Our policy liability limits vary by line and state. In workers' compensation insurance, state statutes dictate the coverage we offer our policyholders. For medical professional liability insurance, most states allow physicians to choose their own coverage limits. The limits of liability purchased by our medical professional liability policyholders differ by state. In Michigan and New Mexico, the most common limits purchased by our policyholders are $200,000 per claim, with a $600,000 annual aggregate ($200,000/$600,000). In Florida, the most common limits purchased is $250,000/$750,000. In all other states, the most common limit purchased is $11,000,000 per claim, with an $11,000,000 annual aggregate. Higher limits and excess coverage may be written in conjunction with special reinsurance arrangements.
MEDICAL PROFESSIONAL LIABILITY INSURANCE OPERATIONS. Net premiums earned increased by $13.2 million, or 13.7%, to $109.5 million in 2000. This increase reflects the increase in direct premiums written and changes in our reinsurance program, primarily eliminating the 50% quota share arrangement in Florida.
The provision for unpaid losses and loss adjustment expenses is estimated actuarially using the Company's claim experience. These estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in such estimates, management believes that the liability for unpaid losses and loss adjustment expenses is adequate. The method for making such estimates and for establishing the resulting liabilities are continually reviewed, and any adjustments are reflected in current earnings.
The reserve for extended reporting period claims coverage is recorded during the term of the original claims-made policy, utilizing the pure-premium approach, in amounts believed to be adequate to pay for estimated future claims reported subsequent to a current policyholder's death, disability or retirement. The amount of this reserve is $15,000,000 and $21,000,000 at December 31, 2001 and 2000 respectively and is included in unpaid losses on the balance sheet. Changes in this reserve are charged or credited to income.
In April 2000, the Company began to phase out its health lines and restructure its New Mexico operations. A total of six people were terminated at the time, resulting in charges of $408,000 of severance costs and $105,000 of other charges. In October 2000, the Company began to phase out its personal and commercial lines in Lapeer, Michigan. A total of 14 people were terminated, resulting in a charge of $406,000.
In connection with the offering, the Company also granted 200 shares of restricted stock to each employee for a total grant of 39,600 shares at $13.50 per share. These shares vest at a rate of 20%, 35% and 45%, respectively, over the next three years. Upon issuance of the stock award, unearned compensation is charged to shareholders' equity and amortized over the vesting periods. During 2001, a total of 18,110 shares vested under terms of these stock award programs. A total of 21,700 shares were forfeited as a result of employee terminations prior to vesting. The vesting of stock awarded to officers, directors and employees resulted in a total compensation expense of $435,000 and $83,000 in 2001 and 2000, respectively.
In management's opinion, existing stock option valuation models do not provide an entirely reliable measure of the fair value of non-transferable employee stock options with vesting restrictions.
The Company is obligated under operating leases, which have various expiration dates through December 2006. Minimum future lease payments are as follows: 2002 -- $1,624,000; 2003 -- $1,384,000; 2004 -- $688,000; 2005 -- $529,000 and 2006 -- $560,000. Rental expense was $2,177,000 in 2001, $2,419,000 in 2000 and $2,665,000 in 1999.