(B) The Board of Directors declared special stock dividends in December 1999 (5%), 1998 (10%), 1997 (5%), and in August 1997 the Board declared a two-for-one stock split. All Net income per share and Total capital per share data on this page has been restated as if the dividends and the stock split had been declared on January 1, 1997. Additionally, treasury stock is excluded from the date of acquisition for purposes of determining the weighted average number of shares outstanding used in the computation of net income per share of common stock.
(C) Operating results include the operating results of Professionals Group since the date of consolidation, June 27, 2001. See Note 2 to the consolidated financial statements.
The payment of losses and LAE and operating expenses in the ordinary course of business and debt service are currently ProAssurance's principal need for liquid funds. During 2001, cash provided by operating activities was sufficient to meet those needs, and ProAssurance believes those sources will be sufficient to meet its cash needs for at least the next twelve months. ProAssurance believes that its reserves for losses and LAE are adequate to discharge outstanding contractual liabilities.
On June 27, 2001, Medical Assurance and Professionals Group became wholly owned subsidiaries of ProAssurance, a newly formed holding company. The consolidation of Medical Assurance and Professionals Group under ProAssurance is described in Note 2 to ProAssurance's consolidated financial statements. The cash required for the consolidation was $196 million, which ProAssurance derived from internal funds generated from dividends paid by Medical Assurance and Professionals Group at the time of closing and the proceeds of a $110.0 million term loan.
The term loan was obtained pursuant to a credit agreement with the lending banks, a copy of which was filed as an exhibit to the ProAssurance Form 8-K/A filed with the SEC on May 18, 2001. The credit agreement includes a $40 million revolving line of credit available for ProAssurance's working capital and operating requirements, including debt service. See Note 11 to ProAssurance's consolidated financial statements for more information regarding the terms of the credit agreement, including the financial covenants. ProAssurance is, and anticipates it will be, in compliance with all loan covenants during the next 12 months.
The cash required for the consolidation was less than originally anticipated by management because fewer than expected Professionals Group shareholders elected to receive an all-cash distribution instead of electing to receive cash and stock. ProAssurance made a $22.5 million prepayment against the term loan in September 2001, and also made the two required quarterly repayments of $2.5 million.
ProAssurance's long-term debt is held and serviced by the parent holding company, ProAssurance, and it currently has sufficient funds in its direct non-insurance subsidiaries to meet its debt service requirements for 2002. ProAssurance's future cash requirements will be funded principally by dividends from its insurance subsidiaries, which may require regulatory approval.
The professional liability segment also includes accident and health, workers compensation and multi-line insurance. ProAssurance has curtailed its participation in these lines of business and expects substantial reductions in premiums written over the next twelve months. Earned premiums will taper off more slowly, reflecting the written premium volumes of earlier periods.
Interest expense for the year ended December 31, 2001 of $2.6 million relates entirely to the credit agreement obtained in order to finance the consolidation with Professionals Group. The debt bears interest at a variable rate based on the London Interbank Offered Rate (LIBOR) or the bank's base rate as elected from time to time by ProAssurance. At December 31, 2001 the interest rate was 3.4%. See Note 11 to the ProAssurance's consolidated financial statements for more information regarding ProAssurance's credit agreement.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. Management evaluates these estimates and assumptions on an on-going basis based on historical developments, market conditions, industry trends and other information management believes to be reasonable under the circumstances. There can be no assurance that actual results will conform to management's estimates and assumptions, and that reported results of operations will not be materially adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time. The following policies are those management believes to be the most sensitive to estimates and judgments. ProAssurance's significant accounting policies are more fully described in Note 1 to ProAssurance's consolidated financial statements.
Investments. At December 31, 2001 and 2000, all of ProAssurance's securities are classified as available-for-sale and are those securities that would be available to be sold in response to its liquidity needs, changes in market interest rates and investment management strategies, among others. Available-for-sale securities are recorded at fair value, with unrealized gains and losses, net of the related income tax effect, excluded from income and reported as a separate component of shareholders' equity. A decline in the fair value of an available-for-sale security below cost that ProAssurance's management judges not to be temporary is charged against income in the current period.
Operating results for ProAssurance's professional liability insurance segment for the twelve months ended December 31, 2001 and 2000 are summarized in the table below (in thousands).
Professional liability premiums written for the year ended December 31, 2001 increased by $91.8 million as compared to the same period of 2000. The increase is primarily attributable to ProAssurance's consolidation with Professionals Group but also includes the effect of rate increases implemented during 2001.
Medical Assurance and Professionals Group implemented rate increases averaging 23% on 2001 renewals. Their retention of insureds averaged approximately 84% during 2001. ProAssurance plans to continue to implement rate increases based on loss trends, subject to regulatory approval. To date, premiums renewed at the higher rates coupled with new business have more than offset the effect of premiums lost due to decreased retention of insureds. However, the higher rates may result in a greater loss of insureds in future periods.
Reinsurance premiums ceded are estimated based on the terms of the respective reinsurance agreements. The estimated expense is continually reviewed and any adjustments that become necessary are included in current operations. Several factors contributed to the increase in reinsurance premiums ceded for 2001 as compared to 2000. The increase in earned premiums as a result of the consolidation accounted for approximately 30% of the increase. During the fourth quarter of 2000, ProAssurance decreased retention levels and, thus, in 2001 more earned premiums were subject to reinsurance. Also, in 2001 more premiums were earned in markets where ProAssurance relies more heavily on reinsurance.
Included in net earned premiums for the years ended December 31, 2001, and 2000 are accident and health, workers compensation and multi-line premiums of approximately $38.8 million and $34.7 million, respectively. ProAssurance has historically written accident and health, workers compensation and multi-line premiums from time to time as favorable opportunities arose to utilize capital. ProAssurance began during 2000 to decrease its commitment to these programs. However, premiums continued to be written and earned during 2001 and 2000 due to existing contractual relationships. ProAssurance expects substantially decreased premiums from this source in the coming year. The increase during 2001 reflects both volume increases and higher rates charged on this business. The volume increases in 2001 relate to contractual agreements that have now either expired or been canceled.
Claims are resolved over an extended number of years and a number of these claims are litigated. Management uses methods it believes to be reasonable and appropriate in establishing its loss reserves, but during the extended period in which claims are resolved, the legal environment and other factors may change. Consequently, ultimate losses are inherently difficult to estimate and actual results may vary from the estimated amounts. Given the large volume of loss reserves at any balance sheet date, a small change in the estimate of those reserves can have a significant effect on current operations. ProAssurance's most recent actuarial evaluation indicated that due to increasing trends in severity and frequency of claims, the average ultimate payment of indemnity and loss adjustment expenses per exposure unit for recent accident years appears likely to exceed comparable averages for previous years. Consequently, during 2001, ProAssurance recognized $13.8 million of additional net losses related to prior accident years, representing approximately 1.4% of December 31, 2001 professional liability net reserves of $1.0 billion. In 2001, the $18.6 million decrease in the reserve for death, disability and retirement is principally the result of an increase in premium rate loads and a decrease in the number of insureds primarily related to the ProNational book of business.
For purposes of this discussion, the investment portfolio is comprised of fixed maturities and equity securities at amortized cost and short-term investments. The earnings on the portfolio constitute the related net investment income.
The principal investment objective of ProAssurance is to achieve a high level of after-tax income while minimizing risk. Although fixed maturity securities are purchased with the initial intent to hold such securities until their maturity, disposals of securities prior to their respective maturities may occur if management believes such disposals are consistent with ProAssurance's overall investment objectives, including maximizing after-tax yields. ProAssurance is restructuring its investment portfolio to include a higher proportion of taxable securities. At December 31, 2001 approximately $133 million of the professional liability portfolio is invested in principally taxable short-term securities; a substantial portion of these short-term securities will be converted to longer term fixed maturity and equity investments during 2002.
The most significant component of other income is net realized capital gains. Net realized capital gains increased from $0.9 million in 2000 to $5.4 million in 2001. This increase primarily resulted from additional sales of investment securities related to ProAssurance's restructuring its investment portfolio, as discussed under investment income.
Underwriting, acquisition and insurance expenses increased approximately $16.4 million for the year ended December 31, 2001 as compared to the same period of 2000 due to the consolidation with Professionals Group. The underwriting expense ratio (underwriting, acquisition and insurance expenses divided by net premiums earned) also increased; for 2001 the ratio was 22.6% as compared to 21.7 % for the same period in 2000. The increase in the ratio is primarily due to an increase in guaranty fund assessments. The remaining increase is due to normal fluctuations in acquisition expenses between years.
ProAssurance's personal lines segment is comprised of the operations of a single insurance company, MEEMIC Insurance Company, acquired on June 27, 2001. Operating results for ProAssurance's personal lines insurance segment for the six months ended December 31, 2001 are summarized in the table below (in thousands).
For purposes of this discussion, the investment portfolio is comprised of fixed maturities and equity securities at amortized cost and short-term investments. The earnings on the portfolio constitute the related net investment income, which totaled $5.0 million for the period ended December 31, 2001. No securities within the portfolio were deemed to have permanent declines in market values during the six months ended December 31, 2001 and no such declines were recognized during the period.
Other income consists primarily of commission income. No significant amount of net realized capital gains is included in other income.
During the years ended December 31, 2000 and December 31, 1999, ProAssurance operated in the United States of America in only one reportable insurance industry segment, professional liability insurance, which was principally made up of its two operating insurance subsidiaries: MA-Alabama and MA-West Virginia. Effective December 29, 2000, ProAssurance consolidated its organizational structure and merged two of its formerly separate insurance subsidiaries, Medical Assurance of Missouri, Inc. and Medical Assurance of Indiana, Inc., into MA-Alabama.
For the year ended December 31, 2000 as compared to the same period of 1999, accident and health, workers compensation and multi-line premiums increased by $20.7 million; however, as previously discussed, similar growth is not expected in future periods.
Medical professional liability premiums earned decreased $4.9 million for the year ended December 31, 2000 as compared to same period in 1999. As with written premiums, $3.9 million of this decrease was due to one-time additional premiums earned in 1999 related to the purchase of a book of business. Direct and assumed accident and health, workers compensation and multi-line premiums earned increased by $13.7 million during the year ended December 31, 2000 as compared to the same period of 1999.
Consolidated losses and loss adjustment expenses (losses) and the related current year loss ratio are summarized in the following table (dollars in thousands).
The current accident year loss ratio (current accident year net loss divided by net premiums earned) increased to 100% from 96%. This change is due to increasing trends in severity and frequency of professional liability claims recognized by ProAssurance during the year 2000. As a result of these same trends, the average ultimate payment of indemnity and loss adjustment expenses per exposure unit for recent accident years appears likely to exceed comparable averages for previous years. Although such per claim average remains within the level contemplated by the previously established reserves, the effect was favorable loss development during the year ended December 31, 2000 of $12.5 million versus $53.6 million during the year ended December 31, 1999. In 2000, the $10.0 million decrease in the reserve for death, disability and retirement is principally the result of an increase in premium rate loads and a decrease in the number of insureds.