ProAssurance Corporation (PRA) Q4 2007 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to today's ProAssurance FourthQuarter and Year End for 2007 Earnings Release Conference Call. As a reminder,today's conference is being recorded. Foropening remarks and introductions, I would like to turn the call over to you,Mr. Frank O'Neil. Please go ahead sir. Frank O’Neill: I would like to welcome everybody and thank you for joiningus We will discuss our results andoutlook after I remind you that one of the reasons you have joined us is tohear forward-looking statements and projections. And we do expect to make some of those duringthis call. These statements andprojections will be based on our estimate and anticipation of future resultsand events. Please review the cautionregarding forward-looking statements in the news release we issued Today,Tuesday, February 26, 2008. You shouldalso consult the detailed discussion of risk factors and uncertainties aboutour business in our Forms 10-K and 10-Q. Both will help you better understand today’s remarks in our business. We will not undertake and expressly disclaim any obligationto update or alter forward-looking statements where there is a result of newinformation or future events, except as required by law or regulation. The content of the call is accurate only onTuesday, February 26, 2008, the day of the first broadcast and it is theproperty of ProAssurance. It you are reading a transcript of this call, especiallythrough one of the realtime transcription services, place no transcripts aresubject to error and we have neither reviewed nor approved the transcript. Ned will review willreview a few of the key numbers and help provide some background for our briefremarks. So Ned lead us off.

I am going to let most of the numbers speak for themselvesbut there are a few key items on which I want to focus your attention. Long-time investors are aware of ourdedication to a strong balance sheet and solid bottom line results. We continued to maintain both in 2007 aidedby a solid fourth quarter. We grew a book value per share by 15% during 2007. It is now $38.69. Our ROE for the year was 14.2 %, whichsquarely hits the upper range of our long-term target. For the quarter, ROE was 16.7%. Both the year and the quarter were boosted byfair overall net reserve development. Net income from continuing operations was up 43.5% in the quarter to$51.4 million and up 32.4% for the year to $168.2 million. Earnings per diluted share from continuing operations rosefrom $1.01 in the fourth quarter of 2006 to a$1.47, an increase of 45.5%. Year-over year, net income for diluted sharewas up 28.5% to $4.78, making this one of the most successful years in ourhistory in terms of earnings per diluted share and by virtually every othermeasure. Favorable net reservedevelopment was a major driver of results in the quarter, so I am going toHoward, if we will talk more about the actual numbers in the process forreaching the ultimate conclusions.

I think I mentioned some of this last quarter but it variesrepeating. With every quarter, we havenew lost data with which to evaluate our current reserves. Thus, we obtained a new insight as prioraccident years mature quarter by quarter and our evaluation could move up ordown. Remember that we set initial reserves at levels which webelieve to be adequate. Should resultsbe no better than previous experience as indicated? That prevents us from a major financialstumble of things deteriorate. If on theother hand the losses mature better than we expect. We benefit. That is why necessity color is not only our current thinking but ripplesback through reserves still on the books. After all those cases have yet to be resolved and their outcomes will bedetermined in the current or future loss climate. For now we are seeing today’s favorable loss trendsprincipally affect accident years 2003 through 2005. Because this is an alternative processinvolving a number of variables each quarter we will not try to tell you todaywhat lies ahead in 2008. I canre-emphasize that we look at this every quarter in a systematic manner. The regular valuation of our reserves and our commitment tomaintain our historical level of reserving go hand in hand to ensure that weare able to meet our policy obligations.

The primary driver of the increase in the expense ratio forthe year is the reduction and earned premiums. Expenses for the year were also affected somewhat by stock basecompensation cost. There has been a lot in the media recently regarding thecredit markets. As you heard us statebefore, we maintained a very conservative investment portfolio. I will refer you to an 8-K we filed onFebruary 11 providing details of the compensation of our portfolio as of theend of the year. Finally, an update on capital management, in December of2007, we redeemed $15.5 million of trust preferred debt that came to us in the nickof our transaction. We also continued tobe active but prudent in share repurchases. As of January 31, 2008, we have repurchased approximately 1.2 millionshares of our stock at the total cost, the $67.1 million. After the debt redemption and sharerepurchases, we had $67.4 million remaining in our authorization the repurchaseshare and redeem that securities. Our convertible debt becomes callable this summer and today,it is likely that we will call their securities. There are a lot of moving parts. Not the least of what (inaudible) theinterest rate environment and the state of the capital markets. Frank O’Neill: Howard, you briefly mentioned the fact that premiums weredown in the quarter into the year. Willyou touch on that for us?

Sure, we will continue to see the effects of both softwaremarket and the decline and loss costs. In the fourth quarter our gross rate and premiums were $109 million down14% compared to last year. Year to date, gross written premiums were down a little bitmore than 5%. The new business broughton to our books in the first seven months of the year by the PIC Wisconsin transaction, did cushion the year-over-yearnumber as we expected. I want to emphasize here that while everyone acknowledges thatwe are in a soft market, it is not only competition that has resulted inpremium declines. I will comment more specifically on frequency and severityin a moment, but overall our loss projections are down and we are reflectingthat with lower rates, obviously leading to lower written premiums. On the whole we are not seeing the irrationalKamikaze – pricing that we saw during the soft market of the late 1990’s. My guess is that the hard market did noterase all the pain from the last stock market and that is a good thing forindustry and our insurance. While we tend to ease into a soft market, the hard marketoften arrives abruptly. We have tried tomaintain our pricing discipline and we hope to avoid the rapid severe priceescalations that mark the early part of this decade. That market place discipline means that weare prepared to see our top line fall but we will maintain our margins andprotect our balance sheet at all costs. We had a retention rate of 86.5% in the fourth quarter andpolicy is renewed at premium rates that were down 7.5% from a year ago. For the full year, policy is renewed atpremium rates that were within 2.3% of expiring. Loss trends have improved and we do expectthat to continue. We see frequencymoderating generally across the board although there are variations from stateto state. Those who were able tomaintain our margin expectations and that rate that we are filing. Even though most of those are likely toindicate a decrease in 2008 but I want to emphasize what I mentioned lastquarter, if we were not seeing this almost universal trend toward lowerfrequency. Rates would likely be increasing due to severity, which iscontinuing to rise at expected and manageable levels. Frank O’Neill: That is a little underscore expected in manageable levels.

Certainly. Frank O’Neill: Darryl Thomas, will you comment for us on 2007, claim dateand the current claims environment?

Sure Frank. Just asHoward and Ned have reported, little change in their areas, I can say the sameholds through for claims. Within theworking layers, relative stability Howard mentioned is very evident. Although we continued to experience sporadiclarge verdicts, in 2007 obtained favorable outcomes and 90% of the claimsclosed in our historical book of business and an 89.4% of the claims closedwhen we include PIC Wisconsin;that means we made not indemnity payments on behalf of our insured in thosecases. We tried 733 claims to a juryverdict last year in 528 separate trials and the current claims environmentleads me to the conclusion that will likely try significantly fewer claims in2008, due to the decline in our claims inventory, which is a direct result offewer file claims over the past few years. I does not signal a change in our claims philosophy, it is just areflection of the current claims trend and our lower inventory of claims. As I mentioned, we do see large verdicts from time to time,they are facts of life in medical liability. We have always had them and they are absolutely changing the laws butthey will always be with us, but it is just that do occur seem to be larger,which puts the premium on having the balance sheet to cope with them which wedo and now the need for experience or localized claims management, which is oneof your many strengths. Given the current claims trend, we have heard of somecompanies that have been reducing claims staff, we have been able to use outproprietary data system to shift some processing around to balance workloadamong offices and we have been able to reposition some claims staff into otherrole. This preserves our expertise andcapabilities for when feel a return to what we believe are more normalizedclaim level. Frank O’Neill: Vic, this is not the first cycle you have been through. Any thoughts on how this one compares?

Yes Frank, I agree with Howard’s comments but we do not seethe degree of irrational pricing that existed in prior cycles although we dosee examples of pricing that raises our eyebrows but theses practices are notas broadly based as in prior years and as Howard also noted, the general dropin frequency does give some level of rational underpinning great decreases. Tort reform often has a role in market pricing but the TWIsare difficult to read at this moment. The Bush administration is once again sending the total reformproposal. The congress this time is partof an effort to control Medicare cost and while we applaud this effort, it isunrealistic to think that any tort reform will emerge from this congress. At state level, the plane ASPire just yesterday began theirfirst real challenge of Texasin these tort reforms. They are tryingto convince the Federal Courts to declare the Texas reforms unconstitutional. And while it is hard to imagine thatsucceeding, if it does, that could be a significant consequence to companies inTexas giventhe size of a rate decrease that they have given based on tort reform. There was also a recent ruling in CookCounty declaring the Illinois tort reform unconstitutional. That now sets up appeal and ruling in thefuture by the Illinois Supreme Court. Onthe other hand, in Ohio,the Supreme Court rules in favor of non-medical tort reforms and court watchersay there could be a clue as to how they will handle the almost identicalmedical malpractice tort reform laws when a case comes before the Ohio SupremeCourt. So in some, there is not muchguidance, individual companies can elect how much weight they want to give totort reform. We elect to be cautiousuntil there is a final ruling in the law that emerges. Changing subjects, Frank, if I may to our internaloperations. I am pleased to report thatProAssurance is doing well at the operational level and that PIC Wisconsin is now fully mergedinto our day-to-day activities. Frank O’Neill: Stan, any comments from you?

Frank, I think we have established that we are in a softmarket. So the real question is how longwill it last? It’s one of those thingsthat’s really hard to predict, but given the lack of cut-throat pricecompetition, so far, this maybe a fairly benign manifestation of thecycle. That does not mean that we willsee top-line growth. In fact, we canexpect our top-line to diminish further in the coming year. And no, I cannot predict by how much becauseI do not know what our competitors might do in the market. But I do know that the one sure path toinsurance disaster during the soft market absent some direction of drivingforce is an increasing top line. But I think there is a potential difficulty confronting theindustry. In reviewing the data andcomparing this cycle to others, we see that our industry as a whole has neverbeen this optimistic in the low level of initial reserving. We will show you a chart in our nextpresentation that bears this out but given the softness in pricing and level ofprofit, companies are recognizing today, there could be a number of M&A orexpansion opportunities ahead if or should I say when the market returns to morenormal trends. That is why we are continuing to be dedicated to thediversity of our business and the discipline of our operating model. We are not held hostage to the vagaries ofany one state and as we said in this morning’s news release, we are also beingcareful to maintaining our historical level of reserving and we are building inthe same expectations for margin. It isthis discipline that we think sets apart from the competition. It allows us to sell a product that no oneelse offers. An insurance policy is just a piece of paper until you areassigned a lawyer to defend you or until you are told to pay a verdict againstyou. That is when you want the bestattorney with the chance for an unfettered defense of your non-meritoriousclaim. If you did commit malpractice,you want a company with the resources to make a fare settlement as quickly aspossible. We offer that balance sheet strength and willingness to letour insurers go the distance to defend their names. You hear Darryl Thomas tell you that we havetried 733 planes last year. Othercompanies probably would not tell you how many they tried. They may tell you how many claims they paidno indemnity on but that is a fairly meaning this number if you only tryseveral cases filed against your insurance. This more becomes more important, is the world of transparency comes to othersand across the country as it already has in places such as Floridaand Massachusetts. With the public enjoying access, themalpractice litigation results on the internet. In short, we will think twice about settling claims becauseno matter what, a patient or potential patient will think you must have donesomething wrong if you settled it. Infact, just last Tuesday, I saw a news release from a company that promises tosend watchdog alerts via the e-mail, if a doctor you want to monitor has had amalpractice judgment or a disciplinary action against he or she. The world is changing and we are going to be ready forit. And that means we will do everythingin our power to protect our balance sheet but also the strength of ourorganization. We are committed tomaintain our infrastructure during the softer portion of the market cycle inorder to be able to capitalize on the opportunities when the market turns and weare confident that it will. Frank O’Neill: We will open the line for questions right now.

(Operator Instructions) We will take our first question from David Lewis withRaymond James. David Lewis – RaymondJames: Goof morning, thank you. A couple of questions, first on the gross rate and premium declines down14% in the fourth quarter, kind of accelerating on the downward side afterbeing down 9% in the third quarter and that was difficult to predict and thereare a lot of moving factors and you are a national player but let us kind ofstep back a minute and look at if you can, what you think maybe if you caninput it on your book of business what average rate decreases, just give us arange or a high level of number I you could. Two, do you feel that some of the startups that went backfive plus years ago, we are starting to feel any pain or is the favorable claimtrends allowing them to continue to stay afloat. And then three, do you feel like there is anyincreased M&A activities that might help you out or do we need to start tofeel more pain on the claims side before people get realistic on pricing.

I will start with the first question on the average ratedecreases. I think if you looked at anoverall average we are probably talking bout mid-single digits. Although we have seen some rate decreasesthat are in the 13-14-15% range, we had one that was 11%. We have had other situations where we havelooked at the rates and not made any changes at all or actually had some smallincreases but I would say probably, I guess, 5% on average. I really have not tried to look at itspecifically that way. David Lewis – RaymondJames: Howard, are you talking on about on 2007 or what do youanticipate in 2008.

What we have filed in 2008 so far and what would beeffective in the first half of 2008 at this point? David Lewis – RaymondJames: An how would that compare to the ’07 roughly?

2007, I think we will probably would have been closer to azero. I think the increases anddecreases balanced out at least on a file basis.

David, in terms of the question regarding whether the markethas created paying for some of question regarding whether the market has createdhanging for some of the startups; that is highly variable, this would be a verydifficult market for them to be feeling no pain in the end so we will just haveto wait and see. With respect to M&Aand Gs we think there will be opportunities and in that regard we intend to beopportunistic. The market has a way ofsort of moving those activities forward as people encounter the difficultiesand we have a strong enough balance sheet that we think we will be in aposition to take advantage of that. David Lewis – RaymondJames : Stan, at least all the public companies that we seereporting have pretty significant favorable development, you know, I wouldguess that the other private and smaller independent companies are feeling thesame type of benefit so, does it take a year or two to kind of play off beforethe M&A activity starts really feed up or you know, start to build or areyou starting to see a little increased activity now?

It could take sometime before you see it reach itspeak. I expect we will see someactivities or opportunities to evaluate during the first six months of 2008. Now, whether any of that will come toprovision, it will just depend upon the conditions as they exist. As I commented in my remarks, we have seensomething that we have not previously seen and that is the industry, the wholeis being very optimistic at the low level of initial reserving. We are maintaining our historical levels for reservingon new business, and we think that is a prudent, cautious and long termapproach to the position in which we find ourselves. David Lewis – RaymondJames : And just lastly our comeback with some other questions, PIC Wisconsin – premiums ifyou still can still can break them out? What where they in the fourth quarter and full year of 2007, please?

David, we will come back to that, I must pull thatinformation out. David Lewis – RaymondJames : Alright, thank you Ned.

We will now go to our next question with Ron Baobad fromCapital Returns. Ron Bobman – CapitalReturns: I just have a couple of questions, what is your PIF numberapproximately?

I would think we probably say it is going to be roughly30,000. Ron Bobman – CapitalReturns: Okay, and if that is approximately the number of policiesthat you are buying to each year, you mentioned, I think Howard mentioned the86, well maybe with fourth quarter number, but the 86.5% retention rate. The portion of the business that you do notrenew, whether it be in the fourth quarter, 13.5% or a number that ballpark forthe whole calendar year, are substantially all of those loss that counts thatpresumably someone else has written, lost because you are under quoted onrate. Was there a meaningful number onthose that you choose not to quote, or you are quoting at much higher rates, orwhatever? I am just getting us with adistribution of business not renewed.

Well the first thing I would say is that we use the mostconservative method of calculating retention. It is not one that if we do not think that we have a choice to renew it,we do not count it, that we include people, for example, who are retiring orbecome disabled. Disability would be avery small amount that the number who retired. There is some percentage that we would re-under write and not renewourselves, and then some lost to competitors, and I am to look at Howard now.

And then you have the other situations where physicians die,they retire, they become disabled, they moved to other state. They have all variety of reasons, but thereis underlying… Ron Bobman – CapitalReturns: Right, but I am sure this is 80-plus percent of the lostbusiness really tied to someone under quoting you on a piece of business thatyou would normally like to renew?

I would say that this is really rough, but I would say about2/3 of what we loose is probably due to price competition and the other thirdis due to either the actions of an insured that takes them out of the market orour own action, in terms of not wanting to renew. Ron Bobman – CapitalReturns: Stan, you mentioned in your prepared remarks, I do not knowif some kind of renewed M&A, the business turns the normal trend and I wastrying to understand what you meant by normal trends?

Well normal claim trends. Ron Bobman – CapitalReturns: Normal claim trends.

The people that are pricing their business today andreserving their current business, as if this frequency is a permanent thing andthat the claims environment in the United States is undergoing somedrastic change, it is going to last forever. Only time will tell what the fact is, or we think that is beingunrealistic, and that will create M&A opportunities. Ron Bobman – CapitalReturns: I have two more questions. The loss ratio PIC that you are using right now in early 2008, I amcurious whether you choose to give us the number or not, it is not critical tome, but pretty curious, how about loss ratio PIC is varying from the number youstarted in early 2007, and if it is varying, sort of, what is driving thevariants beyond prizing? Thanks, andwhat order of magnitude might you be talking about?

Well, I guess it is different ways of looking at that, ifyou look at the loss ratio that we booked without favorable development, it isin the roughly 85% range, which is relatively similar to where we were a yearago. I do not have the exact number withme from a year ago. Ron Bobman – CapitalReturns: Are you talking about Q4, Howard, or are you talking aboutearly 2008, 85%?

No, Q4. Yes, I amonly talking about what is already done. So I think that is pretty similar to where we were a yearago. I do not have that at my fingertips, but I would say it is pretty close. We booked in Q4, if you look at the current accident year webooked at 85.9% loss ratio. Not maybeactually be quite higher than where we were, say in Q1, but it is similar. Ron Bobman – CapitalReturns: And would you talk a little bit about going forward, do youthing that you made any changes to the loss ration PIC in Q1 2008, compared tothis, you know, nearly 86 number. Is thechange going to sort of solely be driven by rate action you are taking, or areyou incorporating any factors associated with improving margins on this 2003,2005 book of business. Maybe someindications of 2006 and 2007, looking better, was it going to be all pricedriven changes there?

It is always I think the combination of what we have seenand what we have recognized in the past, because that all feeds into not onlythe pricing but our reserved assumption. So it is a combination of both and we do take a look at the level ofpricing that we are achieving into the, as we mentioned earlier, the rates thatwe are filing have the same level of expected margin built into them. So that in itself would not change ourview. However, if we are being more orless aggressive in certain areas of the market in terms of price deviations,then we have to take that into account in a loss ratio. But I think on the whole, if my sense is thatwhat we are doing right now is consistent with similar to what we have beendoing in the past. Ron Bobman – CapitalReturns: Okay, my last question, thanks a lot for your patience, isyou defined that 733 planes retried in 2007, just so we are clear. What do you mean by claim stride? How are you defining claim stride.

Yes, when a case goes to trial, there maybe multipledefendants in it there are insured. Somemaybe couple of doctors and a codefendant corporation. So we count that those are three in thatexample, those are three trials against our insured, but only one casetried. So that is the distinction thatwe are making for the first time here.

This is Stan. Wetried 733 claims in 2007, and some instance, one claim was tried and one caseand that was all there was tried. Inother cases, there may have been 2 or 3 claims tried in one case.

Does that does clear that up? Ron Bobman – CapitalReturns: Yes, but I sort of focusing on the threshold as far as beingtried. Does that mean that litigationhas been filed against the company, and is actually, the parties have shown upin court one day, and not settled prior there to?

No, it means, that we had cases tried to a jury in which ourinsured were defendants. In 733 of our insureds, were subjected to jury trials in2007. Ron Bobman – CapitalReturns: Got you, and you went to distances as far as the jurydelivering a verdict?

Yes.

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

Okay, thank you. Ijust have a want a couple of questions. Could you give us an update on the Florida market and what you are seeingthere? Is it getting any better or, whatis the situation?

We do not see any change in it Beth.

Are you still concerned about it, or do you feel like youcan manage the environment that is there?

We can manage the environment that is there, if I were atposition in Florida,I would be very concerned about it. Butwe can manage is an insurance company, the environment that exists. Of course, one thing, we do not have adefinitive ruling from the Florida Appellate Courts about tort reform, and thatis going to have a very significant effect, and that room with this issue fromthe…

Do you have any sets of timing, as they would -- rule onthat?

None.

Okay, when we backed out the reserve releases from the yearend, the combined ratio is above a hundred. So I am just wondering, are you all comfortable with that level that youcan meet your ROE goals and everything, was it that high?

Hey, Beth this is Ned. A couple of things, one as you know we are sitting on Connecticut capitaland that probably more than anything makes achieving our ROE goals a challenge. But at the levels that we are currentlyriding business, we are comfortable that we will meet our ROE objectives.

Okay, and then finally, had there been any change or trendin the market itself? Are there more orless physicians out there? Is thatgrowing and what factors drive that, or is it something you even worry about?

Hey Beth, Vic Adamo, you know there is plenty of physiciansout there for a company like ours selling insurance to positions, on a day today basis, it is not dramatically changing. Over long terms, obviously, there is some changes as practices getlarger, they become part of the hospital affiliated group, it might be selfinured and out of the market. Out of,you know, day to day, year to year basis, there is not dramatic changes, butthere maybe long term changes.

Okay, so as more doctors choose to be part of a hospitalprogram or a larger physician group, will you continue to be pretty exclusivelyan individual doctor, or are you looking at extending your product line?

We insure larger groups now. I mean our sweet spot are the smaller groups, and individualphysicians. We do it all up the line,but larger groups have more interest in alternative mechanisms, so that isdefinitely an area on our development. We plan it now, but not maybe as much as down the road.

You know, while we insure a significant number of physicianswho are in small groups less than 5, the fact is, eventually practicearrangement, most positions in United States have, so that is why a majoritybank insurancing group, is because the majority of physicians around thecountry are in those groups. But we doinsure larger groups. We insure groupsthat are affiliated with hospitals. Sothose changes when they occur, I think they will over the long term, I do notfeel any dramatic change in the next few years, but those changes as theyoccur, will be met by us with products which will be of benefit to thosesituations.

Okay, thank you.

And we would now take our next question from Mark Hugheswith SunTrust.

In cases for top-line decline, should we look for thatcontinued inch up a bit, or can you hold that steady?

Mark, I have to tell you that we did not get about the lastfew words of your first sentence. Couldyou repeat that for us?

Yes, what trend do you think an underwriting expense asgiven that you have an outlook for declines and premiums over 2008? Should we look for that to inch up, relativeto revenue or can you hold the line there?

A couple of things, obviously there is a component of theunder running expense that is variable. Commissions and premium taxes in particular. On the operating expenses, our objectives, aswe go into 2008, it is to work to hold operating expenses on par on nominal ordollar value basis with 2007.

On a dollar basis?

Yes.

Right and then, how big the decline in open cases at yearend?

There has been a considerable decline in open cases yearend. I am not going to give year-oldspecific numbers, but year over year, due to the drop in frequency, obviouslythat affects inventory.

Right, and is that the magnitude of the drop greater thanwhat you have seen, you know, relative of the volume of business you have beenwriting compared to prior years?

Yes, I think that is sort to say.

And then just one more point on that, your outlook fortrying fewer cases in 2008, I guess I assume that is already captured in lossreserves, but does that point to the potential for, you know even morefavorable development in the future?

Not well even though development is primarily a result ofwhere we start reserving and what happens to the cases as they areresolved. The frequency issue really,only comes into play on the reporting endorsement or tell business and on thesmall amount of the current business that we have. So I do not know that you can draw the directcorrelation there. I think the overallclaims environment that we are seeing is one of moderating or decreasingfrequency and gradually increasing severity, both of which are better than weanticipated when we established the reserves for the prior years, and that iswhy we are seeing development in a favorable manner.

Let us pause for a second, Ned has got an answer to DavidLewis’s earlier question, and then we will get back to questions.

David, you asked about premiums coming from PIC Wisconsin, and the fourth quarter, we had gross writtenpremiums on PIC Wisconsinof $12.1 million for the year. Thatwould be $74.4 million on a net basis. $11.7 million and $66.8 million, and on a net earned basis, $18.6million and $73.9 million, thanks Frank.

Okay.

And I think, here to say that given the way we areintegrating PIC Wisconsinin the rationalization of distribution, it is going to be really hard for us todo that next year. Okay Jennifer, we will resume questions.

(Operator Instructions) We do have a follow up question from David Lewis.

Thank you Ned for that, you would not have by chance whatthe gross rate was in the fourth quarter of 2006, would you? Just to throw another kink in your thoughtprocess there.

I actually do have that you call it $15 million in thefourth quarter of 2006.

Oh I understand, okay $15 million perfect. Stan, just clarifying on Beth Malone’squestion, you said that there are no decisions out on ****, and Florida. To my understanding, there is not a case thatis actually pending out there to go to the State’s Supreme Court, is thataccurate?

I do not know if that is accurate? I have been told, and this is hearsay, I havebeen told that there is at least one and perhaps as many as two cases makingtheir way up the system in Floridaon that. But now that is adding dawdleup. Just bear in mind, they are not ourcases, so I can not tell you what the sureness if they are. Bear in mind that in the Florida StateSystem, of an appeal of right, lies from the Circuit Court in Florida to an intermediate Appellate Court,which you are geographically spread among the state according todistricts. Thereafter, any furtherappellant activity would take place in the Supreme Court of Florida andtypically that is by permission, there is no right of appeal, and actuallyright of appeal in this kind of case to this Supreme Court of Florida,according to my understanding. So to geta definitive ruling, you would have to first have ruling in a CircuitCourt. You then have to have a ruling inan intermediate Appellate Court, and you would then have to have the SupremeCourt of Florida agree to accept the case, and issue its own ruling.

That is awful. Stan I know you still have not been therethat long as CEO, but when I met with you the day after you accepted theposition, you indicated that, you thought it would be helpful to kind of haveeverybody, including yourself, kind of review each of the operations to seethey are greater efficiencies or better operating methodology to kind of moveforward, and you know, in your short 10 year there, have you found any? I know, you are pushing everybody to look forbest practices, even further than what they have historically. Is there anything meaningful that you cantell us?

You know, we said back in July and I say again today,everything is on the table. We wan totake a fresh look at everything to see that we are doing things in a way thatbest accommodates the needs of our share holders and our policy holders and ouremployees. We have made some changes, Ido not know that I care to announce under the world and then need to tell you,but we are moving forward as we think things are appropriate and I would saythat the changes, or changes in new launch, and not drastic changes indirection. We are just twicking it. You know, everything can be made better. There is nothing that is perfect and we aredoing our best everyday to make things a little bit better here, and I have totell you, one of the great strengths of this organization is our cadre ofemployees who are simply magnificent. Ican not take credit for that, but I can tell you that observing it closely andfirst hand, I would not trade them for anybody in the world.

That is thoughtful, and Howard, I know you said most of theprior development came out of 2003 and 2005 years, can you give us a magnitude,is it a greater percentage from the 2003 or 2004, or how do you see that if youcan? Just from a high level?

Yes, it is more from 2004 and 2005 as I recall, but we willbe able to get you more or we will have the statutory statements out there,within a week you will be able to actually see it by accident year.

I guess I am trying to also kind of back into what theexcess capital levels might be at the organization today so do you know whatcapital and surplus was at your end?

Statutory capital and surplus? We have that, we are going to have to get ourhands on it. I would speculate it isroughly $900 million, in that neighborhood.

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

Actually, it is right at a billion dollars. That is statutory capital.

So with the repurchases and the redemption of the preferred,are we still looking at potentially excess capital today in the $250 millionrange, would you guess?

I think everybody kind of comes up with their ownnumber. Obviously, the rating agencieshave one perspective on it and we at the company may have another, so I am kindof hesitant to throw in numbers out there, but we are in a position of havingexcess capital.

And I do not know what the exact numbers are right now, soyou are clearly riding at a much lower premiums to statutory capital andsurplus that you might prefer, so what do you think you could write up withoutthe rating agencies getting too excited. Is that 1.2 to 1.3, a reasonable number, is it now 1.1 or 1.2? What do you guess?

The rating agencies seem to rate for our line of business 1to 1. You can push them a little bit andmaybe go a little higher, but they seem to like 1 to 1.

And that is really a change over the last couple of years,is it not? It seems to me it is.

A dramatic change, I think there have been times when we mayhave been willing to go up t 1.2, but I have not seen them go above that.

And just lastly, Ned, do you know what the stock basedoption costs were in 2007 versus 2006.

We have that. It willjust take me a second. Stock-basedcompensation costs 2007, $8.3 million and 2006 $4.7 million; I would remind youthat in 2007, we had about $1.8 million of options related to Stan coming onboard.

We will now take our next question from John Glen withMorgan Keegan. John Gwynn – MorganKeegan: Howard, a year or so ago, one of your competitors in atleast one venue reintroduced the occurrence form, is there any broadening ofthat trend in the business?

No, John. We reallyhave not. That was announced, it made alittle bit of a splash at the time. Wereally have not seen any of our insured leave us to take advantage of movingback to our occurrence, at least not that we are aware of. I think it is probably more about talkingpoints, sales at the time of sales than it is for actual selling any, but wehave not. John Gwynn – MorganKeegan: And Howard, your buddy, Thomas McCarthy down in Florida recently mandated a return of premium I guess is whatI will call it or excess profits and Work Comp, it seemed to be specific toWork Comp, but is there a similar legislation on meds now in Florida?

No, there is not. Florida has a fairlywell prescribed medical malpractice rating process and a very formula drivenapproach to rate approval, rate making, but no excess profit provisions havebeen put into place at this point that we are aware of and nothing that has hadany effect. We just went through a rateapproval process in Floridawithin the last month. John Gwynn – MorganKeegan: Okay, was that a public hearing?

No, it did not require a hearing. We had a rate decrease and went through theprocess within the LIRD office, the office on insurance regulation and resultedin approval. John Gwynn – MorganKeegan: Ned, what is the cash at the holding company?

Just one second, with cash and short term, we are sitting onabout $80 million and we have got about almost $70 million and six maturities. John Gwynn – MorganKeegan: Oh so it is 80 plus 70?

Yes. John Gwynn – MorganKeegan: And do you have an idea of what your dividend capacity isthis year from the subs?

Some of it, $162 million without prior approval. John Gwynn – MorganKeegan: And Ned, do you spearhead the relationship with AMBest.

Actually Frank does. John Gwynn – MorganKeegan: So, Frank, this is all your fault? Frank O’Neill: No, somebody here has to take the blame for it, might aswell be me. John Gwynn – MorganKeegan: Your A-minus rating is sort of out of kilter from myperspective, I know I am just preaching to the choir, but— Frank O’Neill: Do I get your phone number to call? John Gwynn – MorganKeegan: I mean, if they give A-minus ratings to almost anything thatwalks around these days, I am just curious, I mean with the operating infinancial lack of leverage that you have in the operations today, what is thehang up?

Obviously, BEST looks at the world the way they do as welook at what they do, ourselves and competitors. I mean, clearly they do not, from our pointof view look at it holistically, and we would say, you look at us as anorganization, not by individual pieces. In addition to that, I guess part of the reason that we do not make it amajor issue which is not a factor in the marketplace and so there is no, Imean, A-minus, you are on everybody’s good list from the agency point of viewand there is really not much premium above that, so I guess it is one of theissues that we will work on and desire to continue to maintain. It is not a high priority item in anorganization. We certainly have conversations with them and talk to themabout their view of our company, but I guess the bottom line is we just do notget the credit for cash at the holding company that we might get with anotheragency.

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

My questions have been answered. Thank you.

We will go to the next question from Amit Kumar withFox-Pitt, Kelton.

I guess just going back to maybe Beth or Ron’s question ontop line. Do you see any organic growthopportunities in new states or perhaps in allied lines?

I think the first answer is, probably yes, we might see alittle bit, but if we knew where they were, we probably would not tell ourcompetitors. I mean, we typically do notget into state by state discussions. Wehave a couple of states where we have grown and we have at least one state thatwe are looking at right now in terms of a market entry. We have some related lines of business thatwe already are in. You know that we arein the large professional area. We arelooking and doing more in smaller hospitals and allied health; allied healthmeaning, non-physician medical liability. So there is a variety of things underway, at the same time, most ofthese are relatively small average premium lines so, it does not have quite thesame impact as writing physicians or hospitals, but nevertheless, we think itwill add to the business going forward.

That is helpful, and I guess just moving on to theinvestment portfolio just based on what the markets have done recently, hasyour approach or thought process changed in terms of how your portfolio isstructured?

Not in particular, especially if you look at our core fixedincome portfolio, there has really been no change there. What we are seeing is perhaps some betteropportunities in some of the areas that we have alternative exposures to, sofor instance, sub prime, there seems to be opportunities and leverage loans,there seem to be opportunities and so we are certainly looking at expanding ourallocations to those areas but we are talking very, very small components tothe portfolio. I think alternativeinvestments for us equities and equity substitute is around 3% of the portfolioand I do not see it much going above 5% in the near term.

And then maybe, this is the final question, I think in theQ3 call, you had mentioned a shock loss and I was wondering if A) there was anyupdate to that and B) have you seen any other shock losses recently. That is my final question. Thanks.

I think Darryl mentioned that we see them from time to timein our book of business and that as I go back to that I do not think there is atrend that you would say that we are seeing some rapid acceleration in that?

No, certainly no rapid acceleration and I think you arereferring to the Floridacase, as you know that amount was confidential and the minute it was resolvedwith all claims taken cared of, resolved amicably among the parties.

I think he was referring to the last quarter when wementioned the case in Iowa.

And again, Amit, we mentioned that not to call specificattention to that one case as being something out of the ordinary or anoutlier, but to simply use it as an illustrative example. I am afraid, it got blown way out ofproportion that somebody read into that that this was a major big deal while wetake them all seriously. We were reallyjust using that as an example and I did not want you to reach too much intothat.

No, I was just wondering for an update because obviously,$15 million to $20 million on I guess a $2 billion-plus reserve base prettymuch is not meaningful.

Again because it was an example, we would not be giving anupdate on it. It is obviously in thenumbers we reported.

(Operator Instructions) And we will now take our next question from Michael Paisanwith Steifel-Nicolaus.

A couple of questions actually just a broader base. I am trying to sort of rectify this wholeshock loss issue relative to what others are saying and others are not sayingthe same thing, and is it because ProAssurance basically try so many more casesthan their competitors and therefore the probability that you are going to havea shock loss is greater because you take so many more to jury, is that simplythe reason why or am I looking at it in too general of a term?

I do not know that we have any more or less shock lossesthan anybody else. We happen to mentionone loss in one call and all of a sudden it is being set out that we have thishuge number of shock losses. That is justnot the case.

Well, just to relative to everybody, nobody else seems to beseeing the same shock losses, so I just did not know, there is obviouslysomething in the way that you guys defend or do you your claims versus others.

Let me look back, but I think we mentioned one shock lossthat we had in the last quarter and we mentioned about five or six others thatwe saw in unnamed other companies. So wesaid last time for example, we said there was an $8 million verdict in Maine. We are not in business there, $26.5 millionverdict in Massachusetts,we are not there. It was $23 million in Wisconsin which was not ours, verdicts in Connecticut where we were not and there was a $35 millionverdict in Michiganwhere we were not. So we mentioned one verdict of ours and a handful of verdictsfrom other folks, and again, people blew that out of proportion. We were using it certainly as an example justto say, there are shock losses in the world and Darryl said earlier today,these shock losses have occurred since we got in, since the businessstarted. They are going to continuechanging the laws and they are a fact of life and you better have a strongbalance sheet and good claims management to deal with them and we are probablyat the top of the heap in both of those.

In terms of trying to rectify the lower frequency and howthat may play out, is it fair to assume that their lower frequency is due tothe lack of or the significant decline in frivolous lawsuits that have beenfiled, so in other words, let us say the percentage of meritorious cases wouldreally not be changing that much, it is mostly the frivolous lawsuits or thenon-meritorious claims that are no longer being filed?

That certainly is the theory and at this point, I guess, weare seeing mixed conclusions or mixed results from the theory if you go back afew years. When you look at the yearswhere we actually can see what has happened and in some instances, we have seenno real change in the number or in the ratio of claims both with payment ascompared to those without payment and in some states, we have seen somedifference and there are a lot of things that have to be taken into account tokind give you our controls number in terms of what may have caused thefrequency change, was it the reform that was implemented in a given state, wasit a state without reform. It is notcompletely clear yet. I am not sure thatit ever will be. It was not in the late80’s when the same phenomenon existed and then frequency jumped back up againby about 1990 or 1991, so that is certainly the logical explanation for it, butwe are not completely able to tell and practice whether that is the case.

So it is more theoretical right now?

Yes.

And as we have no further questions, I will turn theconference back over to Mr. O’Neill. Frank O’Neill: Thank you everybody for joining us. We will join you again when we report firstquarter earnings. Thanks again.

This concludes today’s conference. Thank you for participating and have a greatday.