ProAssurance Corporation (PRA) Q1 2010 Earnings Report, Transcript and Summary

Welcome to today’s ProAssurance first quarter earnings conference call. As a reminder, today’s call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Mr. Frank O’Neil. Frank B. O’Neil : Thanks for being part of our call today as we discuss the results of first quarter 2010 operations and address recent development and trends in our industry. We issued a news release Wednesday afternoon reporting our results for the first quarter of 2010. That release and our SEC filings including the 10Q filed this morning provide you with important detailed disclosures and information regarding forward looking statements. We are explicitly identifying statements we make today dealing with projections, estimates, expectations as forward-looking statements subject to various risks. These could cause our actual results to differ materially from current projections or expectations. We will not undertake and expressly disclaim any obligation to update or alter forward-looking statements whether as a result of new information or future events unless required by law or regulation. The content of this call is accurate only on Thursday, May 6, 2010 the date of first broadcast. If you’re reading a transcript of this call please note that we did not authorize it and have not reviewed it for accuracy. Thus, it could contain factual or transcription errors that could materially alter the intent or meaning of our statements. One final reminder, we’re going to reference non-GAAP items in our call today. Please refer to our recent filings on Form 10Q or on Form 10Q and our recent news release for a reconciliation of these non-GAAP numbers to their GAAP counterparts. On the call today is our Chairman and CEO Stan Starnes; our President Vic Adamo; Chief Financial Officer Ned Rand; Chief Underwriting Officer and Actuary Howard Friedman; and our Chief Claims Officer Darryl Thomas. Stan will lead off the conversation today with another quarter of excellent results.

We are pleased to report another solid quarter reflecting strong steady results that are a product of our disciplined long term focus and a continued commitment to all that treated fairly means to our policy holders. Significantly, the first quarter of 2010 did not bring further wholesale softening of the market. We’re excited to discuss the details with you. Frank? Frank B. O’Neil : Since you mentioned the marketplace why don’t we start with Howard Friedman for comments in that area.

As Stan said, we didn’t see any wholesale changes in the marketplace. The market is challenging and adding new premium is difficult but we’ve been successful in adding new quality business on two fronts through acquisition and through organic growth. In our historical book of medical professional liability business we wrote $6.3 million of new premiums at rates we believe will allow us to meet our ROE targets. Jeff Bowlby, our Chief Marketing Officer has been on the road meeting with agents and he reports that the agents that represent us are finding a receptive audience for ProAssurance among physicians looking for more than just the lowest price. Writing new business obviously helps offset what we lose to competition and we do give up business in a soft market but we are retaining our accounts at high levels 88% in our historical NPL business which we calculate on the basis of physician renewals and 91% in PICA’s core medical liability book. On the subject of PICA, PICA accounted for the vast majority of the $21.3 million in new premium from acquisitions in the quarter. There was some increase in our lawyers line at ProAssurance Midcontinent but the majority was due to PICA. Let me remind you that this is the last quarter in which the PICA transaction will affect our quarter-over-quarter premium comparisons as that transaction closed on April 1, 2009. We are somewhat encouraged by the pricing on renewals in the quarter. The average renewal pricing on physician policies in our historical medical professional liability business was down 2% in the quarter which compares favorably with a 4% average price reduction in last year’s first quarter. PICA’s renewal pricing on medical professional liability business in Q1 was 5% higher than expiring compared to 2% higher in the same quarter last year. Our current accident year loss ratio is 84% in line with the first quarter of last year. Net favorable loss reserve development was $25 million in the quarter, $6.5 million better than last year and again reflective of relatively stable long term trends. Severity continues to increase at a more moderate level than anticipated in our prior reserve reviews which leads to the favorable development and in this quarter to a net loss ratio of 64%, almost 2.5 points better than Q1 2009. Frank B. O’Neil : Darryl Thomas can you comment for us on recent claim trends?

Sure. On the frequency side we saw a small increase in our reported rolling average claim counts in the quarter. This confirms our belief that the period of sustained frequency decline has ended. There are many factors that could cause a variation in the number of new claims in any one quarter so we’re not overly concerned by this. What’s hard to know from a single quarter is whether this is part of a trend which could help to firm the market or whether it’s an isolated event. We’re certainly going to monitor it carefully as the year progresses. Severity hasn’t varied overall from the rate of increase we reported in prior quarters, somewhere between 4% to 5% across many states. Frank B. O’Neil : Ned Rand is next to address the financial highlights.

This should be fairly straight forward because the story for us is, as always, the success of the bottom line. Compared to the first quarter of last year, net income was up 34% or about $10 million to $38 million and net income per share was up 38% over the same period last year to $1.16 per diluted share. Operating income was up about $6 million or 19% to $39.6 million. Operating income per diluted share was $1.21, a 22% increase over the first quarter of 2009. These solid increases are the result of the higher earned premium and favorable development that Howard touched on plus an increase of net investment income driven primarily by our TIPs portfolio which performed more in line with our long term expectations. You may recall that in the first quarter of 2009 net investment income was adversely affected by the performance of our TIPs allocation. We also benefitted from a turnaround in results from our investment and unconsolidated subsidiaries, essentially our alternative investments which are also returning to more historical return levels. We continue to face a challenging interest rate environment in which to invest. Even though we held higher average balances in our core fixed income portfolio which helped boost income, this was offset by a reduction of approximately 25 basis points in the book yield on the portfolio. Our expense ratio was 24.6%, up about two points and there are a couple of moving parts to understand. Fixed costs are essentially flat in our historical book of business while earned premiums are down slightly. At the same time we saw an increase in commission costs because of the commission paid on our ProAssurance Midcontinent business which has higher acquisition costs but lower expected ultimately losses. Our return on equity was 8.8% higher than first quarter last year. We added $1.48 to our book value per share which stands at $54.07 as of March 31st, a 3% increase over yearend 2009 and a 22% increase over book value per share at the end of the first quarter 2009. These increases are consistent with our goal of maintaining a strong capital base that will sustain a high rating and will distinguish us from competitors in the market especially with institutional purchasers of our product. Our track record demonstrates our willingness and desire to deploy our capital in a prudent manner through both share buybacks and acquisitions such as PICA and nothing has changed in that regard. As examples, we closed on three transactions last year and we spent $52 million to buy back more than one million in shares. In the last five years we’ve spent almost $200 million buying back shares. There are a number of factors that must be considered when evaluating a share repurchase. As a result, we did not repurchase any shares during the quarter. We have over $115 million in authorization from our board and expected to deploy that when circumstances warrant. Frank B. O’Neil : Much of the interesting news on this quarter came out of Washington and several state courts, state supreme courts. We’ll get updates on both of those from Vic and Stan. Vic, can you start with healthcare reform?

We know that healthcare reform will mean significant changes for the healthcare insurance system but we don’t expect any immediate or direct changes for the medical professional liability business. There’s nothing in the bill to address lawsuit reform other than some poorly funded demonstration projects and certainly nothing that directly addresses how medical liability insurers operate. On the positive side, it’s clear that the number of people working in healthcare will need to increase at all levels from physicians to home healthcare so the good news is that it’s going to increase the available market for ProAssurance. This should allow us to leverage our nationwide geographic reach and insurance expertise to offer a wide range of liability insurance products that respond at every level. For example, at one end of the market we ensure over 175 hospitals in our MPL book while at the other end of the market we ensure a broad range of ancillary healthcare workers through ProAssurance Midcontinent. Another example of our product diversification can be found at PICA which will become the endorsed carrier of the American Optometric Association starting July 1st taking on the AOA’s national professional liability program. The program will be completely administered over the Internet and will help us gain further experience in lower premium products that require alternative distribution. Stan, I know that you have some thoughts about how the reforms might affect the medical legal system based on your years in the courtroom.

Vic, I think we have to anticipate that the higher number of people in the system will increase patient frustration as the system becomes over crowded. It’s also a fact that many people often have unrealistic expectations about the outcome of their healthcare. So, down the road as our healthcare system evolves through 2013 and beyond, there could be a consequential changes in claims trends. We have to wait and see what develops but we’re prepared. We have the capital, we have the experience and we have the products to meet these evolving needs. We get quite a few questions about tort reform each quarter which is natural given the unmatched geographic scope for ProAssurance. While recent tort reform rulings are important and I’ll discuss them in a minute, I think it’s just as important to note the relatively small total premium we have in the effected states. While the rulings on tort reform in Illinois, Georgia and Missouri may be immaterial to our overall financial results here at ProAssurance, they are important and material to our customers and to society as a whole thus, we pay close attention. Any time important hard won legislation such as these reforms are overturned there are consequences for any company that has not priced and reserved its business in a prudent manner. You know there’s never a certainty of winning any lawsuit so having any kind of cap gives a plaintiff lawyer a reason to turn down a marginal case. But, with caps gone the chances of a lottery type jury verdict go up. Likewise, the absence of damage caps causes settlement demands to increase so all of this requires close scrutiny. We still take a cautious view of the tort reforms in other states such as Ohio and Florida where the highest courts in those states have yet to rule on the reforms in question. We mentioned the Illinois ruling on our last call. It’s still too early to see any real change in the marketplace behavior or loss trends in Illinois since that ruling. The same is true in Georgia where the Supreme Court struck down significant parts of their tort reform in March. The key portion of the Georgia ruling was the overturning of damage caps in that state. As in Illinois, we’re monitoring the climate there but we’ve seen no changes yet. There’s already talk of a Texas like constitutional amendment to bring about tort reform in Illinois but we have not heard that yet in Georgia. There was a ruling in Missouri on a very narrow question in one case. The end result is that the tort reform limits cannot be applied retroactively there. We all hope for retroactivity but expect that it would probably not be allowed. That ruling did not address the main question of the constitutionality of the cap on non-economic damages or other tort reform laws in Missouri so they remain in place and are still being applied. All that said, to summarize the quarter, great results for ProAssurance shareholders who focus on financial results and great results for ProAssurance policy holders who depend on us for long term financial strength and responsive service. One final note Frank, happy birthday to the PICA group which is celebrating 30 years of service to the nation’s physicians of podiatric medicine. Dr. Jerry Brant, Adam Wilczek and all of our colleagues at PICA have created a market leading company that we are very proud to have as a part of ProAssurance. Frank B. O’Neil : Operator, I think we’re done with prepared remarks. Will you open the line and queue the questions.

(Operator Instructions) Your first question comes from [Jose Mourinho] – Piper Jaffray. [Jose Mourinho] – Piper Jaffray: My first question I’m wondering if you could maybe touch upon your capital management strategy a little bit more. I know you didn’t purchase any shares in the quarter and you did talk about it a little bit but I’m wondering if you’re seeing anything different out there in terms of acquisition opportunities or if any of the metrics you use to decide on whether or not to purchase shares have changed?

Capital management is a discussion that we have here at ProAssurance among the senior officers and at the board level on a regular basis. We look at it very, very hard and you’ve seen our past results which speak for themselves. The M&A market, the chatter has gone up a little bit as opposed to what it was this time a year ago when there was no chatter at all and we continue to look for attractive possibilities for our shareholders and we will continue in that regard. In terms of capital management, everything is on the table for consideration and we move forward in that regard in a prudent careful manner and as the law and circumstances permit. Ned, do you want to add to that?

I would say that I agree that everything is on the table. I would say that one thing I think is less attractive today than it was perhaps a year ago is some sort of recurring dividend given the expectations of taxation of dividends. [Jose Mourinho] – Piper Jaffray: My next question, I think your growth excluding acquisitions, correct me if I’m wrong but I think it was down 13%, if that is correct. I think rates on existing business that you retained I guess were down just 2% and you still had pretty good retention. What is causing the short fall there in organic growth? Obviously it’s mostly lower premium rates but is the number of doctors per policy declining at all or is there anything else I should think about in terms of that?

Let me just say one thing and then I’ll let Howard give you the details. First, with respect to retention, it’s very important to remember as you compare our numbers to others that it is a pure number, it’s all expiring policy holders even those that are not available for renewal. For example, we include people who die, who move away, who become disabled, who retire, our number is a pure number and you need to make sure you’re comparing apples-to-apples. The retention number for the quarter is one we’re quite pleased with given the market remains soft. Second, and again Howard will give you the details in just a moment, we remain very committed to disciplined underwriting. We’re prepared, as we said repeatedly to see our top line shrink if we cannot get adequate rate because that is in the best interest of our shareholders and that’s in the best interest of our policy holders. You can have all the market share you want in this business, it will just be disastrous if it’s based on mispriced products.

One other thing that we had talked about on the yearend call last quarter was the shift that we had made in some of our business in certain states to try and equalize our underwriting and processing work load and we have shifted the number of polices that would normally have renewed on January 1st of 2010 and moved them back in to 2009 by offering our policy holders a chance to change their effective dates. As you’ll see in the queue this quarter, we report that about $6.5 million of that premium would have renewed in this first quarter of 2010 and it actually renewed in 2009 so that’s also a factor when you’re doing your calculations in addition to the 88% retention and a few percent drop in renewal pricing offset by the new business.

There’s a couple of other things in there Howard that you might want to mention.

We have also spoken about the two year policy term that we offer in one jurisdiction and that actually has a lesser affect in this quarter than it has had in some other quarters. We had about $4 million of premium associated with two year policies that was written in the first quarter of 2010 compared to approximately $5.4 million in the first quarter of 2009. [Jose Mourinho] – Piper Jaffray: How would you characterize pricing on business that is not suitable for ProAssurance, that is priced too aggressively versus renewing policies. How much lower are premiums on those types of policies that you’re kind of walking away from or refusing to write?

I think it’s more a question of the policy holder is not accepting our offer than we’re refusing to write it because we do quote on a lot. But, I think historically we’ve said that most of the time a 15% price difference is about the threshold at which time a policy holder will seriously consider a move and we’re certainly seeing competitors that are coming in a good bit lower than that or with a greater percentage difference than 15%. Physicians have a lot of loyalty, they recognize product differences, they recognize the differences in the defense that we offer and in many instances, in most instances, they’re willing to pay more. But, when you start to talk about differences of 20% or more which we see on a fairly regular basis it tends to get their attention.

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

We’re very happy and satisfied with the 88% retention.

Your next question comes from Michael Nannizzi – Oppenheimer & Co. Michael Nannizzi – Oppenheimer & Co.: Just a capital management question to follow up, right now you’re writing business at about if my math is write, at about .4 times your stat surplus, maybe a little bit lower. I know Ned you had mentioned that a potential change in taxation law makes a dividend relatively less attractive today. If we look ahead if we keep up at this rate, we’ll be at .3 times or lower at the end of the year. Where do you see and how do you think about what that means for your operating leverage both on an ROE perspective and from just an expense perspective as we kind of look out from here?

Obviously it’s a considerable drain on ROE especially given where we can invest new monies so obviously it’s a consideration. I guess to the broader question I would go back to just looking at what we’ve done in the past and we have been prudent managers of that capital. We’ve deployed it in ways we think is meaningful. We’ve bought back stock when we thought it was warranted. We’ve done acquisitions when we thought they were warranted. We will continue to be good stewards of that capital. We are much more long term focused and so one or two quarters of sitting on excess capital does not overly concern us. We’re very confident in our ability to deploy that capital over the long term. Michael Nannizzi – Oppenheimer & Co.: Can you talk a little bit about the taxation issue that you mentioned? Because, there are a lot of companies that do select dividends as a method to return capital to shareholders?

As we look, and I don’t have the rates right in front of me, but right now I think dividends are taxed at 15%. The tax rate on dividends goes up to 20% or 25% under the healthcare bill. Plus, you’ve got the 4.5% Medicare that will go on to dividends now so you’re looking at a dividend tax rate of going up substantially. So the double taxation of dividends because there’s no relief in corporate taxation built in anywhere, the double taxation dividends is going to get much more profound.

Mike, I would just add to that, I read I think it was Forbes a couple of weeks ago where they said if Congress does not do something by the end of the year the effective tax rate on dividends will be north of 40%. That’s just a heavy bite and an inefficient way I think to return shareholders their money. Now, we’re going to look at that very closely. Everything as I said is on the table, there are just some things that are less attractive at the moment than other things and that’s one of them. Michael Nannizzi – Oppenheimer & Co.: I’m just trying on this end trying to understand how you guys are thinking about it there. You’ve done a great job of building a substantial amount of capital and to Ned’s point up to here you’ve managed that capital so very well. But now, we just wanted to try and understand what you’re thinking about. Acquisitions is something you’ve done in the past, buybacks, I’m still not totally clear as to why that dropped off. I mean, is it purely a book value metric Ned?

Mike, there are a lot of factors. There’s book value, there’s alternative use, there’s blackout periods, there are a lot of factors that go in to the evaluation.

I think it’s a great point that you make, it’s a great question and just know that we’re looking at it just like you want us to be looking at it. We have a history of capital management and I think you can see that history repeated in the future. Michael Nannizzi – Oppenheimer & Co.: One question, just on healthcare reform, I know we’ve kind of talked a little bit about it but if suddenly you see your doctors changing the amount of patients they’re seeing so their patient load goes up, can you talk about when you can think about rate changes if you feel like the exposure is increasing even if there’s no change in immediate loss trends? Is that something you can do proactively or do you need to wait until losses start to come in?

We can, within in reason, consider prospective changes in how we rate and how we price. Of course, in many instances we might have to provide and justify what we are doing. But, at the same time, some of our exposure base is I want to say visit sensitive. It’s a portion of our policies like emergency room policies and some other full-time equivalency rated policies, are based on patient encounters so those would be somewhat self rating. For the typical policy for the primary care physicians, internists and so forth, they are not patient encounter sensitive rate basis and for those we would have to have some reasonably good evidence of increasing patient volume and then make the case that we should rate those or adjust the premiums on those. It’s something that we’re looking at. I think a few things to note there, one is that all of this is going to evolve over the next three years, nothing happens immediately under the healthcare bill. We’ll have some time to see how this all shakes out. Secondly, while we do think that the number of patients represents a potentially increased exposure, there are a lot of other factors that go in to it as well and we’re going to have to try to evaluate all of that as we go. I guess to go back to your original question, I think we do have some ability to adjust price if we think we need to. Michael Nannizzi – Oppenheimer & Co.: Just one last one if I could on expenses, the expense ratio ticked up a little bit year-over-year. Frank, or maybe Ned, can you just walk us through anything that might have changed so we just from a modeling perspective understand?

As we said in our prepared remarks, there are really a couple of factors at play there. From kind of a fixed costs standpoint our operating costs, there’s really no significant dollar change in our operating costs. But, we are applying that when you look at our historical book of business to a lower earned premium base so that’s in part the reason. Another component of it is the business we write through ProAssurance Midcontinent, it has a higher acquisition costs but it also has a lower expected ultimate loss on that business so that’s driving the commission costs up a little bit. PICA comes in to the mix but the expense ratio is not really being driven by PICA. PICA’s expense ratio is very much in line with the expense ratio that we reported for the quarter. It’s really the ProAssurance Midcontinent business and the fact that fixed costs are flat relative to a reduction in earned premium on the historical book of business.

Your next question comes from Amit Kumar – Macquarie Research Equities. Amit Kumar – Macquarie Research Equities: Two quick questions, first of all in your 10Q there’s a discussion on PICA’s exit from E&O lines. Just trying to understand a bit better in terms of what the impact would be on top line and maybe just touch upon on the loss experience in that line?

The top line impact is minimal, like $6 million or something is what they’ve written historically. They will continue to write some of that business in the current year as we shut that down. The loss experience on the business has been I think we’re looking at 130% loss ratio on that business. Amit Kumar – Macquarie Research Equities: Was there like some specific claim activity which sort of resulted in you exiting the line instead of pricing action? What was the thought process behind that exit?

Basically that was a business that PICA had entered before our transaction. As we looked at the new combined organization, the management of PICA came to the conclusion that it just didn’t make sense to go forward with that business on the basis they were writing it and they suggested to us that we exit the business and we concurred in that and that is what we’re in the process of doing now. Amit Kumar – Macquarie Research Equities: Just moving on, I know you talked about pricing action impact of the healthcare bill, can you also touch upon the competition and what you might be seeing out there based on current trends?

Obviously a lot of competition continuing as a result for the most part of generally good results in the industry. We’ve seen this really now for four to five years, pretty significant competition. I guess the most notable thing about it from my perspective in the physician market place is the competitors really haven’t changed. We have not seen any major efforts by the large commercial carriers to get in to the physician market space in comparison to what we had seen in the 1990s or even the 1980s. The players for the most part, the significant players are still the same and have been. The biggest competitor really if you want to talk about competitors, the biggest competitor that we have and I think it’s true across the industry space is hospitals that are acquiring physician practices and bringing physicians in to their insurance programs whether they’re self insured trusts, hospital captives or other mechanisms and taking those physicians out of the available marketplace for all of the carriers. On the hospital side, we do see a fair amount of activity from what I would again call the commercial carriers, the large multiline companies. That’s not unusual, they’ve always been in that market, particularly in the larger hospital segment. They’ve moved down to some extent in to the mid range hospitals but not really in to the small hospital space. In the smaller and say lower end of their mid range segment of hospital business pretty much the same carriers that we’ve seen all along. It’s quite competitive but not as a result really of new entrance. I think it’s really just as a result of top line pressure for a lot of companies and relatively good results. Amit Kumar – Macquarie Research Equities: I guess just related to that, and this is the final question, based on what you are seeing and in terms of rates I think you said on an average are down 2%. Do you get the sense of we hit 0% end of 2010 or do we actually move in to sort of plus 1%, plus 2% end of 2010?

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

I think it’s fair to say that there has been in some states by some companies some rate violence for higher rates.

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

What I think as Jeff Bowlby always reminds us too, it’s not what’s filed it’s what is actually charged.

Your next question comes from [Jack Sherik] – SunTrust Robinson Humphrey. [Jack Sherik] – SunTrust Robinson Humphrey: Most of my questions have been answered, I just had a couple of quick follow ups. On the $6.3 million you wrote in new premium in the quarter, what was it in the December quarter? I know you wrote about $28 for all of last year but do you know the fourth quarter number specifically?

We’ll get our fingers on that and try and get it to you. I know we reported it in the K, well actually the K would be hard to dissect it out of but we’ve got it and we’ll try and get that out for you. If we don’t get it by the end of the call we’ll try and follow up with it. [Jack Sherik] – SunTrust Robinson Humphrey: Finally, I had one last question about pricing, have you seen any change in the gap or differential between new or renewal pricing lately?

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

Your next question comes from Elizabeth Malone – Wunderlich Securities, Inc. Elizabeth Malone – Wunderlich Securities, Inc.: A couple of questions, on the healthcare reform act does that potentially have the opportunity to increase demand for kind of the new product or the new business that you’re writing for home healthcare and that kind of business?

Yes Beth it does. If you look at this from a macro level, we as a nation are going to drive the provision of healthcare down to the least expensive deliverers and that will include home healthcare, ancillary healthcare providers freeing physicians to deal with the most difficult aspects of healthcare. But, our view is that there will be an increase in ancillary home healthcare providers and other ancillary providers of the type written by Midcontinent and you may recall that was one of the driving motivations for that transaction. But, of necessity that has got to happen, there has got to be more of those sorts of healthcare providers in the future and it will happen over time. It won’t be something that you will see next week or next month but if we gather back together in a few years I think we will see a significant increase in that.

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

Beth, one other thing I should have mentioned earlier when Mike asked his question about the number of office visits, one thing we’re very proud of here at ProAssurance are our colleagues and our risk management department. It’s a robust operation very much in tune with what’s happening in the real world of medicine today and it’s led by Dr. Whiteside, our Medical Director and they’re going to be looking very closely at ways to help physicians and other healthcare providers navigate the coming world that we’ll see evolve over the next several years. Elizabeth Malone – Wunderlich Securities, Inc.: Then this is just me trying to understand the dynamic here, you just often have referenced the fact that you’re very disciplined underwriters and very conservative in how you price your business which has resulted in a lower top line growth in some cases, especially in current market conditions which appear to be improving. Yet, when we exclude the reserve development from prior years your combined ratios are well above 100% underwriting. If it were any other business that would be viewed as being less than conservative. I know medical malpractice is certainly a unique line when it comes to the combined ratio. Could you just kind of explain that?

Going back to some of the comments that we’ve made in the past, we tend to establish the initial loss ratio at a level that is higher than our pricing expectation. We’ve talked about the typical eight to 10 points above our pricing expectation for the going in loss ratio on an accident year with the idea that if we’re wrong in terms of the assumptions that we’re making we’ll be able to accommodate that in the reserves that we establish and if we’re right or things turn out better than expected as the years mature we’ll bring it down. That is really the basis for the combined ratio that exceeds 100% because we’re starting off with an 84% loss and LAE ratio and our pricing would probably be indicating more in the 75% range. Elizabeth Malone – Wunderlich Securities, Inc.: So the way to look at it is you have to assume the reserve development in order to really look at the way you price?

We’re not assuming favorable reserve developments. What we’re doing is we’re establishing the price that we think is the correct price and that is what we’re charging. We’re taking if you will a penalty at the outset because of the uncertainty. If you look back at this line of business over the years when things historically went wrong, or when things were different than assumed they were typically different in the wrong direction. In other words severity was higher than anticipated, frequency turned out to be worse than expected. That has happened many more times than not. That’s, if you will, the assumption that we’re building in when we establish the reserve. Elizabeth Malone – Wunderlich Securities, Inc.: The last time that occurred was what 2000? 10 years ago, is that right?

I think probably more like 2003. Frequency really didn’t start to decline until after 2003. Severity was still even in early in the first half of the decade was still at a higher level than where it was right now so I would say probably five or six years that things are significantly different than they were historically.

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

Those are very good comments. It’s so difficult to even begin to predict what will happen down the road because you’re dealing as you say with the interaction of human behavior and medical demand. Obviously, the one thing that will be clear is that there will be more patient availability in the system. How that’s responded to in terms of the supply of physicians and other healthcare workers, how the public perceives it I’ll go in to the mix and most of it’s not going to happen until 2013 and further on down the road. So it’s something that we’re thinking about all the time but at this point in time you’re exactly right the expectations are somewhat unpredictable. Howard Flinker – Flinker & Company: Physicians will respond by finding ways to crowd their schedule so that if you or I want to see a urologist that we have not seen typically in the past regularly we might have to wait nine months for a regular visit or 15 months. While it may seem that they have a lot more patients, only on the calendar do they have a lot more patients about six minutes apiece and the rest of the time is spent reading trade journals. Seeing a patient for six minutes is usually not very risky. I just wanted to point that out.

We have no further questions from the phone audience. I’ll turn the conference back over to our speakers. Frank B. O’Neil : Thank you very much. We’ll adjourn and look forward to speaking with you when we report second quarter results in August. Thank you.

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