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WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required] for the fiscal year ended December
31, 2001, or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period from
to .
-------- ---------
Commission file number: 001-16533
ProAssurance Corporation*
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 63-1261433
- ------------------------ -----------------------------
(State of incorporation (I.R.S. Employer Identification No.)
or organization)
100 Brookwood Place, Birmingham, AL 35209
-----------------------------------------
(Address of principal executive offices) (Zip Code)
(205) 877-4400
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
------------------- ----------------------------
Common Stock, par value $0.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant at March 15, 2002 was $435,428,483.
As of March 15, 2002, the registrant had outstanding approximately 25,841,453
shares of its common stock.
*On June 27, 2001 Medical Assurance, Inc. (Commission file number 001-19439) and
Professionals Group, Inc. (Commission file number 001-21223) became wholly owned
subsidiaries of ProAssurance as more fully described herein.
Exhibit Index at page 79
Page 1 of 80 pages
Documents incorporated by reference in this Form 10-K:
(i) The definitive proxy statement for the 2002 Annual Meeting of
the stockholders of ProAssurance Corporation (Commission File
No. 001-16533) is incorporated herein by reference into Part
III of this report.
(ii) The Registration Statement on Form S-4 with respect to the
Common Stock of ProAssurance Corporation (Commission File No.
333-49378) is incorporated herein by reference into Part IV of
this report.
(iii) The ProAssurance Corporation Form 8-K for event occurring May
10, 2001 (Commission File No. 001-12129) is incorporated
herein by reference into Part IV of this report.
(iv) Registration Statement on Form S-4 with respect to the common
stock of MAIC Holdings, Inc. (Commission File No. 33-91508)
originally filed April 20, 1995 is incorporated by reference
into Part IV of this report.
(v) The MAIC Holdings, Inc. Proxy Statement for the 1996 Annual
Meeting (Commission File No. 0-19439) is incorporated herein
by reference into Part IV of this report.
(vi) The Registration Statement on Form S-4 with respect to the
Common Stock of Professionals Group, Inc. (Commission File No.
333-3138) is incorporated herein by reference into Part IV of
this report.
(vii) The Registration Statement on Form S-4 with respect to the
Common Stock of MEEMIC Holdings, Inc.(Commission File No.
333-66671) is incorporated herein by reference into Part IV of
this report.
(viii) The ProAssurance Corporation Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001 (Commission File No.
001-16533) is incorporated by reference into Part IV of this
report.
(ix) The ProAssurance Corporation Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001 (Commission File No.
001-16533) is incorporated by reference into Part IV of this
report.
2
PART 1
ITEM 1. BUSINESS
General:
ProAssurance Corporation ("ProAssurance Holding Company") is an
insurance holding company incorporated under the laws of the state of Delaware
on October 20, 2000. ProAssurance Holding Company was formed for the purpose of
consolidating Medical Assurance, Inc. ("Medical Assurance") and Professionals
Group, Inc. ("Professionals Group") as its wholly owned subsidiaries.
ProAssurance Holding Company and its subsidiaries are collectively referred to
as "ProAssurance". ProAssurance Holding Company commenced operations upon
completion of the consolidation of Medical Assurance and Professionals Group
(referred to hereafter as the "consolidation") on June 27, 2001 and began
trading on the New York Stock Exchange (NYSE: PRA) the following day.
ProAssurance Holding Company's principal executive offices are located at 100
Brookwood Place, Birmingham, Alabama 35209, and its telephone number is (205)
877-4400.
The consolidation of Medical Assurance into ProAssurance Holding
Company was in the form of a corporate reorganization and was treated in a
manner similar to a pooling of interests. Upon consummation of the
consolidation, each outstanding share of Medical Assurance common stock (NYSE:
MAI and SEC file number 001-19439) was converted into one share of ProAssurance
common stock, and Medical Assurance common stock was delisted from the New York
Stock Exchange.
The consolidation of Professionals Group into ProAssurance Holding
Company was treated as a purchase transaction. Each outstanding share of
Professionals Group common stock (NASDAQ: PICM and SEC file number 001-21223)
was converted into the right to receive, at the holder's election, either (i)
0.897 of a share of ProAssurance Holding Company common stock plus $13.47 in
cash, or (ii) $27.47 in cash, and Professionals Group was delisted from the
NASDAQ Stock Market(R). Additional information about the consolidation is
provided in Note 2 to ProAssurance's consolidated financial statements.
Medical Assurance was incorporated in 1995 under the name of MAIC
Holdings, Inc. (changed to Medical Assurance, Inc. in 1998), to serve as an
insurance holding company. Medical Assurance owns all of the capital stock of
The Medical Assurance Company, Inc., an Alabama stock insurer ("MA-Alabama") and
Medical Assurance of West Virginia, Inc., a West Virginia stock insurer
("MA-West Virginia"). These insurance subsidiaries provide professional
liability insurance to physicians, hospitals, dentists and health care
organizations.
Professionals Group was incorporated in 1996 to serve as an insurance
holding company. Professionals Group owns all of the capital stock of
ProNational Insurance Company, a Michigan stock insurer ("ProNational") and,
indirectly, ProNational Casualty Company, an Illinois stock insurer
("ProNational Casualty"). These insurance subsidiaries provide professional
liability insurance to providers of health care services, and, to a limited
extent, providers of legal services.
Professionals Group also owns 84% of the capital stock of MEEMIC
Holdings, Inc. ("MEEMIC Holdings"), a publicly traded Michigan business
corporation (NASDAQ: MEMH and SEC file number 001-14673), which owns all of the
capital stock of MEEMIC Insurance Company, a Michigan stock insurer ("MEEMIC").
MEEMIC provides personal lines insurance (private passenger automobile,
homeowners, boat and umbrella protection) in Michigan primarily to educational
employees and their immediate families.
On March 18, 2002 MEEMIC Holdings announced that it intends to acquire
all of its outstanding shares of stock not currently owned by ProAssurance for
$29 per share in cash (a total of 1,294,905 fully diluted shares). The proposed
transaction has been unanimously approved by the MEEMIC Holdings' Board of
Directors, including its independent Directors not affiliated with
ProAssurance. Following completion of the offer, MEEMIC Holdings intends to
delist its stock from the NASDAQ Stock Market and terminate the registration of
its common stock under the Securities Exchange Act of 1934, as amended. MEEMIC
Holdings intends to primarily use its own existing cash resources to fund the
purchase of the shares.
No timetable has been established for the transaction, although
ProAssurance expects MEEMIC Holdings to proceed expeditiously. The transaction
is subject to several conditions, including, without limitation, the negotiation
of final terms of the transaction between the MEEMIC Holdings Board and the
independent Directors; the receipt of fairness opinions; the receipt of all
required regulatory and bank approvals; the receipt of confirmation from
insurance rating agencies that the repurchase would not impair the current
A-rating of MEEMIC Insurance Company or any of the other insurance subsidiaries
of ProAssurance; and a favorable vote by a majority of the shareholders other
than ProAssurance and persons who are affiliated with ProAssurance. These
statements are subject to a variety of risks and uncertainties, including
without limitation the fulfillment of the conditions to the transaction
described above. There can be no assurance that the transaction will be
completed. Further, on March 18, 2002 a complaint against the repurchase was
filed on behalf of the minority shareholders, as described in Item 3. The suit
may delay or prevent progress toward the completion of the proposed transaction.
3
ProAssurance operates in the United States of America, principally in
the property and casualty insurance industry and has two reportable industry
segments: professional liability insurance and personal lines insurance. Segment
information is regularly reviewed by management in making decisions about
resources to be allocated to the segments and assess their performance.
Financial information regarding these segments is disclosed in Note 3 to
ProAssurance's consolidated financial statements.
PRODUCTS AND SERVICES
Professional Liability Segment:
ProAssurance offers professional liability insurance and reinsurance
principally for providers of health care services, primarily through MA-Alabama
and ProNational. Medical professional liability insurance provides insurance
against the legal liability of an insured arising out of the death, injury or
disablement of a person as the result of negligence or other misconduct in
rendering professional service. ProAssurance also offers professional liability
insurance for providers of legal services and offers professional office package
and workers compensation insurance products, primarily in connection with its
professional liability products.
ProAssurance has offered accident and health and workers compensation
insurance and reinsurance through various programs to entities and individuals
other than health care providers. ProAssurance has reduced its emphasis in
marketing these programs in order to focus on its core products for its health
care customers. These accident and health and workers compensation programs are
expected to terminate in 2002.
Personal Lines Segment:
ProAssurance offers personal property and casualty insurance through
MEEMIC. Private passenger automobile coverage is the primary line; homeowners,
boat and umbrella coverages are also offered. MEEMIC's personal automobile
policy provides policyholders with protection against claims resulting from
bodily injury and property liability and automobile physical damage. MEEMIC is
currently writing business in Michigan only.
MARKETING
Professional Liability Segment:
ProAssurance utilizes direct marketing and independent agents to write
business in the eastern portion of the United States, with concentrations in
Alabama, Florida, Illinois, Indiana, Michigan, Missouri, Ohio and West Virginia.
ProAssurance is currently licensed in virtually every state, allowing it to
respond outside this region when an opportunity arises.
In Alabama, ProAssurance relies solely on direct marketing, and in
Florida and Missouri, direct marketing accounts for a majority of its business.
ProAssurance primarily relies on the use of agents and brokers to market its
professional liability insurance products outside of Alabama, Florida and
Missouri. At December 31, 2001, approximately 62% of professional liability
direct written premiums were produced through independent insurance agencies. No
single agent or agency accounts for more than 5% of total direct written
premiums.
4
ProAssurance supports its marketing efforts through various services
and communications, including risk management consultation, loss prevention
seminars and other educational programs; legislative oversight and active
support or opposition of proposed legislation relating to liability issues
affecting the health care industry; the preparation and dissemination of
newsletters and other printed material with information of interest to the
health care industry; and endorsements by, and attendance at meetings of, the
state and local medical societies and related organizations. ProAssurance is an
accredited provider of continuing medical education, which enables it to sponsor
numerous risk management education seminars, which has helped ProAssurance gain
exposure among potential insureds. The purpose of these communications and
services is to convey that ProAssurance understands the insurance needs of the
health care industry, and to promote a commonality of interest among
ProAssurance, its insureds, and the medical community generally.
Personal Lines Segment:
MEEMIC markets its insurance products primarily to the educational
community in Michigan exclusively through sales representatives associated with
its wholly owned agency, which is the exclusive distributor of MEEMIC's
insurance products. The representatives are unique in that most of them also
belong to the educational community and sell to their peers. MEEMIC is currently
licensed in Minnesota, Michigan, and Ohio, but is actively marketing only in
Michigan.
MEEMIC conducts regular meetings with its sales representatives,
establishes benchmarks and goals, and conducts technical training and sponsors
continuing education programs. MEEMIC periodically recruits and trains new sales
representatives in order to support it marketing goals. No single agency
representative accounts for more than 5% of total direct written premiums.
UNDERWRITING
Professional Liability Segment:
ProAssurance's underwriting staff makes all decisions regarding the
provision of coverage. During the past three years the professional liability
industry has experienced an increase in loss trends and legal costs, and
ProAssurance has placed greater emphasis on risk selection and rate adequacy.
ProAssurance believes that rate adequacy is more important than market share.
ProAssurance establishes and implements underwriting guidelines for all
forms of professional liability coverage. Through its underwriting process,
ProAssurance assesses the quality and pricing of the risk, primarily emphasizing
loss history, practice specialty and location of practice. Agents have
independent binding authority for medical professional liability coverages.
5
Personal Lines Segment:
MEEMIC's agency representatives have the authority to bind coverage for
a thirty-day period. MEEMIC's underwriting staff accepts applications for
insurance based on established underwriting guidelines.
CLAIMS MANAGEMENT
Professional Liability Segment:
ProAssurance is responsible for investigating the circumstances
surrounding a medical incident from which a covered claim arises against an
insured. Upon investigation, and in consultation with the insured and
appropriate experts, ProAssurance will evaluate the claim and either seek
reasonable settlement or aggressively defend the claim. If the claim is
defended, ProAssurance is responsible for managing the case, including planning
the defense, coordinating and managing defense attorneys and obtaining medical
and/or other professional experts who are retained to assist in the analysis and
defense of the claim.
ProAssurance's aggressive claims management philosophy may contribute
to increased loss adjustment expenses compared to those of other property and
casualty lines or others specializing in professional liability insurance, but
ProAssurance believes it results in greater policyholder loyalty and contributes
to lower overall loss costs. The success of this claims philosophy depends
largely on the ability of ProAssurance to develop relationships with attorneys
who have significant experience in the defense of professional liability claims
and who are able to defend claims in an aggressive, cost-efficient manner.
ProAssurance has claims offices throughout the states in which it
writes business, in order to provide localized and timely attention to claims.
ProAssurance also relies on the advice of several claims committees whose
members principally consist of local physicians, dentists and representatives of
hospitals and health care entities who advise and participate in the
administration of claims management with respect to the professional liability
insurance written in their respective states.
Personal Lines Segment:
MEEMIC's claims department is responsible for the timely investigation,
evaluation and settlement of claims. MEEMIC's claims operation is centralized in
Auburn Hills, Michigan; however, several multi-line resident adjusters are
located in cities throughout Michigan. MEEMIC has also established a network of
automobile glass and body shops that provide damage appraisals and repairs
according to established company guidelines. Independent adjusters are used when
claim volume rises. Less than 1% of all claims result in litigation. Litigation
is internally reviewed to determine whether the file is outsourced to an outside
specialist or handled internally and is monitored by the claims department.
LOSS RESERVES
All reserves of ProAssurance are considered property and casualty
reserves. The following discussion of loss reserves addresses both segments. At
December 31, 2001 a substantial portion of ProAssurance's loss and loss
adjustment expense reserves are associated with professional liability coverage;
prior to the consolidation with Professional Group, ProAssurance did not operate
in the personal lines segment.
6
There are two types of liability insurance policies, occurrence and
claims-made. Under occurrence coverage, insurance is provided against claims of
liability arising from incidents that "occur" during the policy period,
regardless of when claims arising out of such incidents may be reported.
Claims-made coverage provides protection against only those claims which arise
out of incidents occurring and of which notice to the insurer is given while
coverage is effective. Claims-made policies enable the insurer to estimate its
loss reserves with more certainty as reserves for losses are accrued in the year
that a claim is reported instead of in the year of occurrence as is the case
with occurrence policies.
ProAssurance establishes reserves based on its estimates of the future
amounts necessary to pay claims and expenses associated with the investigation
and settlement of claims. These estimates consist of case reserves and bulk
reserves. Case reserves are estimates of future losses and loss adjustment
expenses ("losses and LAE") for reported claims and are established by
ProAssurance's claims department. Bulk reserves (which include a provision for
losses that have occurred but have not been reported to ProAssurance as well as
development on reported claims) are the difference between (i) the sum of case
reserves and paid losses and (ii) an actuarially determined estimate of the
total losses and LAE necessary for the ultimate settlement of all reported
claims and incurred but not reported claims, including amounts already paid.
Losses and LAE reserves are determined on the basis of individual
claims and actuarially determined estimates of future losses based on
ProAssurance's past loss experience, available industry data and projections as
to future claims frequency, severity, inflationary trends and settlement
patterns. Estimating reserves, especially professional liability reserves, is a
complex process that is heavily dependent on judgment and involves many
uncertainties. As a result, reserve estimates may vary significantly from the
eventual outcome. The assumptions used in establishing ProAssurance's reserves
are regularly reviewed and updated by management as new data becomes available.
Any adjustments necessary are reflected in current operations.
ProAssurance believes that the methods used by it to establish reserves
are reasonable and appropriate. These methods include a detailed review of
reserves for losses and loss adjustment expenses of each insurance subsidiary
being performed by its independent actuaries for each fiscal year. The
independent actuaries prepare reports that include recommendations as to the
level of reserves. ProAssurance considers these recommendations as well as other
factors, such as known, anticipated or estimated changes in frequency and
severity of claims and loss retention levels and premium rates, in establishing
the amount of its reserves for losses and loss adjustment expenses. The
statutory filings of each insurance company with the insurance regulators must
be accompanied by an actuary's certification as to their respective reserves in
accordance with the requirements of the National Association of Insurance
Commissioners.
Losses and LAE reserves associated with medical professional liability
coverage tend to be relatively higher than those associated with most other
types of property and casualty insurance for two primary reasons. First, the
yearly increases in the overall costs of professional liability insurance
coverage have historically been among the highest of the property and casualty
insurance lines. These increased costs can be attributed principally to
increases in both the frequency and severity of professional liability claims.
Second, the complexity of professional liability claims increases loss
adjustment expenses. In addition, delays between the collection of premiums and
the payment of losses are longer for professional liability insurance than other
property and casualty lines. This delay, which is commonly referred to as the
"long tail," is the result of the length of time that elapses between the
incident giving rise to an insured claim and its reporting to the insurer, and
the length of time that elapses between the reporting of the claim to the
insurer and the ultimate resolution of the claim. Frequently, injuries are not
discovered until years after an incident, or the claimant may delay pursuing the
recovery of damages. As a result of the delay, a major component of the loss
reserves includes an estimate of the claims that have been incurred but not yet
reported.
7
CLAIMS RECONCILIATION
The following table reconciles beginning and ending reserves for losses
and LAE as shown in ProAssurance's consolidated financial statements for the
years indicated. As of December 31, 2001, ProAssurance's insurance subsidiaries
had consolidated reserves for losses and LAE on a generally accepted accounting
principles (GAAP) basis that exceeded those on a statutory basis by
approximately $24.8 million, which is principally due to the portion of GAAP
reserves that are reflected for statutory accounting purposes as unearned
premiums. These unearned premiums are applicable to extended reporting
endorsements issued without a premium charge upon death, disability, or
retirement of an insured. See also Note 8 to ProAssurance's Consolidated
Financial Statements.
YEARS ENDED DECEMBER 31,
2001 2000 1999
----------- --------- ---------
(In thousands)
Balance, beginning of year $ 659,659 $ 665,786 $ 660,631
Less reinsurance balances recoverable (166,202) (179,507) (179,890)
----------- --------- ---------
Net balance, beginning of year 493,457 486,279 480,741
----------- --------- ---------
Losses and LAE net reserves acquired from
Professionals Group 557,284 -- --
Incurred related to:
Current year 303,387 178,210 158,303
Prior years 13,818 (12,500) (53,646)
Change in death, disability and (18,647) (10,000) --
retirement reserve ----------- --------- ---------
Total incurred 298,558 155,710 104,657
----------- --------- ---------
Paid related to:
Current year (137,121) (14,909) (10,293)
Prior years (143,893) (133,623) (88,826)
----------- --------- ---------
Total paid (281,014) (148,532) (99,119)
----------- --------- ---------
Net balance, end of year 1,068,285 493,457 486,279
Plus reinsurance balances recoverable 374,056 166,202 179,507
----------- --------- ---------
Balance, end of year $ 1,442,341 $ 659,659 $ 665,786
=========== ========= =========
8
LOSS RESERVE DEVELOPMENT TABLE
The following table includes information regarding the development of
the liability for unpaid losses and LAE of ProAssurance for the years ended
December 31, 1991 through 2001. The table includes losses and LAE on both a
direct and an assumed basis and is net of reinsurance recoverables:
- the line entitled "Losses and LAE Reserves, undiscounted and net of
reinsurance recoverables" reflects the amount recorded as the reserve
for liability for unpaid losses and LAE in the consolidated balance
sheet at the end of each year (the "Balance Sheet Reserves");
- the section entitled "Cumulative net paid, as of" reflects the
cumulative amounts paid as of the end of each succeeding year with
respect to the previously recorded Balance Sheet Reserves;
- the section entitled "Re-estimated net liability as of" reflects the
re-estimated amount of the liability previously recorded as Balance
Sheet Reserves that includes the cumulative amounts paid and an
estimate of additional liability based upon claims experience as of the
end of each succeeding year (the "Net Re-estimated Liability");
- the line entitled "Net cumulative redundancy, (deficiency)" reflects
the difference between the previously recorded Balance Sheet Reserve
for each applicable year and the Net Re-estimated Liability relating
thereto as of the end of the most recent fiscal year.
The gross liability for losses and LAE before reinsurance, as reflected
on the balance sheet and re-estimated in each of the years since 1993, and the
reconciliation of the gross liability to amounts net of reinsurance are
reflected below the table.
Information presented in the following table is cumulative and,
accordingly, each amount includes the effects of all changes in amounts for
prior years. The table presents the development of ProAssurance's Balance Sheet
Reserves; it does not present accident year or policy year development data.
Conditions and trends that have affected the development of liabilities in the
past may not necessarily occur in the future. Accordingly, it may not be
appropriate to extrapolate future redundancies or deficiencies based on this
table. The information relating to subsidiaries other than MA-Alabama is limited
to the property and casualty reserves from their respective dates of
acquisition. ProAssurance does not discount its reserves.
9
ANALYSIS OF LOSSES AND LOSS ADJUSTMENT EXPENSE RESERVE DEVELOPMENT
(IN THOUSANDS)
December 31,
--------------------------------------------------------------------------------------------------------------
1991(a) 1992(a) 1993(a) 1994(a) 1995(a) 1996(a) 1997(a) 1998(a) 1999(a) 2000(a) 2001(b)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
Losses and LAE
reserves,
undiscounted
and net
of reinsurance
recoverables $228,119 $252,739 $272,392 $295,541 $352,521 $440,040 $464,122 $480,741 $486,279 $493,457 $1,068,285
Cumulative net
paid as of:
One year later 19,560 19,752 21,296 24,102 27,532 48,390 67,383 89,864 133,832 143,892
Two years later 35,461 36,185 40,988 42,115 58,769 98,864 128,758 192,716 239,872
Three years later 46,417 52,550 53,186 58,793 80,061 136,992 194,139 257,913
Four years later 58,124 58,526 61,153 65,520 107,005 173,352 227,597
Five years later 62,573 63,325 66,419 76,291 120,592 191,974
Six years later 65,090 68,021 73,308 81,722 129,043
Seven years later 68,719 71,466 76,716 82,605
Eight years later 71,305 72,352 86,821
Nine years later 71,802 79,788
Ten years later 71,994
Re-estimated net
liability as of:
End of Year $228,119 $252,739 $272,392 $295,541 $352,521 $440,040 $464,122 $480,741 $486,279 $493,457 $1,068,285
One year later 217,558 241,655 251,445 268,154 352,212 393,363 416,814 427,095 463,779 507,275
Two years later 205,277 221,236 220,385 239,243 280,518 347,258 364,196 398,308 469,934
Three years later 185,349 190,744 194,213 200,311 237,280 294,675 333,530 400,333
Four years later 159,301 167,062 159,096 157,836 190,110 264,714 323,202
Five years later 139,570 136,996 126,379 122,570 173,148 259,195
Six years later 114,407 108,862 106,403 105,779 168,828
Seven years later 97,177 94,908 92,954 99,787
Eight years later 89,271 84,719 88,828
Nine years later 79,734 79,788
Ten years later 76,042
Net cumulative
redundancy
(deficiency) 152,077 172,951 183,564 195,754 183,693 180,845 140,920 80,408 16,345 (13,818)
======= ======= ======= ======= ======= ======= ======= ====== ====== =======
Original gross
liability -
end of year 311,394 355,735 432,937 548,732 614,720 660,631 665,786 659,659
Less: reinsurance
recoverables (39,002) (60,194) (80,416) (108,692) (150,598) (179,890) (179,507) (166,202)
------- ------- ------- -------- -------- -------- -------- --------
Original net
liability
- - end of year 272,392 295,541 352,521 440,040 464,122 480,741 486,279 493,457
======= ======= ======= ======= ======= ======= ======= =======
Gross re-estimated
liability - latest 98,152 130,718 197,555 310,012 424,519 542,396 617,689 651,359
Re-estimated
reinsurance
recoverables (9,324) (30,931) (28,727) (50,817) (101,317) (142,063) (147,755) (144,084)
------ ------- ------- ------- -------- -------- -------- -------
Net re-estimated
liability - latest 88,828 99,787 168,828 259,195 313,202 400,333 469,934 507,275
====== ====== ======= ======= ======= ======= ======= =======
Gross cumulative
redundancy 213,242 225,017 235,382 538,720 190,201 118,235 38,064 8,300
======= ======= ======= ======= ======= ======= ====== =====
(a) Reflects reserves of Medical Assurance excluding Professionals Group
reserves, which were acquired on June 27, 2001. Accordingly, the gross
and net reserve development (reserves recorded at the end of the year,
as originally estimated, less reserves re-estimated as of subsequent
years) relates only to the operations of Medical Assurance and does
not include Professionals Group.
(b) Reflects combined reserves of Medical Assurance and Professionals
Group as December 31, 2001.
10
Medical professional liability loss experience is volatile and
cyclical. Over the past twenty-five years, the industry has experienced several
periods of increasing claim frequency and severity, followed by periods of
relative stability. At other times, due to tort reform, favorable judicial
decisions, favorable economic conditions or other unknown factors, claim
frequency and/or severity have decreased. Malpractice claims generally require
an extended period of time to resolve, and in many jurisdictions, the average
life of a claim is five years or longer. The combination of changing conditions
and the extended time required for claim resolution result in a loss cost
estimation process that requires actuarial skill and good judgment, and such
estimates require periodic revision. Management believes it is prudent to
establish initial loss and loss expense reserves that are reasonable and are
based on historical experience as well as on facts and circumstances known at
the balance sheet date. To the extent that actual results deviate from
expectations, reserve estimates are subsequently adjusted and ultimate paid
losses and loss expenses are more or less than the original estimates.
ProAssurance's loss and loss expense reserves developed favorably in
many prior years for several reasons. First, ProAssurance utilizes a rigorous
and disciplined approach to investigating, managing and defending claims. This
philosophy, especially in Alabama, has generally produced results that are
better than industry averages in terms of loss payments and the proportion of
claims closed without indemnity payment. Second, ProAssurance's volume of
business, while substantial, is not of a sufficient size to fully support the
projection process, thus ProAssurance's data is supplemented with
industry-based data. Ultimately, actual payments on these reserves have often
been less than originally projected, creating redundancies.
Third, reserves established in the late 1980's and early 1990's were
strongly influenced by the dramatically increased frequency and severity
experienced by ProAssurance, and the industry as a whole, during the
mid-1980's. Some of these trends moderated, and in some cases, reversed, by the
late 1980's or early 1990's. However, the ability to recognize the improved
environment was delayed due to the extended time required for claims
resolution. When these trends moderated, the reserves established during those
periods proved to be redundant.
Finally, ProAssurance believed that its overall loss experience would
be worse than that which was anticipated by many of its competitors. As a
result, ProAssurance prudently established accident year reserves, resulting in
accident year loss ratios in excess of 100% of earned premium. In some
instances, these loss ratios proved to be accurate, while in other cases,
experience has been better than expected and redundancies have developed.
The professional liability legal environment has deteriorated once
again during the past several years. Beginning in 2000, ProAssurance recognized
adverse trends in claim severity, causing increased estimates of certain loss
liabilities. As a result, favorable development of prior year loss reserves
slowed during 2000 and some amount of adverse development occurred during 2001.
ProAssurance has addressed these trends through increased rates, stricter
underwriting and modifications to claims-handling procedures.
In each year, ProAssurance has utilized a consistent approach in
establishing reserve levels. The actuarial methodologies utilized include
incurred loss development, paid loss development and frequency-severity
projections. These techniques are applied to the data and the resulting
projections are evaluated by management to establish a best estimate of
reserves.
11
REINSURANCE
General:
ProAssurance uses reinsurance to reduce losses of a catastrophic
nature and to stabilize underwriting results in those years in which such
losses occur. Insurance companies transfer a portion of the risk on their
policies to other insurance companies through the purchase of reinsurance. The
purchase of reinsurance does not relieve an insurer from the ultimate risk on
its policies, but it does provide reimbursement from the reinsurer for certain
losses paid by the insurer. The effective transfer of risk is dependent on the
creditworthiness of the reinsurer.
Reinsurance is placed under reinsurance treaties and agreements with a
number of individual companies to avoid concentrations of credit risk. For
policy periods beginning on or after August 1, 1989, MA-Alabama has not placed
more than 25% of the total amount of risks ceded to reinsurers with any one
reinsurer. ProNational's largest reinsurer is General Reinsurance Corporation,
with 56% of ProNational's total ceded premiums in 2001. MEEMIC's largest
reinsurer is Michigan Catastrophic Claims Association ("MCCA"), with 54% of
MEEMIC's total ceded premiums in 2001. No other reinsurers exceeded 25% of
ProNational's or MEEMIC's respective total ceded premiums in 2001. ProAssurance
relies on reinsurance brokers to assist in the analysis of the credit quality
of its reinsurers.
ProAssurance has not experienced any material difficulties in
collecting amounts due from reinsurers. Management believes ProAssurance's
reinsurance recoverable at December 31, 2001 did not include a material amount
due from any financially troubled reinsurer. See also Note 5 to ProAssurance's
consolidated financial statements.
Professional Liability Segment:
Risks are reinsured under treaties pursuant to which the reinsurer
agrees to assume all or a portion of all risks insured by ProAssurance above
its individual risk retention and up to the maximum individual limit offered
(currently $16 million). Generally, ProAssurance's risk retention level is
dependent upon numerous factors including the price and availability of
reinsurance, volume of business in a particular region, service infrastructure
within a region, level of experience within a region, and ProAssurance's
analysis of the potential underwriting results within each region.
As a consequence, MA-Alabama's retention has varied between the first
$200,000 and the first $2 million since 1989, and ProNational's retention has
varied between the first $150,000 and the first $1 million. Currently,
MA-Alabama retains $1 million in Alabama and $250,000 in which elsewhere
(including MA-MV), and ProNational retains $500,000 in the states in which it
writes business. ProAssurance reinsures the risks above the maximum limits of
its reinsurance treaties on a facultative basis - the reinsurer agrees to insure
a particular risk up to a designated limit.
The events of September 11, 2001 have not significantly affected
ProAssurance's ability to obtain desired levels of reinsurance at acceptable
rates. ProAssurance is aware that reinsurers have been affected by the events
of September 11, 2001 and it is difficult to predict the potential effect of
those events on future reinsurance pricing and availability.
Personal Lines Segment:
MEEMIC currently reinsures its risks in excess of $200,000 per loss.
Individual property risks in excess of $200,000 are covered on an excess of
loss basis up to $1 million per risk. Casualty risks in excess of $200,000 are
covered on an excess of loss basis up to $3 million per occurrence. MEEMIC has
also purchased catastrophe reinsurance for automobile physical damage,
homeowners and boat property damage in four layers up to $15.0 million in
excess of $1 million, with each layer subject to a retention of 5%.
12
MCCA is an unincorporated nonprofit association created by Michigan
law and every insurer engaged in writing personal protection insurance coverage
in Michigan is required to be a member of the MCCA. Michigan law provides that
the MCCA assessments charged to member companies for this protection can be
recognized in the rate-making process and passed on to policyholders. The MCCA
covers all personal injury losses incurred by MEEMIC in excess of $250,000.
ProAssurance treats any amounts due from the MCCA as reinsurance. The MCCA
charges an annual assessment, based on the number of vehicles for which
coverage is written, to cover the losses reported by all member companies.
INVESTMENTS
Both of ProAssurance's segments invest principally in fixed maturity
securities, all of which are classified as available for sale. Investment
management services such as reviewing and recommending investment policies and
implementing and executing investment strategies are provided to ProAssurance
by independent third party investment managers. These services are currently
provided for a fee based on the market value of the investment portfolio
managed by the respective managers. The general investment policies of
ProAssurance are intended to accommodate its need for liquidity and current
income. The primary objective is to achieve a high level of after-tax income,
while minimizing risk. Accordingly, investment assets of ProAssurance
substantially consist of fixed maturity securities, substantially all of which
are investment grade as defined by national rating agencies.
RATING AGENCIES
ProAssurance's insurance subsidiaries are all rated A- (Excellent) by
A.M. Best Company, Inc. ("Best"), its fourth highest rating category out of 15
categories. ProAssurance is rated A- (Strong) by Standard & Poor's Corporation
("S&P"), its seventh highest rating category out of 21 categories. In
developing these ratings, Best and S&P evaluate an insurer's ability to meet
its obligations to policyholders, and are not directed toward the protection of
shareholders. ProAssurance believes its ratings are stable, but no assurance can
be given that either Best or S&P will not reduce the ratings in the future.
COMPETITION
Professional Liability Segment:
ProAssurance competes with various insurance companies and
self-insuring entities in the medical professional liability market.
Competition depends on several factors including pricing, size, name
recognition, service quality, breadth and flexibility of coverage, method of
sale, financial stability and ratings assigned by A. M. Best and/or Standard &
Poor's.
ProAssurance believes the market is changing from one based primarily
on low prices and/or attractive terms, to one in which the insurers' financial
strength, stability, experience and commitment are of prime importance. During
2001 one of the larger suppliers of medical professional liability insurance,
The St. Paul Companies, announced it would exit the market during the course of
2002 and early 2003 and two major companies became insolvent. These
insolvencies have already reduced overall market capacity, and St. Paul's exit
will continue that trend through 2003. ProAssurance believes that it will be
the third largest medical liability insurer in the United States following St.
Paul's exit from the market.
This reduction in capacity comes at a time when many medical liability
insurers are raising prices, eliminating policy credits and discounts and
tightening policy terms. ProAssurance believes the effect of lower capacity and
higher pricing is to focus buying decisions on more traditional insurance
factors such as balance sheet strength, ratings and long-term commitment to a
particular market. ProAssurance also believes that concern over the long-term
viability of some insurers is also forcing independent agents to focus more on
these traditional factors.
13
ProAssurance believes it has a competitive advantage in the current
market due to its size, geographic scope and name recognition as well as its
heritage as a policyholder-founded company with a long-term commitment to the
professional liability insurance industry. These advantages have been achieved
through ProAssurance's balance sheet strength, defense expertise, strong
ratings and its ability to deliver a high level of service to its insureds and
agents. ProAssurance believes that these competitive strengths make it a viable
competitor in those states where it is currently writing insurance.
ProAssurance is evaluating potential opportunities to enter new
markets given the reduction in market capacity and the advent of higher
pricing. However, ProAssurance will only expand into new markets where it
believes the regulatory climate, legal system and competitive landscape allow
it a reasonable chance to achieve an acceptable rate of return; these
opportunities are likely to be limited in the current environment. Marketing
efforts in new states take substantial time and resources in order for
prospective customers to become familiar with ProAssurance and its insurance
products.
The success of ProAssurance may also be influenced by general economic
conditions in the geographic markets served by it. No assurance can be given
that favorable economic conditions will exist in such markets.
Personal Lines Segment:
Personal Lines insurance is highly competitive and ProAssurance has
many competitors. Some of these competitors are larger than ProAssurance and
have much greater financial, technical and operating resources. Competition
depends on several factors including the price and quality of insurance
products, the quality and speed of service and claims response, financial
strength, sales and marketing capability, technical expertise and ratings
assigned by A. M. Best and/or Standard & Poor's.
A number of factors are under ProAssurance's control, but many, such
as market conditions, the ratings assigned by rating agencies, and regulatory
conditions are out of its control. ProAssurance's strong capitalization
provides operational flexibility allowing growth and expansion capabilities for
current and new product lines. Offsetting these strengths is the geographic
concentration in a single state (Michigan) and the increasing exposure to large
weather-related losses due to the growing homeowners book.
REGULATION
General:
Insurance holding companies and insurance companies are affected by a
variety of state and Federal legislative and regulatory measures and judicial
decisions. Regulation of the insurance industry is undergoing continuous change
and the ultimate effect of such changes cannot be predicted. Regulations now
affecting ProAssurance may be modified at any time and new regulations
affecting ProAssurance may be enacted. There is no assurance that such
modifications will not adversely affect the business of ProAssurance.
14
Insurance companies are subject to regulation by government agencies
in the states in which they are licensed. ProAssurance, through its various
insurance subsidiaries, is currently licensed to do business as a property and
casualty insurer in 46 states and the District of Columbia and will apply for
authority to do business in almost all states. In 2001, ProAssurance wrote
premiums in 27 states. The nature and extent of such regulation varies from
jurisdiction to jurisdiction, but typically involves approval of premium rates,
forms and policies used for many lines of insurance, standards of solvency and
minimum amounts of capital and surplus which must be maintained, establishment
of reserves required to be maintained for unearned premium, losses and loss
adjustment expenses or for other purposes, limitations on types and amounts of
investments, restrictions on the size of risks which may be insured by a single
entity, licensing of insurers and agents, deposits of securities for the
benefit of policyholders, and the filing of periodic reports with respect to
financial condition and other matters. In addition, state regulatory examiners
perform periodic examinations of insurance companies, including market conduct
examinations. Such regulation is generally intended for the protection of
policyholders rather than shareholders. In addition, individual state insurance
departments may prevent premium rates for some classes of insureds from
reflecting the level of risk assumed by the insurer for those classes, or may
limit an insurers ability to withdraw from a market. Such developments may
adversely affect the profitability of various lines of insurance.
ProAssurance is an insurance holding company system, and is subject to
the insurance holding company act in the states in which it has a domiciled
insurance subsidiary: Alabama, Illinois, Indiana, Michigan and West Virginia.
State holding company acts generally require prior approval of the direct or
indirect acquisition of control of an insurance company, and prior approval of
extraordinary dividends and certain transactions entered into by an insurance
company with its affiliates.
Change or Acquisition of Control:
A person seeking to acquire control, directly or indirectly, of a
domestic insurer or of any person controlling a domestic insurer must generally
file with the relevant insurance regulatory authority an application for change
of control (commonly known as a "Form A") containing certain information
required by statute and published regulations, and provide a copy of such Form
A to the domestic insurer. Control is generally presumed to exist if any
person, directly or indirectly, owns, controls, holds the power to vote or
holds proxies representing 10% or more of the voting securities of any other
person (5% in Alabama). In addition, many state insurance regulatory laws
contain provisions that require pre-notification to state agencies of a change
in control of a non-domestic admitted insurer in that state. While such
pre-notification statutes do not authorize the state agency to disapprove the
change of control, such statutes do authorize issuance of a cease and desist
order with respect to the non-domestic admitted insurer if certain conditions
exist such as undue market concentration.
Insolvency Funds; Mandatory Pools:
Most states require admitted property and casualty insurers to become
members of insolvency or guaranty funds or associations, which generally
protect policyholders against the insolvency of such insurers. Members of the
fund or association must contribute to the payment of certain claims made
against insolvent insurers. ProAssurance makes accruals for its portion of
assessments when notified of assessments by a fund or association. Assessments
from guaranty funds may, to a limited extent, be recovered through future
premium tax reductions.
15
Insurance companies are also required to participate in various
mandatory insurance facilities or in funding mandatory pools, which are
generally designed to provide insurance coverage for consumers who are unable
to obtain insurance in the voluntary insurance market. Pools are typically
found in insurance lines such as workers' compensation, homeowners and personal
automobile insurance. These pools typically require all companies writing
applicable lines of insurance in the state for which the pool has been
established to fund deficiencies experienced by the pool based upon each
company's relative premium writings in that state, with any excess funding
typically distributed to the participating companies on the same basis.
ProAssurance makes accruals for its portion of assessments when notified of
assessments by a pool.
Restrictions on Dividends:
State insurance codes generally limit dividends payable by a stock
insurer to its earned surplus. Additionally, for Alabama and Michigan, these
same laws generally require a domestic insurer to obtain prior approval of any
dividends that would cause combined dividends paid in the preceding twelve
months to exceed the higher of 10% of surplus or net income of the prior year.
Dividends in excess of these limitations are referred to as extraordinary
dividends.
Because MA-Alabama and ProNational paid extraordinary dividends to
fund the consolidation, any dividend in the twelve month period following those
payments will be considered an extraordinary dividend requiring prior approval
under applicable insurance laws. After the expiration of this period,
ProAssurance's insurance subsidiaries will be permitted to pay dividends of
approximately $35.9 million during the next twelve months without prior
approval. However, the payment of any dividend requires prior notice to the
insurance regulator in the state of domicile and the regulator may prevent the
dividend if, in its judgment, payment of the dividend would have an adverse
effect on the surplus of the insurance subsidiary.
Restrictions on the payment of dividends by insurance subsidiaries or
any additional subsequently imposed restrictions may in the future affect
ProAssurance's ability to fund its operations, pay principal and interest on
its debt, pay its expenses and pay any cash dividends to its stockholders.
Risk-Based Capital:
The National Association of Insurance Commissioners (the "NAIC") has
established risk-based capital ("RBC") requirements to assist regulators in
monitoring the financial strength and stability of property and casualty
insurers. Under the NAIC requirements, regulatory compliance is determined by a
ratio of an insurer's regulatory total adjusted capital, as defined by the
NAIC, to its authorized control level of RBC, as defined by the NAIC. Insurers
whose ratios are 2:1 or below require specific corrective action by either
ProAssurance or insurance regulators.
ProAssurance's insurance subsidiaries have calculated their ratios of
total adjusted capital to authorized RBC control level and each were in excess
of 2:1 at December 31, 2001. In determining each of the insurance subsidiaries'
total adjusted capital, ProAssurance gave effect to the regulatory accounting
policies, which are known as Codification and became effective on January 1,
2001.
Effect of Federal Legislation:
Although the Federal government does not directly regulate the
business of insurance, Federal initiatives often affect the insurance business
in a variety of ways. Current and proposed Federal measures which may
significantly affect the insurance business include Federal government
participation in health care reform, product liability claims, environmental
regulation, pension regulation (ERISA), the taxation of insurers and
reinsurers, the Health Insurance Portability and Accountability Act (HIPAA),
proposals for a "Patient's Bill of Rights", and minimum levels of liability
insurance and safety regulations.
16
EMPLOYEES
At December 31, 2001, ProAssurance and its subsidiaries employed 585
persons. None of the employees of ProAssurance or its subsidiaries is
represented by a labor union. ProAssurance considers its employee relations to
be good.
FORWARD-LOOKING STATEMENTS
The U.S. securities laws, including the Private Securities Litigation
Reform Act of 1995, provide a "safe harbor" for certain forward-looking
statements. This report contains forward-looking statements (identified by words
such as, but not limited to, "believe", "expect", "intend", "anticipate",
"estimate", "project" and other analogous expressions) including statements
concerning: liquidity and capital requirements, losses and loss reserves,
premium rates and retention of current business, competition, the expansion of
product lines, the development or acquisition of business in new geographical
areas, the availability of acceptable reinsurance, actions by regulators and
rating agencies and rating agencies, the consolidation with Medical Assurance
and Professionals Group, the repurchase of MEEMIC Holdings shares, compliance
with the credit agreement, payment of dividends, and other matters.
These forward-looking statements are based upon our estimates and
anticipation of future events that are subject to certain risks and
uncertainties that could cause actual results to vary materially from the
expected results described in the forward-looking statements. Due to such risks
and uncertainties, you are urged not to place undue reliance on forward-looking
statements. All forward-looking statements included in this document are based
upon information available to us on the date hereof, and we undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
Risks which could adversely affect our operations and/or cause actual
results to differ materially from anticipated results include, but are not
limited to, the following:
- underwriting losses on the risks we insure are higher or
lower than expected;
- unexpected changes in loss trends which might require the
reevaluation of the liability for loss and loss adjustment
expenses, thus resulting in an increase or decrease in the
liability and a corresponding adjustment to earnings;
- our ability to retain current business, acquire new business,
expand product lines and a variety of other factors affecting
daily operations such as, but not limited to, economic,
legal, competitive and market conditions which may be beyond
our control and are thus difficult or impossible to predict;
- changes in the interest rate environment and/or the
securities markets that adversely impact the fair value of
our investments or operations;
- inability on our part to achieve continued growth through
expansion into other states or through acquisitions or
business combinations;
- general economic conditions that are worse than anticipated;
- inability on our part to obtain regulatory approval of, or to
implement, premium rate increases;
- changes in the legal system that affect the frequency and
severity of claims;
- significantly increased competition among insurance providers
and related pricing weaknesses in some markets;
- changes in the availability, cost, quality, or collectibility
or reinsurance; and
- changes to our rating by rating agencies;
- regulatory and legislative actions or decisions that adversely
affect us; and
- our ability to utilize loss carryforwards and other defferred
tax assets.
17
For every forward-looking statement, we claim the protection of the
safe harbor for forward-looking statements under the Private Securities
Litigation Reform Act of 1995.
ITEM 2. PROPERTIES
MA-Alabama owns an office building located in Birmingham, Alabama
where ProAssurance and its subsidiaries occupy approximately 55,000 square feet
of office space. The remaining 101,000 square feet of office space is leased to
unaffiliated persons or is available to be leased. Professionals Group owns a
53,000 square foot office building in Okemos, Michigan that houses only its
principal executive offices. Both buildings are currently unencumbered. MEEMIC
leases its principal executive offices in Auburn Hills, Michigan. MEEMIC also
owns, primarily for investment purposes, an 11.5-acre vacant parcel of land in
Auburn Hills, Michigan. ProAssurance also leases office facilities in various
locations and leases computer and operating equipment under cancelable and
non-cancelable agreements.
ITEM 3. LEGAL PROCEEDINGS
On March 18, 2002, a complaint was filed against MEEMIC Holdings, its
directors and its parent company, ProAssurance, in the 6th Circuit Court in
Oakland County, Michigan by a purported shareholder of MEEMIC Holdings seeking
to enjoin the stock repurchase transaction described in Item 1. The suit, which
purports to be a class action on behalf of the minority shareholders, alleges,
among other things that the transaction has been timed to freeze out the
minority shareholders, that the proposed transaction is unfair and that
ProAssurance and the directors have violated their fiduciary duties. The
complaint also seeks damages in an undermined amount. The suit may delay or
prevent progress toward the completion of the proposed transaction.
MEEMIC Holdings has not responded to the complaint but intends to
vigorously defend itself and the other defendants against these claims. MEEMIC
Holdings believes that it has meritorious defenses to the claims made by the
plaintiff, including without limitation, the fact that it has taken several
steps to protect the rights of the minority shareholders in the proposed
transaction and to ensure its fairness. These steps include permitting a
committee of two independent directors who have no other affiliation with MEEMIC
Holdings or ProAssurance Corporation to negotiate and approve the proposed
transaction, and making the completion of the transaction subject to the
approval of the holders of a majority of the shares not owned by ProAssurance or
its affiliates and the receipt of fairness opinions from independent financial
advisors. There can be no assurance, however, as to the outcome of this
litigation and, if MEEMIC Holdings is not able to successfully defend against
the claims made by the plaintiff, the outcome of this litigation could have a
material adverse impact on the proposed transaction and on MEEMIC Holdings
financial position, liquidity and results of operations.
ProAssurance's insurance subsidiaries are involved in various other
legal actions, a substantial number of which arise primarily from claims made
under insurance policies. While the outcome of all legal actions is not
presently determinable, management and its legal counsel are of the opinion that
these actions will not have a material adverse effect on the financial position
or results of operations of ProAssurance and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
18
EXECUTIVE OFFICERS OF PROASSURANCE CORPORATION
The executive officers of ProAssurance serve at the pleasure of the
Board of Directors. Set forth below are the current executive officers of
ProAssurance and a brief description of their principal occupation and
employment during the last five years.
A. DERRILL CROWE, M.D. Dr. Crowe has served as Chairman of the Board and
Chief Executive Officer of ProAssurance since it
began operations in June, 2001. Dr. Crowe has also
served as President, Chairman of the Board, and Chief
Executive Officer of Medical Assurance since its
formation in 1995, and as President, Chief Executive
Officer, and a director of MA-Alabama since its
organization in 1976. Dr. Crowe also serves as
chairman of MEEMIC Holdings. (Age 65)
VICTOR T. ADAMO, ESQ. Mr. Adamo has served as Vice-Chairman of the Board,
President, and Chief Operating Officer of
ProAssurance since it began operations in June, 2001.
Mr. Adamo also serves as President, Chief Executive
Officer, and a director of Professionals Group. Mr.
Adamo has served as a director of ProNational since
1990, and was its Chief Executive Officer from 1987
to 1998, and from 1999 to present. Mr. Adamo has been
the Chairman, and a director of MEEMIC since 1997,
and a director of MEEMIC Holdings since its formation
in October 1998 and the Chief Executive Officer since
2001 . (Age 54)
PAUL R. BUTRUS Mr. Butrus was appointed as Vice-Chairman and a
director of ProAssurance since it began operations in
June, 2001. Mr. Butrus has been Executive Vice
President and a director of Medical Assurance since
its incorporation in 1995. Mr. Butrus has been
employed by MA-Alabama and its subsidiaries since
1977, most recently as Executive Vice President and
Chief Operating Officer since 1993. (Age 61)
HOWARD H. FRIEDMAN Mr. Friedman was appointed as Senior Vice-President,
Chief Financial Officer, and Corporate Secretary of
ProAssurance during 2001. Mr. Friedman also serves
as Senior Vice President- Corporate Development of
Medical Assurance. He has been associated with
Medical Assurance since November 1996. Mr. Friedman
is an Associate of the Casualty Actuarial Society.
(Age 43)
JAMES J. MORELLO Mr. Morello was appointed as Chief Accounting
Officer and Treasurer of ProAssurance during 2001.
Mr. Morello has been Senior Vice President and
Treasurer for Medical Assurance since its formation
in 1995. Mr. Morello has been employed as Treasurer
and Chief Financial Officer of MA-Alabama since
1984. He also serves as a director of Medical
Assurance's insurance subsidiaries, and as treasurer
for ProNational and MA-West Virginia. Mr. Morello is
a certified public accountant. (Age 53)
19
FRANK B. O'NEIL Mr. O'Neil was appointed as Senior Vice-President of
Corporate Communications and Investor Relations
of ProAssurance during 2001. Mr. O'Neil has been
Senior Vice-President of Corporate Communications for
Medical Assurance since 1997 and employed by
MA-Alabama and its subsidiaries since 1987. (Age 48)
WILLIAM P. SABADOS Mr. Sabados has served as Chief Information Officer
for ProAssurance it began operations in June 2001,
and for Professionals Group since July of 1998. He
currently serves as director and Chief Information
Officer for ProNational Insurance Co. Mr. Sabados has
also served as the Chief Information Officer and
director of MEEMIC Holdings since September 2001.
(Age 52)
LYNN M. KALINOWSKI Mr. Kalinowski has been President of MEEMIC Holdings
and MEEMIC since September 2001 and has been a
director of MEEMIC Holdings since October 1998 and a
director and Executive Vice President of MEEMIC
since May 1997. Mr. Kalinowski also served as
President of MEEMIC from January 1993 to May 1997.
Prior to joining MEEMIC in 1993, Mr. Kalinowski was
the President of Southern Michigan Mutual Insurance
Company and previously served as Director of
Financial Analysis for the Michigan Insurance Bureau
(now the State of Michigan Office of Financial and
Insurance Services). (Age 50)
20
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At March 15, 2002, ProAssurance Corporation (PRA) had 3,775
stockholders of record and 25,841,453 shares of common stock outstanding.
ProAssurance's common stock currently trades on The New York Stock Exchange
(NYSE) under the symbol "PRA".
ProAssurance had no outstanding shares prior to the completion of the
consolidation of Medical Assurance, Inc. (NYSE:MAI) and Professionals Group,
Inc. (NASDAQ:PICM) on June 27, 2001. As a result of the consolidation, each
share of Medical Assurance stock was converted to a share of stock in
ProAssurance; the conversion ratio of Professionals Group shares was based on
the market value of Medical Assurance stock during a period immediately
preceding the consolidation. Shares of Medical Assurance and Professionals Group
ceased trading and were delisted from their respective public markets following
the close of business on June 27, 2001.
ProAssurance common stock began trading on the NYSE on June 28, 2001.
Because the NYSE considered the consolidation as the formation of a holding
company for Medical Assurance and a change of its corporate name, the quotations
below reflect prices for Medical Assurance common stock prior to June 28, 2001,
and for ProAssurance common stock from that date forward. All quotations reflect
trading on the NYSE.
QUARTER 2001 2000
------- ---------------------- ----------------------
HIGH LOW HIGH LOW
------ ------ ------ ------
First $18.06 $12.00 $22.88 $16.88
Second 16.49 12.30 20.81 10.19
Third 19.13 14.50 12.50 10.56
Fourth 17.99 13.49 15.88 12.25
Neither Medical Assurance nor ProAssurance has paid any cash dividends
on its common stock and ProAssurance does not currently have a policy to pay
regular dividends. ProAssurance is limited in its ability to pay cash dividends
by certain covenants in its credit agreement with the banks that provided
financing for the consolidation. Generally, ProAssurance may not, without the
consent of the lending bankers, declare any cash dividends or repurchase its
stock if the total funds to be expended would exceed 25% of its cumulative net
income earned after June 27, 2001.
ProAssurance's insurance subsidiaries are subject to restrictions on
the payment of dividends to the parent. Information regarding restrictions on
the ability of the insurance subsidiaries to pay dividends is incorporated by
reference from the last paragraph under the caption "Regulation -- Restrictions
on Dividends" in Item 1 on page 16 of this Form 10-K.
21
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
2001 2000 1999 1998 1997
----------------------------------------------------------------------------------
(in thousands, except per share amounts)
Gross premiums
Written(C) $ 388,983 $ 223,871 $ 201,593 $ 192,479 $ 188,195
Premiums earned(C) 381,510 216,297 207,492 195,515 158,061
Premiums ceded(C) (68,165) (38,701) (43,068) (54,199) (39,094)
Net premiums earned(C) 313,345 177,596 164,424 141,316 118,967
Net investment income(C) 59,782 41,450 39,273 39,402 38,474
Other income(C) 9,428 3,543 4,332 12,885 3,301
Total revenues 382,555 222,589 208,029 193,603 160,742
Net losses and loss
adjustment expenses(C) 298,558 155,710 104,657 93,893 77,674
Net income(A)(C) 12,450 24,300 46,700 47,400 37,458
Net income per share of
common stock (basic and diluted)(B)(C) $ 0.51 $ 1.04 $ 1.95 $ 1.92 $ 1.51
Weighted average number
of shares outstanding(B) 24,263 23,291 23,992 24,729 24,844
BALANCE SHEET DATA:
(as of December 31)
Total investments $1,516,465 $ 796,526 $ 761,918 $ 791,579 $ 720,202
Total assets 2,238,325 1,122,836 1,117,668 1,132,239 1,063,173
Reserve for losses and
loss adjustment expenses 1,442,341 659,659 665,792 660,640 614,729
Long-term debt 82,500 -- -- -- --
Total liabilities 1,802,606 777,669 791,944 808,059 775,985
Total capital 413,231 345,167 325,724 324,180 287,188
Total capital per share of
common stock outstanding(B) $ 16.02 $ 15.22 $ 13.92 $ 13.24 $ 11.57
Common stock outstanding
at end of year(B) 25,789 22,682 23,401 24,477 24,829
(A) Net income for 1998 was reduced by $1.1 million, which represents the
cumulative effect (net of tax) of an accounting change for guaranty fund
assessments due to the adoption of the American Institute of Certified
Public Accountants' Statement of Position 97-3. The cumulative effect
reduced net income per share of common stock (Basic and Diluted) by $0.04
per share.
(B) The Board of Directors declared special stock dividends in December 1999
(5%), 1998 (10%), 1997 (5%), and in August 1997 the Board declared a
two-for-one stock split. All Net income per share and Total capital per
share data on this page has been restated as if the dividends and the stock
split had been declared on January 1, 1997. Additionally, treasury stock is
excluded from the date of acquisition for purposes of determining the
weighted average number of shares outstanding used in the computation of
net income per share of common stock.
(C) Operating results include the operating results of Professionals Group
since the date of consolidation, June 27, 2001. See Note 2 to the
consolidated financial statements.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The payment of losses and LAE and operating expenses in the ordinary
course of business and debt service are currently ProAssurance's principal need
for liquid funds. During 2001, cash provided by operating activities was
sufficient to meet those needs, and ProAssurance believes those sources will be
sufficient to meet its cash needs for at least the next twelve months.
ProAssurance believes that its reserves for losses and LAE are adequate to
discharge outstanding contractual liabilities.
On June 27, 2001, Medical Assurance and Professionals Group became
wholly owned subsidiaries of ProAssurance, a newly formed holding company. The
consolidation of Medical Assurance and Professionals Group under ProAssurance is
described in Note 2 to ProAssurance's consolidated financial statements. The
cash required for the consolidation was $196 million, which ProAssurance derived
from internal funds generated from dividends paid by Medical Assurance and
Professionals Group at the time of closing and the proceeds of a $110.0 million
term loan.
The term loan was obtained pursuant to a credit agreement with the
lending banks, a copy of which was filed as an exhibit to the ProAssurance Form
8-K/A filed with the SEC on May 18, 2001. The credit agreement includes a $40
million revolving line of credit available for ProAssurance's working capital
and operating requirements, including debt service. See Note 11 to
ProAssurance's consolidated financial statements for more information regarding
the terms of the credit agreement, including the financial covenants.
ProAssurance is, and anticipates it will be, in compliance with all loan
covenants during the next 12 months.
The cash required for the consolidation was less than originally
anticipated by management because fewer than expected Professionals Group
shareholders elected to receive an all-cash distribution instead of electing to
receive cash and stock. ProAssurance made a $22.5 million prepayment against the
term loan in September 2001, and also made the two required quarterly repayments
of $2.5 million.
ProAssurance's long-term debt is held and serviced by the parent
holding company, ProAssurance, and it currently has sufficient funds in its
direct non-insurance subsidiaries to meet its debt service requirements for
2002. ProAssurance's future cash requirements will be funded principally by
dividends from its insurance subsidiaries, which may require regulatory
approval.
ProAssurance repurchased approximately 99,000 of its shares during 2001
leaving a total of 1.02 million shares remaining from stock repurchase
authorizations granted to Medical Assurance prior to the consolidation. These
authorizations will be used to repurchase ProAssurance shares.
As discussed in detail in Item 1, under the caption of General, on
March 18, 2002 MEEMIC Holdings announced that it intends to acquire all of its
outstanding shares of stock not currently owned by ProAssurance for $29 per
share in cash (a total of 1,294,905 fully diluted shares), for a total possible
purchase price of $37.6 million. If the transaction is successfully completed,
MEEMIC Holdings intends to primarily use its own existing cash resources to
fund the purchase of the shares. The transaction is subject to numerous
contingencies as discussed in Item 1 and in Item 3.
23
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000:
OVERVIEW
ProAssurance operates in the United States of America in two reportable
insurance industry segments: professional liability and personal lines.
ProAssurance's professional liability insurance segment principally
provides professional liability insurance and reinsurance for providers of
health care services, and, to a limited extent, providers of legal services.
This segment is principally made up of its three operating insurance
subsidiaries: MA-Alabama, ProNational and MA-West Virginia.
The professional liability segment also includes accident and health,
workers compensation and multi-line insurance. ProAssurance has curtailed its
participation in these lines of business and expects substantial reductions in
premiums written over the next twelve months. Earned premiums will taper off
more slowly, reflecting the written premium volumes of earlier periods.
ProAssurance's personal lines insurance segment provides personal
property and casualty insurance to individuals. ProAssurance's personal lines
segment includes the operations of a single insurance company, MEEMIC Insurance
Company.
Professionals Group activity has only been included in ProAssurance's
consolidated results since the date of the consolidation on June 27, 2001. Prior
to the consolidation with Professionals Group, ProAssurance did not have a
personal lines segment.
All revenues and expenses of ProAssurance are allocated to the
operating segments, other than investment income earned directly by the
ProAssurance Holding and interest expense related to long-term debt held by the
parent.
Interest expense for the year ended December 31, 2001 of $2.6 million
relates entirely to the credit agreement obtained in order to finance the
consolidation with Professionals Group. The debt bears interest at a variable
rate based on the London Interbank Offered Rate (LIBOR) or the bank's base rate
as elected from time to time by ProAssurance. At December 31, 2001 the interest
rate was 3.4%. See Note 11 to the ProAssurance's consolidated financial
statements for more information regarding ProAssurance's credit agreement.
ProAssurance recognized a tax benefit of $2.8 million for the year
ended December 31, 2001 as compared to a tax expense of $4.0 million for the
year ended December 31, 2000. Tax-exempt investment income is the primary reason
that ProAssurance's effective rates for both years are significantly lower than
the expected statutory rate of 35%. ProAssurance derives a significant portion
of its investment income from tax-exempt sources. Income before taxes and
minority interest includes tax-exempt investment income of approximately $18.7
million in 2001 and $17.4 million in 2000. After adjustment for tax-exempt
income, ProAssurance experienced a taxable loss for the year ended December 31,
2001 as compared to taxable income for the year ended December 31, 2000.
ProAssurance has available approximately $55 million in Federal tax
loss carryforwards. These carryforwards begin to expire in the year 2018.
Approximately $44 million of the carryforwards relate to the consolidation with
Professionals Group. As such, the amount which can be utilized by ProAssurance
in any one year is limited to approximately $12.5 million.
24
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions in certain circumstances that affect amounts reported in the
accompanying consolidated financial statements and related footnotes. Management
evaluates these estimates and assumptions on an on-going basis based on
historical developments, market conditions, industry trends and other
information management believes to be reasonable under the circumstances. There
can be no assurance that actual results will conform to management's estimates
and assumptions, and that reported results of operations will not be materially
adversely affected by the need to make accounting adjustments to reflect changes
in these estimates and assumptions from time to time. The following policies are
those management believes to be the most sensitive to estimates and judgments.
ProAssurance's significant accounting policies are more fully described in
Note 1 to ProAssurance's consolidated financial statements.
Revenue Recognition. ProAssurance recognizes insurance premium income on a
monthly pro rata basis over the respective terms of the policies in force.
Unearned premiums represent the portion of premiums written applicable to the
unexpired terms of the policies in-force. Reinsurance arrangements are
prospective contracts for which prepaid reinsurance premiums are amortized
ratably over the related policy terms based on the estimated ultimate amounts
to be paid. Changes in estimated outcomes are recognized currently.
Reserve for Losses and Loss Adjustment Expense. ProAssurance's reserve for
losses and loss adjustment expense represents Management's estimate of the
future amounts necessary to pay claims and expenses associated with
investigation and settlement of claims. These estimates consist of case and
reserves and bulk reserves. Case reserves are estimates of future losses and
loss adjustment expenses ("losses and LAE") for reported claims and are
established by ProAssurance's claims department. Bulk reserves, which include a
provision for losses that have occurred but have not been reported to
ProAssurance as well as development on reported claims, are the difference
between (i) the sum of case reserves and paid losses and (ii) an actuarially
determined estimate of the total losses and LAE necessary for the ultimate
settlement of all reported claims and incurred but not reported claims,
including amounts already paid. The estimates take into consideration
ProAssurance's past loss experience, available industry data and projections as
to future claims frequency, severity, inflationary trends and settlement
patterns. Estimating reserves, especially professional liability reserves, is a
complex process which is heavily dependent on judgment and involves many
uncertainties. As a result, reserve estimates may vary significantly from the
eventual outcome. The assumptions used in establishing ProAssurance's reserves
are regularly reviewed and updated by management as new data becomes available.
Any adjustments necessary are reflected in current operations.
Investments. At December 31, 2001 and 2000, all of ProAssurance's securities are
classified as available-for-sale and are those securities that would be
available to be sold in response to its liquidity needs, changes in market
interest rates and investment management strategies, among others.
Available-for-sale securities are recorded at fair value, with unrealized gains
and losses, net of the related income tax effect, excluded from income and
reported as a separate component of shareholders' equity. A decline in the fair
value of an available-for-sale security below cost that ProAssurance's
management judges not to be temporary is charged against income in the
current period.
25
PROFESSIONAL LIABILITY INSURANCE SEGMENT
Operating results for ProAssurance's professional liability insurance
segment for the twelve months ended December 31, 2001 and 2000 are summarized in
the table below (in thousands).
YEAR ENDED
DECEMBER 31
-------------------------------------------------
Increase
2001 2000 (Decrease)
--------- --------- ---------
Gross premiums written $ 315,698 $ 223,871 $ 91,827
========= ========= =========
Revenues:
Premiums earned $ 310,222 $ 216,297 $ 93,925
Premiums ceded (66,307) (38,701) (27,606)
--------- --------- ---------
Net premiums earned 243,915 177,596 66,319
Net investment income 54,339 41,450 12,889
Other income 8,571 3,543 5,028
--------- --------- ---------
Total revenues 306,825 222,589 84,236
Expenses:
Net losses and loss
adjustment expenses 250,257 155,710 94,547
Underwriting, acquisition
and insurance expenses 55,021 38,579 16,442
--------- --------- ---------
Total expenses 305,278 194,289 110,989
--------- --------- ---------
Income
before income taxes $ 1,547 $ 28,300 $ (26,753)
========= ========= =========
PREMIUMS
Premiums written:
Professional liability premiums written for the year ended December 31,
2001 increased by $91.8 million as compared to the same period of 2000. The
increase is primarily attributable to ProAssurance's consolidation with
Professionals Group but also includes the effect of rate increases implemented
during 2001.
Medical Assurance and Professionals Group implemented rate increases
averaging 23% on 2001 renewals. Their retention of insureds averaged
approximately 84% during 2001. ProAssurance plans to continue to implement rate
increases based on loss trends, subject to regulatory approval. To date,
premiums renewed at the higher rates coupled with new business have more than
offset the effect of premiums lost due to decreased retention of insureds.
However, the higher rates may result in a greater loss of insureds in future
periods.
Premiums earned:
As with written premiums, the increase in earned premiums for the for
the year ended December 31, 2001 as compared to 2000 is primarily attributable
to the consolidation and to a lesser degree, higher rates. Rate increases
implemented after January 1, 2001 have not yet been fully reflected in earned
premiums since premiums are earned over the entire policy period (usually
one-year) after the policy is written.
Reinsurance premiums ceded are estimated based on the terms of the
respective reinsurance agreements. The estimated expense is continually reviewed
and any adjustments that become necessary are included in current operations.
Several factors contributed to the increase in reinsurance premiums ceded for
2001 as compared to 2000. The increase in earned premiums as a result of the
consolidation accounted for approximately 30% of the increase. During the fourth
quarter of 2000, ProAssurance decreased retention levels and, thus, in 2001
more earned premiums were subject to reinsurance. Also, in 2001 more premiums
were earned in markets where ProAssurance relies more heavily on reinsurance.
Included in net earned premiums for the years ended December 31, 2001,
and 2000 are accident and health, workers compensation and multi-line premiums
of approximately $38.8 million and $34.7 million, respectively. ProAssurance has
historically written accident and health, workers compensation and multi-line
premiums from time to time as favorable opportunities arose to utilize capital.
ProAssurance began during 2000 to decrease its commitment to these programs.
However, premiums continued to be written and earned during 2001 and 2000 due to
existing contractual relationships. ProAssurance expects substantially decreased
premiums from this source in the coming year. The increase during 2001 reflects
both volume increases and higher rates charged on this business. The volume
increases in 2001 relate to contractual agreements that have now either expired
or been canceled.
26
LOSSES
ProAssurance's consolidation with Professionals Group on June 27, 2001
increased professional liability net loss reserves by approximately $498 million
bringing consolidated professional liability net loss reserves to approximately
$1.0 billion. As discussed in Note 2 of ProAssurance's consolidated financial
statements, the transaction was accounted for as a purchase transaction and
Professionals Group reserves were valued at their estimated fair value on the
date of consolidation.
Professional liability losses and loss adjustment expenses (losses)
and the related current accident year loss ratio are summarized in the following
table (dollars in thousands).
Year ended
December 31
------------------------------
2001 2000
--------- ---------
Incurred loss related to:
Current accident year $ 255,086 $ 178,210
Prior accident years 13,818 (12,500)
Change in death, disability and
retirement reserves (18,647) (10,000)
--------- ---------
Net incurred loss $ 250,257 $ 155,710
========= =========
Current accident
year net loss ratio 105% 100%
========= =========
Losses incurred include three components: a) actuarial evaluation of
incurred loss levels for the current accident year; b) actuarial re-evaluation
of incurred loss levels for prior accident years and c) actuarial re-evaluation
of the reserve for the death, disability and retirement provision. These
components take into consideration prior loss experience, loss trends, changes
in the frequency and severity of claims, premium rate loads and the retention of
insureds. Any adjustments related to previously established amounts are included
in current operations.
Claims are resolved over an extended number of years and a number of
these claims are litigated. Management uses methods it believes to be reasonable
and appropriate in establishing its loss reserves, but during the extended
period in which claims are resolved, the legal environment and other factors may
change. Consequently, ultimate losses are inherently difficult to estimate and
actual results may vary from the estimated amounts. Given the large volume of
loss reserves at any balance sheet date, a small change in the estimate of those
reserves can have a significant effect on current operations. ProAssurance's
most recent actuarial evaluation indicated that due to increasing trends in
severity and frequency of claims, the average ultimate payment of indemnity and
loss adjustment expenses per exposure unit for recent accident years appears
likely to exceed comparable averages for previous years. Consequently, during
2001, ProAssurance recognized $13.8 million of additional net losses related to
prior accident years, representing approximately 1.4% of December 31, 2001
professional liability net reserves of $1.0 billion. In 2001, the $18.6 million
decrease in the reserve for death, disability and retirement is principally the
result of an increase in premium rate loads and a decrease in the number of
insureds primarily related to the ProNational book of business.
The current accident year loss ratio in the table above is calculated
by dividing current accident year incurred losses by net premiums earned. The
principal reason for the increase in that ratio in 2001 is the effect of the
inclusion of Professional Group's premiums and losses.
27
INVESTMENT INCOME
For purposes of this discussion, the investment portfolio is comprised
of fixed maturities and equity securities at amortized cost and short-term
investments. The earnings on the portfolio constitute the related net investment
income.
Net investment income increased by $12.9 million as compared to the
year ended December 31, 2000. The increase is primarily due to the net increase
in the investment portfolio as a result of the consolidation with Professionals
Group.
At December 31, 2001, the investment portfolio of $1.31 billion
consisted of 78% taxable securities and 22% tax-exempt securities. At December
31, 2001, the average yield of the professional liability segment fixed maturity
investments was 5.9%.
The principal investment objective of ProAssurance is to achieve a high
level of after-tax income while minimizing risk. Although fixed maturity
securities are purchased with the initial intent to hold such securities until
their maturity, disposals of securities prior to their respective maturities may
occur if management believes such disposals are consistent with ProAssurance's
overall investment objectives, including maximizing after-tax yields.
ProAssurance is restructuring its investment portfolio to include a higher
proportion of taxable securities. At December 31, 2001 approximately $133
million of the professional liability portfolio is invested in principally
taxable short-term securities; a substantial portion of these short-term
securities will be converted to longer term fixed maturity and equity
investments during 2002.
OTHER INCOME
The most significant component of other income is net realized capital
gains. Net realized capital gains increased from $0.9 million in 2000 to $5.4
million in 2001. This increase primarily resulted from additional sales of
investment securities related to ProAssurance's restructuring its investment
portfolio, as discussed under investment income.
Net realized capital gains included in other income by quarter during
each year are as follows (in thousands):
First Second Third Fourth
----- ------ ----- ------
2001 $ 31 $1,163 $858 $3,389
2000 378 200 266 69
Net capital gains in the fourth quarter of 2001 include a loss of
$409,000 recognized on one investment that was deemed to have an other than
temporary decline in market value. All other declines in market values of
ProAssurance's investment securities at December 31, 2001 were deemed to be
temporary.
28
UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES
Underwriting, acquisition and insurance expenses increased
approximately $16.4 million for the year ended December 31, 2001 as compared to
the same period of 2000 due to the consolidation with Professionals Group. The
underwriting expense ratio (underwriting, acquisition and insurance expenses
divided by net premiums earned) also increased; for 2001 the ratio was 22.6% as
compared to 21.7 % for the same period in 2000. The increase in the ratio is
primarily due to an increase in guaranty fund assessments. The remaining
increase is due to normal fluctuations in acquisition expenses between years.
Guaranty fund assessments for the year ended December 31, 2001 were
approximately $1.3 million, an increase of $0.9 million as compared to the year
ended December 31, 2000. ProAssurance is required by most states to be a member
of its insolvency or guaranty fund association and, as such, must make payments
to the association when so assessed by the state. Such assessments can and do
vary widely from year to year. Guaranty fund assessments (reductions of
assessments) included in acquisition expenses by quarter of each year are as
follows (in thousands):
First Second Third Fourth
----- ------ ----- ------
2001 $ 0 $ 15 $454 $ 878
2000 52 367 83 (505)
29
PERSONAL LINES INSURANCE OPERATIONS SEGMENT
ProAssurance's personal lines segment is comprised of the operations of
a single insurance company, MEEMIC Insurance Company, acquired on June 27, 2001.
Operating results for ProAssurance's personal lines insurance segment for the
six months ended December 31, 2001 are summarized in the table below (in
thousands).
Gross premiums written $ 73,285
========
Revenues:
Premiums earned $ 71,288
Premiums ceded (1,858)
--------
Net premiums earned 69,430
Net investment income 5,003
Other income 857
--------
Total revenues 75,290
Expenses:
Net losses and loss
adjustment expenses 48,301
Underwriting, acquisition
and insurance expenses 15,416
--------
Total expenses 63,717
--------
Income before income taxes and
minority interest $ 11,573
========
PREMIUMS
Gross premiums written were $73.3 million and net premiums earned were
$69.4 million related to the personal lines segment for the period ended
December 31, 2001. Net premiums earned from personal automobile coverage
represent approximately 87% of the total, and premiums from homeowners coverage
represent approximately 12% of the total.
LOSSES
Net losses and LAE incurred related to the personal lines segment were
$48.3 million for the period ended December 31, 2001. The incurred loss and LAE
ratio was 69.6% during the period ended December 31, 2001.
30
INVESTMENT INCOME
For purposes of this discussion, the investment portfolio is comprised
of fixed maturities and equity securities at amortized cost and short-term
investments. The earnings on the portfolio constitute the related net investment
income, which totaled $5.0 million for the period ended December 31, 2001. No
securities within the portfolio were deemed to have permanent declines in market
values during the six months ended December 31, 2001 and no such declines were
recognized during the period.
At December 31, 2001, the investment portfolio consisted of 48% taxable
securities and 52% tax-exempt securities. At December 31, 2001, the average
yield of the personal lines segment fixed maturity investments was 5.0%.
The principal investment objective of ProAssurance is to achieve a high
level of after-tax income while minimizing risk. Although fixed maturity
securities are purchased with the initial intent to hold such securities until
their maturity, disposals of securities prior to their respective maturities may
occur if management believes such disposals are consistent with ProAssurance's
overall investment objectives, including maximizing after-tax yields.
OTHER INCOME
Other income consists primarily of commission income. No significant
amount of net realized capital gains is included in other income.
UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES
Underwriting, acquisition and insurance expenses related to the
personal lines segment were $15.4 million for the period ended December 31,
2001, consisting of normal, recurring expenses such as commissions, salaries and
other expenses. The underwriting expense ratio (underwriting, acquisition and
insurance expenses divided by net premiums earned) was 22.2% for the period
ended December 31, 2001. No guaranty fund assessments were included in
underwriting, acquisition and insurance expenses in 2001.
ADDITIONAL INFORMATION
MEEMIC Insurance Company is a wholly owned subsidiary of MEEMIC
Holdings, Inc. MEEMIC Holdings, Inc. is publicly traded on the NASDAQ National
Market (symbol "MEMH"). For additional information about MEEMIC and comparative
analysis to periods prior to the consolidation, see the MEEMIC Holdings, Inc.
December 31, 2001 annual report on Form 10-K filed with the Securities and
Exchange Commission.
31
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED
DECEMBER 31, 1999
OVERVIEW
During the years ended December 31, 2000 and December 31, 1999,
ProAssurance operated in the United States of America in only one reportable
insurance industry segment, professional liability insurance, which was
principally made up of its two operating insurance subsidiaries: MA-Alabama and
MA-West Virginia. Effective December 29, 2000, ProAssurance consolidated its
organizational structure and merged two of its formerly separate insurance
subsidiaries, Medical Assurance of Missouri, Inc. and Medical Assurance of
Indiana, Inc., into MA-Alabama.
PROFESSIONAL LIABILITY INSURANCE SEGMENT
Operating results for ProAssurance's professional liability insurance
segment for the twelve months ended December 31, 2000 and 1999 are summarized in
the table below (in thousands).
YEAR ENDED
DECEMBER 31
------------------------------------------------
Increase
2000 1999 (Decrease)
--------- --------- --------
Gross premiums written $ 223,871 $ 201,593 $ 22,278
========= ========= ========
Revenues:
Premiums earned $ 216,297 $ 207,492 $ 8,805
Premiums ceded (38,701) (43,068) 4,367
--------- --------- --------
Net premiums earned 177,596 164,424 13,172
Net investment income 41,450 39,273 2,177
Other income 3,543 4,332 (789)
--------- --------- --------
Total revenues 222,589 208,029 14,560
Expenses:
Net losses and loss
adjustment expenses 155,710 104,657 51,053
Underwriting, acquisition
and insurance expenses 38,579 40,212 (1,633)
--------- --------- --------
Total expenses 194,289 144,869 49,420
--------- --------- --------
Income (loss)
before income taxes $ 28,300 $ 63,160 $(34,860)
========= ========= ========
32
PREMIUMS
Gross Premiums Written:
Medical professional liability premiums written during the year ended
December 31, 2000 increased by $1.4 million as compared to the same period of
1999, from $178.6 million to $180.0 million. After giving effect to insureds
that did not renew, a net increase of approximately $5.3 million resulted from
rate increases and writing premiums at approved higher rates. Partially
offsetting this $5.3 million increase was a decrease of $3.9 million resulting
from one-time additional premiums written in January 1999 related to the
purchase of a book of business.
For the year ended December 31, 2000 as compared to the same period of
1999, accident and health, workers compensation and multi-line premiums
increased by $20.7 million; however, as previously discussed, similar growth is
not expected in future periods.
Premiums Earned:
Medical professional liability premiums earned decreased $4.9 million
for the year ended December 31, 2000 as compared to same period in 1999. As with
written premiums, $3.9 million of this decrease was due to one-time additional
premiums earned in 1999 related to the purchase of a book of business. Direct
and assumed accident and health, workers compensation and multi-line premiums
earned increased by $13.7 million during the year ended December 31, 2000 as
compared to the same period of 1999.
Premiums ceded decreased by approximately $4.4 million for the year
ended December 31, 2000 as compared to the year ended December 31, 1999,
primarily related to workers compensation, accident and health, and multi-line
premiums earned. While the total earned amount of these premiums increased
during 2000, the proportion of the premiums that were ceded decreased. As a
result, ceded premiums were lower for the year ended December 31, 2000.
Net earned premiums included accident and health, workers compensation
and multi-line premiums of approximately $34.8 million in 2000 and $14.8 million
in 1999. ProAssurance has previously disclosed its commitment to discontinue
participation in the underwriting programs that generated most of these premiums
and expects substantially decreased premiums in future periods.
33
LOSSES
Consolidated losses and loss adjustment expenses (losses) and the
related current year loss ratio are summarized in the following table (dollars
in thousands).
Year ended
December 31
------------------------------
2000 1999
--------- ---------
Incurred loss related to:
Current accident year $ 178,210 $ 158,303
Prior accident years (12,500) (53,646)
Change in death, disability and
retirement reserves (10,000) --
--------- ---------
Net incurred loss $ 155,710 $ 104,657
========= =========
Current accident
year net loss ratio 100% 96%
========= =========
Losses incurred include three components: a) actuarial evaluation of
incurred loss levels for the current accident year; b) actuarial re-evaluation
of incurred loss levels for prior accident years and c) actuarial re-evaluation
of the reserve for the death, disability and retirement provision. These
components take into consideration prior loss experience, loss trends, changes
in the frequency and severity of claims, premium rate loads and the retention of
insureds. Any adjustments related to previously established amounts are included
in current operations.
The current accident year loss ratio (current accident year net loss
divided by net premiums earned) increased to 100% from 96%. This change is due
to increasing trends in severity and frequency of professional liability claims
recognized by ProAssurance during the year 2000. As a result of these same
trends, the average ultimate payment of indemnity and loss adjustment expenses
per exposure unit for recent accident years appears likely to exceed comparable
averages for previous years. Although such per claim average remains within the
level contemplated by the previously established reserves, the effect was
favorable loss development during the year ended December 31, 2000 of $12.5
million versus $53.6 million during the year ended December 31, 1999. In 2000,
the $10.0 million decrease in the reserve for death, disability and retirement
is principally the result of an increase in premium rate loads and a decrease in
the number of insureds.
INVESTMENT INCOME
For purposes of this discussion, invested assets are comprised of fixed
maturities and equity securities at amortized cost and short-term investments.
The earnings on such invested assets constitute the related net investment
income.
Consolidated net investment income was $41.5 million in 2000 compared
to $39.3 million in 1999. The $2.2 million increase is attributable to both to
increased average yields and to growth in the amount of invested assets.
At December 31, 2000, the investment portfolio consisted of 51% taxable
securities and 49% tax-exempt securities. At December 31, 2000, the average
yield of fixed maturity investments was 5.5%.
34
OTHER INCOME
Other income decreased to $3.5 million for the year ended December 31,
2000 compared to $4.3 million for the year ended December 31, 1999. The decrease
is principally attributable to a $0.8 million decrease in capital gains realized
upon the sale of securities during 2000 as compared to 1999.
UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES
Underwriting, acquisition and insuranc