ProAssurance Corp (PRA) 2005 Q1 法說會逐字稿

  Good morning ladies and gentlemen and welcome to today’s conference call. This call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Mr. Frank O’Neil. Please go ahead sir.

Frank O’Neil: Thank you Cindy [ph]. Thank you everyone for being with us this morning. We understand that many of you are in the midst of a marathon this morning, so we’ll try to be as brief as we can about our optimism about the quarter and what it says about the year ahead. Prior to our opening statements, we have a few legal items to cover.

We expect to discuss historical information and make forward-looking statements and projections on this 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 the call in conjunction with the caution regarding forward-looking statements in the news release we issued this morning, May 10, 2005. Further discussion of risk factors and uncertainties about our business are contained in our Forms S-4, 10-K, 10-Q, and other publicly available documents. We will not undertake and we expressly disclaim any obligation to alter or update 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. Today’s content is time sensitive. It’s accurate only on May 10, 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. So if you have obtained a transcript of this call you should know that we have not reviewed it nor approved it.

Please understand that we have very limited options in discussing anything connected with our proposed transaction with NCRIC Group because we are in registration, and our S-4 is not final. We filed our Form S-4 Registration Statement, number 33-124156 with the Securities and Exchange Commission on April 19, 2005. Investors may obtain a free copy of the Registration Statement, as well as other documents such as Form 10-K and 10-Q from either the Edgar section of the SEC’s website, SEC.gov, or our website proassurance.com, or you may get them directly from us.

Participating with me on today’s conference call are Dr. Derrill Crowe, our Chairman, Mr. Vic Adamo, the President of ProAssurance, Mr. Ned Rand, ProAssurance’s Chief Financial Officer, Mr. Howard Friedman, our Chief Actuary and Underwriter, and Mr. Jim Morello, our Treasurer and Chief Accounting Officer. Many of you will recall that Ned was named CFO as of April 1 allowing Howard to concentrate on leading the Professional Liability Actuarial and Underwriting Departments.

Just a short bit of background for those who missed the news release on Ned. He is a CPA and joined us in November. He comes to us from PartnerRe where he was Chief Accounting Officer and the Head of Corporate Finance. Prior to that, he was Chief Financial Officer for Atlantic American. So today, Ned will lead us off with a review of the numbers.

Thanks Frank. To echo Frank’s thoughts at the outset, this is the quarter that gives us real confidence in our profitability and earnings’ power going through the rest of the year. Those of you who have followed ProAssurance for any length of time know that we focus on the bottom line in 2 measures to define success in that area; our consolidated combined ration, and return on equity. Our main target is the creation of stockholder value through a sustainable ROE with a target of obtaining a long-term average of 12% to 14%. In this quarter, we hit 14.4%, so we consider that milestone achievement for us.

Making this ROE possible is the continued change we are making in another area, our consolidated combined ratio. That key to ratio is 97.5% in the quarter, almost 4 points lower in this quarter than the year-ago period. Personal lines continue to shine in terms of combined ratio reaching 84.5% in what is typically the worst weather quarter. Professional liability dropped 102.3% in the quarter, an improvement of more than 5.5 points year-over-year. Our goal remains to achieve a combined ratio in professional liability below 100%. You should note that the professional liability combined ratio was achieved while we continued to book current losses very conservatively, as you would expect for a Company in a long-tailed line such as ours.

Flowing out of these results are 2 measures which we all track; net income and cash flow. Net income per diluted share was $0.71 for the quarter versus $0.52 for the same period last year. I’d like to remind everyone that these numbers reflect our implementation of the EITF-04-8, which mandates that we report the effect of contingent re-convertible debt on diluted earnings per share for both 2005 and 2004.

As the bottom line has grown, cash flow from operations has continued to grow, reaching $97.5 million in this quarter. Positive cash flow is a powerful engine in a Company like ours, and is also a leading indicator of successful operations and earning power. Because our cash flow has been strong, we have continued to grow the investment portfolio, which is now just over $2.5 billion. And although we experienced the same mark-to-market effect as other companies on our fixed income portfolio, we were able to essentially maintain book value due to our strong earnings and by structuring our investment portfolios to moderate the effect of rising rates.

So in summary, this quarter has helped us build a solid foundation for the year ahead, and we are standing by our assessment from last quarter that we will improve on the consolidated combined ration in 2005.

I do want to acknowledge the fact that there was no favorable reserve development in professional liability this quarter. Due to the long-tailed nature of the liabilities in this line, and the volatility that has historically been seen by the industry, we believe it is prudent to react cautiously to any trend we see on a quarterly basis. We did not perform an in-depth review for the first quarter; thus, we have no new information on which to base the reserve development decision. This is our usual practice, just as it’s our usual practice to perform an in-depth analysis in this, the second quarter of the year. Over time, as trends become more reliable, we may become more comfortable making quarterly adjustments. I caution against reading too much into this decision other than it again signals our focus on protecting the bottom line and being cautious with our reserves. We did see $2.2 million of favorable development in personal lines, which due to the short-tailed nature of this business, are more determinable on a quarter-to-quarter basis.

I want to tie our caution and conservatism back to premiums. We’ve noted that our consolidated gross written premium did drop slightly year-over-year, with professional liability being the driver. While there is a decline in premiums for the first quarter, this primarily relates to our tailed premiums which do fluctuate from quarter to quarter. However, our core position business actually grew by a small amount during the quarter, reflecting our commitment to writing profitable business. We continue to be diligent in our underwriting of risks and attentive to the markets in which we operate. We continue to believe that this is a very localized business, and experience has shown that each state, or even regions within states have different risk profiles that must be understood to operate profitably. That’s why we are selective in where we are allocating our cap. In those states where we see uncertain environment, Florida for example, we are cautious. In states where we see opportunities, we are pushing to grow within the limits of our underwriting guidelines. Examples would be core states, such as Alabama, Indiana, Michigan, and Ohio, plus expansion states such as Kentucky and Oklahoma.

In the quarter, our average rate increase on our renewals in our professional liability segment was approximately 12%, right where we expected it. In every state, we believe our rate levels are and have been adequate and any business we write will support our ROE target. We’re just being very careful about the business we write. Frank?

Frank O’Neil: Thanks Ned, that’s a good segue I think into Vic Adamo’s comments on operations. Vic?

Thanks Frank. While we would have liked to have had more premium during the quarter, we continue to believe our first job is profitability and balance sheet strength. We were pleased to see both premiums and insureds increase in our personal line segment. And in our professional liability segment, our policy holder retention edged up a bit towards 86%.

I would note that we are looking forward to merging NCRIC into ProAssurance because we see the M&A route as a preferable method for increasing our top line. Our results would have shown market year-to-year premium growth, for example if NCRIC had been a part of our group during the quarter. Dr. Crowe in his remarks is going to look ahead in a few minutes, and will comment on our outlook, but from a current operation point of view, I want to tell you that we are still in a relatively firm market. There is competition, most of it from established, long-term players.

There is also price-based competition from newer companies chasing market share. We’re monitoring competition, but at this point there is still limited capacity in these new market entrants, and we don’t see them as having a major impact.

We are now in that part of the insurance cycle where insureds are beginning to catch their breath after several years of significant price hikes. We find that insureds are now able to respond more rationally to differentiating factors, such as the service we provide, our willingness to defend non-meritorious claims, and our dedication to balance sheet integrity.

All in all, this was a very successful quarter and the signs for the future remain positive for us because of our disciplined focus. The marked improvement in professional liability results continues to show the wisdom of controlling risks at the outset, maintaining rate adequacy, and ensuring that underwriting is diligent in pricing and risk selection, and that claims are diligently handled after they are filed with us.

With respect to the NCRIC transaction, initial regulatory filings have been made with the Insurance Commissioner in the District of Columbia, with the FCC, and under the Hart-Scott-Rodino Act. The fore-made [ph] hearing has been scheduled for June 6 as we announced last week. We still expect to close the transaction during the third quarter.

Next I imagine everyone is interested in torte-reform development and especially in Florida. First, for torte reform in general; Federal torte reform remains an open question, and in our view predicting political outcomes is better left to the political pundits. The President seems to have more immediate priorities, even though we know he is still solidly behind medical malpractice reform. What that means is most of the action is occurring at the state level as it always has. In the past quarter, Georgia and Missouri have joined the ranks of states that have passed what could prove to be meaningful torte reform, but remember until the state Supreme Courts have their say, nothing is etched in stone and we cannot prospectively guess at the impact of torte reform until it shows up in the numbers.

Florida has certainly been a hot topic in recent days. Right now, we are still sorting things out. The 3-strikes amendment was clarified recently by the Florida Legislature in that 3 strikes don’t apply to any case involving incidents that occurred prior to November 2, 2004. That means that we probably don’t even have a reported claim yet to which the law would apply, and it’s likely to be at least another year before we see a claim, and then 2 to 4 years before it is resolved. So we do not see an immediate impact on our operations from 3-strikes amendment. We do have the issue under study, and we will make whatever adjustments are needed to maintain our financial integrity with continuing to serve the positions in Florida.

I would also like to note that a review board in Florida has for years had the power to revoke a physician’s license for even one incident of serious malpractice. We as a Company hope that we are not underwriting any physicians that would have multiple incidents of that nature.

I’d like to conclude with a word or two about our personal-line subsidiary, MEEMIC. It’s hard to think of something to say that we haven’t said before, but this quarter again underscores the value of MEEMIC’s peer-selling market-focused business model. The combined ratio of 84.5 is excellent, although a bit behind the comparable quarter from last year, but that was an exceptional quarter. We are still on solid ground with excellent results. There was a slight uptick in the expense ration, but that is a quarterly comparison issue. We expect the annual expense ratio at MEEMIC to be comparable to 2004.

And that ends my remarks. Dr. Crowe will offer some thoughts about our strategic progress and our goals.

Thank you Vic. I’ll echo Vic’s and Ned’s sentiments about the quarter and our prospects for 2005. The first quarter was a good one for us, but it also gives us a sense of the challenges we face in the rest of the year and in 2006. I’m sure most of you are concerned about the lack of top-line growth. I can assure you we’re watching it, but we don’t think it’s a bad sign. What it shows is that we are continuing to be disciplined underwriters. Companies can write their way into trouble in this business. We do expect to see growth through the rest of the year. I’m not going to predict how much, but we expect it to come. Some will be organic, but some will come through our transaction with NCRIC. Organic growth in this industry has been problematic for companies without the patience to move deliberately. We have this patience, and our track record has demonstrated how to do it right in the long run.

Let me also underscore Vic’s comments about our history of successfully growing through acquisitions. Our growth will benefit from the additional premium supplied by NCRIC when that transaction closes. We have been able to successfully integrate companies and grow and retain the expertise of the companies that have become part of our organization. That’s growth on a solid foundation.

But where are we in the market today? I can tell you that I think the market remains firm. I will say that the market overall remains in good condition, but as Vic pointed, there are pockets of price competition and we especially are seeing that in Red Mountain, our surplus lines carrier. But we recognize that the market may soften, and I want to lay out a course and a vision for that time. First, every one of ProAssurance executives on this call has talked about rate adequacy and disciplined underwriting. That’s because it really is something we focus on here, just as we focus on claims management. We’ve always been recognized as a leader in how we handle claims, and we’ve shown that the results produced a big benefit for our bottom line. And I’m convinced that we could have the same sort of impact on the bottom line in underwriting.

So the first thing to write down about the future is we will not chase market share, and we will let business go if it doesn’t meet our pricing and underwriting criteria. If that happens, we’ll find better use for capital than subsidizing inadequate premiums. You see, I’m convinced that if or when the market gets soft again, we’re going to see a few shipwrecks. If the tide of rising premiums starts to go out, those boats that have been lifted by the tide will begin dropping again. We’ve proven our ability to navigate through the hard market and soft market cycles.

One final comment about the medical liability market, we’ve been asked by a number of people about how Berkshire-Hathaway’s purchase of Medical Protective will affect us. First, we think that they will be a responsible competitor based on what we know of Berkshire’s operations and the public comments about their profit goals. Second, those of you who know us understand that we focus on our operation and how we can make our Company better than reacting to what our competitors are doing. We believe that the success in the medical malpractice line depends upon a case-by-case decision in both underwriting and claims. Our model is built to support that decision-making process, and it will continue to bring the focus of this specialists’ Company to a specialty line of insurance. Frank?

Frank O’Neil: Thank you gentlemen. Cindy we’re going to end our prepared remarks here and ask for any questions. And as we do so, let me remind you again about the constraints we are under regarding our proposed transaction. Cindy?

  [Operator Instructions]. David Lewis, Sun Trust Robinson-Humphrey.

Thank you good morning. Dr. Crowe, a couple of questions to start for you. You indicated that the gross premium growth should develop through both organic channels as well as the MEEMIC transaction assuming that gets completed. Does that imply that we might anticipate gross premiums to be up in the second quarter, because obviously you won’t have the MEEMIC deal completed at that point?

You mean the NCRIC deal.

I’m sorry, the NCRIC, excuse me.

No, you cannot anticipate that.

Okay.

Frank O’Neil: And I think for clarification, that doesn’t mean it doesn’t happen. It’s just that we’re telling you it may or may not. We’re not forecasting the future.

I understand. Let’s assume that we do go into a soft market at some point in the future. You talked about looking for better uses of capital. Does that mean you focus more on the personal lines, you maybe implement a re-purchase program? What kind of uses of capital would you anticipate in a softer environment if the pricing gets very competitive?

Well, I wouldn’t say that we’re looking at any one of them. Obviously, I think that the use of the capital will be available in the not-too-distant future for purchases. But having said that, you’re very limited in what you can do with that capital. You can’t just go out and chase market share, be it personal lines or professional liability lines. We could buy back stock, but as you know we’re selling at a pretty good multiple and I would question the wisdom of that. One other alternative, of course, would be a dividend, which may make some short sellers a little nervous.

Okay, so this final question is I think about redundant reserve release of professional liabilities, and I understand it’s difficult to predict. But since you do a review in the second quarter, is it more likely that we could maybe have some adjustment in the second and fourth quarters than you would more consistently through the year?

Yes David, you know we do the reviews semi-annually. What we saw at the end of the year, we were able to recognize because it was the result of an extensive review, and I’m looking at the entire year. Once we start to get somewhat of a better track record where we’re seeing consistent indications, and we see them from one in-depth review to the next, I think we would then feel much better about making estimates on a quarterly basis than we do right now.

Okay, thank you.

David, I think you should understand one other thing. The majority of the work that we do in that line comes in the third and fourth quarters, and it’s done with our independent actuary also. So yes, we do some evaluations during the second quarter but the majority of the evaluation that we do in-depth, that’s in the third and fourth quarters.

Thanks very much.

Mike Dion, Sandler O Neill & Partners.

Good morning, a couple of questions. First off, I guess under your prepared remarks you indicated markets that you were willing to grow. Outside of Florida which you touched on, are there any other markets that concern you as far as premium growth and some of the market issues there, whether it’s competition, current legislative or regulatory environments, etc.?

I’m going to take a stab at that. I was sitting here thinking and I don’t think we have another market that we are as concerned about as Florida. On the other side of the coin, we also -- I’ll be honest with you. We’ve looked at the bill that the legislature passed in depth, and there are still some fuzzy fringes around that bill and how this thing is going to operate. But we think it may not be as bad as we originally anticipated. It’s according to how some of the portions of that bill are interpreted. But I don’t -- Vic, Howard, Ned -- I don’t know of another.

We have small books of business in states like Pennsylvania, and certainly we don’t see those growing. They’re a different price-based competition from different markets. For example, Missouri has some very aggressive competition now from these entities the state allows to be created that don’t really require much capital. But all in all, and we’re committed to our footprint in the states that we’re in, and we don’t see any dramatic change in our footprint.

And I guess just with respect to Florida, I think you had indicated in prior conference calls that you had seen some new doctor groups, risk-retention groups being formed down there although I believe there are a number of doctors that are uninsured down there. But maybe you can just comment on that and the impact of 3 strikes and some of the issues down in Florida.

We’re still, as we said, we’re still trying to sort out the 3-strikes legislation. It has been passed by the legislature, but not as yet sent to Governor Bush. Parts of it seem quite good in the sense that a verdict, although it becomes a strike does not really result in a loss of licensure unless the Florida Board of Medicine, I think that’s the correct body, determines by clear and convincing evidence that there was medical malpractice. That’s a higher standard that the normal case method, which is preponderance of the evidence.

So that there will be a review, even of verdicts by the Florida Board and they also have the power to review settlements now. So I think we all have to see over time how this sorts out, and if the Board takes an active role, there may not be that much difference between a settlement and a verdict.

We’re committed to our defense model. We think in the end that’s better for a position to maintain the climate there. Other than that, I think again it’s just trying to understand how this plays out over time. It’s a little bit difficult to predict now since the Governor has not even signed the legislation.

Okay, and I guess just one last question concerning the MedPro acquisition by Berkshire. You know maybe if you could just characterize MedPro’s market conduct in the last couple of years when I think most people knew that GE was looking to possibly sell that unit, and I know it’s still early yet as far as the acquisition goes. But do you expect competition to perhaps escalate over the long haul with Berkshire, albeit that they are somewhat of a disciplined competitor throughout most of the other insurance lines?

Mike this is Howard. I think that we’ve certainly seen MedPro be more or less competitive over the past 2 or 3 years as their view of the market has changed. In fact, I think in 2004 from some of the preliminary numbers we saw, they had a significant premium decrease compared to what they wrote in 2003. On the other hand, they have been one of the more consistent competitors from the perspective of their underwriting and generally in terms of their pricing, at least over the past 18 months or so. One of the things that appears to have constrained them in the past is the capital, if Berkshire provides more capital, then I would think that MedPro might be willing to take advantage of some opportunities.

On the other side, I think Berkshire’s track record is one that very much values profits and I think that will make them a more reliable and consistent competitor in terms of looking for a return. So I think on the whole, my view is that it would tend to balance out.

I want to make a comment Howard. Number one, we all know that Berkshire has been a fair and reasonable competitor in the marketplace for years, and quite honestly so has Medical Protective. We have been head-to-head with them in several markets. This is a well-run company; they have been very disciplined in their pricing and their underwriting, etc. We look for it to be good competition, but we expect it to be fair competition.

I think the segment of the industry that this spells the most trouble for are the start-up companies and the companies that are low-balling trying to find market share. They’re going to eventually run into trouble. I think this makes Medical Protective a long-term player that’s going to be here with us. I think we’re going to be competing head-to-head in a lot of markets over the next several years. I’m looking forward to it. They’ve got nice people running it, people you enjoy working against and you enjoy beating sometimes. But, of course, they enjoy beating us, but it’s going to fair. I’m excited about it.

Great, thank you very much.

Greg Peters, Raymond James & Associates.

Good morning everyone. I apologize if I didn’t hear your answer correctly, but I thought you said in answer to the question regarding uses of capital in a softening market that you thought there might be opportunities for additional purchases going forward. And I’m trying to square that with, in the context of a softening market, where you think those opportunities are coming from if everyone is reporting improving results.

Somewhere in the USA.

Okay, did I hear you correctly Dr. Crowe when you said that from a capital allocation standpoint, that you would question the wisdom of buying your own stock at its current price level?

Yes. Buying it back you’re talking about?

Yes sir.

Sure, we sell it at 1.8, 9 times book?

Yes.

I mean, I’m not sure I would want to do it at that price. But if there was a dramatic drop, I’d look at it. But there again, why not just pay a dividend if you can’t find some place to put it to work?

Yes, fair enough. On the regulatory front, one state that we’ve heard some whisperings that there’s prospective improvement has been West Virginia. I’m wondering if you’re seeing any of that from a legislative or judicial standpoint, or has there been any change in your position in that state?

Well Howard, why don’t you answer the first part of that question?

Yes sir, I don’t think that with respect to West Virginia the West Virginia torte reform has been put into place. It’s been in place now for probably about 2 years. It has not been tested in any significant manner yet. There have been a few cases on the fringes that have been favorably reviewed by the judiciary, but the overall bulk of the legislation still remains to be booked [ph].

We are seeing a decrease in the frequency, the claims frequency up there, but there are 2 things going on. Number one, we have tremendously, tremendously cleaned up that book of business, that’s the first thing. Second thing is there were a lot of cases that were filed when torte reform was going to come into effect to get ahead of the curve, the deadline for filing under the old regulations. And secondly, I think the people of West Virginia, and maybe even the Supreme Court of West Virginia are beginning to realize that that train had to slow down a little bit or it was going to affect the healthcare in the state. So I’m cautiously optimistic that it may be a better environment. I think that the Mutual company that was started up there in West Virginia is doing fairly well.

I see. I thought there was something that happened more recently, but I may be mistaken there.

Greg I think what you were thinking about was West Virginia’s recent legislation that eliminated the third-party bad-faith claims for property casualty insurance in general. That had already been done for medical malpractice in 2002. This was an extension of that to the other lines of business that had a big impact on the automobile and general liability insurers.

Okay, that’s fair enough. I suppose another, and the last question I’ll have for you is just on re-insurance. Could you remind me when your main treaty is up for renewal, and I’m curious if you’ve seen any change in the number or willingness of the re-insurers to participate in the programs?

The re-insurance treaties renew on October 1 of each year.

Okay, so we’ve got a while.

We have a while. I think generally we have seen more interest from re-insurers. We did at the last renewal, and our expectation is that we will see some additional re-insurers being interested in looking at the program this year.

Can you remind me, were there any dramatic changes from the October program last year.

No, not at all.

So retentions remain relatively…

Retention is $1 million per claim in all states for medical malpractice business.

Okay, thank you very much.

Adam Klauber, Cochran, Caronia & Company.

Good morning, thank you. I just have a couple of follow-up questions on the growth. You mentioned weakness at Red Mountain, which is obviously a business that was a little quicker. In 2004, how much premium was at Red Mountain, and for this quarter, if you exclude the loss for the lower premium at Red Mountain, what would the growth have been?

Frank O’Neil: Adam let us kind of look on that while you ask your next question. And we’ll try to circle back to you with an answer.

Okay, and the next question also on growth is what was the tailed premium this quarter compared to the first quarter of last year?

Frank O’Neil: Okay, in the interest of keeping the call moving we’ll dig that up as well, tailed premium, and then circle back to you with an answer. Can we do that?

Sure, and the next, I have 1 or 2 other questions.

Frank O’Neil: Sure go ahead.

On the loss side, have you seen any material change in severity trends?

No we have not. Severity trends remain where what we’ve been saying for the past several quarters, or maybe even over a year now, more or less the 6% range.

Okay. On a competition basis, maybe any change in the competition in the Midwest in Michigan, Illinois, Indiana?

Not generally speaking, the same players are there, some are a little more competitive now. On the other hand, the large company in Illinois still has its moratorium on, so I’d say the landscape is generally moving with the market. But there’s no significant aberration.

How about competition from MEEMIC? I mean the loss ratios I guess remain very favorable. Is that, is the state attracting more competition on the auto side?

I think you’re seeing more competition in the auto business all over the country. Now, I don’t think there are any major players there, but the rates are not going up as high as rapidly anywhere, and yes, you’re not seeing the top-line growth at MEEMIC like you’ve seen in the past, although it is pretty good this quarter. But there’s no shift in who is competing. It’s the degree that they’re competing.

And as you know from your general work Adam, there have been a lot of ups and downs over auto liability generally, and auto damage over the last couple of years, so MEEMIC has I think seen similar trends. It’s been a relatively good time, and we’ll see how it goes going forward.

Right, okay, and finally whether now or in fact it can be later on the level of tailed losses versus this quarter versus last year.

Frank O’Neil: We will.

Do you have that yet guys?

And that was it, thank you.

Frank O’Neil: And we will come back to you with a couple of answers there.

Great, thanks Frank.

Frank O’Neil: Cindy next question.

John Gwynn, Morgan Keegan.

Good morning, Frank just tell me real quick whether you can answer these or not. On NCRIC, I had a question on the hospital judgment that was referenced in your filing.

Frank O’Neil: Ask me the question and I’ll tell you if I can answer it.

All right, the question there was a reference in there I think to the possibility or a theoretical settlement of $12 million. If that were to occur prior to closing, would there be a tax benefit associated with it?

Frank O’Neil: We’ve got our lawyer that’s going through his head John.

Okay, number two…

Frank O’Neil: Wait just a minute. I’m not sure we can answer it. Our lawyer is indicating it depends on where the stock is at the time. So I don’t think we can answer it off the top of our heads. We can certainly research it.

Okay, and I assume this is in the Form A, but if NCRIC is purchased, where will -- structurally where is it going to be put?

It would remain, well NCRIC would become a subsidiary of the Holding Company. In terms of our Insurance Companies, it would be a sister operation to Medical Assurance and Pro National. NCRIC would remain as a free-standing insurance company writing in the District of Columbia and potentially in some of the other states. We may or may not choose to move some of the NCRIC premium in Virginia and Delaware over to one of our other Companies for capital management purposes.

You need to understand when you say free-standing, that’s for a while, there are things that will occur. You know, we tend to consolidate our back-office stuff, accounting, re-insurance, etc., and that will be done.

I’m sorry, I meant in terms of the organization chart.

It’s not going to be stacked right?

It’s not going to be stacked, but NCRIC Holdings will be a subsidiary of Pro Assurance, and NCRIC Insurance Company will be under that.

Okay, great. Howard, you had favorable med-mal development for the year 2004, but it consisted of unfavorable development in Medical Insurance and favorable development obviously in the greater amount at Pro National. Is there anything that I should be more concerned about in terms of the development at Medical Insurance?

No John, I don’t think so. I think a lot of this is, as you know comes from different years, different states, different lines of business. And when you look at it, I mean I think where we saw some of the unfavorable development at Medical Insurance some of that came from our old runoff business, the Medical Re-insurance Company business that we had done in the late ‘90s s that we are no longer doing. We also had some unfavorable developments in one state where we had favorable in the other. I wouldn’t attribute any overall trend or particular level of discomfort to that.

On the Pro National side, we did generate some favorable development in Florida, and that goes back to some of the earlier years that had been initially booked at very high levels because of the Florida environment and has developed somewhat better than originally we anticipated, though not necessarily where we would like it to be, but better than we had been holding. So I think it really is just a mixture of the states and the lines of business that the 2 Companies are writing.

Okay, thanks. Vic you mentioned competitive structures in Missouri as competition on the margin. Are these RRGs or SIFs again?

They’re called 383s. I believe that they are more or less trusts that the state allows to be created under state law. Can you speak more favorably to it?

They can be created under the Missouri law basically for any group of professionals, whether they’re physicians, real estate agents, accountants, hospitals, and they are outside of the regulation or purview of the Insurance Commissioner and the Insurance Department and the Guarantee Fund. So they operate more or less as business corporations that can provide insurance. They are fully assessable, and again they have no Guarantee Fund protection, so they don’t need to meet the capitalization requirements. They don’t need the same amount of start-up capital, nor ongoing capital, and for the most part, they can operate freely without rate regulation or form regulation as well.

John the sad part about that is the rates can be very, very cheap if you’re not…

I was going to say Dr. Crowe here we go again.

Yep, here we go again. The State of Missouri Regulatory Legislative environment doesn’t see this, but here we go again. And where it hurts us, I mean other than it’s messing up the business and screwing up rates in the state and that type of thing, you come down to a case, a trial where one of those co-defendants, one of those insurers, and lo and behold that thing goes out of business, what happens? It all runs off to our defendant because it’s the deep pocket. So it has a tendency to adversely affect us 2 or 3 different ways, but you and I both know this is just a flip in the tide, and sooner or later these things will be bankrupt and go on for sale.

Right.

I’m not, we’re not particularly concerned about it other than the fact we just have to be very careful in that market while these things are developing.

Right, Ned I don’t want you to feel left out of your first rodeo.

Thanks.

Just a simple question, the tax rate for the first quarter, 27 or thereabouts.

Yes 27.5.

Is that something, I know that this is real difficult with your books of business, but you have a run rate for the year or any idea?

I think that’s probably a reasonable run rate for the year. It’s really driven by that portion of our net income that’s generated by the tax-exempt interest in our investment portfolio. And I think for the purpose of looking forward, that’s a pretty reasonable run rate.

Right, in terms of your investment -- your net investment income results were outstanding for the quarter in both entities. Is that a -- obviously your operating cash flows helped there. I assume maybe you’ve lengthened your portfolio.

Really the duration on the portfolio has not changed drastically. What you’re saying is a combination of a couple of things. One is just the ability to invest at higher rates, as rates have crept up a little bit. And two is just putting the cash flow that was generated over the past 12 months to work.

Okay, great that’s all I have.

And I guess the other thing John that’s important to note is we are allocating a portion of the investment portfolio as tax exempt. That tends to obviously deflate the increase in investment income, but as you look at investment income on an after-tax basis, you see a more substantial improvement.

Okay, thanks a lot. Frank, I’d be interested in that tailed question too.

Frank O’Neil: Okay, we’re working.

The question that Adam asked about tailed premiums.

Mr. Gwynn anything further?

No, thank you.

[OPERATOR INSTURCTIONS]. Mike Paisan, Legg-Mason, Inc.

Hi, good morning everybody. Actually most of my questions have been answered, but I do have just one sort of I guess theoretical question going back to the 3 strikes and you’re out rule. If the new say threshold is I guess a clear and convincing measure, which is more stringent than it was before, does that essentially create more of a dis-incentive for lawyers to file some of the fringe claims since it is a higher threshold?

Well let me clarify Mike. There are 2 standards going, the standard by which a medical malpractice case is tried in court and somebody can win a jury verdict of damages is the same as it’s always been. The law does not impact that. But what the law clarifies is that before a doctor can lose his or her license, the Medical Review Board needs to look at that verdict and say would they have sustained medical malpractice by a clear and convincing evidence, a higher standard. So they in a sense re-analyze the case. What the law that the Florida Legislature has passed, and again it has not been signed as yet by the Governor, but is really an extension of the current licensing law whereby the Licensure Board has already the authority to suspend the doctor’s license based on medical malpractice. So this is a continuation of it.

But the standard for license suspenditure is higher than for a general negligence torte suit. So they are carrying that standard over for licensure purposes, not for medical malpractice judgments.

So it’s sort of a second tier?

A second-tier review, yes.

That means that you will see a lot of cases, in fact I would think the preponderance of cases in which you’ll see a medical malpractice verdict. But the Board will not find clear and convincing evidence.

Okay.

There will be a higher standard to get to that strike that they will institute.

Okay.

We think it levels the playing field some.

Right, right okay, that’s it. Thanks.

Frank O’Neil: Cindy:

Yes?

Frank O’Neil: Would you bring back up Mr. Klauber? I think we’ve got some answers to his questions.

Absolutely, Mr. Klauber if you could just press star 1 again at this time please. Thank you, your line is open sir.

Thank you.

Hey Adam, I think we’ve got answers to your questions. You asked a question on paid losses, and let me give you the paid loss numbers. For the quarter, paid losses were $78.1 million. For the same quarter last year, that number was $86.8 million, and for the fourth quarter of last year, that number was $74.8 million.

Okay.

On your question about our Red Mountain, or our ENS business, 2004 we wrote for the full year about $25 million of ENS business.

Okay.

For the quarter, our ENS business is down just under $2 million.

Okay.

And to your question on tailed premium, the reduction in tailed premium for the quarter was around $7 million.

Oh really? Okay, what was the face on the tailed premium last quarter?

It’s around $15 million.

Okay, thank you very much.

Beth Malone, The Advest Group.

Okay, thank you good morning. Could you just talk a little bit about some of the markets that you’re in. For example, in Kentucky a number of other carriers have found it very challenging. What has been your experience? And why would, what’s the factor that makes co-insurance successful in a market that’s still more difficult for others.

Frank O’Neil: Let Howard take that.

I think Beth several reasons; first is we don’t have any what I would call Legacy issues in Kentucky. We’ve been in the state in a very small way during the softest period of the market. We don’t have any catch up to do because we were very concerned about the pricing in that state for a long period of time, and therefore did not look for business and actually had a very small book of business.

We’ve now, over the past 18 months or so gotten much more comfortable with the environment. Most of the irresponsible competition has left the state, and we’ve been able to put our rate levels where we think they need to be, and we are attracting a significant amount of business at those rate levels.

We have a claims office now that we’ve opened in Louisville, and therefore we can get the type of claims management that we prefer to have, which is right on-site dealing directly with the plaintiffs’ attorneys on a day-to-day, the defense attorneys on a day-to-day basis, and we think the physicians in Kentucky after a lot of the turmoil that they’ve been through now have come to respect a more stable and long-term provider of malpractice coverage.

All right thank you, and now in the case of your potential acquisition of NCRIC, that would put you contentiously next to Maryland, and Maryland has been going through their own restructuring, legislative restructuring. I’m not sure it’s been, it’s going to be viewed at all that successful. But is that another market that you would consider once you’ve completed the transaction?

NICRIC is quite cautious on Maryland now, so I think we will study it. We will take the lead of the NICRIC folks that really know that market better than we do and see where it goes. NICRIC’s premium base is relatively small there, and they have not been adding to it until again some of this new legislation sorts out. So where we don’t see ourselves entirely getting out of Maryland the day after the transaction, I doubt that we’d be adding much business until we got a better feel for what was going on.

Okay, thank you, and in terms of potential acquisitions, now with Med Pro kind of taken off the market or I assume it was on the market, then I guess that removes the number of potential acquisitions that Pro Insurance may have considered. Does that accelerate the probability that you will be paying a dividend in the near future?

No ma’am.

Okay, so there are still plenty of other opportunities out there from an acquisition standpoint?

Well, I can’t say that there are plenty of opportunities out there, but we think there will be. There are still some companies that have not gotten clear of the last soft market yet, and I think you’ve probably -- well you may not be, some of them are not public companies. But they have not been able to, the hard market didn’t last long or was strong enough to get them out of the swamp water.

Well then I would assume that they’re not in the greatest financial shape, but they still would make a good acquisition for ProAssurance even if they are troubled because of their inability to overcome their legacy?

Well, the first thing you want to look at is what you pay for it. That’s the first thing. The second thing is how easily can you fix it, and a lot of these companies are in trouble because they haven’t been managed properly, or the rates haven’t been adequate. And yes, you’ve got to look at all of those issues, and believe you me, we look at those issues. And there are some of them that we can acquire and the rates are inadequate, and by the time we correct the rates, we’re going to lose 30%, 40% or 50% of the book of business. And we know that when we do the deal. And that’s why you don’t see us willing to pay huge sums for these companies to buy. Plus the fact you’ve always got the problem of the deficiencies in the reserves, but that is a moderately easy thing to look at and make a judgmental decision about. The retention rate on a book of business that’s tremendously under-priced is not as easily measured.

Now in terms of identifying these companies, are the regulators coming to you with their problem children companies and their markets?

I’m not sure regulators ever had a problem child.

Okay, all right well that’s helpful. Thank you very much and congratulations on the quarter.

Thank you.

[OPERATOR INSTRUCTIONS]. Mr. O’Neil it appears we have no further questions at this time. If I could turn the call back over to you.

Frank O’Neil: Very good Cindy. Thanks to everyone for participating with us. We will talk with you after the second quarter news release is out.

This will conclude today’s conference. Again, we would like to thank you all for your participation and have a great day.