ProAssurance Corp (PRA) 2005 Q4 法說會逐字稿

Good day, everyone and welcome to today's ProAssurance fourth quarter earnings conference call. As a reminder, today's conference is being recorded. For opening remarks and introductions, I will now turn the call over to Mr. Frank O'Neil. Please go ahead, sir.

Thank you. For those people who have joined us, we thank you for your interest and your time this morning. We will start with our legal precautions. We expect to discuss historical information this morning and we'll likely make forward-looking statements and projections on this call. They will be based on our estimates and anticipation of future results and events. This is especially true for any discussion of the proposed transaction with PIC Wisconsin. 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 expect our statements today to be reasonable, but you should review the contents of this call in conjunction with the caution regarding forward-looking statements in the news release that we issued on Tuesday, February 28.

Further discussion of risk factors and uncertainties about our business will be contained in the Form 10-K we will file for the year ended December 31, 2005. We will also present these risk factors in the registration statement we filed on February 15, 2006, in connection with the proposed PIC Wisconsin transaction. That registration statement includes a proxy statement, prospectus, and other relevant documents concerning the proposed transaction. We urge you to read the registration statement and any other relevant documents filed with the SEC, as well as any amendments or supplements to those documents as they will contain important information. You may obtain a free copy of the proxy statement prospectus as well as other filings containing information about ProAssurance and PIC Wisconsin at the SEC's website, SEC.gov. Those documents are also available without charge from ProAssurance's investor relations office by writing to us at 100 Brookwood Place, Birmingham, Alabama, 35209. You may also call us at 205-877-4400, or send an e-mail to information@ProAssurance.com. Finally you can obtain those documents from the investor relations section of our website, ProAssurance.com.

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 February 28, 2006, the date of first broadcast. This call is property of ProAssurance and you may not disseminate the contents without our expressed written content. If you are reading a transcript of the call, you should know that we have neither reviewed nor approved it. Participating with me on today's conference call are Dr. Derrill Crowe, our Chairman; 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. Together, Darryl and Howard are the co-Presidents of our Professional Liability division. We'll discuss the PIC Wisconsin transaction at the end of our prepared remarks, but first, we're going to get a number review from Ned.

Thanks, Frank. In discussing our numbers I want to be sure that everyone knows that we are presenting the results of our personal line segment, the MEEMIC companies as discontinued operations. The sale of MEEMIC was effective January 1, 2006 and in accordance with accounting regulations the results of our personal lines operations are presented as discontinued operations. One further reminder, NCRIC was in for the entire fourth quarter and for the year the results came in starting in August. With those footnotes out of the way, I would like to report on what I think was an exciting quarter, a fitting way to wrap up what we believe was an excellent year.

I want to first focus on the items that are key metrics by which we judge the success of our operation. Our combined ration in the quarter was 91.5%, an improvement of a full 10 points over last year's fourth quarter. For the year, we reached 97.1%, the first full year of underwriting profitability and professional liability since 1999. We're really seeing the effects of the rate increases we implemented starting in 2001. The compounding effects of those coupled with our claims management expertise and disciplined approach to underwriting are producing the results we anticipate and we would expect them to continue. For the quarter our return on equity was 14.3%, ROE was 11.6% for the year.

Going forward, we will not have the benefit of MEEMIC's earnings and we understand the challenge we face in achieving our ROE objectives especially as we look to put the additional capital created by the sale of MEEMIC to work; however, we believe that the sale of personal lines was in the best long-term interest of our shareholders. Looking into 2006 we know that the achievement of our ROE objectives will remain a challenge and I will give some more details on the MEEMIC transaction in just a minute. Our cash flow from continuing operations remained strong, $73 million in the quarter and $323 million for the year. These numbers are down a bit over the comparable period from last year, but we believe they will remain strong through the coming year, especially as we bring PIC Wisconsin online and fully recognize the NCRIC contribution. Since the beginning of 2002 our operating cash flow has totaled more than $1 billion. You can see the effect that this has had on net investment income. It's a real positive for us when combined with rising interest rates. On that subject, taxable equivalent yield for the fourth quarter was 4.94%. We do have to acknowledge that rising interest rates put some downward pressure on book value, but even so, book value rose to $24.59 at the end of 2005. Continuing a string of 15 straight years in which we've increased book value.

Now to touch on a little bit about the sale of MEEMIC which took places in 2006. As previously discussed, the sale of MEEMIC provided us with us gross proceeds of $400 million and that includes $75 million that was paid out by the MEEMIC companies in dividends prior to the sale. The sale will generate an after-tax gain of around $110 million, and increase our book value by approximately $3.50 per share. The sale also generated approximately $320 million of cash net of tax. Approximately a $150 million of these proceeds will remain at Pro National to support its ongoing operations. The remainder, we hope to dividend up to our holding company; however, a dividend of this size will require regulatory approval. Frank.

Thanks, Ned, now we're going to hear from Howard Friedman who will focus on reserves, premiums and related issues. Howard?

Thanks, Frank. As a bridge from the financial discussion, I want to give you a bit of color on the $13 million of favorable net loss reserve development in the quarter. We continue to see that development from year's prior to 1999, but it won't be too much longer before we all but close the books on many of those years. We're also seeing some favorable development from the 2003 and 2004 accident years which reflects the attention we paid to returning rates to adequate levels during the earliest years in this decade. For the year favorable net loss development totaled $23 million which is 1% of our overall reserves.

We completed our year-end reserve analysis and I will reiterate our confidence in reserves and at the same time I want to reiterate our cautionary approach to our business. Multi million dollar verdicts are still a fact of life in our business and we believe that the need for strong conservative reserving cannot be overstated. To that end we continue to reserve the current year above our pricing targets, to insure that our balance sheet strength remains in act and to be able to respond when our policyholders need us.

Over the course of the year, we retained 85% of our expiring policies. That continues to be be in our expected range. Rates on those policies were on average 11% higher than the expiring rates. Policyholder count was up 7%, benefiting from additional insureds at at NCRIC and growth in several targeted states. Gross premiums were essentially unchanged year-over-year. We did benefit from the addition of NCRIC premiums from roughly midyear onward and the addition of NCRIC premiums for the full year will be a benefit to us in 2006, as will be the addition of PIC Wisconsin premiums assuming that transaction closes as expected.

With our rates at adequate levels we expect 2006 to be a stable year for us, with our rate increases keeping pace with loss costs. We continue to price to make our expected margins and we're confident that we'll be able to maintain those margins in 2006 for the business we renew. But we should say that organic premium growth will be difficult to achieve in the current pricing environment. Darryl Thomas can comment on frequency and severity trends and any new developments in that area. Darryl.

Thanks, Howard. To add to your information, let me address the wide-spread discussion of severity and frequency trends in medical liability. Severity continues to be a concern. As Howard said, multimillion dollar verdicts remain all too common and we can't say that severity has shown any signs of retreating. Frequency continues to be a mixed bag because we have the advantage of being diversified across 23 different jurisdictions. You could imagine that we are seeing frequency declines in some states and stable frequency in others. In most of the states where there were lower frequency trends in 2005, we saw tort reform of some sort in 2004. What we can't yet tell in 2004's frequency -- what we can't yet tell is if 2004's frequency was pushed up by cases that were rushed into the system prior to tort reform, thus making 2005 look artificially low, or if these are sustainable trends. As you know, we prefer to await hard proof rather than rush to judgment at the first hint of good news. Our track record speaks for itself in this area.

From a general claims standpoint, we tried 473 cases in 2005, down some from 2004, but reflective of our strong defense approach. This also leaves us with smaller inventory of suits awaiting trial. We continue to see the erosion of tort reforms, which is a key reason why we don't react to news until it makes its way into the data. For example, two weeks ago the Georgia supreme court struck down a key tort reform that addressed venue shopping. That follows a trend of nibbling away at tort reforms in that state and it's what we worry about in other states such as Ohio, Missouri, Florida and Illinois, where tort reforms have been passed, but not yet tested. We learned just yesterday that the first challenge to Missouri's reforms have been filed.

With our proposed transaction with PIC Wisconsin many people have asked about tort reform there, and we report that a compromise bill is working its way through the legislature. It would cap non-economic damages at $750,000 but it's too soon to tell if it will pass or if the governor will veto it. The Florida legal climate remains fluid and we continue to be very cautious about Florida's legal climate, despite the optimism of others. The Florida Supreme Court appears to be on the verge of setting rules that would allow plaintiffs to agree to pay higher contingencies -- higher contingency fees by waiving certain constitutional rights and that may have an effect on frequency. Frankly, lawyers have been circumventing those limits for months and this would only codify what is already happening. So for us, it's a non-event. Frank?

Thanks, Darryl. That's a brief overview of the operational and financial side of things. I am going to ask Vic Adamo now to give us an update on our M&A transactions.

Thank you, Frank. Let me start with NCRIC. The integration of NCRIC into ProAssurance is moving along as planned and we appreciate the cooperative effort that has been displayed in the integration process. NCRIC was folded into ProAssurance's reinsurance treaty as of January 1, of 2006. NCRIC D.C. office, now officially our mid-Atlantic hub will coordinate and does coordinate the underwriting of ProAssurance's business in D.C., Maryland, Virginia, and Delaware. We expect the integration to be completed during the second quarter, when the data processing conversion is finished. All in all, we believe the transition has been a success.

The PIC Wisconsin update is also positive. All the required filings have been made. We received early termination of the HartScottRodino waiting period in January so we have cleared any antitrust concerns. We will shortly amend our SEC registration statement to include year-end numbers and we will be ready to mail as soon as the Form A process is completed. The office of the Commissioner of Insurance of Wisconsin is now reviewing the Form A and we hope to have a hearing date scheduled in the near future. Following the hearing, there will be a vote of the PIC Wisconsin shareholders. Our goal remains to complete the transaction sometime this summer.

I would like to wrap up my M&A comments with a public thank you on behalf of ProAssurance to the management and employees of MEEMIC for their contribution to ProAssurance. The run a wonderful organization and we all wish them every success in their new home with personalized specialist GMAC. Frank.

Thank you, Vic. At this point, I would like to bring in Dr. Crowe, and give him a chance to make any observations on the '05 results and to speak to the future. Dr. Crowe?

Thank you, Frank. We had a good 2005, as the energy and discipline we brought to our business has really paid off. With the sell of MEEMIC we are again focused on the single line of business that we know best, professional liability. I think we'll find out a lot about the state of our line of business in 2006, as you heard Darryl say, we see some states with stable frequency, some states with moderating frequency, and some states with increasing frequency and decreasing frequency. We'll learn in '06 if these are sustainable trends, and we will react appropriately.

In '06, we could see the pigeons coming home to roost for the first of the start-up companies that sprung up at the height of the hard market. Many of them will be entering the third year of operations, sometimes and we'll see if they have the rates that they have charged will allow them to meet maturing claims obligations. That's likely to be a big story in 2006 and 2007. A couple of final thoughts on the insurance operations. This is the time of the year when everyone wants to know what we expect in the coming year. As has been our practice, we will not give guidance. We simply can't tell you how our insureds will react to the marketplace forces. In fact we can't tell you what competitors will be doing this year to shape the marketplace. I can tell you one thing with certainty, we will continue to be disciplined in our pricing, underwriting, and claims management. And I reiterate that we are prepared to let business go if we can't achieve our margins.

In my view, you can't characterize this market one way or another. There's variability throughout the market with regard to pricing and competition, which comes back to my view that we'll learn a lot about the business in '06. We will learn who is disciplined and who feels the need to chase market share. The closest we'll come to any guidance is to say we do expect to lower our combined ratio again in '06 which means we expect something lower than 97.1% to be achieved this year on the combined ratio. To the corporate side of things, we have heard a lot of companies talking about the M&A climate in the past few weeks. There continues to be some movement and we continue to learn of a few new opportunities, which we will consider if they make sense. I can't promise you that we'll have anything else to announce this year, because as with our underwriting we have a strict discipline when it comes to our M&A activity also.

Which leads to the next question. What do we plan to do with the proceeds from the sale of MEEMIC? We are not going to rush in to deploy this capital outside of our normal investment channel for a while. While we prefer to pay for our M&A activities with stock, sometimes we have to pay with cash, especially if the book of business -- if it is a book of business or a piece of a company. So our first priority is to use it for M&A, should we want to rise, as we think it will but as a just said, I can't tell you when the next one will come. We recognize our duty to use the capital in the best interest of shareholders. To that end, we always evaluate how to deploy the capital. We have convertibles that reach their First Call option in the not too distant future and it could be that calling that debt is the best use of the capital. At some point, we may like to buy back shares or pay a dividend.

I want you to know we are aware of our duties and aware of our extra money, but we are not in a position to commit to any particular strategy at this time. I will tell you this, we and I am very excited about 2006, and confident in our ability to succeed in this market. I'm excited to see how this year plays out. Frank?

Thanks, everyone. That ends our prepared remarks. We are ready to take questions now, if you will queue folks up.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question of the day comes from David Lewis of SunTrust Robinson Humphrey.

Howard, a couple questions for you. Can you talk a little bit about whether you've seen any change in the severity or frequency in your core markets over the past six months? That's the first question. And two, if we don't see any changes in the severity or frequency, as we kind of move forward here over the next 6, 12 months, would you anticipate more systematic quarterly redundant reserve releases to occur throughout 2006?

Okay, I will start with your first question. In terms of the frequency and severity, yes, we're always seeing some changes from quarter to quarter, year-to-year, we get slight movements in some cases, up or down. In certain states, as I mentioned earlier in the prepared text, we have seen some indications that -- of reduced frequency. In other states as we mentioned earlier in the prepared deck, we have seen some indications of reduced frequency. In other states we've actually seen some frequency increases. When we have seen the reduced frequency, it's really then now a question of whether as we mentioned earlier, whether that's a reaction to tort reform that has temporarily depressed the filing of cases and whether those are being held up as long as possible to see if the judicial challenges might change the environment before the case needs to be filed. We have also seen to some extent a reduction in the number of multi defendant cases. So while the absolute number of claims being filed is down, the essential number of lawsuits, when you combine them together against a particular physician or hospital, really, hasn't changed. So some of the indications that others may be talking about in terms of reduced frequency may not be that real.

But we're -- we always are monitoring that and I can't say right now that we see what I would describe as a good long-term trend. So to go to your second question, we look at the reserves every quarter, as we always have, and we'll make whatever changes we see, but in terms of making a prediction about reserve changes right now, we are really not ready to do that.

I understand. Can you give us just a generic number of where the reserves stood relative to the external reviews actuarial midpoint?

Well that's another issue that we talked about in the past, on the -- we don't approach our reserves with respect to a range. We look at the overall uncertainty, and with respect to a specific range we have not talked about a point estimate, versus where the external actuary is. However, this year in the 10-K we have provided some additional disclosure regarding loss reserve confidence intervals and you will see that when we release the 10-K tomorrow, I believe.

The next couple of days.

Okay. In the next couple of days. The values for the confidence intervals were statistically determined and considered historic loss development variation and correlation between the different parameters that we use in the estimation process. But they also demonstrate how volatile the estimation of medical malpractice loss reserves are. I think when you see that, you will get a better sense of what the overall amount of volatility is. But we're still not talking about the point estimate, versus the external actuary.

Just a final question on the NPL expense ratio spiked up to the 17% area in the fourth quarter versus running in a 15 to 15.5% range. Was there anything unusual there. Was that related to incentive comp due to the favorable results? And any outlook for '06.

I think -- a couple of things one,--.

Wait just one moment. Could we not use the word "spike."

How about the rise?

The slight increase.

The slight increase.

Thank you.

A couple of things. This will be more clearly reflected in our 10-K when it's filed. We have reclassified some items basically out of the premium line into the commission line, and that, quite honestly is the largest driver there and when our 10-K is filed, we've reclassified that for all periods, you will be able to see that.

I'm sorry, what is that again, Ned?

Yes, we've reclassified some things out of premiums into expenses and so you've got an increase in the expense ratio but you have got basically a comparable decrease in the loss ratio. The net impact of the combined ratio is pretty minimal, and when our 10-K is filed, you will see we have reclassified it in all prior periods as well, so it will be more comparable period to period. That's the largest factor there.

So something in the 17% area is maybe a better number to kind of look forward to start off of?

Yes. I think that's correct.

Okay. Thanks very much.

Sure.

And next we'll hear from John Gwynn of Morgan Keegan.

Good morning. Ned, could you give me that split on what you intend to do with MEEMIC's net proceeds again?

Sure, we expect that we will be around $150 million in ProNational and then the remainder of the proceeds we'll upstream to the holding company, but we caution saying that with saying that any dividends out of ProNational where all the proceeds are currently being held will require regulatory approval and until we have that regulatory approval the funds will stay in ProNational. We expect to leave $150 million there abouts in ProNational and that replaces the capital that we got from stacking MEEMIC underneath ProNational.

Right.

And then the remainder would be upstream. Our net cash proceeds we estimate to be in the neighborhood of 320 million. I say estimate until the final tax returns are done, we don't have a precise number.

Right. And Ned, on PIC, could you just briefly -- mechanically that patient's fund up there, I understand it attaches at 1 million and I think they got recently a 25% rate increase. But where -- how does the money flow? Do you all collect the premium and remit to the fund?

No. In Wisconsin, it's a great mechanism, the state directly collects the funds premium.. It does not go through the insurance company as it does in other states.

Okay.

John, the interesting thing about that fund is it doesn't have a limit.

Yes, I -- if I were -- that's not a state guaranteed fund either, is it?

I don't know if it's state guaranteed or not, but it's funded by the providers, I know that. I'm not sure.

I'm not sure that the state pays in credit or not.

I'm not sure either. It's a very interesting concept. It does attach it to a million. Has no limits. Of course you can imagine the loss of the capital affects them much more than it does the underlying primary carriers. And you notice the legislature is trying to pass another bill that puts caps in at 750,000 and so they've just, I think sort of arbitrarily automatically put in a 25% rate increase when they lost that cap. And I would imagine you are going to see further - changes with that fund's premiums.

Right. I would love to see Howard and Hurly loose on that reserve. [ LAUGHTER ] Ned, the surplus note that's down at PIC now, do you intend to leave that there?

Yes, there's no intention to move it.

Okay. And one last question on PIC, the so-called ACAP ownership, has that been validated by the Wisconsin Department, and has there been any evidence of transfer on PIC's books?

To the best of our knowledge, the stock has never been transferred. ACAP has not approached PIC Wisconsin about transferring the shares and PIC Wisconsin is its own transfer agent. There's still a form A from ACAP out there that the department has not signed off on. Nonetheless, ACAP and PIC Wisconsin have agreed to adjourn that matter until after the completion of our form A. So I guess the prevailing wisdom is that if our form A goes through the Wisconsin department probably would not object to that transfer of ownership, but that's not -- that's just the conjecture. We certainly don't know what the commissioner would choose to do.

Howard, it would not be a complete call from me, without me asking you a couple of things on reinsurance. The layer move your 1 million retention, the four excess one, is that something that you might consider maybe introducing some volatility into your earnings but the returns in that layoff are pretty outrageous these days.

Well, two things. The layer of 4 million, and excess of 1 million is a retrospectively rated contract. So while we are paying the reinsurance margins on that, the loss experience that we have ultimately is reflected in our premiums and to the extent that it's good and we are able to close claims without penetrating that layer to a great extent. We will have a reduction in the future with respect to the premiums that we have recorded. Number two, if there is some volatility and there are other ways that we can look at it, we could possibly increase the retention going forward. We could introduce an aggregate deductible. We look at that each year when we renegotiate the reinsurance. But up until this point, the pricing that we have, and given that it is a retrospectively rated layer we are pretty comfortable with the structure of it, as it is.

Okay. And Howard, were there any computations or other items that might affect schedule D during the quarter?

No.

Okay. Thanks a lot.

You're welcome.

And our next question comes from Brian Meredith of Banc of America.

Good morning. A couple of quick questions.

Good morning, Brian.

First of all, I don't know if you provided this earlier, but do you have what the NCRIC premium in the quarter was? So we can kind of get comparable purposes.

Brian, one thing that we have done, that I think will be helpful. We will get you that number for you. In our 10-K the way we have gone about our analysis of the 2005 comparative information, we will have broken NCRIC out pretty much on all components, but if you hold on one second, we will give you the premium numbers. On a gross premium basis for the year, NCRIC brought in 24.9 million of gross written premium.

To us.

To us.

Right.

And this is reflected in our earnings and on an earned basis 34.2 million.

Okay. So therefore, if I strip that out, the actual pro service premiums were pretty much flat to down, right?

That's correct. But if we may editorialize. Our strategy is growth by M&A as well as organic growth. So we very much look at that as growth premium from this side of the table.

No. No. Understood. But I guess from an organic perspective, you mentioned it's a challenging environment, I guess, going into '06 from an organic standpoint. Are there are any particular states or any particular reasons, you point to why it's such a challenging environment?

Sure. Yes. I guess several things. One is that we -- as you know, there have been a number of companies that have started up in the med mal business over the past several years and those start-up companies are in a number of states, Florida, Missouri, I guess are good examples, Ohio to some extent. And they are selling insurance at prices that we don't feel are justifiable or that we can compete with. So we are losing business to those companies and not only losing business out of our standard carrier but also losing business I think we mentioned in prior calls out of our excess and surplus lines company. We also are seeing competition from the more established carriers as companies are looking to add to their top line or trying to become more aggressive in the marketplace. So it's a combination of what we would consider the existing med mal competitors as well as the start-ups.

Have you seen any impact from the med pro Burkes or Hathaway merger. Are they still being -- are they responsible in the marketplace? Still competitive? Has that had any impact on the business.

They are competitive in the marketplace and they have been competitive even prior to the acquisition. Med pro is -- I think has targeted a number of states, they said publicly that they targeted several states for growth and we are seeing them being quite active in those states. Overall, we are trying to replace the business that we lose with good quality new business, either in the states where we lose it or actually in the past year, more so in states where we have seen better market opportunities. States that we have been in already but states where we think the market environment is better or the judicial system is more favorable for us.

Got you. Last question, Dr. Crowe, when you look at the potential M&A landscape out there, are there any areas let's say that are outside of the medical malpractice area that may be complimentary that you would entertain as possibly making acquisitions?

We would look at anything. I am not going to say that there's a particular area outside of the med mal business that we are looking at right now but yes, we are always open to business.

Great. Thank you.

And next we will hear from Michael Dion from Sandler O'Neill.

A couple of questions mainly pertaining to NCRIC and your plans for that. To what extent now that NCRIC is on your reinsurance program effective January 1, '06. Do you have flexibility in terms of retaining higher premiums in '06? And secondly, with respect to the loss picks, for the NCRIC business, have you done anything differently now that you've had five or so months of that merger to assess how to set those loss fix and what is your expectation going forward?

NCRIC is part of the reinsurance program January 1, and the overall pricing for the program from our perspective remained essentially the same. So we're looking at building NCRIC rates as we go forward in the same manner that we do with ProAssurance rates overall. In terms of establishing the loss picks, I think two things, one is that we were certainly involved from August forward with respect to establishing NCRIC's rates for 2006, and NCRIC's rate filing anniversaries are essentially January 1. We were definitely involved in the establishment of the rates and therefore we're comfortable with those rate levels for 2006 in terms of a loss picks we are going to, again, adopt the same approach that we have for the -- what you would consider the rest of ProAssurance and that is setting our initial reserves at a level that is somewhat higher than what was built in as the expected loss ratio in the rate filings to develop the same degree of caution or conservatism as we have in our overall rates.

Okay. And I guess just overall, with respect to retention levels, given the MEEMIC proceeds that you are going to have at the insurance company level, would you consider retaining more premium in '06, ex any potential acquisition outside of PIC Wisconsin with the excess capital there and then maybe take on a little bit more volatility in the earnings? Is that something you have looked at?

I think it's something that we have always looked at whenever we look at the reinsurance equation, and in the past, certainly, we have had a little less room to do that when we were more constrained in terms of growing premium and our surplus. I think going forward, it will be, as I mentioned earlier, it will be a possibility that we would look at an aggregate deductible. We could look at a higher retention. Our overall seeded premium is not that high in terms of -- as a percentage of gross written. But it is a possibility. Going back, again on the other side, though, this is a pretty volatile business as we mentioned earlier and reinsurance does provide us with a good bit of stability when we have individual large losses. So there will be a limit certainly as to how much we would be willing to retain.

I would like to say something. We realize that this cash that we have in our pocket does not give us the return on equity that the ongoing business, personal lines of business we had gave us; however, having said that, having the cash in our pocket does not worry me nearly as much as it seems to worry some people on the Street. We will deploy judiciously. Okay?

That's a good answer. And I guess just the last follow-up to that. Have you looked at any other new states potentially as expansion goes, related to '06 and perhaps even '07 growth plans?

We're fairly much liking our footprint as you know, obviously NCRIC brought in a couple of states that we had no business prior in and a couple states with a small amount of business. So there is growth there. Wisconsin will do that, and Wisconsin brings in four or five states that ProAssurance currently - does not do business in. I think that will -- getting the understanding there will really keep our platter full for the year, as well as growth in some of the states that we have smaller books of business in, say on the western fringe of our footprint.

An example is Oklahoma.

An example would be Oklahoma, Kansas, any of those states out that way.

Okay. Great. Thank you.

[OPERATOR INSTRUCTIONS] Next we will hear from Rob Mason's line of Schneider Capital.

Just a couple of questions. One, I was just wondering if you would be able to give a ballpark estimate, if you make this -- in terms of the organic premium growth, or decline, if you assume you have kind of a similar level of retention rate and new business to what you have seen lately, and rates kind of in line with loss costs like you said you expect, would we be looking at kind of 5 to 10% decline in gross written premium on an organic basis before you add in the full year of NCRIC and the PIC Wisconsin acquisition?

If you want to assume that this year will be like last year, I guess that's a normal assumption.

Okay. All right. And then just in -- and then the second question related to the -- the MEEMIC proceeds you guys mentioned -- I forget what it was, a little under 5% taxable equivalent yield. Should we basically take the Q4 investment income number and assume that that 320 gets invested at about that rate going forward? Or are there other adjustments? I guess you have continuing cash flow coming on. But as a starting point, is that the way to approach it?

I think a couple of things to look at, when you think about that. Obviously the money that will be retained at ProNational, the 150 million would be invested just as -- and very much in line with the -- our existing investment strategy and so whatever the new money rate is, or AA security is what we would expect. I think our duration is about 3.9 years. So it would very much be in that neighborhood. I think with the remaining funds, we're likely to have a slightly shorter duration. We see those funds as probably being put to work somewhat opportunistically and as a result of that, probably won't go out quite as far, so a duration more in the 2 neighborhood is probably more in line with what we expect to do with the remainder of this fund.

Okay. I guess you probably don't have too much of a yield differential at this point?

Not right now, you sure don't. It's a pretty flat yield curve.

Okay. Great. Thanks a lot.

And next you will hear again from David Lewis of SunTrust Robinson and Humphrey.

Thank you just a couple of quick follow-ups. Any new developments regarding the large hospital claim against NCRIC? And two, Ned, do you have the pre-FAS 115 book value? And, three, Dr. Crowe, can you maybe give us any more details about your plans for diversification of your ProAssurance holdings.

We'll start with me. We are internally looking at a document where -- filing a document where I would sell on a periodic basis and probably in that you will give some indication as to the amount that we will be selling per year. I will tell you, it will be a long, long term situation, in which we'll be divesting. And quite honestly, even what I have sold, I think I still either own or have options and own more shares than I started with. So I'm trying to prepare my life, but I'm having a difficult time getting there. The investment is too good. Does that answer your question?

Yes, it does. Thank you.

Darryl do want to talk about Columbia hospital?

Yes, briefly, at the Columbia hospital case, the trial judge has ruled against us on our post-trial motions. That was not unexpected. In fact, we were awaiting that, so we could take our course to the next level.

I think we reported that last quarter.

That's right. So we have done that now. We have filed with the Court of Appeals and we are expecting something to come out of the Court of Appeals maybe sometime in the fall.

And then on the book value, we got about $8.8 million and accumulated other comprehensive income as a loss, and so I think you - just add that back and divide that by the 31.2 million shares outstanding. I apologize, I don't have the number in front of me, but I think that's all you need to do to get to it.

That's helpful, thank you.

[OPERATOR INSTRUCTIONS] Next we will hear from Greg Peters from Raymond James.

All of my questions have been answered but I wanted to just focus in on a really small item within your income statement, the guaranteed fund assessments. And specifically, I noticed that the variability year-over-year in the fourth quarter. I was wondering if there's anything unusual going on in there? And more specific, I suppose, is there anything looming out on the horizon that we should be thinking about in terms of changes to that line item? And I recognize it's a small line, but like I said, most of my questions have been answered anyways.

Sure. The guaranty funds assessments are unpredictable, unfortunately, and we don't try -- we don't really make an effort to try and predict them for that very reason. And so as we learn of assessments, we accrue them. We do not know of anything in the future that is -- that's coming down the pipe that -- I guess, you can never be certain, but we book them as we become notified of them, and for that reason, they are somewhat sporadic.

Do you get more activity in a state or a group of states relative to your entire book or is it generally spread across the entire book?

It really just depends on where an event has occurred. You get an insolvency in the state and the guaranty funds comes knocking. It depends on facts and circumstances. I don't think there's any one state or area that dominates.

In some cases we've actually had a refund.

Yes, we do occasionally get refunds where they overcharge and once they get the runoff of the book or whatever they need to do to rehabilitate the Company. There is a refund.

Greg, let me make a comment or two. You notice we said a few minutes ago that probably this year and next, you have to actually going to start seeing the chickens come home to roost with these people that started up. Remember that a lot of those are risk retention groups and they don't fall under the guaranty fund. And in fact the reciprocal that went down a couple of years ago has left many doctors in this state totally bare. That's going to be a major factor as to how many of these start-up companies are covered by the guaranty fund and how many are not. Now a few are and we'll see some action probably because even those are not charging enough. Some of the start-ups.

The real question in my mind is once one of these goes under and is taken over by the department for runoff of management or what have you, what happens to the reinsurance that these people are buying? Who gets that premium? Where does it go? What happens to the attachments? That's an interesting subject that we are beginning to look at here and feel like we need to talk to some of the commissioners about. I wonder if the reinsurers are totally walking away with the premiums they have charged. Do you have any comment on that particular issue.

Are you talking to me Dr. Crowe.

I'm talking to you, yes.

I wouldn't even begin to suggest I know what's going through money reinsurer's minds so I'm going to pass on that one. But thanks for asking the question of me.

Okay.

But just as a follow-up, sir, I did -- I was listening to your commentary regarding start-ups and the competitive pressures coming in certain states and certain markets. And given the tail that is associated with the product, one of the questions I have is really -- I guess it depends on the amount of capital available, but how long is it going to take for this process to work its way through the system, where these start-ups are getting into the business and they are going to ruin market conditions for a period of time and then they come around to realizing what damage they have done. And I'm just curious what your sense is of how that is going to transpire over the course of the next couple of years.

My estimate on the time frame is 4 to 6 years, you are going to start seeing the problems crop up.

Is that four to six years from the time they started?

Yes.

Okay.

Four to six years. So we will start seeing problems this year maybe a little bit, next year some, and in '08, they will really, really come home and then you're right it's going to be -- there's going to be a lot of business. They are going to want to get tail coverage because entities have gone bankrupt and there is going to be a need for capital. So you guys on Street, just sit tight. We'll find some place to use it.

Fair enough. Thanks for the question, Dr. Crowe.

Yes, sir.

And there are no further questions at this time, Mr. O'Neil, I will turn the call back over to you for any additional closing remarks.

Thank you, and thanks to everyone who participated and listened in. We will speak to you again in the next quarter. Thank you.

That does conclude today's teleconference. We thank you all for your participation. Have a great day.