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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, 2002, 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 19, 2003 was $672,619,509.
As of March 19, 2003, the registrant had outstanding approximately 28,880,185
shares of its common stock.
Exhibit Index at page 104
Page 1 of 106 pages
Documents incorporated by reference in this Form 10-K:
(i) The definitive proxy statement for the 2003 Annual Meeting of
the Stockholders of ProAssurance Corporation (Commission File
No. 001-16533) is incorporated 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 by reference into Part IV of this
report.
(iii) The ProAssurance Corporation Form 8-K/A for event occurring
May 10, 2001 (Commission File No. 001-12129) is incorporated
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) is
incorporated by reference into Part IV of this report.
(v) The MAIC Holdings, Inc. Definitive Proxy Statement for the
1996 Annual Meeting (Commission File No. 0-19439) is
incorporated 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 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 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.
(x) The ProAssurance Corporation Annual Report on Form 10-K for
the year ended December 31, 2001 (Commission File No.
001-16533) is incorporated by reference into Part IV of this
report.
(xi) The ProAssurance Corporation Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002 (Commission File No.
001-16533) is incorporated by reference into Part IV of this
report.
(xii) The Registration Statement on Form S-3 with respect to the
Common Stock of ProAssurance Corporation (Commission File No.
333-100526) is incorporated by reference into Part IV of this
report.
2
PART I
ITEM 1. BUSINESS
GENERAL
We are a holding company for specialty property and casualty insurance
companies focused on the professional liability and the personal lines insurance
markets. Our executive offices are located at 100 Brookwood Place, Birmingham,
Alabama 35209. Our telephone number is (205) 877-4400 and our website is
www.ProAssurance.com. Our stock trades on the New York Stock Exchange under the
symbol "PRA."
We have a regional orientation, applying a focused underwriting
strategy to local markets where we have built a strong reputation among our
customers and producers. Our professional liability business is concentrated in
the southeast and midwest and serves physicians, dentists, other healthcare
providers and healthcare facilities. We believe we are the third largest active
writer of medical professional liability insurance in the United States. Our
personal lines segment is solely in Michigan, focusing on educators and their
families. We believe we are the tenth largest writer of personal automobile
insurance in Michigan.
By concentrating on specialty markets where customers have specialized
needs, we seek to provide value added solutions through our underwriting
expertise and our emphasis on strong customer service. Our regional presence
allows us to maintain active relationships with our customers and be more
responsive to their needs. We seek to maintain a strong financial position to
protect our customers. We believe these factors have allowed us to establish a
leading position in our markets, enabling us to compete on a basis other than
just price.
For the year ended December 31, 2002, we generated $636.2 million of
gross premiums written, $477.4 million of net premiums earned and $555.8 million
of total revenues. As of December 31, 2002, we had cash and invested assets of
$1.8 billion, total assets of $2.6 billion and stockholders' equity of $505.2
million. At December 31, 2002 our cash and invested assets totaled $63.12 per
outstanding share.
CORPORATE ORGANIZATION AND HISTORY
We were incorporated in Delaware to serve as the holding company for
Medical Assurance in connection with its acquisition of Professionals Group in
June 2001. Our principal operating subsidiaries are The Medical Assurance
Company, Inc., ProNational Insurance Company, Medical Assurance of West
Virginia, Inc., Red Mountain Casualty Insurance Company, Inc., and MEEMIC
Insurance Company. Our financial statements and other financial information
include Professionals Group only from the date of acquisition in compliance
with purchase accounting rules.
We are the successor to 11 insurance organizations. Our predecessor
company, Medical Assurance, was founded by physicians as a mutual company in
Alabama and began in 1977. We demutualized and became a public company in 1991.
Medical Assurance expanded through internal growth and the acquisition of
professional liability insurance companies with strong regional identities in
West Virginia, Indiana and Missouri, along with books of business in Ohio and
Missouri.
Professionals Group traces its roots to the Brown-McNeeley Fund, which
was founded by the State of Michigan in 1975 to provide medical professional
liability insurance to physicians. Physicians Insurance Company of Michigan,
which ultimately became ProNational, was founded in 1980 to assume the business
of the Fund. That company also expanded through internal growth and the
acquisition of books of business in Illinois and Indiana and the acquisition of
a professional liability insurer in Florida.
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MEEMIC Insurance was founded as a mutual company by Michigan teachers
and has provided personal lines insurance to the education community in that
state since 1950. Professionals Group became affiliated with MEEMIC in 1997 and
acquired majority ownership of MEEMIC Holdings, Inc. (MEEMIC Holdings) in 1999.
In each acquisition we retained key personnel, allowing us to maintain
a local presence and preserve important institutional knowledge in claims
management and underwriting. Our successful integration of each organization
demonstrates our ability to grow effectively through acquisitions.
SEGMENT OVERVIEW
We conduct our business through two operating segments, each of which
maintains a strong position in its local markets:
- Our professional liability segment, which represents our
commercial lines business, primarily focuses on providing
medical professional liability insurance. We provide
protection against claims arising out of the death, injury or
disablement of a person resulting from a negligent deviation
from the standard of care by physicians and other healthcare
professionals.
- Our personal lines segment offers personal automobile, and to
a lesser extent, homeowners, boat and umbrella insurance
primarily to teachers, administrators, professors and other
members of the educational community and their families in
Michigan. Personal lines insurance provides policyholders with
protection against claims resulting from bodily injury and
property damage liability and physical damage to property.
The following table illustrates our gross premiums written for our two
primary segments for each of the periods indicated:
Year Ended December 31
2002 2001 2000
---------------------- ---------------------- ----------------------
$ % $ % $ %
--------- ----- --------- ----- --------- -----
Professional liability $ 461,715 73% $ 315,698 81% $ 223,871 100%
Personal lines 174,441 27% 73,285 19% -- --
--------- ----- --------- ----- --------- -----
Total $ 636,156 100% $ 388,983 100% $ 223,871 100%
========= ===== ========= ===== ========= =====
4
Professional Liability Segment:
In our professional liability segment, our top five states represented
73% of gross premiums written for the year ended December 31, 2002. The
following table displays the distribution of our gross premiums written in
states that represent 6% or more of our business in the professional liability
segment.
Year Ended December 31
2002 2001 2000
------------------ ------------------ ------------------
$ % $ % $ %
------- --- ------- --- ------- ---
Ohio 91,571 20% 51,520 16% 30,357 14%
Alabama 83,818 18% 74,917 24% 66,123 30%
Florida 71,366 15% 29,519 9% 7,636 3%
Michigan 52,203 11% 22,404 7% -- --
Indiana 41,925 9% 25,130 8% 13,667 6%
All other states 120,832 27% 112,208 36% 106,088 47%
------- --- ------- --- ------- ---
Total 461,715 100% 315,698 100% 223,871 100%
======= === ======= === ======= ===
For the year ended December 31, 2002, our professional liability
segment produced a combined ratio of 125%. The combined ratio is the sum of the
underwriting expense ratio (the ratio of underwriting expenses to earned
premiums) and net loss ratio (the ratio of losses and loss adjustment expenses
to earned premiums).
A combined ratio below 100% generally indicates profitable underwriting
prior to the consideration of investment income. However, if investment income
is considered, companies writing professional liability insurance may be
profitable with combined ratios above 100%. This is due to the "long tail"
nature of this line of business.
The term "long-tail" refers to the long period of time between
collecting the premium for insuring a risk and the ultimate payment of losses,
often exceeding five years. This "long tail" allows us to invest the premiums we
collect until we pay losses, which results in a higher level of invested assets
and investment income as compared to other lines of property and casualty
business.
The combined ratio may not always be indicative of our ultimate results
because of the "long tail" nature of the professional liability business.
We also measure our results by calculating our operating ratio, which
is the combined ratio offset by the benefit of investment income generated from
our cash and invested assets, also expressed as a percentage of net premiums
earned. For the year ended December 31, 2002 our professional liability segment
produced an operating ratio of 104%. A ratio below 100% indicates profitability.
Personal Lines Segment:
Business in our personal lines segment is currently confined to
Michigan. The following table displays gross premiums written in this segment.
Years Ended December 31
2002 2001 2000
------------------- ------------------- ----------------
$ % $ % $ %
-------- --- -------- --- ----- -----
Personal lines 174,441 100% 73,285 100% - --
-------- --- -------- --- ----- -----
Total $174,441 100% $ 73,285 100% $ -- --
======== === ======== === ===== =====
5
Personal lines insurance is generally referred to as "short tail", due
to shorter time periods between insuring the risk and the ultimate payment of
claims. As a result, there is less time to invest premiums collected, which
makes it necessary to achieve an underwriting profit in order to generate a
satisfactory return on equity. For the year ended December 31, 2002, MEEMIC
reported a combined ratio of 88%.
RECENT EVENTS
Purchase of Minority Shares of MEEMIC:
On January 29, 2003 MEEMIC Holdings, the parent company of MEEMIC
Insurance Company, purchased all of the issued and outstanding shares of its
common stock, other than those held by ProAssurance's subsidiary, ProNational
Insurance Company (ProNational). MEEMIC Holdings used its internal funds in the
approximate amount of $34.1 million to acquire all of the 1,062,298 shares of
its common stock not owned by ProNational, to pay for outstanding options for
120,000 shares, and to pay the expenses of the transaction. The funds were
derived from MEEMIC Holdings' cash and investment resources.
As a result of the transaction, MEEMIC Holdings was delisted from the
NASDAQ stock market, and MEEMIC Insurance Company became a wholly-owned
subsidiary of ProNational.
Follow-On Public Offering:
In the fourth quarter of 2002 ProAssurance sold 3,025,000 shares of
common stock at a price of $16.55 per share in an underwritten public offering.
ProAssurance received net proceeds from the offering in the amount of
approximately $46.5 million. ProAssurance is using the proceeds from the
offering to support the growth of the professional liability insurance business
and for general corporate purposes.
MANAGEMENT
Our senior management team is led by A. Derrill Crowe, M.D., our
Chairman and Chief Executive Officer, and Victor T. Adamo, Esq., our President
and Chief Operating Officer. Dr. Crowe has acted as the Chief Executive Officer
of Medical Assurance since its founding in 1977. He has applied a hands-on
management style in developing our underwriting and claims strategies and was
instrumental in establishing us as a leading professional liability specialist.
Mr. Adamo has held various positions with Professionals Group since 1985,
becoming its CEO in 1987 and being named President in 1989. He is largely
responsible for building Professionals Group into a successful regional
professional liability company.
Dr. Crowe practiced medicine as his principal occupation for more than
25 years and Mr. Adamo was in the private practice of law for 10 years,
providing them with knowledge of medical and legal issues that are critical to
our insurance operations. We also have a knowledgeable and experienced
management team with established track records in building and managing
successful insurance operations. In total, our senior management team has
average experience in the insurance industry of 22 years.
CORPORATE STRATEGY
Our objective is to build value for our stockholders through superior
underwriting of classes of business in which we have a comprehensive
understanding and which offer us the opportunity to generate competitive returns
on capital. We target a return on equity of 12% to 14% over the long term. Over
the five years ending December 31, 2002, however, we achieved an average return
on equity of 8.3%, with a high of 15.0% in 1998 and a low of 2.1% in 2002. The
major elements of our strategy are:
6
Adhere to a Strict Underwriting Philosophy:
We emphasize disciplined underwriting and do not manage our business to
achieve a certain level of premium growth or market share. In our professional
liability business, we apply our local knowledge to individual risk selection,
and determine the appropriate price based on our assessment of the specific
characteristics of each risk. In our personal lines business, we target the
educational community, which we believe provides a preferred, stable and
predictable group of risks.
Aggressively Manage Policyholder Claims:
In addition to prudent risk selection, we seek to control our
underwriting results through effective claims management. We investigate each
professional liability claim and have fostered a strong culture of aggressively
defending those claims that we believe have no merit. We manage these claims at
the local level, tailoring claims handling to the legal climate of each state,
which we believe differentiates us from national writers. In our personal lines
business, we seek to quickly and efficiently settle claims through an
established network of auto repair shops and other repair facilities, focusing
on minimizing the cost of handling each claim.
Operate Through Regional Offices in Local Markets:
By concentrating on specialty markets where customers have specialized
needs, we seek to provide value added solutions through our underwriting
expertise and our emphasis on strong customer service. Through our regional
underwriting and claims office structure, we are able to gain a strong
understanding of local market conditions and efficiently adapt our underwriting
and claims strategies to regional conditions. Our regional presence also allows
us to maintain active relationships with our customers and be more responsive to
their needs. We believe these factors have allowed us to establish a leading
position in our markets, enabling us to compete on a basis other than just
price.
Expand Our Position in Regional Markets:
Our goal is to build upon our position as a leading writer of
professional liability and personal lines insurance and expand within a defined
geographic area, while maintaining our commitment to disciplined underwriting
and aggressive claims management. We believe we are the third largest active
medical liability insurance writer in the nation, and we believe we are the
largest medical liability writer in our states of operation. The withdrawal and
reduced capacity of several competitors in the medical professional liability
market has provided new business opportunities. We believe that our strong
reputation in our regional markets, combined with our financial strength, strong
customer service and proven ability to manage claims, should enable us to
profitably expand our position in select states. In our personal lines business,
we estimate that we currently insure approximately 23% of educational
professionals in Michigan. We expect to increase our penetration of the
educational community by appointing additional agents and broadening our
existing relationships with educational institutions and their employees.
Pursue Consolidating Acquisitions:
We have successfully acquired and integrated companies and books of
business in the past and believe our financial size and strength make us an
attractive acquirer. We continually evaluate opportunities to acquire
professional liability companies or books of business that leverage our core
underwriting and claims expertise.
7
Maintain Our Financial Strength and Security:
We have sustained our financial stability during difficult market
conditions through responsible pricing and loss reserving practices. We are
committed to maintaining prudent operating and financial leverage and
conservatively investing our assets. We recognize the importance of our "A-"
(Excellent) A.M. Best rating to our customers and producers and intend to manage
our business to protect our financial security.
PRODUCTS AND SERVICES
Professional Liability Segment:
We offer professional liability insurance for providers of medical and
other healthcare services. Although we generate a majority of our premiums from
individual and small group practices, we also insure several major physician
groups as well as several hospitals. We also offer professional liability
insurance for providers of legal services, and we offer professional office
package and workers' compensation insurance products, primarily in connection
with our professional liability products. We believe our size, financial
strength and flexibility of distribution differentiates us from our competitors.
The following table illustrates the distribution of our gross premiums written
of our professional liability segment by type of coverage for the periods
indicated.
Years ended December 31
2002 2001 2000
--------------------- --------------------- ---------------------
$ % $ % $ %
--------- ---- --------- ---- --------- ----
Professional Liability--
Physicians & Dentists $ 410,560 89% $ 228,139 72% $ 161,113 72%
Professional Liability--Other (1) 37,576 8% 39,080 12% 18,175 8%
--------- ---- --------- ---- --------- ----
Total Medical Professional Liability 448,136 97% 267,219 84% 179,288 80%
Professional Liability--Legal 5,968 1% 2,134 1% -- --
Other Commercial Lines (2) 7,611 2% 46,345 15% 44,583 20%
--------- ---- --------- ---- --------- ----
Total Commercial Liability 13,579 3% 48,479 16% 44,583 20%
--------- ---- --------- ---- --------- ----
Professional Liability total $ 461,715 100% $ 315,698 100% $ 223,871 100%
========= ==== ========= ==== ========= ====
(1) Primarily includes miscellaneous healthcare providers, hospitals and
other health care facilities.
(2) Primarily includes workers' compensation and commercial multi-peril
coverages.
There are two predominant types of professional liability insurance
policies, occurrence and claims-made. Occurrence coverage provides permanent
insurance protection against claims arising from incidents that occur during the
policy period, regardless of when these claims may be reported. Due to the
long-tail nature of our business, it may be many years before we become aware of
claims under occurrence policies. Claims-made coverage provides protection
against only those claims reported during the policy period, resulting from
incidents that occurred while continuously insured on a claims-made basis.
Therefore, most claims are known, although not resolved, at the end of the
policy period. This allows us to estimate our loss reserves for claims-made
coverage with more certainty. The basic claims-made policy does not provide
protection against claims which are reported after the policy period ends; the
insured must either continue to renew the claims-made policy or purchase
extended reporting coverage in order to have permanent protection. In the event
of death, disability or qualified retirement, most insureds receive extended
reporting coverage as part of the policy terms. Approximately 86% of our direct
premiums written for the year ended December 31, 2002 were for claims-made
policies.
8
We previously offered accident and health and workers' compensation
insurance and reinsurance through various programs to entities and individuals
other than healthcare providers. We ceased our marketing of these programs in
order to focus on our core professional liability products. We began terminating
these programs in 2000 and substantially completed our withdrawal from this
business in 2002.
In October 2002, we started offering professional liability insurance
to medical and other healthcare professionals who generally do not qualify for
standard coverage because of their claim history or other factors. We write this
business on an excess and surplus lines basis, which provides us with greater
flexibility in establishing prices and terms of coverage. While we do not expect
this class of insured to become a major portion of our business, we believe this
provides profitable opportunities to expand our business. In 2002 this line of
business produced $3.0 million in premiums. This business is written primarily
through our subsidiary Red Mountain Casualty Insurance Company, Inc.
Personal Lines Segment:
Our personal lines business is written through our subsidiary, MEEMIC,
which primarily serves educational employees and their families in Michigan.
Private passenger automobile insurance is our primary line of business. To
provide for the other insurance needs of our auto customers, we also offer
homeowners, boat and umbrella policies. The following table illustrates our
gross premiums written for each of our personal lines classes of business for
each of the periods indicated.
Years Ended December 31
2002 2001 (1)
--------------------- ---------------------
$ % $ %
--------- ---- --------- ----
Personal Automobile $ 147,168 84% $ 62,422 85%
Homeowners 26,600 16% 10,637 15%
Boat (2) 497 * 163 *
Umbrella (2) 176 * 63 *
--------- ---- --------- ----
Total $ 174,441 100% $ 73,285 100%
========= ==== ========= ====
(1) The year ended December 31, 2001 includes gross premiums written since
June 27, 2001, the date of consolidation of Professionals Group and
Medical Assurance.
(2) Less than 1%
MARKETING
Professional Liability Segment:
We primarily write insurance in the southeast and midwest and are
licensed to do business in every state but Connecticut, Maine, New Hampshire,
New York and Vermont. Based on gross premiums written in 2002, Ohio, Alabama,
Florida, Michigan, and Indiana represented our five largest states.
We utilize direct marketing and independent agents to write business.
In Alabama, we rely solely on direct marketing, and in Florida and Missouri,
direct marketing accounts for a majority of our business. We use independent
agents to market our professional liability insurance products in other markets.
For the year ended December 31, 2002, we estimate that approximately 60% of our
gross professional liability premiums written were produced through independent
insurance agencies. These local agencies usually have one to three producers who
specialize in professional liability insurance and who we believe are able to
convey the factors that differentiate our professional liability insurance
product. No single agent or agency accounts for more than 10% of our total
direct premiums written.
9
We focus our marketing efforts on sole practitioners and small groups
of physicians. We generally do not target large groups or facilities because of
the difficulty in underwriting the individual risks and because their purchasing
decision is usually based primarily on price. Our marketing efforts
differentiate our professional liability insurance products by emphasizing
claims service and the other services and communications we provide to our
customers including:
- the sponsorship of risk management education seminars as an
accredited provider of continuing medical education.
- risk management consultation, loss prevention seminars and
other educational programs;
- legislative oversight and active support of opposition to
proposed legislation relating to liability issues affecting
the healthcare industry;
- the preparation and dissemination of newsletters and other
printed material with information of interest to the
healthcare industry; and
- endorsements by, and attendance at meetings of, the state and
local medical societies and related organizations.
These communications and services have helped us gain exposure among
potential insureds and demonstrate our understanding of the insurance needs of
the healthcare industry and promote a commonality of interest among us and our
insureds.
Personal Lines Segment:
We market our personal lines insurance products, personal automobile,
homeowners, boat and umbrella policies, to members of the educational community
and their families in Michigan. Our policies are sold through our exclusive
agents who are typically current or former teachers, school administrators or
other education professionals. We currently are licensed in Minnesota, Michigan,
and Ohio, but write insurance only in Michigan.
Our sales representatives also have access to other insurance products
underwritten by other carriers in Michigan who pay us commissions for such
sales. In general, these carriers offer products that we do not currently offer,
or insure a class of business that does not meet our underwriting guidelines. By
offering complementary insurance products, our sales representatives provide our
customers with the convenience of being able to purchase a full range of
insurance products through a single agent, thus allowing our representatives to
compete with independent agents. We benefit by having potential customers for
products we may offer in the future.
We conduct quarterly meetings with our sales representatives, establish
benchmarks and goals, and conduct technical training and sponsor continuing
education programs. Our representatives provide us with important information
about market conditions and feedback from our customers regarding their
insurance requirements and our level of service provided. This information is
used to develop new products and new product features. We recruit and train new
sales representatives to work in under-represented areas of the state. Sales
representatives are paid a fixed commission with some opportunity for contingent
bonuses, based upon the representative's production and loss ratios.
For the year ended December 31, 2002, one sales representative
accounted for approximately 5% of our direct premiums written within our
personal lines segment. No other sales representative accounted for more than 4%
of our direct premiums written in 2002. The top 10 sales representatives
accounted for approximately 35% of our direct premiums written in 2002.
10
We provide personal computer software that allows sales representatives
to quote rates for auto, homeowners and boat insurance. In addition, we have a
web site on the internet for the public that is periodically updated with
pertinent information on MEEMIC, its products, and how to locate a sales
representative.
UNDERWRITING
Professional Liability Segment:
Because we focus our primary efforts on sole practitioners and small
groups, our underwriting process is driven by individual risk selection rather
than by account, and our pricing decisions are focused on achieving rate
adequacy. We assess the quality and pricing of the risk, primarily emphasizing
loss history, practice specialty and location of practice in making our
underwriting decision. Our underwriters work closely with our local claims
departments. This includes consulting with staff about claims histories and
patterns of practice in a particular locale as well as monitoring claims
activity.
Our underwriting focuses on knowledge of local market conditions and
legal environment. Through our five local underwriting offices located in
Alabama, Florida, Indiana, Missouri and Michigan, we have established a local
presence within our targeted markets to obtain better information more quickly.
These offices are staffed by underwriting professionals who report to the branch
vice presidents of their respective local office. The underwriting offices each
report to a regional vice president who is ultimately responsible for the
pricing and underwriting decisions in their region.
Our underwriting department establishes guidelines to classify risks by
practice specialty and by location. Our underwriters work with our field
marketing force to identify business that meets these established underwriting
standards and to develop specific strategies to write the desired business. In
performing this assessment, our underwriters may also consult with internal
actuaries regarding loss trends and pricing and utilize loss-rating models to
assess the projected underwriting results of certain insured risks. Our agents
are permitted to bind professional liability coverage within our underwriting
guidelines, but binding authority is exercised only after authorization from our
underwriting staff.
Our underwriters are also assisted by our local medical advisory
committees that we have established in our key states. These committees are
comprised of local physicians, dentists and representatives of hospitals and
healthcare entities and help us maintain close ties to the medical communities
in these states, provide information on the practice of medicine in each state
and provide guidance on critical underwriting and claims issues.
Personal Lines Segment:
We rely to a significant degree on information provided by our sales
representatives in underwriting risks. The majority of our sales representatives
are, or were, teachers. This enhances the sales representatives' ability to act
as field underwriters since they have a general understanding of lifestyles and
insurance needs within the educational community to effectively pre-screen
applicants. We believe that the educational community in Michigan provides
better than average risk-selection, which contributes to our historically
profitable underwriting results.
Our underwriters then evaluate and accept applications for insurance
submitted by the sales representatives based on consistently applied
underwriting guidelines. Our processing system allows for some modification of
these guidelines by individual underwriters, and underwriting supervisors
regularly audit their work and ensure these exceptions fall within acceptable
limits. Our underwriters monitor policyholder deviations from the underwriting
guidelines to assist in decisions related to cancellation and non-renewal.
11
CLAIMS MANAGEMENT
Professional Liability Segment:
We have claims offices throughout the states in which we write business
in order to provide localized and timely attention to claims. Our claims
department investigates 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, we evaluate the merit of
the claim and either seek reasonable settlement or aggressively defend the
claim. If the claim is defended, our claims department manages the case,
including selecting defense attorneys who specialize in medical liability cases,
planning the defense and obtaining medical and/or other professional experts to
assist in the analysis and defense of the claim.
Our claims department establishes the appropriate case reserves for
each claim and monitors the level of each case reserve as circumstances require.
The department also decides when and if to settle all but the most
significant claims, which are currently reviewed by an internal committee made
up of our Chairman and Chief Executive Officer, our Senior Vice President -
Claims, and our outside legal counsel. In each of the states in which we
operate, we meet regularly with our local medical advisory committees to examine
claims, attempt to identify potentially troubling practice patterns and make
recommendations to our staff.
We aggressively defend claims against our insureds that we believe have
no merit or those we believe cannot be reasonably settled. As a result of this
policy, many of our claims are litigated, and we engage experienced trial
attorneys in each venue to handle the litigation in defense of our
policyholders.
Our aggressive claims management approach generally results in
increased loss adjustment expenses compared to those of other property and
casualty lines or other companies specializing in professional liability
insurance. However, we believe that our approach contributes to lower overall
loss costs and results in greater customer loyalty. The success of this claims
philosophy is based on our ability 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.
Personal Lines Segment:
In responding to claims, we emphasize timely investigation, evaluation
and fair settlement while controlling claims expense and maintaining adequate
reserves. We have a year-round, 24-hour claim reporting telephone service for
insureds and third-party claimants. This reporting methodology enables us to
more quickly complete initial claim handling and ultimately reduce indemnity
payments such as rental and storage.
Our claims operation is centralized in Auburn Hills, Michigan, but we
also employ resident adjusters located in cities throughout Michigan. These
employee adjusters settle a majority of our claims, and independent multi-line
adjusters are used on a contract basis when claim volume rises. We have also
established a network of auto repair shops and other repair facilities that
provide damage appraisals and repairs according to established company
guidelines. An inspection audit program ensures that repairs are completed
timely, economically and to the satisfaction of the customer.
Audits of liability claim files are conducted regularly by claims
department managers and reinsurers. We decide which claims we seek to settle and
which claims we defend. We believe that less than 1% of all claims result in
litigation.
12
Our claims department actively monitors all litigation including
selecting defense attorneys who specialize in insurance defense cases, planning
the defense, and obtaining professional experts to assist in the analysis and
defense of the claim. The department establishes the appropriate case reserves
for each claim and monitors the level of each case reserve as circumstances
require.
LOSS RESERVES
We establish our reserves based on our estimates of the future amounts
necessary to pay claims and expenses associated with the investigation and
settlement of claims. Losses and loss adjustment expenses (LAE) reserves are
determined on the basis of individual claims and actuarially determined
estimates of future losses based on our past loss experience, available industry
data and projections as to future claims frequency, severity, inflationary
trends, judicial trends, legislative changes and settlement patterns.
Many of these items are not definitively quantifiable. Additionally,
there may be significant reporting lags between the occurrence of an insurable
event and the time it is reported to us. The assumptions used in establishing
our reserves are regularly reviewed and updated by management as new data
becomes available. The reserves for losses and LAE of each of our insurance
subsidiaries are reviewed by its independent actuaries for each year. The
independent actuaries prepare reports that include recommendations as to the
level of reserves. We consider 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 our reserves for losses and LAE. The statutory filings of each insurance
company with the insurance regulators must be accompanied by an actuary's
certification as to its reserves in accordance with the requirements of the
National Association of Insurance Commissioners (the "NAIC").
We believe the methods we use to establish our reserves for losses and
LAE are reasonable and appropriate. However, estimating reserves, especially
professional liability reserves, is a complex process heavily dependent on
judgment. We believe that past experience, adjusted for the effects of current
developments and anticipated trends, is an appropriate and reasonable basis for
evaluating the adequacy of our loss reserves. There is no precise method for
evaluating the adequacy of reserves and changes are made to the amount of the
reserves as estimates change based on current information. Changes in the amount
of reserves for losses and LAE are reflected in current earnings. Because of the
size of our reserves, a small percentage change in the amount of the reserves
can have a material effect on our results of operations for the period in which
the change is made.
We believe we do not have any exposure to asbestos claims that are
currently prevalent in the insurance industry. Although our policies do not
contain specific terrorism exclusions we do not believe we have a material
exposure to terrorism losses.
13
CLAIMS RECONCILIATION
The following table reconciles beginning and ending reserves for losses
and LAE as shown in our consolidated financial statements for the years
indicated. As of December 31, 2002, our insurance subsidiaries had consolidated
reserves for losses and LAE on a GAAP basis that exceeded those on a statutory
basis by approximately $19.5 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 ("tail" coverage) issued without a premium charge upon death,
disability, or retirement of an insured.
2002 2001 2000
----------- ----------- ---------
Balance, beginning of year $ 1,442,341 $ 659,659 $ 665,786
Less reinsurance recoverables 374,056 166,202 179,507
----------- ----------- ---------
Net balance, beginning of year 1,068,285 493,457 486,279
Net reserves acquired from Professionals Group -- 557,284 --
Incurred related to:
Current year 439,600 303,387 178,210
Prior years 8,429 13,818 (12,500)
Change in death, disability and retirement reserve -- (18,647) (10,000)
----------- ----------- ---------
Total incurred 448,029 298,558 155,710
Paid related to:
Current year (84,376) (137,121) (14,909)
Prior years (271,482) (143,893) (133,623)
----------- ----------- ---------
Total paid (355,858) (281,014) (148,532)
----------- ----------- ---------
Net balance, end of year 1,160,456 1,068,285 493,457
Plus reinsurance recoverables 462,012 374,056 166,202
----------- ----------- ---------
Balance, end of year $ 1,622,468 $ 1,442,341 $ 659,659
=========== =========== =========
14
LOSS RESERVE DEVELOPMENT TABLE
The Loss Reserve Development Table includes information regarding the
development of our reserves for the liability of unpaid losses and LAE for the
years ended December 31, 1992 through 2002. The table includes losses and LAE on
both a direct and an assumed basis and is net of reinsurance recoverables. The
following definitions may be helpful in understanding the Loss Reserve
Development Table:
- 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 shown on
the balance sheet, and the reconciliation of that gross liability to amounts net
of reinsurance are reflected below the table. We do not discount our reserves to
present value.
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 our 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.
In each year reflected in the table, we have utilized actuarial
methodologies, including incurred loss development, paid loss development and
frequency-severity projections, to estimate reserves. These techniques are
applied to the data and the resulting projections are evaluated by management to
establish the estimate of reserves.
15
ANALYSIS OF LOSSES AND LOSS RESERVE DEVELOPMENT
(IN THOUSANDS)
December 31,
1992 (a) 1993 (a) 1994 (a) 1995 (a) 1996 (a) 1997 (a)
-------- -------- -------- -------- -------- --------
Losses and LAE Reserves,
undiscounted and net of
reinsurance recoverables $252,739 $272,392 $295,541 $352,521 $440,040 $464,122
Cumulative net paid
as of:
One Year Later 19,752 21,296 24,102 27,532 48,390 67,383
Two Years Later 36,185 40,988 42,115 58,769 98,864 128,758
Three Years Later 52,550 53,186 58,793 80,061 136,992 194,139
Four Years Later 58,526 61,153 65,520 107,005 173,352 227,597
Five Years Later 63,325 66,419 76,291 120,592 191,974 252,015
Six Years Later 68,021 73,308 81,722 129,043 204,013
Seven Years Later 71,466 76,716 82,605 135,620
Eight Years Later 72,352 76,821 84,649
Nine Years Later 72,305 77,713
Ten Years Later 73,149
Re Estimated Net Liability As Of:
End of Year $252,739 $272,392 $295,541 $352,521 $440,040 $464,122
One Year Later 241,655 251,445 268,154 325,212 393,363 416,814
Two Years Later 221,236 220,385 239,243 280,518 347,258 364,196
Three Years Later 190,744 194,213 200,311 237,280 294,675 333,530
Four Years Later 167,062 159,096 157,836 190,110 264,714 323,202
Five Years Later 136,996 126,379 122,570 173,148 259,195 320,888
Six Years Later 108,862 106,403 105,779 168,828 248,698
Seven Years Later 94,908 92,954 99,787 160,784
Eight Years Later 84,719 88,828 94,192
Nine Years Later 79,788 83,251
Ten Years Later 76,086
Net cumulative redundancy
(deficiency) 176,653 189,141 201,349 191,737 191,342 143,234
======== ======== ======== ======== ======== ========
Original gross liability - end of year 311,394 355,735 432,937 548,732 614,720
Less: reinsurance recoverables (39,002) (60,194) (80,416) (108,692) (150,598)
-------- -------- -------- -------- --------
Original net liability - end of year 272,392 295,541 352,521 440,040 464,122
======== ======== ======== ======== ========
Gross re-estimated liability - latest 92,070 124,809 188,809 299,934 418,566
Re-estimated reinsurance recoverables (8,819) (30,617) (28,025) (51,236) (97,678)
-------- -------- -------- -------- --------
Net re-estimated liability - latest 83,251 94,192 160,784 248,698 320,888
======== ======== ======== ======== ========
Gross cumulative redundancy
(deficiency) 219,324 230,926 244,128 248,798 196,154
======== ======== ======== ======== ========
December 31,
1998 (a) 1999 (a) 2000 (a) 2001 (b) 2002 (b)
-------- --------- --------- ----------- ----------
Losses and LAE Reserves,
undiscounted and net of
reinsurance recoverables $480,741 $ 486,279 $ 493,457 $ 1,068,285 $1,160,456
Cumulative net paid
as of:
One Year Later 89,864 133,832 143,892 271,482
Two Years Later 192,716 239,872 251,855
Three Years Later 257,913 313,993
Four Years Later 308,531
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Re Estimated Net
Liability As Of:
End of Year $480,741 $ 486,279 $ 493,457 $ 1,068,285
One Year Later 427,095 463,779 507,275 1,076,714
Two Years Later 398,308 469,934 529,698
Three Years Later 400,333 488,426
Four Years Later 414,008
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Net cumulative redundancy
(deficiency) 66,733 (2,147) (36,241) (8,429)
======== ========= ========= ===========
Original gross liability - end of year 660,631 665,786 659,659 1,442,341
Less: reinsurance recoverables (179,890) (179,507) (166,202) (374,056)
-------- --------- --------- -----------
Original net liability - end of year 480,741 486,279 493,457 1,068,285
======== ========= ========= ===========
Gross re-estimated liability - latest 547,964 624,886 666,822 1,464,052
Re-estimated reinsurance recoverables (133,956) (136,460) (137,124) (387,338)
-------- --------- --------- -----------
Net re-estimated liability - latest 414,008 488,426 529,698 1,076,714
======== ========= ========= ===========
Gross cumulative redundancy
(deficiency) 112,667 40,900 (7,163) (21,711)
======== ========= ========= ===========
(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.
Losses and LAE reserves associated with medical professional liability
coverage tend to be higher than those associated with most other types of
property and casualty insurance for two primary reasons. First, overall costs of
providing professional liability insurance coverage historically have been among
the highest of the property and casualty insurance lines. These 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 LAE. In addition, delays between the collection of premiums and
the payment of losses are generally longer for professional liability insurance
than other property and casualty lines. 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 component of the loss reserves for
occurrence coverage and "tail" coverage includes an estimate of the claims that
have been incurred but not yet reported (IBNR).
16
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 or severity have decreased. Malpractice claims generally require an
extended period of time to resolve, and the average life of a claim can be five
years or more. 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 the application of judgment, and such estimates
require periodic revision. We believe it is prudent to establish initial losses
and LAE 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 LAE are more or less than the
original estimates.
Prior to 2001, our reserves were solely for the Professional Liability
Segment. Our losses and LAE reserves developed favorably in many prior years for
several reasons:
- Substantially all of our business was derived from medical
professional liability insurance written in Alabama until we
began to geographically expand our business in the mid to late
1990s. We utilized a rigorous and disciplined approach to
investigating, managing and defending claims. This philosophy
generally produced results in Alabama that were better than
industry averages in terms of loss payments and the proportion
of claims closed without indemnity payment.
- Our volume of business in the late 1980's and early 1990's,
while substantial, was not of a sufficient size to fully
support the actuarial projection process; thus, our data was
supplemented with industry-based data. Ultimately, actual
results proved better than the industry data, creating
redundancies.
- Our reserves established in the late 1980's and early 1990's
were strongly influenced by the dramatically increased
frequency and severity that we, and the industry as a whole,
experienced during the mid-1980s. Some of these trends
moderated, and in some cases, reversed, by the late 1980s or
early 1990s. However, the ability to recognize the improved
environment was delayed due to the extended time required for
claims resolution. When these negative trends moderated, the
reserves we established during those periods proved to be
redundant.
- We prudently established accident year loss reserves,
resulting in some initial accident year net loss ratios that
were higher than industry averages. In some instances, these
net loss and LAE ratios proved to be accurate, while in other
cases, experience has been better than we expected and
redundancies developed.
The professional liability legal environment deteriorated once again
during the past several years. Beginning in 2000, we recognized adverse trends
in claim severity, causing increased estimates of certain loss liabilities. As a
result, favorable development of prior year loss reserves slowed in 2000 and
reversed in 2001. We have addressed these trends through increased rates,
stricter underwriting and modifications to claims handling procedures.
Due to the size of our reserves, even a small percentage adjustment can
have a material effect on our results of operations for the period in which the
change is made.
17
REINSURANCE
General:
We use reinsurance to provide capacity to write large limits of
liability, to reduce losses of a catastrophic nature and to stabilize
underwriting results in those years in which such losses occur. The purchase of
reinsurance does not relieve us from the ultimate risk on our policies, but it
does provide reimbursement from the reinsurer for certain losses paid by us.
The effective transfer of risk is dependent on the creditworthiness of
the reinsurer. We purchase reinsurance from a number of individual companies to
avoid concentrations of credit risk. Our reinsurance brokers assist us in the
analysis of the credit quality of our reinsurers.
We have not experienced any difficulties in collecting amounts due from
reinsurers. As of December 31, 2002 we do not believe we have any reinsurance
recoverables that are uncollectible. Should future events lead us to believe
that any reinsurer is unable to meet its obligations to us, adjustments to the
amounts recoverable would be reflected in the results of then current
operations.
The following table identifies our reinsurers from which our
recoverables are $10 million or more as of December 31, 2002:
A. M. Best Amounts Due
Reinsurer Company Rating From Reinsurer
--------- -------------- --------------
Michigan Catastrophic Claims Association Not rated $56,769
Hannover Ruckversicherungs Ag A+ $51,889
PMA Capital Insurance Company A- $35,236
General Reinsurance Corp A++ $34,115
Continental Casualty Company A $31,144
Gerling Global Reins Corp Not rated $28,268
Transatlantic Reins Company A++ $18,572
Lloyds Syndicate 435 A- $13,808
Converium Rein North America Inc. A $11,763
St. Paul Reinsurance Company Ltd. A $11,121
18
Recently, there has been public speculation about the ability of
Gerling Global Reinsurance Corporation of America (Gerling) to pay claims.
Gerling is not accepting new business, and is therefore not rated by A.M. Best.
Gerling does not participate in our current reinsurance treaties, however it has
been part of previous reinsurance programs. At December 31, 2002 our recorded
receivable from them was $28.3 million of which approximately 85% related to our
estimates of IBNR and its allocation to the various reinsurance treaties. Based
upon information available to us, including statements made by Gerling, we
anticipate that Gerling will meet its obligations to us.
Professional Liability Segment:
We reinsure risks under treaties pursuant to which the reinsurer agrees
to assume all or a portion of all risks that we insure above our individual risk
retention and up to the maximum individual limit offered (currently $16
million). Periodically, we provide insurance to policyholders above the maximum
limits of our reinsurance treaties. In those situations, we reinsure the excess
risk above the limits of our reinsurance treaties on a facultative basis,
whereby the reinsurer agrees to insure a particular risk up to a designated
limit.
Our risk retention level is dependent upon numerous factors including
the price and availability of reinsurance, volume of business, level of
experience and our analysis of the potential underwriting results within each
state. Historically, per claim retention levels have varied between the first
$200,000 and the first $2 million depending on the coverage year and the state
in which business was written.
Effective October 1, 2002, the professional liability segment has a
uniform retention of $1,000,000.
Personal Lines Segment:
The Michigan Catastrophic Claims Association (MCCA) covers all
automobile related personal injury incurred losses in excess of $300,000. The
MCCA is an unincorporated nonprofit association created by Michigan law, and
every insurer engaged in writing personal protection automobile insurance
coverage in Michigan is required to be a member of the MCCA. 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. 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. We treat any amounts due from the MCCA as reinsurance and the
assessments due to MCCA as ceded premiums.
We currently reinsure our other personal lines risks in excess of
$250,000 per loss. Individual property risks are covered up to $1 million per
risk and casualty risks other than personal automobile are covered on an excess
of loss basis up to $3 million per occurrence.
Catastrophic reinsurance provides additional protection from
significant aggregate loss exposure arising from a single event such as
windstorm, hail, tornado, earthquake, riot, blizzard, freezing temperatures or
other extraordinary events. We have purchased catastrophe reinsurance for
automobile physical damage, homeowners and boat property damage in four layers
up to $15,000,000 in excess of $1,000,000 with each layer subject to a retention
of 5%. Since we began offering umbrella policies in 2000, we have a quota share
reinsurance arrangement under which we retain 5% and cede 95% of our liability
on these policies.
19
INVESTMENTS
Our overall investment strategy is to focus on maximizing current
income from our investment portfolio while maintaining safety, liquidity,
duration of liabilities and portfolio diversification. 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 our overall
investment strategy, including maximizing after-tax yields. This investment
strategy is implemented through investment guidelines that are established from
time to time by our board of directors with the assistance of outside
consultants.
Our investment portfolio had an estimated fair value of $1,409 million
at December 31, 2002. The portfolio is generally managed by professional
third party asset managers whose results are evaluated periodically by
management and its consultants. The asset managers typically have the authority
to make investment decisions, subject to investment policies, within the asset
class they are responsible for managing.
We categorize our marketable securities as debt securities (cash
equivalents, debt instruments, convertible debentures and preferred stocks
having scheduled redemption provisions) and equity securities (common stocks,
convertible preferred stocks and preferred stocks that do not have mandatory
redemption provisions).
We currently classify all debt and equity securities as
available-for-sale and report such investments at market value.
At December 31, 2002 we held investments, excluding real estate, with a
market value of $1,409 million and a net unrealized gain of $35.5 million. The
fixed maturity securities in our investment portfolio had a dollar weighted
average rating of "AA," a weighted average modified duration of 3.7 years and an
average yield of 5.2% before investment expenses at December 31, 2002. Average
yield is calculated by dividing annualized investment income from fixed
maturities by the book value of fixed maturities.
Because most of our investment portfolio is comprised of fixed maturity
securities, periodic changes in interest rate levels generally affect our
financial results to the extent that reinvestment yields are different than the
original yields on maturing securities. For a more detailed discussion of the
impact of changes in interest rates on our investment portfolio see
"Management's Discussion and Analysis -- Market Sensitive Instruments --
Interest Rate Risk."
20
The following table reflects the amortized cost and fair market value
of the investment portfolio for both of our segments at December 31, 2002:
Amortized Estimated Percentage of
Cost Fair Value Fair Value
---------- ---------- -------------
($ in thousands)
Fixed maturities
U.S. Treasury Securities.................... $ 234,745 $ 241,180 17%
State and Municipal Bonds................... 399,899 416,788 30
Corporate Bonds............................. 442,653 466,176 33
Asset Backed Securities..................... 197,638 204,183 14
Certificates of Deposit..................... 570 570 *
Total Fixed Maturities............ 1,275,505 1,328,897 94
Equity Securities............................... 77,556 80,197 6
Total Investments................. $1,353,061 $1,409,094 100%
---------- ---------- ---
* Less than 0.1%.
Substantially all of the fixed maturities are either United States
government or agency obligations or investment grade securities as determined by
national rating agencies. Although accounted for as available-for-sale, our
fixed maturities are purchased with the intent to hold such investments to
maturity. Our investment policies implement an asset allocation that uses length
to maturity as one method of managing our long term rate of return. The
following table reflects the estimated fair value of our fixed maturities by
contractual maturity at December 31, 2002.
Estimated Percent
Fair Value of Total
---------- --------
($ in thousands)
Due in one year or less $ 49,993 4%
Due after one year through five years 361,789 27
Due after five years through ten years 395,162 30
Due after ten years 317,770 24
Asset-backed securities 204,183 15
---------- ---
Total $1,328,897 100%
The table below shows investment income information for the years ended
December 31, 2002 and December 31, 2001. The yield on fixed maturity securities
is calculated by dividing gross earnings on fixed maturity securities by the
average of the quarterly ending book value balances of such securities.
21
We have significant amounts invested in tax-exempt state and municipal
bonds. These bonds pay lower interest rates than securities that are subject to
federal income taxes. We have, therefore, calculated a tax equivalent yield. The
gross earnings on fixed maturity securities is increased to calculate gross
earnings as though all of our fixed maturity securities are taxable. The tax
adjusted gross earnings are divided by the average of the quarterly ending book
value balances of fixed maturity securities to determine the tax equivalent
yield on fixed maturity securities.
Year Ended Year Ended
December 31, December 31,
2002 2001
------------ ------------
($ in thousands)
Net Investment Income $ 76,918 $ 59,782
Net Realized Investment (Losses) Gains (5,306) 5,441
Yield on Fixed Maturity Securities 5.5% 5.6%
Tax Equivalent Yield on Fixed Maturity Securities 6.1% 6.6%
Our current investment policy requires that the market value of our
equity investment portfolio not to exceed 50% of our capital at the end of the
prior year. At December 31, 2002, equity investments represented 6% of the total
market value of our portfolio, and 16% of our capital. Our equity investments
are diversified primarily among domestic growth and value holdings through
common and convertible preferred stock.
RATING AGENCIES
Our insurance subsidiaries are all rated "A-" (Excellent) by A.M. Best,
its fourth highest category out of 15 categories. They are rated "A-" (Strong)
with a negative outlook by Standard & Poor's, its seventh highest category out
of 21 categories. In developing these ratings, A.M. Best and Standard & Poor's
evaluate an insurer's ability to meet its obligations to policyholders, and are
not directed toward the protection of stockholders. These ratings are neither
ratings of securities nor a recommendation to buy, hold or sell any security.
COMPETITION
Competition depends on several factors including pricing, size, name
recognition, service quality, market commitment, breadth and flexibility of
coverage, method of sale, financial stability and ratings assigned by A.M. Best
and Standard & Poor's. Many of these factors, such as market conditions, the
ratings assigned by rating agencies, and regulatory conditions are out of our
control. However, for those factors over which we do have control, such as
service quality, market commitment, financial strength and stability, we believe
we have competitive strengths that make us a viable competitor in those states
where we are currently writing insurance.
Professional Liability Segment:
We compete with insurance companies and self-insuring entities in the
medical professional liability market. Many of the competing companies
concentrate on a single state and have an extensive knowledge of the local
markets. We also compete with large national insurers that may have greater
financial strength and other resources than we do.
22
We believe that we have a competitive advantage in the current market
due to our size, geographic scope and name recognition, as well as our heritage
as a policyholder-founded company with a long-term commitment to the
professional liability insurance industry. These advantages have been achieved
through our balance sheet strength, claims defense expertise, strong ratings and
ability to deliver a high level of service to our insureds and agents. We
believe that these competitive strengths make us a viable competitor in those
states where we are currently writing insurance.
Since 1999, insurance companies focused on medical professional
liability coverage have experienced higher claim costs on business written in
prior years than they had reserved for initially. This has resulted in
significant losses, reduced capital to support current and future business, and
higher premium rates to meet expected higher claims costs.
Reduced profitability, reductions in surplus and capacity constraints
have led many professional liability carriers focused on medical professional
liability coverages to withdraw from, or limit new business in, one or more
markets. Given the continued reduction in capacity and the uncertainty
surrounding several writers in the medical professional liability market, we
believe there will be a "flight to quality" as insurers place greater emphasis
on financial strength and stability. We believe this trend will continue at
least until 2004.
Personal Lines Segment:
Personal lines insurance is highly competitive and some of these
competitors are substantially larger than we are 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 Standard &
Poor's.
Our strong capitalization provides operational flexibility allowing
growth and expansion capabilities for current and new product lines. Offsetting
these strengths is our geographic concentration in a single state (Michigan) and
our increasing exposure to large weather-related losses due to our growing
homeowners book of business.
GROWTH OPPORTUNITIES AND OUTLOOK
We expect to achieve our growth primarily as a result of (i) the
withdrawal of competitors from actively writing business in certain states, (ii)
increased prices in our professional liability business and (iii) expansion of
our personal lines business in Michigan.
We believe we are viewed as a market leader because of our financial
strength and stability, and our ability to deliver excellent service at the
local level. This reputation allows us to take advantage of marketing conditions
that are improving as price increases are implemented and earned. Our stability
also makes us an attractive insurer in light of the highly publicized
insolvencies in our industry, as well as the regulatory actions taken against
several former competitors.
We expect the growth of our professional liability business will be
primarily generated through increased pricing across our book of business. In
2002, we achieved average gross price increases of approximately 28% on renewal
business (weighted by premium volume). In 2001 we achieved average gross renewal
price increases of approximately 23% (weighted by premium volume).
We expect our future growth will also be supported by controlled
expansion in our primary market area and in states where we have recently
commenced writing business but have little or no presence. These states include
Arkansas and Virginia, where The St. Paul Companies was a leading writer prior
to its departure from the market and which we believe have favorable medical and
legal climates.
23
We also believe there will be additional opportunities for profitable
expansion as a number of insurers are experiencing financial difficulties,
requiring them to reduce their business or completely exit the marketplace. This
may also lead to opportunities to expand through the acquisition of other
companies or books of business.
We believe we can achieve our growth while improving our combined
ratio. Based on price increases achieved to date, our objective is to achieve a
combined ratio on our professional liability business of 102% or lower. This
takes into account expected increases in the cost of claims and reinsurance
protection purchased. As with all property and casualty companies, we expect the
beneficial impact of price increases and any development of losses to be fully
reflected in our financial results over time. We recognize the impact of higher
prices as the associated premiums are earned which generally occurs over the
course of the year after the policy is written. In our personal lines business
our objective is to achieve an underwriting profit, which is in line with our
historical financial results.
INSURANCE REGULATORY MATTERS
We are subject to regulation under the insurance and insurance holding
company statutes, of various jurisdictions, including the domiciliary states of
our insurance subsidiaries and other states in which our insurance subsidiaries
do business.
General:
Insurance companies are also affected by a variety of state and federal
legislative and regulatory measures and judicial decisions that define and
qualify the risks and benefits for which insurance is sought and provided. These
include redefinitions of risk exposure in such areas as medical liability,
product liability, environmental damage and workers compensation. 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. Although there is limited federal regulation of the insurance
business, each state has a comprehensive system for regulating insurers
operating in that state. In addition, these insurance regulators periodically
examine each insurer's financial condition, adherence to statutory accounting
practices, and compliance with insurance department rules and regulations.
Our operating subsidiaries are required to file detailed annual
reports with the state insurance regulators in each of the states in which they
do business. The laws of the various states establish supervisory agencies with
broad authority to regulate, among other things, licenses to transact business,
premium rates for certain types of coverage, trade practices, agent licensing,
policy forms, underwriting and claims practices, reserve adequacy, transactions
with affiliates, and insurer solvency. Many states also regulate investment
activities on the basis of quality, distribution and other quantitative
criteria. States have also enacted legislation regulating insurance holding
company systems, including acquisitions, the payment of dividends, the terms of
affiliate transactions, and other related matters. Our principal insurance
subsidiaries are domiciled in Michigan, Alabama and West Virginia.
Applicable state insurance laws, rather than federal bankruptcy laws,
apply to the liquidation or reorganization of insurance companies.
24
Insurance Regulation Concerning Change or Acquisition of Control:
The insurance regulatory codes in our operating subsidiaries'
respective domiciliary states each contain similar provisions (subject to
certain variations) to the effect that the acquisition of "control" of a
domestic insurer or of any person that directly or indirectly controls a
domestic insurer cannot be consummated without the prior approval of the
domiciliary insurance regulator. In general, a presumption of "control" arises
from the direct or indirect ownership, control, possession with the power to
vote or possession of proxies with respect to 10% (5% in Alabama) or more of the
voting securities of a domestic insurer or of a person that controls a domestic
insurer. A person seeking to acquire control, directly or indirectly, of a
domestic insurance company or of any person controlling a domestic insurance
company must generally file an application for approval of the proposed change
of control with the relevant insurance regulatory authority.
In addition, certain state insurance laws contain provisions that
require pre-acquisition notification to state agencies of a change in control of
a non-domestic insurance company admitted in that state. While such
pre-acquisition notification statutes do not authorize the state agency to
disapprove the change of control, such statutes do authorize certain remedies,
including the issuance of a cease and desist order with respect to the
non-domestic admitted insurer's doing business in the state if certain
conditions exist, such as undue market concentration.
Statutory Accounting and Reporting:
Insurance companies are required to file detailed annual reports with
the state insurance regulators in each of the states in which they do business,
and their business and accounts are subject to examination by such regulators at
any time. The financial information in these reports is prepared in accordance
with the accounting requirements of the state regulatory authorities. The
accounting principles differ from Generally Accepted Accounting Principles
("GAAP") and are referred to as Statutory Accounting Practices ("SAP").
Insurance regulators periodically examine each insurer's financial condition,
adherence to SAP, and compliance with insurance department rules and
regulations.
Regulation of Dividends and Other Payments from Our Operating Subsidiaries:
We are a legal entity separate and distinct from our subsidiaries. As a
holding company with no other business operations, our primary sources of cash
to meet our obligations, including principal and interest payments with respect
to indebtedness, are available dividends and other statutorily permitted
payments, such as tax allocation payments and management and other fees, from
our operating subsidiaries.
Our operating subsidiaries are subject to various state statutory and
regulatory restrictions, applicable generally to any insurance company in its
state of domicile, which limit the amount of dividends or distributions an
insurance company may pay to its stockholders without prior regulatory approval.
The restrictions are generally based on certain levels or percentages of
surplus, investment income and operating income, as determined in accordance
with SAP. Generally, dividends may be paid only out of earned surplus. In every
case, surplus subsequent to the payment of any dividends must be reasonable in
relation to an insurance company's outstanding liabilities and must be adequate
to meet its financial needs.
State insurance holding company acts generally require domestic
insurers to obtain prior approval of extraordinary dividends. Under the
insurance holding company acts governing our principle operating subsidiaries, a
dividend is considered to be extraordinary if the combined dividends and
distributions to the parent holding company in any 12 month period is more than
the greater of either the insurer's net income for the prior fiscal year or 10%
of its surplus at the end of the prior fiscal year.
25
If insurance regulators determine that payment of a dividend or any
other payments to an affiliate (such as payments under a tax-sharing agreement
or payments for employee or other services) would, because of the financial
condition of the paying insurance company or otherwise, be hazardous to such
insurance company's policyholders, the regulators may prohibit such payments
that would otherwise be permitted without prior approval.
Risk-Based Capital:
In order to enhance the regulation of insurer solvency, the National
Association of Insurance Commissioners (NAIC) specifies risk-based capital (RBC)
requirements for property and casualty insurance companies. These RBC
requirements are designed to monitor capital adequacy and to raise the level of
protection that statutory surplus provides for policyholders. The NAIC's RBC
model law stipulates four levels of regulatory action with the degree of
regulatory intervention increasing as the level of surplus falls below a minimum
amount as determined under the model law. At December 31, 2002, all
ProAssurance's insurance subsidiaries exceeded the minimum level and, as a
result, no regulatory response or action was required.
Investment Regulation:
Our operating subsidiaries are subject to state laws and regulations
that require diversification of investment portfolios and that limit the amount
of investments in certain investment categories. Failure to comply with these
laws and regulations may cause non-conforming investments to be treated as
non-admitted assets for purposes of measuring statutory surplus and, in some
instances, would require divestiture.
Guaranty Funds:
All fifty states have separate insurance guaranty fund laws requiring
admitted property and casualty insurance companies doing business within their
respective jurisdictions to be members of their guaranty associations.
These associations are organized to pay covered claims (as defined and
limited by the various guaranty association statutes) under insurance policies
issued by insurance companies that become insolvent. Such guaranty association
laws create post-assessment associations, which make assessments against member
insurers to obtain funds to pay association covered claims after the insolvency
of an insurer occurs. These associations levy assessments (up to prescribed
limits) on all member insurers in a particular state on the basis of the
proportionate share of the premiums written by member insurers in the covered
lines of business in that state. Maximum assessments permitted by law in any one
year generally vary between 1% and 2% of annual premiums written by a member in
that state. Some states permit member insurers to recover assessments paid
through surcharges on policyholders or through full or partial premium tax
offsets, while other states permit recovery of assessments through the rate
filing process.
Shared Markets:
Our operating subsidiaries are required to participate in mandatory
property and casualty shared market mechanisms or pooling arrangements that
provide certain insurance coverage to individuals or other entities that are
otherwise unable to purchase such coverage in the commercial insurance
marketplace. Our operating subsidiaries' participation in such shared markets or
pooling mechanisms is not material to our business at this time.
26
Possible Legislative and Regulatory Changes:
In recent years, the insurance industry has been subject to increased
scrutiny by regulators and legislators. The NAIC and a number of state
legislatures have considered or adopted legislative proposals that alter and, in
many cases, increase the authority of state agencies to regulate insurance
companies and insurance holding company systems.
In addition, several committees of Congress have made inquiries and
conducted hearings as part of a broad study of the regulation of insurance
companies, and legislation has been introduced in several of the past sessions
of Congress which, if enacted, could result in the federal government assuming
some role in the regulation of the insurance industry. Although the federal
government does not regulate the business of insurance directly, federal
initiatives often affect the insurance business in a variety of ways. Current
and proposed federal measures that may significantly affect the insurance
business include changes in medical patient protection laws such as the
"Patients Bill of Rights," tort reform and environmental laws.
The Legislatures in various states are currently considering, or being
asked to consider, changes to the laws governing medical liability lawsuits. The
changes are collectively called Tort Reforms. There are also Tort Reform
proposals being considered at the Federal level. In general, the changes would
place limits of non-economic damages, allow insurers more flexibility in paying
large judgments, and would alter some of the rules governing legal proceedings
and qualification of expert witnesses. In certain states, Tort Reform
legislation may also place limits on the ability of medical liability insurers
to raise or maintain rates at adequate levels.
We do not believe it is possible to predict the outcome of any of the
foregoing legislative, administrative or congressional activities or the
potential effects thereof on us.
EMPLOYEES
At December 31, 2002, we employed 580 persons, including 386 employees
in our Professional Liability segment and 194 employees at MEEMIC. None of our
employees is represented by a labor union. We consider our employee relations to
be good.
FORWARD-LOOKING STATEMENTS
Any written or oral statements made by us or on our behalf may include
forward-looking statements that reflect our current views with respect to future
events and financial performance. Forward-looking statements (identified by
words such as, but not limited to, "believe", "expect", "intend", "anticipate",
"estimate", "project" and other analogous expressions) include among other
things statements concerning: liquidity and capital requirements, return on
equity, financial ratios, net income, premiums, losses and loss reserves,
premium rates and retention of current business, competition and market
conditions, 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, the effect of the consolidation of
Medical Assurance and Professionals Group into ProAssurance, the effects of the
merger of MEEMIC into ProAssurance , compliance with our 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.
27
Risks that could adversely affect our operations 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 and reserving assumptions
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 our income;
- 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;
- the effects of weather-related events;
- changes in the legal system, including retroactively applied
decisions 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
of reinsurance;
- changes to our ratings by rating agencies;
- regulatory and legislative actions or decisions that adversely
affect us; and
- our ability to utilize loss carryforwards and other deferred
tax assets.
ITEM 2: PROPERTIES
We own a 156,000 square foot office building located in Birmingham,
Alabama where we currently occupy approximately 55,000 square feet and plan to
occupy approximately 14,500 square feet of additional office space. The
remaining office space is leased to unaffiliated persons or is available to be
leased. We also own a 53,000 square foot office building in Okemos, Michigan
that we fully occupy. Both buildings are currently unencumbered. MEEMIC leases
its principal executive offices in Auburn Hills, Michigan. MEEMIC owns,
primarily for investment purposes, an 11.5-acre vacant parcel of land in Auburn
Hills, Michigan. We lease other office facilities in various locations and lease
computer and operating equipment under cancelable and non-cancelable agreements.
28
ITEM 3: LEGAL PROCEEDINGS
Our insurance subsidiaries are involved in various legal actions,
a substantial number of which arise 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 our financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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 our Board and our
Chief Executive Officer since we 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
Medical Assurance Company since its founding in 1977.
Dr. Crowe also serves as chairman of the board of
MEEMIC Holdings. (Age 66)
VICTOR T. ADAMO, ESQ. Mr. Adamo has served as our Vice Chairman, President,
and Chief Operating Officer since we 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 since 1987. Mr. Adamo is the Chief
Executive Officer and a director of MEEMIC Holdings.
(Age 55)
29
PAUL R. BUTRUS Mr. Butrus has served as our Vice Chairman and a
director of ProAssurance since we 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 Medical Assurance Company and its
subsidiaries since 1977, most recently as Executive
Vice President and Chief Operating Officer since
1993. (Age 62)
HOWARD H. FRIEDMAN Mr. Friedman was appointed as our Senior Vice
President, Chief Financial Officer, and Secretary in
June 2001. Mr. Friedman has served in a number of
positions for Medical Assurance since 1996, most
recently as Senior Vice President, Corporate
Development of Medical Assurance. Mr. Friedman is an
Associate of the Casualty Actuarial Society. He also
serves as a director of MEEMIC. (Age 44)
JAMES J. MORELLO Mr. Morello was appointed as our Senior Vice
President, Chief Accounting Officer and Treasurer in
June 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 Medical
Assurance Company since 1984. He also serves as a
director of Medical Assurance's insurance
subsidiaries and as treasurer for ProNational. Mr.
Morello is a certified public accountant. (Age 54)
30
FRANK B. O'NEIL Mr. O'Neil was appointed as our Senior Vice President
of Corporate Communications and Investor Relations in
September 2001. Mr. O'Neil has been Senior Vice
President of Corporate Communications for Medical
Assurance since 1997 and employed by Medical
Assurance Company and its subsidiaries since 1987.
(Age 49)
WILLIAM P. SABADOS Mr. Sabados has served as our Chief Information
Officer since we began operations in June 2001 and
for Professionals Group since July 1998. Mr. Sabados
has been Senior Vice President and Chief Information
Officer of MEEMIC since 1997. In addition, he
currently serves as director and Chief Information
Officer for ProNational. (Age 53)
LYNN M. KALINOWSKI Mr. Kalinowski has been President of MEEMIC Holdings
and MEEMIC since September 2001. Mr. Kalinowski
previously served as President of MEEMIC from January
1993 to May 1997 and as Executive Vice President of
MEEMIC from May 1997 to September 2001. 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). Mr. Kalinowski has been a
director of MEEMIC Holdings since 1998. (Age 50)
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At March 17, 2003, ProAssurance Corporation (PRA) had 3,736
stockholders of record and 28,880,185 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.
31
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 2002 2001
- ------- -------------------- ------------------------
HIGH LOW HIGH LOW
------ ------ ------ ------
First $18.22 $15.99 $18.06 $12.00
Second 19.70 16.01 16.49 12.30
Third 18.00 14.20 19.13 14.50
Fourth 21.11 15.78 17.99 13.49
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 paragraphs under the caption "Regulation - Restrictions on
Dividends" in Item 1 on page 25 of this Form 10-K.
32
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(in thousands, except per share amounts)
Gross premiums written(C) $ 636,156 $ 388,983 $ 223,871 $ 201,593 $ 192,479
Net premiums written 537,123 310,291 194,279 156,923 141,787
Premiums earned(C) 576,414 381,510 216,297 207,492 195,515
Premiums ceded(C) (99,006) (68,165) (38,701) (43,068) (54,199)
Net premiums earned(C) 477,408 313,345 177,596 164,424 141,316
Net investment income(C) 76,918 59,782 41,450 39,273 39,402
Net realized investment gains (losses) (5,306) 5,441 913 1,787 11,281
Other income(C) 6,747 3,987 2,630 2,545 1,604
Total revenues 555,767 382,555 222,589 208,029 193,603
Net losses and loss
adjustment expenses(C) 448,029 298,558 155,710 104,657 93,893
Income before cumulative effect of
accounting change(C) 10,513 12,450 24,300 46,700 48,523
Net income(A)(C)(D) 12,207 12,450 24,300 46,700 47,400
Income per share before cumulative
effect of accounting change(C)
Basic $ 0.40 $ 0.51 $ 1.04 $ 1.95 $ 1.96
Diluted $ 0.39 $ 0.51 $ 1.04 $ 1.95 $ 1.96
Net income per share:(B)(C)
Basic $ 0.47 $ 0.51 $ 1.04 $ 1.95 $ 1.92
Diluted $ 0.46 $ 0.51 $ 1.04 $ 1.95 $ 1.92
Weighted average number
of shares outstanding:(B)
Basic 26,231 24,263 23,291 23,992 24,729
Diluted 26,254 24,267 23,291 24,008 24,731
BALANCE SHEET DATA:
(as of December 31)
Total investments $1,679,497 $1,521,279 $ 796,526 $ 761,918 $ 791,579
Total assets 2,586,650 2,238,325 1,122,836 1,117,668 1,132,239
Reserve for losses and
loss adjustment expenses 1,622,468 1,442,341 659,659 665,792 660,640
Long-term debt 72,500 82,500 -- -- --
Total liabilities 2,055,086 1,802,606 777,669 791,944 808,059
Total capital 505,194 413,231 345,167 325,724 324,180
Total capital per share of
common stock outstanding(B) $