ProAssurance Corp (PRA) 2010 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 call 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, Carla. Good morning everyone. We look forward to discussing the results for 2010 and the fourth quarter with you. First I need to take care of a little legal housekeeping.

We issued a news release on Wednesday afternoon reporting our results for the full year of 2010 and the fourth quarter. That release along with our SEC filings including the 10-K that we are filing this morning are designed to provide you with important detailed information about our Company as well as disclosures 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.

This is especially true for any discussion of our transaction with American Physicians Service Group. These risks could cause our actual results to differ materially from current projections or expectations. We will not undertake and we 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 24, 2011, the date of first broadcast. If you're reading a transcript of this call please note we did not authorize the transcript and we have not reviewed it for accuracy. Thus, it may 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. We refer you to our recent filing on Form 10-K and our recent news release for a reconciliation of these non-GAAP numbers to their GAAP counterparts.

Let me tell you who's on the call with us today. We have our Chairman and CEO, Stan Starnes; our President, Vic Adamo; Chief Financial Officer, Ned Rand; our Chief Underwriting Officer and Actuary, Howard Friedman; our Chief Claims Officer, Darryl Thomas and our Chief Marketing Officer, Jeff Bowlby. Stan, will you start us off?

Thank you, Frank. We're pleased to be able to report strong results again for the fourth quarter of 2010 and indeed for the full year. As I said in the news release, we think the results we've achieved validate the disciplined, long-term approach we take to every phase of our operations. And while we're confident that our share holders and policy holders benefit from that long-term view, we also know that focusing on the long-term very often produces good results in the short-term. That's certainly the case this quarter and this year. Frank?

Thanks, Stan. Ned, will you give us your comments on the year and the quarter?

Sure, Frank. With a full year to report, I'll focus on those results. But we'll mention the quarterly components where they have some bearing.

For the year, gross premium region was $533 million, down 4% from $554 million in 2009. In 2010, the two-year policies accounted for about $16 million of the decline in gross written. There was also a onetime effect due to the redistribution of policy renewal dates. We did that in late 2009 to smooth out our work flow.

In the fourth quarter, gross premium written was essentially unchanged from the same quarter in 2009. We did see $5 million of new premium resulting from our acquisition of American Physicians Service Group. That acquisition closed on November 30, 2010, so we received the benefit of one month's premium as a result of the transaction.

Our net investment result was $148 million for the year. While we did have more money to put to work, lower yields on the portfolio resulted in a decline of 3% from 2009 net investment results of $152 million. Total expenses were up 2% for the year with half of the increase related to the effects of acquisitions.

In 2010, we had an additional three months of PICA activity and one month of ATFs. We also saw policy acquisition expenses reported in the financial statements for PICA normalized in 2010 after seeing artificially low expenses in 2009 due to the effects of purchase accounting.

Policy acquisition expenses overall were up as our premium earned from our allied healthcare business increased. This line has higher policy acquisition expenses than our physician premiums but also higher return expectations.

Net favorable loss reserve development was $234 million for the year compared to favorable reserve development of $207 million in 2009. Our 2010 net loss ratio was 42.6% for the year compared to 46.4% for 2009. Obviously, the fourth quarter saw significant development which Howard will touch on shortly.

That brings us to the bottom line. Operating income was $219 million in 2010, which is $6.82 per diluted share compared to operating income of $215 million or $6.49 per diluted share in 2009. Net income for 2010 was $232 million, or $7.20 per diluted share.

Fourth quarter 2010 operating income was $96 million or $3.08 per diluted share compared to $80 million or $2.42 per diluted share in 2009. Fourth quarter 2010 net income was $102 million, or $3.28 per diluted share.

We repurchased 1.9 million shares last year at a cost of $106 million. Almost 206,000 of those shares were purchased in the fourth quarter. We purchased an additional 252,000 shares so far in the first quarter of 2011 and have approximately $194 million remaining from the $200 million authorized by our board in November of last year. Since 2005, we have spent approximately $315 million to buy back 6 million shares.

The buyback had a beneficial effect on our return on equity this year. We achieved a return on equity of 13% for the year and 22% for the quarter. We calculate return on equity by dividing net income for the period by the average of beginning and ending share holders equity.

Book value per share now stands at $60.35 and that number also benefited from the cumulative effect of our buybacks during the year which added about $0.45 per share to book value. As , we think book value per share is the single best measurement of our progress as a Company and we're proud to highlight this year's increase of 15% which continues an unbroken string of increases in year-over-year book value per share since we became public in 1991. In fact since that time, book value per share has grown at a compound annual growth rate of 16%.

Our tangible book value per share at year end 2010 is $53.15 compared to $48.09 at year end 2009. Our intangible assets at December 31, 2010 are comprised of $161 million of goodwill and $60 million of other intangible assets, $46 million of which we will amortize over time.

Our ratio of goodwill to total assets is 3.3% up about 1 point as a result of the American Physicians transaction in the fourth quarter. Frank?

Thanks, Ned. Howard, I know you have some comments to make on the net favorable reserve development and would you also update loss and rate climate in general?

Thanks, Frank. Our net favorable reserve development in the fourth quarter was significant, but in line with prior year's fourth quarter development. Given the size I think our methodology bears repeating to hopefully answer any questions.

Our independent consulting actuaries conduct two major studies each year which complement the ongoing work that our in-house actuaries perform. Each quarter builds on the available data and by the fourth quarter we have a better picture of what another full year of loss data looks like.

For the past three years, that analysis has led to significant development in the fourth quarter. But remember, it could just as easily go the other way if loss trends change. And also remember that the analysis we perform each year is consistent with prior year's analysis, but with an expanding pool of data.

In the quarter, you'll notice a small increase in the current accident year loss ratio if you compare it to prior quarters this year. As part of our annual evaluation we made some reserve adjustments having to do with the tail coverage we provide on death, disability or retirement of qualified insureds. These are infrequent adjustments and I don't see them as having a regular effect. The progression in 2009 was much the same and taken together with 2010 is probably a pretty good guide for any projections of trend.

On the subject of loss trends, I think we could essentially repeat the comments from any quarter last year and be reasonably accurate. The overall frequency trend is flat and has been so for the past two years. Severity continues to trend upward at about 4% to 5% which is the same manageable and steady pace we've seen for the past several years.

Podiatric's severity trends have been slightly higher, mainly because of the scope of care provided by podiatrists is expanding. As a result, rates for podiatric business increased in 2010 and will likely continue that trend in 2011. But the average increase is in the mid single digits.

The slightly higher rates charged to podiatrists in 2010 resulted in our average overall renewal pricing being flat. This compares to a 2% overall decline in average renewal rates in 2009. We are continuing to evaluate the needs for rate adjustments in our other lines of business, and 2011 looks to hold more of the same kind of filings we made in 2010. Some slightly up, some slightly lower, but generally in the low single digits.

Thanks, Howard. On the subject of premium dollars, I'd like to now switch to Jeff Bowlby, our Chief Marketing Officer, for a business review from 2010. Jeff?

Thanks, Frank. We had our sales and underwriting executives in the office last week for a 2010 wrap-up session and to talk about 2011. The report we heard pegged the market as competitive, but not to the degree of the soft market that occurred ten years ago.

The heavy competition is isolated and seems to move around a bit as one company or another makes a push for new business. Writing new business is the real challenge for every MPL insurer. We were able to do that to some degree, writing a total of $21.7 million of new business in 2010.

Premium retention at our consolidated physician medical professional liability book was 90% in 2010, the same as in the prior year. In the quarter, premium retention was 92% compared to 90% a year ago. When we can retain this level of business in a very competitive market, I believe it is a real testament to how much our insureds value what they receive in exchange for their premium dollars.

I'll remind you, because of the differences in our product, we are rarely the lowest premium in the market, so I think the retention ratio we maintained in 2010 is impressive. I'm confident that our dedication to the tenants of Treated Fairly are playing a visible role in that level of retention. In the almost 2.5 years since we began to formally emphasize our commitment to Treated Fairly, we've seen it grow in importance throughout our organization and our agents and insureds are telling us it is increasingly a deciding factor in purchasing decision. Frank?

Thanks, Jeff. The other side of the underwriting and marketing coin is our claims success. I think it's another reason for our high retention. Darryl Thomas is our Chief Claims Officer. Darryl, can you give us some insight into the year in claims?

Sure, Frank. We did not see any significant new trends in claims this year. The trial numbers which lag claim numbers continue to reflect the trends Howard cited. In 2010 we tried 354 individual files to a jury verdict. However, it's important to note that we continue to try the same percentage of files to claims inventory as in recent years.

The real driver is the number of new claims coming in the door. With fewer claims, we can bring more manpower and more intensity to our handling of each claim.

At year end 2010, we had 7,921 open claims compared to 8,123 at year end 2009. In 2010, we received 3,977 new claims, just slightly higher than the 3,835 new claims in 2009. None of the numbers I just cited include American Physicians.

Our trial win ratio this year was just over 74% essentially unchanged from recent years. Given the significant number of claims we take to trial, including the tough claims that other companies almost always settle, this is a great result and one we believe benefits our insureds as well as our share holders. Frank?

Thanks, Darryl. Now over to Vic for an update on the American Physicians integration. Vic, can you also update us on all the talk about tort reform in Washington?

Sure. Frank, I'm pleased to comment on the integration process at American Physicians or APS for short. The process is going as smoothly as we could have hoped. I'll give credit to the executives and staff at APS for running a first class operation and for being very supportive of the transaction and the transition.

Just a few details. We have already integrated operating units such as underwriting and claims. Financial data was consolidated successfully for our year end reporting. We are well along in the data systems integration project and anticipate that we'll complete that sometime during the third quarter.

From a sales and marketing standpoint, many of the APS agents also represented ProAssurance prior to the transaction so we hit the ground running. And given the ProAssurance capabilities with hospitals and clinics, we see real opportunity to expand these product offerings in the Texas market and add new policy holders. All in all, we believe this will be a real success story for ProAssurance.

As for tort reform, we're seeing more movement and hearing more talk of national level tort reform than we've heard in several years. The Health Act made it out of committee and seems assured of passage in the House. This bill contains a $250,000 cap on noneconomic damages and other features of the proven micro reforms that have benefited California physicians and their patients.

A similar bill has been introduced in the Senate where the sailing has never been smooth for tort reform even when the Republicans were in control. President Obama has mentioned federal tort reform several times recently, and events will unfold over the next few months that will show whether folks in Washington are seriously committed to real tort reform.

We're participating in the process through our very active industry group, the Physician Insurers Association of America or PIAA. They've been a leader in the push for tort reform at both the state and national levels. We'll be closely monitoring the debate as it unfolds.

I know Stan has some interesting thoughts about tort reform which come from his years as a practicing defense attorney. Stan?

Vic, the climate in Washington is remarkable right now, and it's interesting to watch and listen to the debate about tort reform. But the leadership and the PIAA is right. You have to wait and see what emerges when these bills are finally considered.

I caution everyone not to be seduced by the talk, but wait for real action. It's just hard for me to imagine the plaintiffs' bar will allow meaningful tort reform to become the law of the land. It's just contrary to their interest and things that are contrary to the interest of the plaintiffs' bar are difficult to pass in Washington.

The more problematic scenario is that something may emerge that some in Washington will call tort reform, but which won't live up to the expectations of those who demand real change. As we debate the future of health care in this country, I think it's important for us to achieve some sort of meaningful tort reform so that a physician who makes a decision based on her best judgment in the midst of a medical emergency, doesn't spend years defending a decision she was forced to make in 30 seconds or less.

While tort reform has attracted quite a bit of attention in the past two weeks, it's just in the talking stage. Where we have seen real change is in the structure of the health care delivery system. With or without the recently enacted federal changes to our health care system, the provision of health care in this country is evolving and will continue to change in ways that we really can't begin to imagine.

The sheer economics of it demand some change. As I have said, we as a country can deliver far more health care than we can afford. As we attempt to rein in the costs of health care delivery, one of the most noticeable changes is the movement of physicians into larger groups, or hospital-owned or affiliated practices. It is a fact that more than half of the physicians practice in one of those settings already and the number will continue to grow.

In fact, we lose more insureds to hospital programs than to any insurance company competitors. That's why we are so excited about the recently announced relationship we've formed with Ascension Health Care, the largest health care system in the United States.

Under this arrangement, we will work with them to insure private practice physicians at their ministry locations in Michigan. This program kicks off on April 1 and we're already meeting with those physicians. We expect to expand that program as Ascension sees fit to their other hospitals across the country.

I'd like to publicly thank Jeff Bowlby and Howard Friedman who led a great team to organize this process and project and to demonstrate our enthusiasm for it to everyone at Ascension.

This idea of risk sharing with hospitals and facilities isn't new, but adding the physician insurance component makes this an entirely new ball game. Hospitals and physicians have different expectations for their liability programs. We understand these differences and feel that we are uniquely situated to accommodate the needs of both. The vast majority of our competitors lack the balance sheet size or the experience and the hospital setting, to participate in this new world of health care. We certainly can deliver a range of services, including an unmatched level of risk management that addresses these unique situations. We think that creates great opportunity for us in the future, and our ability to lead in that setting will we hope allow us to continue reporting future results that are as impressive as those we have reported in 2010. Frank?

Thank you, Stan. We'll ask Carla to open the line for questions and then we'll discuss the quarter and the year with you.

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions). We'll take our first question from Amit Kumar with Macquarie.

Thanks and good morning and congrats on the quarter.

Good morning, Amit.

Just quickly going back to your opening comments on federal tort reform and health care bill. I'm just wondering, you mentioned that something might emerge which might not be the best option. Now, your pricing does not factor any reform on a state level. I'm just wondering, if we do get some sort of a product further down the road, does it make it easier on your competition to compete with you at that point, or does it still benefit you?

It benefits our customers and therefore it benefits us. One of the things that differentiates us from others is our ability and willingness and experience and history of successfully defending positions in the court room when the physician did not breach the standard of care or cause damage to the patient.

Most insurance companies settle the case and they don't try the case. With a ProAssurance product you have an opportunity for vindication which becomes increasingly important to physicians as credentialing decisions and medical professional liability claims outcomes become increasingly publicly available. So that's important to physicians.

Tort reform is needed so that the physicians have a system that they can have confidence will treat them fairly and will not subject them to unnecessary litigation or to lottery style justice when they've done their jobs appropriately. So, the purpose of tort reform is not to benefit an insurance company, us or any of our competitors. The purpose of tort reform is to assure the public with access to health care from physicians who can operate in an environment in which they feel they will be treated appropriately under all circumstances.

Okay. I guess moving on to reserve releases. Did any releases come from APS? And maybe can you touch upon the time period in a bit more detail? I think you said it was 2007 and prior. Maybe just give us where did the biggest contribution come from, what years? That would be helpful.

Hey, Amit. It's Howard. There were no APS releases as part of the reserve development. APS was in the group for only one month and we did not have a prior year reserve change for that one month period.

If you look at the reserve development, and I think we have some more detail on this that's coming in the 10-K, most of the -- well, the reserve development was really predominantly, I guess you can say, in coverage years 2004 through 2007. 2006 and 2007 were a little bit greater than some of the other years, and I just got the 10-K table here as well.

The 2006 and 2007 years were the greatest two-year period. We have them broken into two-year blocks. 2004 and 2005 were also pretty significant. You will be able to see this when you look at the K and it breaks it out into four groups.

Looks like page 59.

Page 58-59.

58.

I guess it just came across. I'll look at it. Then just the final question and I'll re-queue. On the new business, $21.7 million for 2010. I don't know if you have that number for Q4, 2010. Can you break that out between hospitals and your physician group book?

Amit, I don't think we'll be able to break that out for you.

And do you have a Q4 number?

No.

We'll get it for you, Amit.

Okay.

Just don't have it at our finger tips.

Okay. I'll circle back. Thanks so much and congratulations once again.

Thank you.

Mark Hughes with SunTrust has our next question.

Thank you. Stan, you've talked a bit about the change in the structure of the health care delivery. I think the consolidation of practices, physicians moving under hospital umbrellas. But it seems like your retention continues to be quite good and improving, if anything. I know we're in the midst of that restructuring now. How much of a risk do you think that really is?

Well, it's a reality. And it's part of our job to respond to that reality.

That's why we've developed products that we think will help us continue with that level of retention. I mentioned Ascension. It's the largest Catholic health care system in the United States, and our newest arrangement with Ascension will permit us to retain physicians that across the country that we might have lost going forward. Similar arrangements will enable us to do the same thing.

Mark, I would remind you, that the way we count retention which is different than others, is we include all expiring premium in that number. So we don't omit from consideration, for example, the premium of physicians who are retiring or become disabled or who move out of state. So we are proud of that retention number. And we think the migration of physicians into hospital systems makes that an even more impressive number.

But you are right. That is an issue. That's an issue we're seeking to address in the products that we're delivering.

Every MPL carrier in the country is at a fork in the road and we have to either watch our universe of customers move into hospital settings or we have to provide products that they will find of value in those settings. And it's clear which path we've taken down that fork. But we think it's necessary to do that if we're going to keep our retention where it is and write new business.

Right. Could you talk about pricing? I guess on your core business, excluding PICA, we're now in the third month of the quarter here. Anything you can say about the pricing trend in Q1 the most recent look at it versus what you experienced in Q4 or Q3?

Mark, we really don't have anything that we can give you at this point. I think if we notice something that was markedly different one way or the other, we'd be in a position to tell you that. But I don't see that we have anything major in that regard.

I think it's a continuation of the same type of pricing that we saw during 2010. And at this point we're making the same types of rate adjustments as I mentioned earlier, relatively small, fine tuning type adjustments, a few points up or down, depending on individual state loss experience and changes in investment yield and that type of thing. If you look at the year, whenever we made any comments in the past with several quarters it's been what we're seeing now is the same as what we've been seeing for the past few quarters in terms of competition and pricing.

Thank you.

All right. Carla, before we take the next question, in response to Amit Kumar's request for a breakout of data, that's on page 53 in the K. It gives you the breakout of the year-to-date new business. So we can get that as well, yes, for the physician business, which is the predominant. Okay, Carla. Thank you.

Moving on we'll go to Beth Malone with Wunderlich.

Good morning and congratulations on the quarter; a couple of questions. On the Texas expansion through the acquisition of American Physicians, what is it that ProAssurance can bring to the table that's going to penetrate that market? Or is it just that you're going to take advantage of the success that American Physicians has already had in the Texas market?

Beth, it's Stan. We're going to do both things. That is to say we are going to continue to build on the success of American Physicians, a well respected MPL provider in Texas that has deep and long roots in Texas. We think we're in a position to build on that business.

We're also going to bring to the Texas market an array of products and different options for physicians that perhaps they've not had in the past. And we think that combination of historical legacy business in Texas through American Physicians and the new options and opportunities that we'll provide in the Texas market will provide the path for growth in that market.

Additionally American Physicians did not write hospital business and of course we have written hospital business for over 25 years. So we think the opportunities that will be created through this migration of physicians into hospital systems really requires that an organization such as ours have the experience and the appetite and the will to write hospital business, and so that brings a new dimension to our now new Texas business through American Physicians that did not exist before.

Okay. And then on the Ascension relationship, is that exclusive? Will you be seeking those kinds of relationships with other large hospital groups or can you only do it with Ascension?

Well, the relationship that is announced and in concrete is with Ascension and it's in Michigan at the moment. That kicks off April 1 and as the program evolves and health care evolves, we'll see what other opportunities that presents as we go forward. But for the moment, the relationship that is in fact in place and up and running is with Ascension and is in the state of Michigan.

But it doesn't prohibit you from doing the same thing with competitor hospital programs in other states?

No. There's nothing we have signed that would prohibit us from doing that if the market permits it.

Okay. Then one question for Howard, I guess. I'm always surprised, but pleasantly so, by the reserve development that you all are able to release in these quarters. My question is, should we really be viewing this as just a timing differential of when profit is recognized from the business written that you're recognizing the profit that was generated from business written prior to 2007? And we should be looking at the results over a longer period of time than even one year?

I think definitely in the liability insurance business, you have to take a long-term view of recognizing your results and whether those results are profitable or not profitable. You make the estimate at the outset and you really do find out three, four, five years later how accurate you are and you make adjustments.

So I don't think it's so much a question of recognizing profit on a delayed basis or anything like that. I think it's really more a matter of best estimate and making adjustments to that estimate as you go along and get more information.

We've always taken the view in terms of taking a conservative position to start with and to the extent the data permits, we recognize the results when that data comes through, when we are closing claims at a significant rate and have a much better perspective on what a particular coverage year results will be. And based on the payoff patterns and the timing of our business that really starts to become much more evident at three years or four years into the process.

So do you find it a challenge to talk about this to your client base, these physicians that are paying a rate, and then later on realize that maybe that rate was a little bit higher than what the actual experience was going to be on their exposure? Do you get push back that people want price decreases to offset the higher prices they paid in the past?

I think there is reality in that the rate making also reflects the experience. And as we get the experience built into the rates, rates have tended to come down two, three, four years after the tide turned, so to speak, and the results of frequency and severity improved and rates have been reduced. At the same time, looking back ten years ago when we were raising rates, our clients weren't complaining about the fact that they underpaid in the 1995 to 1999 period. It's always a matter of making corrections as we go both in terms of reserves and rates. The discussions that take place, to be honest with most clients, relate to what the expectation is for next year, not so much what happened two, three, four years ago.

Okay. All right. Thank you.

Beth, it's Stan. I'd also suggest to you that if you were a physician and you're buying a professional liability product, the last thing you want is to buy that product from a company that is charging inadequate rates, because that company won't be here four, five years from now when the time that you need that policy comes to bear.

Okay. Kind of along those lines, in terms of opportunities and acquisitions in the market place, do you see conditions changing for some of the companies that are less able to compete? And are they attractive for you or would you prefer not to get involved with companies that are challenged right now?

Generally speaking, companies in the MPL sector are doing financially well. There's an increasing amount of top line pressure; as rates are going down, expenses are going up and it's getting harder and harder for those companies, I believe personally, to look forward and see the future for themselves.

So I think there definitely will be opportunities out there. We continue to be interested in pursuing them. And our feeling at ProAssurance is that there will continue to be consolidation in the MPL sector as we go down the road.

And evaluate every opportunity on its own merits.

Oh, yes. Everything stands on its own, of course, but you asked a sector question. We believe there will continue to be consolidation in the sector.

Okay. All right. Thank you.

Now we'll hear from Mike Grasher with Piper Jaffray.

Hey. Good morning everyone. Congratulations on a great year. First question I wanted to ask was the statutory surplus number at the end of the year?

Mike, just one second. We'll get that for you.

Okay.

While we're getting that, if you can go ahead.

Yes. Then a couple of follow-ups to the hospital program and the relationship with Ascension. I guess the first question would be, what is it that's driving the migration of docs to the hospital programs? And second question would be, what states are you seeing the most movement in currently?

As to the cause of the migration, it's a confluence of several factors. One, the demography of medicine has changed. The physician today tends to be less entrepreneurial than the physician 30 years ago. The physician today wants greater structure to his or her life. There are fewer physicians coming out of medical school and training that want to leave home at 5.30 in the morning and not have a clue as to when they're going to get home that night. The hospitals can provide schedules and structures that have greater certainty than the typical private practitioner has enjoyed over the years. So that's one factor that's doing it.

A second factor is reimbursement patterns are different for the physician in private practice versus the physician performing a procedure as a hospital employee. That's serving to incentivize the migration.

And finally, the practice of medicine is becoming increasingly bureaucratic. That is there is a regulatory overlay and a compliance overlay that many private practitioners find overwhelming. They want to take care of their patients. They don't want to deal with bureaucrats. So that makes it attractive to a physician to go into a hospital and the hospital say, we'll take care of all the forms, we'll take care of the electronic medical records, we'll do all those things.

So whereas when I started practicing law in 1972, there were fewer probably than 8% of physicians employed by hospitals. Today that number is 50% and growing.

So it's going to continue. We saw back in the mid 90s some integration of physicians in hospitals, and ultimately most of that came unwound. This time it feels very different. This time I think it's going to stick.

In terms of where we're seeing the programs, Jeff Bowlby can tell you better.

Yes. There is a variety of -- I wouldn't say it's isolated to any one state or area. We see consolidation in rural areas. We see it in metro areas. It's really hit and miss. Some states are just a little more active than others, but not anything that's remarkable to us.

Okay. So no state with any particular program is driving it, or I guess the tort law in any particular state would be driving it?

No.

Okay.

No. And that's a thing that's important to remember. In our view there will always be a significant number of physicians who are in private practice and following a model much as they are today. It's just that it's going to be a very large number unlike in the past that are with hospitals. And our challenge is to offer programs and products that appeal to both types of structure. And that's what we're trying very hard to do. We think our ability to do that will be one thing that distinguishes us in the future.

Okay. And the statutory surplus, did we find it?

Yes, Mike, we've got it -- just under $1.4 billion.

Okay. I guess the final question here then would be if you're looking at something around $1.4 billion, I mean it seems to me that you're sitting in an extremely large excess capital position. Can we expect management to be a little bit more aggressive and share holder friendly in terms of managing capital?

I think that we personally manage capital for the long-term. We think that is share holder friendly. It may be a longer term than you're looking for.

We think the opportunity to put that capital to work over time will come. As we mentioned on the call, we've put about $315 million back to share holders and share repurchases over the last several years. This so far this quarter we've repurchased 252,000 shares. We have an authorization of $190 million plus from our Board that we intend to put to use if circumstances permit us to do so.

It just seems to me that $1.4 billion, if you took $400 million of that through a special dividend, you'd still be at a risk to capital of 0.5 and still seeing an excess capital position.

And the acquisition opportunities that are out there certainly there seem to be quite a few from hearing Vic's commentary. But at the same time, I'd have to think because of the fragmentation they're probably not really all that large. So just seems to me that you do have an opportunity here to give more back to shareholders.

I appreciate your comment. The A rating that we have, especially as we start to look at the hospital market in a more serious way, is a real differentiator for us. We don't want to do anything that jeopardizes that A rating.

The rating agencies take a very different view of what is excess capital than we do, than our shareholders do. We're very mindful of the rating agency perspective on things. So we appreciate you sharing your perspective as well.

And then just in terms of that. What sort of risk to capital ratio would the rating agencies be looking at?

It's not as simple as a premium to surplus ratio. There are a lot of factors that go into the rating agency model. The line of business matters, the duration of the liabilities matter, the volatility of the line. We write in a line of business that historically has been very volatile.

Rating agencies factor that into their models when they look at the premium we're writing, and they charge a risk -- charge to the premium we're writing. They look at it when they look at reserves, and they charge a risk premium for the reserves that we carry.

We can talk about premiums and surplus as a back-of-the-envelope sort of saying, and we certainly have the ability to write at a much higher premium to surplus ratio than we write, but it's just hard from a rating agency perspective to say what that number is. If you go back and look at some of our investor presentations, you'll see a slide in there that shows the difference from the rating agency model perspective of taking a dollar of surplus out versus putting a dollar of premium in. They have a very different impact.

A dollar of premium does not carry with it the same additional capital needs as the reduction of a dollar of capital takes away from your solvency model with the rating agency. So the models aren't linear and they've got a lot of different factors. We believe we can write it close to a 1 to 1 ratio, but that does not imply that you could take $800 million of our capital out of the Company and maintain an A rating.

Understood. Thanks for the color.

And now we'll go to Matt Rohrman with KBW.

Gentlemen, good morning. First question I guess for Stan or Vic. Obviously as you guys get more immersed in the Texas market, from all the data and folks that I have talked to down there, seems like things are going pretty well. Is it fair to say that as you've been more entrenched down there, the deal and the market have played out as well if not better than you initially expected?

We closed November 30, so we are 90 days into it roughly. As Vic said in his comments, we are very pleased with the transaction and the transition. We expect that if we came back five years from today, we'll look back and say Texas has been a very good transaction for us. And it's moving in that direction, but you can't say after 90 days that something has happened with certainty. But it could not be going any better. I'll say that.

Okay. Great. And then just last question. Ned, I know you had mentioned that the buyback in the quarter was going to be a bit moderated just due to the acquisition. Is 2010 a fair benchmark for the general pace in 2011 there?

A lot of it depends on kind of the opportunity to buy our shares. What we said in the past is that below book value, we're very aggressive buyers of our stock. As the stock goes above book value, we do buy stock above book value. It's dependent upon a number of factors. One is our forward view of book value. Another is our perception of our ability to replace that capital if we would need to replace it. So it's hard to say. I think that circumstances played out similarly in 2010 with our stock than during 2011, that 2010's a pretty good proxy. It just depends on the market dynamics.

All right. Okay. Thanks, guys. Great quarter.

(Operator Instructions). We'll take a follow-up from Amit.

Thanks. Just one quick follow-up. Going back to the discussion on Ascension, now your pilot program will have 1,000 physicians.

Amit, we didn't say it was going to have 1000 physicians. We said the market could be of a certain size. We don't know how many we're going to have because it doesn't really kick off until April 1. That's when we find out how many we are able to bring in.

Got it. So just expanding or staying on that fact, Ascension has access to 20,000 physicians; it's in 500 locations in 19 states. What I'm trying to understand is -- let's say after the pilot program you like the result. Is this something which could end up becoming a big driver for ProAssurance going forward, or is this more on the side, you're sort of exploring that market?

Amit, the program begins in Michigan on April 1. We will evaluate the program. I'm sure Ascension will evaluate the program. And we will make our individual and joint decisions about expansion of the program as we see how the program develops in Michigan. I think it is fair to say that the program carries with it opportunity for ProAssurance, an opportunity for Ascension.

But we try to make it very clear that we're not in the prediction business, and so I'm not going to predict what's going to happen with Ascension. I will say to you we think the Ascension relationship is the sort of relationships that have to be fostered among physicians and hospitals and professional liability writers in our space in order to accommodate the evolving and changing world of health care.

So we regard Ascension with a lot of respect. It's the largest Catholic health center system in the United States. So we think the program has a lot to do.

Ascension is very professional. They're very dedicated to their physicians. We're very pleased to be in this relationship with them. And we will attempt to execute the program in Michigan in a way that is very fair to the physicians in Michigan, very fair to Ascension. And then ProAssurance and Ascension will evaluate where we go next.

Got it. I guess a follow-up. This might be premature, but how different are the loss trends for a charity hospital versus your core book?

Amit, it's Howard. I think two things. First I wanted to make it clear that we're not insuring hospitals, at least Ascension hospitals, as part of the program at this time. We're just looking at the physicians who are independent physicians, who have privileges and affiliations with the Ascension hospitals in Michigan.

The broader question in terms of for-profit and not-for-profit hospitals, over the years the loss experience on an industry-wide basis between the two has not really been significantly different. In fact, if you look at the general rating indications and loss cost indications from ISO, a statistical organization that compiles insurance results for years and years, they had the same rates or the same loss cost indications for for-profit and not-for-profit hospitals in most states. So I would not see a major difference there.

That's actually quite helpful. Thanks and congrats once again.

(Operator Instructions). Our next question comes from private investor, [Leonard Cooper].

Leonard, let me just tell everybody we need to ask that this be our last question because we are running up against a Company-wide employee meeting that begins in about ten minutes that we have to address to discuss the results of the year and the quarter. So now, Leonard, please.

Okay. One, excellent report. I have never heard one of your Company's reports before. About that dividend, you may know better what to do with the excess cash than a person like myself, but I do have to go to the supermarket every week, so I can't be looking years ahead to the advantages of retaining the money. A dividend would be greatly appreciated, even a small one. Then, my other question which my wife says you'll never answer is, are you ever a target of another larger insurance company seeking acquisitions?

Our congratulations to your wife (laughs). All seriousness, our Company policy is not to comment on any potential, perceived, rumored, talked about acquisition activity, whether it's in the exit door or in the entrance door.

Okay. Well. How about that dividend?

I think Mr. Rand answered that as best we can, in that we do factor in a large range of capital management alternatives, and I'd point out that we are significant owners, each and every one of us on the management team, of Company stock and we too go to the grocery store, so we would just tell you we're doing what we think is in the best long-term interest of the Company.

And we constantly re-evaluate it.

Okay. Thank you.

That does conclude our question-and-answer session for today. I'd like to turn it back to our speakers for any closing or additional remarks.

That's all, Carla, thank you. We'll look forward to speaking to everyone again in May when we release first quarter results.

Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation.