ProAssurance Corp (PRA) 2007 Q3 法說會逐字稿

Please standby, we are about to begin. Good day everyone and welcome to today's ProAssurance Third 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, Sarah. Well, thank everyone for joining us on the call today. Before we address our results for the quarter and give you our outlook, let me remind you that we expect to make forward-looking statements and projections during this call, these will be based on our estimates and anticipation of future results and events.

We urge you to review the caution regarding forward-looking statements in the news release we issued today, Tuesday, November 6, 2007. You should also consult the detailed discussion of risk factors and uncertainties about our business in our forms 10-K and 10-Q, both will help you better understand today's remarks and our business. 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 on November 6, 2007, the date of first broadcast and is the property of ProAssurance. You many not disseminate the call in any form without our expressed written consent. If you happen to be reading a transcript of this call, please know that we neither reviewed it nor approved it.

On our call today is the Chief Executive Officer of ProAssurance, Stan Starnes, our President, Vic Adamo, Chief Financial Officer Ned Rand, Chief Underwriting Officer, Howard Friedman, and Chief Claims Officer, Darryl Thomas to help us to put a framework on our remarks we are going to ask Ned to review a few of the important numbers to start with. Ned.

Thanks, Frank. We turned in another solid quarter and what is shaping up to be another year strong results for us. Howard and I are going about the top-line in a few minutes, but we are a company that focuses first on the bottom-line because that's where we create shareholder value.

We are pleased to report our net income from continuing operations was up 29% over last year's third quarter to $43 million and was $117 million through nine-months, up 28% over 2006. Net investment income continues to be important, but let me mention a couple of items here. While investment income is higher in this quarter than last year's, it's down a bit from last quarter, two of the equity funds in which we invest underperformed when compared to last quarter. And we had about $500,000 in exchange fees as we moved approximately half of our business and life insurance program to other carriers to get better performance. The cash flow was strong and we continue to be please with a positive effect cash flow has on our bottom-line.

A couple of notes on expenses. In the third quarter we recognized the impact of the grant of 100,000 options to our new CEO on July 1. As we forecast in last quarter's call the pre tax expense amounted to approximately $1.8 million. We also received another notice -- a notice of another assessment for hurricane related insolvency of a home owners company in Florida. This was for 2% of our business in Florida and amounts to approximately $1 million pre tax.

As with the assessments we received last year we are allowed to recover the assessments of the surcharge over the next 12 to 18 month. The combined effect of these two items was to increase in expense ratio by 2 points in the quarter and by .6 of a point year-to-date. This amounts to about $0.05 per diluted share for the quarter. Had it not benefit those two items our expenses in absolute dollar terms would have down slightly. As we began to realize savings gained from an overhead decrease at PIC Wisconsin.

Even with the one time events and expenses our combined ratio continuously improving driven primarily by favorable net loss reserve development which we will touch on shortly. We've moved a needle a bit on ROE which was at almost 15% for the quarter and 13.4% for the year-to-date period. Our overall performance accounts for most of that but share repurchases did contribute. So far this year we've repurchased approximately 764,000 shares at a weighted average cost of $53.97, we have $109 million left in our authorization right now. We will use $16 million of that in December to redeem all of the trust preferred debt we acquired in the NCRIC acquisition.

We will continue to evaluate the best use of our capital, but if that analysis indicates we should be repurchasing shares we expect to reenter the market after the quiet period following this conference call. One of the contributing factors on our profitability is favorable net loss reserve development. That was $25 million in the quarter and is $60.6 million for the year-to-date period. I'll let Howard comment more specifically on this topic.

Thanks, Ned. As we move ahead we have new data to evaluate and we gain new insight as accident years mature quarter-by-quarter. For the most part our favorable reserve development is from accident years 2003 through 2005. We have seen the '03 and '04 years developing and we now have greater confidence in the development of 2005. We don't predict reserve development, but we can tell you that our analysis remains consistent each quarter as does our commitments to maintain our historical level of reserving, which has ensured our ability to meet our obligations to our insurers.

Thanks, Howard. Now to the top-line; in the quarter our gross written premiums were $149 million. This was down 8.7% compared to last year and year-to-date gross written premium was down 2.7% at $440 million. We have been able to limit a decline in our premium somewhat because of the additional business that came to us through PIC Wisconsin.

Howard do you want to -- well, elaborate just for a minute what's behind those numbers?

Sure. First let me give you two fact then I can give you a bit of analysis. For the year-to-date we are renewing expiring policies of pricing that is within a point or two of expiring rates although the trend is down slightly. Our retention rate in the quarter as edged upward incrementally to 86%. Most companies are reporting similar renewal trend so it's fair to say that the battle is over new business. We are in the heat of that battle, but we are being selective in underwriting and pricing our business. This is as true today as it was five years ago. We see the results of the selectivity and the results for the quarter and year-to-date and we are going to maintain that discipline going forward. Hopefully we will see the same pattern of results in the years ahead because of the discipline we are applying today.

That said, loss trends are improving, we are seeing continued moderation in frequency generally across the board, but there can be wide swings from state to state. We are working now on rate filings for the first quarter of 2008 and those are likely to be rate decreases for the most part. But if we and other companies weren't recognizing this improved frequency, rates would likely be increasing due to severity which is continuing to rise although at expected at manageable levels. But it's a drop in frequencies as much as anything else that's driving rate actions and I'm fairly confident that if not for the frequency decline rates would still be hedging upward. Frank.

Howard before we leave you, would you give us an update just for a second on reinsurance?

Sure, we have all the finalized our treaties for the 2007-2008 year, remember we renew effective October 1st each year, we have no change in retention and no meaningful change in terms, conditions, or pricing. We are bringing most of the PIC Wisconsin risk into our treaties this year with some minor exceptions.

In the quarter, we commuted our prior reinsurance with a Alea, a London-based reinsurer with a small participation on the old PIC Wisconsin and NCRIC programs. The terms we negotiated were favorable to us and acceptable to them so we net a gain of about $1 million after tax when the amount we had reserved is matched against the amount of the computation. Continuing to explore the computations to see if they make financial sense. Frank.

Thanks, Howard. Would you -- let me ask Darryl Thomas now about claims environment. Darryl, I think you can tell us?

Yes, Frank. I can't say that there has been any major change in the environment. It's still relatively stable in the working layers as you would expect given Howard's comment. For the year-to-date we have obtained favorable outcomes at 91% of our closed claims. This means we have made no indemnity payment on behalf of our insured, but at the same time the shock verdicts continue throughout the medical malpractice industry. ProAssurance had a $13.5 million verdict in Iowa in quarter. Other verdicts that were not ours included an $8 million verdict in rural Maine, notable because of the normally conservative nature of the juries there. There was a $26.5 million verdict in Massachusetts, a $23 million verdict in Wisconsin and verdicts of $21 million and $10 million in Florida, a $16 million verdict in Connecticut and a $12 million verdict in Illinois. So the worry about large and shock verdicts is on everyone's mind. We are often asked what could turn the cycle and if these shock verdicts continue to make headlines we could see juries starting to believe that the large verdicts are the norm and that could produce a severity driven lives in lost cost. One other note, to head off any questions we still haven't heard anything on our appeal to Columbia Hospital case in the district, I can't say whether that's good or bad, just that we haven't heard.

And Darryl I do want to underscore that in that list of verdicts you read that only the $13.5 million in Iowa was our book.

That's correct.

Vic, will you make some observations on the stand to market in general?

Yes, Frank. Thanks. I want to first make sure that everyone on the call is aware that Fitch Ratings has just this morning announced our upgrade to an A rating, which we believe is indicative of our excellent operating performance in our strong capital position.

As you've heard there is strong competition in the marketplace right now and while competitors are taking less conservative positions than we think our warranted, we haven't seen companies acting irrationally on a wide spread basis. By and large when the solo practitioner in small group space we haven't seen wide spread erosion in policy terms and conditions. However, outside of our position business and hospitals and facilities there is more intense pricing competition that is the hospital focused companies that must primarily contend with this competition.

We are seeing some opportunities for new business, some emerge as captors and other alternative insurance vehicles face hard choices in the new premium environment. As an example we have added insureds in Michigan who have come out of a hospital captive that decided for financial reasons to discontinue offering physician coverage and cause those doctors to return to the commercial market. Likewise, we are observing that some of the companies started in the past two years appear to be struggling now because physicians are less willing to do business with these unseasoned organizations when they can buy coverage at competitive prices from high-rated established companies such as ProAssurance. Given the overall decline in medical malpractice premium rates, we would expect these new players to have a more difficult time controlling expenses including the cost associated with handling the claims that will now begin to emerge as the long tail reporting lag matures.

Another factor that helps ProAssurance is our geographic spread of risk. When you are geographically concentrated, one of them such as the guaranty fund assessment or a change in the local tour lock and have a major impact on results. Our geographic spread of risks helps us avoid concentration problems and achieve diversified and balance result and that's what we have been striving for ProAssurance. We continue to be pleased with the performance of the risks we have retained from the transactions completed in the past few years. For example, as mentioned PIC Wisconsin contributed about $8.6 million to our top-line, very positive addition. So all in all we see the environment is challenging, but good companies with sound management showed a competitive advantage in challenging times. Frank.

Thanks, Vic, and we are going to turn out our Stan Starnes and get his thoughts as we wrap our remarks and we will be ready for questions when Stan is done.

Thanks, Frank. We are in exciting times with ProAssurance. Given the remarks you heard about the soft market -- may that, know that may sound like heresy to think about it. May be one gets healthy when the market is hard and everyone is a winner. We are now in the soft market and the ability to respond to challenges determines the real winners. Those who proved that they are better, better protecting the balance sheet. Better developing and executing their business plan that leverages financial strength and transactional expertise and ensuring that their company comes out of the soft market with a lead and strength further ahead.

We will use our strength not only to excelling the insurance market place, but to be an active player in those M&A opportunities that makes sense for us. Vic mentioned the troubles we believe, some of the startups face already and that maybe the source of some transactions although those would be small, and while the established players are doing well now, we continue to be aware of scenarios under which some M&A activity may be possible.

I am confident that we will continue to get a look at the significant transactions. But we are and will be actively looking to improve our current position in the market. We are not going to simply stand back and react to the market. We are undertaking some very specific market retention programs in selected states and working to expand our presence in others. I am not going to go into detail about that for competitive reasons, but I think you will see these payoff over the years ahead.

We are going to be an aggressive company in terms of promoting the things that set ProAssurance apart from other organizations. For example, I heard one of our competitors say that they are now taking an aggressive stance on claims. First, I would ask them to tell you how many cases they took the trail last year so that you can see how the numbers really match up. For the record, we expect to try several hundred cases again this year and we are going to continue challenging the competition to show our insureds and potential customers that there is difference at ProAssurance. I believe we can explain to them while we worth paying more for.

I want to tie back to something Howard said earlier. The results we are reporting here in 2007 are shaped by the decisions we made several years ago with regard to underwriting, pricing and reserving. The success we are having today underscores the need for discipline and conservatism in our volatile business and the positive results that can come from that strategy. I can promise you that we are being just as cautious in underwriting today as we were in 2002 and we are being every bit is careful in establishing reserves that will protect our insureds and the strength of our balance sheet. That bodes will for our future and for our ability to protect our insureds and build value for our shareholders no matter what's the market finding.

I believe that no matter what's the market grows with us we are better prepared to weather a storm than we ever been. That's a tribute to the management and staff we have here and to our agents and insureds who believe in us. And as well as we perform, I am confident we can do better, we will be all about doing that and the coming year. Frank?

Thank you Stan. Sarah, if you want to prepare the lines for questions we will be happy to take them right now.

Certainly. The question and answer session will be conducted electronically. [OPERATOR INSTRUCTIONS]. And your first question today comes from Beth Malone with KeyBanc.

Good morning, Beth.

Good morning. Thank you and congregations on the quarter. Could I get a little bit more color on the verdict in Iowa, is -- was that a third quarter event and how do you view that in terms of -- do you go back and look at all your outstanding cases to see if there is something that you have to do differently based on that or is do you see that as a one-time development?

That was a verdict at Ohio, I will not going to comment specifically on that claims. We are still waiting for post trial motion, so I don't it would be prudent to offer any other comments on that.

Okay. So that was -- so you are going to appeal or whatever, so that's not set, you haven't already taken the charge for that in your own reserves, right?

We have not taken the change for that and we still determining whether we are going to appeal based on the issues.

Okay. And do you -- I know you mentioned that you are concerned about, we know what that could mean, do you -- does this shock -- does this look like anything going back to the days that when we saw a lot of -- when we severity jump up in the late 90s when there was a series of high profile large cases settled?

Well, I think it's fair to say that there are larger verdicts throughout the nation right now going on medical malpractice industry. Is that a trend that's going to continue? I think we are going to have to wait and see, but they are certainly coming in on a more frequent basis.

Okay.

For the entire industry.

Beth, I just want to clarify one thing, this is Ned. You said that thing about taking the charge for that claim, we -every quarter do an evaluation of our excess of policy when it claims in large claims and set reserves that we think are conservative and prudent for the exposures we have out there.

Okay. And then also could you talk a little bit about, you know, Florida has been a challenging market for you, they just -- you were just assessed again for the pro, I assume its for pro insurance for the number of other companies that reported the same kind of guaranty fund in charge in Florida. What's the status of the Florida business and how do you see that all developing at this point?

I guess the first thing I would say is, you said it's been challenging for us, I think it's been challenging for a lot of people.

First, yeah Beth, this is Vic. Florida -- we have stable book of business now in Florida and we are very much want to continue writing in Florida, but it's a very challenging environment not only in the liability side, but the assessment side, the regulatory side. I'd say of the states that we operate in it is certainly the most challenging environment.

Again Beth, this is Howard. The assessment, while it's a timing issue is not an overall issue because we are allowed and have been and we'll continue to recoup those assessments from the policy holders. It's really -- when you get down to it it's more of an issue for the policy holder then it is for us.

Okay. And then just finally on the reserve releases, I mean, I know, it's very difficult for us outsiders to make assumptions about what we could anticipate you all will release on a quarterly basis, but the pattern would suggest that every quarter for the last, I guess eight quarters we've seen an increase in the reserve release every quarter, can you -- is there any way you could talk a little bit about, you know, how that's determined or what's driving that factor, I know you touched on the good business and the way you manage yourselves historically. But is there any other color you can give us on that?

Well not, I mean not in terms of a prediction, but in terms of the process sure. We go through this very similar process each quarter, obviously we do more of that at the year-end because that's our -- you could say, our big reserve analysis, but we are doing it really much more detailed basis quarterly now than we were even several years ago. I think really when you go down to it it's a matter of the passage of time and the continued proving of the results, and I think in part the increasing pattern that we've seen, and again not to make a prediction but the increasing pattern that we've seen is a matter of results proving themselves over a longer period of time, and therefore the process that we use it takes time into account and results into account. If you will the credibility or the weighted results have produced the increasing reserves on their own through a consistent process. It's not a matter of making a different set of assumptions or a different type of evaluation, it's the process continuing on a consistent basis with more stable data.

Okay. Thank you.

Moving on, we'll hear from John Gwynn with Morgan Keegan.

Ned, could you run through for me one more time that net investment income conversation; that I just I didn't quite catch what you said?

Sure, John. And when I am referring to net investment income I am also going into that the results of our investment of non-consolidated, so. In third quarter of '07 the third quarter of '06 we see an increase but if you go back and look at the second quarter of '07 to the third quarter of '07 you will see that net investment income is actually down and there are really three things that are driving that. One is on our business, I think life insurance program, we've moved about half of that business to two other carriers. In doing so we incurred an exchange fees onetime fees for about $500,000 that hit during this quarter.

In addition to that both in our other invested asset line and our investment and unconsolidated subs, we've got investments in limited partnerships and other structures and in particular two of those structures one that is a distressed debt structure and one it is a long short equity structure underperformed when compared to the second quarter of 2007; does that give you enough detail?

And what was number three?

Two different funds.

Okay, okay. Yeah, that takes of that. Now, Ned, aside from the guarantee fund assessment if may be never-ending in the case of Pro, what it do -- that does the hurricane fund and Citizens if there are assessments there in '08 it's Ned now involved in that?

I think it is largely the sense as I understand it, John, by no means expert in this, what other lines of business those carriers write. So if Citizens has non -- I don't know, since I think they're purely a property player so I wouldn't think there'd be exposure. But if companies that go into insolvency even if the hurricane as a result of that their property lines driving there, they wrote non-property lines of business though assess those non-property lines, the only line of business I am aware of that's not being assessed right now is comp -- workers comp.

All right. Okay. And one, Ned, the Q will be out later today?

Either later today or first thing tomorrow morning.

Okay. And on, you know, Fitch is a rating organization I admire a lot and I think they do really good work. The fact of life is they invest to still the gorilla in this business. Is there any indication that they'll ever upgrade in Med Mal combination again?

John, this is Vic. They will upgrade their Mal combination they have, I think one of the difference is in this situation and certainly we'd hope to get an aid from Best as time moves on, but one of the differences in this situation in our view, Fitch looks at our organization we'd say more holistically and looks at the capital of the holding company and our ability to deploy capital effectively for the security of the policyholders. Best appears to take a much more specific look at the statutory companies and their capitalization as a part from the organization as a whole, so the way we manage here actually we think fits is the Fitch model more directly than the Best model, although certainly A Best and important player and we intend to maintain our A- rating with that best did not hire.

Thanks Vic. That's all I have.

Our next question today comes from David Lewis of Raymond James.

Good morning. Thank you.

Hi Dave.

A couple of things; first, I thought it was interesting in the press release that you cited the reason for the favorable development reflective of the severity improvements and then I know, Howard, you chatted a little bit about the favorable frequency and severity trends, can you, why did you just cite that in the press release like that or may be it was an oversight, but I guess I'm curious does that mean that you're containing to be very conservative on your frequency assumptions given the potential reversal of some tort reports.

This is Howard. Well, really when you get down to it other than tail coverage what -- let me go back a step, we don't write a current coverage and we haven't written it for a number of years. So other than tail coverage frequency doesn't really drive prior year favorable development, because at the end of a given year we'd pretty much know how many claims we have. The question that we have really is what the severity of those claims will be, how many of those claims will close with or without payment, what will cost us to defend them. So, it's really not a frequency driven result when we see prior year development one way or the other once we're out of the occurrence business, which we are. PIC Wisconsin has some occurrence coverage but that is pretty well managed because it's within $1 million wire in Wisconsin subject to the Patient's Composition Fund above it and it has been stable for us.

Well, can you provide any additional comments on kind of some of the frequency trends that you're seeing, I mean, are they continuing to decline at a 5% plus rate and maybe also what you're kind of thought are on severity trends?

Sure. Severity trends, as we've said in a couple of prior quarters, I'd say is in the 4% to 5% range now and that is within the $1 million layer. The verdicts that Darryl talked about earlier for the industry as a whole, to the extent that those ultimately wind up in payments for any of the companies involved will certainly result in higher severity trends for layers above a $1 million in a -- typically in a reinsurance layer. But in $1 million, first $1 million of coverage were at 4% to 5%. On frequency, I wouldn't say that we're continuing to see a drop in frequency, what I would say is that frequency is certainly lower than where it was and seems to be stable right now. And that is holding the severity trend down, or offsetting these severity trends in terms of rates because the rate-making process always looks back several years and as we blend in the more recent results with the earlier results the fact that we have more and more years of lower frequency entering into the rate-making process has dampened the severity increase.

And Howard, the current accident year loss ratio declined in the third quarter versus the first half, if I calculating correctly, by 3.4% have been run in the upper 80's; is that kind of a new level that you think you'll be running at here over the foreseeable future, can you provide any guidance there?

See, it's really more of a mix of business issue than anything explicit. We have not made any specific assumptions in terms of current accident year that's different than before and really it's very consistent to what it was a year ago.

I guess, that you are saying it's a change in mix of business, then should we assume that it's running in the, you know, 83% to 85% range versus maybe an 88% range or kind of what's your thoughts?

I would say that 83% to 85% is -- would be, where I would look at it for the -- as we see the year right now, you know, we do have some variation because of the introduction of PIC Wisconsin into the mix and PIC Wisconsin's loss ratios have been somewhat higher in part because of prior pricing assumptions and also because of the effect of deductibles in their business and how they're accounted for. But I would think that, you know, the 83% to 85% is a reasonable level as we see it right now based on current loss experience.

Is that maybe a good guess at this point for '08 as well?

That involves a prediction which we typically don't make.

Okay. And on the expense ratio, I think the comment, if I heard it correctly, was expenses are coming just a little more in check with PIC Wisconsin. So should we assume that maybe that's an 18% to 19% kind of expense ratio range over the next several quarters?

Yes. I think the expenses we -- if you back out the of extra ordinary expenses from the quarter, that was a -- it was a fairly a normal quarter. As you look forward and particularly the first quarter, I believe, in 2008, just keep in mind that the way that our stock options expense it's front end loaded into the first quarter because of the way the retirees are treated for expensing stock options and do it back in the last two years we see that pattern. The only driver will obviously be with the top-line does.

Sure. Now, is there a general number that does add a point to the first quarter, I can go back and look historically?

You know, as of now, I don't have that number.

Okay, that's fine. And Ned or somebody, can you just provide me with the exact accounting details for the commutation or with the impact on the net and how did that flow through?

Yes, hold on one second. The net impact was on an after-tax basis it's about $1 million of profit or income to us.

Can you kind of maybe just start at the top of the --

Yes.

-- P&L and kind of work me through it? I wanted to make some adjustments.

Yeah. We decreased premiums seated by approximately $1.9 million and decreased reinsurance recovery by approximately $400,000. We received approximately $2 million in cash.

Received $2 million in cash?

Yes.

Yes.

Okay. And Stan, since you brought up the point about M&A you've thought there would eventually be some opportunities out there, have you seen any change in activity or discussion levels over the past three to six months -- really three months?

No is the short answer to that question. But as this market continues down the course it's presently on, it would not be unusual to see those opportunities arise as a consequence of the decisions that have been made over the past several months.

Now do you think the M&A activity given the favorable profitability overall for the industry is going to be more reflective of concerns about slowing top-line, is there going to be concerns about some of the large shock verdicts that have, you know, smaller player out there you can take with one that's going to make it vulnerable as occurred with [Nick Rick] or it's all of the above or any other thoughts?

It's all of the above and it's just -- it will ultimately be determined by the strength of the balance sheet of either the acquirer or the acquiree and it -- strength of the balance sheet means everything and as the soft market presents challenges to balance sheets those opportunities are likely to arise.

That's helpful. Thank you very much.

From Flinker & Company, we will now take our next question from Howard Flinker.

How are you? Good morning.

Hi Frank.

Hello everybody else too. Could you please tell me about the asset side of the balance sheet, where you have your liquid securities invested, what types?

I'm sorry, on a short term...

Yeah.

Six months?

Both short and long; I am just curious?

Oh, okay. Let's start with the long term, that's the vast majority of what we hold. The vast majority of our portfolio is fixed maturities, average rating of AA, duration of somewhere under four years on the portfolio. In addition to that we have a small portfolio of equity and equity-backed securities. Short term investment is a variety of short term products, primarily commercial paper, again all A1 and P1 typically type paper.

And you've invested directly in the commercial paper or in some pools of commercial paper?

We've directly into commercial papers.

So you know who the borrowers are?

Yeah, we know who the borrowers are.

And that applies also to your longer term investments?

By in large the longer term investments, we do have asset-backed securities, we've got a number of mortgage-backed securities and things of that nature, we have virtually no exposure to CDOs or anything like that.

You have also mentioned that in the first week of September, and I can give you an exact date if you phone me later, we've filed an 8-K that contained a very detailed description there were some slides for an investor presentation. But it is a very detailed description of all of our investments and breakdowns in percentages and years to maturity and quality. If you either look for that or phone me later I can provide that to you or anybody else on the call it's filed on -- I think it was September 5th or 6th.

Then I can find that on your site?

Yeah.

As for the asset-backed securities, what kind of assets are they and are they direct or is that also part of a pool?

We have a variety of different asset-backed but the largest is mortgages, and they're Fannie Maes, Jenny Maes and structures like that. We don't have any direct mortgage investments.

Okay. Thank you.

Our next question comes from Ron Bobman with Capital Returns.

Good morning, gentleman, congrats on continued great results. I had a couple of questions, the Alea commutation was that PIC Wisconsin treaty or is that a Pro treaty?

It was -- there were actually two; there was a PIC Wisconsin several -- were participants on several years treaties along with a lot of other reinsurers. We just commuted the Alea portion, some of it was on PIC Wisconsin treaties and some of that was on NCRIC treaties. There was no Alea participation on the historical ProAssurance other than those two companies.

Stan, thanks. And there was a comment about -- I'm not sure if it was by Ned or by Stan -- that you're going to continue to sort of look at commutations as a future area of activity and I guess opportunity. Do you think of that in the context of sort of been the remnant NCRIC and PIC Wisconsin treaties were for historic ProAssurance ones as well?

Both -- we look at commutations really for few reasons the ones that we have done really over the last couple of years have primarily been reinsurers that are in run of, and while we haven't had clients paying problems per se we -- if we have the opportunity to clean those up before the companies went, got smaller and smaller and [since] management so forth we wanted to do that. We also look at commutations as the way of simplifying our own internal processes particularly for the older contracts that haven't had much activity. So we would be looking back at all of the companies in that regard.

Got you. And then I had a question, what -- when is for Ned really -- when you book actually your loss ratios do you have different accident year picks for different states and/or different medical professions?

We evaluate each state individually for determining fastening your loss fix and we do take into consideration we distinguish between physician, hospitals, facilities and things of that nature.

Okay. And in my last question was if my math is right on -- because you would have sort of trailing year-to-date capital management number for the shares. But why did you buy half as many shares in the third quarter at generally lower price level than the number of shares of shares that you bought in the second quarter?

Fair question. There are number of factors that we have to consider when we are buying back stocks and quite frankly there may be times when the price is attractive, but we are constrained from buying. We are subject -- the company is subject to the same rules as individuals on buying with knowledge, and so if -- you know, circumstances will present themselves, we will be active in the market but there are times that we can't be.

Is it -- and that was sort of -- that was a primary driver for Q3 versus Q2?

Yeah.

Alright. Thank a lot, continued best of luck.

Our next question comes from Amit Kumar with Fox-Pitt Kelton.

Good morning.

Good morning Amit.

Hi, I guess a couple of quick follow-up question, since most of my questions have been already asked. Just going back to the rate filing comment, is it fair to say just based on what your peers have done, is it fair to expect may be a high single-digit rate decrease, rate filing going forward?

That varies a lot from state-to-state and in some states we will be making filings in that rage and some possibly with a greater decrease than that and some with no decrease at all and it is just -- it's all over the board in terms of any kind of an overall average I hesitate to speculate on that. But I guess, what I would say is that we will more decreases than increases certainly.

Okay. Got it. In terms of going back to your comment regarding increasing the market retentions, could you just expand on that comment a bit?

Amit, I think that what we said was that we really not going to be able to talk about specifics given the very competitive nature of what we were doing in the market places in which we operate. I hate to say that, but it is a kind of proprietary information so if you will permit us to -- just invoke to peer competition listening in will do that.

Okay. Fair enough and just moving back I guess to the top-line decrease. Could you just go through the mechanics, you know, PIC Wisconsin number was I think $8.5 million. Could you just breakdown the remainder in terms of perhaps in a policy holder of growth, lost business and maybe, you know, just give some more color on that?

The retention for the quarter was 86%, rate this year over last year was virtually flat, it's down less than 1% and PIC Wisconsin three months in this quarter versus two months in the comparable quarter last year added an additional $8.5 million. I think for those pieces you can pull everything together.

All right. Okay, and then finally just going back to the competition, I know, you talked about the new players having issues, what about, you know, may be some of the mutuals or the larger you know, public players?

I think what Vic was saying is that we don't see anybody doing anything that's absolutely irrational, right?

Okay.

And they may have a little bit more, we might be a little more conservative, but we don't see anybody, you know, we are continuing to follow the path that we have followed to be conservative and our approach to the current year and the way we go into be aggressive in our claims handling philosophies. There is certainly top-line pressure and expense pressure on all the companies. But with the decline in frequency, I am not sure companies are feeling too much of a claim side pressure right now. So, I think the world as we know changes overtime and we will see how it evolves. But right now the established players, I think are in their own minds at least doing reasonably well.

Okay. That's all for now. Thanks so much.

Once again if you do have a question, please press star-one on your touchtone telephone. Our next question comes from [Alex Fasino] with [Matash] Investments..

Hi, thank you very much. I am looking at some past quarters estimating what the accident year loss ratios have been. I know, it's tricky to take a single quarter and draw too much from that. But if I add back the reserve releases you guys had in the third quarter of '06 and in the third quarter of '05, it looks like your accident year loss ratio went from the high-70s in the third quarter of '05 to the mid-80s in the third quarter of '06, so pretty big change. Could you please remind us what the rate change was in '06 versus '05 and what the loss cost trends was in '06 versus '05?

Loss cost trend that we -- I guess generally observed in '05, it's probably more in a 6% maybe 6.5% range. '06 loss cost trend, and this is severity trend that moved down may be to 5.5% and now as mentioned earlier we are probably in the 4% to 5% range that's all on claims severity. Frequency generally was moving downward in terms of the raw number of claims reported so it offset some of that. The accident year loss ratios, I guess don't necessarily agree with your math on that, just looking at some numbers that we had here, the '05 accident year loss ratio at least through three quarter of '05 was 85 -- a little bit above 85 and for 86 through three quarter about 81 and then again we mentioned earlier this year slightly higher and again that has to do to a large extent with PIC Wisconsin business coming in.

Right. I was -- again I was calculating just the third quarter -- just a quarter, in third quarter in '05 and third quarter in '06, so guys, I probably got different numbers that way.

Third quarter of '05 at least our numbers here have 84.8 and 81.3 for the third quarter of '06.

Okay. Thank you very much.

(Operator Instructions). Mr. O'Neil, it appears that at this time we have no further questions.

All right, we will wish everybody happy holidays, and I guess next time we speak as a group will be 2008. Thank you everyone.

Once again that does conclude today's conference. Thank you for your participation. Have a nice day.