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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended JUNE 30, 2003 or
_______________ .
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________________
to ________________ .
Commission file number 0-16533
ProAssurance Corporation
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 63-1261433
- ------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation of organization) Identification ID No.)
100 Brookwood Place, Birmingham, AL 35209
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(205) 877-4400
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (l) 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes [X] No [ ].
As of June 30, 2003 there were 28,963,030 shares of the registrant's common
stock outstanding.
Page 1 of 36
ProAssurance Corporation
Form 10Q
Table of Contents
Part I - Financial Information
Item l. Condensed Consolidated Financial Statements (Unaudited)
of ProAssurance Corporation and Subsidiaries
Condensed Consolidated Balance Sheets.............................................................3
Condensed Consolidated Statements of Changes in Capital...........................................4
Condensed Consolidated Statements of Income.......................................................5
Condensed Consolidated Statements of Comprehensive Income.........................................6
Condensed Consolidated Statements of Cash Flows...................................................7
Notes to Condensed Consolidated Financial Statements..............................................8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................................18
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................................32
Item 4. Controls and Procedures..........................................................................33
Part II - Other Information
Item 1. Legal Proceedings................................................................................34
Item 2. Changes in Securities and Use of Proceeds........................................................34
Item 6. Exhibits and Reports on Form 8-K.................................................................35
Signatures.................................................................................................36
PROASSURANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30 December 31
2003 2002
----------- -----------
ASSETS
Investments:
Fixed maturities available for sale, at fair value $ 1,666,178 $ 1,328,897
Equity securities available for sale, at fair value 77,901 80,197
Real estate, net 17,336 17,549
Short-term investments 81,824 252,854
Business owned life insurance 50,399 --
----------- -----------
Total investments 1,893,638 1,679,497
Cash and cash equivalents 47,591 143,306
Premiums receivable 114,593 111,028
Receivable from reinsurers on unpaid losses and loss adjustment expenses 499,064 462,012
Prepaid reinsurance premiums 20,969 21,294
Deferred taxes 65,991 73,091
Other assets 107,330 96,422
----------- -----------
$ 2,749,176 $ 2,586,650
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Reserve for losses and loss adjustment expenses $ 1,748,580 $ 1,622,468
Unearned premiums 279,394 248,371
Reinsurance premiums payable 65,131 62,549
----------- -----------
Total policy liabilities 2,093,105 1,933,388
Other liabilities 50,363 49,198
Long-term debt 67,500 72,500
----------- -----------
Total liabilities 2,210,968 2,055,086
Minority interest -- 26,370
Commitments and contingencies -- --
Stockholders' Equity:
Common stock, par value $0.01 per share
100,000,000 shares authorized; 29,084,795 and 28,998,917 shares
issued, respectively 291 290
Additional paid-in capital 309,818 308,501
Accumulated other comprehensive gain, net of deferred tax
expense of $28,056 and $19,612, respectively 52,100 35,545
Retained earnings 176,055 160,914
----------- -----------
538,264 505,250
Less treasury stock, at cost, 121,765 shares (56) (56)
----------- -----------
Total stockholders' equity 538,208 505,194
----------- -----------
$ 2,749,176 $ 2,586,650
=========== ===========
See accompanying notes
3
PROASSURANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL (UNAUDITED)
(IN THOUSANDS)
ACCUMULATED
OTHER
COMPREHENSIVE OTHER
INCOME RETAINED CAPITAL
TOTAL (LOSS) EARNINGS ACCOUNTS
-------- ------------- -------- --------
Balance at December 31, 2002 $505,194 $35,545 $160,914 $308,735
Net income 15,141 -- 15,141 --
Change in fair value of securities available
for sale, net of reclassification adjustments
and deferred taxes 15,669 15,669 -- --
Acquisition of minority interest 886 886 -- --
Common stock issued for compensation 1,038 -- -- 1,038
Stock options exercised 280 -- -- 280
-------- ------- -------- --------
Balance at June 30, 2003 $538,208 $52,100 $176,055 $310,053
======== ======= ======== ========
Accumulated
Other
Comprehensive Other
Income Retained Capital
Total (Loss) Earnings Accounts
-------- ------------- -------- --------
Balance at December 31, 2001 $413,231 $ 3,533 $148,707 $260,991
Net income 4,756 -- 4,756 --
Change in fair value of securities available
for sale, net of reclassification adjustments,
deferred taxes and minority interest 8,003 8,003 -- --
Change in minority interest (139) -- -- (139)
Common stock issued for compensation 969 -- -- 969
Stock options exercised 11 -- -- 11
-------- ------- -------- --------
Balance at June 30, 2002 $426,831 $11,536 $153,463 $261,832
======== ======= ======== ========
See accompanying notes
4
PROASSURANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------- ---------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues:
Gross premiums written $ 157,806 $ 123,075 $ 360,466 $ 304,188
========= ========= ========= =========
Net premiums written $ 138,278 $ 103,853 $ 317,214 $ 255,653
========= ========= ========= =========
Premiums earned $ 168,290 $ 136,066 $ 329,443 $ 268,532
Premiums ceded 20,606 22,472 43,563 44,449
--------- --------- --------- ---------
Net premiums earned 147,684 113,594 285,880 224,083
Net investment income 17,844 19,752 35,092 38,954
Net realized investment gains (losses) 1,706 (2,659) 2,713 (3,778)
Other income 1,891 2,023 3,550 3,624
--------- --------- --------- ---------
Total revenues 169,125 132,710 327,235 262,883
Expenses:
Losses and loss adjustment expenses 170,556 127,943 316,202 258,240
Reinsurance recoveries 39,256 20,879 59,854 43,977
--------- --------- --------- ---------
Net losses and loss adjustment expenses 131,300 107,064 256,348 214,263
Underwriting, acquisition and insurance expenses 26,234 23,500 50,656 44,482
Interest expense 491 745 1,069 1,514
--------- --------- --------- ---------
Total expenses 158,025 131,309 308,073 260,259
--------- --------- --------- ---------
Income (loss) before income taxes, minority interest and
cumulative effect of accounting change 11,100 1,401 19,162 2,624
Provision for income taxes:
Current expense (benefit) 5,581 634 6,139 1,635
Deferred expense (benefit) (3,273) (1,341) (2,299) (3,501)
--------- --------- --------- ---------
2,308 (707) 3,840 (1,866)
Income (loss) before minority interest and cumulative
effect of accounting change 8,792 2,108 15,322 4,490
Minority interest -- 1,024 181 1,428
--------- --------- --------- ---------
Income (loss) before cumulative effect of
accounting change 8,792 1,084 15,141 3,062
Cumulative effect of accounting change, net of tax -- -- -- 1,694
--------- --------- --------- ---------
Net income (loss) $8,792 $ 1,084 $ 15,141 $ 4,756
========= ========= ========= =========
Earnings per share (basic and diluted):
Income (loss) before cumulative effect of
accounting change $ 0.30 $ 0.04 $ 0.52 $ 0.12
Cumulative effect of accounting change, net of tax -- -- -- 0.06
--------- --------- --------- ---------
Net income (loss) $ 0.30 $ 0.04 $ 0.52 $ 0.18
========= ========= ========= =========
Weighted average number of common shares outstanding:
Basic 28,943 25,849 28,919 25,842
========= ========= ========= =========
Diluted 29,154 25,879 29,079 25,864
========= ========= ========= =========
See accompanying notes
5
PROASSURANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- --------
Comprehensive income:
Net income (loss) $ 8,792 $ 1,084 $ 15,141 $ 4,756
Change in fair value of securities available for sale, net of
deferred taxes and minority interest 16,895 14,035 17,243 5,547
Reclassification adjustment for realized (gains) losses included in
income, net of deferred taxes (1,033) 1,728 (1,574) 2,456
-------- -------- -------- --------
Comprehensive income (loss) $ 24,654 $ 16,847 $ 30,810 $ 12,759
======== ======== ======== ========
See accompanying notes
6
PROASSURANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30
-------------------------------
2003 2002
--------- ---------
OPERATING ACTIVITIES
Net cash provided (used) by operating activities $ 139,999 $ 97,577
INVESTING ACTIVITIES
Purchases of fixed maturities available for sale (552,233) (398,830)
Purchases of equity securities available for sale (4,563) (14,693)
Proceeds from sale or maturities of fixed maturities available for
sale 231,365 338,408
Proceeds from sale of equity securities available for sale 10,252 5,780
Purchases of business owned life insurance (50,000) --
Net decrease in short-term investments 171,030 10,866
Other (3,261) (3,670)
--------- ---------
Net cash provided (used) by investing activities (197,410) (62,139)
FINANCING ACTIVITIES
Repayment of debt (5,000) (5,000)
Purchase of minority interest (33,304) --
--------- ---------
Net cash provided (used) by financing activities (38,304) (5,000)
Increase (decrease) in cash and cash equivalents (95,715) 30,438
Cash and cash equivalents at beginning of period 143,306 53,163
--------- ---------
Cash and cash equivalents at end of period $ 47,591 $ 83,601
========= =========
See accompanying notes
7
ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2003
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of ProAssurance Corporation and its subsidiaries
(collectively "ProAssurance"). The financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by accounting principles generally accepted in
the United States for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation have been included. Operating
results for the six month period ended June 30, 2003 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003.
ProAssurance grants stock options to key employees under its Incentive
Compensation Stock Plan ("the ProAssurance Plan") and accounts for such stock
options under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations ("APB
25"). The following table illustrates the effect on net income (in thousands)
and earnings per share as if ProAssurance had applied the fair value
recognition provisions of Statement of Financial Accounting Standard (SFAS) No.
123, Accounting for Stock-Based Compensation, to options granted under the
ProAssurance Plan.
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
-------------------- ---------------------
2003 2002 2003 2002
------ ------ ------- ------
Net income, as reported $8,792 $1,084 $15,141 $4,756
Add back: Stock-based employee compensation
expense recognized under APB 25 with the exercise
of options 62 -- 62 --
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (261) (188) (410) (376)
------ ------ ------- ------
Pro forma net income $8,593 $ 896 $14,793 $4,380
====== ====== ======= ======
Earnings per share:
Basic--as reported $ 0.30 $ 0.04 $ 0.52 $ 0.18
====== ====== ======= ======
Basic--pro forma $ 0.30 $ 0.03 $ 0.51 $ 0.17
====== ====== ======= ======
Diluted--as reported $ 0.30 $ 0.04 $ 0.52 $ 0.18
====== ====== ======= ======
Diluted--pro forma $ 0.30 $ 0.03 $ 0.51 $ 0.17
====== ====== ======= ======
In 2003, ProAssurance granted 303,000 options under the plan. The
options granted during 2003 have an exercise price of $22 per share. The
estimated fair value of each option is $8.46, using the Black-Scholes option
pricing model and the following model assumptions: risk-free interest rate of
3.1%; volatility of 0.34; expected life of 6 years; and dividend yield of 0%.
8
2. SEGMENT INFORMATION
ProAssurance operates in the United States of America in two
reportable industry segments: the professional liability insurance segment and
the personal lines segment.
The professional liability insurance segment principally provides
professional liability insurance for providers of health care services, and to
a limited extent, providers of legal services. The professional liability
segment includes the operating results of four significant insurance companies:
The Medical Assurance Company, Inc., Medical Assurance of West Virginia Inc.,
ProNational Insurance Company, and Red Mountain Casualty Insurance Company,
Inc.
The personal lines segment provides personal auto, homeowners, boat
and umbrella coverages primarily to educational employees and their families
through a single insurance company, MEEMIC Insurance Company.
The accounting policies of each segment are consistent with those
described in Note 1 to the December 31, 2002 Consolidated Financial statements
included in Form 10K. Other than cash and marketable securities owned directly
by the parent company, the identifiable assets of ProAssurance are allocated to
the reportable operating segments. Except for investment income earned directly
by the parent company and interest expense related to long-term debt held by
the parent company, all revenues and expenses of ProAssurance are allocated to
the operating segments for purposes of SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. Revenue is primarily from
unaffiliated customers and the effects of transactions between segments have
been eliminated.
9
2. SEGMENT INFORMATION (CONTINUED)
The table below provides a reconciliation of segment information to
total consolidated information (in thousands).
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------- ---------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues:
Professional liability lines $ 123,691 $ 92,748 $ 238,565 $ 185,351
Personal lines 45,427 39,962 88,601 77,532
Corporate investment income 7 -- 69 --
--------- --------- --------- ---------
Total $ 169,125 $ 132,710 $ 327,235 $ 262,883
========= ========= ========= =========
Income (loss) before cumulative
effect of accounting change:
Professional liability lines $ 3,101 $ (3,830) $ 4,906 $ (3,503)
Personal lines 6,006 5,398 10,885 7,549
Corporate (315) (484) (650) (984)
--------- --------- --------- ---------
Total $ 8,792 $ 1,084 $ 15,141 $ 3,062
========= ========= ========= =========
Net income (loss):
Professional liability lines $ 3,101 $ (3,830) $ 4,906 $ (1,809)
Personal lines 6,006 5,398 10,885 7,549
Corporate (315) (484) (650) (984)
--------- --------- --------- ---------
Total $ 8,792 $ 1,084 $ 15,141 $ 4,756
========= ========= ========= =========
JUNE 30 DECEMBER 31
2003 2002
---------- ----------
Identifiable Assets:
Professional liability lines $2,351,453 $2,184,551
Personal lines 397,696 372,086
Corporate 27 30,013
---------- ----------
Total assets $2,749,176 $2,586,650
========== ==========
10
3. INVESTMENTS
The amortized cost of fixed maturities and equity securities was
$1.664 billion and $1.353 billion at June 30, 2003 and December 31, 2002,
respectively.
Operating results for the six months ended June 30, 2003 and 2002
included the following (in millions):
SIX MONTHS ENDED
JUNE 30
-------------------------
2003 2002
------ ------
Proceeds from sales excluding maturities and
paydowns $155.6 $237.8
====== ======
Gross realized gains 5.0 6.0
Gross realized (losses) (2.0) (7.8)
Other than temporary impairment losses (0.3) (2.0)
------ ------
Net realized investment gains (losses) $ 2.7 $ (3.8)
====== ======
4. RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
ProAssurance establishes reserves for losses and loss adjustment
expenses based on its estimates of the future amounts necessary to pay claims
and expenses associated with investigation and settlement of claims.
ProAssurance considers expected outcomes for individual claims and actuarially
determined estimates of future losses based on ProAssurance's past loss
experience, available industry data and projections as to future claims
frequency, severity, inflationary trends and settlement patterns. ProAssurance
believes that the methods it uses to establish reserves are reasonable and
appropriate. However, estimating reserves, especially professional liability
reserves, is a complex process which is heavily dependent on judgment and
involves many uncertainties. As a result, reserve estimates may vary
significantly from the eventual outcome. The assumptions used in establishing
ProAssurance's reserves are regularly reviewed and updated by management as new
data becomes available. Any adjustments necessary are reflected in then current
operations.
ProAssurance's management believes the unearned premiums under
contracts together with the related anticipated investment income to be earned,
are adequate to discharge the related contract liabilities.
5. DEFERRED POLICY ACQUISITION COSTS
Costs that vary with and are directly related to the production of
new and renewal premiums (primarily premium taxes, commissions and underwriting
salaries) are deferred to the extent they are recoverable against unearned
premiums and are amortized as related premiums are earned. Amortization of
deferred acquisition costs, net of ceding commissions earned, amounted to
approximately $25.9 million and $20.0 million for the six months ended June 30,
2003 and 2002, respectively.
11
6. INCOME TAXES
The provision for income taxes is different from that which would be
obtained by applying the statutory Federal income tax rate to income before
taxes because a portion of ProAssurance's investment income is tax-exempt.
7. LONG-TERM DEBT
At June 30, 2003, ProAssurance had an outstanding term loan of $67.5
million. The term loan was obtained in 2001 under a bank syndicate credit
facility. Interest on the loan was at a variable rate based on the London
Interbank Offered Rate. At June 30, 2003 the 30-day interest rate was 2.3%. The
credit facility required that ProAssurance maintain certain financial
standards, otherwise known as loan covenants and as of June 30, 2003,
ProAssurance was in compliance with the aforementioned loan covenants. On July
23, 2003, the entire outstanding balance of the term loan was repaid with
proceeds from ProAssurance Convertible Debentures (the Debentures) issued in
July 2003. See Note 13 for additional information regarding the Debentures.
8. STOCKHOLDERS' EQUITY
At June 30, 2003 ProAssurance had 100 million shares of authorized
common stock and 50 million shares of authorized preferred stock. The Board of
Directors has the authorization to determine the provisions for the issuance of
shares of the preferred stock, including the number of shares to be issued and
the designations, powers, preferences and rights and the qualifications,
limitations or restrictions of such shares. At June 30, 2003, the Board of
Directors had not authorized the issuance of any preferred stock nor determined
any provisions for the preferred stock.
9. COMMITMENTS AND CONTINGENCIES
ProAssurance is involved in various legal actions arising primarily
from claims related to insurance policies. At other times legal actions may
arise from claims asserted by policyholders. The legal actions arising from
these claims have been considered by ProAssurance in establishing its reserves.
While the outcome of all legal actions is not presently determinable,
ProAssurance's management is of the opinion, based on consultation with legal
counsel, that the settlement of these actions will not have a material adverse
effect on ProAssurance's financial position. However, to the extent that the
settlement of these actions exceeds the corresponding reserves, the settlements
could have a material effect on our results of operations for the period in
which the settlements are made.
10. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE AND NEW ACCOUNTING
PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141 Business Combinations. SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations with a closing date
after June 30, 2001. SFAS No. 141 includes guidance on the initial recognition
and measurement of goodwill and other intangible assets in a business
combination. The FASB has also issued SFAS No. 142 Goodwill and Other
Intangible Assets, effective for fiscal years beginning after December 15,
2001. SFAS No. 142 addresses how goodwill and other intangible assets should be
accounted for in financial statements upon acquisition and how these items
should be accounted for subsequent to acquisition. SFAS No. 142 does not
presume that goodwill and all other intangible assets are wasting assets
requiring amortization. Instead, goodwill and intangible assets that have
indefinite useful lives are tested at least annually for impairment.
ProAssurance does not believe that any of its recorded goodwill or intangible
assets has suffered impairment.
12
10. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE AND NEW ACCOUNTING
PRONOUNCEMENTS (CONTINUED)
ProAssurance adopted SFAS Nos. 141 and 142 effective January 1, 2002.
Upon adoption, ProAssurance discontinued amortizing its recorded goodwill and
deferred credits and wrote-off unamortized deferred credits of $1.7 million
that existed at December 31, 2001 related to business combinations completed
prior to July 1, 2001. The write-off was recognized as the cumulative effect of
a change in accounting principle. There was no tax effect related to the
write-off because the deferred credits were not amortizable for tax purposes.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, which amends the
disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation.
SFAS No.148 became effective for financial statements for fiscal years ending
after December 15, 2002. ProAssurance has adopted the provisions of SFAS No.
148.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN
46"), Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51. FIN 46 requires certain variable interest entities to be consolidated by
the primary beneficiary of the entity if the equity investors in the entity do
not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. In the normal course of
business the Company has invested in limited liability entities which have a
carrying value of $24.2 million at June 30, 2003. These investments are
considered variable interest entities, however, the Company does not believe
that these entities would be required to be consolidated under the provisions of
FIN 46. Therefore, the Company does not believe that the adoption of FIN 46 will
have a material impact on the Company's financial statements.
11. MINORITY INTEREST
On January 29, 2003 ProAssurance's indirect subsidiary, MEEMIC
Holdings, Inc. (MEEMIC Holdings) repurchased all of the outstanding shares of
its common stock that were not owned by ProAssurance's subsidiary, ProNational
Insurance Company. MEEMIC Holdings used its internal funds in the approximate
amount of $34.1 million to acquire 1,062,298 shares of its common stock, to pay
for outstanding options representing 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 is now a
wholly owned indirect subsidiary of ProAssurance. ProAssurance recognized
goodwill of $7.6 million related to the transaction. Income for the six months
ended June 30, 2003 was reduced by the income attributable (16%) to the MEEMIC
Holdings minority interest for the period from January 1, 2003 to January 29,
2003. MEEMIC Holdings is the 100% owner of MEEMIC Insurance Company.
13
12. EARNINGS PER SHARE
The following represents a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations (amounts
are in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- --------------------------
2003 2002 2003 2002
-------- -------- -------- --------
BASIC EARNINGS PER SHARE CALCULATION:
Numerator:
Income before cumulative effect of accounting change $ 8,792 $ 1,084 $ 15,141 $ 3,062
Cumulative effect of accounting change -- -- -- 1,694
-------- -------- -------- --------
Net income $ 8,792 $ 1,084 $ 15,141 $ 4,756
======== ======== ======== ========
Denominator:
Weighted average number of common shares outstanding 28,943 25,849 28,919 25,842
======== ======== ======== ========
Basic earnings per share:
Income before cumulative effect of accounting change $ 0.30 $ 0.04 $ 0.52 $ 0.12
Cumulative effect of accounting change -- -- 0.06
-------- -------- -------- --------
Net income $ 0.30 $ 0.04 $ 0.52 $ 0.18
======== ======== ======== ========
DILUTED EARNINGS PER SHARE CALCULATION:
Numerator:
Income before cumulative effect of accounting change $ 8,792 $ 1,084 $ 15,141 $ 3,062
Dilutive effect of stock options held by minority
shareholders -- (68) -- (82)
-------- -------- -------- --------
Income before cumulative effect of accounting
change--diluted computation 8,792 1,016 15,141 2,980
Cumulative effect of accounting change -- -- -- 1,694
-------- -------- -------- --------
Net income--diluted computation $ 8,792 $ 1,016 $ 15,141 $ 4,674
======== ======== ======== ========
Denominator:
Weighted average number of common shares outstanding 28,943 25,849 28,919 25,842
Assumed conversion of dilutive stock options and awards 211 30 160 22
-------- -------- -------- --------
Diluted weighted average number of common shares
outstanding 29,154 25,879 29,079 25,864
======== ======== ======== ========
Diluted earnings per share
Income before cumulative effect of accounting change $ 0.30 $ 0.04 $ 0.52 $ 0.12
Cumulative effect of accounting change -- -- -- 0.06
-------- -------- -------- --------
Net income $ 0.30 $ 0.04 $ 0.52 $ 0.18
======== ======== ======== ========
Options to purchase approximately 3,000 and 411,000 shares of common
stock were outstanding at June 30, 2003 and 2002, respectively, but were not
included in the computation of diluted earnings per share. The effect of
including the options would have been antidilutive to earnings per share
because the exercise price of the options was more than the average market
price of our common stock.
14
13. SUBSEQUENT EVENT
In early July 2003, ProAssurance issued $107.6 million of 3.90%
Convertible Debentures (Debentures) in a Private Offering transaction. Net
proceeds from the offering were approximately $104.3 million, after adjusting
for the underwriters' discount and estimated issuance expenses. ProAssurance
used the net proceeds to pay off its existing term loan having an outstanding
principal balance of $67.5 million. The balance of the net proceeds will be
used for general corporate purposes, which may include contributions to the
capital of its insurance subsidiaries to support the expected growth in
insurance operations.
Summarized information regarding the structure and terms of the
Debentures follows:
Issue Price. The Debentures were issued at 100% of their principal
amount and each Debenture has a principal amount at maturity of $1,000.
Maturity Date. June 30, 2023.
Ranking. The Debentures are unsecured obligations and rank equally in
right of payment with all other existing and future unsecured and
unsubordinated obligations. The Debentures are not guaranteed by any
of ProAssurance's subsidiaries and, accordingly, the Debentures are
effectively subordinated to the indebtedness and other liabilities of
ProAssurance's subsidiaries, including insurance policy-related
liabilities.
Interest. Interest is payable on June 30 and December 30 of each year,
beginning December 30, 2003, at an annual rate of 3.90%. In addition,
ProAssurance may be required to pay contingent interest, as set forth
below under Contingent Interest.
Contingent Interest. Contingent interest is due to the holders of the
Debentures during any six-month period from June 30 to December 29 and
from December 30 to June 29 commencing with the six-month period
beginning June 30, 2008, if the average market price of a Debenture
for the five trading days ending on the second trading day immediately
preceding the relevant six-month period equals 120% or more of the
principal amount of the Debentures. The amount of contingent interest
payable in respect of any six-month period will equal 0.1875% of the
average market price of a Debenture for the five trading day period
referred to above.
Conversion Rights. Holders may convert the Debentures at any
time prior to stated maturity from and after the date of the
following events:
- if the sale price of ProAssurance's common stock for
at least 20 trading days in the 30 trading-day
period ending on the last trading day of the
immediately preceding fiscal quarter exceeds 120% of
the conversion price on that 30th trading day;
- if ProAssurance calls the Debentures for redemption;
or
- upon the occurrence of the specified corporate
transactions.
15
13. SUBSEQUENT EVENT (CONTINUED)
For each $1,000 principal amount of Debentures surrendered for
conversion, holders initially will receive 23.9037 shares of common
stock. This represents an initial conversion price of approximately
$41.83 per share of common stock. The conversion rate may be adjusted
for certain reasons, but will not be adjusted for accrued interest or
contingent interest, if any. Upon conversion, holders will generally
not receive any cash payment representing accrued interest or
contingent interest, if any. Instead, accrued interest and contingent
interest will be deemed paid by the common stock received by the
holders on conversion. Debentures called for redemption may be
surrendered for conversion until the close of business two business
days prior to the redemption date. Upon conversion, ProAssurance has
the right to deliver, in lieu of common stock, cash or a combination
of cash and shares of common stock.
Payment at Maturity. Each holder of $1,000 Debentures will be entitled
to receive $1,000 at maturity, plus accrued interest, including
contingent interest, if any.
Sinking Fund. None.
Optional Redemption. ProAssurance may not redeem the Debentures prior
to July 7, 2008. ProAssurance may redeem some or all of the Debentures
for cash on or after July 7, 2008, upon at least 30 days but not more
than 60 days notice by mail to holders at par.
Repurchase Right of Holders. Each holder of the Debentures may require
ProAssurance to repurchase all or a portion of the holder's Debentures
on June 30, 2008, June 30, 2013 and June 30, 2018 at a purchase price
equal to the issue price of the Debentures plus accrued and unpaid
interest, including contingent interest, if any, to the date of
repurchase. ProAssurance may choose to pay the purchase price in cash,
shares of common stock, or a combination of cash and shares of common
stock. If ProAssurance elects to pay all or a portion of the
repurchase price in common stock, the shares of common stock will be
valued at 97.5% of the average sale price for the 20 trading days
immediately preceding and including the third day prior to the
repurchase date.
Change of Control. Upon a change of control of ProAssurance, holders
may require ProAssurance, subject to conditions, to repurchase all or
a portion of the Debentures. Depending upon the date at which the
change of control occurs, ProAssurance will pay a purchase price equal
to a varying percentage of the applicable principal amount of such
Debentures plus accrued and unpaid interest, including contingent
interest and additional amounts. The percentage ranges from 110% for
dates before June 29, 2004 to 100% for dates after June 29, 2008.
ProAssurance may choose to pay the repurchase price in cash, shares of
common stock, shares of common stock of the surviving corporation or a
combination of cash and shares of the applicable common stock. If
ProAssurance elects to pay all or a portion of the repurchase price in
shares of common stock, the shares of the applicable common stock will
be valued at 97.5% of the average sale price of the applicable common
stock for 20 trading days commencing after the third trading day
following notice of the occurrence of a change of control.
16
13. SUBSEQUENT EVENT (CONTINUED)
Events of Default. If there is an event of default under the
Debentures, the issue of the Debentures, plus accrued interest,
including contingent interest, if any, may be declared immediately due
and payable. These amounts automatically become due and payable if an
event of default relating to certain events of bankruptcy, insolvency
or reorganization occurs.
Transfer Restrictions. The Debentures and common stock issuable upon
conversion are not registered under the Securities Act or the
securities laws of any jurisdiction and are subject to certain
restrictions on transfer.
Registration Rights. ProAssurance has agreed to file a shelf
registration statement with respect to the resale of the Debentures
and the shares of common stock issuable upon conversion of the
Debentures with the SEC within 120 days after the original issuance of
the Debentures; and to use reasonable best efforts to cause such shelf
registration statement to become effective within 180 days after the
original issuance of the Debentures. ProAssurance has also agreed to
keep the shelf registration statement effective until the earliest of:
- two years after the last date of original issuance
of any of the Debentures;
- the date when the holders of the Debentures and
common stock issuable upon conversion of the
Debentures are able to sell all such securities
immediately pursuant to Rule 144 under the
Securities Act;
- the date when all of the Debentures and common stock
issuable upon conversion of the Debentures are
registered upon the shelf registration statement and
sold in accordance with it; or
- the date when all of the Debentures and common stock
issuable upon conversion of the Debentures have
ceased to be outstanding.
ProAssurance will be required to pay additional amounts if its
obligations to register the Debentures and the shares of common stock
issuable upon conversion of the Debentures are not fulfilled within
the specified time periods.
Trading. ProAssurance does not intend to list the Debentures on any
national securities exchange. The Debentures are expected to be
eligible for trading in the Private Offerings, Resales and Trading
through Automated Linkages (PORTAL) Market.
The Debentures do not require ProAssurance to maintain minimum financial
covenants.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
We are required to make estimates and assumptions in certain
circumstances that affect amounts reported in our consolidated financial
statements and related footnotes. We evaluate these estimates and assumptions
on an on-going basis based on historical developments, market conditions,
industry trends and other information that we believe to be reasonable under
the circumstances. There can be no assurance that actual results will conform
to our estimates and assumptions, and that reported results of operations will
not be materially adversely affected from time to time by the need to make
accounting adjustments reflecting changes in these estimates and assumptions.
We believe the following policies are the most sensitive to estimates and
judgments.
Premium Income: We recognize insurance premium income on a monthly pro
rata basis over the respective terms of the policies in force. Unearned
premiums represent the portion of premiums written applicable to the unexpired
terms of the policies in force.
Reserve for Losses and Loss Adjustment Expenses ("losses and LAE"):
Our reserve for losses and LAE represents our estimate of the future amounts
necessary to pay claims and expenses associated with investigation and
settlement of claims. These estimates consist of case reserves and bulk
reserves. Case reserves are estimates of future losses and LAE for reported
claims and are established by our claims departments. Bulk reserves, which
include a provision for losses that have occurred but have not been reported to
us as well as development on reported claims, are the difference between (i)
the sum of case reserves and paid losses and (ii) an actuarially determined
estimate of the total losses and LAE necessary for the ultimate settlement of
all reported claims and incurred but not reported claims, including amounts
already paid. The estimates take into consideration our past loss experience,
available industry data and projections as to future claims frequency,
severity, inflationary trends and settlement patterns. Independent actuaries
review our reserves for losses and LAE each year and 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. Estimating professional liability reserves is a particularly complex
process because such estimates reflect multiple judgments involving many
uncertainties made over an extended period of time, often exceeding five years,
during which these claims are resolved. Our reserve estimates may vary
significantly from the eventual outcome. The assumptions used in establishing
our reserves are regularly reviewed and updated by management as new data
becomes available. Any adjustments necessary are reflected in then current
operations. Due to the size of our reserves, even a small percentage adjustment
to these estimates could have a material effect on our results of operations
for the period in which the change is made.
Reinsurance: Loss recoveries and receivables from reinsurers are
estimates of the ultimate amount of our losses and LAE that will be reimbursed
by reinsurers. We also estimate premiums ceded under reinsurance agreements
wherein the premium, subject to certain maximums and minimums, due to the
reinsurer is a percentage of the losses paid under the agreement. These
estimates are based upon our estimates of the ultimate losses and LAE that we
expect to incur and the portion of those losses that we expect to be allocable
to reinsurers based upon the terms of our reinsurance agreements. Given the
uncertainty of the ultimate amounts of our losses and LAE, these estimates may
vary significantly from the eventual outcome. Our estimates of the amounts
receivable from and due to reinsurers are regularly reviewed and updated by
management as new data becomes available, including data regarding the
collectibility of the recorded amounts receivable from reinsurers. Any
adjustments necessary are reflected in then current operations. Due to the size
of our receivables from reinsurers, even a small adjustment to these estimates
could have a material effect on our results of operations for the period in
which the change is made. At June 30, 2003, all receivables from reinsurers are
considered collectible.
18
Investments: We consider our fixed maturity securities as available
for sale and our equity securities as either available for sale or trading. We
anticipate the majority of our future equity security purchases to be
designated as a trading portfolio. A trading portfolio is more responsive to a
highly volatile equity market since a trading portfolio is carried at fair
value with the unrealized holding gains and losses included in investment
income in the current period. Our available-for-sale securities are available
to be sold in response to a number of issues, including our liquidity needs,
changes in market interest rates and investment management strategies, among
others. Available-for-sale securities are recorded at fair value, with
unrealized gains and losses, net of the related income tax effect, excluded
from income and reported as a separate component of shareholders' equity.
We evaluate the securities in our investment portfolio on at least a
quarterly basis for declines in market value below cost for the purpose of
determining whether these declines represent other than temporary declines. The
evaluation involves judgment by management. Some of the factors we consider in
the evaluation of our investments are:
- the extent to which the market value of the security is less
than its cost basis
- the length of time for which the market value of the security
has been less than its cost basis
- the financial condition and near-term prospects of the
security's issuer, taking into consideration the economic
prospects of the issuers' industry and geographical region,
to the extent that information is publicly available
- ProAssurance's ability and intent to hold the investment for
a period of time sufficient to allow for any anticipated
recovery in market value
A decline in the fair value of an available-for-sale security below
cost that we judge to be other than temporary is realized as a loss in the
current period and reduces the cost basis of the security. In subsequent
periods, we base any measurement of gain or loss or decline in value upon the
adjusted cost basis of the security.
Business Owned Life Insurance (BOLI): During the second quarter of
2003 we acquired business owned life insurance contracts on certain of our key
employees at a purchase cost of $50 million. The primary purpose of the program
is to offset future employee benefit expenses through earnings on the cash
value of the policies. As a part of the program, we will pay to each insured
employee's beneficiary $50,000 from the death proceeds received; the aggregate
death benefits payable to employees represents approximately 1% of the total
estimated death proceeds. These life insurance contracts are carried at their
current cash surrender value. Changes in the cash surrender value are included
in income in the current period as investment income. The death proceeds and
the related payable to the employee's beneficiary are recorded upon the insured
employee's death.
19
LIQUIDITY AND CAPITAL RESOURCES
We need liquid funds to pay losses and loss adjustment expenses
(losses and LAE) and operating expenses in the ordinary course of business and
to meet our debt service requirements. Cash provided by our operating
activities was sufficient to meet those needs during the six months ended June
30, 2003. We believe that our operating activities will provide sufficient cash
to meet our liquidity needs during the next twelve months.
Our net reserves for losses and LAE (net of amounts receivable from
reinsurers) at June 30, 2003 increased approximately $89.1 million over those
at December 31, 2002. Substantially all of this increase is in our professional
liability segment, a "long tailed" business. A characteristic of a "long
tailed" business is that there is a long length of time between the occurrence
of an insured event and significant payment on that event. Because of this
characteristic, it is not unusual for reserves to increase, especially during
periods of business growth.
Our positive cash flow from operations for the six months ended June
30, 2003 of approximately $140 million primarily results from timing delays
that exists between the collection of premiums and the payment of losses and
from growth in our premiums written, which is discussed in more detail in the
following section, "Results of Operations".
Investments and cash and cash equivalents increased by approximately
$118.4 million during the six months ended June 30, 2003. The increase
primarily resulted from the cash flow from operations offset by the funds that
were expended to purchase the MEEMIC Holdings, Inc. (MEEMIC Holdings) minority
interest, as discussed below.
On January 29, 2003 ProAssurance's subsidiary, MEEMIC Holdings
repurchased all of the outstanding shares of its common stock that were not
owned by ProAssurance's subsidiary, ProNational Insurance Company
(ProNational). MEEMIC Holdings used its internal funds in the approximate
amount of $34.1 million to acquire 1,062,298 shares of its common stock, to pay
for outstanding options representing 120,000 shares, and to pay the expenses of
the transactions. The funds were derived from MEEMIC Holdings' cash and
investment resources. As a result of the transaction MEEMIC Holdings is now a
wholly owned indirect subsidiary of ProAssurance. Goodwill of approximately
$7.6 million was recorded related to the transaction.
As premiums grow so does our need for capital to support our insurance
operations. We have experienced significant growth with respect to our
professional liability premiums and expect continued growth throughout the
remainder of 2003 and into 2004. This growth has primarily come as a result of
increased prices but is also a result of reduced competition in the
professional liability market. We have taken actions to position ourselves to
take advantage of these favorable market conditions. In late 2002, we raised
$46.5 million through the sale of our common stock in an underwritten public
offering, and applied $36 million to the capital of our insurance subsidiaries.
20
In July 2003 we issued $107.6 million of 3.9% Convertible Debentures,
due June 2023, and received net proceeds from the issuance of approximately
$104.3 million. We utilized $67.5 million of the net proceeds from the sale of
the Debentures to repay our term loan, as discussed in the following paragraph.
We will use the balance of the net proceeds for general corporate purposes,
which may include contributions to the capital of our insurance subsidiaries to
support the expected growth in insurance operations. See Note 13 of our
condensed consolidated financial statements for a description of the
Debentures.
As discussed in Note 7 to the condensed consolidated financial
statements, at June 30, 2003 we had an outstanding term loan of $67.5 million,
at an interest rate of 2.3%. This interest rate was variable and was subject to
redetermination at 30, 60, or 90 days throughout the loan. On July 23, 2003 we
repaid the entire balance of the loan and canceled the credit agreement under
which the loan had been provided. There were no fees or penalties associated
with the prepayment or the cancellation of the credit agreement. Given our
current capital position, we are considering whether or not to replace the line
of credit previously provided under the credit agreement.
Through 2006, the annual cash outflows are expected to be significantly
less for the Debentures than for the term loan. The term loan required minimum
annual principal payments of $10 million and the entire remaining loan balance
became due in 2006. The Debentures do not require annual repayments of principal
and are not due until 2023, although holders may require Proassurance to
repurchase the Debentures on June 30 of 2008, 2013, and 2018 or upon a change in
control. See note 13 of our condensed consolidated financial statements for a
description of the Debentures.
21
RESULTS OF OPERATIONS - OVERVIEW
We operate in two industry segments: professional liability insurance
and personal lines insurance. Our professional liability insurance segment
principally provides liability insurance for providers of health care services,
and, to a limited extent, providers of legal services. The principal operating
insurance subsidiaries of this segment are: The Medical Assurance Company,
Inc., Medical Assurance of West Virginia, Inc., ProNational Insurance Company
and Red Mountain Casualty Insurance Company, Inc.
Our personal lines insurance segment provides personal property and
casualty insurance to individuals. Our personal lines segment includes the
operations of a single insurance company, MEEMIC Insurance Company.
All of our revenues and expenses are allocated to the operating
segments, other than investment income earned directly by the parent holding
company and interest expense related to long-term debt held by the parent.
Our consolidated net income is $8.8 million, or $0.30 per share for
the three months ended June 30, 2003 and $15.1 million, or $0.52 per share for
the six months ended June 30, 2003. The operating results of each of our
reportable industry segments are discussed separately in the following
sections.
Interest expense for all periods presented relates entirely to a term
loan acquired in 2001 that provided financing for the consolidation with
Professionals Group. As discussed under "Liquidity and Capital Resources" this
loan was repaid in its entirety in July 2003. Interest on the term loan was at
a variable rate based on the London Interbank Offered Rate. At June 30, 2003 a
30-day rate of 2.3% was in effect on the loan.
Interest expense is approximately $491,000 and $1.1 million,
respectively, for the three and six month periods ended June 30, 2003 as
compared to approximately $745,000 and $1.5 million for comparable periods in
2002. Interest expense decreased during 2003 as compared to 2002 both because
the average outstanding balance on the loan was $10 million lower in 2003 and
because interest rates were lower in 2003.
For all periods presented, the provision for income taxes is different
from that which would be obtained by applying the statutory Federal income tax
rate to income before taxes because a portion of ProAssurance's investment
income is tax-exempt.
Minority interest in both 2003 and 2002 relates entirely to the
minority interest in the income of MEEMIC Holdings. As discussed under
"Liquidity and Capital Resources" this minority interest was purchased on
January 29, 2003. In 2003, earnings were allocable to the minority interest
only for the period from January 1 to January 29. In 2002, earnings were
allocable to the minority interest for the entire period.
22
PROFESSIONAL LIABILITY INSURANCE SEGMENT
Operating results for our professional liability insurance segment for
the three and six months periods ended June 30, 2003 and 2002 are summarized in
the table below (dollars in thousands).
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
----------------------------------------- -----------------------------------------
INCREASE INCREASE
2003 2002 (DECREASE) 2003 2002 (DECREASE)
--------- --------- ---------- --------- --------- ----------
Gross premiums written $ 107,567 $ 78,500 $ 29,067 $ 265,816 $ 220,341 $ 45,475
========= ========= ========= ========= ========= =========
Net premiums written $ 91,967 $ 63,069 $ 28,898 $ 230,790 $ 177,870 $ 52,920
========= ========= ========= ========= ========= =========
Revenues:
Premiums earned $ 121,856 $ 95,886 $ 25,970 $ 238,754 $ 191,567 $ 47,187
Premiums ceded 16,689 18,706 (2,017) 35,350 38,403 (3,053)
--------- --------- --------- --------- --------- ---------
Net premiums earned 105,167 77,180 27,987 203,404 153,164 50,240
Net investment income 15,379 17,292 (1,913) 29,991 33,895 (3,904)
Net realized investment gains
(losses) 1,780 (3,303) 5,083 2,612 (4,422) 7,034
Other income 1,365 1,579 (214) 2,558 2,714 (156)
--------- --------- --------- --------- --------- ---------
Total revenues 123,691 92,748 30,943 238,565 185,351 53,214
Expenses:
Net losses and loss adjustment
expenses 103,948 85,024 18,924 202,002 165,674 36,328
Underwriting, acquisition and
insurance expenses 16,803 14,954 1,849 32,298 28,329 3,969
--------- --------- --------- --------- --------- ---------
Total expenses 120,751 99,978 20,773 234,300 194,003 40,297
--------- --------- --------- --------- --------- ---------
Income (loss) before income
taxes $ 2,940 $ (7,230) $ 10,170 $ 4,265 $ (8,652) $ 12,917
========= ========= ========= ========= ========= =========
Net loss and LAE ratio* 98.8% 110.2% (11.4)% 99.3% 108.2% (8.9)%
Underwriting expense ratio* 16.0% 19.3% (3.3)% 15.9% 18.5% (2.6)%
--------- --------- --------- --------- --------- ---------
Combined ratio 114.8% 129.5% (14.7)% 115.2% 126.7% (11.5)%
Less: Investment income ratio* 14.6% 22.4% (7.8)% 14.7% 22.1% (7.4)%
--------- --------- --------- --------- --------- ---------
Operating ratio 100.2% 107.1% (6.9)% 100.5% 104.6% (4.1)%
========= ========= ========= ========= ========= =========
* Ratios shown are expressed as a percentage of net premiums earned.
June 30 December 31
2003 2002
----------- -----------
Net reserves for loss and LAE $ 1,182,724 $ 1,096,205
=========== ===========
23
PREMIUMS
Premiums written:
Our professional liability insurance segment principally provides
liability insurance for providers of medical and other healthcare services, and
to a limited extent, providers of legal services.
Premiums written for the professional liability segment increased by
$29.1 million for the three months and $45.5 million for the six months ended
June 30, 2003 as compared to the same periods in 2002, principally due to rate
increases. We experienced significant premium growth from new business,
however, this growth has largely been offset by business that did not renew.
New business has largely come in states where competitors have left the
professional liability market.
We have implemented and we plan to continue to implement rate
increases based on loss trends, however, our ability to implement those rate
increases is subject to regulatory approval. We estimate that, on average, 2003
renewals to date are at rates that are more than 25% higher than 2002 rates.
However, we do not expect premium growth to reflect the full amount of the rate
increases because retention of our insureds may be reduced by the higher rates.
Additionally, we are in the process of converting occurrence coverage to
claims-made coverage in certain states. Since first-year claims-made coverage
has a significantly lower premium than occurrence coverage, due to lower loss
exposure, the conversion will reduce gross premiums written.
Premiums earned:
Premiums earned for the professional liability segment increased $26.0
million for the three months and $47.2 million for the six months ended June
30, 2003 as compared to the same periods in 2002. Premiums are earned pro rata
over the entire policy period (generally one year) after the policy is written.
The increase in 2003 earned premiums therefore reflects on a pro rata basis the
changes in written premiums that occurred during both 2002 and 2003. Thus
earned premiums have increased both due to price increases, net of the effect
of lower retention, and new business.
Premiums ceded:
Premiums ceded represent the premiums we must ultimately pay to our
reinsurers for their assumption of a portion of our losses. Premiums ceded
decreased by $2.0 million and $3.1 million, respectively, for the three and six
month periods ended June 30, 2003 as compared to the same periods in 2002. We
have reduced the portion of our losses that we cede to our reinsurers. Under
reinsurance contracts that became effective in October 2002, our retention
levels became $1.0 million in all states whereas previously our retention in
many states was as low as $250,000. Premiums ceded have decreased both in total
dollars and as a percentage of premiums earned because we have ceded a smaller
portion of our risk.
24
LOSSES AND LOSS ADJUSTMENT EXPENSES
Our reserve for losses and LAE represents our estimate of the future
amounts necessary to pay claims and expenses associated with investigation and
settlement of claims. The resulting net losses and loss adjustment expenses
(hereafter referred to as "net losses and LAE") may be summarized into three
components of these estimates: (i) actuarial evaluation of incurred loss levels
for the current accident year; (ii) actuarial re-evaluation of incurred loss
levels for prior accident years and (iii) actuarial re-evaluation of the
reserve for the death, disability and retirement provision.
Accident year refers to the accounting period in which the insured
event becomes a liability of the insurer. For occurrence policies the insured
event becomes a liability when the event takes place; for claims-made policies
the insured event becomes a liability when the event is first reported to the
insurer. We believe that measuring losses on an accident year basis is the most
indicative measure of the underlying profitability of the premiums earned in
that period since it associates policy premiums earned with our estimate of the
losses incurred related to those policy premiums.
The following table summarizes professional lines net losses and LAE
and net loss ratios for the three and six month periods ended June 30, 2003 and
2002 by separating losses between the current accident year and all prior
accident years (dollars in thousands). The net loss ratios shown are calculated
by dividing the applicable net losses and LAE by calendar year net premiums
earned.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------ -------------------------------
2003 2002 2003 2002
---------- --------- ---------- ----------
Net losses and LAE:
Current accident year $ 103,198 $ 82,624 $ 201,252 $ 163,274
Prior accident years 750 2,400 750 2,400
Change in death, disability, and
retirement reserves -- -- -- --
---------- --------- ---------- ----------
Calendar year net losses and LAE $ 103,948 $ 85,024 $ 202,002 $ 165,674
========== ========= ========== ==========
Net loss ratio attributable to:
Current accident year net losses and LAE 98.1% 107.1% 98.9% 106.6%
Prior accident years net losses and LAE 0.7% 3.1% 0.4% 1.6%
Change in death, disability, and
retirement reserves -- -- -- --
---------- --------- ---------- ----------
Calendar year net loss ratio 98.8% 110.2% 99.3% 108.2%
========== ========= ========== ==========
Current accident year net losses and LAE increased by $20.6 million
and $38.0 million, respectively, for the three and six month periods ended June
30, 2003 as compared to the three and six month periods ended June 30, 2002,
primarily due to higher estimates of per unit loss cost, including inflation,
and additional losses due to new business. The current accident year net loss
ratio for the three months ended June 30, 2003, as compared to the same period
in 2002, has decreased from 107.1% to 98.1%. The current accident year net loss
ratio for the six months ended June 30, 2003, as compared to the same period in
2002, has decreased from 106.6% to 98.9%. The improvement in the loss ratio
primarily reflects the effects of a more adequate premium structure as a result
of rate increases implemented during 2003 and 2002.
25
NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS (LOSSES)
Our professional liability segment investment income is primarily
derived from the interest income earned by our fixed maturity securities but
also includes interest income from short-term and cash equivalent investments,
dividend income from equity securities, increases in the cash surrender value
of BOLI contracts, and rental income earned by our commercial real estate
holdings. Investment fees and expenses and real estate expenses are deducted
from investment income.
Our net investment income decreased by $1.9 million and $3.9 million,
respectively, for the three and six month periods ended June 30, 2003 as
compared to the same periods in 2002. The decrease occurred even though our
average invested funds increased in 2003. The positive effect of additional
invested funds was more than offset by the detrimental effect of lower average
yields. The weighted average tax equivalent book yield (tax adjusted gross
earnings divided by the average quarterly ending book value) of our
professional liability segment fixed maturity investments is 4.8% and 4.9%,
respectively, for the three and six months ended June 30, 2003 as compared to
6.3% and 6.4%, respectively, for the same periods in 2002. Market conditions in
2002 and 2003 have been such that maturing securities were reinvested at lower
rates. Also, in the fourth quarter of 2002 we sold a significant portion of our
fixed maturity portfolio in order to realize capital gains and these securities
were reinvested at substantially lower rates. Additionally, funds generated
from operations in 2003 were also invested at yields that were lower than the
2002 average yield.
Net realized investment gains (losses) include gains and losses
realized on sales of investment securities and realized losses for other than
temporary impairments in the fair value of investment securities, as shown in
the following table (in thousands).
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------- -------------------------
2003 2002 2003 2002
------- ------- ------- -------
Net gains (losses) from sales $ 1,813 $(3,303) $ 2,934 $(2,422)
Other than temporary impairment losses (33) -- (322) (2,000)
Holding gains (losses) on trading portfolio -- -- -- --
------- ------- ------- -------
Net realized investment gains (losses) $ 1,780 $(3,303) $ 2,612 $(4,422)
======= ======= ======= =======
26
UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES
Underwriting, acquisition and insurance expenses increased by
approximately $1.9 million and $4.0 million, respectively, for the three and
the six month periods ended June 30, 2003 as compared to the same periods in
2002. These expenses are comprised of variable costs, such as commissions and
premium taxes that are directly related to premiums earned and fixed costs that
have no direct relationship to premium volume, such as the costs of our
underwriting department and guaranty fund assessments. The 2003 increase in
expenses is due to higher costs incurred as a result of premium growth,
somewhat offset by lower guaranty fund assessments. Guaranty fund assessments
were approximately $113,000 and $224,000, respectively, for the three and six
month periods ended June 30, 2003 as compared to approximately $1.2 million and
$1.4 million for the respective periods in 2002.
The underwriting expense ratio is the total of underwriting,
acquisition and insurance expenses divided by net premiums earned. This ratio
is 16.0% and 15.9%, respectively, for the three and six month periods ended
June 30, 2003 as compared to 19.3% and 18.5% for the same respective periods
in 2002. The ratio decreased because there was no significant change in our
fixed costs, other than the previously discussed decrease in guaranty fund
assessments, while premiums earned increased in both the three and the six month
periods.
27
PERSONAL LINES INSURANCE OPERATIONS SEGMENT
Our personal lines segment is comprised of the operations of a single
insurance company, MEEMIC Insurance Company. Selected financial data for our
personal lines insurance segment is summarized in the table below (dollars in
thousands).
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------------ -----------------------------------
INCREASE INCREASE
2003 2002 (DECREASE) 2003 2002 (DECREASE)
-------- -------- --------- -------- -------- ---------
Gross premiums written $ 50,239 $ 44,575 $ 5,664 $ 94,650 $ 83,847 $ 10,803
======== ======== ======== -------- -------- --------
Net premiums written $ 46,311 $ 40,784 $ 5,527 $ 86,424 $ 77,783 $ 8,641
======== ======== ======== ======== ======== ========
Revenues:
Premiums earned $ 46,434 $ 40,180 $ 6,254 $ 90,689 $ 76,965 $ 13,724
Premiums ceded 3,917 3,766 151 8,213 6,046 2,167
-------- -------- -------- -------- -------- --------
Net premiums earned 42,517 36,414 6,103 82,476 70,919 11,557
Net investment income 2,458 2,460 (2) 5,032 5,059 (27)
Net realized investment gains
(losses) (74) 644 (718) 101 644 (543)
Other income 526 444 82 992 910 82
-------- -------- -------- -------- -------- --------
Total revenues 45,427 39,962 5,465 88,601 77,532 11,069
Expenses:
Net losses and loss adjustment
expenses 27,352 22,040 5,312 54,346 48,589 5,757
Underwriting, acquisition and
insurance expenses 9,431 8,546 885 18,358 16,153 2,205
-------- -------- -------- -------- -------- --------
Total expenses 36,783 30,586 6,197 72,704 64,742 7,962
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes $ 8,644 $ 9,376 $ (732) $ 15,897 $ 12,790 $ 3,107
======== ======== ======== ======== ======== ========
Net losses and LAE ratio* 64.3% 60.5% 3.8% 65.9% 68.5% (2.6)%
Underwriting expenses ratio* 22.2% 23.5% (1.3)% 22.3% 22.8% (0.5)%
-------- -------- -------- -------- -------- --------
Combined ratio 86.5% 84.0% 2.5% 88.2% 91.3% (3.1)%
Less: Investment income ratio* 5.8% 6.8% (1.0)% 6.1% 7.1% (1.0)%
-------- -------- -------- -------- -------- --------
Operating ratio 80.7% 77.2% 3.5% 82.1% 84.2% (2.1)%
======== ======== ======== ======== ======== ========
* Ratios shown are expressed as a percentage of net premiums earned.
JUNE 30 December 31
2003 2002
----------- ----------
Net reserves for loss and LAE $ 66,791 $ 64,251
=========== ==========
28
PREMIUMS
Premiums written:
Gross premiums written for the three and six month periods ended June
30, 2003, respectively, increased by $5.7 million and $10.8 million as compared
to the same periods in 2002. Premiums by line of business for each period are
as follows (dollars in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- --------------------------
2003 2002 2003 2002
------- ------- ------- -------
Automobile $40,177 $37,406 $78,366 $72,294
Homeowners 9,704 6,876 15,833 11,190
Boat, umbrella and other 358 293 451 363
------- ------- ------- -------
$50,239 $44,575 $94,650 $83,847
======= ======= ======= =======
Automobile premiums are higher during 2003 for both the three and the
six month periods due to increases in the number of autos insured and increases
in the value of those autos. The number of insured vehicles increased to
188,358 at June 30, 2003 from 178,967 at June 30, 2002.
Homeowner premiums are higher during 2003 in both the three and the
six month periods primarily due to a rate increase of approximately 22% that
became effective on July 1, 2002. Homeowner premiums have also grown due to
increases in the number of homes insured and the value of those homes. The
number of insured homes increased to 58,320 at June 30, 2003 from 52,070 at
June 30, 2002.
Premiums earned:
Premiums earned increased by $6.3 million and $13.7 million,
respectively, for the three and six month periods ended June 30, 2003 as
compared to the same periods in 2002. As with premiums written, this growth is
primarily due to increases in the number of autos and homes insured and
increases in the value of those autos and homes.
Premiums ceded:
Premiums ceded are the portion of our earned premium due to reinsurers
in return for the transfer of a portion of our risk to them. Premiums ceded for
the three months ended June 30, 2003 increased $151,000 as compared to the
three months ended June 30, 2002.
Premiums ceded increased by $2.2 million for the six months ended June
30, 2003 as compared to the same period in 2002, due to reductions in 2002 of
our estimates of the amounts due to our reinsurers related to prior year
coverages, the increased volume of our business, and a small increase in the
rates charged by our reinsurers.
29
LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table summarizes personal lines net losses and LAE and
net loss ratios for the three and six month periods ended June 30, 2003 and
2002 by separating losses between the current accident year and all prior
accident years (dollars in thousands). The net loss ratios shown are calculated
by dividing the applicable net losses and LAE by calendar year net premiums
earned.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------ ------------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net losses and LAE:
Current accident year $ 29,424 $ 25,147 $ 57,806 $ 50,925
Prior accident years (2,072) (3,107) (3,460) (2,336)
--------- --------- --------- ---------
Calendar year net losses and LAE $ 27,352 $ 22,040 $ 54,346 $ 48,589
========= ========= ========= =========
Net loss ratio attributable to:
Current accident year net losses and LAE 69.2% 69.0% 70.1% 71.8%
Prior accident years net losses and LAE (4.9)% (8.5)% (4.2)% (3.3)%
--------- --------- --------- ---------
Calendar year net loss ratio 64.3% 60.5% 65.9% 68.5%
========= ========= ========= =========
As compared to the same periods in 2002, current accident year net
losses and LAE of $29.4 million for the three months and $57.8 million for the
six months ended June 30, 2003 increased by $4.3 million and $6.9 million,
respectively, principally due to increased volume. The current accident year net
loss ratios for 2003 reflect a rate increase for homeowners and decreases in the
frequency of auto and homeowner claims due to milder weather conditions, offset
by slight increases in the severity of auto and homeowner property claims from
higher repair costs.
The adjustments to prior year losses recorded in 2003 and 2002 were
made in the normal course of business as a part of our recurring review of loss
reserves and reflect favorable development in our estimates of prior years'
loss reserves.
NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS (LOSSES)
Our net investment income is comprised of the interest and dividend
income from our fixed maturity, short-term, cash equivalents and equity
investments, net of investment expenses. There is no significant change in our
net investment income for either the three month or the six month period ended
June 30, 2003 as compared to the same periods in 2002, primarily because
increases in the size of the portfolio were offset by declines in market
interest rates.
The weighted average tax equivalent book yield (tax adjusted gross
earnings divided by the average quarterly ending book value) of the personal
lines segment fixed maturity investments are 5.7% and 5.9%, respectively, for
the three and six months ended June 30, 2003 as compared to 6.1% and 6.2%,
respectively, for the three and six month periods ended June 30, 2002. The
average yield is reduced as compared to 2002 because market rates available for
the investment of new and matured funds were lower in 2003.
30
Net realized investment gains and losses for the three and six month
periods ended June 30, 2003 and 2002 did not include any realized losses for
other than temporary impairments.
UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES
Underwriting, acquisition and insurance expenses consist of normal,
recurring expenses such as commissions, salaries and other expenses. These
expenses increased by approximately $885,000 and $2.2 million, respectively,
for the three and six month periods ended June 30, 2003 as compared to the same
periods in 2002, due to premium growth. The underwriting expense ratio is the
total of underwriting, acquisition and insurance expenses divided by net
premiums earned. This ratio is 22.2% and 22.3%, respectively, for the three and
six month periods ended June 30, 2003, a slight improvement as compared to our
2002 ratios for the comparable periods.
31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We believe that we are principally exposed to three types of market
risk related to our investment operations. These risks are interest rate risk,
credit risk and equity price risk.
The term market risk refers to the risk of loss arising from adverse
changes in market rates and prices, such as interest rates, equity prices and
foreign currency exchange rates.
All market sensitive instruments discussed here relate to our
investment assets that are classified as available for sale.
As of June 30, 2003, our fair value investment in fixed income
securities was $1.666 billion. These securities are subject primarily to
interest rate risk and credit risk.
At June 30, 2003 we own no equity or fixed income securities that
require treatment as derivatives under generally accepted accounting principles
and we have no plans to acquire securities that would require such treatment.
INTEREST RATE RISK
Our fixed maturities portfolio is exposed to interest rate risk.
Fluctuations in interest rates have a direct impact on the market valuation of
these securities. As interest rates rise, market values of fixed income
portfolios fall and vice versa. We believe we are in a position to keep our
fixed income investments until maturity, as we do not invest in fixed maturity
securities for trading purposes.
The table below displays the anticipated effect of market interest
rate fluctuations on the value and weighted average modified duration of our
fixed maturity portfolio.
Portfolio Change Weighted
Interest Value in Value Average Modified
Rates $ Millions $ Millions Duration Years
- -------- ---------- ---------- ----------------
200 basis point rise $1,543 $(123) 4.14
100 basis point rise 1,606 (60) 3.87
Current rate* 1,666 -- 3.68
100 basis point decline 1,729 63 3.71
200 basis point decline 1,793 127 3.79
* Current rates are as of June 30, 2003.
Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including the maintenance of the
existing level and composition of fixed income security assets, and should not
be relied on as indicative of future results.
32
Certain limitations are inherent in the method of analysis presented
in the computation of the fair value of fixed rate instruments. Actual values
may differ from those projections presented should market conditions vary from
assumptions used in the calculation of the fair value of individual securities,
including non-parallel shifts in the term structure of interest rates and
changing individual issuer credit spreads.
At June 30, 2003, the fair value of our investment in preferred stocks
was $33.4 million, including net unrealized gains of $1.5 million. Preferred
stocks are primarily subject to interest rate risk because they bear a fixed
rate of return. The investments in the above table do not include preferred
stocks.
CREDIT RISK
We have exposure to credit risk primarily as a holder of fixed income
securities. We control this exposure by emphasizing investment grade credit
quality in the fixed income securities we purchase. We believe that this
concentration in investment grade securities reduces our exposure to credit
risk on these fixed income investments to an acceptable level. However, in the
current environment even investment grade securities can rapidly deteriorate
and result in significant losses.
EQUITY PRICE RISK
At June 30, 2003 the fair value of our investment in common stocks,
excluding preferred stocks as discussed in the preceding paragraphs, was $44.5
million, which included net unrealized gains of $3.6 million. These securities
are subject to equity price risk, which is defined as the potential for loss in
market value due to a decline in equity prices. A hypothetical 10% increase in
the market prices as of June 30, 2003 would increase the fair value of these
securities to $49.0 million; a hypothetical 10% decrease in the price of each
of these marketable securities would reduce the fair value to $40.1 million.
The selected hypothetical change does not reflect what could be considered the
best or worst scenarios.
ProAssurance's cash and short-term investment portfolio at June 30,
2003 was on a cost basis which approximates its fair value. This portfolio
lacks significant market rate sensitivity due to its short duration.
ITEM 4. CONTROLS AND PROCEDURES
The Chief Executive Officer and Chief Financial Officer of the
Company evaluated the effectiveness of our disclosure controls and procedures
(as defined in SEC Rule 13a-15(e)) as of June 30, 2003. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective.
During the quarter ended June 30, 2003, there was no change in our
internal control over financial reporting (as defined in Rule 13a-15(f)) that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
33
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 9 to the condensed consolidated financial statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On July 7, 2003, ProAssurance issued and sold, in a private placement,
$100 million aggregate principal amount of its 3.90% Convertible Senior
Debentures due 2023 (the Debentures). On July 16, 2003, ProAssurance issued and
sold, in a private placement, $7.6 million aggregate principal amount of the
Debentures pursuant to an option to purchase additional Debentures granted to
the initial purchasers. The Debentures are senior unsecured obligations of
ProAssurance and rank equally with ProAssurance's other unsecured and
unsubordinated obligations.
The Debentures were sold to Banc of America Securities LLC and
Cochran, Caronia Securities LLC, as the initial purchasers, as "accredited
investors" within the meaning of Rule 501 under the Securities Act of 1933, as
amended (the Securities Act), in reliance upon the private placement exemption
afforded by the Securities Act, and were offered and sold to "qualified
institutional buyers" under Rule 144A under the Securities Act. Pursuant to a
registration rights agreement entered into in connection with the private
offering, ProAssurance has agreed to file with the Securities and Exchange
Commission a registration statement under the Securities Act to permit
registered resales of the Debentures and the shares of ProAssurance's common
stock issuable upon the conversion of the Debentures.
The aggregate offering price of the Debentures was $107.6 million,
representing 100% of the principal amount thereof. The net proceeds from the
offering were approximately $104.3 million, which represented the initial
offering price of the Debentures less direct expenses of the offering and an
underwriters' discount of 2.75% of the aggregate principal amount of the
Debentures, which discount totaled approximately $3.0 million. ProAssurance
used the net proceeds to pay off its existing term loan having an outstanding
principal balance of $67.5 million. The balance of the net proceeds will be
used for general corporate purposes, which may include contributions to the
capital of its insurance subsidiaries to support the expected growth in
insurance operations.
The Debentures are convertible, upon the occurrence of certain events,
into shares of common stock of ProAssurance at an initial conversion rate of
23.9037 shares for each $1,000 principal amount of the Debentures, which is
equivalent to an initial conversion price of approximately $41.83 per share.
ProAssurance's common stock is traded on the New York Stock Exchange under the
symbol "PRA". See Note 13 of the Notes to Condensed Consolidated Financial
Statements of ProAssurance and subsidiaries included elsewhere herein for a
description of the conversion rights and other terms of the Debentures.
34
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
4.1 Indenture dated July 7, 2003, between ProAssurance and
SouthTrust Bank with respect to the 3.90% Convertible Senior
Debentures due 2023*
4.2 Registration Rights Agreement, dated July 7, 2003, between
ProAssurance and Banc of America Securities LLC and Cochran,
Caronia Securities LLC as initial purchasers of the 3.90%
Convertible Senior Debentures due 2023*
10.1 Description of ProAssurance Corporation's Executive
Supplemental Life Insurance Plan
31.1 Certification of Principal Executive Officer of ProAssurance
as required under SEC rule 13a-14(a)
31.2 Certification of Principal Financial Officer of ProAssurance
as required under SEC rule 13a-14(a)
32.1 Certification of Principal Executive Officer of ProAssurance
as required under SEC Rule 13a-14(b) and Section 1350 of
Chapter 63 of Title 18 of the United States Code, as amended
(18 U.S.C. 1350)
32.2 Certification of Principal Financial Officer of ProAssurance
as required under SEC Rule 13a-14(b) and Section 1350 of
Chapter 63 of Title 18 of the United States Code, as amended
(18 U.S.C. 1350)
* Previously filed as an exhibit to ProAssurance's Current
Report of Form 8-K for event occurring July 7, 2003, and
incorporated herein by reference pursuant to SEC Rule 12b-32.
(b) Reports on Form 8-K.
ProAssurance filed a Current Report on Form 8-K on May 12, 2003 that
furnished information regarding operating results for the quarter
period ended March 31, 2003 that was publicly released on that same
day.
ProAssurance filed a Current Report on Form 8-K on June 30, 2003 that
furnished information regarding earnings expectations for the quarter
period ended June 30, 2003 and announcing the proposed private
offering of convertible debentures that was publicly released on that
same day.
ProAssurance filed a Current Report on Form 8-K on July 1, 2003 that
furnished information regarding the pricing and terms of its private
offering of convertible debentures that was publicly released on that
same day.
ProAssurance filed a Current Report on Form 8-K on July 7, 2003 that
furnished information regarding the closing of its private offering of
convertible debentures that was publicly released on that same day.
35
(b) Reports on Form 8-K (continued).
ProAssurance filed a Current Report on Form 8-K on July 8, 2003 that
furnished information regarding A.M. Best's affirmation of
ProAssurance's Financial Strength Rating and Best's rating of the
company's recently issued debentures that was publicly released on
that same day.
ProAssurance filed a Current Report on Form 8-K on July 15, 2003 that
furnished information regarding the exercise of an over-allotment
option in connection with the company's recently issued debentures
that was publicly released on that same day.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PROASSURANCE CORPORATION
August 11, 2003
/s/ Howard H. Friedman
---------------------------------------
Howard H. Friedman, Chief Financial
Officer (Duly authorized officer and
principal financial officer)
36