we have shown in quarters past our underwriting means, our book of business will perform well when there's no adverse weather.

Looking ahead, we're on track to open up in Wisconsin. We should see some business from that State in the next few months -- although it won't produce meaningful premium volume for some time to come.

A final note. Today I'd like to welcome Edward -- Ned, it is -- Rand -- to our Senior Executive Team. Ned is joining us a SVP for Finance. He'll be working with Howard, Jim Morello and [Chris Bit] to deepen our -- strengthen the financial and management area with ever-growing demands placed on us and all public companies by the Sarbanes-Oxley Act and new related audit requirements.

Ned comes to us from Partner Reeve, where we served in a similar position. In addition to his industry experience, he's also a CPA. He worked for one of the Big 4 firms before moving to the industry side. We will believe that he will be a valuable addition to the team, and we welcome Ned.

Frank?

Thank you, Dr. Crowe, Nick and Howard. Darcy, that's the end of our prepared remarks. If you'll queue up the questions and let everybody know the procedures, we'll stand ready to answer them.

Certainly. P: John Gwynn, Morgan Keegan.

Howard, on your contingent converts -- when will you start including them into your reports?

We're planning to do that in the fourth quarter of this year.

Roughly, can you estimate the impact of what that might have?

Yes. Our estimate right now is that it would be a $0.09 reduction in EPS.

For the year?

Yes. That's correct.

And Howard, what was -- I guess your Q's going to be out tonight -- is that right?

Yes.

Can you give me what your GAAP gross reinsurance balances were at the end of the quarter?

Tell you what --

If you want to look that up.

Yes. We can look that up. Yes.

John, we'll come back to you on that, sometime later in the call. We'll get some folks looking that up, and then we'll move on, if that's okay with you.

That's fine. Vic -- on MEEMIC's reported results -- is there any distortion from the M -- MCCA program up there?

I don't know if "distortion." MCCA has been higher over the past year, and so that's caused a -- somewhat of a premium increase. But it doesn't reflect our net. So it -- it only fell on the gross side or the direct side. I think the best place to probably look is the MEEMIC statutory, John.

Believe it or not, that's all I have.

John, just to get back to you. It's $462 million.

Mike Dion, Sandler O'Neill.

My question is on just the overall operating environment. Wouldn't expect to have seen rate increases tick up in the third quarter. So if you could just kind of expound on what -- what you saw in the quarter. Vis-à-vis the competition. And is this something that you expect, given rate adequacy, you think will be sustainable, going forward? Or is this more a kind of a one-time anomaly in what you're seeing in the market?

Mike, this is Howard. It actually was a little higher than we were expecting, as we mentioned. We were looking at 15-20 -- we thought -- for the year. So having had 20 for quarter was a -- a bit -- a few points above where we thought it would be.

I think to some extent, it's the mix of business by State, renewal, cycles and -- and so forth. Because of course different States, you have a concentration of renewals at different times of the year. And in some States, we've had higher rate increases. Some have -- we've had lower and -- and also, again, we -- in some areas, we have more or less competition.

I think we're still saying for the year -- we're still staying with our 15-20 percent estimate. We were also encouraged by the higher retention rates in the -- in the third quarter, we mentioned. And that was up to about 88 percent.

And with your rate filings so far for 2005, and -- and maybe you can just talk a little bit about what you expect for '05. Both the rates that have already been filed, and what you expect to file.

The rate increases that we have filed so far have generally been a little bit lower. Again, because we've gotten to the rate-adequacy level in -- in all of our States, at least in our opinion. We're filing rates now that are typically more in the 7, 8, 9 percent range. We -- we made a filing in Illinois in that range. We made one in Florida for in that range. Florida's actually more in the 6.5 range, actually. Ohio, earlier this year, was about 8.5 percent.

So not to say that every State will be that way, because we have to do the evaluation as each of them come up and new re-evaluate all the prior loss experience. It's not just a matter of reflecting the current trend, but we do expect it to be on-average, lower in 2005. And again that goes back to the fact that we've reached -- in our opinion -- rate-adequacy. And we'd be more in a maintenance mode to take into account the increasing annual loss-cost trend.

I think it's important we say on one issue -- We're not seeing rate reductions, yet. We're not seeing the market soft enough that rates are actually going down. The rate of increase, of course, is slowing -- as it should -- as we gain adequacy. And I think more States' companies are gaining adequacy.

But I think we're several months -- maybe a year or two or three away from seeing rates decrease.

And -- and Howard, if I could just ask -- is the loss concentration still roughly 5-7, 8 percent? Somewhere in that range?

Yes. I guess that probably will head off another question later on, to talk about the loss-cost trend. Yes. It will, we think averaging about 6. Maybe as low as -- as 4.5, in some places. As high as 8 or 8.5 in others. But overall, for our group of States, probably averaging 6. And that is again a severity trend. We're not seeing any real change in frequency that we could identify.

David Lewis, Suntrust Robinson Humphrey.

There've been a number of companies, obviously reported over the past 24 hours, that have shown new claim trends improving fairly substantially in the third quarter. Can you give us any direction of what you've seen on your overall book of business? And two, Howard, I guess traditionally the Company would do kind of their full-blown reserve analysis in the fourth quarter. Have you started that process? And are you feeling a little bit better about potential redundant reserve releases?

Let me address the issue on claims, first. It is a fact that we have seen a slight decrease or some decrease in claims in the last few months in -- in a couple States. One of those specifically is Florida. But you should keep in mind that this is coming off an era in which they had accelerated claims because of potential tort reform. So we always see a decrease in claims in a State like that. But we expect those to pick up again back into the normal trend.

But in general, across the country, from all of our States -- and I was just speaking to Derrill Thomas this morning about that very issue. We don't think we see a significant decrease in trends of claims coming in, countrywide.

David, let me just follow up on that. We've probably heard some of the same calls and numbers that you heard this morning. And you know one of the things that we try to avoid in -- in talking about counts and -- and averages is -- is the distortion effect that those types of conversations lead to.

When you're talking about a wide variety or number of States -- you're talking about different reinsurance retentions over the years. And you're talking about companies that have expanded and then contracted in various markets and -- and are now actually smaller than they were several years ago -- you would expect that the number of claims recorded would go down.

That's why we don't really think that reporting number of -- of reported cases or even number of open cases is particularly meaningful. Because you would need so much additional information to analyze that that we couldn't provide it on the conference call or the press release.

On count of your review on redundant reserves?

We -- we believe our reserves are adequate and conservative where they are. We evaluate them every time that we publish financial statements. And [Chillinghest] is doing the analysis as of September 30th, as they always do. And -- and we'll have the results of that when we make our year-end filings.

But right now, no -- no projections or predictions.

Yes. But historically, you do make any adjustments more likely in the fourth quarter than other periods. Correct?

Not -- not necessarily. We've -- we've had some adjustments in interim quarters, as you could see on the Personal Lines side. MEEMIC has continued to make adjustments going through the year.

We do full -- full -- and [Half Tilling] has to do full reserve evaluations twice a year. So it could come either -- at -- at any quarter.

I think the typical year-end reserve adjustment for a lot of companies, and maybe even in some cases ours, is a result of putting together the full annual statement, where you actually have to categorize things by each individual year. So I don't -- I wouldn't say that one quarter is better for us in terms of evaluating reserves.

And I think I heard you earlier, Howard, indicating that you weren't willing to make a projection on account of the Professional Liability underwriting profit. But if you're at reserve adequacy -- or at adequate reserve levels -- you're getting adequate pricing -- would you think that we'd get pretty close to that in 2005 if there were not a change in kind of the ultimate claim trends, from expectations?

Our -- our reserving philosophy is and has been that we are -- we established the reserves for the current accident year at something around 10 points above our pricing model. Our pricing model, right now, is designed to produce an ultimate combined ratio in the 93-94 percent range. And that's given current investment yields. So ultimately, that's where we think we will end up.

Until we start to recognize favorable development from prior years though, the current accident year result will equal the calendar-year result, as it is right now. So I think the answer to the question is when we start to generate prior-year favorable reserve development, then the calendar-year result will drop below 100. But until then, we're still booking the current year pretty conservatively, as you can see.

That's helpful. Just a couple -- a number of questions. MEEMIC reserve releases and the 3 million or so number I think Vic indicated. Or someone indicated. If I recall correctly, that was running a little higher last quarter. Can you also give us what the 9-months was?

David, I can get to that pretty quickly. So far, for the year, we've had net favorable reserve of $8.9 million.

$8.9 million, including the third quarter?

Including third quarter. Correct. If you'll give me a second, we can go back and tell you what second quarter was.

While you're looking that up -- I just wanted to make sure I was clear in talking about the reinsurance renewals.

Tell you what, David. Before you go into that question -- we had $3 million of favorable net reserve development in Personal Lines in the second quarter.

And $2.5 million in the first quarter.

I'm sorry. I didn't mean to interrupt you. But go back to your next question.

Yes. The reinsurance. I think you said level term -- terms on the renewal -- October. Does that imply also that rates are relatively flat, year-over-year?

Reinsurance rates, you mean?

Yes.

Yes.

Final question. Sarbanes-Oxley costs in the third quarter year-to-date, and what the outlook might be?

I want to give you our -- our estimate. We're estimating that overall, to comply with Sarbanes -- including the earlier phases in 404, we're going to spend hard costs approaching $2 million plus countless hours -- thousands of hours of internal time. I don't actually have it on a quarter breakdown.

That's fine. But would that not maybe be cut in half as we kind of go on a go-forward basis?

We look to be substantially down. I mean a lot of that cost was legal fees and such, in the first round of implementation and the 404 -- getting the documentation in place. And once in place, we'll be more in a go-forward and an amendment mode, as changes come up. But yes, we look for it to dramatically reduce in 2005.

[Mark Sarason], Banc of America Securities.

My question is -- is a little bit more on the competitive environment and some of the tort reform comments Dr. Crowe made. You all seem to be holding fairly conservative in your assumptions that these -- that some of these initiatives passed in the States, and the majority in the Senate -- will bring to fruit to bear for the industry.

Do you feel that rate competition, possibly from the competitors, will be in the same areas that you are? The 7-9 percent in 2005? Or do you think that the competitors will be somewhere in the 15-20 percent range still in 2005, as they try to catch up for -- for rate adequacy? And maybe as -- as color around that -- do you feel that the competition is taking the same type of perspective into the potential for reform in their assumptions?

It's hard for us to know what our competitors will do. One of the -- one of the keys in that -- first off, I -- I guess we'll say we don't know what they will do. We would hope they would price their product responsibly. What we can't control is what they -- where they set their prices. But then how much they discount. Anybody can talk about high rates. The real key is, "Are they sticking to those rates?" And we can't control, really, whether they will file or whether they will all of a sudden begin to chase market share.

As far as whether they are anticipating any result from tort reform in their -- in their outcome, in their business predictions -- I'll head that off here by saying we don't give advance credit for any legislative or government initiative until it turns up in the loss data.

As far as what our competitors do, I think we've heard on conference calls this morning and in previous conference calls, that everybody says, "No, they won't. Except as required by law." But again, we don't know when that itchy trigger finger will maybe pull the trigger on beginning to discount the chase market share. We can just tell you that we won't do that.

So it's tough to say exactly when the competition may be adding additional discounts, in terms of rates. I mean, how easy will that be for you all to see?

You should see it pretty quickly in the marketplace. Let me make a comment. I've been in this business for 20-some odd years -- 25 or more years. And the -- always -- the cheapest competitor -- the least-expensive competitor usually is the one in the most trouble. And the closer they get to going into receivership or going into supervision of the department, the cheaper their rates get. For some reason, people think that if you just load up the truck with watermelon and sell them cheap, you're going to make more money. And that's not the way the insurance industry works.

As these smaller companies who have problems get into trouble, they become extremely unpredictable. But I think that's true in industry, worldwide.

Do you think that the insurance buyers are starting to gain a greater appreciation for that?

No.

They're not, yet?

No. And the reason for that is -- I think the sophisticated buyers do. I think the large hospitals -- large groups -- they are. But the individual doctor -- as far as I know -- it's almost unheard of for them to accept the consequences of buying cheap coverage.

Usually when a coverage company goes down and it -- it for instance -- the guaranty fund takes over -- then the judges almost always protect those policyholders by getting the plaintiffs to accept whatever the guaranty fund will pay.

Now we've got a new thing beginning to creep in to it, now. A new -- a new scenario. And that is the ones in which they're insured by risk-retention groups. And those go down and they're not covered by the guaranty fund. For instance, I believe there was one last year up in Virginia or Tennessee, et cetera -- and a lot of those are not covered by the guaranty funds. And a lot of the doctors now are having to pay for the cost even of defending those cases out of their pockets. That's going to create a totally different scenario, and I'm not sure how the courts are going to react to that.

Adam Klauber, Cochran Coronia.

Was there anything unusual in the investment in [inaudible]?

Yes. A lot of money coming in.

That's good unusual.

The only thing, Adam, is -- is we've been in the process of shifting a little bit more towards tax-free income, and a little bit longer maturity on some of the tax-free bonds we've been buying. So that's had a -- a favorable effect on our -- on our yield, on a tax-equivalent basis -- and generated a little bit more investment income for us, overall. I think that and the cash flow really explain it.

What was the yield, this quarter, compared to last quarter?

Tax equivalent basis -- have that here. Yes. 4.5 percent on the Professional Liability segment, and 5 percent on the Personal Lines segment. And it compared to last quarter, I think -- we're both looking for that -- but I think both just down slightly, on average. Let me -- let me get that. That's on a book-yield basis.

[Matt Pleasant], Advest.

We'll come back to that answer with Adam. Go ahead, Matt.

Yes. I have two questions. Were there any efforts to expand your underwriting of business in Michigan through MEEMIC? And the last one is what was the total income tax expense for the third quarter?

First question. Let me make sure, because we had a hard time hearing you. You were asking about expanding business within Michigan for MEEMIC?

Yes.

And total income tax expense?

Yes. Correct.

I'll take the second one, first. Total tax expense for the quarter on a consolidated basis was $5.8 million.

On MEEMIC, we've -- we've got consistent growth in MEEMIC in Michigan, within the Educators' segment. High single-digit, low double-digit growth, year-over-year, on a very, very consistent basis.

We -- we've made the decision -- ProAssurance and MEEMIC management -- that we definitely want to remain focused on the educational community. There's still plenty of room to expand in Michigan, but we do have a significant market share -- say in the 30 percent range. And that's why we're starting the process of looking at other States. Because we do see the future of MEEMIC as being more than just Michigan.

But I think we could look to get larger market share if we went out of the educator niche. But we've decided in the long-run for the integrity of MEEMIC -- for the profitability of the entire organization -- we want to stay in that educator niche.

Is there any discussion as to what States expansion might occur in?

Well we've identified Wisconsin as the first State, and we're in the process of licensing folks and doing the work that needs to be done to put policies out there. If you haven't followed us too closely in the past, the key to this is MEEMIC has a unique distribution system where we train teachers and other educators to sell on a peer-relationship basis. They start out often doing this part-time, and then maybe as they gain more insurance experience in larger book, become full-time agents. We very much want to carry that model, as we go forward. We don't want to just go into a new State and become the fourth or fifth auto-carrier in somebody's independent-agency book.

So this will in the long-run, we think, will produce the best results for MEEMIC. It's also the slowest growth. So we're trading off some growth for long-term profitability.

John Gwynn, Morgan Keegan.

Howard, I forgot to ask. Forgive me -- I don't remember. Do you disclose paids? Med-mal paids -- on a quarterly basis?

We have in the -- in the q-and-a. Yes. So... On the -- for the quarter -- medical -- the Professional Liability paid loss and LIE on a net basis was $54.4 million. And just to I guess finish the question, Personal Lines was $27.2 million. So consolidated was $81.7 million.

Howard, in the third quarter, your -- your top line in med, now picked up again around 10 percent gross written premium. And your loss ratio sequentially was up only -- was up slightly -- but it was up. Is there a connection between the two?

No, not really. That -- that was really more due to a just a slight change in the mix of business on an earned basis. We -- we establish loss ratios at different levels for different States, depending on where we are in our rate increase cycle, and when the premium that was earned in the quarter was -- was originally written. So it's -- it's really just a -- a mix of business difference, there.

Dr. Crowe -- In my favorite State -- Florida -- after they passed that so-called tort reform, they implemented the presume factor in rate filings. If -- if that piece of legislation is successfully challenged at the State Supreme Court level, are you all going to have to eat the -- you and everyone else in Florida -- are you going to have to eat the preferred factor?

Yes. Probably. In other words, can we go back and bill for it and recover it?

You can -- I'll send you a check, Frank. Don't worry about it.

Check's in the mail. Yes. You got it.

That won't happen.

No, we'll have to eat it.

[Rob Meaton], Schneider Capital.

I guess you just gave the paid and loss numbers. But was there anything else unusual in the quarter on the -- on the cash flow number? It seemed like you had better growth there than you'd had in the first half of the year.

Not -- nothing remarkable. I mean just -- just a slightly higher average rate increase, and relatively stable paid losses. And a little higher investment income. I mean nothing -- nothing systemic.

It's been increasing over the last couple of years, at a rate about like you're seeing, now. And hopefully, it'll continue into the next quarter or two.

Then my other question, and I don't know if you would have this number at hand. But with all the claims-made conversion that you've done, now -- now being complete -- I'm wondering if -- if there's a way to estimate the premium impact if -- if you were to look at all your current claims-made business, and adjust it to a mature basis -- just to give us an idea of how much upside there is over the next few years, as -- as those rates step up to a mature level?

I guess if you go back to -- and this is -- this is very -- going to be very approximate. If you go back to 2002, when we started the -- the first of the claims-made conversation process in Ohio and New Jersey and Pennsylvania. We had at that point in time something on the order of $50 million of occurrence premium on the books. Now obviously, that converted over a period of time, and is at different steps, right now. And we've also had rate increases in the interim. I would say that -- and -- and finally, the final variable there is fact that Indiana was the biggest piece of it. And Indiana really just finished converting in June of 2004. Which represented about $30-35 million at the time that it began to convert.

So I would think that at this point, we probably have I would say $20-30 million of upside potential, based on the combination of where things are in the various steps, plus the rate changes that have taken place in the overall rate levels, during that period of town.

But Howard, you've got to consider that we -- some of the business didn't repeat.

That's correct. Some of it didn't [ramp].

So it's going to be a problem at the low end of that.

And let me just qualify that by again -- that's an extremely forward-looking statement, because of the approximation of what rates will do, what retentions will be... But again, I want to just echo the approximation of that number.

Adam Klauber, Cochran Coronia.

What's the potential after you see the reserve number, to update your combined ratio goal, for the company in the fourth quarter?

In other words, are we going to provide combined ratio guidance for next year?

Right. Similar to what you have -- obviously -- this year.

I think not.

Is the reason you wouldn't [come forward]?

For guidance for next year?

Yes. Just being that you obviously did it this year.

I understand. You're talking about combined ratio. We have just over the last couple of years started cutting back on the amount of leading or suggesting or where we think things are going to go. We're now getting down to a point we've got -- we think we're beginning to get adequate pricing in most of our States. Growth is going to be coming in some new States -- and States that we have gone into in a startup basis. Rates are going to be changing a good bit in some of those States. It's going to be very difficult for us to predict, but we think that we will continue to see the down trend in the combined ratio. I don't think we want to predict exactly where we think we'd be, given a target like 96 or 95 percent or something like that.

Gentlemen, we appear to have no further questions at this time. Would you like to make any closing statements?

Well thank you, Darcy. And thanks everyone for participating with us. We will speak with you when we report fourth quarter results. Thank you.