ProAssurance Corp (PRA) 2006 Q4 法說會逐字稿

Good day, everyone and welcome to today's ProAssurance fourth quarter earnings release 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, and thanks, everyone, for joining us this morning. We want to move quickly to our prepared remarks, but first I need to say that we expect to discuss historical information and make forward-looking statements and projections on this call. These will be based on our estimates in anticipation of future results and events. You should review the contents of this call in conjunction with the caution regarding forward-looking statements in the news release we issued today, Tuesday, February 27, 2007. Further discussion of risk factors and uncertainties about our business are contained in our Forms 10-K and 10-Q. We will not undertake and expressly disclaim any obligation to update or alter forward-looking statements whether as a result of new information or future events except as required by law or regulation.

The content of this call is accurate only on February 27, 2007, the date of first broadcast. We say every quarter that this call is the property of ProAssurance and may not be disseminated without our express written consent; however every quarter that statement is routinely ignored so if you're reading a transcript you should know that we've neither reviewed it nor approved it. Our Executive team is assembled for the call. Our Chairman Dr. Darrel Crowe is here; our President, Mr. Vic Adamo; Mr. Ned Rand, our Chief Financial Officer; our Chief Accounting Officer, Mr. Jim Morello; our Chief Underwriting Officer, Mr. Howard Friedman; and Chief Claims Officer, Mr. Darryl Thomas. Ned Rand will start with a brief review of the financial information. Ned?

Thanks, Frank. I want to focus on a few items from this mornings news release that merit some extra attention. Just a reminder that our PIC Wisconsin transaction was effective August 1.

We finished 2006 with the highest level of assets, equity, and earnings in our history so financially it was a stand out year for ProAssurance. Some balance sheet items that echo this strength. Stockholders equity grew 46% during 2006 to $1.1 billion with total assets growing 11% to $4.3 billion. We grew book value per share $9.02 during 2006 an increase of 37%. Organic growth was $4.70 with the sale of MMIC contributing $3.29 and the purchase of PIC Wisconsin adding another $1.03. One of our long term goals is continuous growth in book value and this was another great year for us. Of note, since the acquisition -- inception of our predecessor company, Medical Assurance, the compound annual growth rate in book value has been 16%. The same as from the start of ProAssurance five years ago. Our return on equity was 13.5% for the year, frankly a bit better than we would have expected given the amount of capital we had to put to work but good investing and an improving rate environment helped. We're proud of those numbers as they speak to our long term financial strength, good news for investors and policyholders in a volatile line of business.

Onto the income statement, as we have said many times our focus is on the bottom line. 2006 was a strong year in that respect as well. For the year, net income from our continuing operations, professional liability, grew 59% over 2005 to $127 million. In the quarter, the increase over the same period in 2005 was also substantial, up 33% to $36 million. Our continuing operations generated net earnings per diluted share of $3.72, an increase of 47% over 2005. The sale of MMIC generated an additional $3.13 per share. Cash flow remained strong in 2006 with cash flow from insurance operations at $289 million for the year. The effect of our trading portfolio purchases and the taxes we paid on the sale of MMIC reduced net cash flows from operations to $183 million. But those are one off items that should not be a factor in 2007. We met our goal of improving the combined ratio over 2005, lowering it to 94.2 % from 97.6%. We had favorable net loss reserve development of $13.3 million in the quarter, a total of $36.3 million for the year. I'd like to stress again that this reserve development represents a very small fraction of our almost $3 billion in reserves.

Our strategy of growing through intelligent acquisitions has paid off in many ways. The acquisition of NCRIC and PIC Wisconsin allowed us to grow year-over-year premiums in the face of a softening market. Granted it's not the rate of growth we've seen in the past three or four years, but as we said in this mornings release, it's counter to prevailing negative growth trend among our peers. That said, we did see premiums decline in the fourth quarter by 8% due to competitive market conditions. While we did have the addition of PIC Wisconsin's business, the fourth quarter is typically a slower quarter for them and this increase was not enough to offset the loss in our organic book of business. Howard will discuss this further in a minute.

Let me underscore two points here. We price our product to achieve a long term ROE of 12 to 14% and we will forego premium growth in order to protect profitability. We are confident we can achieve our margins and thus sustainable earnings by writing profitable business. We're equally confident that profitability in this market doesn't depend on simply finding ways to grow the top line. Frank?

Thanks, Ned. Howard's closer I think to the day-to-day market than any of us so I'm going to ask him to talk to us a little bit about premiums and competition. Howard?

Thanks, Frank. We do see competition in the market but there is also opportunity. One certainty is that we'll add new premium in 2007 as we bring PIC Wisconsin policyholders on to our books. PIC's peak renewals are at the start of the first quarter and obviously haven't been included in our gross written premiums and also at the start of the third quarter which wasn't in our results for that quarter because PIC was not a part of the group until August 1. So as our industry sees some decrease in core premium growth, we'll feel the same pressures, I'm sure, but we do expect new, PIC premiums to offset some of that shortfall. We can't predict how much, but we do have a leg up on the competition in terms of adding premium in 2007.

While the overall market is more competitive we're holding our own and we're seeing new opportunities as well. For example, there are instances where our service commitment may attract an agent with a significant book or a flexibility to meet the unique needs of an insured as the deciding factor. This is not entirely a priced focus market and we do see that insureds and agents often focus on quality.

Any companies that are building market share and adding substantial numbers of insureds in this market are doing so by competing on price which has always been a dangerous strategy in medical liability. We see extreme examples from only a few players, mostly in the Midwest. Rates are being effected by moderating overall loss trends and we're seeing some benefit from that. We are seeing a decline in the frequency of claims in some states and that's a good sign, but there may be more here than meets the eye. If the trends continue, we'll be more willing to recognize their effect but for now, our conservative nature, the conservative nature that served us so well for so long, suggests that we not jump into the pool with both feet as some have done.

As I said last quarter, severity is a puzzle. In the primary layer of $1 million or less, severity is better than we anticipated when we established reserves. As an example, much of the favorable net loss reserve development in this quarter came from the years between 2002 and 2004. But as those trends are improving we continue to see large shock losses throughout the industry. These trends are going in opposite directions so something is likely to snap. That's why we remain leary of pricing too much good news into our policies. We'll remain focused on rate adequacy and underwriting discipline.

As Ned mentioned we are playing close attention to the adequacy of our rates to ensure that they remain at the levels acquired to achieve our return goals. Most of our recent rate actions have been essentially flat with some variations up or down. On average our policies renewed at rates that were 3% higher than last year, both in the quarter and for the full year. Retention was 84% for the year. Frank?

Thanks, Howard. Now we're going to turn to Darryl Thomas to get a review of the year from a claims perspective.

Thanks, Frank. In claims, 2006 was a better year than in 2005 from many viewpoints. For starters we took a record 720 files to trial and our rate of successful outcomes on all claims closed on behalf of our insured was 86%, a point higher than the previous year. Our claims department and our claims commitment are a key foundation for our Company so its an area that gets quite a bit of attention whenever we have new operations to fold into our department. So in 2006, we paid close attention to integrating the claims Department of NCRIC and PIC Wisconsin, I'm very pleased with the state of claims operation in both offices.

But I do want to echo Howard's comments about severity. We're especially wary of the growing number of large shock verdict we see in venues throughout the country. These verdicts have been somewhat concentrated in Florida but not limited to that state and they've been spread out among different carriers, commercial, mutual and self-insured pools. We see scores of fair minded juries make even handed decisions and then one of these mega verdicts will pop-up. It's one reason we continue to maintain a strong defense posture. We just can't let our guard down on any case and I believe our insureds expect that.

The Tampa verdict of $217 million is the poster child for the shock verdict issue. The situation around that verdict changes by the minute, but here is the most current update. Our initial post-trial motions to set aside the verdict were denied as we expected and appeals are under way as is our case involving the availability of coverage. Right now, a key issue revolves around potential juror misconduct. Our post-trial due diligence turned up a felony conviction that the juror did not disclose. Furthermore, we found evidence that the juror withheld previous involvement in litigation with a healthcare provider. Florida law precludes jury service by felons.

We made filings last week asking that the verdict be set aside for that reason and we're hopeful we'll get a ruling soon, but as you would expect, counsel for the plaintiff is pulling all the stops to oppose us. This is a case in which we are prepared to demonstrate our resolve to see that the right things are done and should there be a protracted appeal, the eventual resolution of this case will be some years away. There's not much more we are permitted to say on this case until there are further rulings on pending motions and appeals. Frank?

Thanks for that overview, Darryl. Now we're going to ask Derrill Crowe for his thoughts before we open it up for questions. Dr. Crow?

Thanks, Frank. I want to add to Darryl's comments just a bit. I believe this type of case is a real test of the willingness and fairness of the Florida judicial system. We have what we believe is a clear case in which an unqualified juror was seated and to allow that, especially in light of outcome of this case would completely undermine the sanctity of the jury system as I see it. The other key issue I want to address is capital management. Because I know this has been a frequent question in investor meetings and presentations.

We understand that many people feel we have excess capital. What a problem. How much is a matter of debate and depends on your point of view. We have several constituents in this debate. The rating agencies never think you have enough capital so they have one view. Our investors have a second view and the management has even a third view. We're trying to address all of these views in considering how we deploy this capital. Management and most of our investors would prefer that we use the capital for an acquisition and given our successful track record in that area, it would certainly be our first consideration. Acquisitions in our business, however, cannot be rushed or manufactured and we just have to be patient and await those opportunities. So we are prepared to wait. I understand that the impatience of Wall Street is present. I don't disagree with it, but I do understand it even though I don't agree with it.

So that leaves us to the best use of the capital absent an acquisition. It's a subject we have examined in depth here. I can tell you we most likely would like to use some of the capital to retire the $16 million of debt that come from the NCRIC transaction and is callable in December. It's a small amount but it's one piece of the puzzle. Beyond that we're not prepared to make any commitments other than tell you that we are aware of the need to do something rational with the capital. We have more debt that can be retired next year. We understand that we can buy our stock back and we have a Board committee looking at that and I must admit I have become possibly more receptive to this action as our stock remains stable and our earnings increase.

We haven't heard much support for a dividend, either a regular or a special one, but it's certainly something that should be considered in light of the fact that there are a lot of institutional investors that only invest in stocks that pay regular dividends. I want to reiterate that we hear and understand the need to deploy this capital. There's no disagreement on that. Where we might have a disconnect is on the timing and I'll just say our view which comes with a long term record of success is a bit longer than what seems to be the view of Wall Street. And I'd like to make a final comment on the overall market.

I think many insurance executives may have flunked history, because I see them making the same mistakes now that they made in the midst of the last Stock Market. We can be very profitable writing a bit less premium but too many people think there has to be a growth of the top line at any cost. I will state again that that is a mistake, that it's the one that's being made and I can assure you we are running our company so that we will remain strong with positive results, even when history teaches companies the lessons others have learned in this decade. We have had an excellent year because of the decisions we made several years ago. We're making those same decisions now designed to keep our bottom line profitable in the future. Frank?

Thank you, Dr. Crowe. Thanks, everyone. We're ready to take questions from the callers if you'll open the lines.

Thank you, Mr. O'Neill. [OPERATOR INSTRUCTIONS] And we'll take our first question from Amit Kumar of Fox-Pitt Kelton.

Good morning. Congrats on the quarter. Just one question on capital management. I guess you talked about an acquisition and then you talked about a dividend and then retiring debt. What are your thoughts on a possible share buyback?

Well, first of all, I don't think we talked about an acquisition. We said that would be our first choice of the way we would like to use the capital.

Right.

But the way we do our acquisitions, we wait until the opportunity arises. We don't really go out and try to buy well-run active companies, particularly although we have done a couple in the past. As far as buyback shares, we do have a committee of the Board looking at that. I must admit as our shares remain stable now over the past 15 months and our earnings continue to increase. Our multiple goes down. The multiple on our book value goes down and the buyback of shares become much more attractive. It is something that I am thinking more of and will consider my recommendations to the Board in the future.

Okay and just one other quick question on our reserve releases. Can you just maybe talk a bit more about the specific trends perhaps by states (indiscernible)?

Amit, we typically don't talk about states and particularly with respect to the reserve releases. I think what we can say is that overall, the reserve releases are a result of -- primarily a result of claim severity increasing at a rate that is lower than we originally anticipated when we established those reserves several years ago, and the major releases are coming out of the 2002, 2003, 2004 coverage years, but that's about the extent of the detail we can provide.

Can you break down the number between accident years?

This is approximate and it has to do, obviously with the break down between companies as well as indemnity versus loss adjustment expense, but of the $36 million and of course, some years we have some years that go up as well as some years that go down. Of the bulk of the release, about 40% of it comes from the 2004 year, about 30% from 2003, and the other 30% from 2002 plus a number of prior years.

And that's the release you're talking about for 2006.

That's correct. That's for the calendar year 2006.

Okay, thanks for your answers.

And we'll take our next question from David Lewis of SunTrust. Please go ahead.

Thank you and good morning.

Good morning, David, how are you?

Doing well. A couple of questions. First, Ned, or someone, can you give us exactly what the gross premium written was in the fourth quarter from PIC Wisconsin and if you have it for the full year?

Hold on one second.

Well, starting obviously August 1, so that's kind of one question. And two, as we kind of look at the organic growth, I know at the beginning of 2006, you'd predicted organically you might be down 5 to 10%. You think that's a reasonable assumption as we go into 2007 or you think it may deteriorate further given the pricing environment.

Let me take your question on PIC Wisconsin. In the fourth quarter PIC Wisconsin added just under $15 million of gross written premium and for -- since the August date, they've added about $24.8 million in gross written premium.

If I recall, it was running pretty close to about a $80 million annualized book, so do we assume the first quarter falling closer to $25 million?

The first and third quarters for them are typically the bigger quarters and the third quarter being July, which we did not pick up, so their businesses, it's kind of more geared toward those two quarters.

So would you say that it's still kind of at the $80 million run rate?

We don't do any projections, but I think it's reasonable to look back to what they've done in the past. We'll have the statutory statements for all of our companies including PIC Wisconsin up in the next couple days on our website as well to give some more detail.

Okay. And I know you don't give guidance, but just kind of a bigger range, you think the 5 to 10% decline in organic revenue or gross premium written is reasonable or do you think it might be something a little more onerous than that?

Let me answer that, Dave.

Okay.

First of all, it appears that the softening in our marketplace has probably bottomed out. I don't think we're seeing more softening as we go forward. Secondly, as you know, the problems that are being brought into the marketplace by the new start-ups et cetera. And not only them but some of the others, I think they're beginning to and we certainly see this in one state that has had a problem with start-up companies trying to buy the marketplace about three years ago, but beginning to have some pretty strong repercussions, so it is extremely difficult for us to predict or even think about what our internal growth rate or lack of growth rate or written premium is going to be for the coming year but I would have to say that I would tend to think it would be slightly down rather than up but it all depends on where this market truly starts to pick back up and it could be by the end of this year. It's just a matter of when. You can't predict them that closely. And it also depends on when some of these small companies get in trouble.

Sure. Now, Dr. Crowe, you I believe in your comments indicated that servicing capabilities are clearly the competitive advantage that you have and if we have seen the softening kind of leveling out a little bit, I would think that someone would really have to go in and have fairly material double digit type rate decrease to take the business away so therefore, your retentions may actually go up a bit in '07. Do you agree with that?

Well, I would certainly hope you're right, but I can't say that, although I must admit that we have had, and I would confirm this, some telephone calls from certain agents that are interested in doing more business with us because of our service and the quality of our program and our ratings, the financial security of our programs, et cetera. That is beginning to show up a little bit and I'm just hoping like heck that it continues the rest of this year. I'm beginning to feel good, better, I guess I should say, about where we're going.

That's helpful. Just final question for Howard. If I look at the -- if I calculated correctly, it looks like the current year loss ratio for '06 was about 82.2% versus 84.9%. That improvement I'm guessing was largely driven by improvements in frequency versus severity assumptions. Is that accurate?

Your numbers are correct. In terms of the reason, I think it's probably a combination of those two things as well as the continuing attention to the pricing itself. We did indicate that we had an overall 3% increase on renewal rates, so that certainly factors into it or helps to offset any residual claim severity increases but I think it really depends on the state. In some states it is driven by frequency and some just by the combination of severity being a little lower than expected as well as investment yields being a little higher and being able to fine tune our pricing based around that even though the investment yields don't get into the combined ratio, they certainly do affect our rates overall.

That's helpful. Thank you.

And we'll move on to our next question from John Gwynn of Morgan Keegan. Please go ahead.

Good morning.

Good morning, John.

Ned, your fourth quarter run rate and net investment income, is there anything seasonal that might have affected that number or was that a good static assumption run rate going forward?

John, the only thing that I guess you might call seasonal is the fact that we do have several investments in limited partnerships where the investment income from those can be a little less predictable. I think in the fourth quarter was not an anomaly for the returns we had from those limited partnerships, but beyond that, I think it's probably a pretty good run rate.

And those -- but those investments and those entities are relatively small.

Relatively small.

Yes. Okay and Ned, your expense ratio for the quarter and year, is that a good run rate also?

I think again, it probably is reasonable. Obviously, it's up from the prior year because principally because of the expensing of stock options but part of that will depend on what happens with that this year.

Okay. And your K will be out tonight or tomorrow?

Hope to have the K out tomorrow.

And the stat statements will be up, you said in a few days.

They should be up in the next couple of days I believe. We're trying to get them up right now. It's just a question of when the web guys can get them posted.

Whoever wants to answer this next one. If someone could refresh my memory in Florida, where you still have a chunk of business, does Med Mal -- Med Mal used to be exempt from assessments on one of these either the cat fund or citizens, but there's all sorts of chatter in Florida about the assessment and that need being made much wider by line of business. Do you have any comment on that?

Currently, the rules have not changed at least not yet. Med Mal is subject to assessment by the Florida Insurance Guarantee Association for insolvencies of companies, and we and other companies were assessed actually twice recently for failure primarily of Homeowners Insurance Companies in Florida. The new legislation to my knowledge does not change anything in that regard one way or the other.

Howard, you've seen the quotes from the politicals in Tallahassee about given citizens a broader net; right?

Yes, I've seen that and legislation that's been proposed and we're watching all of that very closely, but nothing has happened yet that has gone into place that would affect us differently than what we had last year.

Right. Howard, do you have any comment on, and I think you are heavily involved in predictive modeling for Med Mal. It looks to me like your colleagues, the actuarial consultants are churning out material like crazy which gives me some pause. Do you really think maybe you were right to begin with. There may not be enough data points in this business yet even though you are getting to be one of the biggest in the business?

Well, I think a couple of things. One is that obviously, we are doing predictive modeling. We've disclosed that in the past although we typically don't provide a lot of detail about it but we are utilizing it, and I think we're utilizing it in a way that helps us to make hopefully better decisions but we are not ready to rely on it as the beginning and end of the process, and I think that's where the potential pitfall is by relying on it too much or jumping to conclusions with it, similarly the way that the industry I think over relied on cat modeling in the property area. I think there's a lot that still needs to be done in terms of the techniques as well as the data and Med Mal is an area that has a limited amount of data which I think requires that you have a longer experience period before you jump to conclusions.

Right. Have you run into anything, quite frankly in my review of the material, I've not seen any evidence that these guys have come up with something that's not already intuitive in terms of predicting a loss event?

Amen.

John, Vic Adamo, let me add a little bit here too. Med Mal since we have much larger average premiums than personal lines, say, we're able to look at each file each year, certainly each file that has been flagged to be looked at, so predictive modeling while an incremental tool just doesn't substitute for underwriting. It may in the personal auto space where you're dealing with such huge fines but in medical malpractice we continue to run the operation on a customized look at the file basis.

Right. I'm in agreement, Vic. Thanks a lot.

And at this time we have one question remaining in the queue. [OPERATOR INSTRUCTIONS] We'll take our next question from Greg Peters of Raymond James. Please go ahead.

Good morning, everyone.

Hi, Greg.

Dr. Crowe, I appreciate the, I guess the slight change in temperature in your view towards share repurchase and I'm just curious how you might reconcile this modest change in your view there with some of these large severity shock losses that you've seen come through, not only at ProAssurance, but also hitting others within the industry.

Well, first of all we haven't seen any of them "come through". Those are all shock losses that have been against our insureds and as you know, there's coverage and appellate issues that have got to be worked out so we really don't know what the shock losses are yet but the truth is, we do have some excess capital right now. We do have some debt that is aging that we can call in the next year or two, so there's several options. On the other hand though, we've always said, we do not look at buyback of shares when our stock was selling at two times book and a high multiple of earnings. We just put that on the back burner.

Right.

In the meantime though, our stock has been pretty stable for about 15 months in the 50, $51 range has not varied very much. The short position on our stock went up about 25% last month. Our earnings have gone up significantly in the last 15 months, year and a half, the multiples have come down on PE and book, and so therefore, the option of buyback becomes more viable.

Right. When does the -- remind us again, you may have said this in the opening comments. When can you call in the convert?

It's July of next year I think it is.

The convertible is July of 2008.

Yes, 2008, next year July.

And you can call that in and pay either cash or stock or is it just cash?

Both. Either/or, and I believe a combination of.

Yes. And don't forget the NCRIC debt that you mentioned.

So you got an option here. Can you number one you want to pay it back in cash if you got plenty of money. That's one. On the other side of the coin, we may want to buy some stock down here at this area and use that to pay it back.

Can you remind us when the last time ProAssurance has actually been in the market and been active with the share repurchase program?

It's been several years ago, and I cannot tell you when but I'm going to guess--.

As a Company, ProAssurance has never bought back stock.

Okay, but prior to that Medical Assurance bought some back, I'd just have to guess, but what, nine, ten years ago?

I was going to say like 1996 maybe 1997?

Maybe. It could be that.

All right well, do you remember, you know what, I'll take that question off line. Howard, I was hoping, and I appreciate the comment you made that your sense is that across the market, you think that the softening may have bottomed out, but clearly, within your book, different states are in different stages I guess, and so without getting into the best and worst discussion on -- across your entire market, I thought maybe you might give us a sense of just which states you're really scared about right now and which states you seem somewhat optimistic about or just some additional color I guess.

You should know better than that, being on the calls for so long. We don't get into state by state detail especially with respect to competitors and where we think we're at an advantage or might be more vulnerable, so I think the main thing is what you said that it varies tremendously by state and it's due to not only the legal or judicial environment and in some cases what's been done legislatively but also the competitors and their relative strengths or weaknesses whether it's financially strong or weak or their aggressiveness in terms of wanting to write premiums. So that's about all we can say on state by state detail right now.

Well, it was worth a try. Maybe finally you might just give us an updated sense of what the reinsurance markets, what their view of your book of business is. I think you went through some renewals recently and can you give us a sense, was there a larger appetite this go around or was there less of an appetite, et cetera?

Yes. I think I'd say that there was a little bit more of an appetite or interest on the part of reinsurers. We saw some additional companies that we had not seen in the past that were interested in looking. We renewed our program with virtually no change in the terms as far as we were concerned and that was after a lot of evaluation on our part as to whether we wanted to take a larger retention. Ultimately we decided to renew with the same structure that we had before and basically at the same terms so we were pleased with that outcome. And other than that, I really didn't have much to add. Frank? Did you want to?

Want to talk about the risk that we are retaining.

Yes, sure. We did choose to take a small participation in our program this year, and that was a result of, again the analysis that we did of where we thought the pricing was when we looked at our current retention, and we chose to take a 5% participation in the first layer of our program and a 2% participation in the second layer, meaning that conversely, we placed 95% and 98% respectively on the two layers of the program.

How much total premium are you talking about and is it a material number or is it immaterial in that small sliver.

In the overall scheme of ProAssurance, it's pretty immaterial. You've seen our ceded premium or you will see it shortly so if you averaged out the two on a percentage of the ceded premium, we're probably talking 3% or so of the ceded premium.

Okay. Thank you very much.

And we have a follow-up question from Amit Kumar of Fox-Pitt Kelton. Please go ahead.

Just going back to the changes in the CAT fund. There is a lot of talk about Bermudians and other commercial players looking at different industries for possible acquisitions. Do you see any of that happening and again, this is not specifically targeted towards you, but are you seeing maybe other sectors or perhaps private equity taking another look at the Med Mal players?

We've seen very little commercial market interest in this cycle. Clearly one Bermuda player bought the hospital book that was with General Electric so there's some participation there but generally speaking, we've not seen any new commercial market interest in the medical malpractice sector nor specifically private equity. Certainly, there are constraints as you know in terms of regulation at the statutory level, it's hard to leverage up the companies from a debt perspective the way private equity likes and while we certainly wouldn't rule it out we have not seen any of that emerging.

Okay, and one final question. Do you have any update on Red Mountain and how that sort of performed in Q4 as markets have softened?

Well, Red Mountain continues as I think we talked about but I think it was last quarter. The excess in surplus lines market expands and contracts for medical malpractice at least inversely with the competitiveness of the standard market and right now with the standard market being very competitive, the excess in surplus lines market is smaller. Red Mountain, I don't have the numbers right with me, we're getting them right now, but as far as premium volume for the year -- okay, the excess in surplus lines premium for the full year was approximately $12.5 million for Red Mountain and that's down from about over $18 million last year. So as we had said previously, we expect Red Mountain to grow and shrink inversely with what we're seeing in the market overall and that's fine with us. We had established Red Mountain to take advantage of the opportunities that existed in 2002, 2003 and we did all the way through 2004 really and I think what we're satisfied with doing now is to continue to write the core business to look for some other opportunities in medical liability excess and surplus volumes and wait for the next hard market.

Okay. Fair enough. Thanks for your answers.

And we'll take our final follow-up question from David Lewis of SunTrust. Please go ahead.

Thank you. Howard, your primary reinsurance program is still $4 million [X] of $1 million is that correct?

Yes, that's correct.

Okay. And go back on the M&A discussion. First of all, the Company has what? Something over $250 million of excess capital at year-end; is that accurate?

I don't think it would be quite that much, but I don't know what excess is. We still are A- rated by AM Best.

What do you carry at the holding Company level?

It's around that number.

Okay. I guess what I kind of think about your M&A opportunities historically have been a little bit more distressed or a more willing seller out there, and given the profitability of the industry and the improvement in theoretically frequency trends, it looks like that opportunity may be a little further out until somebody starts to feel the pain. Do you have similar thoughts there?

Absolutely.

Yes.

How about as far as Med Pro and any thought in how Berkshire has kind of viewed that side of the business and where I'm going with that is seems like Med Pro could probably very easily expand their business through looking to partner with ProAssurance and add some management expertise to their overall business. Any comments on that front?

I thank you for the compliment.

Okay. And lastly, probably to Ned, can you give us a sense of what the debt costs are on both the NCRIC deal and the convert relative to what kind of short-term returns you're getting on that excess capital today?

Sure. The NCRIC debt is I think LIBOR plus 400 or 410. The convert is fixed at 385, 395.

Great. Thanks very much.

Sure.

And Mr. O'Neil it appears there are no further questions at this time. I'd like to turn the conference back over to you for any additional or closing remarks.

Thanks, everyone, for joining us today. We'll speak with you again next quarter.

And that does conclude today's ProAssurance Corporation fourth quarter earnings conference call. We thank you so much for your participation, and hope that you have a wonderful day. Please disconnect your line at this time.