MA-Alabama owns an office building located in Birmingham, Alabama where ProAssurance and its subsidiaries occupy approximately 55,000 square feet of office space. The remaining 101,000 square feet of office space is leased to unaffiliated persons or is available to be leased. Professionals Group owns a 53,000 square foot office building in Okemos, Michigan that houses only its principal executive offices. Both buildings are currently unencumbered. MEEMIC leases its principal executive offices in Auburn Hills, Michigan. MEEMIC also owns, primarily for investment purposes, an 11.5-acre vacant parcel of land in Auburn Hills, Michigan. ProAssurance also leases office facilities in various locations and leases computer and operating equipment under cancelable and non-cancelable agreements.
(A) Net income for 1998 was reduced by $1.1 million, which represents the cumulative effect (net of tax) of an accounting change for guaranty fund assessments due to the adoption of the American Institute of Certified Public Accountants' Statement of Position 97-3. The cumulative effect reduced net income per share of common stock (Basic and Diluted) by $0.04 per share.
ProAssurance repurchased approximately 99,000 of its shares during 2001 leaving a total of 1.02 million shares remaining from stock repurchase authorizations granted to Medical Assurance prior to the consolidation. These authorizations will be used to repurchase ProAssurance shares.
As discussed in detail in Item 1, under the caption of General, on March 18, 2002 MEEMIC Holdings announced that it intends to acquire all of its outstanding shares of stock not currently owned by ProAssurance for $29 per share in cash (a total of 1,294,905 fully diluted shares), for a total possible purchase price of $37.6 million. If the transaction is successfully completed, MEEMIC Holdings intends to primarily use its own existing cash resources to fund the purchase of the shares. The transaction is subject to numerous contingencies as discussed in Item 1 and in Item 3.
RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000:
ProAssurance operates in the United States of America in two reportable insurance industry segments: professional liability and personal lines.
ProAssurance's professional liability insurance segment principally provides professional liability insurance and reinsurance for providers of health care services, and, to a limited extent, providers of legal services. This segment is principally made up of its three operating insurance subsidiaries: MA-Alabama, ProNational and MA-West Virginia.
ProAssurance's personal lines insurance segment provides personal property and casualty insurance to individuals. ProAssurance's personal lines segment includes the operations of a single insurance company, MEEMIC Insurance Company.
Professionals Group activity has only been included in ProAssurance's consolidated results since the date of the consolidation on June 27, 2001. Prior to the consolidation with Professionals Group, ProAssurance did not have a personal lines segment.
All revenues and expenses of ProAssurance are allocated to the operating segments, other than investment income earned directly by the ProAssurance Holding and interest expense related to long-term debt held by the parent.
Revenue Recognition. ProAssurance recognizes insurance premium income on a monthly pro rata basis over the respective terms of the policies in force. Unearned premiums represent the portion of premiums written applicable to the unexpired terms of the policies in-force. Reinsurance arrangements are prospective contracts for which prepaid reinsurance premiums are amortized ratably over the related policy terms based on the estimated ultimate amounts to be paid. Changes in estimated outcomes are recognized currently.
Professional liability losses and loss adjustment expenses (losses) and the related current accident year loss ratio are summarized in the following table (dollars in thousands).
Losses incurred include three components: a) actuarial evaluation of incurred loss levels for the current accident year; b) actuarial re-evaluation of incurred loss levels for prior accident years and c) actuarial re-evaluation of the reserve for the death, disability and retirement provision. These components take into consideration prior loss experience, loss trends, changes in the frequency and severity of claims, premium rate loads and the retention of insureds. Any adjustments related to previously established amounts are included in current operations.
The current accident year loss ratio in the table above is calculated by dividing current accident year incurred losses by net premiums earned. The principal reason for the increase in that ratio in 2001 is the effect of the inclusion of Professional Group's premiums and losses.
Net investment income increased by $12.9 million as compared to the year ended December 31, 2000. The increase is primarily due to the net increase in the investment portfolio as a result of the consolidation with Professionals Group.
At December 31, 2001, the investment portfolio of $1.31 billion consisted of 78% taxable securities and 22% tax-exempt securities. At December 31, 2001, the average yield of the professional liability segment fixed maturity investments was 5.9%.
Net capital gains in the fourth quarter of 2001 include a loss of $409,000 recognized on one investment that was deemed to have an other than temporary decline in market value. All other declines in market values of ProAssurance's investment securities at December 31, 2001 were deemed to be temporary.
Guaranty fund assessments for the year ended December 31, 2001 were approximately $1.3 million, an increase of $0.9 million as compared to the year ended December 31, 2000. ProAssurance is required by most states to be a member of its insolvency or guaranty fund association and, as such, must make payments to the association when so assessed by the state. Such assessments can and do vary widely from year to year. Guaranty fund assessments (reductions of assessments) included in acquisition expenses by quarter of each year are as follows (in thousands):
Gross premiums written were $73.3 million and net premiums earned were $69.4 million related to the personal lines segment for the period ended December 31, 2001. Net premiums earned from personal automobile coverage represent approximately 87% of the total, and premiums from homeowners coverage represent approximately 12% of the total.
Net losses and LAE incurred related to the personal lines segment were $48.3 million for the period ended December 31, 2001. The incurred loss and LAE ratio was 69.6% during the period ended December 31, 2001.
At December 31, 2001, the investment portfolio consisted of 48% taxable securities and 52% tax-exempt securities. At December 31, 2001, the average yield of the personal lines segment fixed maturity investments was 5.0%.
The principal investment objective of ProAssurance is to achieve a high level of after-tax income while minimizing risk. Although fixed maturity securities are purchased with the initial intent to hold such securities until their maturity, disposals of securities prior to their respective maturities may occur if management believes such disposals are consistent with ProAssurance's overall investment objectives, including maximizing after-tax yields.
Underwriting, acquisition and insurance expenses related to the personal lines segment were $15.4 million for the period ended December 31, 2001, consisting of normal, recurring expenses such as commissions, salaries and other expenses. The underwriting expense ratio (underwriting, acquisition and insurance expenses divided by net premiums earned) was 22.2% for the period ended December 31, 2001. No guaranty fund assessments were included in underwriting, acquisition and insurance expenses in 2001.
MEEMIC Insurance Company is a wholly owned subsidiary of MEEMIC Holdings, Inc. MEEMIC Holdings, Inc. is publicly traded on the NASDAQ National Market (symbol "MEMH"). For additional information about MEEMIC and comparative analysis to periods prior to the consolidation, see the MEEMIC Holdings, Inc. December 31, 2001 annual report on Form 10-K filed with the Securities and Exchange Commission.
Operating results for ProAssurance's professional liability insurance segment for the twelve months ended December 31, 2000 and 1999 are summarized in the table below (in thousands).
Premiums ceded decreased by approximately $4.4 million for the year ended December 31, 2000 as compared to the year ended December 31, 1999, primarily related to workers compensation, accident and health, and multi-line premiums earned. While the total earned amount of these premiums increased during 2000, the proportion of the premiums that were ceded decreased. As a result, ceded premiums were lower for the year ended December 31, 2000.
Net earned premiums included accident and health, workers compensation and multi-line premiums of approximately $34.8 million in 2000 and $14.8 million in 1999. ProAssurance has previously disclosed its commitment to discontinue participation in the underwriting programs that generated most of these premiums and expects substantially decreased premiums in future periods.
For purposes of this discussion, invested assets are comprised of fixed maturities and equity securities at amortized cost and short-term investments. The earnings on such invested assets constitute the related net investment income.
Consolidated net investment income was $41.5 million in 2000 compared to $39.3 million in 1999. The $2.2 million increase is attributable to both to increased average yields and to growth in the amount of invested assets.
At December 31, 2000, the investment portfolio consisted of 51% taxable securities and 49% tax-exempt securities. At December 31, 2000, the average yield of fixed maturity investments was 5.5%.
Other income decreased to $3.5 million for the year ended December 31, 2000 compared to $4.3 million for the year ended December 31, 1999. The decrease is principally attributable to a $0.8 million decrease in capital gains realized upon the sale of securities during 2000 as compared to 1999.
Underwriting, acquisition and insurance expenses decreased by approximately $1.6 million for the year ended December 31, 2000 as compared to the same period in 1999 primarily because of a $2 million decrease in guaranty fund assessments. The underwriting expense ratio (underwriting, acquisition and insurance expenses divided by premiums earned) for 2000 was 21.7% as compared to 24.5% for the same period in 1999. The decrease in the ratio was due both to the reduction in guaranty fund assessments and to the cost control measures implemented by ProAssurance during 2000.
The Consolidated Financial Statements and Financial Statement Schedules of ProAssurance Corporation and subsidiaries listed in Item 14(a) have been included herein beginning on page 43. The Supplementary Financial Information required by Item 302 of Regulation S-K is included in Note 15 of the Notes to Consolidated Financial Statements of ProAssurance Corporation and its subsidiaries.