ProAssurance
Annual Report 2003

Plain-text annual report

V I G I L A N T P r o A s s u r a n c e • 2003 Annual Report ever V I G I L A N T F i n a n c i a l H i g h l i g h t s Fiscal Years Ended December 31 (in thousands) 2003 2002 2001 2000 1999 Income Statement Highlights(1) Gross premiums written(1) Total revenues Net income(1)(2) Balance Sheet Highlights Total investments Total assets Reserve for losses and loss adjustment expenses Long-term debt Total liabilities $ 740,110 709,640 38,703 $2,055,672 $2,879,352 $1,814,584 $ 104,789 $2,333,047 $ 636,156 555,767 12,207 $1,679,497 $2,586,650 $1,622,468 $ 72,500 $2,055,086 $ 388,983 382,555 12,450 $1,521,279 $2,238,325 $1,442,341 $ 82,500 $1,802,606 $ 223,871 222,589 24,300 $ 796,526 $1,122,836 $ 659,659 $ — $ 777,669 $ 201,593 208,029 46,700 $ 761,918 $1,117,668 $ 665,792 $ — $ 791,944 (1) Includes Professionals Group since the date of consolidation, June 27, 2001. See Note 2 to the Consolidated Financial Statements. (2) Net income for the year ended December 31, 2002 was increased by $1.7 million due to the adoption of SFAS 141 and 142. See Note 14 to our Consolidated Financial Statements. In accordance with SFAS 142, we wrote off the unamortized balance of deferred credits that related to business combinations com- pleted prior to July 1, 2001. The cumulative effect increased net income per share (basic and diluted) by $0.07 per share. $18.77 $17.49 $16.02 $15.22 $13.92 ’99 ’00 ’01 ’02 ’03 Book Value per Share $546 $505 $413 $326 $345 ’99 ’00 ’01 ’02 ’03 Shareholders’ Equity (in millions) $283 $177 $46 ’99 $36 ’00 $61 ’01 ’02 ’03 Cash Flow from Operations(1) (in millions) A b o u t P r o A s s u r a n c e C o r p o r a t i o n ProAssurance Corporation is a specialty insurer with almost $2.9 billion in assets and more than $740 million in gross written premiums. Through its subsidiaries ProAssurance is the nation’s fourth largest writer of medical professional liability insurance and is one of the top ten writers of personal auto coverage in Michigan. letter T O M Y F E L L O W S H A R E H O L D E R S , has declined from 124.5% in 2002 to 111.6% in 2003. We expect that ratio to continue to show improvement in the next few years as price increases work their way to our bottom line and we see claims for recent years reach maturity. M a r c h 1 5 , 2 0 0 4 By every measure, 2003 was our most successful year since the creation of ProAssurance in 2001. We returned our Professional Liability segment to profitability and believe it to be poised to achieve the financial goals we’ve set for this line of business. Our Personal Lines segment again generated industry-leading returns. As we enter 2004, we are Ever Vigilant in running a customer-focused and financially strong insurance group that provides security for its policyholders and strong returns for its shareholders. In Professional Liability, our largest business segment, the operational discipline that has been a hallmark of ProAssurance has allowed us to succeed in today’s turbulent liability environment. Our commitment to rate adequacy has not wavered, and we have already filed for increases in nine of our states so far in 2004. Now that rates are at what we believe are appropriate levels, we do expect to see some slowing in the rate of overall premium increases, which has been at 28% for the past two years. This certainly will be welcome news for our customers. Because of our close ties to the medical community and the physician leaders in our management, we understand the effect our rate increases have had on our insureds. But the failure of more medical malpractice insurers in 2003 brought fresh lessons of the disastrous consequences of failing to properly operate a business. We have chosen to protect our balance sheet and ultimately, the financial well-being of those we insure. The compounding effect of our rate increases and the continuing re-underwriting of our book has driven significant improvements in our combined ratio. The Professional Liability combined ratio Our success in Professional Liability is based upon our experi- enced staff and regional operating model. Our regional approach to underwriting ensures that our coverage decisions reflect the latest developments in each state. We are confident that market conditions in 2004 will allow us to begin adding well- underwritten business to our book at advantageous pricing, thus further enhancing our ability to meet our underwriting and profitability targets. Our hands-on, local approach is also vital to our claims success. Our edge is in the venue-specific knowledge that allows us to conclude over 90% of all claims filed against our insureds with a favorable outcome. We recognize the upfront costs expended in defending a claim. However, our success helps us control our ultimate loss and legal costs and produces tremendous policy- holder loyalty. We believe this localized approach to basic insurance decisions is one of the reasons we have succeeded where other companies have failed. In 2003, we also saw great progress toward our goal of becoming a key player in the Excess & Surplus Lines market for professional liability risks. Many of the risks that have fallen outside the standard market have found a home with our new company, Red Mountain Casualty. Red Mountain allows us to customize our pricing and coverage terms to meet the needs of these unique, yet potentially insurable risks. Red Mountain generated $20 million in premium in 2003 and could easily build to $30 million in 2004. The success we’ve enjoyed in our operations gives us confi- dence in our ability to raise capital as needed to support our organic growth as well as potential mergers or acquisitions opportunities. As an example, our sale of convertible debentures last summer allowed us to eliminate variable rate debt and a variety of restrictive covenants imposed by our lenders, thus giving us additional financial flexibility at attractive terms. Looking toward growth and future capital needs, we have filed a $250 million universal shelf offering that gives us the flexi- bility to move quickly to raise capital through an offering of equity, debt, or a combination of both. The ability to obtain capital will allow us to take advantage of any opportunities that may present themselves to us. Our recent renewal rights transaction with the OHIC Insurance Company is one such example. We believe that the capacity crunch in our sector, and the inability of competitors to effectively raise capital, will provide us with additional opportunities to grow our business within our established business footprint. The issue of capacity, whether to support growth or to fund an acquisition, is something we are constantly and carefully eval- uating. Should we see that our new business and premium growth are straining our capacity, we likely would move to obtain enough capital to give us room to grow and assure the rating agencies of our commitment to balance sheet strength. We would also pursue additional capital, if needed, to fund an acquisition. While we are committed to a strong balance sheet with growth, we do not intend to seek additional capital unless we have a justified need. We will not burden the Company with debt for which we have no use, nor will we issue equity that would have a long-term dilutive effect on our current shareholders. But often the most important transactions are the ones that are not executed. Rest assured that we will apply the same diligence and skill to our evaluation of mergers and acquisi- tions that we apply to our underwriting and claims efforts. Our goal is to write profitable business that will allow us to achieve our financial targets. We will not acquire simply for the sake of acquisition, nor will we commit blindly to top-line growth at the expense of profitability. We will learn much about the future of Tort Reform in the com- ing year. Tort reforms failed twice at the federal level in 2003 and will likely be a key campaign issue in this fall’s election. At the state level, the past 18 months have been fruitful for those supporting Tort Reform as a way to balance the scales of jus- tice. We are waiting to learn if the Supreme Courts in those states will uphold those reforms. If the reforms are upheld, we could see a new era of stability in medical liability rates. If they are overturned, rates are likely to resume their rapid ascent toward unaffordability. We expect to succeed no matter what the outcome of the Tort Reform fight. Opportunities will abound for a strong, respon- sive medical liability insurer. We are equipped and ready to capitalize on those opportunities, no matter how the business environment evolves. Along with our excitement regarding Professional Liability, we are equally enthusiastic about the ability of our Personal Lines segment to bolster our earnings. In 2003, MEEMIC Insurance Company’s combined ratio was a stellar 87.9%, marking the ninth consecutive year that MEEMIC has earned an underwriting profit. We see no reason that MEEMIC’s success should end, absent an unpredictable weather-related catastrophe loss. I do want to compliment MEEMIC’s management and employ- ees for the high quality execution of MEEMIC’s business plan. At MEEMIC, we focus on the best risks from a preferred mar- ket, Michigan educators and their families. Our ability to select the best risks from that pool and then efficiently handle their claims allows MEEMIC to be an integral part of the profit pic- ture at ProAssurance. In 2004, we expect MEEMIC to produce solid earnings and generate the capital required to support its planned growth in Michigan’s parochial schools, colleges and universities. We also expect MEEMIC to expand beyond its Michigan base in 2004. Peer-to-peer selling plays a key role in our policy persis- tency and overall success in Michigan, so we are identifying qualified educators outside of Michigan to serve as our sales arm. Our growth outside of Michigan won’t be explosive or immediate, but our success in Michigan allows us the luxury of moving deliberately in this expansion, thus creating a model for successful expansion for the future. While we are pleased to tell you about our 2003 results in both Professional Liability and Personal Lines, we believe the best is yet to come. With our merger solidly behind us and the effects of price increases being realized in our income state- ment, we expect a combined ratio of approximately 100% for 2004, and foresee further improvement in 2005. We are thus confident in our ability to reach our ultimate goal of a Return on Equity of between 12% and 14%. In reaching those financial goals we will also meet the equally important goal of main- taining a balance sheet whose strength is beyond question. Every employee at ProAssurance is working each day to meet this goal while exceeding our customers’ expectations. Our success is due to their diligence and dedication; I am grateful for their efforts. I am equally grateful to the agents and defense attorneys who represent us and our insureds with honest, effective advocacy. I would also like to thank the insureds who serve on our advi- sory committees; they really make the difference in keeping us up-to-date with the emerging changes in medicine and den- tistry as well as the insurance needs of our clients. Finally, I am most grateful to those of you who join with us as investors in ProAssurance. I hope you’ll continue to share in our success in the years ahead. A. Derrill Crowe, M.D. Chairman and CEO looking out F O R O U R C U S T O M E R S E v e r V i g i l a n t ProAssurance’s financial strength is now more important—and more evident— than ever before. The power of our balance sheet allows us to respond when other insurers can’t, and gives our customers the confidence that we can keep our promise of insurance protection. As one of America’s leading specialty insurance groups, our singular focus is on uncompromising financial stability that supports our dedication to excellence. Our commitment to responsive service enhances our position as an industry leader and enables us to deliver the performance that our insureds and investors have come to expect. MAR KET CAPITALI ZATION S I NC E I NC E PTION (in millions) $230 $192 $186 $131 $103 $348 $319 9/11/91 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 P r o f e s s i o n a l L i a b i l i t y The Professional Liability market has been shaken by signifi- cant contractions in the past few years. While thousands of American physicians face the specter of bankrupt companies, abandoned markets or restricted coverage, ProAssurance’s insureds have learned not to fear because they know our firm financial foundation is their assurance that we remain solidly behind them. P e r s o n a l L i n e s For more than fifty years MEEMIC Insurance Company has pro- vided security and value to educators and their families in Michigan. We offer a full range of auto and home insurance products tailored to meet the budgets and lifestyles of the people we serve. Our representatives are a part of the educa- tional communities they serve, which ensures that we maintain our reputation for integrity and unmatched service. This unquestioned dedication to financial strength goes hand- in-hand with our unparalleled commitment to the defense of non-meritorious claims. We understand our insureds’ desire to protect their hard-won reputation, and we are committed to the strongest advocacy on their behalf, while at the same time seeking reasonable, expedient settlement of claims that have merit. We are recognized as an industry leader because we combine our experience and knowledge to provide the complete cus- tomized coverage our insureds demand. As MEEMIC expands beyond Michigan, we remain dedicated to the premise that educators deserve a specialized insurance company that understands their unique and evolving needs. $1,013 $936 $771 $605 $606 $496 $453 $379 ProAssurance’s market capitalization exceeded the $1 billion mark in the first quarter of 2004. This represents a milestone for our organiza- tion’s management, employees and agents, and reflects the financial markets’ support of our measured approach to sustaining profitable growth and building balance sheet strength. 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03 3/1/04 T A B L E O F contents Business Properties Legal Proceedings Submission of Matters to a Vote of Security Holders Market for Registrant’s Common Equity and Related Stockholder Matters Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes In and Disagreements With Accountants on Accounting and Financial Disclosure Controls and Procedures Directors and Executive Officers of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management Certain Relationships and Related Transactions Principal Accountant Fees and Services Exhibits, Financial Statement Schedules, and Reports on Form 8-K Report of Independent Auditors Consolidated Balance Sheets Consolidated Statements of Changes in Capital Consolidated Statements of Income Consolidated Statements of Cash Flow Notes to Consolidated Financial Statements Schedule I: Summary of Investments—Other Than Investments in Related Parties Schedule II: Condensed Financial Information of Registrant Schedule III: Supplementary Insurance Information Schedule IV: Reinsurance Schedule VI: Supplementary Property and Casualty Insurance Information 3 18 19 19 21 22 23 58 59 59 59 60 60 60 60 60 61 65 66 68 69 70 71 101 102 105 106 107 D i r e c t o r s A. Derrill Crowe, MD(4)* Chairman & Chief Executive Officer Lucian Bloodworth(1)(2) Chairman, Cain Manufacturing Company, Inc. John J. McMahon, Jr.(1)(3)(5)* Chairman, Ligon Industries Victor T. Adamo, Esq., CPCU(4) Vice-Chairman & Chief Operating Officer Robert E. Flowers, MD(1)(3)*(4)(5) Retired Physician John P. North, Jr., CPA(1)(2)* Retired Accounting Firm Partner Paul R. Butrus(4) Vice-Chairman Wilfred W. Yeargan, MD(1)(3) Physician Ann F. Putallaz, Ph.D.(1)(2) Vice-President, Munder Capital Management Committees (1) Independent (2) Audit (3) Compensation (4) Executive (5) Nominating & Corporate Governance *Chair S e n i o r O f f i c e r s Jeffrey L. Bowlby, ARM Senior Vice-President, Marketing & Sales Professional Liability Group Lynn Kalinowski President MEEMIC Insurance Company Robert D. Francis Senior Vice-President Managing Director Red Mountain Casualty Insurance Company, Inc. James J. Morello, CPA Chief Accounting Officer & Treasurer Senior Vice-President ProAssurance Corporation Howard H. Friedman, ACAS, MAAA Chief Financial Officer & Secretary Senior Vice-President ProAssurance Corporation Frank B. O’Neil Investor Relations Officer Senior Vice-President Corporate Communications ProAssurance Corporation William H. Woodhams, MD(1)(5) Physician Christine C. Schmitt, CPA Chief Financial Officer & Treasurer MEEMIC Insurance Company Darryl K. Thomas, Esq. Senior Vice-President, Claims Professional Liability Group I n v e s t o r I n f o r m a t i o n There were 29,105,971 shares of ProAssurance Corporation common stock outstanding at March 1, 2004. On that date, we had 3,605 shareholders of record. Our common stock trades on The New York Stock Exchange under the symbol PRA. Our stock is listed as ProAsr in the stock section of USA Today and many major newspapers, and as ProAssurance in The Wall Street Journal. We also post the price of our stock on our website, www.ProAssurance.com. Our Transfer Agent is Mellon Investor Services, LLC. You may phone them at (800) 851-4218, and you may access their website at www. melloninvestor.com. If you hold shares in certifi- cate form, you may learn more about your share- holdings by using Mellon Investor Services’ dedicated website, https://vault.melloninvestor. com/isd/. This website will allow you to verify your shareholdings and report address changes. You also may report address changes by mail by writing to: Mellon Investor Services, LLC P. O. Box 3338 South Hackensack, NJ 07606-1916 If you have a certificate to transfer, you should obtain forms and instructions from Mellon Designed by Curran & Connors, Inc. / www.curran-connors.com Investor Services by phone or through their website. Send the certificate(s) and required form by insured, registered mail to: www.ProAssurance.com. If you prefer, you may request the same information by mail or phone by contacting: Mellon Investor Services, LLC Stock Transfer Department P. O. Box 3312 South Hackensack, NJ 07606-1912 If you need to report lost or stolen stock certifi- cates, please phone (800) 851-4218 or send a registered letter to: Mellon Investor Services, LLC Estoppel Department P. O. Box 3317 South Hackensack, NJ 07606-1917 How to learn about our Corporate Governance We post detailed information in the Corpo- rate Governance section of our website, www.ProAssurance.com. If you prefer, you may request the information by mail or phone. How to obtain financial information We post detailed financial information, and maintain archives of that information, along with prior presentations and conference calls on the Investor Relations section of our website, Frank B. O’Neil Senior Vice President, Corporate Communications & Investor Relations Investor@ProAssurance.com (205) 877-4461 How to contact us You may write to us at: ProAssurance Corporation P. O. Box 590009 Birmingham, AL 35259-0009 We also can be reached by phone, fax or through our website: Phone: (205) 877-4400 • (800) 282-6242 Fax: (205) 802-4799 www.ProAssurance.com Annual Meeting The 2004 Annual Meeting is scheduled for 10:30 a.m. on May 19, 2004 at the Harbert Center, 2019 4th Avenue North, Birmingham, AL. ProAssurance’s Professional Liability advertising focuses on our financial strength and market leadership. 100 Brookwood Place, Birmingham, Alabama 35209 205-877-4400 800-282-6242 www.ProAssurance.com 

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