ProAssurance Corp (PRA) 2005 Q3 法說會逐字稿

Good day, everyone and welcome to today's ProAssurance third quarter earnings release conference call. For opening remarks and introductions I will turn the call over to Mr. Frank O'Neil. Please go ahead, sir.

Thank you, Jim, and thank you everyone, for being with us this morning. We've got a lot to cover for you including the following legal items: Today we expect to discuss historical information and make forward-looking statements and projections. Those will be based on our estimates and anticipation of future results and events. This is especially true for any discussion of the planned sale of our personal lines business.

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 that we issued on Monday November 7th, and the one we issued this morning November 8th. Further discussion of risk factors and uncertainties about our business are contained in our forms 10-K, 10-KA, 10-Q and other publicly available documents.

We will not undertake and expressly disclaim any obligation to update or alter forward-looking statements whether as a result of new information, future events or otherwise except as required by law. We are webcasting this call. We'll make it available for replay as described in our news release in 8-K. Today's content is time sensitive. It's accurate only on November 8, 2005, the date of first broadcast.

The call is the property of ProAssurance and you may not disseminate its contents without our express written consent. If you happen to be reading a transcript of this call please know that we have neither reviewed, approved, or authorized it.

Participating with me on today's conference call are Dr. Derrill Crowe our Chairman, and Mr. Vic Adamo the President of ProAssurance, and Mr. Ned Rand ProAssurance's Chief Financial Officer, and Mr. Howard Friedman our Chief Underwriting Officer, and Mr. Darryl Thomas, our Chief Claims Officer. The other Darryl and Howard are the co-presidents of our professional liability division. Also with us is Jim Morello, our Treasurer and Chief Accounting Officer. Dr. Crowe will be addressing the planned sale of MEEMIC at the end of our remarks on professional liability, but first, Ned will lead us off with a review of the numbers.

Thanks, Frank.

Before I get into the numbers, let me remind you that NCRIC is included in our results for this quarter. We brought the results into our income statement for the last two months of the quarter and their contribution to the balance sheet is reflected at quarter end. As far as the results in the quarter, I'm pleased to be able to report that our outstanding results continue this year and we believe the fourth quarter will see us continuing our success.

Last quarter we reached underwriting profitability in professional liability. And again this quarter we maintained underwriting profitability. Professional liabilities combined ratio was 97.1% for the quarter and is under 100% for the year to date period. The combined ratio and personal lines was 78.7% in the quarter, bringing the consolidated combined to 92.5% in the quarter. That's one key goal.

The other is a long-term average ROE between 12 and 14%. In the quarter we exceeded that goal. Our ROE was 16.8% and it's 15.6% for the year to date period, both of those numbers being an on annualized basis.

As we have previously discussed we look to expand our professional liability business through two avenues. While we look to achieve organic growth, we also believe growth can be achieved through selective acquisitions. The acquisition of NCRIC added $10.9 million in written premiums in the quarter and allowed us to grow our premiums in this market in spite of increasing competition.

Cash flow from operations continues to be a high point of our results, at almost $101 million and a quarter and$ 282 million for the year to date period. We believe that cash flow will continue to be strong and will likely increase as we bring NCRIC's operations fully on board in the coming year.

On the subject of NCRIC, book value rose in the third quarter with a boost from the acquisition. Our book value is $23.76 at quarter end, up from $20.92 at the beginning of the year. The acquisition of NCRIC added $0.95 to that number. Book value continues to fluctuate with interest rates. With higher rates adding some downward pressure during the quarter.

As I mentioned last quarter, rising interest rates are a mixed blessing for us. While higher rates will reduce book value, they will add to income as we put our strong cash flow and maturing bonds to work at higher rates. Our taxable equivalent income yield for the third quarter was 4.86%, a slight increase over the second quarter of this year when interest rates had dipped a bit.

Frank?

Thanks, Ned. Now we're going to look to Howard Friedman who will talk to us a little bit about reserves, premiums and other actuarial/underwriting issues.

Thanks Frank. Favorable net loss reserve development in both professional liability and personal lines did add to our results in the quarter. As you might expect, the favorable reserve development was highest in our professional liability segment, where our reserves are significantly larger than in personal lines, and the size of our overall professional liability reserve is worth underscoring.

While we saw $5 million in favorable net development in professional liability in the quarter, this is only 0.3% of total professional reliability net reserves. Even the total of $10 million in favorable net reserve development for the year to date is also a very small fraction of our overall reserves. We're confident in the adequacy of our reserves, the net confidence is growing quarter by quarter, as a result of our long-term decision to protect our balance sheet by reserving carefully in a volatile insurance segment, we can report that the net favorable development doesn't come from any single year, but we can tell you that it's from more mature years, 2003 and prior.

Please understand that the recognition of favorable net reserves should not be taken for granted. In the past quarter alone, we've seen individual verdicts against physicians insured by other companies topping $10 million, emphasizing that this is an extremely volatile line of insurance and we are here for the long-term. As such, we'll maintain our conservatism about reserves as a core tenet of our operations.

Let me make a couple of additional points from the actuarial side of things. Neither frequency nor severity appears to be changing overall from the trends we've observed for some months now. In a few states, we've seen a slight decrease in frequency but that's been offset by an uptick in frequency in other states. It's also not clear whether these are changes are timing issues related to tort reform legislation or true changes. As I said, overall there's no marked trend.

Now let me shift to matters related to professional liability underwriting. Premiums are up quarter over quarter because we've added NCRIC. We view growth through transactions such as NCRIC every bit as viable as organic growth in existing markets, or de novo expansion into new markets. In fact, it's often preferable because entering new markets often requires significant price concessions unless the market is in crisis like we saw in Oklahoma last year.

Right now we are seeing continuing growth in a number of states such as Kentucky and Oklahoma, but we are not making any movement into new states at this stage of the market. This results in a shifting of our risk profile away from higher premium, higher risk states and into states with a lower risk profile. This means we can sell $1 million policy for less in one state versus another and still make the same margin while facing less risk.

Coinciding with that trend is the fact that many insured in high risk states are now buying lower limits, which does reduce premiums somewhat, but also lowers our risk profile. Given the pace and size of rate increases since the year 2000 when we led the industry in response to higher loss trends, our need for large rate increases has vastly diminished. So the actual rate increases you see from us may be lower than in previous years.

But make no mistake, we are pricing to achieve the margins we require to support our operating goals and we are convinced that our rates remain adequate. And that allows us to make long-term commitments to our insured that we'll be there when they need us. The average rate increase on renewing policies was approximately 12.5% in the quarter and stands at approximately that same rate for the year to date.

Policy holder retention in the quarter was 87%, up a bit from last quarter and in line with our expectations due to continued reunderwriting and competition. Frank?

Thanks, Howard. Darryl Thomas joins us today to give us some insight into the claims of our business. Darryl, can you start by updating the status for the Columbia Hospital For Women case that involves NCRIC?

I'm happy to start there, Frank. As most of you know, the Columbia Hospital case became ours when we completed the NCRIC transaction. The initial verdict of the $18.2 million was rendered against NCRIC back in February of 2004 in the District of Columbia Superior Court. NCRIC filed several post-trial motions seeking to set aside the judgment or obtain a new trial.

At September 30, we learned that those motions have finally been acted upon and as expected, they were denied. It's hard to say that we welcome the decision, but it does free us to pursue an appeal, which we could not do until the post trial motions were decided upon. We're confident that there are several appealable issues and we're going to pursue those vigorously. We did however take the possibilities of this adverse judgment into account in developing our pricing in the NCRIC transaction.

On a more global basis, I can reinforce Howard's comments about claims frequency and severity. Both are essentially unchanged since the first of the year. I should probably report on tort reform here. In the last quarter, we saw tort reform enacted in Illinois but as in other states, we have to wait to see how the Supreme Courts rule in each state, and see how the reforms affect losses.

We're in that same wait and see mode in other -- in a number of states. West Virginia and Ohio are probably the closest to seeing some ruling on their most recent reform. There's been quite a bit of lower court activity on tort reform in Georgia, and many of the rulings have been unfavorable, but the issue of damage caps hasn't yet come up for appeal.

I know the spotlight continues to shine on Florida, but we just don't see any real change in the climate there because of the amendments that were passed a year ago today. Florida's plaintiff's bar is still managing to evade the restrictions on the percentage of contingency fees they can collect, the effect of the three strikes law are so far in the future that it's not the hot button that it was 12 months ago. In summary, Florida is dangerous, but we're able to live with that because of the experience and expertise of the claims staff and defense counsel we use there and the fact that our rates are adequate for the higher risk faced by our insured.

What is interesting is that a number of physicians going there have stabilized because of recent bankruptcy laws. In some cases they supersede the Florida laws regarding asset protection and that can make going there less attractive. In some states where tort reform has been struck down, Wisconsin, for example, there is already an active political push to reintroduce tort reforms that will pass constitutional muster. In the Wisconsin example, it doesn't mean everything goes back the way it was, but it does show that there is an active group pushing for fairness in the legal system and we find that encouraging.

Vic?

Thank you, Darryl. Let me give you our view of the professional liability landscape. At ProAssurance, we continue to focus on our basics, financial strength, proper pricing, careful underwriting, aggressive defensive claims and providing quality service to our insured. We have had success with this approach and believe that we'll continue to do so in the future.

Let me touch on how we view the current marketplace dynamics. For starters, rush of thinly capitalized companies to enter the market seems to have subsided. They are still troublesome, especially in selected areas like Missouri, and to a lesser extent in Florida and Ohio. However, the startups remain limited in capital and therefore limited in scope. Given their low price focus, we are skeptical of their ability to increase capital and grow their market share.

Of late, we are also experiencing greater price base competition in a few areas in some of our states from more established competitors. We closely monitor these market dynamics and so far we have been able to compete well with our emphasis on financial strength, claims defense, and customer service, without pricing below what we consider to be an adequate rate.

The hospital market is more problematic. Given the institutional nature of the purchasing decision and the large size of premiums, it has traditionally been more price-focused than the doctor business. As we mentioned in our news release, we're seeing growing price based competition for hospital risk from admitted companies and from capitas. In our book, this is most evident in the state of Indiana, where we picked up a number of hospitals several years ago when FICO failed and went out of business.

We continue to move cautiously in the hospital segment. We believe that the competition gets attracted to the large premiums and forgets that hospitals present a complicated and volatile risk profile. It's just not a part of our game plan to chase these risks if we do not meet our ROE goals. To do so, we believe, would be detrimental to us and our insureds in the long-term.

At ProAssurance, we have the benefit of diversification that comes from writing business across different states and across a broad range of specialties. We can take a step back from the marketplace when necessary and use our capital in those states where we have the best chance of reaching our ROE goals and where we can be of greatest service to our insureds.

Before concluding, I would like to touch briefly on the integration of NCRIC into the ProAssurance organization. The integration is going far smoother and proceeding far father than we could ever have anticipated. We have a good deal of experience in bringing companies into ProAssurance, and we understand the issues and how to solve them.

There's been a real sense of commitment to the process by the ProAssurance employees who joined us from NCRIC, and I'd like to thank them for their efforts and to recognize former NCRIC president Ray Pate and his team for setting the tone for a successful merger. Frank, turn it back to you.

Thank you, Vic. I'm now going to ask Dr. Crowe to talk to us a little bit about yesterday's announcement regarding MEEMIC and to give us any final remarks on medical liability. Dr. Crowe?

Thank you, Frank. Before I talk about MEEMIC, let me mention a couple of items relating to professional liability.

First, as we reported in our news release we expect to renew our existing reinsurance premiums with no significant changes in terms or conditions. Because we renew October the 1st, our reinsurance renewal this year wasn't affected by the three major storms, but I'm not certain that renewals at the traditional January 1st will be as lucky, and we may be affected next year.

Many of you have heard me say that certain reinsurers may be our real competitors because they give capacity to smaller underpriced startups. I'm a firm believer that reinsurance capacity will flow to where our terms are the highest. As prices go up in catastrophic-related exposures I think you'll see it tighten in tough areas such as medical liability, worker's comp, and in other long-term lines that are harder to underwrite. They'll have a lot of exposure and plenty of volatility.

It is my prediction that the storms won't bring a dramatic end to the current pricing environment in general insurance lines but it will limit capacity in others. We see this as a benefit of sorts to us. We can increase our retention or otherwise reduce our use of reinsurance due to our financial strength. Many of our competitors do not have the ability to do so, and may be faced with restricted capacity and higher re-insurance costs.

This leads me to echo Vic's thoughts on the professional liability market. We're starting to see pockets of what we consider to be price-focused marketing by some of the established carriers, and I'm not going to name names. On the other hand we see states such as Kentucky where we have identified good risk and we've met with success in broadening our market penetration. All in all, I see more bright spots than tarnish on the silver lining and I'm excited about the opportunities to come in the professional liability field.

As pricing becomes more challenging, and the business environment gets tougher, that's when we're at our best, and when we really differentiate ourselves from the competition. Professional liability is where our expertise lies, and it's where we can make the greatest difference. That's one of the things that I find so compelling about our MEEMIC transaction.

The sale of MEEMIC was a difficult decision for us, as you can imagine. Those of you know who have followed our company know that MEEMIC carried us in the unprofitable period in medical liability insurance. MEEMIC is a great company with strong management team and a dedicated group of employees, but as we assess the strength and direction of ProAssurance, it is clear that we are primarily a professional liability insurance organization.

As we look at the personal lines space, we believe that there are substantial benefits of scale that we could not reasonably achieve or expect to achieve at MEEMIC. I look around, I see personal line companies becoming much more data driven and their ability to play very price competitive games as they compete for increasing distinct market segments. In fact, I'm willing to bet most of the leading personal lines companies have more people in their informational technology departments than we have employees at MEEMIC.

A number of months ago we were approached by GMAC about the prospect of selling MEEMIC to their organization. GMAC has a large and developed personal lines business, and has a longstanding presence in the Michigan market, which is MEEMIC's home. We thought this transfer made good sense for MEEMIC as well as for ProAssurance. We also surveyed the market and found that GMAC was willing to pay a very favorable price so we decided to move forward.

We understand that in the short term, there will be a hit to earnings, but we believe our balance sheet will be stronger, our book value higher as we invest funds from the portfolio and we will now be able to bring even greater focus to our long-term goal of remaining the premier medical malpractice insurance group. With a company such as GMAC, MEEMIC will have the resources to sharpen its marketing, expand its reach, and ensure its ultimate success. GMAC has a long history in Michigan, and real expertise in personal lines insurance and a place where MEEMIC will fit right in and continue to be a great asset.

I don't like business school phrases but this is really a situation where both sides win. While GMAC gets a valuable asset we get something equally valuable: capital and focus. GMAC will pay us $327 million in cash under terms of the agreement and we will dividend up $73 million from MEEMIC prior to the closing for a total of 400 million. MEEMIC is technically a subsidiary of ProNational, one of our professional forms part of its capital base so we will leaf enough of the proceeds to ensure that our capital continues to satisfy the rating agency and the regulators. We will be looking at any capital needs and other subsidiaries.

The remainder will be available for general corporate purposes and we'll think long about the best use for that capital. While we certainly could use it to fund an acquisition, we have a very good currency right now with our stock.

If you look at our track record, you'll see we're judicious in our use of capital and we do the right thing for our shareholders and our policy holders. We expect the transition with GMAC will close in the first quarter of '06, our initial discussion with Michigan regulators will lead us to believe that we will scrutinize the terms closely but they have said they generally are in favor of the transaction. Frank?

Thank you, gentlemen. We'll end our prepared remarks and Jim, if you can come back in and queue everybody up for questions, we'll take those as we go.

Thank you, sir. [OPERATOR INSTRUCTIONS]. And our first question comes from David Lewis from SunTrust Robinson and Humphrey.

Good morning and thank you.

Good morning, David.

Ned, a couple of questions on the MEEMIC transaction. First, can you tell us what the GAAP after tax gain on the sale or the accretion to book value might be?

Sure.

And two, and I have a couple followups. I'm estimating you'll have somewhere in the 250 to 300 million of excess capital following the transaction, yourself or Dr. Crowe could maybe talk about kind of the M&A landscape. Would you rather keep your powder dry for deals or would you rather initiate a repurchase program?

I'll take on the questions about the balance and I'll let Dr. Crowe talk about the M&A landscape. The proceeds are $400 million. That's a pre-tax number. We expect after taxes and transaction costs somewhere in the neighborhood of $325 million of cash.

The carrying value of MEEMIC right now is roughly in the neighborhood of $225 million so we'll see $100 million approximately increase in book value for the company and I think that -- that works out to a little north of $3.20 a share increase in book value.

Dr. Crowe?

And to answer your question, David? On that part?

Yes, it did, yes, sir.

Okay. What we're going to do with the cash. Number one M&A activity, there's probably more verbal communications going on in the M &A activities field than I've seen ever. Whether or not anything will come to fruition we don't know, and as you know, we're not going to comment on that. With our stock selling at two times book value, I do not think I would look favorably upon a stock buyback plan at this time. Does that answer your question?

It does, but just to kind of follow up on the M&A landscape. Are there nonpublic opportunities out there, whether the reciprocals or other transactions that you're referring to, or would it primarily be in the public realm?

I think it would probably be close to everything.

Okay. Thank you. And just one other question. On the professional liability reserve releases, traditionally I guess over the last year or so they've come in the second and the fourth quarters as you've had your reserve studies. Now we had one in the third quarter. Does that imply if claim trends remain as favorable as we've seen recently that that may become more of a quarterly phenomena?

Hi, David. Howard. I don't think it implies anything necessarily quarter to quarter.

What we saw as a result of the March 31st analysis, which we first reflected in the -- in the second quarter was an improvement in some of the earlier accident years. We made a decision in the second quarter to recognize a portion of that, and also made a decision to continue to monitor the claim trends as we go through the rest of the year in terms of closing averages on those claims in terms of success rate at trial and that type of thing.

We continue to see favorable results in the third quarter and based on the results of that as well as what we had coming out of the March 31st analysis, we made the decision to continue the reserve release this quarter. We would take the same kind of quarts, I think in any interim quarter meaning a quarter that was not the result of a particular reserve analysis we would look back at what we'd seen previously plus anything that came to light during the quarter.

So you'll have a study completed again in the fourth quarter, that if it shows similar results that you've seen previously, that you might have an additional redundant release in the fourth?

Well, we will have and we're in the process of having the analysis done as of September 30th and that forms the basis of our year-end decision-making. We also do a -- a true up as of December 31st in a short time frame, and that would -- those together would form the basis of whatever we decide to do in the fourth quarter, but it's yet to be seen what those results will be.

Right. And can you give us any idea of where your reserves are relative to the midpoint of the range? As of the last study?

That's information that we have not historically provided and would not be able to do that at this point on the call.

David, we generally as we've said before don't approach professional liability with the objective of creating a range, because there's always some uncertainty regarding loss reserves, so we've just said that a range may not provide useful or better information than our approach.

At year end and at other times during the year, as you've heard, we conduct a thorough analysis in conjunction with [Tillinghast] in professional liability and Millman in personal lines and then based on their recommendations, our judgments, we establish what we think is the correct liability and then the actuaries review that decision and so we really don't focus on a range.

I understand. Thank you very much.

And our next question will come from Jason Busell from KBW.

Good morning, gentlemen. Nice quarter.

Thank you.

One followup on the MEEMIC transaction. Is there any reason why it was structured the way it was?

This transaction was almost totally finalized by Ned, and Ned I'm going to let you answer that.

The -- I think it mainly had to do with two things and I don't want to speak for GMAC, but it had to do with what they perceived the capital needs within their organization of MEEMIC being, and their desire just not to trade dollars for cash. And so it was just driven by that, I believe.

Okay. On the commercial liability business, I know you made the comment that some physicians are purchasing lower limits. Can you be a little bit more specific as to what states we're talking about?

Yes. I think -- well, actually I think we're seeing it in most states to be honest, certainly the states that have higher average premiums and where rates have gone up. But I think in particular Florida has been a state over the last several years that physicians have been gravitating to lower limits and many are now at the $250,000 level which is the minimum that they are required to carry, but certainly in Ohio, Missouri, Illinois,

So Florida, which I know that -- that trend has been happening for a while so some of the other states this is has been more of a recent phenomenon?

I'd say that over the last year to two years but we're certainly seeing a continued pattern and it's starting to have a more significant impact on premium volume on some of those states.

Okay. Just a final question. The -- the fact that some of the new entrants have slowed, Dr. Crowe, is that related to your comment of less access to reinsurance where -- after the hurricanes?

No, I don't think so. The reinsureds don't react that quickly. I -- these startups that we've been seeing are by the same people that have been doing it for years and years. They always come out of the woodwork and appear in a tight market and problems develop and they're usually gone sometimes. I think it's just a matter of they probably filled what niches they can find, that they can get doctors to buy from them, and I think that a lot of them have assessable clauses in them.

Assessability features that the doctors don't care for. They certainly don't have ratings. Obviously they are penetrating the market by selling anywhere from 25 to 35, 40% below our rates and you combine that with the higher reinsurance cost that they're certainly getting because that's the only way that reinsurers will write them and they're marked for problems straight out of of the chute and it's a matter of how long they lost and that's the function of how long the tail end of the liability market is.

But perhaps we're starting to see -- we're getting to the point where we're seeing a tail of 24 to 46 months?

No, no, no. No, they can last five or six years.

Okay. Okay.

Before they -- they --

I appreciate it. Thank you.

Yes.

Our next question will come from Mike Dion from Sandler O'Neill.

Good morning, everyone. I've got three questions. First just with respect to capital management, I didn't hear you mention a possible dividend, Dr. Crowe, if that's something you've looked at if you're not able to find any acquisitions that meet your criteria.

Secondly, I know it's early yet, but any change in pricing given the -- the hurricanes with expected higher reinsurance costs, is you seen any subtle change in pricing as we go into year end and January 1 renewals, and then lastly, just with respect to NCRIC, I think you had indicated last quarter that you were going to do a further reserve study of their reserves and I didn't know if by Vic's comments if that has being better than expected, if that has included any adverse development that NCRIC was less or not any that -- that that was what you meant by that.

And also, maybe if you would give a little color on NCRIC renewals and how that's going and maybe a percentage of the NCRIC book that you're renewing versus kind of letting lead off.

That's four questions, Mike.

Sorry about that.

I'll answer one. Number one, yes, we've considered dividends. We've considered stock purchase buyback. Yeah, we look at everything.

Obviously we are rounding up gunpowder. We intend to keep it dry, so there are a lot of small companies, small books of business out there and we're hoping we'll have some activity and we won't need to consider dividends and purchase -- stock buyback programs. Having said that, Howard, did you catch his last three questions? It sounded like underwriting.

I'll get two out of the three and Ned's going to do one. On the reinsurance the effect of any reinsurance costs increases passing through yet to pricing, no, we have not seen that yet. I think it's too soon. If -- if we see competitors or competitors' experience changes then reinsurance costs it will take them a little while to build those into the rates. If that happens I wouldn't expect it to have an effect before January 1 and we would about see it until sometime in the first quarter. It's yet to be determined though.

With respect to NCRIC renewals, more or less, on -- on track. NCRIC has -- had some significant rate increases over the past year, and in the competitive market we did see some attrition of business, mostly as a result of -- of price -- but overall our expectations are good and we've been looking at that business very carefully as it renews both from an underwriting quality perspective as well as a price level and we're satisfied with what we're seeing.

You also asked the question about NCRIC reserves. Ned?

Sure. Our NCRIC reserves -- A couple of points. One is, they will be floated into the reserve study that we have ongoing now with Tillinghast.

As to what we saw in the third quarter we did not experience any adverse development. Probably the only -- I don't know if you'd call it a change, but the only change to NCRIC was basically we've instituted our reserving philosophy at NCRIC, and we've begin doing that at NCRIC.

On income --

Yes, on a going forward basis. But we did not see anything in the quarter that caused us to make any adjustments to our prior reserves.

Okay. And I guess if you guys will let me maybe just a followup to one of my prior questions. In terms of activity with the capital proceeds from MEEMIC, historically you've stuck to your footprint. Would you consider expanding your footprint outside of your existing geographic areas as opposed to an M&A acquisition if that looks more attractive to you?

Vic here. Capital, we look at the foot print as a management issue at this point in time where we feel comfortably we can understand the marketplace and manage them, it's not been a capital issue in terms of the footprint, so the additional capital while it could be used for M&A activity I don't think it in and of itself will cause it to expand or not expand our footprint.

Okay. Fair enough. I'll let others ask questions. Thank you very much.

Thank you.

[OPERATOR INSTRUCTIONS]. We'll take our next question from John Gwynn from Morgan Keegan.

Morning. Ned, the -- y'all have not published separate GAAP book values for MEEMIC in a while. Can I assume that your basis for 225 approximates GAAP books?

Yes, it does and when we -- we will have our 10-Q out by close of business today. We've got a subsequent event footnote in there that gives a little bit more detail on the balance sheet of MEEMIC as a stand alone entity.

Vic as an aside I guess this gets you a good bonus. Your sponsor demutualization cost was pretty low.

MEEMIC was a great transaction for the organization here.

Howard, when I look at -- in my simple little fashion, I look at what's going on among the public peers in medmal and for the first nine months of '05 your public peers reported a net loss in LAE, this again a simple average of 75%. ProAssurance is running rounded 84%. 900 basis points higher than your competition.

My question, Howard and once again I'll give you a yes or no question. Is there some disadvantage in your organization that has eluded my examination in regard to geographic compensation to the book, underwriting talent or claims expertise? I realize that's not a universal list that would cause the difference, but I'm just curious about those three items.

No. We're just more conservative about establishing reserves at the outset.

Thank you very much, Howard.

Okay.

Actually, John, if you want to get down to it, they're better than we are.

Dr. Crowe, we'll have a talk about that.

Okay.

Anything else, John?

He's gone.

Our next question will come from Beth Malone from Advest.

Beth, go ahead.

Ms. Malone, your line is open.

In that case we'll move along to our next question from [Rob Matone from Schneider Capital.]

Good morning.

Good morning, Rob.

Just a couple questions. One, you mentioned in -- that you have a strong currency in your stock now to use potentially for acquisitions, and I'm just wondering if you could talk a little about your thinking when you look at valuing companies that you're acquiring.

Is that -- is that process completely independent of your stock price or does the fact that your stock price is now stronger allow you to potentially pay more to -- to make an acquisition?

I would say 90% of it just as a -- as a -- is us assessing what we think a company's worth. And sure, if -- if that entity wants stock, yeah, we can pump it a tad. Maybe a 10th of a point or something like that. You know, a book.

0.2 at the most. But other than that, we tend to look for book value. And that's adjusted book value after we evaluate preserves, et cetera. Any contingent liability. Does that answer your question?

Yes. Yes. Thanks. And my second one is I've head a couple things in industry publications about some developments in pricing techniques and medical malpractice and I think there was some reference in one of your filings to some small amount of money you spent on some research there. I'm just wondering if there's anything you can report in terms of things you're looking at with predictive modelling or new pricing techniques.

No.

We don't want to.

We are doing it, and yes, we're working with somebody. Whether we've came out in our -- what is it Q? K? And yes, we are doing it and yes, we're continuing to work on it, and yes, we are about the actual -- the way it functions.

Because we're competitive.

Absolutely.

Okay.

You can understand that.

Yes, I do. All right. Okay. Thanks a lot.

Yes.

[OPERATOR INSTRUCTIONS]. And we'll go again to Beth Malone from Advest.

Thank you. Just a couple questions. On the -- on the lawsuit that you've inherited with NCRIC, is there any ongoing material costs that will be associated with appealing that and working through that?

You know, I guess there's I guess two -- obviously there will be some attorney's fees et cetera costs with the appeal. The appeal will be coordinated by our attorneys in-house, and there is post judgment interest that will accrue. It's a slightly strange formula in D.C. And it varies, but those are the two ongoing costs.

Okay. And just a general question, on the NCRIC health care business, the management business, is that continuing?

Vic? That's yours.

We are -- I think as we identified early on, it doesn't fit into our focus as an insurance group and we are working on a sale of the transaction. We're talking to the management of the organization currently about -- about a transaction. There are no documents signed, but we would like to complete it if possible by year end.

Okay. All right. Thanks. And then kind of a general question. We haven't heard much object federal tort recently. Is that pretty much dead again as an issue that's going to have an impact on the industry in the next year or so?

Not in the next year or so. My personal prediction is we may have one in the next ten years and it's as alive today as it has ever been, which is zero.

Okay. So you're not looking for relief from that.

Not looking at relief. The Plaintiff Bar is very, very powerful in the U.S. Senate.

And lastly on your investment strategy, are you reacting to the short term rates going up or what your expectations are in your portfolio?

We don't anticipate any significant changes in our investment strategy.

So you're going to keep it relatively short for the near term?

Yeah, the duration is right around a 4 and we plan to keep it right around that.

Thank you and congratulations on the quarter.

Thank you.

And we do have a followup from David Lewis from SunTrust Robinson and Humphrey.

Thank you. Two quick questions. First, what do you anticipate getting as far as off the yield off the excess proceeds from MEEMIC, and secondly, Dr. Crowe, can you talk about medpro and any increased competitive factors that they may have put in, now being under Berkshire?

I'll take the first one. We would anticipate investing the funds that we get from the MEEMIC transaction in much the same fashion that our current portfolio is structured, so somewhere between 35 and 45% of our funds in municipal bonds and the remainder in AAA and AA bonds and I guess that depends on where the market stands at the time the deal closes.

And what kind of rate would that be, roughly, the new money rates today, if nothing changed with rates it would be what?

Yeah, right around a 5% on if tax equivalent, yes.

Okay.

And the second part of your question was what?

I know you talked a little bit about competition, Dr. Crowe.

Yes.

Is Med Pro doing anything different now being under the Berkshire family?

Medical Protective has become a little bit more competitive, I guess. They're entering some new markets. We're seeing them to re-evaluate their rates. They're repricing some of their insurance, maybe coming up with discounts that they can give. They're a little more aggressive, but we're not seeing anything like we're seeing at the startups, where they're 30, 35, 40% below the going rate.

They are attempting to come into some markets that we're in, for instance, here in Alabama, Oklahoma, really being competitive there. It's exactly what we'd expect from a company like Medical Protective. A good company, good management and of course you know, Mr. Buffett's not going to give the product away, so -- I appreciate having him in the field.

That's helpful and just finally, are there any other competitors out there that are maybe teetering that might create an opportunity to pick up some business if they have additional troubles here over the near term?

I don't know. All we do is just wait. We try to keep our powder dry. We try to keep our stock where it's a good vehicle to either number one, use it to purchase the company or to use it to raise cash if we need it and you know, in this business, Dave, you've been with it a long time, in the medmal business you can hide trouble for a long time and what we try to do is keep our eye on things and we've gone to talk so some of the companies that went bankrupt before they went bankrupt and tried to get them to do something and couldn't do it.

And finally they would call us after they've downed the tube and there's nothing anything can do. We're continuing to see conversations, we're continuing get out and talk to people. I'm not going to say though that this's anybody in particular that's in trouble.

I think we may even see some transactions where they're not in trouble, but just need to be part of a bigger group for economy's purposes and strength and reinsurance costs and the whole nine yards. The M &A market is changing a little bit. For the first time, I've been looking for this change for ten years or longer. It's beginning to change.

In what way?

In what way?

Yes.

I think there's more activity. I think there's more interest in doing something for more companies. Before they're totally bankrupt.

I understand. That's helpful. Thank you.

[OPERATOR INSTRUCTIONS]. And gentlemen, it appears there are no further questions at this time. I turn the conference back over to you for any additional or closing remarks.

Thank you, Jim and thank you for participating on our conference call. We will talk to you again when we have something new to report or at the time we release fourth quarter earnings.

Thank you. That does conclude today's conference. We appreciate your participation.