ProAssurance Corporation Q2 2010 Earnings Call Transcript

Aug. 7.10 | About: ProAssurance Corporation (PRA)

ProAssurance Corporation (NYSE:PRA)

Q2 2010 Earnings Call Transcript

August 5, 2010 9:00 am ET

Executives

Frank B. O’Neil – SVP, Corporate Communications and IR

Stan Starnes – Chairman and CEO

Ned Rand – CFO and SVP

Howard Friedman – Co-President, Professional Liability Group; Chief Underwriting Officer and Chief Actuary, SVP

Vic Adamo – President

Analysts

Amit Kumar – Macquarie Group

Mark Hughes – SunTrust

Ray Iardella – Oppenheimer & Company

Mike Grasher – Piper Jaffray

Jay Willadsen – Lee Munder Capital

Beth Malone – Wunderlich Securities

Operator

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

Frank B. O’Neil

Thank you, Corinne. Good morning, everyone. Thanks for taking time to be part of our call to discuss our solid results of the quarter and six months ended June 30, 2010. We issued a news release Wednesday afternoon reporting our results for those periods, and that release along with our SEC filings, including the 10-Q filed 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 that deal with projections, estimates and expectations as forward-looking statements subject to various risks. These risks could cause our actual results to differ materially from current projections or expectations. We will not undertake and expressly disclaim any obligation to alter or update forward-looking statements whether as a result of new information or future events unless required by law or regulation.

A note about our 10-Q; this is the first filing with the XBRL coding mandated by the SEC. We're anxious to learn if you find that to be helpful.

The content of the call is accurate only on Thursday, August 5, 2010, the date of first broadcast. If you’re reading a transcript of this call, please note 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. As a final reminder, we’re going to reference non-GAAP items in our call today. Please refer to our recent filing on Form 10-Q and our recent news release for a reconciliation of those 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; and Chief Underwriting Officer and Actuary, Howard Friedman.

Let’s start with Stan.

Stan Starnes

Thanks, Frank. This quarter’s quite positive results and our discussion of industry trends will be familiar to most of you. There are no real surprises in our business or our investments. That's a reflection and a result of the disciplined approach we take to our business.

In this part of the market cycle, we are maintaining our long-term focus on the strength of our balance sheet and the depth of our commitment to policyholders through our pledge of “treated fairly”. While there were no surprises in the results, there were a few moving parts and we’d like to review those with you.

Frank B. O’Neil

Thanks, Stan. I want to remind everyone on the call the results we’re discussing today combine PICA with our historical book of business. For the past year, we've been breaking out PICA results, but the second quarter marks the one-year anniversary of PICA becoming part of ProAssurance, so we can now give you comparable period-over-period data.

So with that, I am going to ask Ned to walk us through the financials. Ned?

Ned Rand

Thanks, Frank. Although our focus is on the bottom line, I am going to start with the top line so that we can help you understand the significant line items in the income statement.

Gross written premium was $99 million in the quarter, down 12% year-over-year, and was at $256 million for six months, a decline of 4% year-over-year. To be sure, part of this is the effect of a competitive market, but approximately half of the quarter's decline in gross premium and close to 90% of the year-to-date decline is due to the continued offering of two-year policies in a key market.

Net earned premiums provide a more normalized view of our premium trend which is where I'd really like to focus your attention. As we discussed in late 2008 and early 2009 when we first began to write these two-year policies, they are credited as written premium at inception, so they increase gross written premium initially but they are earned on a pro rata basis over the course of the policy. This makes the net earned number a more meaningful number in terms of actual premium working its way into the earning stream.

To help you quantify that effect, two-year policies accounted for $1.6 million of our gross written premium in the second quarter of 2010 and $5.7 million for the six months ended June 30. That compares to $7.1 million and $12.5 million in gross written for the same periods in 2009. These are not huge numbers in the overall scheme of things, but understanding their effect on the top line and the relationship to net earned premium gives you some perspective.

And looking at the net earned numbers, you can see that we’re at $125 million for the quarter, down 2% year-over-year and $249 million for the six months, which is a 7% increase year-over-year. The most significant piece of the increase in net earned premium for the six-month period is the addition of PICA.

The net investment result is down 5% in the quarter despite having more funds to invest because of the same decline in interest rates affecting every other investor. For the six months, net investment result is up 8% year-over-year because of the improvement last quarter and the results from our investment in unconsolidated subsidiaries. You will note that we recognized approximately $3.5 million in net investment losses during the quarter.

Here's why – while we did sell some securities during the quarter at a gain, we also decided to exit a group of high-yield asset-backed securities. In accordance with applicable accounting guidance, this change in intent results in our recognizing the unrealized losses on these securities through our income statement as an other-than-temporary impairment. The result is a net investment loss for the quarter and for the first half of the year.

Expenses ticked up a bit in the quarter and there are several moving parts here. The majority of the increase relates to PICA and there are two primary components; first, purchase accounting resulted in our elimination of PICA's deferred acquisition costs at the time of the acquisition, so we have been building this balance back up over the last four quarters resulting in a buildup of expenses. In addition, as we moved PICA over to our accounting processes we reduced the amount of operating expenses they were allocating to losses, known in the industry as unallocated loss adjustment expenses, to be more in line with our historical practices.

In addition to these items, we had a few one-time personal related expenses. Our current accident year loss ratio in the quarter was 84.5%, a 3 point increase over the same quarter a year ago. Net favorable loss reserve development was $37.5 million in the quarter, essentially level with last year's second quarter. That favorable development reduced our net loss ratio to 54.6% in the quarter.

Year-to-date, favorable reserve development is $62.5 million compared to $55.5 million in the same period last year. That reduced the net loss ratio for the year-to-date to 59.2%.

This brings us to the bottom line. For the quarter, operating income was $42 million and net income was $40 million. For the first six months of 2010, operating income was $82 million and net income was $78 million. Return on equity was 9.1% for the quarter, up a bit from last quarter's 8.8%. ROE stands at 9% for the year-to-date.

Book value is $56.31, up 7% year-to-date from $52.59 at year-end, and up from $54.07 at March 31 of this year. We were active in the share repurchases during the quarter spending $39.2 million to buy 674,000 shares of stock. We will continue to prudently allocate our capital in share buybacks and debt retirement as opportunities present themselves, and still give preference to using capital for an acquisition. Frank?

Frank O'Neil

Thanks, Ned. I am sure we are going to get back to you for some questions during the Q&A. We’ll ask Howard now to weigh in on the state of the market and on current loss trends.

Howard Friedman

Thanks, Frank. The market continues to be challenging and it's tough to add new premium right now. We did write about $2.7 million of new business in the quarter, which helped offset some of the business loss to competitors who were very aggressive during the second quarter. Perhaps the big story is not that the market is aggressive, but that we retained 89% of our consolidated medical professional liability book, down 1 point from last year second quarter. Given the level of discounting going on in the market that tells us a lot about the confidence our insureds have in ProAssurance and the value they place on the coverage and service we provide.

Renewal pricing on expiring premiums showed no change during the quarter as compared to a 3% reduction in the second quarter of 2009 and a 2% reduction last quarter. While quarter-to-quarter pricing changes may fluctuate based on the mix of business, I certainly see the price stabilization as a positive sign.

Overall, we are encouraged with the level of pricing and loyalty. When the market turns, we think that will place us in an especially good position to retain existing business and find new business from competitors who may be forced to raise prices to make up for years of pricing aggressively.

Ned mentioned our favorable development in the quarter. Let me give you a bit more color. The development is largely from accident years 2004 through 2008 and is the result of the continuation of fairly stable loss trends. Severity is moving higher but at a manageable rate of 4% to 5% in most areas and at levels that are lower than we forecast when our reserves were established.

Our loss ratio was 3 points higher in the quarter than in the year-ago period and 1.6 points higher comparing the six-month period of 2010 to 2009. This difference has more to do with the 2009 loss ratio than to what we’re booking in 2010. The second quarter of 2009 was the first time that PICA had been incorporated in our results. As we discussed with you in the third quarter conference call last year, we then began to bring the PICA reserving process more in line with our historical reserving practices and have increased the loss ratio for PICA’s current accident year to more closely match the cautious approach that we use.

That accounts for approximately half of the increase for both periods and the remainder is the result of normal changes in our mix of business. As part of our regular monitoring of rate adequacy and the underlying frequency and severity, we are being especially mindful of potential changes in jurisdictions such as Illinois and Georgia where we've recently seen tort reform overturned. Frank?

Frank O'Neil

Thanks, Howard. I know you all are just back from New York and London where you've been meeting with reinsurers. Anything you can share on that ahead of our October 1 renewal?

Howard Friedman

Sure, Frank. We continue to have a high level of interest from reinsurers and we don't expect that to change, given the success we achieve in defending our insureds. As far as the broad outlook, the reinsurers have had a profitable run over the past few years in medical professional liability, just as the primary insurers have, but I think they too know the cycle always turns. So they're being very diligent in scrutinizing the pricing and underwriting on underlying risk.

To me, they seem especially mindful that many of the companies that started up in the middle of the decade are just now entering their first real round of serious claims on business they acquired at very competitive prices. We are not the subject of their concern and we're always looking to improve our reinsurance terms, so we will be working on that during the next couple of months. Frank?

Frank O'Neil

Thanks, Howard. Stan, will you sum up the quarter and then we will take questions.

Stan Starnes

Thanks, Frank. In my mind, the summary for the quarter is much like the hot Alabama weather this time of year – constant, predictable and much the same as this time last year. We continue to be disciplined in what we do and how we do it and we continue to build the strength of our balance sheet and prepare for the inevitable turn in the market.

At the same time, we are determined to manage capital wisely and buy back shares when the market gives us the appropriate opportunity. We are exploring other ways to put that capital to use and given our track record I think you should have every confidence that when we do spend the money you entrust us to manage, we’ll do so wisely.

One final comment, Frank, on an accomplishment that underscores both our commitment to extraordinarily high standards and our commitment to deliver the finest possible services to our insureds; the ProAssurance Risk Management department has recently been awarded accreditation with commendation by the Accreditation Council for Continuing Medical Education. Less than 10% of the nation’s 2,200 accredited providers receive this highest designation from the ACCME, and I want to salute our Medical Director, Dr. Hayes Whiteside, Karen Everitt, Liz Brott and the incredibly talented team of people who work with them throughout our organization. Frank?

Frank O'Neil

Thanks, Stan. Corinne, we're going to open the line for questions now.

Question-and-Answer Session

Operator

(Operator instructions) We’ll take our first question from Amit Kumar with Macquarie.

Amit Kumar – Macquarie Group

Good morning, and congrats on the quarter. Just quickly going back to the discussion on capital management, you mentioned share buyback and debt. First of all, I'm just wondering, did you buy back any stock in third quarter to date?

Stan Starnes

We did, Amit. We go into a blackout fairly early after the end of each quarter, but during the time when our window was open, we bought back 36,739 shares for $2.2 million.

Amit Kumar – Macquarie Group

Okay. That's helpful. And on that topic, what are your thoughts on a special dividend going forward? I know you view it as excess capacity versus excess capital. Just trying to understand your thoughts on that a bit better.

Ned Rand

Amit, it is Ned. Certainly, we don’t ever take anything off the table, but I would say that if you were ranking our preferred uses, or ways to deal with that excess capital, that a special dividend would be toward the bottom.

Amit Kumar – Macquarie Group

Got it.

Ned Rand

We never say, never.

Amit Kumar – Macquarie Group

That's very helpful. Just moving on in terms of the state of market, I'm trying to reconcile – on the one side, you're saying that renewal pricing did not change versus minus 2% in Q1 2010, and at the same time, there was this discussion on challenging market conditions where it's tough to add new business. Do you think this Q2 rate is somewhat of an aberration or do you think that this is the bottom?

Howard Friedman

Amit, this is Howard. No, I'm not calling the bottom; I'm not foolish enough to do that. No, I think it's just to some extend a reflection of what we’ve been saying and seeing. We said last year we had a reduced level of price reduction as compared to the year before and it was 4% down in the first quarter or 2% down.

We feel that it’s starting to stabilize but whether it’s going to be small negative or zero or small positive, I think that’s the kind of range we are talking about. Not any kind of dramatic inflection point. I think the difference between the zero that we had – and we are very happy with it, but the zero change we had in the second quarter and the minus two in the first quarter is much a reflection of the mix of business in the particular accounts and states and things like as compared to any kind of broad market change.

Amit Kumar – Macquarie Group

But at the same time, you talk about competition and I'm just wondering if you look at the industry, probably they're not making money on the underwriting side. Is that fair? And if that is the case, why wouldn't their rates be somewhat more realistic than what they might be charging?

Howard Friedman

I think every company has a view of the marketplace and loss costs and what they can do in terms of pricing and also what they are looking for in terms of a target return. Some companies who are not looking for the same level of return could legitimately price it at a different price level than we do. We are very confident in the book of business that we have and what we think the pricing should be on that business, and when we look at new business we bring that expectation to the new business as well.

So I think reasonable people can differ on the same accounts. What we see a lot of times is pricing that's so far away from where we are that it’s hard to understand or consider to be reasonable.

Amit Kumar – Macquarie Group

Okay. That's helpful. And final question, and then I will reach you after this. In terms of the discussion on the two-year policy terms – two-year policies versus the usual – first of all, it's a small portion of your book. I'm just wondering, you mentioned there was one region in 2008 where you offered this and I'm just trying to understand this a bit better. Is this – was this a one-off thing or was this more related to the market conditions at that time, or did the insured ask for a two-year policy? Maybe just explain that a bit better as to what led to you writing the two-year policies as opposed to the year.

Howard Friedman

It’s a program that we implemented. It wasn’t something that was specifically requested by our policyholder base. We did it from a perspective of being quite comfortable with the particular market with our pricing and with our book of business. It helps us to stabilize the marketplace from our perspective. It also provides a little bit of benefit to our insureds and it provides us internally with a little bit of a reduction of workload and marketing effort once an insureds is on that two-year policy. We expect to continue it where we are doing it, but at the same time we are currently not looking to expand it geographically.

Amit Kumar – Macquarie Group

And then the loss trends better than your overall book?

Howard Friedman

With respect to these policies?

Amit Kumar – Macquarie Group

Yes.

Howard Friedman

No, I wouldn't – we have not handpicked the policies or the policyholders that are involved in this. I would think that – I would say that the business that is eligible for this, based on the geography, is business that is quite stable and has produced very good results for us.

Amit Kumar – Macquarie Group

Got it. Thanks so much for the answers.

Howard Friedman

Thank you.

Operator

We will take our next question from Mark Hughes with SunTrust.

Mark Hughes – SunTrust

Thank you very much. Ned, did you say with the PICA, the shift in expenses, that was moving some from LAE into operating expenses?

Ned Rand

Yes, yes. They were allocating a higher portion of expenses historically to unallocated loss adjustment expenses than we do, and so it shifted dollars out of the loss ratio into the expense ratio as it was.

Mark Hughes – SunTrust

Do you have any specific numbers on that, the impact on the quarter?

Ned Rand

Yes. Hold on one second. I will get it for you.

Mark Hughes – SunTrust

Then I'll ask another question. In Illinois and Georgia, when you see those decisions or the tort reform overturned, do you see an immediate impact on pricing, or does it take some time to flow through?

Stan Starnes

Mark, it is Stan. You don’t see an immediate impact on pricing. It takes some time for the market all [ph] to flow through. As you know, we don’t bank on tort reform until the highest court in the state declares it constitutional.

Mark Hughes – SunTrust

Right.

Stan Starnes

So our practices will not be changed by the tort reform revocation. That is our internal practices. What you will see in the fullness of time in those states is an increase in settlement demands and that will likely lead to an increase in settlement, and that likely will have consequences in pricing, but it is not instantaneous.

Mark Hughes – SunTrust

Right. And then Howard, I think you had described the continuation of the modest loss trends. What are your latest thoughts on frequency?

Howard Friedman

Yes, frequency is still – from our perspective and our data, frequency is still flat and really has been now in our view for about 18 months or so. It’s no longer declining, but not increasing either. And this is an overall picture across our book of business.

Mark Hughes – SunTrust

Right.

Ned Rand

Mark, it’s Ned. Going back to your earlier question, it’s about an $800,000 shift. But there is also – part of that $800,000 didn't get potentially capitalized as deferred acquisition costs or what actually is hitting through the expense line. I don't have it handy, but the shift from yearly to expense was about $800,000.

Mark Hughes – SunTrust

Okay. Thank you.

Operator

Moving on to Michael Nannizzi with Oppenheimer.

Ray Iardella – Oppenheimer & Company

Hi, Good morning. It's actually Ray Iardella on behalf of Mike.

Stan Starnes

Good morning.

Ray Iardella – Oppenheimer & Company

Good morning. The first question, I guess for Howard, did you mention reserve of leases, maybe from the PICA business or – I know you guys don't split that out anymore, but do you have that number?

Stan Starnes

I think we're going to say that's part of the overall business we've combined, Ray. We didn't – wouldn't break out, for example, neurosurgical versus pediatrician, so we look at the PICA insureds as podiatric physicians or doctors of chiropractic and we wouldn't break out a specialty there either.

Howard Friedman

Ray, just to add. You are going to see the quarterlies when they come out, and you'll see that it’s minimal with anything.

Ray Iardella – Oppenheimer & Company

Okay, great. And then I guess for Ned, can you talk a little bit about the tax rate in the quarter? I know it was a little bit higher than your run rate and there was some – I think there was some adjustment for business in life insurance.

Ned Rand

Yes.

Ray Iardella – Oppenheimer & Company

But I was wondering if the increase was maybe your allocation of munis or something else?

Ned Rand

We did lighten up on munis during the quarter by about $150 million, but it really wasn’t enough and the timing was such that it did not have a big impact on the effective tax rate. The big impact on the effective tax rate is the redemption of some business on life insurance. We had about $16 million of our business on life insurance portfolio that had a stable value wrap on it and given where the markets where and where that stable value wraps hit, economically, it made sense to take the tax penalty related to that business on life insurance, cash it in and reinvest the proceeds. And that resulted in about $1.3 million tax increase.

Ray Iardella – Oppenheimer & Company

Okay, thanks. And then just –

Ned Rand

There are other moving parts. There are some increases in state income taxes and some other things, but the biggest piece is the business on (inaudible).

Ray Iardella – Oppenheimer & Company

Okay, great. And then I guess can you just talk a little bit more about your current capital position, and I guess how long are you willing to hang on to write that capital and do you have a timeframe in mind? And then maybe a follow-up to that, Vic, can you maybe give us your thoughts on how important an A rating is for you guys, given your current line of business?

Vic Adamo

Ray, I'm confident that our time horizon is longer than yours. We take a pretty long-term view of the business. We do recognize that we have this capital. We are constantly looking for opportunities to put that capital to work and we are buying back stock in what we think is a prudent manner. I don't know that we have a deadline in place. I think it's a current evaluation of the opportunities that we see on the horizon and then making decisions based on that.

Ray Iardella – Oppenheimer & Company

Okay, thanks.

Vic Adamo

To answer your question on rating, also, we are very proud of our A ratings with Best and Fitch and to be named to the Ward's 50 for the fourth consecutive year, and they're important to the organization both to show our financial stability to the insureds in the market. I think as we said in the past, operating with the primary part of our business, the difference between an A-minus and an A is probably minimal.

On the other hand as we look forward to serving other markets, getting more into ancillary type products that are more program oriented, having an A becomes important there because the brokers and the folks who deal with that business do make a distinction between an A and an A-minus. So while I guess, I would say it’s important to us, not essential, but important.

Ray Iardella – Oppenheimer & Company

Okay. Thanks, guys.

Vic Adamo

Thanks, Ray.

Operator

(Operator instructions) We’ll take a follow-up question from Mark Hughes.

Mark Hughes – SunTrust

The shift you've seen, early shift from consolidation of small practices with bigger groups, I know that has been something of a trend, but has healthcare reform stimulated any more activity on that front?

Stan Starnes

Mark, it’s Stan. I think we are going to see an ongoing consequence of healthcare reform, some of which we can’t specify, some of which is predictable. I think part of the predictable consequences include a migration of physicians, larger groups, to some sort of hospital umbrella; reported this spring that 50% of the physicians in the United States now work for a hospital or a hospital-affiliated organization. There are number of reasons for that having to do with demographics, reimbursements, but healthcare reform is also part of the reason for that. We think that will continue and we anticipate having products that will appeal to that and accommodate those changes.

We went through a period of integration back in the ‘90s. It was not permanent. It was probably a little overblown at the time, probably essentially economics-driven. This integration, in our view, that’s taking place now is likely permanent and irreversible and it’s going to create challenges and great opportunities for organizations like ours.

Mark Hughes – SunTrust

Okay. Thank you.

Operator

Moving on to Mike Grasher with Piper Jaffray.

Mike Grasher – Piper Jaffray

Thank you. Good morning. A couple of questions – since one of your public competitors have been taken out, have you seen any sort of change in terms of expectations of sellers from a valuation perspective?

Stan Starnes

No, that's – the answer to that is no, we have not seen any expectations, but who knows whether the expectations will change or will not change. I think every transaction has to be closely analyzed on its own terms. This space is so unique and it's also limited, that I think it's easier to analyze each transaction on its own terms and what's appropriate to that transaction, and I think a disciplined approach to M&A activity results in a very transaction-specific pricing level.

Mike Grasher – Piper Jaffray

Okay, that makes sense. And then you spoke about – I think it was 2.7 million of new business in the quarter, I guess not a material amount relative to the entire portfolio, but just curious as to maybe what states you're picking that up in, and then I guess secondarily, what states maybe you're offering the best opportunities here?

Stan Starnes

Mike, that's really spread across our entire book of business. I don't know that we could single out, or would single out, a particular state. If we found a honey pot, I'm not sure that we'd direct the competition to it. As far as specialties, I think it's spread across that. It's really a result of a very focused and targeted effort on the part of our agents who are out looking for new business. It's important to them, it's important to us, and they're reacting to the efforts of Jeff Bowlby, our Senior VP for Sales and Marketing, his staff. We've given them direction as to the business that we think we can write in places we can be most competitive.

Mike Grasher – Piper Jaffray

And then just to follow up on that, in the previous question, do you see any opportunities to pick up any business with that recent transaction?

Howard Friedman

It’s Howard. I think there may well be opportunities any time that there is disruption in the marketplace of any type, there are opportunities and particularly when you have a company that physicians have been associate with for 30 years, and there's a change, there will inevitably be relationships that are broken, people that may no longer be with the company that insureds or administrators are used to dealing, changes in the way that the acquirer looks at the business, prices it, underwrites it and so forth.

So, yes, we're very attuned to that; we've seen it over the years in different locations and we’ve been able to take advantage of that in some cases. It just depends on how it turns out there.

Mike Grasher – Piper Jaffray

Okay. Thank you for that. And then just a final housekeeping question. Statutory capital, do you have a number?

Ned Rand

Yes, just one second, we've got it. I think it's around 1.3 billion.

Mike Grasher – Piper Jaffray

Okay. Thank you for that. And –

Ned Rand

Something like 1.3. I don't have an exact number in front of me.

Mike Grasher – Piper Jaffray

Okay. So, 1.3 billion roughly. Thank you very much.

Stan Starnes

Thanks, Mike.

Operator

Our next question will come from Jay Willadsen with Lee Munder Capital.

Stan Starnes

Good morning, Jay.

Jay Willadsen – Lee Munder Capital

Good morning, guys. Just a question on the pricing cycle; you guys are willing to walk away from business, so you think some business is not being written at profitable levels? I guess at what point do you think some of these players that are writing the business at levels that you deem unprofitable start to have reserve charges?

Like what kind of timeframe are we looking at here where you guys, with excess capital and a strong balance sheet, can pick up some of those guys or pick up some of their clients when their clients start to realize that this guy might not be able to pay my claims and – a few years down the road or whatever.

Stan Starnes

Jay, it sounds like you're asking us to call the bottom and I can tell you, we're all looking around here at each other kind of saying "who wants to answer that?" I guess it's going to be hard to call the bottom, but everybody seems to end up looking at Howard. So we're going to make him do it.

Howard Friedman

Well, I guess you go back to the lifecycle in the business and typically, it's three to five years. So you are closing out the bulk of your claims from any given policy year particularly, and towards the later end of that time period for any of the more serious claims that are going to go to trough. So it does take a while and I guess we’ve been saying what we bank is pretty aggressive pricing for at least the last couple of years. When you look back over the decade, the market really started to firm up in 2000, by the beginning of 2002 was quit hard and remained that way probably for about two years.

But beginning in about 2005 or so, the combination of the start-up companies and a little bit less pressure on some of a more established companies that had taken their reserve charges and moved on, started to loosen things up a bit. But it’s really been the last two or three years that things have been very competitive. So I would think that we are getting there. It’s very hard to call a particular time period. One of the analysts that I had seen recently said that the only way that the market is going to harden is when calendar-year results start to deteriorate because many companies really are more concerned with calendar year than the accident year. That’s not our view but we’ve seen it in the past. So I think it's a little ways to come.

Jay Willadsen – Lee Munder Capital

What do you think current business ROEs are right now?

Howard Friedman

For whom?

Jay Willadsen – Lee Munder Capital

Well, for you guys. You're putting a policy on the books. What do you think the return is on that business today?

Howard Friedman

Well, our approach, and we're very consistent about this, and not only in what we say, but what we do, is that we are looking for the 13% after tax and that’s how we price, that’s how we underwrite and that’s what we think we are doing at any given point in time. And that’s based on current investment yields and it’s based on assumptions that we make in the pricing model. So I guess from – that's was we try to do every day.

Jay Willadsen – Lee Munder Capital

All right. Thanks.

Stan Starnes

And Jay, I would just mention that that's also based on a – that pricing model assumes a one-to-one premium to surplus ratio, so it's on an allocated capital basis for the business we're writing.

Jay Willadsen – Lee Munder Capital

Okay. Thank you.

Operator

(Operator instructions) We’ll move on to Beth Malone with Wunderlich.

Beth Malone – Wunderlich Securities

Okay. Thank you. Good morning.

Stan Starnes

Good morning.

Beth Malone – Wunderlich Securities

Hi. Just a question on the competitive environment that you guys are talking about. In the case of ACAP being acquired by the Doctors Group, there's a lot of overlap with ACAP in your market, and the Doctors Group is not a public company.

So the assumption is that their pricing behaviors, and their expectations of return on the business they write, is probably not going to be as stringent as a public company like yours. So, my question is do you see this acquisition actually creating more competition in some of those markets that you operate in that you overlap with ACAP?

Stan Starnes

No. This is Stan, Beth. The only way we will know that is come back in two or three years and analyze it at that time. What I can tell you is that we don’t seek to differentiate ourselves or distinguish ourselves on the basis of price. 62 years of living, it taught me that you usually get what you pay for. Our goal is to provide our insureds with protection, both financial protection, reputational protection, first-rate risk management and offer a product that's unexcelled in the marketplace. Deliver that product to them at a fair price. And I think as long as we continue to do that we don’t need to worry about anybody, but ourselves.

Beth Malone – Wunderlich Securities

Okay. And then your expansion strategy, are you look – there's some markets that you all have not been in in the past, especially on the West Coast. Is there thought that – any interest in expanding out that way and is there any way to do that without making an acquisition?

Stan Starnes

Of course, our PICA operation writes in California today in a very significant way. We have a significant book of business in Nevada. We're looking at any opportunity that presents itself in both our historical geographic market and new geographical markets. The typical way we've expanded is through merger and acquisitions, but we're not closed to other means of expanding, and I think you'll see other means of expansion develop in the coming years because of the structural changes in healthcare.

Beth Malone – Wunderlich Securities

So the Healthcare Reform Act could create opportunities?

Stan Starnes

Sure, absolutely. It absolutely – it will create opportunities because it's going to place, in my view, a premium on size, dexterity and ability to navigate difficult waters. My own sense is, and others around this table, much less all the country, may disagree with this, but much of the low-hanging fruit has been picked.

Beth Malone – Wunderlich Securities

Okay. All right. Thank you.

Operator

At this time, we have no further questions.

Frank O'Neil

Thank you, Corinne. Thanks, everybody, for joining us. We will speak to you again soon.

Operator

Ladies and gentlemen that does conclude today’s conference. Thank you for your participation.

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