ProAssurance Corp (PRA) 2010 Q1 法說會逐字稿

Good day everyone, and welcome to today's ProAssurance first quarter earnings conference call. As a reminder, today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Frank O'Neil. Please go ahead, sir.

Thanks, Miranda and good morning everyone. Thanks for being part of our call today as we discuss the results of first quarter 2010 operations and address recent developments and trends in our industry. We issued a news release Wednesday afternoon reporting our results for the first quarter of 2010. That release and our SEC filings including the 10-Q filed this morning provide you with important detailed disclosures and information regarding forward-looking statements. We are explicitly identifying statements we make today dealing with projections, estimates, and expectations as forward-looking statements subject to various risks. These could cause our actual results to 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, May 6th, 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 could contain factual or transcription errors that could materially alter the intent or meaning of our statements. One final reminder, we're going to reference non-GAAP items in our call today. Please refer to our recent filing on forms 10-Q or on form 10-Q in our recent news release for a reconciliation of these non-GAAP numbers to their GAAP counterparts.

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; and our Chief Claims Officer, Darryl Thomas. Stan will lead off the conversation today with another quarter of excellent results.

Thanks, Frank. We are pleased to report another solid quarter reflecting strong, steady results that are a product of our disciplined long-term focus and a continued to commitment to all that Treated Fairly means to our policyholders.

Significantly, the first quarter of 2010 did not bring further wholesale softening of the market. We're excited to discuss the details with you. Frank?

Thanks Stan. Since you mentioned the marketplace, why don't we start with Howard Friedman for comments in that area. Howard?

Thanks, Frank. As Stan said, we didn't see any wholesale changes in the marketplace. The market is challenging and adding new premium is difficult. But we've been successful in adding new quality business on two fronts -- through acquisition and through organic growth. In our historical book of medical professional liability business, we wrote $6.3 million of new premium at rates believe will allow us to meet our ROE targets.

Jeff Bowlby, our Chief Marketing Officer, has been on the road meeting with agents, and he reports that the agents who represent us are finding a receptive audience for ProAssurance among physicians looking for more than just the lowest price. Writing new business obviously helps offset what we lose to competition, and we do give up business in a soft market. But we are retaining our accounts at high levels -- 88% in our historical MPL business which we calculate on the basis of physician renewal, and 91% in PICA's core medical liability book.

On the subject of PICA, PICA accounted for the vast majority of the $21.3 million in new premium from acquisitions in the quarter. There was some increase in our lawyers' lines and at ProAssurance Mid-Continent, but the majority was due to PICA. And let me remind that this is the last quarter in which the PICA transaction will affect our quarter-over-quarter premium comparisons, as that transaction closed on April 1st of 2009.

We are somewhat encouraged by the pricing of renewals in the quarter. The average renewal pricing on physician policies in our historical medical professional liability business was down 2% in the quarter, which compares favorably with the 4% average price reduction in last year's first quarter. PICA's renewal pricing on medical professional liability business in Q1 was 5% higher than expiring, compared to 2% higher in the same quarter last year. Our current accident year loss ratio is 84%, in line with the first quarter of last year.

Net favorable loss reserve development was $25 million in the quarter, $6.5 million better than last year, and again reflective of relatively stable long-term trends. Severity continues to increase at a more moderate level than anticipated in our prior reserve reviews, which leads to the favorable development, and in this quarter to a net loss ratio of 64%, almost 2.5 points better than Q1 of 2009.

Thanks, Howard. Darryl Thomas, can you comment for us on recent claim trends?

Sure, Frank. On the frequency side, we saw a small increase in our reported rolling average claim count from the quarter. This confirms our belief that the period of sustained frequency decline has ended. There are many factors that could cause the variation in number of new claims in any one quarter, so we're not overly concerned by this. What's hard to know from a single quarter is whether this is part of a trend which could help to firm the market, or whether it's an isolated event. We're certainly going to monitor it carefully as the year progresses.

Severity hasn't varied overall from the rate of increase we reported in prior quarters, somewhere between 4% to 5% across many states. Frank?

Thanks, Darryl. Ned Rand is next, to address financial highlights. Ned?

Thanks, Frank. This should be fairly straightforward because the story for us is, as always, the success of the bottom line. Compared to the first quarter of last year, net income was up 34%, or about $10 million, to $38 million, and net income per share was up 38% over the same period last year to $1.16 per diluted share.

Our operating income was up about $6 million, or 19%, at $39.6 million. Operating income per diluted share was $1.21, a 22% increase over the first quarter of 2009. These solid increases are the result of the higher earned premium and favorable development that Howard touched on, plus an increase in net investment income driven primarily by our tips portfolio, which performed more in line with our long-term expectations. You may recall that in the first quarter of 2009, net investment income was adversely affected by the performance of our tips allocation.

We also benefitted from a turnaround in results from our investment in unconsolidated subsidiaries, essentially our alternative investments, which are also returning to more historical return levels. We continue to face a challenging interest rate environment in which to invest, even though we held higher average balances in our core fixed income portfolio which helped boost income. This was offset by a reduction of approximately 25 basis points in the book yield on the portfolio.

Our expense ratio was 24.6%, up about 2 points, and there are a couple of moving parts to understand. Fixed costs are essentially flat in our historical book of business, while earned premiums are down slightly. At the same time, we saw an increase in commission costs because of the commission paid on our ProAssurance Mid-Continent business, which has higher acquisition costs but lower expected ultimate losses.

Our return on equity was 8.8%, higher than first quarter last year. We added $1.48 to our book value per share, which stands at $54.07 as of March 31st, a 3% increase over year end 2009 and a 22% increase over book value per share at the end of the first quarter 2009. These increases are consistent with our goal of maintaining a strong capital base that will sustain a high rating, and will distinguish us from competitors in the market, especially with institutional purchasers of our product.

Our track record demonstrates our willingness and desire to deploy our capital in a prudent manner through both share buyback and acquisitions such as PICA, and nothing has changed in that regard. As examples, we closed on three transactions last year and we spent $52 million to buy back more than 1 million shares. In the last five years, we spent almost $200 million buying back shares. There are a number of factors that must be considered when evaluating a share repurchase. As a result, we did not repurchase any shares during the quarter. We have over $115 million in authorization from our Board, and expect to deploy that when circumstances warrant. Frank?

Thanks, Ned. Much of the interesting news in this quarter came out of Washington and several state courts, state supreme courts. We'll get updates on both of this from Vic and Stan. Vic, can you start with health care reform?

Sure, Frank. We know that health care reform will mean significant changes for the health care insurance system, but we don't expect any immediate or direct changes for the medical professional liability business. There's nothing in the bill to address lawsuit reform other than some poorly funded demonstration projects, and certainly nothing that directly addresses how medical liability insurers operate.

On the positive side, it's clear that the number of people working in health care will need to increase at all levels, from physicians to home health care. So the good news is that it's going to increase the available market for ProAssurance. This should allow us to leverage our nationwide geographic reach in insurance expertise, to offer a wide range of liability insurance products that respond at every level.

For example, at one end of the market we insure over 175 hospitals in our MPL book, while at the other end of the market we insure a broad range of ancillary health care workers through ProAssurance Mid-Continent. Another example of our product diversification can be found at PICA, which will become the endorsed carrier of the American Optometric Association starting July 1st, taken on the AOA's national professional liability program. The program will be completely administered over the Internet and will help us gain further experience in lower premium products that require alternative distribution.

Stan, I know that you have some thoughts about how the reforms might affect the medical legal system, based on your years in the courtroom.

Vic, I think we have to anticipate that the higher number of people in the system will increase patient frustration as the system becomes overcrowded. It's also a fact that many people often have unrealistic expectations about the outcome of their health care. So down the road as our health care system evolves through 2013 and beyond, there could be a consequential change in claims trends. We have to wait and see what develops, but we're prepared. We have the capital, we have the experience, and we have the products to meet these evolving needs.

We get quite a few questions about tort reform each quarter, which is natural given the unmatched geographic scope of ProAssurance. While recent tort reform rulings are important, and I'll discuss them in a minute, I think it's just as important to note the relatively small total premium we have in the effective states. While the rulings on tort reforms in Illinois, Georgia, and Missouri may be immaterial for our overall financial results here at ProAssurance, they are important and material to our customers and to society as a whole, thus we pay close attention. Any time important, hard-won legislation such as these reforms are overturned, there are consequences for any company that has not priced and reserved its business in a prudent manner.

You know, there's never a certainty of winning any lawsuit, so having any kind of cap gives a plaintiff lawyer a reason to turn down a marginal case. But with caps gone, the chances of a lottery-type jury verdict go up. Likewise, the absence of damage caps causes settlement demands to increase. So all of this requires close scrutiny. We still take a cautious view of the tort reforms in other states such as Ohio and Florida, where the highest courts in those states have yet to rule on the reforms in question.

We mentioned the Illinois ruling on our last call. It's still too early to see any real change in the marketplace behavior or loss trends in Illinois since that ruling. The same is true in Georgia, where the Supreme Court struck down significant parts of their tort reform in March. The key portion of the Georgia ruling was the overturning of damage caps in that state. As in Illinois, we're monitoring the climate there, but we have seen no changes yet. There's already talk of a Texas-like constitutional amendment to bring about tort reform in Illinois, but we've not heard that yet in Georgia.

There was a ruling in Missouri on a very narrow question in one case. The end result is that tort reform limits cannot be applied retroactively there. We all hoped for retroactivity, but expected it probably would not be allowed. That ruling did not address the main question of the constitutionality of the cap on non-economic damages, or other tort reform laws in Missouri. So they remain in place and are still being applied.

All that said, to summarize the quarter, great results for ProAssurance shareholders who focus on financial results, and great results for ProAssurance policyholders who depend on us for long-term financial strength and responsive service. One final note, Frank -- happy birthday to the PICA group, which is celebrating 30 years of service to the nation's physicians of podiatric medicine. Dr. Jerry Brant, Adam Wilczek, and all of our colleagues at PICA have created a market-leading company that we are very proud to have as a part of ProAssurance. Frank?

Thank you, Stan and everybody. Miranda, I think we're done with prepared remarks. Will you open the line and queue the questions?

Certainly. (Operator Instructions). We'll go first to Joe DeMarino with Piper Jaffray.

Thank you and good morning, congrats on the quarter. My first question, I'm wondering if you could maybe touch upon your capital management strategy a little bit more. I know you didn't purchase any shares in the quarter and you did talk about it a little bit, but I'm wondering if you're seeing anything different out there in terms of acquisition opportunities, or if any of your, the metrics you use to decide on whether or not to purchase shares have changed? Thank you.

Thank you for the question. You know, capital management is a discussion we have here at ProAssurance among the senior officers and at the Board level on a regular basis. We look at it very, very hard and you've seen our past results which speak for themselves. The M&A market, the chatter has gone up a little bit as opposed to what it was this time a year ago when there was no chatter at all, and we continue to look for attractive possibilities for our shareholders, and we will continue in that regard.

In terms of capital management, everything is on the table for consideration and we move forward in that regard in a prudent, careful manner and as the law and circumstances permit. Ned, do you want to add to that?

No, I would say I agree that everything is on the table. I think one thing that is less attractive today than it was perhaps a year ago is some sort of recurring dividend, given the expectations of taxation of dividends.

Okay, thank you. That's very helpful. And my next question -- I think your growth excluding acquisitions, correct me if I'm wrong, but I think it was down 13% if that is correct, and I think rates on existing business that you retained were down just 2% and you still had pretty good retention. What is causing the shortfall there in organic growth? Is it, I mean obviously it's mostly lower premium rates, but is there, is the number of doctors per policy declining at all or is there anything else that I should think about in terms of that?

Let me just say one thing and then I'll let Howard give you the details. First, with respect to retention, it's very important to remember as you compare our numbers to others that it is a pure number. It's all expiring policyholders, even those that are not available for renewal. For example, we include people who die, who move away, who become disabled, who retire. Our number is a pure number and you need to make sure you're comparing apples to apples. And the retention number for the quarter is one we're quite pleased with, given that the market remains soft.

Second, and again Howard will give you the details in just a moment, we remain very committed to disciplined underwriting. And we're prepared, as we've said repeatedly, to see our top line shrink if we cannot get adequate rate, because that's in the best interest of our shareholders and that's in the best interest of our policyholders. You can have all the market share you want in this business, it'll just be disastrous if it's based on mispriced products. Howard?

Thanks, Stan. One other thing that we had talked about in the year end call last quarter was the shift that we had made in some of our business in certain states to try to equalize our underwriting and processing workload, and we had shifted the number of policies that would normally have renewed on January 1st of 2010 and moved them back into 2009 by offering our policyholders a chance to change their effective dates. And as you see in the Q this quarter, we report that about $6.5 million of that premium would have renewed in this first quarter of 2010, and it actually renewed in 2009. So that's also a factor when you're doing your calculations in addition to the 88% retention and the 2% drop in renewal pricing, offset by the new business.

Thanks, that --.

Hold on, Joe, there's a couple other things in there, Howard, you might want to mention.

Well, we also have spoken about the two year policy term that we offer in one jurisdiction, and that actually has a lesser effect in this quarter than it has had in some other quarters. We had about $4 million of premium associated with two year policies that was written in the first quarter of 2010, compared to approximately $5.4 million in the first quarter of 2009.

Okay. Alright, thank you. How would you characterize pricing on business that is not suitable for ProAssurance, that is priced too aggressively versus renewing policies? How much lower are premiums on those types of policies that you're kind of walking away from or refusing to write?

Well, I think it's more the question of the policyholder is not accepting our offer than we're refusing to write it, because we do quote on a lot. But I think historically we've said that most of the time a 15% price difference is about the threshold at which time a policyholder will seriously consider a move, and we're certainly seeing competitors that are coming in a good bit lower than that, or with a greater percentage difference than 15%.

Physicians have a lot of loyalty, they recognize product differences, they recognize the differences in the defense that we offer. And in many instances, they are willing to, and in most instances they are willing to pay more. But when you start to talk about differences of 20% or more, which we see on a fairly regular basis, it tends to get their attention.

It might make it all the more remarkable that we're retaining that high a level of business.

I mean we're very happy and satisfied with the 88% retention.

I would agree it's high. Thank you, that was all I had. Thank you.

(Operator Instructions). We'll go next to Michael Nannizzi with Oppenheimer.

Thank you. Just a capital management question to follow up -- so right now, you're writing business at about, if my math is right, about 0.4 times your stat surplus, maybe a little bit lower. And I know Ned, you had mentioned that the potential change in taxation law makes a dividend relatively less attractive today. If we look ahead at the end of the fourth, if we keep up at this rate, it will be at 0.3 times or lower at the end of the year. Where do you see and how do you think about that sort of, what that means for your operating leverage, both from an ROE perspective and from just an expense perspective as we look out from here?

Obviously it's a considerable drain on ROE, especially given where we can invest new monies, so obviously a consideration. I think to the broader question, I would go back to just looking at what we've done in the past, and we have been prudent managers of that capital. We've deployed it in ways we think is meaningful, we've bought back stock when we thought it was warranted. We've done acquisitions when we thought they were warranted, and so we will continue to be good stewards of that capital. We are much more long-term focused, and so one or two quarters of sitting on excess capital does not overly concern us. We're very confident in our ability to deploy that capital over the long term.

Okay. And so as you look at your -- and can you talk a little bit about the taxation issue as you mentioned, because there are a lot of companies that do select dividends as a method to return capital to shareholders. I just want to --.

Yes, as we look at it, I don't have the rates right in front of me, but it's -- right now I think dividends are taxed at 15%. The tax rate on dividends goes up to 20% or 25% under the health care bill, plus you've got the 4.5% Medicare that will go onto dividends now. So you're looking at a dividend tax rate of going up substantially.

Right.

And so the double taxation of dividends, because there's no relief in corporate taxation built in anywhere, the double taxation of dividends is going to get much more profound.

You know Mike, I would just add to that that I read, I think it was Forbes, a couple of weeks ago where they said if congress does not do something by the end of the year, the effective tax rate on dividends will be north of 40%. And that's just a heavy bite and an inefficient way, I think, to return shareholders their money. Now we're going to look at that very closely, everything as I said is on the table. There are just some things that are less attractive at the moment than other things, and that's one of them.

Right. No, I understand, I'm just trying to, we're on this end just trying to understand how you guys are thinking about it there. Because you've done a great job of building a substantial amount of capital, and to Ned's point, up to here you've managed that capital so very well. But now it just, we just want to try and understand what you're thinking about. Acquisition is something you've done in the past. Buybacks, I'm still not totally clear as to why that dropped off. I mean is it purely a book value metric, Ned?

No, again Mike, there are a lot of factors. There's book value, there's alternative use, there's blackout periods, there are a lot of factors that go into the evaluation.

Okay.

I think Mike, I think it's a great point that you make. It's a great question, and just know that we're looking at it just like you want us to be looking at it. And we have a history of capital management, and I think you can see that history repeated in the future.

Okay. Alright, thank you so much for answering that. And then one question just on health care reform, I know you kind of talked a little bit about it. But if suddenly you see your doctors change in the amount of patients they're seeing, so their patient load goes up, can you talk about when you can think about rate changes if you feel like the exposure is increasing? Even if there's no change in immediate loss trends, is that something that you can do correctively or do you need to wait until losses start to come in?

Mike, Howard. We can, within reason, consider prospective changes in how we rate and how we price. Of course in many instances, we might have to provide and justify what we're doing, but at the same time some of our exposure base is, you want to say, visit-sensitive. A portion of our policies like emergency room policies and some other full-time equivalency rated policies are based on patient encounters. So those would be somewhat self-rating. For the typical policy for the primary care physicians, internists, and so forth, they are not patient-encounter sensitive rate bases, and for those we would have to have I think some reasonably good evidence of increase in patient volume and make the case that we should rate those or adjust the premiums on those. It's something that we're looking at.

I think a few things to note there -- one is that all of this is going to evolve over the next three years. Nothing happens immediately under the health care bill, we'll have some time so see how this all shakes out. And secondly, while we do think that the number of patients represents a potentially increased exposure, there's a lot of other factors that go into it as well and we're going to have to try evaluate all that as we go. But I guess to go back to your original question, I think we do have some ability to adjust price if we think we need to.

That's a very, very thorough answer. Thank you so much, Howard. And then just one last one if I could on expenses, the expense ratio ticked up a little bit year over year. Frank or maybe Ned, could you just walk us through anything that might have changed, so we just from a modeling perspective understand what that --?

Yes Mike, absolutely. As we said in our prepared remarks, there are really a couple of factors at play there. From a kind of fixed-cost standpoint, our operating costs, there's really no significant dollar change in our operating costs. But we are applying that, when you look at our historical book of business, to a lower earned premium base and so that's in part the reason. Another component of it is the business we write through ProAssurance Mid-Continent. It has a higher acquisition cost, but it also has a lower expected ultimate loss on that business.

Okay.

And so that's driving the commission costs up a little bit. PICA comes into the mix, but the expense ratio is not really being driven by PICA. PICA's expense ratio is very much in line with the expense ratio that we reported for the quarter. It's really the ProAssurance Mid-Continent business and then the fact that fixed costs are flat relative to a reduction in earned premium on the historical book of business.

Got it. Great, thank you so much.

(Operator Instructions). We'll go next to Amit Kumar with Macquarie Group.

Thanks and congrats on the quarter. Two quick questions -- first of all, in your 10-Q there's a discussion on PICA's exit from E&O lines. Just trying to understand a bit better in terms of what the impact would be on top line, and maybe just touch upon the loss experience in that line.

The top line impact is minimal, I think $6 million or something is what they've written historically in that. They will continue to write some of that business in the current year as we shut that down. The loss experience on the business has been, I think we're booking at about 130% loss ratio on that business.

And then was there some specific claim activity which resulted in you exiting the line instead of pricing action? What was the thought process behind that exit?

Amit, it's Stan. Basically that was a business that PICA had entered before our transaction. And as we looked at the new combined organization, the management of PICA came to a conclusion that it just didn't make sense to go forward with that business on the basis they were writing it. And they suggested to us that we exit the business and we concurred in that. And that's what we're in the process of doing now.

Okay, that's helpful. And just then moving on, I know you talked about pricing, pricing action, impact of health care bill. Can you also touch upon the competition and what you might be seeing out there, based on current trends?

Sure, it's Howard. Well, obviously a lot of competition continuing as a result for the most part of generally good results in the industry. We've seen this really now for four to five years, pretty significant competition. I guess the most notable thing about it from my perspective, in the physician marketplace the competitors really haven't changed. We have not seen any major efforts by the large commercial carriers to get into the physician market space, in comparison to maybe what we had seen in the 1990's or even in the 1980's. The players for the most part, the significant players, are still the same and have been. The biggest competitor really, if you want to talk about competitors, the biggest competitor that we have, I think it's true across the industry space, is hospitals that are acquiring physician practices and bringing physicians into their insurance programs, whether they're self-insured trusts, hospital captives, or other mechanisms, and taking those physicians out of the available marketplace for all of the carriers.

On the hospital side, we do see a fair amount of activity from the what I would again call the commercial carriers, the large multi-line companies. That's not unusual, they've always been in that market, particularly in the larger hospital segment. They've moved down to some extent into the midrange hospitals, but not really into the small hospital space in the smaller and say, lower end of their midrange segments of hospital business -- pretty much the same carriers that we've seen all along. So it's quite competitive, but not as a result really of new entrance. I think it's just as a result of top line pressure for a lot of companies, and relatively good results.

I guess it's related to that, and this is the final question. Based on what you were seeing and in terms of rates, I think you said on an average you're down 2%. Do you get the sense of we hit 0% end of 2010, or do we actually move into a sort of plus 1%, plus 2%, end of 2010?

We generally tend to avoid making predictions about where rates are going to go, except in a very broad sense. We did say I think in the fourth quarter call at the end of 2009 that we expected the pricing, the rate change, or in other words the rate decrease on renewals to be less in 2010 than it was in '09, and we had minus 4% in '09 obviously, we have minus 2% the first quarter this year, so it's definitely holding towards that. I'm not sure I'd make a prediction at this point as far as future motion.

I think it's fair to say that there have been in some states, by some companies, some rate filings for higher rates.

True, right.

In the last six to eight months.

That's correct, and that includes us. We've had, and I think we mentioned this in the last call as well, we had some small rate increases, talking about low single-digit rate increases, again just as the result of low interest rates, flat frequency historically, compared to what we had seen over the past few years, and gradually increasing severity. So in other words, things starting to catch up on the rate side.

Yes, but I think as Jeff Bowlby always reminds us too, it's not what's filed it's what's actually charged.

Sure.

Absolutely. Okay, that's very helpful, that's all I have. Thanks so much.

We'll go next to Jack Sherck with SunTrust.

Thank you very much. Most of my questions have been answered, I just had a couple of quick follow-ups. On the $6.3 million you wrote in new premium in the quarter, what was it in the December quarter? I know you wrote about $28 million for all of last year, but do you know the fourth quarter number specifically?

Well we're all kind of looking --

Yes, we'll get our fingers on that and try and get it to you. I know we reported it in our K, well actually K would be hard to dissect it out of. But we've got it and we'll try and get that for you. If we don't get it by the time of the call, we'll try and follow up with it.

Okay, no problem. And then just finally, I had one last question about pricing. Just have you seen any change in the gap or differential between new versus renewal pricing lately?

I wouldn't say any change. I think typically, I think most companies would probably say the same thing, typically the pricing on new business is a little bit less than the pricing on renewal business just by the nature of trying to attract new business. And I guess you can attribute that in part to the idea that you're looking at new business that you think is good, otherwise you wouldn't be writing and quoting it at those prices. In terms of a gap, on a very broad average I would say that the gap is probably 3% to 5% difference.

Great. Thank you very much.

We'll go next to Beth Malone with Wunderlich.

Okay, thank you. Good morning.

Good morning, Beth.

A couple of questions -- on the health care reform act, does that potentially have the opportunity to increase demand for the new product or new business that you're writing for home health care and that kind of business?

Yes Beth, it does. You know, if you look at this from a macro level, we as a nation are going to drive the provision of health care down to the least expensive deliverers. And that will include home health care, ancillary health care providers, freeing physicians to deal with the most difficult aspects of health care. Our view is that there will be an increase in ancillary home health care providers and other ancillary health care providers of the type written by Mid-Continent, and you may recall that was one of the driving motivations for that transaction.

But of necessity, that's got to happen. There have got to be more of those sorts of health care providers in the future. And it will happen over time, it won't be something that you will see next week or next month. But if we gather back together in a few years, I think we'll see a significant increase in that.

And Beth, if you look at the bill or the final legislation, there's even a part in there by which the federal government's going to get into the long-term care insurance business. So that, whether it's successful or not, I certainly don't know, but it certainly is going to bring it more visible to the public in terms of that product. And having that product of course leads to more health care workers being able to deliver at the end when those care needs come about.

Beth, one other thing I should have mentioned earlier when Mike asked his question about the number of office visits, one thing we're very proud of here at ProAssurance are our colleagues in our Risk Management department. And it's a robust operation, very much in tune with what's happening in the real world of medicine today. And it's led by Dr. Whiteside, our Medical Director, and they're going to be looking very closely at ways to help physicians and other health care providers navigate the coming world that we'll see evolve over the next several years.

Okay, thanks. And then this is just me trying to understand the dynamic here -- you often have referenced the fact that you're very disciplined underwriters and very conservative in how you price your business, which has resulted in a lower top line growth in some cases, especially in current market conditions which appear to be improving. Yet, when we exclude the reserve development from prior years, your combined ratios are well above 100% underwriting. And if it were any other business, that would be viewed as being less than conservative. I know medical malpractice is certainly a unique line when it comes to the combined ratio. But could you just kind of explain that?

Well, going back to some of the comments that we've made in the past, we tend to establish the initial loss ratio at a level that is higher than our pricing expectation. We've talked about the typical 8 to 10 points above our pricing expectation for the going-in loss ratio on an accident year, with the idea that if we're wrong in terms of the assumptions that we're making, we'll be able to accommodate that in the reserves that we establish. And if we're right, or things turn out better than expected as the years mature, we'll bring it down.

So that is really the basis for the combined ratio that exceeds 100%, because we're starting off with an 84% loss & LAE ratio, and our pricing would probably be indicating more in the 75% range.

Okay, so the way to look at it is you have to assume the reserve development in order to really look at the way you price it.

Well we don't, we're not assuming favorable reserve development. What we're doing is we're establishing the price that we think is the correct price, and that's what we're charging.

Okay.

We're taking, if you will, a penalty at the outset because of the uncertainty. And if you look back in this line of business over the years, when things historically went wrong or when things were different than assumed, they typically were different in the wrong direction. In other words, severity was higher than anticipated, frequency turned out to be worse than expected. That's happened many more times than not. And that's the, if you will, the assumption that we're building in when we establish the reserve.

Okay. So and the last time that occurred was what, 2000? Ten years ago? Is that right?

Well, I think probably more like 2003 or so, in terms of --.

Oh, okay.

You know, frequency really didn't start to decline until after 2003. Severity was still even in the early, in the first half of the decade, was still at a higher level than where it is right now. So I'd say probably five or six years, really, that things are significantly different than they were historically.

Okay. Well thank you very much.

Welcome.

We'll go next to Howie Flinker with Flinker and Company.

Morning, Howie.

Hey, Frank, both Frank and Stan.

Good morning, Howie.

As to Medicare possibly adding a load to doctors, if one looks at Canada, one actually could make a case that claims would fall because doctors become more bureaucratic and more cautious. And instead of requiring one recommendation for a patient to see a specialist, doctors may either await two or put the patient so far down the waiting list -- typically 12 to 14 months -- that the only time when a patient gets a procedure, which is where you get most of your claims, is when it's urgent, an emergency, and then all bets are off. So from the point of view of property and casualty companies, this could be beneficial, and I just wanted to point that out. As you probably know, I have got family both on the board of a hospital and in medicine in Canada.

And those are very good comments. It's so difficult to even begin to predict what will happen down the road, because you're dealing as you say with the interaction of human behavior and medical demand. We just, obviously the one thing that will be clear is that there will be more patient availability in the system. How that's responded to in terms of the supply of physicians and other health care workers, how the public perceives it, all go into the mix and most of it's not going to happen until 2013 and further on down the road. So it's something we're thinking about all the time, but really at this point in time, you're exactly right. The expectations are somewhat unpredictable.

Physicians will respond by finding ways to crowd their schedule, so that if you or I wants to see a urologist and we have not typically seen in the past regularly, we might have to wait 9 months for a regular visit, or 15 months. And while it may seem that they have a lot more patients, only on the calendar do they have a lot more patients. They'll go six minutes apiece, and the rest of the time is spent reading trade journals. Seeing a patient for six months is usually not very risky, I mean for six minutes is not very risky. I just wanted to point that out.

Thanks.

Unless they fix something in that six minutes.

Well, they can always say, "I was hurrying to get a cab."

Yes, I hear you.

Okay.

And we have no further questions from the phone audience. I'll turn the conference back over to our speakers.

Miranda, thanks very much. We'll adjourn and look forward to speaking with you when we report second quarter results in August. Thank you.

Ladies and gentlemen, that does conclude today's conference call. We'd like to thank you all for your participation.