ProAssurance Corp (PRA) 2009 Q4 法說會逐字稿

Good day everyone, and welcome to today's ProAssurance Q4 year end conference call. As a reminder, today's conference is being recorded. For opening remarks and introductions, I would like to turn the conference over to Mr. Frank O'Neil. Please go ahead, sir.

Thanks, Gwen. Good morning everyone. Thank you for being part of the call today. Our news release issued Wednesday afternoon reporting full year and fourth quarter 2009 results, and our SEC filings including the 10-Q filed this morning, include important detailed disclosures and information regarding forward-looking statements. We explicitly identify statements we make today dealing with projections, estimates and expectations as forward-looking statements subject to various risks. Our actual results could differ materially from current projections or expectations.

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, unless required by law or regulation. The content of this call is accurate only on Thursday, February 25th, 2010, the date of first broadcast. If you are reading a transcript of this call, please know that we did not authorize it and have not reviewed it for accuracy, thus it may contain errors that could materially alter the intent or meaning of our statements.

On the call today is our Chairman and CEO, Stan Starnes; our President, Vic Adamo; Chief Financial Officer, Ned Rand; Chief Underwriting Officer and Actuary, Howard Friedman; Chief Claims Officer, Darryl Thomas; and Chief Marketing Officer, Jeff Bowlby. Stan is going to start us by setting the tone for the call.

Thanks, Frank. I want to also thank everyone who has joined us this morning. Simply put 2009 was a terrific year for ProAssurance and the fourth quarter was a key contributor to the results. At a time when quality top line growth is scarce in property casualty insurance, we grew our top line with quality business, both from acquisitions and from within our historical book of business.

Investment results grew quarter-over-quarter even though we are seeing the same pressure on short-term rates as other companies, and we had strong contributions from net favorable reserve development. As a result we saw a 23% increase in book value per share for the year, and we achieved a 14% return on equity. We are excited to discuss these items with you. Frank.

Thanks, Stan. We are going to save Ned for the end of the discussion today, so we can put his numbers in perspective with reports from our operational areas. First Howard Friedman with underwriting and actuarial. Howard.

Thanks, Frank. As Stan mentioned, we had favorable net reserve development in the quarter, $109.3 million. For the year total favorable development was $207.3 million. This development came primarily from accident years 2003 through 2007, although contributions for 2007 are limited, because that year has not had the same time to develop as earlier years. The main driver of the favorable development as in past years is claims severity that is increasing at a more moderate level than originally anticipated. As claims close and we complete our reserve evaluations, we continue to gradually recognize these results. Our current accident year loss ratio was relatively high in the quarter at 100.5%.

Let me address any concerns about that since it is unrelated to our historical book of business. We booked the fourth quarter for the historical portion of our business at approximately 84%, which is essentially the same loss ratio that we booked to during the first three quarters of the year. Let me say that again to be clear. Our historical book of business was reserved in the fourth quarter, at the same ratio as in the prior three quarters.

The increase in the overall loss ratio for the quarter is primarily due to a few miscellaneous adjustments that don't relate to the run rate on our core business. An increase in reserves for the death disability and retirement provisions in our claims made policies, an increase in reserves for the Georgia lawyer business that we acquired during 2009, and adjustments to PICA reserves related to a reinsurance commutation and to the agent's E&O business.

When compared on a year-over-year basis the current accident year loss ratio increased only slightly. Finally, our calendar year loss ratio, which includes the impact of favorable development, was essentially unchanged year-over-year. Overall loss trends remained stable with frequency essentially unchanged for the past year even in the industrial Midwest where some people expected more claims to be filed due to the economy. As I mentioned previously, severity inflation remains moderate. As a result our rate actions during the year were muted, with relatively small increases or decreases reflecting the interplay between lost costs and investment income. As always we remain committed to rate levels that support our ROE goals.

Thanks, Howard. While we are on subject of claims we will get a year end wrap-up from Darryl Thomas.

Thanks, Frank. We know of no other company that discloses the number of claims taken to trial. With that said for 2009 we tried 444, down from 503 in 2008. Both years do include claims at PICA. This decline is a reflection of the reduction of claims frequency and claims inventory over the last several years. We are trying the same percentage of our open claims inventory. However, as I just mentioned, the number of open claims has fallen significantly in the past several years. At year-end 2009, we had 8,171 open claims, compared to 10,742 at year-end 2008.

I agree with Howard that frequency appears to have leveled off. We had 3,890 new claims in 2009, compared to 3,880 new claims in 2008. Both sets of numbers open claims and new claims do include PICA. Our trial win ratio this year was just over 81%, which considering the number of claims we take to trial is a great result. We are continuing to take a broad range of claims to trial, and we continue to have significant success in the courtroom. We believe this approach pays benefits for both our insureds as well as our shareholders. Frank.

Thanks, Darryl. That courtroom success and strong courtroom advocacy on behalf of our insureds remains a major advantage for us in retaining existing insureds and adding new business. Chief Marketing Officer Jeff Bowlby is going to comment on that. Jeff.

Thanks Frank. Reports from the field from our agents and direct sales reps tell us that the market remains competitive or relatively stable. I think the phrase that has been used is isolated pockets of insanity, but not a wholesale disruption of the market, and in fact we are successfully increasing agents initiating activity and writing new insureds in this market, and a vital importance for future profitability, we are maintaining our underwriting standard and pricing discipline in the process.

In 2009, sales and marketing was challenged to produce new business and also increase retention. I am pleased to report we were able to do both. We added new insureds in our historical book of business, the vast majority of that being physician business, which accounted for $22 million of the $28 million of new business in that book. At the same time retention in that book was 89% for the year, up a point over 2008. Retention at PICA was 93% for the year, which we think is excellent but especially so, given that it was a year of transition for PICA and its insureds. I think that speaks to the strength of PICA and the relationship PICA has with its insureds.

I also want to underscore the difference Treated Fairly has made in the market. Using that as the touchstone against which all of our interactions are measured really resonates with our insureds, agents and prospective customers, and we know there have been accounts in which our commitment to the customer and Treated Fairly have been the tie-breaker in our favor. Frank.

Thanks Jeff for that insight. Howard, can we come back to you for a brief comment on premium growth?

Sure Frank. We added $95 million of new premium from our M&A transactions. $77 million of that was from PICA, $14 million came from mid-Continent and approximately $4 million from Georgia Lawyers. That growth from M&A combined with the $28 million of new business in our historical book offset the business loss due to competition and normal attrition.

Jeff mentioned the 89% retention in our historical MPL book. The average renewal pricing on that retained business declined just 4% for the year. At PICA renewal pricing was flat year-over-year. As an aside remember we will have one more quarter of new premium coming from PICA, since they came into the organization at the start of the second quarter of 2009.

Thanks, Howard. Now we will get Ned to tie things together with some comments on the financial results. Ned.

Thanks, Frank. Investments have been on the minds of everyone for the past year, so I will focus on that to start. Net investment income increased just under $2 million when compared to the fourth quarter of last year, and our equity and earnings of unconsolidated subsidiaries showed positive improvement of approximately $5 million. Overall we have seen a turnaround in these investments. Howard previously mentioned the loss ratio so let me focus on the expense ratio.

You will note that the expense ratio for the year and the quarter are both up about a point. In terms of dollars the increase for the year and the fourth quarter is primarily attributable to PICA being in the equation this year but not last year. Net income is significantly higher for the year, $222 million for full year 2009 versus $178 million for 2008. That is $6.70 per diluted share for 2009, versus $5.22 for 2008.

Operating income was $215 million for 2009 versus $207 million in 2008. That is $6.49 per diluted share for 2009, versus $6.07 for 2008. As Stan mentioned, our return on equity was 14.2% for the year, a point higher than 2008. As a result we are proud to report to you.

Part of our uptick in ROE has come as a result of our share buy backs. We did repurchase some shares prior to the start of our blackout period, buying 268,000 shares at a cost of approximately $13.9 million in the quarter. In 2009, we bought a total of 1.1 million shares at an approximate cost of $52 million. We will continue to buy our shares when the timing of corporate events allows it, and the price fits our view of prudent capital management.

Finally, I would like to highlight the yardstick against which we measure our performance most critically, book value per share. In 2009 book value per share increased 23% to $52.59. In addition to the sizeable contribution from net income, the increase is also a result of the sizeable change in our unrealized investment gains.

At the start of 2009, the net aftertax unrealized loss position in the portfolio was approximately $36 million, which swung to a net unrealized gain position of approximately $60 million at year end, a $96 million difference. But even in 2008 we grew book value per share by 10% in a very difficult environment. This ability to consistently grow book value per share in good years and bad is a hallmark of our disciplined operational strategy. We believe that the two-year increase from $38.69 at the end of 2007 to $52.59 as we talk today, is a real testament to our successful approach to building a strong stable company that rewards shareholders and protects insureds. Frank.

Thanks, Ned. Vic, how about an update on events in Washington?

Sure, Frank. I was in Washington with our industry association. I can tell you there are as many opinions about the future of healthcare reform as there are lobbyists and legislative aides in the capital. As we have said before, we don't see any direct issues for MPL carriers. There is no mention of Tort reform in the President's new version of the healthcare bill that came out Monday. But we will be watching today's Healthcare Summit to see if Tort reform does get any traction.

Also medical liability insurers have now officially been removed from the proposed legislation repealing the McCarran-Ferguson Anti-Trust exemptions for insurance companies. We think that is the right course of action even though as we said last quarter our operations would not have been significantly affected by a repeal. Frank.

Thanks, Vic. Stan, I know as a former medical liability defense attorney you have been following tort reform very closely. Will you give us your take on Illinois, and what it might mean for the rest of the country?

Most knowledgeable observers doubted that the Illinois Supreme Court would uphold the tort reforms in that state. Because the law tied all of the reforms together, a finding against even one aspect of the reforms had the effect of killing the whole package. It is a shame, because most people miss the point of tort reform. It is primarily an issue of access to care. I said this on the A.M. Best call two weeks ago discussing the state of the MPL market. Having effective tort reform allows physicians and other people and institutions that deliver healthcare, to believe that they will be treated with equity in the court system, which in turn allows them to be more comfortable in their practice and delivery of medicine, which helps ensure wider access to care for everyone.

As you know, Frank, we price our products and set our reserves based on actual loss data, not expected outcomes of appellate litigation. Thus, our book of Illinois business will not be affected, nor do we feel that the need for any special rate action there exists. We are the number five writer in Illinois with $20 million of premium in 2009, so it is not a large percentage of our business.

The next few rulings will likely come in Missouri, Kansas, and Georgia, where challenges have been heard. We are keeping and eye on those states but if the reforms are struck down in Missouri things could get very interesting, because there has been a real growth there in companies with a minimal amount of capital, that are able to write under a special section of Missouri law, and that law also permits those companies to assess their insureds if the companies run into financial difficulties. Removing limits imposed by tort reform could raise severity, which ripples back through every unadjudicated claim.

As I said, we'll be watching that ruling and its consequences very closely. Though it won't be a significant issue for us because of the way we priced our product, and the strict underwriting we have applied to the business which we have written.

This whole question of frequency and severity and resulting loss trends is part and parcel of the debate, over when we will see a turn in the market. You know in that same A.M. Best market status call which I was a part of earlier this month, one of Milliman's leading actuaries commented that he was perhaps seeing the initial signs of a shift toward higher frequency. That could be another major factor in hardening the market if that is true.

With the hardening of the market we believe our ability to write business in virtually any state, would allow us to take advantage of any market dislocation, and the capacity we have right now would allow us to do so very quickly. But hard market or soft I think you can see from our results this quarter and this year, that disciplined companies that focus on their customers on the excellence in their day-to-day operations, and on the strength of their balance sheet, will be successful. I think that is where we are. And I think that our stock continues to represent a good value. As we have said, we think the best measurement is book value per share, which we have grown at a compound annual rate of 20% over the past five years.

Since we became a public company in 1991, book value has grown at a compound annual growth rate of 16%. Cumulatively that is more than 1,300% growth across several insurance cycles. So I continue to be optimistic. Frank.

Thanks, Stan, and everyone here. Gwen we are ready for questions now, if you will open the line.

Thank you. (Operator Instructions). We will go first to Amit Kumar with Macquarie.

Good morning and congratulations on the strong results. I guess just starting with this DDR number. Can you maybe just expand on that a bit more, and sort of explain to us, does this come back in Q4 2010 and Q4 2011, or was there something specific going on here?

Amit, it is Howard. I wouldn't say there is anything that is necessarily recurring about this. We evaluate their death disability and retirement reserves on a periodic basis, typically on the end of the year basis, although we do look at them at other points in the year. I think what you have is several factors. Number one, the physicians are getting older before they retire, and while that means that they will stay with us for a longer period of time and pay additional premium, it also means that we have to make sure that we have the adequate reserves for that.

We have some physicians, younger physicians in particular, who are more price conscious and may move around from company to company, and when they join the company we have to establish reserves for them when they leave the company we get the benefit of a lapse. So it really is a number of factors that goes into the DDR reserves. We also provide DDR coverage in our claims made policies to attorneys, and we have to reserve for that as well. So I really wouldn't characterize it as a necessarily recurring item. I think it is just a matter of the re-evaluation that we do from time to time.

Okay. That is helpful. Just maybe staying on the topic of reserves, I think there was a mention regarding PICA other liability, and I think in the 10-K there is maybe a discussion on modest development on that front and you, I guess, are planning to no longer renew that book in 2010. Can you just sort of expand on that a bit more?

The insurance agents book of business is something that PICA had diversified into several years ago, and it is a very competitive line of business. The initial reserves that were established for that business have proven to be a little bit light, not anything that is that dramatic, but there was some upward movement in that book of business, and we established some additional reserves for that at the end of the year. The whole agency book of business is under re-evaluation right now. There hasn't been a final decision as to where to go with that, but I think it is a fair chance that PICA may choose to move out of that book of business going forward.

And what was the size of that book?

About $6 million of annual premium.

That is a small number. Maybe just moving onto the broader discussion on new business expectations I think you said $22 million for 2009. As you look towards 2010 broadly speaking, where does that number go?

Well, I guess I will jump in here again. We typically don't make projections about premium, whether it is retained premium or new premium. We were happy with the opportunity that we had in 2009 to write new business. It was more than we had in 2008. We are always trying to search out new business submissions in the marketplace, and we are very active in looking at new business accounts, but it is very difficult to predict what the next year is going to bring, because it is driven so much by what the competitors decide to do not so much by what we decide to do. We quote on a lot of accounts and we only get a relatively small portion, like everyone else in the market.

Is it fair to say, though, that the goals for retention and agent submission are still there.

Yes. Thanks. The other comment is by increasing submissions it gives us a better chance to select which business we want to write, and that has had a big impact as well, so it goes hands in glove with it.

Thanks.

Maybe just quickly moving on and then I will requeue. In terms of capital management, I know you talked about what you bought back in Q4. I might have missed this, but did you buy anything to date in Q1?

Amit, it is Ned. We have essentially been blacked out for most of the year. We have got a pretty strict blackout period, so as soon as we have a sense of earnings, we take ourselves out of the market.

And then I guess if the number is $115.4 million remaining in the buy back, obviously you anticipate reloading that as and when it is done, or would the focus be on maybe special dividends, or does it come back to looking at acquisition targets?

Amit, this is Stan. The capital management program here at the Company is under regular and recurring review, both at the senior management level and at the Board level, and given where we are at the year end now, we will take a fresh look at our capital management program and consider everything, and that will be the subject of further ongoing discussions. But we look at everything from a capital management standpoint, to figure out what the right mix is for our shareholders.

And in terms of a special dividend, any thoughts on that?

Well, we are not going to speculate about what the Board might decide to do from the standpoint of capital management, but history is often a good prologue for the future and I think that we will continue to look at all possibilities, but we want to maintain ourselves as a very well-capitalized company.

Okay. That is all for now. I will requeue. Thanks so much.

We will go next to Joe DeMarino with Piper Jaffray.

Good morning. Congratulations on the quarter. My first question I know you talked about it but can you aside from the disability, what were some of the other miscellaneous items that resulted in the higher accident year loss ratio?

Right. In addition to the death disability and retirement reserve change, we had mentioned the increase in the reserves for the agent, insurance agent E&O business at PICA, and a commutation, a reinsurance commutation that was affected at PICA during 2009, and then also an increase in the reserves for the acquired Georgia Lawyers book of business that this was the first full year end evaluation on that book of business, and we decided to push the reserves up to some extent there as well.

Joe. One thing I would point out just to keep in mind, under purchased accounting any adjustments that we make to PICA's reserves, for instance, the agents E&O, adjustment flows through as a current accident year adjustment for us.

As well as on the Georgia Lawyers?

Yes. As well as on the Georgia Lawyers.

Okay. Great. Got it. Thank you. And then on the favorable development I know you said that very little came from 2007, but given the longer tail nature of your business, I was surprised to see that some came from '06 as well, so maybe if you could give a little more detail on that, perhaps an example as to what may have changed with the particular claim that resulted in a change in your view? Thanks.

Well, in 2006 we are really three years past the end of that year, four years past the beginning of it, so a lot of those claims have been resolved. There is still a good portion to go, but we have a much better read on that year at this point than on 2007 and likewise as you move back. But this is claims made business that we wrote in 2006, so we are really looking at what is essentially happening on claims that are well into their life cycle right now. So it is not atypical I think for a year that is three years past its end to be, if all things work right, which we hope that they continue to do, to be generating that favorable development.

As we have always said, we initially establish the reserves at a level that is above our pricing parameters to allow for the volatility in this business, and if things do work out well as the claims mature, we can start to bring them down. We have a little schedule in the 10-K that breaks out the development by, favorable development by year, or any favorable or unfavorable development by year. You can take a look and see which years are contributing.

Okay. Thanks. Thank you for the additional detail. Just two more quick questions. Do you have an estimate of how much excess capital you might have right now?

Joe, we have our internal models, but two points. One I think that it is important to differentiate between excess capital and excess capacity. From a capacity standpoint the equation is a little easier. Under most models we can write at approximately a one-to-one dollar premium for a dollar of surplus. So you can do the math on that. Excess capital is different. As you take a dollar of capital out of the system it has a very different impact on capital models than does adding an additional dollar of premium. We do have excess capital, but we typically don't put out a number.

I think it is fair to say that rating agencies would think no amount of capital is excess, so part of the tension is determining what best allows us to keep our ratings at a competitive spot, and then is responsive to the market.

Okay. Thank you. And then my final question, I know you gave us the numbers for the year, and I apologize if I missed it for the fourth quarter, but how much did acquisitions contribute to the fourth quarter in premium?

Joe, we have got that. It will take us a minute to put our hands on it, we will come back and get that for you before the call is over.

Okay. Thank you. Congratulations again.

We will go next to Mark Hughes with SunTrust.

Thank you very much. Any sort of fine detail you can give on pricing in the fourth quarter. I think you had suggested in Q3 it was down 3% year-over-year. At that time it was still down 4 on a year-to-date base. Here in 4Q you said down 4 year-to-date, what kind of sequentially does the pricing feel in force?

Yes. We had this obviously same question last year at this time, and at that point we were looking at 6 for the year 2008, and we said that we expected a little lower rate of decrease in 2009, which it did turn out to be about 4. I think personally I would see it trending gradually, I don't know if you said upwards or downwards, downwards in percentage terms, slightly upwards maybe in relative terms. I wouldn't be surprised if we see a lower rate of decrease in 2010 than we did in 2009, but that is just based on recent observations in the markets.

We seem to be able to renew business at a little less discount relative to expiring. We have seen a few companies take small rate increases. We have taken a few small rate increases ourselves. And when I mean small, I am talking about low-single digits, but it goes back to this relationship that we have talked about in the past, between the relatively low loss costs inflation on the severity side, the flat frequency, and the very low interest rates putting pressure on pricing upwards. Not to say that I expect real upward movement in pricing, but I would say that we would see less of a downward movement as we go into this year.

Yes. Frequency trends I know it is difficult to judge on the short term basis, but in the back half of the year you were flat essentially for 2009, in Q3 or Q4 did you see that move up a little or not?

Not in any measurable way in our book of business. Stan did mention the comments from Chad Karls at Milliman, who participated on that A.M. Best call, and also we had the [AON Ashram] Hospital frequency analysis that came out in the fourth quarter, and they AON said in their analysis they saw some slight upward movement in hospital frequency, hospital claim frequency. We are still seeing what amounts to flat frequency when you look at it across our book of business, once you try to take out the normal just noise or variation on the data.

Then finally M&A opportunities, how would you characterize them now?

It is Stan, Mark. A year ago there was really no chatter regarding M&A, because of the state of the capital markets, and because of the uncertainty in the world. I think it is fair to say that with perhaps the chatter has picked up just a bit. There is still a lot of uncertainty. Capital is still king. Companies like ours that have a strong financial sheet are attractive, in terms of taking a position with respect to smaller companies. So I would imagine that if we got together a year from now, we would say that we saw a little more M&A activity over the coming year than we had over the past year.

Okay. Thank you.

We will go next to Beth Malone with Wunderlich.

Okay. Thank you. Good morning.

Good morning, Beth.

In your discussions about these changes in the legislation in certain markets, and also discussions about changes that possibly frequency or severity could be getting more difficult, I would assume, doesn't that change or should that change our expectation of reserve development or favorable reserve development for you going forward, that if market conditions change wouldn't that change the assumptions that are used to calculate the reserve development?

It is Stan. I will let Howard respond to that specifically, but I think that will vary from company to company, depending on the philosophy they brought pricing their product and setting their reserves. You could have a change in severity, which ripples back through every open claim, and if people have not been conservative in setting their reserves, then that would clearly affect future favorable or adverse development. On the other hand, you can have companies that have taken into account the historical volatility in this business, and find themselves still very, very well reserved. Howard, you might want to add specifics to that.

I definitely agree with that. It really depends on where you are, where you started. I think Illinois' situation is a good example from our perspective, we were very skeptical all along about the attitude of the Illinois Supreme Court, and whether the tort reform would be upheld, and we really did not take that into account in the way that we established case reserves, or in the overall financial reserve evaluation of Illinois. In other words, the IBNR portion. And as a result, I would say that from a reserving standpoint on the cases that we have for Illinois it is not a matter of making a change.

I will say though, that if you look at companies that are writing occurrence business, a change like the declaring of the cap unconstitutional in Illinois, or maybe pick another state where it might be more of a question mark, as to what the Supreme Court is going to do, if a cap is struck down, or other tort reforms are struck down, that certainly gives you the potential from the plaintiff's side of making medical malpractice claims more attractive, and that will likely increase frequency and if you have an occurrence book of business and frequency increases, that goes back through the last several years, unlike claims made business. So that is another reason that the company to company variation on this type of thing is going to be very different. We don't have very, we essentially have very little occurrence business, just a little bit in Wisconsin, but other companies have quite a bit more.

Okay. And then kind of along those lines I guess in the last couple of years as tort reform has been put out there and frequency has been coming down, have you seen more competition come from the non-traditional medical malpractice companies, like more standard insurers trying to sell medical malpractice and increasing capacity in medical malpractice, because the legal and legislative environment has been more favorable and frequency has been down, and if this changes, is that going to push those less experienced insurers out of the market? Is that is that what has happened historically anyway?

I would say that has happened historically and depending on where it happens, it may well repeat itself. As Stan mentioned in his comments, Missouri, and certainly Missouri is one of the more active states, if you look back over the last seven or eight years, in terms of new companies being started very thinly capitalized companies, and if things change in Missouri, yes, that will certainly do that.

You have other states like Florida, New Jersey, Pennsylvania, where we saw an abundance of new companies, very small companies, being started and things changed there. Those are the ones that are most vulnerable to a change in claim severity going back through their business, or claim frequency causing an immediate influx in claims, and they may not be able to react quickly enough, in terms of increasing rates or getting approval to increase rates. So yes, I would say so, that the newer smaller companies are always more susceptible to this type of thing, than a company with a large balance sheet and good solid reserves.

Beth, one of the other parts of that question that you had asked was did we see an increase in competition from I think what you called standard insurance companies, sort of the Main Street insurers and that just hasn't happened. I think there is still a wariness about medical professional liability that has sort of isolated our market.

Okay. And then one last question on the regulatory environment or the legislative environment. Major states for you like Florida, for example, has that continued to operate as expected and are their reforms holding there?

Well, Florida from our internal perspective is operating as expected, but the Florida reforms have not yet been passed upon by the Florida Supreme Court. So it remains an open question as to what Florida will ultimately do with its tort reform legislation.

And then one last question. On the podiatry acquisition that you made last year one of the benefits was the fact that they were licensed in a lot more states than where ProAssurance had historically operated, and I was just wondering are you seeing the benefits or progress of having those relationships in those states, and starting to understand those tort systems as you had hoped?

Beth, Vic Adamo here. Yes, but at a preliminary level. I mean PICA and PACO, its sub, are licensed almost universally throughout the United States, and we do have it in our future plans to take advantage of that, and the first year really our attention has really been focused on the major states we are already in, and PICA being part of the organization. So that remains out there as a potential, but we haven't acted dramatically on it in the first year.

Okay. All right. Well, thank you very much.

We will go next to Michael Nannizzi with Oppenheimer.

Thank you. Just a couple quick ones if I could. Ned, can you just talk about the portfolio duration. It looks like so you went from 3.5 to 4 years from '08 to '09, is that just because of the proportion of short term investments is lower at the end of '09 than versus '08, or is there something different there on the duration side?

The biggest component is certainly the fact that we were holding at the end of 2008 a significant amount of short term investments relative to what we are holding today, but we have seen the duration of the portfolio extend as well, but not to that same extent. I think it is only up a couple of points, and that has really just been where we are placing money.

It is a challenge right now to find attractive places to put new money, and we are putting, we continue to put money in municipal bonds, which tend to be longer dated, and we continue to put money into some corporates. About two-thirds of our new money has gone into corporate bonds with average maturities of 6.5 years, average rating of A, and then we bought AA munis out to 10 to 15 years. So we are seeing some extension of the portfolio, and I think the asset backs are probably just naturally extended a little bit as well.

Okay. Got it. Great. Thanks. And then just a question on the multi-year premiums, I guess you wrote a bit more in '09 than you did in '08. Can you just talk about the thought process on that particular product, and where you place it, how it is being offered, and is that something that you expect will continue to grow as a percentage of your book?

We offer that product in one state. We offer it to all sizes of physician groups. We try to target groups where the benefit of a two year policy would be to their advantage. In other words, groups that are relatively stable where they don't have physicians coming and going, where it is not going to create disruptions in their billing or accounting, and also from our perspective groups that we think are stable, and have had good loss experience. It may grow. We haven't made any plans to extend it elsewhere. It has been successful to the extent that we have used it at this point in time, and we think it helps to stabilize our market.

Great. Thank you. And then just one last one if I could. So just a bigger picture can you just talk a little bit about where exposures are in the areas you write business, and maybe your different lines relative to last year and the year before, and I guess the question I am trying to get at is, did the economic and credit events of '08 and '09 impact the exposures available in your footprint?

I would say not. Healthcare is relatively inelastic. Even in the states where we know that the unemployment rate, for example, is higher, people are still getting healthcare one way or the other, whether it is through their insurance or through the emergency room, and we have not seen a decline in physicians as a result of them leaving practice, or anything like that. In fact, if anything, physicians who have been affected by downturns in their investment portfolio are practicing longer, so we may actually see a little bit of an increase in the available market, nothing that would be significant. Hospitals continue to provide healthcare. There are always economic pressures on physicians in terms of reimbursements, and looking to reduce costs, but at the same time they all need to have professional liability insurance, and we haven't seen any reduction in demand.

Great. And then just as a quick follow-up over that same period going back to this '08/'09 period, and maybe slightly before, other than the accumulation of capital by the existing players and carriers in your competitive set, are you aware of any significant new fresh capital that has entered the line over the last couple of years?

No. Not over the last couple of years. There was certainly a number of small start-ups in the middle of the 2000s, but not in the last couple of years that we are aware of.

Okay. Great. Thank you very much.

And we will take a follow-up question from Amit Kumar with Macquarie.

Thanks. Three quick follow-ups on the discussion. Just going back to the discussion on the two year versus renewals paying. If I look at the K, it talks about $9 million of premiums being impacted. Just so that I understand this clearly all else being equal, Q1 2010 premiums will be lower by $9 million. Is that what this discussion is trying to imply?

Yes. There are really two different things going on there. We do have the two year policies that we mentioned earlier, that we have been offering in a limited manner for the past 15 months or so, but then also during 2009 we made an effort to try to redistribute some of our January 1 policy effective dates, in order to really just smooth out our work load as a company. Our business historically has been focused on first quarter and third quarter, and that goes back historically in the industry for various reasons.

We had quite a bit of January 1 business in a number of states, and we have tried to redistribute that by offering policyholders the opportunity to cancel their policy early, rewrite it for a 12-month period, typically in the fourth quarter of the year. So that had the effect, that was the $9 million that you mentioned of premium that would normally have been January 1 premium, January 1, 2010, premium that was renewed in the latter part of 2009.

And then what portion of the book is two year versus one?

I think we said that there is $23 million of premium now that is on two-year policies, and just to make the point I am sure you know but this is all written premium. Earned premium is unchanged by any of this, because premium is always earned on a pro rata daily basis. So it really doesn't matter when the policies are effective. This only just affects the written.

Okay. That is fair. Just quickly moving onto the discussion on Illinois and the changes there. I think Milliman came out with a study that said claims costs will go up by 18%. I think some of the other companies have opined that perhaps longer term it benefits the smaller carriers, because without taking any names, the largest carrier has such a big share. Do you think, is that the right way to think of it, that down the road new opportunities emerge in Illinois, or are you saying you know what, we don't know what is going to happen down the road. We just don't want to focus on expanding our book here?

Well, this is Stan. I would say a couple of things to that. One is we are very data driven by our own data in what we see. And we will remain that way. Two, when you have uncertainty in a marketplace, be it from any source, in my view that benefits people who are effective and efficient in their operations, disciplined in their underwriting, and have superior financial strength. Those are the people that benefit from uncertainty, and I think we are well-positioned in all of those regards.

Maybe just finally going back to the discussion on M&A. Recently we saw the Zenith acquisition by Fairfax. Do you think companies like you, which have a niche quality book, is there more interest from non Med mal entities, if you sort of look back over the last 12 to 18 months, or do you still think that it is relatively unchanged and any future consolidation stays in this group itself?

Historically with the exception of GE originally buying medical protective, all of the activity in our space has remained in our space. There have been companies consolidating as we have been, and there really historically has not been much interest in that space by multi-line companies.

Do you think that changes going forward or no?

I don't know. I don't know how those companies view the world, but historically that has been the track record.

Okay. That is all I have. Thanks, and once again congratulations on the quarter.

(Operator Instructions). We will go next to Mark Hughes with SunTrust.

Thank you. In the Georgia Lawyers business was there any change in the claims trend, or was this strengthening reserves from I guess prior periods?

It was strengthening reserves from prior periods, which as Ned mentioned earlier all flows through the current period due to the acquisition in 2009, and it was really I think an opportunity to re-evaluate, and apply I guess you could say our reserving philosophy to the Georgia Lawyers book of business. It does not indicate in my view a real, a change in the claim trends. It is really more of the sense of getting in there, and really doing case by case reserve analysis.

Did you notice any change in the composition of the practicing doctors, with respect to individual practices and small groups, versus the large doctor groups, or the hospitals that may be less in your sweet spot?

This is Stan, Mark. I don't know about lessening our sweet spot. I think that you always have to be attuned to the changes in the demographics of medicine, and it is constantly changing. It has changed over my career of almost 40 years now. What is incumbent upon us is to recognize those changes, to follow those changes, and to take advantage of those changes, but we are prepared to take advantage of the market however it may shift in terms of demographics. Solo practitioners versus large group, and that all varies greatly from state to state. As you have heard me say many, many times if you are in 50 states in this business, you are in 50 different businesses.

Thank you.

And there are no further questions at this time. I would like to turn the conference back to our speakers for any closing remarks.

Okay. Gwen, hold on with us just a second because we are going to go back to Joe DeMarino with an answer to his question, and if Joe has any follow-ups, we need to be able to bring him back on. Ned you have got the answer for his question.

Yes. Joe, the question Joe asked it was a while ago was what was the impact in the fourth quarter of our acquisitions. PICA added $20 million of gross written premium in the quarter, and I would remind you all that PICA has some seasonality to its business, and so the fourth quarter is not a big quarter, so anyway $20 million for PICA in the quarter. The other acquisitions just added a couple million dollars to the mix, so all told probably $23 million to $24 million coming from acquisitions in the quarter. That is gross written premium.

And no other questions at this time.

Thanks very much, Gwen. Thanks everybody. We will speak with you later in the year when we report first quarter. Thank you.

Thank you everyone. That does concludes today's conference. We thank you for your participation.