ProAssurance Corp (PRA) 2004 Q4 法說會逐字稿

Good morning, Ladies and Gentlemen, and welcome to the ProAssurance Corporation fourth quarter 2004 earnings conference call. At this time all participants are in a listen-only mode and a question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press star, zero, on your telephone keypad. As a reminder, this conference is being recorded.

It is now my please to introduce your host, Mr. Frank O’Neil. Sir, you may begin.

Thank you, Megan. Good morning everyone. We’re pleased with our results for the year and the quarter. We’re eager to share them with you. Prior to our statements, though, we’ve got to take care of the legal end of things.

We expect to discuss historical information and make forward-looking statements and projections on this conference call. These will be based on our estimates and anticipation of future results and events. 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 we issued this morning, February 23, 2005. Further discussion of risk factors and uncertainties about our business are contained in our Forms 10-K, 10-Q, and other publicly available documents, which we make available through our website or upon request. 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 contents of this call and the webcast are time sensitive. They are accurate only on February 23, 2005, the date of first broadcast. This call is the property of ProAssurance and you may not disseminate its contents without our express written consent. This specifically prohibits the production of written transcriptions. If you have obtained a transcript of this call you should know that ProAssurance has not reviewed it for accuracy.

Participating on today’s conference call are Dr. Derrill Crowe, our Chairman; Mr. Vic Adamo, the President of ProAssurance; Mr. Howard Friedman, our Chief Financial Officer; and Jim Morello, our Treasurer and Chief Accounting Officer.

As is our custom, Howard will lead us off with a review of the numbers. Howard?

Thanks, Frank. As you mentioned, we hit the targets we had wished and we are pleased with our results for both the year and the fourth quarter. We achieved our major goal for the year, bringing our consolidated combined ratio in below 100 for the full year. This is our second straight quarter of underwriting profitability and we believe it sets the tone for our Company as we move into 2005. It brings us closer to the ultimate goal of a sustainable average return on equity of 12–14 percent.

Our consolidated combined ratio was 96.2 percent in the quarter and 99.2 for the full year. Both represent a drop of 6 points from the same period in 2003. As we’ve said before, we think the consolidated combined will continue to improve in 2005, but not to the same degree as in 2004.

Obviously, Professional Liability is the segment where we have the most work to do and it’s where we focused our greatest energy for the past 3 years. For the fourth quarter of 2004 our combined ratio in Professional Liability was 101.6 percent, 7 points better than the same period last year. It’s that kind of improvement that helped us lower the Professional Liability combined ratio to 104.8 for the year, a drop of almost 7 points.

The overall improvement in our calendar year Medical Liability combined ratio comes after several years of price increases in response to accelerating loss (indiscernible). Our dedication to rate adequacy goes hand in hand with our dedication to strict underwriting and gives us confidence that good results will continue working their way to the bottom line.

I also want to note that the improvement in our consolidated combined ratio includes booking current losses in the conservative manner that our long-tailed line of business demands. To reinforce, we will not alter our reserving practices in order to recognize higher current income. Given the past pattern of failures in our industry, most related to inadequate reserves, we believe conservatism is the best choice. The bottom line is that we will protect our balance sheet at all costs.

The combined ratio in Personal Lines is indicative of the results of sound underwriting, coupled with another quarter and year in which we enjoyed benign weather. Premiums are up in both segments, and although our attention is on the bottom line, we are pleased with the growth in our top line. We earned that growth through our position as a market leader with an effective marketing strategy and a solid balance sheet to back up our promises to insureds.

But the bottom line is really our focus and we are pleased to be able to point to the fact that net income grew almost 190 percent in 2004, and show a similar improvement in each quarter of the year. Net income per diluted share was $2.37 for the year and $0.69 for the quarter. As we highlighted in a news release on January 27th, we implemented EITF 04-8, the new requirement that we reflect the effects of Contingently Convertible Debt on diluted EPS for both 2004 and 2003 numbers. So, the diluted EPS numbers in the release do compare apples to apples.

Implementing this new requirement reduced diluted earnings by 11 cents per share for the full year 2004 and by 1 cents per share in the fourth quarter of ’04. The implementation had a 1-cent-per-share effect when applied to the full year 2003 and fourth quarter of ’03.

With premiums growing at an adequate level and the bottom level accelerating, we see cash flow from operations grow to record levels as well. This year’s cash flow was $374 million, a record for us. Going back to the inception of Medical Assurance, the predecessor of ProAssurance, we’ve always had positive cash flow from operations and we believe that growth in that figure is another indicator of the success we expect in 2005.

Our book per diluted share now stands at $20.92, which is the highest in our history. The steady growth in book value per share is also a long-term success story for us. Again going back to the inception of ProAssurance’s predecessor company in 1991, our book value has grown at a compound annual growth rate of 14.3 percent.

Now I want to put on my actuarial hat for a moment to talk about loss trends, reinsurance, and reserves.

We’ve seen loss trends stabilize somewhat this year and our rate filings will likely reflect that flattening trend during the year. Rest assured we will monitor losses and submit rate increases as needed. Two key points here. I’ll again remind you that you should not equate lower rate increases with diminishing margins. We are committed to maintaining the rates required to bring us our targeted ROE numbers.

And the second point is that individual jurisdictions vary and we believe our focus on local operations play a crucial role here. In 2004, our rate increases by state range from less than 1 percent to almost 60 percent. For the year, our weighted average renewal rate increases was 18.6 percent, which is a few percentage points higher than our expectations this time last year. In 2005, we currently expect an overall average between 9 percent and 14 percent, but there are a great many variables, such as regulators, competitors and reinsurers that will have something to say about that ultimate number.

Next, I’d like to talk about the commutation of our various reinsurance treaties with Gerhling.

We received a payment of $12.250 million from Gerhling, increased net losses by $5.4 million and reduced reinsurance expense by $1.6 million, which resulted in a pre-tax loss from the commutation of $3.8 million. In any event, while they were paying their claim to us, Gerhling offered terms that we felt good about in light of our review of projected losses attributable to their treaty, and we accepted. It made good economic sense, removing the risk of collectibility, and giving us the chance to earn a return on the money that came back to us in the commutation. And is also the chance that losses may develop more favorably than expected, given the conservatism in our reserving.

Finally, we can now answer one of the most common questions we’ve been asked for some time now. The answer is, the fourth quarter of 2004. The question is, “When will you see favorable development in Medical Professional Liability reserves?” Our yearend analysis confirmed our confidence in our reserves and led us to release $8.7 million of prior-year MedMal reserves in the fourth quarter. Note that this amount includes the growing commutation and would have been $5.4 million greater had we not commuted those treaties.

Personal Lines reserves increased by $1.4 million in the fourth quarter, but we still had a total of $7.9 million in favorable Personal Lines development for the year. Therefore, on a consolidated basis, favorable reserve development for the year was $16.6 million.

Frank?

Thanks Howard. Before I turn it over to Vic I do want to make one point. The book value per share is $20.92. That’s not book value per diluted share. That’s my mistake in the conference call remarks.

Frank, thank you. I too want to say that 2004 was the year in which we achieved the goals that we set for ourselves and we’re now able to move into 2005 with a sense of confidence. Our initial comments will be on Professional Liability.

For 2004, as Howard noted, our weighted average renewal rate was 18.6 percent, which was ahead of our expectations at this time last year. We wrote slightly more policies in 2004 than in 2003 and our retention for the year was an overall 83 percent, and that was edging upwards towards yearend. Our rates per unit of risk continued to increase and the limits purchased by our policyholders in aggregate are lower.

This highlights the fact that we continue to add new insureds in desirable markets at prices we believe meet our return-on-equity goals of 12–14 percent. We are especially encouraged by this growth because we believe it reflects and understand the value in our commitment to service, aggressive defense of non-meritorious claims, and our dedication to balance sheet integrity.

Looking ahead, we expect continued growth in the space where the competitive market, legal climate, and regulatory environment will allow us to achieve our profitability goal while providing the type of protection our customers demand.

Our current to claims made conversion is now old news, but we are continuing to see the (indiscernible) increases that result from this process show in our top line. This is the year that we will see premium increases undiluted by the drop that occurred when the insurance policyholders converted to claims made.

One of the key stones of our relationship with our insureds is our willingness to defend those claims that don’t have merit. Last year we tried 528 cases to a jury verdict. Let me repeat that. That’s 528 cases. That’s an average of 2 verdicts for each working day and I believe it’s an order of magnitude higher than any of our -- than any other company in our niche. We’d love to see our other public competitors disclose their trial numbers when they do their calls alter this week.

Overall, including trials and settlements, we resolved claims with no indemnity payment on behalf of our insureds 83 percent of the time.

Moving to Personal Lines, the numbers speak for themselves. I want to highlight that this was MEEMIC’s 10th straight year of underwriting profitability, an impressive combined ratio of 83.4 percent. In Michigan, MEEMIC continues to make steady progress in a push to increase distribution in under-served geographic areas in an under-served market such as parochial schools and post-secondary schools.

Our expansion in Wisconsin is on track. We wrote our first policies at yearend, and as we’ve said before, recruiting and training teachers to staff our agency force will continue to be a slow process, but one that we expect to pay off in the long term.

Finally, on behalf of the ProAssurance organization, I want to thank our employees, our defense attorney, our agents, and the other advisors that helped produce a very solid 2004.

Thank ends my remarks and I will turn it over to Dr. Crowe who will offer his thoughts about the future progress and bold approach.

Thanks, Vic. I’ll echo Vic’s and Howard’s sentiments about the prospects for 2005 and I’ll address the forecast and projections in a moment.

The first thing I want to do is comment on torte reform. Now, it’s the second-most-frequently asked question.

The progress on certain types of lawsuit reform in Washington has been impressive to me. I’m encouraged by the rapid passage and signing of the class action reform and that may signal good things for the Medical Liability reform, but it is a mistake to think that all Republicans vote as a block, and unless you can convert some of the GOP Senators who have always voted against torte reform, I still think you are stalled in the U.S. Senate.

However, if there is some bipartisan bargaining that gives the Democrats and trial lawyer Republicans some cover, then I guess it’s possible. But it’s at the same state level that we really see progress. In the past 10 days we’ve seen passage of torte reform in Georgia, and legislators there are to be congratulated for their courage in dealing with this very tough issue.

South Carolina’s Governor is asking his legislature to consider a similar bill, and they are debating torte reform in North Carolina. There has been movement in the Arizona Senate, the Missouri House. The Kentucky Senate Committee has approved a Constitutional Amendment that would be voted on if the Kentucky House goes along. Pennsylvania, Illinois, Massachusetts, and Maryland have all had discussions about Special Medical Liability courts to bring reason and scientific scrutiny to Medical Liability cases.

In short, torte reform is one of the topics of the day, but just because people are talking and one side of the state’s legislature is for it doesn’t mean it’s going to pass. We’re still waiting to see how the Supreme Court, the State Supreme Courts rule in such places as Florida, Mississippi, Ohio, and West Virginia.

But the bottom line is that people are becoming aware of the Medical Liability crisis and they’re asking themselves it is right whether it’s such a major issue could have such a great effect on the U.S. healthcare system. With the number of people being benefited by our torte system is relatively minor. It is a question of the greater good and I’m not saying that there should not be fair compensation for those that are truly injured and suffer real economic loss, but something must be done to reign in the non-economic damages and the jackpot verdicts. And it’s healthy that this is a topic that’s on people’s minds right now. Even without specific torte reform people may realize they can do something about the situation without sitting on a jury.

We still have our eye on Florida. In our last call we spoke about the 3 Constitutional Amendments that passed by votes in Florida. The first one places limits on fees plaintiff attorneys may collect in Medical Liability cases. We understand that already being circumvented by some lawyers who specially worded contracts with their clients.

The second and third amendments were backed by the trial attorneys. The so-called ‘3-strikes amendment’ is the most onerous. It takes away the license of a physician, (Indiscernible) MalPractice judgments or adverse findings by licensing review organizations. This is bottled up in the courts and will require legislative interpretation before it can be implemented, but we’re concerned it will cause physicians to demand settlements of their cases in fear of painting an adverse judgment and perhaps ultimately losing their license.

That certainly was the goal of the trial lawyers when they put the measure on the ballot. If that comes to pass, Medical Liability costs in Florida will mushroom because no physician will risk a trial, and so every (indiscernible) would become a settlement, which will breed more suits and drive up costs exponentially.

The final amendment is also held up in court. It would remove one of the confidentialities of fake complaints filed against doctors and institutions incident reports filed as to medical errors and documents from error reviews done by the hospital. This could disrupt the peer review process that is designed to improve the quality of care in this country.

After torte reform, the most frequently asked question, or second-most, “Is the market softening in Medical Liability?” We do not see the mainstream market softening. We think the hangover from failed and troubled companies, plus the continuing questions about reserve adequacy, will keep our market firm at least another 12–18 months. Startup companies have become a great factor, but so far they are capital constrained for the most part and lack geographic reach.

Frankly, where we see the greatest effect is in our (Indiscernible) and Excess and Surplus Lines company. These startups often pick off our reinsureds from the E&S market and charge them a standard rate. With that kind of underwriting they won’t be long in the market.

Finally, I know everyone would like for me to pinpoint our exact earnings and reserve releases for 2005. It will probably come as no surprise that I tell you we will not provide earnings-per-share guidance this year.

Now, I’m sure the next question is going to be will the (indiscernible) reserve release continues and at what level. The answer is that we can’t and won’t forecast future reserve releases or amounts. We evaluate these reserves each quarter and adjust reserves as needed. As I’ve said, there are too many variables for us to make this prediction about reserve releases until we actually see how the reserves develop.

Thank you.

Thank you gentlemen. Megan, that’s the end of our prepared remarks. We’ll open the floor for questions from our participants.

Thank you sir. (OPERATOR INSTRUCTIONS)

Beth Malone, Advest.

A question on the reserves release. Could you quantify on a per-share basis what impact that had on the fourth quarter?

Beth, this is Howard. The reserve release from Professional Liability was the $8.7 million; from Personal Lines $7.9, so $15 -- a little over $16 million, $16.5 million all together. I don’t have the calculator on yet, but we can just figure it out that way I suppose, and then you have to tax-adjust it, of course.

Right. And that’s all just for the fourth quarter?

No, that was for the year. The Professional Liability was all in the fourth quarter. The Personal Lines, so it was for the quarter and the year. Personal Lines, that number that I quoted, was $7.9 was for the year.

OK. And just one other question. On acquisitions, or potential acquisitions, I know the market continued to change. Do you see it accelerating for you as an opportunity going forward? Is it becoming more attractive under these circumstances?

Beth, this is Crowe. I don’t see it accelerating. I think we will continue to see opportunities here and there.

OK. No change -- does the regulatory or legal environment in any of these states create opportunities, do you think? Or does that not really have a bearing on acquisition targets?

I think we’ve been pretty straightforward in saying that at this point of our life cycle we’re interested in our footprint and so I think our focus is primarily on our footprint in those states we know pretty well. I mean, there are a couple of states, like Louisiana, where we don’t (indiscernible) the legal climate and they probably won’t be on our radar screen. But anything else in the footprint, if anybody else is interested in talking to us we’d certainly be interested in talking to them. The legal climate per se, it’s one of the many variables that we look at.

Greg Peters, Raymond James.

I supposed I had sort of a follow-up question, or perhaps just looking for some additional color on the market. And I realize it varies from state to state, but I’m curious what you’re seeing on the competitive front from companies like GE or MedPro and some of the other larger players in the market.

The only thing I would comment on that, Greg, is the larger companies, we’re seeing fairly responsible competition from the smaller startup companies that are trying to buy their way from the market. We’re seeing irresponsible competition.

You’re seeing irresponsible competition from the smaller companies?

Yes.

I see. And generally speaking, are these smaller companies getting reinsurance support from Bermuda and other areas?

You know that. They couldn’t be selling policies if they didn’t. In fact, our old conversations, Greg?

Is the -- in the standard market have you seen any loosening of terms and conditions? And I realize this is very much a state-by-state…

James J. Morello (?): You’re talking about the primaries or are you talking about reinsurance?

No, I’m talking primary.

James J. Morello (?): So that’s terms of our policy?

Yes.

James J. Morello (?): No, they really haven’t changed.

People talk about softening and you’ve got to define that. Are we seeing rate decreases? No, we’re not. Are we seeing less amount of increase? Yes, we are. But the function of that is more that many companies are getting adequate rates now and we don’t need the rate increases as much. I think that’s a factor more than the competition is a factor.

That’s a fair answer. I was struck by your commentary and it just seems over the past year you’ve become, at least in the conference call format and during your Investor presentations, increasingly cautious about the outlook for Florida. If there is no change in the legislation that’s been passed, stays in place, what might we see, what kind of changes might we see at ProAssurance going forward?

No, no. We are strictly at the mercy of what the courts decide or the legislation decides to implement in this particular ‘3 strikes you’re out’ amendment. And it’s now written, it’s almost impossible to implement because you don’t know what the starting time is, when it finishes, is there a statute of limitations on count and cases, blah, blah, blah. There probably is going to have to be some act by the legislature to make this thing implemental.

On the other side of that coin I do think that the people in Florida have spoken, decided that a) if the doctor has got 3 strikes we want him out of here. And I don’t think that’s going to be changed very much. So, you’re asking what effect it will have on ProAssurance. We absolutely don’t know but I can tell you we’re standing on our tiptoes ready to jump.

Well, maybe -- what percentage of the gross premium written is Florida for you guys? I know it’s a large state for you.

About 13 percent, Greg.

13 percent?

Greg, I want to add too that one of the whole thought process and strategy behind ProAssurance is that every state that we’re in is important to us, but because we have a spread throughout the eastern half of the United States we’re able to adjust our (indiscernible) condition without jeopardizing the security and even the top line of the organization.

So, I suppose that’s another way of saying, depending on how things turn out, you might selectively start withdrawing from the market there if things don’t go --

Not withdrawing. I mean, I don’t think we’d say that. Certainly it colors the way in which we look at the market, whether we want to be more aggressive, less aggressive in the market.

I don’t think we’re going to have any statement -- comments made on that question at all.

OK. That’s fair. The final question for you and then I’ll let others get on. From a capital standpoint, and given the apparent slowdown in the gross premium written growth, and while it looks like it’s going to be opportunistic this year, it would appear to me that you might have a very strong capital position, such that you might consider other alternatives for capital, such as dividends, share repurchases, if there are no acquisitions. Can you comment on sort of your viewpoint on the Company’s capital situation and what the attitude might be to some of the alternatives that are out there?

That the Company capital position is adequate to take us where we would go with the natural course of business both in the next 12–24 months. However, every time we have made that statement publicly something has happened to one of our competitors that has placed extra demand on us and we have developed problems and had to raise capital. Now, will that happen this time? To tell you the truth, I don’t know.

We think we will continue to have good profit flow, good cash flow, for the next 12–24 months. We think we’re fairly adequate. We are not anticipating (inaudible) something happen to the marketplace.

And as far as the other, what do we do with the redundant capital, are we having in a dividend, stock buyback, whatever you want to say, yes, we’re always looking at those kinds of things. But so far we’ve been able to come up with ways to invest the money and make a better return than what in general most people, certainly myself, do on our own private investments over the long term. So, if we continue to do that we will continue to do what we’re doing.

John Gwynn, Morgan Keegan.

Frank, since you’re the designated amateur accountant today, --

No, not me.

On book value, if I were to calculate a fully diluted book, I don’t have to make an adjustment to your share over equity accounts. Just divide it by the larger number of shares?

There’s no effect for the (indiscernible).

So, it’s a little over 19 fully diluted, right?

The book value, John, is on the second page of the press release for $20.92.

Right. Now, Howard, but on a fully diluted basis it’s 19 -- a touch over 19, right?

I guess we’re kind of shaking our heads and saying you don’t really apply the fully diluted basis to the book value per share. That’s the fact that the EITF is only on earnings per share.

Right. I realize that’s an accounting convention, but which I disagree with to begin with, by the way.

Well, I am only an amateur accountant.

We’re not surprised, John.

Moving on, Howard, on the Gerhling commutation, they paid you the $12.250 million. You increased net loss by $5.4. What was the $1.6 again?

The reduction of reinsurance expense. In other words, we had accrued retrospective reinsurance premiums under the terms of the reinsurance contract that we owed to Gerhling that had not been paid to them yet. It wasn’t required to be paid.

OK. So the begin balance was Gerhling was around $18 million?

Approximately $17 --

$17.7 or 8?

$17.8, something in that range, yes.

OK. And that’s totally gone now, right?

That’s correct.

OK. What is your ending overall reinsurance balance now?

On a consolidated basis, including Personal Lines, it’s $409 million.

And that includes the MCCA?

Includes -- yes, everything, including the MCCA, that’s correct.

OK. And do you have -- at yearend did you have any material amounts in dispute or any paids 90 days overdue?

There’s always some claim or other that may be in dispute and some little piece or part that’s over 90 days, but nothing that we, at this point, don’t expect to collect. I mean, you always have these administrative things of terms of one reinsurer or the other not catching up on the quarterly balances and remittances and that type of things, but nothing that we would consider out of the ordinary.

I mean, if you look back in any given year there are amounts that are either in dispute or slightly overdue and then they become collected.

OK. Howard, has there been any change to speak of in frequency or severity since the last call?

No.

OK. Dr. Crowe, in your presentation in New York you had a very compelling couple of charts on closed claim outcomes. If that -- I’m not asking for the exact numbers, but would those pie charts look as attractive in Florida as they are overall?

I would -- I’ll have to tell you that I don’t know the answer to that, but it would not surprise me that they would not be as attractive. Now, John, I’m just giving you my ‘off the top of my head’ impression of my work with claims in Florida versus the rest of the country. I have not looked at actual breakout numbers. Do you understand me?

Yes, I do. Actually, intuitively, that makes sense given it’s the state of Florida. Vic, the -- in MEEMIC your fourth quarter expense ratio dipped quite a bit. Is that just a seasonal effect, or --

The answer is I don’t know the specifics. There’s nothing really different going on in the run rate other than MEEMIC’s expenses are relatively static, so as premium increases the expense ratio is going to modestly decline, but I don’t know the specific fourth quarter event and I apologize on that. It would cause the expense to go down. I think if you annualize the year you’re probably at the run rate.

John, the only item, and I’m not sure that it accounts for all of it, there were certain assessments -- if you saw on the front of the press release we had guarantee fund assessments that actually were credits this time as compared to --

Right. It looks like you were accruing earlier in the year.

Well, you make accruals as you go through the year, and for the Michigan, it’s not just guarantee fund but there was a number of residual plans and so forth that MEEMIC accrues for going through the year. And as it turned out this year the end result was a good bit lower than expected. So that has certainly had some effect on the reduction in the MEEMIC expense ratio.

OK, great! And on the MCCA, Vic, if you want -- your retention goes up every year. Do you explicitly price for that? Or with margins where they are at MEEMIC are you going to absorb that increase?

It’s all factored in. I mean, MEEMIC looks at a variety of factors, including where comparable market prices are, so is it explicitly priced? I think it’s explicitly priced as part of an overall assessment, but MEEMIC management is very focused on maintaining a preferred rate for a preferred market, but not leaving dollars on the table. So I think it all gets factored in. Does it get factored in straight mathematically? No.

I think it’s important to note that the assessment is the same for every part, for every insured.

And the great thing about MCCA from a MEEMIC point of view is that State Farm and the Auto Club and Auto Owners, large players in the state, are paying essentially the same MCCA that MEEMIC does on a per-car basis, so there’s no competitive advantage for being an exceptionally large company in the (indiscernible) market. But MEEMIC is able to take its market position, which is about the 10th largest writer, which is a good position to be, and not be crushed by the financial size of the larger writers.

Right. And Howard, your overall tax rate in the fourth quarter, is that a guide for the future, or is that -- it was up quite a bit in the third quarter.

Yes, there are always some adjustments in the quarter, John. I think if you look at this over the course of the year 2004, I would say that’s probably a reasonable guide going forward. We are moving a little bit more into tax-exempt investments and as a result, we would expect it to come down slightly. But, a 25-percent range is probably a reasonable target from what we see.

OK, and that’s a reflection of the underwriting account, right?

Yes.

Mike Dion, Sandler O’Neill.

A couple of questions. First off, Howard, maybe you can just expand a bit on the reserve release in the fourth quarter and what you saw during the fourth quarter that you didn’t see necessarily over the first 3 quarters of 2004.

And then secondly, with respect to your opening statements, you mentioned that you do expect the overall combined ratio to come down ’05 over ’04, although not as much as ’04 versus ’03. Maybe you can just expand on that a bit in terms of -- in relation to the 12–14 percent ROE targets for this year where you think the combined ratio might be able to go in terms of a range.

Let me respond to you first on the reserve releases. We do the reserve analysis on the Professional Liability side essentially twice a year, at the end of the first quarter and at the end of the third. And the analysis at the end of the third quarter really forms the basis for the yearend work.

And we tend to do even a more thorough analysis, I’d say, at the end of the fourth quarter just because of all the detail that’s required for the statutory filings. So, the fact that we saw things and chose to make adjustments in the ultimate value of losses in the fourth quarter I don’t think signifies anything that we saw then that we wouldn’t have seen earlier. It’s just a matter of when we do the analysis and the scope of the analysis.

I guess what I’m trying to say there is that I wouldn’t say that we saw a single event or series of events that took place in the fourth quarter to change our view. It was really a cumulative effect of looking at trends throughout the year, recognizing those trends that we felt were appropriate and long lasting, and then recognize the change -- ultimate losses in the fourth quarter. And that’s what driving the reserves. We don’t change reserves up and down; we change our estimates of ultimates and the reserves fall out as always.

So, I wouldn’t attribute anything particular to the fourth quarter. The things that we saw in general are for some of the more recent years, even though we generally knew how many claim counts we’ve had, the verdict and settlements, results that we’ve been seeing are a little better than expected. And that in itself tended to reduce our estimates of severities to some extent. These are not major adjustments, but when you’re talking about $2 billion of gross reserves it doesn’t take a major adjustment to generate the kind of reserve development that we saw.

So, we’re really talking about, I think, fairly incremental relatively small changes in average values of cases.

And any color on whether these were fewer and large loss settlements, or just overall improvement in terms of the average?

Well, yes, I think in the sense that similar to what we saw in 2003, losses in the very large range, in other words, excess of $1 million, excess of $2 million per claim, seems to maybe have moderated a little bit. And again, these are few and far between, so it’s hard to generalize, but we have seen a little bit of moderation and that’s caused, as you will see, I think when you get to the statutories and a look at the 10-K you’ll see reduction in our -- in the amount of losses ceded to reinsurers, which again are generally losses that are over $1 million currently or say over $0.5 million in some of the prior years.

So, I think we are seeing a little bit of moderation on the severity side. It’s -- again, I wouldn’t want to attribute too much to this or have anybody go away thinking that there are any major problems that have been solved. It’s just that really incremental difference.

And then with respect to the combined ratio in light of the comments at the opening of the conference call, given that 12–14 percent ROE target.

We think we’ll make those targets.

The 12–percent ROE for ’05.

We think so. If losses don’t dramatically increase and severity goes up, expenses don’t go up dramatically, we’ll probably make it.

David Lewis, Sun Trust Robinson-Humphrey.

A couple of questions. Vic, you talked a little bit about the retention rate. I recall that during the third quarter call that 9 months retention was 85 percent. We’re now saying it’s 83 percent for the year, so we were actually seeing retentions go down to the 79 percent area in the fourth quarter. First, is my math correct? And maybe what’s the reason for that and where you might anticipate retention to go in ’05?

I think what we said was that in the third quarter it was 85 percent of expiring policies in the quarter, so it had been in that lower 80s range, crept up a little bit in the third quarter, and we think it continued to edge up a little bit in the fourth quarter, but we’re giving you just the overall. The number that I think you’re recalling, David, was just our comment last quarter on the third quarter retention.

OK. So actually you would say the retention is better in the fourth quarter than the 83 percent for the year?

Slightly. I think in that area.

OK. Next question, I kind of expected the gross premium growth to accelerate a little bit from where -- at least be a little stronger than what you’re reporting in Professional Liability since we were done with the current space transition back in the third quarter. I guess maybe there’s still some lingering effects there and does that continue in the first half until we get 12 months out? And anybody cares to provide any guidance on what we might should anticipate on gross premium growth in ’05.

Howard H. Friedman (?): There are a number of things that go on there, David. We have -- there are rate increases; there is retention; there is the effect of those policyholders that converted from a current to claims made in some states during 2004 that are now moving into a more mature year in 2005. I don’t think we’re making any projections about actual dollars or percentage of premium growth and certainly we have emphasis or de-emphasis and competition effects from state to state and just because we have the same number, or even a growing number of policyholders, if growth comes in a state of lower average premium rates as compared to losing business in a state with higher average premium rates, you can have an increase in the number of policyholders and actually a decrease in total premium.

Frank B. O’Neil (?): And Dave, let me focus you back on something that we’ve said in this conference call and last time. First off, we focus on the bottom line, but don’t equate premium top-line growth with margin shrinkage. We have maintained rates or will maintain rates to ensure adequate margins. That’s our focus, is on that bottom line.

Well, let’s talk a little bit about just the fourth quarter combined ratio. If you take out the $8.7 million from the Professional Liability, and I guess if you actually add the commutation back to it, it’d be even a little bit different there. But I come up with, if you had not had any favorable reserve development in the fourth quarter your combined ratio would have been 107.8 percent. Is this basically conservatism continuing to play in, or are there any other factors that we might should consider?

I guess from the perspective of looking at the -- I think what you’re getting to is what the coverage year 2004 Professional Liability combined ratio and I would have gotten 106.6.

Well, that’s for the full year, not the fourth quarter.

OK. And I think it is the reflection of what we’ve been saying all along, quarter after quarter, year after year, that we are going to establish losses for the current coverage year or current coverage quarter above our pricing targets, looking at what we’re -- looking at what we’re trying to establish in our rates, leaving a margin in there based on the parameter risk that goes into our rate filings. We make a lot of assumptions in every rate filing in terms of frequencies, severity trends, and all that, and we’re going to establish the initial reserves on a conservative basis given all of those risks and look for our assumptions to be ratified over a period of time.

So, I think that the adjustment again from quarter to quarter on that reflects more of the mix of business by state and the renewal rate of the policies relative to state to state and how we feel about our rates, where our last rate filing was in each of those states. There are a lot of different factors that go into establishing the initial loss estimate.

Right. I know you don’t want to answer this question, but I’ll ask it anyway. On the reserves redundant releases of the favorable reserve development, do you -- if all the factors that you saw at yearend continue to hold steady wouldn’t it be reasonable to assume that you might see some further favorable development because of your conservatism in setting up current year reserves?

I would say that that’s a possibility, but also you’ve got to take into consideration we don’t know what this year is going to bring us in the way of losses.

I understand that, but I’m just saying, if all the factors held the same, that would be a reasonable assumption. OK.

I guess the other question is, since you do a major Professional Liability reserve analysis at the end of the third quarter, which might influence the fourth quarter, and the next one you do at the end of the first quarter, it sounds to me like there is less likelihood of favorable development in the third quarter than it would be -- I mean in the first quarter than there would be in the second quarter. Is that a good way to look at it?

I wouldn’t look at it that way.

Back in the 1990s, everybody had fairly consistent redundant reserve releases on a quarter-by-quarter basis because of, again, the same thing you’re doing now of setting a current year reserve fairly conservatively. And as we get a better understanding of those developments, 4 or 5 years to go written business, then we start to release those on kind of a consistent quarterly basis. Is that reasonable that we kind of get back to something like that again if things don’t change dramatically from what we’re seeing today?

We can’t speak for the industry as a whole. I don’t know what everybody else is doing.

How about you individually?

I don’t speak to those at all.

Rob (Bobman), Capital Returns.

In Michigan, are you seeing developments on the competitive front that are noteworthy relatively recently as compared to prior quarters with respect to the competition that may have an impact on your retentions or in the upcoming periods or current period?

We’re talking -- I’m sorry, you’re talking about MEEMIC, right?

Correct.

Maybe just a generalized statement. I mean, MEEMIC, the Michigan markets is a relatively stable market because of its auto no-fault characteristic in the MPCA. There is competition in Personal Lines. We have 2 things going on here. I mean, Personal Lines are doing well generally speaking across the country, but there’s also competition in Personal Lines, so I think for MEEMIC we’re looking at MEEMIC to be a steady player, hopefully maintaining its relative margin as it feels in the environment. So there’s nothing that we know of right that would dramatically signal a difference in the market, but certainly there’s incremental competition coming back as Personal Lines probably softens up a little more than Professional Liability is.

My second question was, any changes to your current working reinsurance program that would have an impact this coming year with respect to sort of net writings?

No, the reinsurance program is as it has been on the Professional Liability side since October of 2002, really no change at the last renewal, which was October of 2004, so the relationship between gross and net premiums for Professional Liability should be approximately the same as we see it. And the same on the Personal Lines side, no major changes.

Let me add just one additional comment on MEEMIC. Although we’d love to see MEEMIC continue to (indiscernible) their combined ratio for this year I think we all have to acknowledge that (indiscernible) combined ratio and how the role plays out as we go down the road we depend upon the market and many other things. We’re proud of MEEMIC’s results this year and we’re not saying they’re singular, but clearly they’re exceptionally good results.

Mark (Therapin) of Banc of America Securities.

Just real quickly on the net premiums to gross. I mean the uptick in the fourth quarter in the Professional Liability segment, what was really driving that? Was that a mix of business?

It was -- no, really more -- part of the evaluation on losses also carries over into premiums because a number of the reinsurance contracts are what we call respectively rated. In other words, they adjust based on losses. So, to the extent that losses are adjusted, premiums also are adjusted and they flow through the current quarter. And as I mentioned earlier, we have seen some reduction in the upper layers of loss. In other words, the very high severity losses that resulted in a reduction of expected losses in those layers, which then reduced the expected ultimate premiums that we would pay for the reinsurers. That’s what happened there.

Rob Mason, Schneider Capital.

I was just wondering if you have the breakdown for the -- I guess it was about a $14 million reserve adjustment in Professional Liability ex the Gerhling component. Do you know what accident years that came from?

In rough terms, Rob, we’re still finalizing the cyclical dates, but -- and you’ll see those next week, but in a rough sense it came to a small amount from the 2002–2003 years, as well as some from the 1999 year. On the other hand we had some upward development in the 2000–2001 year. Again, we’re talking about relatively small amounts in each of these years that had an offsetting effect of the overall approximately $9 million favorable development.

OK. And then on the net to gross from the last question there, if I kind of apply the year-to-date net to gross ratio, I come up with somewhere around $10–$11 million was the favorable net written premium impact in the quarter from that. Does that sound about right?

Yes, I think that’s actually pretty close. It may have been 9, but yes. You’re certainly in the ballpark there.

OK. And that’s all earned premium as well?

Yes.

OK. And then on the --

Sorry, Rob, that’s Professional Liability we’re talking about.

Right. OK. And then I was just wondering, based on everything you’ve said about the competitive environment and the regulatory changes, how would you characterize kind of the -- and you’ve talking about your retention ratios, but in terms of new business opportunities in the market today versus a year ago of weighing all the pluses and minuses of what you’ve counted on, do you think the environment for Professional Liability is better or worse than it was a year ago?

I would say that really there would be no change, Rob, especially in our outlook business because what we’ve looked for in a piece of new business really hasn’t changed. I’d say really status quo.

Matt Pleasant, Advest.

Yes, I have a quick housekeeping question. What was the total income tax expense in the fourth quarter, please?

$8.5 million.

Mike (Baron), O’Kelly Capital.

I know you mentioned -- probably mentioned this before but I missed it. The impact of torte reform. I believe you’ve made comments before stating that you didn’t think that would be going through, but if it did what is the general impact on your business?

We think -- we don’t really predict the impact of torte reform. As you know, getting to the situation that demands torte reform, you don’t see changes in the premiums, et cetera, until the numbers (indiscernible). Torte reform is a very nebulous thing until the Supreme courts of the various states uphold it, so we don’t take into consideration torte reform in the calculation of our premiums until it flows through the numbers that we use in those calculations and the flow of losses.

So, we really don’t have any outlook on what torte reform will do as far as numbers. That was the question you were asking?

Yes. One more question. Do you guys (indiscernible) the risk for the Insurance segment, is that something you do?

No, we do not.

Gentlemen, there are no further questions at this time.

Thank you, Megan. We’ll say good-bye for another quarter. I thank everybody for their participation on the call today.

Thank you, Ladies and Gentlemen for participating in today’s teleconference. You may disconnect your lines at this time and have a wonderful day.