ProAssurance Corp (PRA) 2007 Q4 法說會逐字稿

Good day, everyone. Welcome to today's ProAssurance fourth quarter and year end for 2007 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, Jennifer. I like to welcome everybody and thank you for joining us. We will discuss our results and outlook after I remind you that one of the reasons you joined us is to hear forward-looking statements and projections. And we do expect to make some of those during this call. These statements and projections will be based on our estimate and anticipation of future results and events. Please review the caution regarding forward-looking statements in the news release we issued today, Tuesday, February 26, 2008. 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 the call is accurate only on Tuesday, February 26, 2008, the date of first broadcast and is the property of ProAssurance. If you are reading a transcript of this call, especially through one of the realtime transcription services, please note transcripts are subject to error and we have neither reviewed nor approved the transcript.

On the call today is our Chief Executive Officer, Stan Starnes, our President, Vic Adamo, Chief Financial Officer, Ned Rand, Chief Underwriting Officer, Howard Friedman, and Chief Claims Officer Darryl Thomas. Ned will review a few of the key numbers to help provide some background for our brief remarks. So, Ned lead us off.

Thanks, Frank. I'm going to let most of the numbers speak for themselves but there are few key items on which I want to focus your attention. Long time investors are aware of our dedication to a strong balance sheet and solid bottom-line results. We continue to maintain both in 2007 aided by a solid fourth quarter. We grew book value per share by 15% during 2007. It's now $38.69. Our ROE for the year was 14.2%, which squarely hits the upper range of our long-term target. For the quarter, ROE was 16.7%. Both the year and the quarter were [boosted] by favorable net reserve development. Net income from continuing operations was up 43.5% in the quarter to $51.4 million, and up 32.4% for of the year, to $168.2 million. Earnings per diluted share from continuing operations rose from $1.01 in the fourth quarter of 2006 to $1.47, an increase of 45.5%. Year-over-year net income for diluted share was up 28.5% to $4.78. Making this one of the most successful years in our history in terms of earnings per diluted share and by virtually every other measure. Favorable net reserve development was a major driver of results in the quarter. I'm going to ask Howard if he will talk about the actual numbers and the process for reaching the ultimate conclusions. Howard?

Thanks, Ned. I think I mentioned some of this last quarter but it bears repeating. With every quarter, we have new loss data with which to evaluate our current reserves thus we obtain new insight as prior accident years mature quarter-by-quarter and evaluation could move up or down. Remember that we said initial reserves at levels which we believe to be adequate should results be no better than previous experience has indicated. That prevents us from a major financial stumble if things deteriorate. If on the other hand the losses mature better than we expect, we benefit. That by necessity colors not only our current thinking but ripples back through reserves still on the books. After all those cases have yet to be resolved and their outcomes will be determined in the current or future loss climate. For now, we were seeing today's favorable loss trends principally affect accident years 2003 through 2005. Because this is an iterative process involving a number of variables each quarter, we won't try to tell you today what lies ahead in 2008. I can re-emphasize that we look at this every quarter in a systematic manner. The regular valuation of our reserves and our commitment to maintain our historical level of reserving go hand in hand to make sure that we are able to meet our policy obligations. Ned.

Thanks, Howard. The primary driver of the increase in the expense ratio for the year is the reduction in earned premiums. Expenses for the year were also affected somewhat by stock base compensation costs. There is a lot in the media recently regarding the credit markets. As you heard us say before, we maintain a very conservative investment portfolio. I will refer you to an 8-K we filed on February 11 providing details of the composition of our portfolio as of the end of the year. Finally, an update on capital management. In December of 2007, we redeemed $15.5 million of trust preferred debt that came to us in the NCRIC transaction. We also continued to be active but prudent in share repurchases. As of January 31, 2008, we have repurchased approximately 1.2 million shares of our stock at a total cost of $67.1 million. After the debt redemption and share repurchases, we had $67.4 million remaining in our authorization to repurchase shares and redeem debt securities. Our convertible debt becomes [inaudible] this summer and while today, it's likely we will call the securities there are a lot of moving parts not at least of which are the interest rate environment and the state of the capital markets. Frank.

Thanks, Ned. Howard, Ned briefly mentioned the fact that premiums were down in the core end of the year, will you touch on that for us?

Sure. We continue to see the effects of both softer market and the decline in loss costs. In the fourth quarter, our gross written premiums were $109 million. Down 14% compared to last year. Year to date gross written premiums were down a little bit more than 5%. The new business brought on to our books in the first seven months of the year by the PIC Wisconsin transaction did cushioned the year-over-year number as we expected. I want to emphasize here that while everyone acknowledges that we were in a soft market, it's not only competition that has resulted in premium declines. I will comment more specifically on frequency and severity in a moment. But overall, our loss projections are down and were reflecting that with lower rates obviously leading to a lower written premiums. On the whole, we are not seeing the irrational kamikaze pricing that we saw during the soft market of the late 1990s. My guess is that the hard market didn't erase all of the pain from the last soft market and that's a good thing for our industry and our insureds. While we tend to ease into a soft market, the hard market often arrives abruptly.

We try to maintain our pricing discipline and we hope to avoid the rapid severe price escalations that mark the early part of this decade. That marketplace discipline means that we are prepared to see our top-line fall but will maintain our margins and protect our balance sheet at all cost. We had a retention rate of 86.5% in the fourth quarter, and policies renewed at premium rates that were down 7.5% from a year ago. For the full year, policies renewed at premium rates that were within 2.3% of expiring. Loss trends have improved and we do expect that to continue. We see frequency moderating generally across the board although there are variations from state to state. Thus, we were able to maintain our margin expectations in the rates that we are filing even though most of those are likely to indicate a decrease in 2008. But I want to emphasize what I mentioned last quarter. If we weren't seeing this almost universal trend toward lower frequency, rates would likely be increasing due to severity which is continuing to rise at expected and manageable levels. Frank.

[Underscore] at expected and manageable level.

Certainly.

Darryl Thomas, will you come in for us on 2007 claim data in the current claims environment?

Sure, Frank. Just as Howard and Ned have reported little change in their areas, I can say the same holds true for claim. Within the working layers, the relative stability Howard mentioned is very evident. Although we continue to experience erratic large verdicts. In 2007, we obtained favorable outcomes at 90% of the claims closed in our historical book of business and 89.4% of the claims closed when we include PIC, Wisconsin. That means we have made no indemnity payment on behalf of our insureds in those case. We tried 733 claims to a jury verdict last year in 528 separate trials and current claims environment leads me to the conclusion that will likely try significantly fewer claims in 2008 due to the decline in our claims inventory which is a direct result of fewer filed claims over the past few years. It doesn't signal a change in our claims philosophy, it's just a reflection of the current claims trend in our lower inventory of claims.

As I mentioned, we do see large verdicts from time to time. They are fact of life in medical liability. We have always had them and after the change in the laws, they will always be with us. But it's just that those that do occur seem to be larger which puts the premium on having the balance sheet to cope with them which we do and the need for experience localized claims management which is one of our many strengths. Given the current claims trends, we have heard of some companies that have been reducing claim staff. We have been able to use a proprietary data system that shift some processing around to balance work loads among offices and we've bee able to reposition some claim staffs into other roles. This preserves our expertise and capabilities for when we see a return to what we believe are more normalized claim levels. Frank.

Thanks, Darryl. Vic, this isn't the first cycle you have been through. Any thoughts on how this one compares?

Yes, Frank. I agree with Howard's comments that we don't see the degree of irrational pricing that existed in prior cycles. Although we do see examples of pricing that raises our eyebrows but these practices aren't as broadly based as in prior years. And as Howard also noted, the general drop in frequency does give some level of rational underpinning to rate decreases. Tort reform often has a roll in market pricing but the tea leaves are difficult to read at this moment. The Bush administration is once again sending a Tort reform proposal to congress. This time it's part of an effort to control medicare costs. And while we applaud this effort, it's unrealistic to think that any Tort reform will emerge from this congress.

At the state level, the claim [inaudible] just yesterday began their first real challenge of Texas' Tort reforms. They are trying to convince the federal courts to declare that Texas' reforms unconstitutional. And while it's hard to imagine that is succeeding, if it does, that could be a significant consequence to [companies] in Texas given the sizable rate decreases they have given based on Tort reform. There was also a recent ruling in Cook County declaring the Illinois Tort reform unconstitutional. That now sets up appeal and ruling in the future by the Illinois Supreme Court. On the other hand in Ohio, the supreme court ruled in favor of nonmedical Tort reforms and court watchers say that could be a clue as to how they will handle the almost identical medical malpractice Tort reform laws when a case comes before the Ohio supreme court. So in sum, there is not much guidance and individual companies can elect how much weight they want to give to Tort reform. We elect to be cautious until there is a final ruling in the loss data emerges.

Changing the subject, Frank, if I may to our internal operations. I'm pleased to report that ProAssurance is doing well at the operational level and that PIC Wisconsin is now fully emerged into our day to day activities. Frank.

Thanks, Vic. Stan, any comments from you?

Frank, I think we've established that we are in a soft market so the real question is how long will it last? It's one of those things that is really hard to predict. But given the lack of cut throat price competition so far this may be a fairly benign manifestation of the cycle. That does not mean we will see top-line growth. In fact, we can expect our top line to diminish further in the coming year. And, no, I can't predict by how much because I don't know what our competitors might do in the market. I do know that the one sure path to insurance disaster during the soft market absent some rational driving force is an increasing top line. But I think there is a potential difficulty confronting the industry. In reviewing the data and comparing this cycle to others, we see that our industry as a whole has never been this optimistic in the low level of initial reserving. We will show you a chart in our next presentation that bears this out. But given the softness in pricing and the level of profit companies are recognizing today, there could be a number of M&A or expansion opportunities ahead if or should I say when the market returns to more normal trends. That's why we are continuing to be dedicated to the diversity of our business and the discipline of our operating model. We are not held hostage to the vagaries of any one state.

And as we said in this morning's news release, we were also being careful to maintain our historical level of reserving and we are building in the same expectations per margin. It's this discipline that we think sets us apart from the competition. It allows us to sell a product that no one else offers. An insurance policy is just a piece of paper until you assigned a lawyer to defend you or until you are told to pay a verdict against you and that's when you want the best attorney with the chance for an unfettered defense of your non-meritorious claim. If you did commit malpractice you want the company with the resources to make a fair settlement as quickly as possible. We offer that balance sheet strength and willingness to let our insureds go the distance to defend their names.

You heard Darryl Thomas tell you that we've tried 733 claims last year. Other companies probably won't tell you how many they tried. They may tell you how many claims they paid no indemnity on but that's a fairly meaningless number if you only trust several cases filed against your insureds. This all becomes more important as the world of transparency comes to medicine across the country. As it already has in places such as Florida and Massachusetts. With the public enjoying access to malpractice litigation results on the internet. Insureds will think twice about settling claims because no matter what a patient or potential patient will think you must have done something wrong if you settle it. In fact, just last Tuesday, I saw a news release from a company that promises to send watch dog alerts via the E-mail if a doctor you want to monitor has had a malpractice judgment or disciplinary action against he or she. The world is chaining and we are going to be ready for it. And that means, we will do everything in our power to protect our balance sheet but also the strength of our organization. We were committed to maintaining our infrastructure during the softer portion of the market cycle in order to be able to capitalize on the opportunities when the market turns. And we are confident that it will. Frank?

Thank you, Stan. Jennifer, if you are there we'll open the line for questions right now.

The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). We will take our first question from David Lewis with Raymond James.

Good morning, thank you. Couple of questions. First on the gross written premium decline down 14% in the fourth quarter. Kind of accelerating on the downward side after being down 9% in the third quarter. I know it's difficult to predict and there's a lot of moving factors and you're a national player. But let's kind of step back a minute and look at if you can what you think may be if you can even put it on your book of business what average rate decreases. Just give us a range or high level number if you could. Two, do you feel that some of the startups that went back five plus years ago are starting to feel any pain? Or is the favorable claim trends allowing them to continue to stay afloat. And then three, do you feel like there is any increased M&A activity that might help you out or do we need to start to feel more pain on the claim side before people get realistic on pricing?

Hi, David. This is Howard. I will start with the first question on the average rate decreases. I think, if you looked at an overall average, we are probably talking about mid single digits, although we have seen some rate decreases that are in the 13, 14, 15% range. We had one that was 11. We've had other situations where we looked at the rates and not made any changes at all or actually had some small increases. But I would say probably I would guess 5% on average. We haven't tried to look at it specifically that way.

Howard, are you talking about in '07 or what you anticipate in '08?

What we have filed in '08 so far. And what would be effective in the first half of '08 at this point.

How would that compare to '07, roughly?

2007 I think will probably would have been closer to a zero. I think the increases and decreases balanced out, at least on a file basis.

Right. Okay. That's helpful.

In terms of question regarding whether the market has created pain for some of the startups, that's highly variable. This will be a very difficult market for them to be feeling no pain in the end. So, we will just have to wait and see. With respect to M&A, yes, we think there will be opportunities in that regard. We intend to be opportunistic. The market has a way of sort of moving those activities forward as people encounter the difficulties and we have a strong enough balance sheet that we think will be position to take advantage of that.

Stan, at least saw the public companies we see reporting have pretty significant favorable development. You know, I would guess that the other private and smaller independent companies are feeling the same type of benefits. Does it take a year or two to play out before the M&A activity starts to really feed up, start to build? Or are you starting to see a little increased activity now?

It could take some time before you see it reach its peak. I expect we will see some active or opportunities to evaluate during the first six months of '08. Whether any of that will come to fruition will depend on the conditions as they exist. As I commented in my remarks, we have seen something that we have not previously seen and that's the industry as a whole is being very optimistic as low level of initial reserving. We were maintaining our historical levels of reserve on new business and we think that is prudent, cautious and long-term approach to the position in which we find ourselves.

Just lastly and I will come back with some other questions. PIC Wisconsin premiums if you can break them out. What were they in the fourth quarter and full year of '07, please?

We will come back to that. We will pull that information out.

Thank you, Ned.

We will now go to our next question with Ron Bobman from Capital Returns.

Hi, congrats on outstanding underwriting results again.

Thank you, Ron.

Really distinguishing. I have a couple of questions. What's your PIF number approximately?

I think we probably say it's going to be roughly 30,000.

And if that's approximately the number of policies that you bind each year, you mentioned, I think Howard mentioned the 80 -- maybe it was a fourth quarter number but 86.5% retention rate. The portion of the business that you don't renew whether being in the fourth quarter, 13.5% or a number in that ballpark for the whole calendar year, are substantial all of those lost accounts that presumably someone else has written lost because you are under quoted on rate? Or there is a meaningful number on those that you choose not to quote or you are quoting at much higher rates? Just trying to get distribution of business not renewed.

Well, first thing I would say is that we used the most conservative method of calculating retention. It's not one that if we don't think we have a choice to renew it, we don't count it. That would include people, for example, who are retiring or become disabled, disability would be a small amount. But the number who retired there is some percentage that we would reunderwrite and not renew ourselves and then some lost to competitors.

Look at Howard now --

And then you have the other situations where physicians die, they retire, they become disabled, they move to other state. There is variety of reasons. There's underlying --

But I'm curious, is it 80 plus percent of the lost business really tied to someone underquoting you on rate on a piece of business that you would normally like to renew?

I would say that is real rough. But I would say about two-thirds of what we lose is probably due to price competition and the other third is due to either the decision -- actions of an insured that takes them out of the market or our own action in terms of not wanting to renew.

Okay. Stan, you mentioned in your prepared remarks -- I don't know if in sort of renewed M&A. Once the business turns to normal trends and I was trying to understand what you meant by normal trends.

Normal claim trends. If people that are pricing their business today and reserving their current business as if this frequency is a permanent thing and that the claims environment in the United States has undergone some drastic change is going to last forever. Only time will tell what the fact is we think that's being unrealistic. That will create M&A opportunities.

And then just so, I have two more questions. The loss ratio pick that you are using right now in early '08, I'm curious whether you choose to give the number or not, it's not critical to me. How about loss ratio pick is varying from the number you started in early '07 and if it's varying what's driving the variance beyond pricing. Thanks. And what order of magnitude are you talking about?

Different ways of looking at that. If you look at the in the loss ratio that we booked without favorable development it's in the roughly 85% range which is relatively similar to where we were a year ago. I don't have the exact number with me from a year ago.

Are you talking about Q4, Howard, or are you talking about early '08, 85%?

Q4.

Okay.

I'm only talking about what is already done. So, I think that's similar to where we were a year ago. I don't have that number at my fingertips but I would say it's pretty close. We booked in Q4 if you look at the current accident year we booked an 85.9% loss ratio and that may be actually slightly higher than where we were in Q1. But it's similar.

Okay. And then would you talk a little bit about going forward. You make any changes to the loss ratio pick in Q1 '08 compared to this nearly 86 number, is it going to be -- is the change going to solely driven by rate action you are taking? Or are you incorporating any factor associated with improving margin on this '03, '05 book of business, maybe some indications that '06 and '07 is looking better? Or is it all going to be price driven changes there?

It's always a combination of what we've seen and what we've recognized in the past because that all feeds into not only the pricing but our reserve assumptions. So it's a combination of both. And we do take a look at the level of pricing that we are achieving into the -- as we mentioned earlier, the rates that we are filing have the same level of expected margin built into them. So, that in itself wouldn't change our view. However, if we are being more or less aggressive in certain areas of the market in terms of price deviations then we have to take that into account in the loss ratio. But I think on the whole, my sense is that what we are doing right now is consistent and similar to what we were doing in the past.

Okay. My last question, thanks a lot for your patience, is you define 733 claims were tried in '07, just so we are clear, what do you mean by claims tried. How are you defining claims tried?

When a case goes to trial, there may be multiple defendants in it that are insured, couple doctors and co-defendant corporation. So, those are three in that example, those are three trials against our insureds, but only one case tried. So, that's the distinction we are making for the first time here.

We just, it's Stan, we tried 733 claims in 2007. In some instances one claim was tried in one case and that was all that was tried. In other cases there may have been two or three claims tried in one case.

Does that clear that up?

And I was focusing on the threshold as far as being tried. Does that mean you've litigation has been filed against the company and actually the parties have shown up in court one day and not settled prior thereto?

It means that if we had cases tried to a jury in which our insureds were defendants and 733 of our insureds were subjected to jury trials in 2007.

Got you. And you went the distance as far as the jury delivering a verdict?

Yes.

Okay. Thanks a lot and best of luck. Hope it continues.

Thank you.

We will now take our next question from Beth Malone with Keybanc.

Thank you. I just have a couple questions. Could you give us an update on the Florida market and what you are seeing there? Is it getting any better or what's the situation?

We don't see any change in it, Beth.

Are you still concerned about it? Or do you feel like you can manage the environment that's there?

We can manage the environment that's there. If I was physician in Florida I would be concerned about it. We can manage the insurance company in the environment that exist's we don't have a definitive ruling from Florida Appellate Court about Tort reform and that is going to have a very significant effect when that ruling is issued.

Do you have any sense of timing as to when they might rule on that?

None.

Okay. When we back out the reserve releases from the year end, the combined ratio is above 100. So I'm just wondering are you all comfortable with that level that you can meet your ROE goals and everything. Was it that high?

Hi, Beth. It's Ned. A couple of things. One, as you know we are sitting on some excess capital and that probably more than anything makes achieving our ROE goals a challenge. But the levels that we were currently writing business, we were comfortable that we will meet our ROE objectives.

Okay. And finally, has there been any change or trend in the market itself? Are there more or less physicians out there? Is that growing and what factors drive that? Or is it something you even worry about?

Hi, Beth. Vic Adamo. There are plenty of physicians out there for a company like ours selling insurance to physicians on a day to day basis it's not dramatically changing. Over long term, obviously, there are some changes as practices get larger or they become a hospital affiliated group and it might be self-insured and out of the market. Day-to-day or year-to-year basis there are not dramatic changes but there may be long term changes.

Okay. So, as more doctors choose to be part of the hospital program or a larger physician group, will you continue to be pretty exclusively an individual doc? Or are you looking at expanding your product line?

We insure larger groups now. Our sweet spot are the smaller groups. And individual physicians. We do it all up the line. But larger groups have more interest in alternative mechanisms. So that's an area on our development. We plan it now but not maybe as much as down the road.

While we insure significant number of physicians who are in small group less than five, the fact is that's the practice arrangement most physicians in the United States have. So, that's why a majority of our insureds are in those groups and because the majority of the physicians around the country are in those groups. But we do insure larger groups. We insure groups that are affiliated with hospitals. So those changes when they occur and I think they will over the long term, I don't feel there will be a dramatic change in the next few years. But those changes as they occur will be met by us with products which will be a benefit to those situations.

Okay, thank you.

We will take our next question from Mark Hughes with SunTrust.

Good morning, Mark.

[Expense] for more top line decline. Should we look for that continued to inch up a bit or can you hold that steady.

Mark, I have to tell you that we didn't get but the last few words of your first sentence. Could you repeat that for us?

Yes, well, what trend do you think an underwriting expense given that you have an outlook for declines in premiums over 2008 should we look for that to inch up relative to revenue or can you hold the line there?

Mark, it's Ned Rand. A couple of things, there is a component of the underwriting expense that's variable commissions and premium taxes in particular. On the operating expenses our objectives as we go into 2008 is to hold -- to work to hold operating expenses on par on a nominal or dollar value basis with 2007.

On a dollar basis.

Yes.

And then how big of the decline in open cases at year end?

There has been a considerable decline in open cases year end. I'm not going to give you specific numbers but year-over-year due to the drop in frequency obviously that affects inventories.

Right and is that the magnitude of the drop greater than what you seen relative to the volume of business you have been writing compared to prior years?

Yes, that's fair to say.

One more point on that. Your outlook for trying fewer cases in 2008, I guess I assume that's already captured in loss reserves. But does that point to the potential for even more favorable development in the future?

Not while the development is primarily a result of where we start reserving and what happens to the cases as they are resolved. The frequency issue really only comes into play on the reporting endorsement and on a small amount of current business. I don't know that you can draw the direct correlation there. I think the overall claims environment that we are seeing is one of moderating or decreasing frequency and gradually increasing severity both of which are better than we anticipated when we established the reserves for the prior years and that's why we are seeing development in a favorable manner.

Okay. Thank you.

I'll tell you what, Jennifer, let us pause for a second. Ned has got an answer to David Lewis' earlier question then we will get back to questions.

David, you had asked about premiums coming from PIC Wisconsin. In the fourth quarter we had gross written premiums on pick Wisconsin on $12.1 million for the year. That would be $74.4 million on a net basis $11.7 million and $66.8 million. And on a net earned basis $18.6 million and $73.9 million. Thanks, Frank.

And I think fair to say that given the way we were integrating PIC Wisconsin and the rationalization of distribution it is going to be really hard for us to do that in the future. Jennifer, we will resume questions.

Thank you. (OPERATOR INSTRUCTIONS). And we do have a follow-up question from David Lewis.

Thank you, Ned, for that. You wouldn't have by chance what the gross written was in the fourth quarter of '06, would you? Just to throw another kink in your thought process there?

Actually, I do have that. It's call it $15 million in the fourth quarter of '06.

It's down, okay, $15 million. Perfect. Stan, just to clarify on Beth Malone's question, you said there are no decisions out on Tort reform in Florida. To my understanding there is not a case that is actually pending out there to go to the state supreme court, is that accurate?

I don't know whether that's accurate. Have I been told and this is hearsay, have I been told that there is at least one and perhaps as many as two cases making their way up the system in Florida on that. But that's anecdotal. Bear in mind they are not our cases, so I can't tell you with assurance that there are. Bear in mind that in the Florida state system an appeal of right lies from the circuit court in Florida to an intermediate appellate court which are geographically spread among the state according to districts. Thereafter any further appellate activity will take place in the supreme court of Florida and typically that's by permission. There is no right of appeal and absolute right of appeal in this kind of case to the supreme court in Florida according to my understanding. So, to get a definitive ruling, you have to first have a ruling in a circuit court. You then have to have a ruling in an intermediate appellate court and then have to have a supreme court of Florida agree to accept the case and issue its own ruling.

That's helpful. Stan, know you still haven't been there that long as CEO, when I met with you the day after you accepted the position you indicated that you thought it would be helpful to kind of have everybody including yourself kind of review each of the operations to see if there are greater efficiencies or better operating methodologies to move forward. In your short tenure there have you found any? I know you pushing everybody to look for best practices. Even further than what they have historically. There is anything meaningful you can tell us?

We said back in July and I say again today everything is on the table. We want to take a fresh look at everything to see that we are doing things in a way that best accommodates the needs of our shareholders and our policy holders and our employees. We have made some changes. I don't know that I care to announce them to the world, I mean, to tell you. But we were moving forward as we think things are appropriate and I would say that the changes are changes in nuance and not drastic changes in direction. We were tweaking it. Everything can be made better. There is nothing that's perfect. And we are doing our best every day to make things a little better here. I will have to tell you one of the great strengths of this organization is our driven employees that are simply magnificent. I can't take credit for that but I can tell you that observing it closely and first hand I wouldn't trade them for anybody in the world.

That's helpful. And, Howard, I know you said most of the prior year development came out of the '03 to '05 years. Can you give us a magnitude as the greater percentage from the '03 or '04 or how do you see that if you can from a high level?

Yeah. It's more from '04 and '05. If I recall. We will be able to get you more -- or will have the statutory statements out there within a week you will be able to actually see it by accident.

And I guess I'm trying to also kind of back in to what the excess capital levels might be in the organization today. Do you know what capital and surplus is at year end?

Statutory capital and surplus?

Yes.

We have that and we will have to get our hands on it. I would speculate it's roughly $900 million. In that neighborhood.

So with the repurchases and the redemption of the preferred, are we still running close -

Actually, it's right at $1 billion.

$1 billion of statutory capital?

That's statutory capital.

Perfect. So, what the repurchases and the redemption of the preferred, are we still looking at potentially excess capital today in the $250 million range, would you guess?

I think everybody comes up with their own number. Obviously the rating agencies have one perspective on it and we at the company may have another. So I'm kind of hesitant to throw a number out there. We are in a position at having excess capital.

And I don't know what the exact numbers are right now. So, you are clearly writing at a much lower premiums to statutory capital surplus than you might prefer. So, what do you think you could write up to without the rating agencies getting too excited, is that 1.2 to 1.3 reasonable number? Is it 1.1 to 1.2? What do you guess?

The rating agency seem to like for our line of business 1 to 1. You can push them a little bit and maybe go a little higher. But they seem to like 1 to 1.

That's change over the last couple of years, isn't it? Seems to me it is.

Dramatic change -- I think there have been times where there may have been willing to go up to 1.2. But never -- not seen to go above that.

And just lastly, Ned, do you know what the stock base option costs were in '07 versus '06?

We have that. Just take me a second to get my hands on it.

That's the last thing I have.

Stock base compensation cost 2007, $8.3 million, and 2006, $4.7 million. I would remind you that in 2007, we had about $1.8 million related to Stan coming on board.

We will now take our next question from John Gwynn with Morgan Keegan.

Thanks. Howard, a year or so ago, one of your competitors and at least one venue reintroduce the occurrence form. Have you seen any -- is there any broadening of that trend in the business?

No, John. We haven't. That was announced and made a little bit of a splash at the time. We haven't seen any of our insureds leave us to take advantage of moving back to our current at least not that we are aware of. I think it's probably more of a talking point at this time of sales and it's for actually selling any. But we haven't.

Howard, your buddy, [Thomas McCarthy] down in Florida recently mandated a return of premium, I guess, what I would call it for excess profits and work comp. It seemed to be specific to work comp. But is there similar legislation on that matter in Florida?

No, there is not. Florida has a fairly well prescribed medical malpractice rating process. And a very formula driven approach to rate approval, rate making. But no excess profit provisions have been put into place at this point. That we are aware of and nothing that had any effect. We went through a rate approval process in Florida within the last month.

Okay. Was that a public hearing?

No, it didn't require a hearing. We had a rate decrease and went through the process with the OIR, office of insurance regulation and resulted in approval.

Ned, what is the cash at hold in company?

Just one second. With cash and short-term, we were sitting on about $80 million. And we have got about almost $70 million in fixed maturities.

So, it's 80 plus 70?

Yes.

Do you have an idea what your dividend capacity is this year from the subs? I can wait and look that up in the statement.

$162 million with prior approval.

And Ned, do you spearhead the relationship with A.M. Best?

Actually, Frank does.

So, Frank, this is all your fault?

You know, somebody has to take the blame for it. It might as well be me.

You know, your A-minus rating is sort of out of kilter from my perspective. I know I'm preaching to the choir.

Give you the phone number to call?

I mean, they give A-minus ratings to almost anything that walks around these days. I'm just curious with the operating of a financial lack of leverage you have in the operation today, what's their hangup?

John, this is Vic. Let me take a shot at it. Obviously Best looks at the world the way they do as we look at the way we do as competitors. Clearly they don't from our point of view look at a holistically and we would say you look at us not as an organization not by individual pieces. In addition to that part of the reason that we don't make it a major issue is that it's not a factor in the marketplace. So there is no -- A-minus you are on everybody's good list from the agency point of view and not much premium and being above that. So, I guess it's one of the issues that we will work on and desire to continue to maintain it. It's not a high priority of the organization.

Okay. Thanks.

We certainly have conversations with them and talk to them about their view of our company. I guess the bottom line is we don't get the credit for cash at the holding company that we might get with another agency.

Right. Thanks a lot.

We will now take our next question from Michael Whitney with Taylor Investment Company.

My questions have been answered. Thank you.

Thank you, Michael.

We will go to the next question from Amit Kumar with Fox-Pitt Kelton.

Thanks. I guess just going back to maybe Beth or Ron's question on top-line. Do you see any organic growth opportunities in new states or perhaps in allied lines?

I think the first answer is probably yes, we might see a little bit. But if we knew where they were we probably wouldn't tell our competitors.

We typically don't get into state by state discussions. We have a couple of states where we have grown and we have at least one state that we are looking at right now in terms of a market entry. We have some related lines of business that we already are in. We are in the lawyers professional area. We were looking and doing more in smaller hospitals and allied health. Allied health meaning nonphysician medical liability. So, there is a variety of things underway. At the same time most of these are relatively small average premium lines. So, it doesn't have quite the same impact as writing physicians or hospitals but nevertheless we think it it will add to the business going forward.

Okay. That's helpful. I guess moving on to the investment portfolio based on what the markets have done recently. Has your approach or thought process changed in terms of how your portfolio is structured?

It's Ned. Not in particular especially if you look at our core fixed income portfolio. There has really been no change there. What we are seeing is perhaps some better opportunities and some of the areas that we have alternatives exposures to. For instance, sub prime, there are going to be opportunities. And leverage loans there seem to be opportunities and so we are certainly looking at expanding our allocations to those areas. We are talking very, very small components to the portfolio. Our turn of investments for us equity and equity substitutes around 3% of the portfolio and I don't see it much going above 5% in the near term.

Got it. And then maybe -- this is the final question. I think in the Q3 call, you had mentioned a shock loss. And I was wondering if, a, there was any update to that. And b, have you seen any other shock losses recently? That's my final question. Thanks

I think Darryl mentioned that we see them from time to time in our book of business and that as I go back to that there is not -- I don't think there is a trend that you would say we were seeing some rapid acceleration in that?

No, certainly no rapid acceleration. If you are referring to the Florida case, as you know, that amount was confidential and the settlement was resolved with all claims taken care of, resolved amicably by all parties.

I think he was referring to last quarter when we mentioned the case in Iowa. We mentioned that not to call specific attention to that one case as being something out of the ordinary or an outlier but to simply use it as an illustrative example. I'm afraid it got blown away out of proportion that someone read into that that this was a major big deal while we take them all seriously. We were really just using that as an example. And didn't want you to read too much into that.

I was wondering for an update because obviously $15 to $20 million on $2 billion plus reserve base pretty much it's not meaningful.

We wouldn't -- again, because it was an example, we wouldn't be giving an update to. It's obviously in the numbers we reported.

Okay. That's helpful. Thanks so much.

(OPERATOR INSTRUCTIONS) And we will now take our next question from Michael Paisan with Stifel Nicolaus.

Yes, good morning, everybody. A couple of questions actually just broader base. I'm trying to rectify this whole shock loss issue relative to what others are saying and others are not saying the same thing. Is it because ProAssurance basically tries so many more cases than their competitors and therefore the probability that you will going to have a shock loss is greater because you take so many more to jury? Is that simply the reason why or am I looking at it in too general of a term.

I don't know that we have any more or less shock losses than anybody else. We happen to mention one loss and one call and all of a sudden it's set out that we have this huge number of shock losses. That's just not the case.

Well, relative to everybody. Nobody else seems to be seeing the same shock loss issues. So, I didn't know - there is obviously got to be something in the way that you guys defend or do your claims versus others.

Mike, let me look back but I think we mentioned one shock loss that we had in last quarter and we mentioned about five or six others that we saw in unnamed other companies.

That's true.

So we said last time, for example, we said there was an $8 million verdict in Maine. We're not in business there. $26.5million verdict in Massachusetts, we're not there. It was 23 in Wisconsin which wasn't ours. Verdicts in Connecticut where we weren't. And there was a $35 million verdict in Michigan where we weren't. We mentioned one verdict of ours and a handful of verdicts from other folks and again people blew that out of proportion. We were using it certainly as an example just to say there are shock losses in the world. And Darryl said earlier today these shock losses have occurred since we got in, since the business started. They are going to continue absolute change in the laws and they are a fact of life and you better have a strong balance sheet in good claims management to deal with them and we are in probably the top of the heat in both of those.

That's fair. Thanks. One other just quick thing. In terms of trying to rectify the lower frequency and how that may play out, is it fair to assume that the lower frequency is due to the lack of or the significant decline in frivolous lawsuits that have been filed. So in other words, the percentage of meritorious cases will not be changing that much. It's mostly the frivolous lawsuit or non-meritorious claims that are no longer being filed?

That certainly is the theory. And at this point I guess we are seeing mixed conclusions or mixed results from the theories. If you go back a few years - when you look at the years where we actually can see what has happened. In some instances we've seen no real change and the number or in the ratio of claims closed with payment as compared to those those closed without payment. And some states we've seen difference. There are a lot of things that have to be taken into account and give you a controlled number in terms of what may have caused the frequency change. Was it the Tort reform that was implemented in a given state? Was it a state without Tort reform? It's not completely clear yet. I'm not sure that it ever will be. It wasn't in the late 80s when the same phenomenon exists and frequency jumped back up again by 1990 or 1991. It's a logical explanation for it and we are not completely able to tell in practice whether that's the case.

It's more theoretical right now?

Yes.

Thanks a lot.

Thanks, Mike.

And as we have no further questions I will turn the conference back over to Mr. O'Neill.

Thank you, Jennifer. Thank you everybody for joining us. We will join you again when we report first quarter earnings. Thanks again.

This concludes today's conference. Thank you for participating and have a great day.