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 MARCH 31, 2005 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 Identification No.)
Incorporation of Organization)
100 Brookwood Place, Birmingham, AL 35209
- ----------------------------------------- --------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(205) 877-4400
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
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(Former Name, Former Address, and Former Fiscal Year,
if Changed Since Last Report
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 March 31, 2005 there were 29,252,379 shares of the registrant's
common stock outstanding.
Page 1 of 34
PROASSURANCE CORPORATION
FORM 10Q
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements (Unaudited)
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 (Loss)................................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..........17
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................30
Item 4. Controls and Procedures........................................................................31
Forward-Looking Statements..............................................................................32
Part II - Other Information
Item 1. Legal Proceedings..............................................................................33
Item 6. Exhibits and Reports on 8-K....................................................................33
Signature...............................................................................................34
2
PROASSURANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31 December 31
-------------------------------------
2005 2004
-------------------------------------
ASSETS
Investments:
Fixed maturities available for sale, at fair value $2,248,984 $2,257,985
Equity securities available for sale, at fair value 29,241 35,230
Equity securities, trading portfolio, at fair value 4,385 4,150
Real estate, net 20,148 19,244
Short-term investments 118,323 41,423
Business owned life insurance 54,705 54,138
Other 43,999 42,883
-------------------------------------
Total investments 2,519,785 2,455,053
Cash and cash equivalents 28,587 30,084
Premiums receivable 145,672 131,736
Receivable from reinsurers on unpaid losses and
loss adjustment expenses 415,294 409,339
Prepaid reinsurance premiums 18,122 18,888
Deferred taxes 92,768 80,107
Other assets 120,399 113,991
-------------------------------------
$3,340,627 $3,239,198
=====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Reserve for losses and loss adjustment expenses $2,096,705 $2,029,592
Unearned premiums 335,773 314,179
Reinsurance premiums payable 70,559 69,507
-------------------------------------
Total policy liabilities 2,503,037 2,413,278
Other liabilities 74,377 63,421
Long-term debt 151,554 151,480
-------------------------------------
Total liabilities 2,728,968 2,628,179
Commitments and contingencies - -
Stockholders' Equity:
Common stock, par value $0.01 per share
100,000,000 shares authorized; 29,374,144 and
29,326,228 shares issued, respectively 294 293
Additional paid-in capital 315,832 313,957
Accumulated other comprehensive income, net of deferred tax expense
of $661 and $13,139, respectively 1,224 24,397
Retained earnings 294,365 272,428
-------------------------------------
611,715 611,075
Less treasury stock, at cost, 121,765 shares (56) (56)
-------------------------------------
Total stockholders' equity 611,659 611,019
-------------------------------------
$3,340,627 $3,239,198
=====================================
See accompanying notes.
3
PROASSURANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL (UNAUDITED)
(IN THOUSANDS)
ACCUMULATED OTHER
COMPREHENSIVE RETAINED OTHER CAPITAL
TOTAL INCOME EARNINGS ACCOUNTS
---------------------------------------------------------------------
Balance at December 31, 2004 $ 611,019 $ 24,397 $ 272,428 $ 314,194
Net income 21,937 - 21,937 -
Change in fair value of securities available
for sale, net of deferred taxes and
reclassification adjustments (23,173) (23,173) - -
Common stock issued for compensation 1,759 - - 1,759
Common stock options exercised 117 - - 117
---------------------------------------------------------------------
Balance at March 31, 2005 $ 611,659 $ 1,224 $ 294,365 $ 316,070
=====================================================================
Accumulated Other
Comprehensive Retained Other Capital
Total Income Earnings Accounts
---------------------------------------------------------------------
Balance at December 31, 2003 $ 546,305 $ 34,422 $ 199,617 $ 312,266
Net income 15,981 - 15,981 -
Change in fair value of securities available
for sale, net of deferred taxes and
reclassification adjustments 11,414 11,414 - -
Common stock issued for compensation 1,593 - - 1,593
Common stock options exercised 81 - - 81
---------------------------------------------------------------------
Balance at March 31, 2004 $ 575,374 $ 45,836 $ 215,598 $ 313,940
=====================================================================
See accompanying notes.
4
PROASSURANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31
--------------- --------------
2005 2004
--------------- --------------
Revenues:
Gross premiums written $ 215,658 $218,726
=============== ==============
Net premiums written $ 196,420 $195,462
=============== ==============
Premiums earned $ 194,103 $188,528
Premiums ceded (19,923) (20,686)
--------------- --------------
Net premiums earned 174,180 167,842
Net investment income 25,422 19,851
Net realized investment gains 942 3,657
Other income 1,646 1,010
--------------- --------------
Total revenues 202,190 192,360
Expenses:
Losses and loss adjustment expenses 155,220 152,673
Reinsurance recoveries (16,004) (10,753)
--------------- --------------
Net losses and loss adjustment expenses 139,216 141,920
Underwriting, acquisition and insurance expenses 30,603 27,973
Interest expense 2,136 1,143
--------------- --------------
Total expenses 171,955 171,036
--------------- --------------
Income before income taxes 30,235 21,324
Provision for income taxes:
Current expense 8,481 5,326
Deferred expense (benefit) (183) 17
--------------- --------------
8,298 5,343
--------------- --------------
Net income $ 21,937 $ 15,981
=============== ==============
Earnings per share:
Basic $ 0.75 $ 0.55
=============== ==============
Diluted $ 0.71 $ 0.52
=============== ==============
Weighted average number of common shares outstanding:
Basic 29,217 29,118
=============== ==============
Diluted 32,070 31,933
=============== ==============
See accompanying notes.
5
PROASSURANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31
--------------------------
2005 2004
--------------------------
COMPREHENSIVE INCOME (LOSS):
Net income $ 21,937 $15,981
Change in fair value of securities available
for sale, net of deferred taxes (22,535) 13,320
Reclassification adjustment for realized investment
(gains) losses included in income, net of
deferred taxes (638) (1,906)
----------------------
Comprehensive income (loss) $ (1,236) $27,395
======================
See accompanying notes.
6
PROASSURANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31
-------------------------------
2005 2004
-------------------------------
OPERATING ACTIVITIES
Net cash provided by operating activities $ 97,473 $ 94,719
INVESTING ACTIVITIES
Purchases of:
Fixed maturities available for sale (248,535) (370,081)
Equity securities available for sale - (149)
Other investments (462) (3,125)
Proceeds from sale or maturity of:
Fixed maturities available for sale 225,640 205,203
Equity securities available for sale 5,690 3,291
Net (increase) decrease in short-term investments (76,900) 58,301
Other (4,452) (1,671)
-------------------------------
Net cash (used by) investing activities (99,019) (108,231)
-------------------------------
FINANCING ACTIVITIES
Net cash provided by financing activities 49 11
-------------------------------
(Decrease) in cash and cash equivalents (1,497) (13,501)
Cash and cash equivalents at beginning of period 30,084 42,045
-------------------------------
Cash and cash equivalents at end of period $ 28,587 $ 28,544
===============================
See accompanying notes.
7
PROASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2005
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of ProAssurance Corporation and its subsidiaries
(ProAssurance). The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States (GAAP) for interim
financial information and with the 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 GAAP 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 three months ended March 31, 2005 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2005. The
accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes contained in
ProAssurance's December 31, 2004 report on Form 10K.
Stock-Based Compensation
ProAssurance grants stock options to key employees under its various stock
compensation plans adopted from time to time by the Board of Directors and
approved by the stockholders ("the ProAssurance Plans"). ProAssurance 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.
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31
----------------------------
2005 2004
------------- --------------
Net income, as reported $ 21,937 $ 15,981
Add: Stock-based employee compensation expense
recognized under APB 25 related to the exercise
of options, net of related tax effects 16 64
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (388) (259)
------------- --------------
Pro forma net income $ 21,565 $ 15,786
============= ==============
Earnings per share:
Basic -- as reported $ 0.75 $ 0.55
============= ==============
Basic -- pro forma $ 0.74 $ 0.54
============= ==============
Diluted -- as reported $ 0.71 $ 0.52
============= ==============
Diluted -- pro forma $ 0.70 $ 0.52
============= ==============
</Table>
8
PROASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2005
1. BASIS OF PRESENTATION (CONTINUED)
Reclassifications
Certain reclassifications have been made to the March 31, 2004 Statement of
Cash Flows to conform to the current year and December 31, 2004 presentation.
The reclassification did not affect cash flow from operating activities.
Accounting Changes
On December 16, 2004 the Financial Accounting Standards Board (FASB) issued
SFAS 123 (revised 2004), Share-Based Payment, hereafter referred to as SFAS
123(R), which is a revision of SFAS 123, Accounting for Stock-Based
Compensation. SFAS 123(R) supersedes APB 25, Accounting for Stock Issued to
Employees, and amends SFAS 95, Statement of Cash Flows. SFAS 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values. Under
current SEC rules, ProAssurance must adopt SFAS 123(R) no later than January 1,
2006; early adoption is permitted. ProAssurance plans to adopt SFAS 123(R) using
the "modified prospective" method permitted by the statement.
Under the "modified prospective" method stock based compensation is
recognized (a) under the requirements of SFAS 123(R) for all share-based
payments granted after the effective date of SFAS 123(R) and (b) under the
requirements of SFAS 123 for all non-vested share-based payments granted prior
to the adoption of SFAS 123(R).
As permitted by SFAS 123, ProAssurance currently accounts for stock options
awarded to employees using APB 25's intrinsic value method and, as such,
generally recognizes no compensation cost related to such awards. SFAS 123(R)
differs from SFAS 123 in several key computational areas, and implementation of
SFAS 123(R) will require ProAssurance to select among various assumptions in
order to perform the computations required under SFAS 123(R). Those assumptions
have not yet been selected, thus the effect that SFAS 123(R) would have had on
prior periods has not been computed. The effect of adoption of SFAS 123(R) on
future operating results cannot be predicted at this time because the effect
will depend on the levels of share-based payments granted in the future and the
methods and assumptions used to determine the fair value of those share-based
payments. SFAS 123(R) also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as required under current literature.
In the fourth quarter of 2004, ProAssurance implemented the FASB's
September, 2004 consensus regarding Issue 04-08-"Accounting Issues Related to
Certain Features of Contingently Convertible Debt and the Effect on Diluted EPS"
("EITF 04-8"). Under the new guidance, issuers of contingently convertible
(Co-Co) debt instruments must include the potential common shares underlying the
Co-Co (the Co-Co shares) in diluted earnings per share computations (if
dilutive) regardless of whether the market price contingency has been met or
not. Prior to implementation of EITF 04-8, ProAssurance followed commonly
accepted interpretations of SAFS 128, "Earnings Per Share" and did not include
the potential Co-Co shares in its diluted earnings per share computations
because the market price contingency had not been met. In accordance with EITF
04-8 diluted earnings per share for the three months ended March 31, 2004 has
been restated; the restatement reduced previously reported diluted earnings per
share by $0.02.
9
PROASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2005
2. SEGMENT INFORMATION
ProAssurance operates in the U.S. 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,
primarily in the Southeast and Midwest. The professional liability segment
includes the operating results of three significant insurance companies. The
personal lines segment provides personal auto, homeowners, boat and umbrella
coverages to educational employees and their families through a single insurance
company.
The accounting policies of each segment are consistent with those described
in the Notes to the Consolidated Financial Statements included in ProAssurance's
December 31, 2004 Annual Report on Form 10-K. Other than cash and securities
owned directly by the parent company, the assets of ProAssurance are
attributable to the reportable operating segments. Except for investment income
earned directly by the parent company and interest expense attributable to
long-term debt held by the parent company, all revenues and expenses of
ProAssurance are attributable 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 effect of transactions
between segments has been eliminated.
The table below provides a reconciliation of segment information to total
consolidated information.
<Table>
Three Months Ended March 31
2005 2004
-------------- --------------
In thousands
Revenues:
Professional liability segment:
Net premiums earned $ 127,273 $ 123,557
Net investment income 21,913 17,300
Other revenues 2,172 3,349
------------- -------------
Total segment revenues 151,358 144,206
Personal lines segment:
Net premiums earned 46,907 44,285
Net investment income 3,016 2,506
Other revenues 358 608
------------- -------------
Total segment revenues 50,281 47,399
Corporate (not attributed to segments) 551 755
------------- -------------
Total revenues $ 202,190 $ 192,360
============= =============
Income (loss) before taxes:
Professional liability $ 21,182 $ 10,856
Personal lines 10,638 10,856
Corporate (not attributed to segments) (1,585) (388)
------------- -------------
Income before taxes $ 30,235 $ 21,324
============= =============
</Table>
<Table>
March 31 December 31
2005 2004
----------------------------
In thousands
Assets:
Professional liability $2,782,714 $ 2,682,987
Personal lines 502,189 495,903
Corporate (not attributed to segments) 55,724 60,308
------------- -------------
Total assets $3,340,627 $ 3,239,198
============= =============
</Table>
10
PROASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2005
3. INVESTMENTS
The amortized cost of available-for-sale fixed maturities and equity
securities is $2.276 billion and $2.256 billion at March 31, 2005 and December
31, 2004, respectively. Proceeds from sales of fixed maturities and equity
securities during the three months ended March 31, 2005 and 2004 are $180.9
million and $155.2 million, respectively.
Net realized investment gains (losses) are comprised of the following (in
thousands):
<Table>
THREE MONTHS ENDED
MARCH 31
-------------------------------
2005 2004
--------------- ---------------
Gross realized gains $ 1,776 $ 3,029
Gross realized (losses) (452) (90)
Other than temporary impairment (losses) (344) -
Trading portfolio gains (losses) (38) 718
--------------- ---------------
Net realized investment gains (losses) $ 942 $ 3,657
=============== ===============
</Table>
4. 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 primarily because a portion of ProAssurance's investment income is
tax-exempt.
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 policy acquisition costs, net of ceding commissions earned, amounted to
approximately $16.8 million and $15.5 million for the three months ended March
2005 and 2004, respectively.
6. RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
ProAssurance establishes its reserve for losses and loss adjustment
expenses based on 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.
Claims may be resolved over an extended period of time, often five years or
more, and are frequently subject to litigation and the inherent risks of
litigation. Estimating losses for liability claims requires ProAssurance to make
and revise judgments and assessments regarding multiple uncertainties over an
extended period of time. 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.
11
PROASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2005
7. LONG-TERM DEBT
Outstanding long-term debt, as of March 31, 2005 and December 31, 2004,
consisted of the following:
MARCH 31 December 31
2005 2004
-------------------------------
In thousands
Convertible Debentures Due June 30, 2023 (the Convertible
Debentures), unsecured and bearing a fixed interest
rate of 3.9%, net of unamortized original issuer's
discounts of $2,441 and $2,515 at March 31, 2005 and
December 31, 2004, respectively. $ 105,159 $ 105,085
Trust Preferred Subordinated Debentures (the Subordinated
Debentures), unsecured, and bearing interest at a
floating rate, adjustable quarterly, equal to the
three-month LIBOR plus 3.85%. At March 31, 2005 this
rate is 6.64%.
Due
April 29, 2034 13,403 13,403
May 12, 2034 10,310 10,310
May 12, 2034 22,682 22,682
---------------- --------------
$ 151,554 $ 151,480
================ ==============
Convertible Debentures
The Convertible Debentures are unsecured obligations that rank equally in
right of payment with all other existing and future unsecured and unsubordinated
obligations of the parent company, but are effectively subordinated to the
indebtedness and other liabilities of ProAssurance's subsidiaries, including
insurance policy-related liabilities.
The Convertible Debentures are convertible into shares of common stock of
ProAssurance. Holders may convert the Convertible Debentures at any time prior
to stated maturity from and after the date of the following events: if
ProAssurance calls the Convertible Debentures for redemption; upon the
occurrence of certain corporate transactions, including a change of control; or
if the sale price of ProAssurance's common stock exceeds 120% of the then
conversion price for a specified period as defined in the Indenture. The
conversion price was initially established at $41.83 per common share or 23.9037
shares per $1,000 principal amount of the Convertible Debentures surrendered for
conversion, and may be adjusted as a result of certain corporate transactions
with respect to our common stock. ProAssurance has the right to deliver cash in
lieu of common stock for all or a portion of any conversion shares.
Holders of the Convertible Debentures may require ProAssurance to
repurchase all or a portion of the holder's Convertible Debentures on June 30,
2008, June 30, 2013 and June 30, 2018 at a purchase price equal to the principal
amount of the Convertible 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. Shares of common stock will be valued at 97.5%
of the average sale price of the stock for a specified period prior to the
redemption.
If there is an event of default under the Convertible Debentures, the
principal amount of the Convertible 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. The
Convertible Debentures do not require ProAssurance to maintain minimum financial
covenants and do not limit the payment of dividends.
ProAssurance may redeem some or all of the Convertible Debentures for cash
on or after July 7, 2008 with proper notice to the holders of the Convertible
Debentures.
12
PROASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2005
7. LONG-TERM DEBT (CONTINUED)
For additional information regarding the terms of the Debentures see Note
10 of the Notes to the Consolidated Financial Statements in ProAssurance's
December 31, 2004 Annual Report on Form 10-K.
Subordinated Debentures
In April and May 2004, ProAssurance formed two business trusts,
ProAssurance Capital Trust I and ProAssurance Capital Trust II (the Trusts), as
the holder of all voting securities issued by the trusts, for the sole purpose
of issuing, in private placement transactions, $45.0 million of trust preferred
securities (TPS) and using the proceeds thereof, together with the equity
proceeds received from ProAssurance in the initial formation of the Trusts, to
purchase $46.4 million of variable rate Subordinated Debentures issued by
ProAssurance, which are the only assets of the Trusts. The Trusts will meet the
obligations of the TPS with the interest and principal ProAssurance pays to the
Trust on the Subordinated Debentures. In accordance with the provisions of FIN
46, the Trusts are not consolidated by ProAssurance. The Subordinated Debentures
payable to the Trusts are included as long-term debt in the accompanying
Condensed Consolidated Balance Sheets.
The Subordinated Debentures and the TPS are uncollateralized and bear a
floating interest rate equal to the three-month LIBOR plus 3.85%, adjustable and
payable quarterly, with a maximum rate within the first five years of 12.5%.
ProAssurance has the right under the Subordinated Debentures to extend interest
payment periods up to twenty consecutive quarterly periods, and as a
consequence, dividends on the preferred securities may be deferred (but will
continue to accumulate, together with additional dividends on any accumulated
but unpaid dividends at the dividend rate) during any such extended interest
payment periods. ProAssurance may not pay any shareholder dividends during any
extended interest payment period or at any time ProAssurance is in default under
the Subordinated Debenture. The Subordinated Debentures and the TPS have stated
maturities of thirty years but may be redeemed at any time after five years. The
Subordinated Debentures do not require ProAssurance to maintain minimum
financial covenants.
ProAssurance received net proceeds from the TPS transactions, after
commissions and other costs of issuance, of $44.9 million. Issue costs of $1.5
million were capitalized and are being amortized over five years as a component
of amortization expense.
ProAssurance has guaranteed that amounts paid to the Trusts related to the
Subordinated Debentures will be remitted to the holders of the TPS. The
guarantee, when taken together with the obligations of ProAssurance under the
Subordinated Debentures, the Indenture pursuant to which the Subordinated
Debentures were issued, and the related trust agreements (including its
obligations to pay related trust cost, fees, expenses, debts and other
obligations of the Trusts other than with respect to the TPS and the common
securities of the Trusts), provides a full and unconditional guarantee of
amounts due on the TPS. The amounts guaranteed are not expected to at any time
exceed the obligations of the Subordinated Debentures, and no additional
liability has been recorded related to the TPS or the guarantee.
Fair Value
At March 31, 2005, the fair value of our Convertible Debentures is
approximately 109% of face value based on available independent market quotes.
The fair value of our Subordinated Debentures approximates the face value of the
debentures.
13
PROASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2005
8. STOCKHOLDERS' EQUITY
At March 31, 2005 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 March 31, 2005 the Board of
Directors had not authorized the issuance of any preferred stock nor determined
any provisions for the preferred stock.
In March 2005 ProAssurance granted 309,500 options under an exercise price
of $41.15 per share. The estimated fair value of each option is $16.68, using
the Black-Scholes option pricing model and the following model assumptions:
risk-free interest rate of 4.3%, volatility of 0.33, expected life of 6 years;
and dividend yield of 0%.
9. COMMITMENTS AND CONTINGENCIES
ProAssurance is involved in various legal actions against ProAssurance
arising primarily from claims related to insurance policies and claims handling,
including but not limited to 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 resolution of these actions will not have a
material adverse effect on ProAssurance's financial position. However, to the
extent that the cost of resolving these actions exceeds the corresponding
reserves, the legal actions could have a material effect on ProAssurance's
results of operations for the period in which any such action is resolved.
14
ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2005
10. 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
MARCH 31
------------ -------------
2005 2004
------------ -------------
Basic earnings per share calculation:
Numerator:
Net income $21,937 $15,981
============ =============
Denominator:
Weighted average number of common shares outstanding 29,217 29,118
============ =============
Basic earnings per share: $ 0.75 $ 0.55
============ =============
Diluted earnings per share calculation:
Numerator:
Net income $21,937 $15,981
Effect of assumed conversion of contingently convertible debt
instruments 742 742
------------ -------------
Net income - diluted computation $22,679 $16,723
============ =============
Denominator:
Weighted average number of common shares outstanding 29,217 29,118
Assumed conversion of dilutive stock options and awards 281 243
Assumed conversion of contingently convertible debt instruments 2,572 2,572
------------ -------------
Diluted weighted average equivalent shares 32,070 31,933
============ =============
Diluted earnings per share: $ 0.71 $ 0.52
============ =============
In accordance with SFAS 128 "Earnings per Share", the diluted weighted
average number of shares outstanding includes an incremental adjustment for the
assumed exercise of dilutive stock options. Stock options are considered
dilutive stock options if the assumed conversion of the options, using the
treasury stock method as specified by SFAS 128, produces an increased number of
outstanding shares. Options are not dilutive when the exercise price of the
option is below the average share price during the quarter. During the three-
month periods ending March 31, 2005 and 2004 certain of ProAssurance's
outstanding options were not considered to be dilutive, because the exercise
price of the options was below the average ProAssurance share price during the
quarter. The number of options not considered to be dilutive during the periods
ended March 31, 2005, and 2004 is approximately 310,000 and 238,000,
respectively.
ProAssurance has implemented the consensus reached in EITF 04-8 and has
assumed conversion of its outstanding convertible debt in the computation of
diluted earnings per share for the three-month periods ended March 31, 2005 and
2004. Prior to implementation of EITF 04-8 in the fourth quarter of 2004,
ProAssurance did not assume conversion of its convertible debt in the
computation of diluted earnings per share and previously reported diluted
earnings per share for the three-month period ending March 31, 2004 as $0.54.
15
PROASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2005
11. PROPOSED MERGER
On February 28, 2005 ProAssurance Corporation and NCRIC Group, Inc.
(NASDAQ: NCRI) reached an agreement to merge NCRIC into ProAssurance in a $69.6
million, all-stock transaction which values NCRIC at $10.10 per share, based on
the closing price of ProAssurance common stock on Friday, February 25, 2005.
The merger agreement provides that upon completion of the transaction, each
share of NCRIC common stock will be exchanged into 0.25 shares of ProAssurance
common stock. The merger agreement provides that if the average price of
ProAssurance common stock as measured during the ten trading days ending on the
date preceding the effective date of the merger is greater than $44.00 per share
or less than $36.00 per share, the exchange ratio will be adjusted so that the
value assigned to a share of NCRIC common stock will not be greater than $11.00
or less than $9.00.
The proposed transaction will be submitted to NCRIC Group's stockholders
for their consideration. ProAssurance and NCRIC Group filed a registration
statement and a proxy statement/prospectus with the SEC on April 19, 2005. The
registration statement is not yet effective.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
Condensed Consolidated Financial Statements and Notes thereto accompanying this
report and ProAssurance's Annual Report on Form 10-K for the year ended December
31, 2004, which includes a Glossary of insurance terms and phrases. Throughout
the discussion, references to ProAssurance, "we," "us" and "our" refers to
ProAssurance Corporation and its subsidiaries. The discussion contains certain
forward-looking information that involves risks and uncertainties. As discussed
under "Forward-Looking Statements," our actual financial condition and operating
results could differ significantly from these forward-looking statements.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP).
Preparation of these financial statements requires us to make estimates and
assumptions in certain circumstances that affect the 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 affected by the need to make accounting
adjustments reflecting changes in these estimates and assumptions.
Management considers the following accounting policies to be critical
because they involve significant judgment by management and the effect of those
judgments could result in a material effect on the financial statements included
herein.
Reserve for Losses and Loss Adjustment Expenses (reserve for losses or reserve)
Our reserve for losses 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. 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
reserve for losses each year and prepare reports that include recommendations as
to the level of such 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 reserve for losses. Estimating casualty insurance reserves,
and particularly professional liability reserves, is a complex process. These
claims are typically resolved over an extended period of time, often five years
or more, and estimating loss costs for these claims requires multiple judgments
involving many uncertainties. Our reserve estimates may vary significantly from
the eventual outcome. The assumptions used in establishing our reserve for
losses 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 reserve for losses, even a small percentage adjustment to
these estimates could have a material effect on our results of operations for
the period in which the adjustment is made.
17
Reinsurance
Our receivable from reinsurers represents our estimate of the amount of our
future loss payments that will be recoverable from our reinsurers. These
estimates are based upon our estimates of the ultimate losses 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. We also estimate
premiums ceded under reinsurance agreements wherein the premium due to the
reinsurer, subject to certain maximums and minimums, is a percentage of the
losses reimbursed under the agreement. Given the uncertainty of the ultimate
amounts of our losses, these estimates may vary significantly from the eventual
outcome. Our estimates of the amounts receivable from and payable to reinsurers
are regularly reviewed and updated by management as new data becomes available.
Our assessment of the collectibility of the recorded amounts receivable from
reinsurers is based primarily upon public financial statements and rating agency
data. Any adjustments necessary are reflected in then current operations. Due to
the size of our receivable 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 adjustment is made. At March 31, 2005, we considered all of
our receivables from reinsurers to be collectible.
We evaluate each of our ceded reinsurance contracts at their inception to
determine if there is sufficient risk transfer to allow the contract to be
accounted for as reinsurance under current accounting literature. At March 31,
2005 all such ceded contracts are accounted for as risk transferring contracts.
Investments
We consider our fixed maturity securities as available-for-sale and our
equity securities as either available-for-sale or trading portfolio securities.
Both available-for-sale and trading portfolio securities are carried at fair
value. Positive and negative changes in the market value (unrealized gains and
losses) of available-for-sale securities are included, net of the related tax
effect, in accumulated comprehensive income, a component of stockholders'
equity, and are excluded from current period net income. Positive and negative
changes in the market value of trading portfolio securities are included in
current period net income as a component of net realized investment gains
(losses).
We evaluate the securities in our available-for-sale 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. 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 issuer's
industry and geographical region, to the extent that information is
publicly available, and
- our 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 income statement 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.
Deferred Policy Acquisition Costs
Policy acquisition costs, primarily commissions, premium taxes and
underwriting salaries, vary directly with, and are primarily related to, the
acquisition of new and renewal premiums. Such costs are capitalized and charged
to expense as the related premium revenue is recognized. We evaluate the
recoverability of our deferred policy acquisition costs based on our estimates
of the profitability of the underlying business and any amounts estimated to be
unrecoverable are charged to expense in the current period.
18
LIQUIDITY AND CAPITAL RESOURCES AND FINANCIAL CONDITION
ProAssurance Corporation is a legal entity separate and distinct from its
subsidiaries. Because the parent holding company has no other business
operations, dividends from its operating subsidiaries represent a significant
source of funds for its obligations, including debt service. The ability of
those insurance subsidiaries to pay dividends is subject to limitation by state
insurance regulations.
Within our operating subsidiaries our primary need for liquidity is to pay
losses and operating expenses in the ordinary course of business. Our operating
activities provided positive cash flow of $97.5 million for the three months
ended March 31, 2005 as compared to $94.7 million for the three months ended
March 31, 2004. In both periods, the primary sources of our operating cash flows
are net investment income and the excess of premiums collected over net losses
paid and operating costs. Timing delays exist between the collection of premiums
and the payment of losses, particularly so with regard to our professional
liability premiums. A general measure of this timing delay is the paid loss
ratio, which is computed by dividing paid losses for the period by net earned
premium. Our paid loss ratios for the three months ended March 31, 2005 and 2004
are 45% and 52%, respectively.
We believe that premium adequacy is critical to our long-term liquidity. We
continually review rates and submit requests for rate increases to state
insurance departments as we consider necessary to maintain rate adequacy. We are
unable to predict whether we will continue to receive approval for our rate
filings.
We held cash and cash equivalents of approximately $28.6 million at March
31, 2005 as compared to $30.1 million at December 31, 2004. We transfer most of
the cash generated from operations into our investment portfolio.
At March 31, 2005 our investment in fixed maturity securities of $2.249
billion represented 89% of our total investments. Substantially all of our fixed
maturities are either United States government agency obligations or investment
grade securities as determined by national rating agencies. The fixed maturity
securities in our investment portfolio had a dollar weighted average rating of
"AA+" at March 31, 2005. Our investment policies implement an asset allocation
that uses length to maturity as one method of managing our long-term rate of
return. The weighted average modified duration of our fixed maturity securities
at March 31, 2005 is 3.86 years. Changes in market interest rate levels
generally affect our net income to the extent that reinvestment yields are
different than the original yields on maturing securities. Additionally, changes
in market interest rates also affect the fair value of our fixed maturity
securities. Market interest rates have increased since December 31, 2004 and as
a result average bond prices have decreased. On a pre-tax basis, net unrealized
gains (losses) related to our available-for-sale fixed maturity securities
decreased from a net unrealized gain of $33.9 million at December 31, 2004 to a
net unrealized loss of $882,000 at March 31, 2005.
At March 31, 2005, available-for-sale and trading portfolio equity
investments represented approximately 1.3% of our total investments, and
approximately 5.5% of our capital. Our equity investments are diversified
primarily among domestic growth and value holdings through common and preferred
stock.
We invested an additional $76.9 million in short-term securities during the
three months ended March 31, 2005. We anticipate moving most of these funds into
fixed maturity securities as our investment managers identify investment
opportunities that are consistent with our longer range investment strategy.
19
For a more detailed discussion of the effect of changes in interest rates
on our investment portfolio see Item 3, "Quantitative and Qualitative
Disclosures about Market Risk."
Our reserves for losses, net of amounts receivable from reinsurers at March
31, 2005 are approximately $1.68 billion, an increase of $61.2 million over net
reserves at December 31, 2004. Substantially all of this increase is in our
professional liability segment, a long-tailed business. Whenever paid losses are
less than incurred losses, reserves will increase; this occurs more frequently
in a long-tailed business.
We use reinsurance to provide capacity to underwrite large limits of
liability and to reduce losses of a catastrophic nature in those years in which
such losses occur. The purchase of reinsurance does not relieve us from the
ultimate risk on our policies, but it does provide reimbursement from the
reinsurer for certain losses paid by us.
The effective transfer of risk is dependent on the credit-worthiness of the
reinsurer. We purchase reinsurance from a number of companies to mitigate
concentrations of credit risk. Our reinsurance broker assists us in the analysis
of the credit quality of our reinsurers. We base our reinsurance buying
decisions on an evaluation of the then-current financial strength and stability
of prospective reinsurers. However, the financial strength of our reinsurers,
and their corresponding ability to pay us, may change in the future due to
forces or events we cannot control or anticipate.
We have not experienced any significant difficulties in collecting amounts
due from reinsurers due to the financial condition of the reinsurer. Should
future events lead us to believe that any reinsurer is unable to meet its
obligations to us, adjustments to the amounts recoverable would be reflected in
the results of current operations.
Proposed Merger
On February 28, 2005 ProAssurance Corporation and NCRIC Group, Inc.
(NASDAQ: NCRI) (NCRIC) reached an agreement to merge NCRIC into ProAssurance in
a $69.6 million, all-stock transaction which values NCRIC at $10.10 per share,
based on the closing price of ProAssurance common stock on Friday, February 25,
2005.
The merger agreement provides that upon completion of the transaction each
share of NCRIC common stock will be exchanged into 0.25 ProAssurance common
shares. The merger agreement also provides that if the average price of
ProAssurance common stock as measured during the ten trading days ending on the
date preceding the effective date of the merger is greater than $44.00 per share
or less than $36.00 per share the exchange ratio will be adjusted so that the
value assigned to a share of NCRIC common stock will not be greater than $11.00
or less than $9.00. The transaction is subject to required regulatory approvals
and a vote of NCRIC stockholders and is expected to close early in the third
quarter of 2005.
The proposed transaction will be submitted to NCRIC stockholders
for their consideration. ProAssurance and NCRIC filed a registration
statement and a proxy statement/prospectus with the Securities and Exchange
Commission (SEC) on April 19, 2005 which is not yet effective. For more
information regarding the proposed merger refer to the registration statement.
We make available all of the reports that we file with the SEC on our web site,
HTTP://WWW.PROASSURANCE.COM, for at least one year after filing.
Off Balance Sheet Arrangements/Guarantees
In April and May 2004, we formed two business trusts (the Trusts) with the
sole purpose of the Trusts being to issue, in private placement transactions,
$45.0 million of trust preferred stock (TPS), and use the proceeds thereof;
together with the equity proceeds that we contributed upon formation of the
Trusts, to purchase our $46.4 million variable rate subordinated debentures
(Subordinated Debentures), which are the only assets of the Trusts. The terms
and maturities of the Subordinated Debentures mirror those of the TPS. The
Trusts will meet the obligations of the TPS with the interest and principal we
pay to the Trusts related to the Subordinated Debentures.
20
In accordance with the guidance given in Financial Accounting Standards
Board Interpretation No. 46R, "Variable Interest Entities" (FIN 46R) the Trusts
are not included in our consolidated financial statements because we are not the
primary beneficiary of either of the Trusts.
Our Subordinated Debentures are payable to Trusts and are included in our
condensed consolidated financial statements as long-term debt. We have issued
guarantees that amounts paid to the Trusts related to the Subordinated
Debentures will subsequently be remitted to the holders of the TPS. The amounts
guaranteed are not expected to at any time exceed our obligations under the
Subordinated Debentures, and we have not recorded any additional liability
related to the TPS or the guarantee.
OVERVIEW
We are an insurance holding company and our operating results are almost
entirely derived from the operations of our insurance subsidiaries.
ProAssurance's professional liability segment primarily provides medical
professional liability insurance to physicians and physician groups. The
personal lines segment primarily provides auto insurance to members of the
Michigan educational community and their families.
The professional liability segment is our largest segment and contributed
more than 74% of our total revenues during each of the three-month periods ended
March 31, 2005 and 2004 and held approximately 83% of total assets at March 31,
2005. Approximately 96% of our net loss reserves at March 31, 2005 are
professional liability reserves. This segment principally provides liability
insurance for providers of health care services in the South and Midwest. The
principal operating insurance subsidiaries of this segment are: The Medical
Assurance Company, Inc., ProNational Insurance Company and Red Mountain Casualty
Insurance Company, Inc. We also write professional liability insurance through
Woodbrook Casualty Insurance Inc. (formerly Medical Assurance of West Virginia,
Inc.).
Our personal lines segment provides personal property and casualty
insurance primarily to members of the educational community and their families
principally in the state of Michigan. Our personal lines segment includes the
operations of a single insurance company, MEEMIC Insurance Company.
Revenues and expenses are attributable to the operating segments with the
exception of corporate income, which consists of investment income earned
directly by the parent holding company and interest expense related to long-term
debt issued by the parent. Operating results by segment for the three-month
periods ended March 31, 2005 and 2004 are summarized below.
Three Months Ended
March 31 Increase
------------------------
2005 2004 (Decrease)
-------------------------------------
In thousands
Income before income taxes:
Professional Liability Segment $21,182 $10,856 $10,326
Personal Lines Segment 10,638 10,856 (218)
Corporate (not attributed to
segments) (1,585) (388) (1,197)
------------ ----------- ------------
Consolidated $30,235 $21,324 $ 8,911
============ =========== ===========
Our professional liability segment operates in a challenging environment.
Medical malpractice loss and loss adjustment costs have increased significantly
in recent years. In response, we have implemented rate increases in all states,
even when this has resulted in non-renewal of business. We have been more
selective in our underwriting criteria and have elected to non-renew business
that we did not expect to write profitably. At the same time, we have also
worked to contain losses and to improve operating efficiencies. These combined
efforts have enabled us to significantly improve the underwriting results of
this segment.
21
Beginning in mid-2000 medical professional liability losses throughout the
United States proved to be higher than insurers anticipated, thus insurers found
that both their rates and their reserves were inadequate. Some competitors were
forced out of business by regulators; some chose to no longer offer medical
professional liability coverages. Most remaining carriers increased their rates
and as rate adequacy and profitability improved within the industry, competition
in our markets increased. In some states, price competition is making it more
difficult to generate new business that meets our criteria for profitability.
Investment income is a substantial revenue source for the professional
liability segment because, on average, premiums are collected several years
before the related losses are paid. We also consider total return and our
ability to realize net investment (capital) gains in the execution of our
investment strategy. Our strategy changes as market and economic conditions
change. The realization of investment (capital) gains or losses is therefore not
predictable; however, such gains or losses can have a substantial effect on our
revenues in the periods in which they occur.
Our personal lines segment operates in a highly competitive environment
dominated by larger insurance organizations. We must provide a high level of
service while operating efficiently in order to competitively price our products
and obtain positive financial results.
Investment income is a less significant component of revenues for the
personal lines segment than for the professional lines segment because the
length of time between the collection of premiums and the settlement of claims
is generally short.
Losses are the largest component of expense for both the professional
liability segment and the personal lines segment. As discussed in critical
accounting policies, net losses in any period reflect our estimate of net losses
related to the premiums earned in that period as well as any changes to our
estimates of the reserve required for net losses of prior periods.
22
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2004
Selected financial data for each period is summarized in the table below.
Three Months Ended March 31 Increase
2005 2004 (Decrease)
---------------- ---------------- ----------------
$ In Thousands
Revenues:
Gross premiums written $ 215,658 $ 218,726 $(3,068)
================ ================ ================
Net premiums written $ 196,420 $ 195,462 $ 958
================ ================ ================
Premiums earned $ 194,103 $ 188,528 $ 5,575
Premiums ceded (19,923) (20,686) 763
---------------- ---------------- ----------------
Net premiums earned 174,180 167,842 6,338
Net investment income 25,422 19,851 5,571
Net realized investment gains (losses) 942 3,657 (2,715)
Other income 1,646 1,010 636
---------------- ---------------- ----------------
Total revenues 202,190 192,360 9,830
---------------- ---------------- ----------------
Expenses:
Losses and loss adjustment expenses 155,220 152,673 2,547
Reinsurance recoveries (16,004) (10,753) (5,251)
---------------- ---------------- ----------------
Net losses and loss adjustment expenses 139,216 141,920 (2,704)
Underwriting, acquisition and insurance expenses 30,603 27,973 2,630
Interest expense 2,136 1,143 993
---------------- ---------------- ----------------
Total expenses 171,955 171,036 919
---------------- ---------------- ----------------
Income before income taxes 30,235 21,324 8,911
Income taxes (benefit) 8,298 5,343 2,955
---------------- ---------------- ----------------
Net Income $ 21,937 $ 15,981 $ 5,956
================ ================ ================
Net loss ratio 79.9% 84.6% (4.7)%
Underwriting expense ratio 17.6% 16.7% 0.9%
---------------- ---------------- ----------------
Combined ratio 97.5% 101.3% (3.8)%
Less: Investment income ratio 14.6% 11.8% 2.8%
---------------- ---------------- ----------------
Operating ratio 82.9% 89.5% (6.6)%
================ ================ ================
Return on equity* 14.4% 11.4% 3.0%
================ ================ ================
* Net income, annualized, divided by the average of beginning and ending stockholders' equity.
23
We measure performance in a number of ways, but particularly focus on the
combined ratio and investment returns which directly affect our return on equity
(ROE). We target a return on equity of 12% to 14%.
Our earnings are almost entirely derived from the operations of our
insurance subsidiaries. We manage our insurance operations at a segment level
because of the differing operating characteristics of each segment. We believe
that a focus on premium adequacy, selective underwriting and effective claims
management is required if we are to achieve our ROE targets and we closely
monitor premium revenues, losses and loss adjustment costs, and acquisition,
underwriting and insurance expenses at the segment level.
Investment income and net realized investment gains and losses are managed
and monitored both at the segment level and on a consolidated basis in order to
meet the liquidity and profitability needs of each insurance company as well as
to maximize after-tax income investment returns at a corporate level.
Our segments engage in activities that generate other income. Such
activities, principally fee generating and agency services, do not constitute a
significant source of revenues or profits on either a segment or a consolidated
basis.
The 2005 increase in our annualized ROE is primarily attributable to our
success in reducing our net loss ratio. The improvement in the professional
liability ratio had a pronounced effect on ROE since three fourths of our
consolidated earned premiums are attributable to this segment.
Our 2005 operating results also benefited from additional investment income
earned as a result of the growth in our invested assets.
Premiums
Gross Premiums Written
Three Months Ended March 31 Increase Increase
2005 2004 (Decrease) (Decrease)
-------------- -------------- -------------- --------------
In thousands %
Gross premiums written:
Professional liability $ 163,397 $ 169,737 $(6,340) (3.7%)
Personal lines 52,261 48,989 3,272 6.7%
-------------- -------------- --------------
$ 215,658 $ 218,726 $(3,068) (1.4%)
============== ============== ==============
Professional liability written premiums vary from period to period for a
number of reasons. Some of the more common differences result from changes to
premium rates, the volume of new business written during the period, the loss of
business to competitors or due to our own underwriting decisions, and the
percentage of our policies that renew, which may also affect the level of tail
premiums written. Strategic factors, such as our decision to convert our
remaining occurrence policies to claims-made coverage, and market factors, such
as the entry or exit of a competitor in a given market, may also affect written
premiums from period to period. The effect of any of these changes also varies
by the proportion of policies written or renewed during each period in the
various geographical regions and classes of business in which we operate.
The modest decline in professional liability premiums is a combination of
several factors. On the positive side, we renewed approximately 86% of our
expiring physician premiums as compared to 83% in the first quarter of 2004 and
the renewed policies are at rates that are approximately 12% higher, on average,
than a year ago. Offsetting these improvements was a decline in the amount of
tail premiums written during the quarter. Tail premiums generally decline as
renewal rates increase. Tail policies are offered to physicians that are
discontinuing their claims-made coverage with us, and the amount of tail premium
written in any period can and does vary widely. During the past two years tail
premiums have ranged from $4.9 million to $15.2 million per quarter.
Personal lines premium revenues are almost entirely comprised of auto and
homeowners premiums with auto premiums representing 83% of 2005 written premiums
and 84% of 2004 written premiums. During the three months ended March 31, 2005
auto premiums increased by $2.2 million while homeowner premiums grew by $1.0
million. The growth of auto premiums is primarily attributable to increases in
the value of insured autos, although average rates and the number of autos
insured also
24
increased slightly. The growth in homeowner premiums is largely due
to an increase in the number of insured homes, but also reflects higher rates
and increased home values.
Premiums Earned
Three Months Ended 31 Increase Increase
2005 2004 (Decrease) (Decrease)
------------- ------------ ------------ -------------
In thousands %
Premiums earned:
Professional liability $ 140,002 $ 138,424 $ 1,578 1.1%
Personal lines 54,101 50,104 3,997 8.0%
------------- ------------ ------------
$ 194,103 $ 188,528 $ 5,575 3.0%
============= ============ ============
Premiums are generally earned pro rata over the entire policy period after
the policy is written. Policies other than auto policies generally carry a
policy period of one-year; auto policies typically carry a six-month policy
period. Professional liability tail policies are 100% earned in the period
written because the policies insure only incidents that occurred in prior
periods.
The increase in 2005 earned premiums reflects on a pro rata basis the
changes in written premiums that occurred during both 2005 and 2004, reduced by
lower tail premiums written in 2005 as discussed in the section on premiums
written.
Premiums ceded
Three Months Ended 31 Increase Increase
2005 2004 (Decrease) (Decrease)
------------- ------------ ------------ -------------
In thousands %
Premiums ceded:
Professional liability $ 12,729 $ 14,867 $ (2,138) (14.4%)
Personal lines 7,194 5,819 1,375 23.6%
------------- ------------ ------------
$ 19,923 $ 20,686 $ (763) (3.7%)
============= ============ ============
Premiums ceded represent the portion of earned premiums that we must
ultimately pay to our reinsurers for their assumption of a portion of our
losses.
Professional liability ceded premiums have decreased primarily because
fewer insureds are purchasing policies with coverage limits in excess of our
retention limits. As a result, premiums ceded have declined.
Personal lines premiums ceded primarily increased because of a significant
rise in the per vehicle assessment charged by the Michigan Catastrophic Claims
Association, and also as a result of growth in the volume of premiums written.
25
Losses and Loss Adjustment Expenses
Calendar year losses may be divided into three components: (i) actuarial
evaluation of incurred losses for the current accident year; (ii) actuarial
re-evaluation of incurred losses for prior accident years; and (iii) actuarial
re-evaluation of the reserve for the death, disability and retirement provision
(DDR) in our claims-made policies.
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. Calendar year results include
the operating results for the current accident year and, as discussed in
critical accounting policies, any changes in estimates related to prior accident
years.
The following table summarizes net losses and net loss ratios for the three
months ended March 31, 2005 and 2004 by separating losses between the current
accident year and all prior accident years. The net loss ratios shown are
calculated by dividing the applicable net losses by calendar year net premiums
earned.
Net Loss
MARCH 31, 2005 March 31, 2004 Ratio
----------------------- ---------------------- ------------
NET LOSS Net Loss Increase
NET LOSSES RATIO Net Losses Ratio (Decrease)
------------ ---------- ------------ --------- ------------
In thousands except percentage amounts
Net losses - calendar year
Professional liability $110,450 86.8% $115,206 93.2% (6.4%)
Personal lines 28,766 61.3% 26,714 60.3% 1.0%
------------ ------------
$139,216 79.9% $141,920 84.6% (4.7%)
============ ============
Net losses - current accident
year
Professional liability $ 110,450 86.8% $115,206 93.2% (6.4%)
Personal lines 30,969 66.0% 29,208 65.9% 0.1%
------------ ------------
$141,419 81.2% $144,414 86.0% (4.8%)
============ ============
Favorable change in prior
accident year losses:
Professional liability $ - 0.0% $ - 0.0% 0.0%
Personal lines (2,203) (4.7%) (2,494) (5.6%) 0.9%
------------ -----------
$ (2,203) (1.3%) $ (2,494) (1.4%) 0.1%
============ ============
Professional liability current accident year net loss ratios are lower in
2005 than in 2004 primarily because loss costs, while continuing to increase,
have increased at a slower pace than premium rates.
ProAssurance experienced $2.2 million of favorable development in the
personal lines segment during the quarter. This favorable development is
primarily the result of actual loss experience indicating better than
anticipated loss costs in the auto liability line. This development was most
pronounced in the 2004 accident year and to a lesser extent in the 2003 accident
year.
26
NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS (LOSSES)
Net investment income is primarily derived from the interest income earned
by our fixed maturity securities and includes interest income from short-term
and cash equivalent investments, dividend income from equity securities,
earnings from limited partnerships, increases in the cash surrender value of
business owned executive life insurance contracts, and rental income earned by
our commercial real estate holdings. Investment fees and expenses and real
estate expenses are deducted from investment income.
%
Increase Increase
2005 2004 (Decrease) (Decrease)
------------ ----------- ------------ ------------
In thousands except percentage amounts
Net investment income:
Professional liability $21,913 $17,300 $ 4,613 26.7%
Personal lines 3,016 2,506 510 20.4%
Not attributed to segments 493 45 448 >100.0%
------------ ----------- ------------
$25,422 $19,851 $ 5,571 28.1%
============ =========== ============
The increase in our net investment income in 2005 as compared to 2004 is
due both to higher average invested funds and improved yields. Market interest
rates began to increase in mid-2004, allowing new and matured funds to be
invested at higher rates. Changes in the asset mix of the portfolio have also
helped to improve the after-tax yield of the portfolio. We increased the
proportion of the portfolio that is invested in tax-exempt securities because of
the higher after-tax yields available on these securities. Our average income
yield, on a consolidated basis, was 4.1% for the three months ended March 31,
2005 as compared to 4.0% for the three months ended March 31, 2004. Our average
tax equivalent income yield on a consolidated basis was 4.7% for the three
months ended March 31, 2005 as compared to 4.4% for the three months ended March
31, 2004.
Investment income is a more substantial revenue source for our professional
liability segment because professional liability premiums are generally
collected some years before the related losses are paid. In our personal lines
segment, the length of time between the collection of premiums and the
settlement of claims is generally short. The positive cash flow generated by our
insurance operations during 2004 significantly increased average invested funds
and the related net investment income. Personal lines investment income has also
increased due to higher average invested funds; however, the improvement is less
pronounced in this segment.
The components of net realized investment gains are shown in the following
table.
Three Months Ended
March 31
2005 2004
------------- ------------
In thousands
Net gains from sales $1,324 $ 2,939
Other-than-temporary impairment losses (344) -
Trading portfolio gains (losses) (38) 718
------------- ------------
Net realized investment gains $ 942 $ 3,657
============= ============
27
UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES
Underwriting, acquisition and insurance expenses are comprised of variable
costs, such as commissions and premium taxes that are directly related to
premiums earned, and fixed costs that have an indirect relationship to premium
volume, such as salaries, benefits, and facility costs. Underwriting acquisition
and insurance expenses increased in 2005 in both segments.
Expense Ratio
--------------------------------------
Three Months Ended Three Months Ended
March 31 Increase March 31 Increase
2005 2004 (Decrease) 2005 2004 (Decrease)
------------ ------------ ----------- ------------ ------------ ------------
In thousands
Underwriting, acquisition and
insurance expenses:
Professional liability $ 19,726 $ 18,144 $ 1,582 15.5% 14.7% 0.8%
Personal lines 10,877 9,829 1,048 23.2% 22.2% 1.0%
------------ ------------ -----------
$ 30,603 $ 27,973 $ 2,630 17.6% 16.7% 0.9%
============ ============ ===========
Guaranty fund assessments were approximately $97,000 for the three months
ended March 31, 2005 as compared to approximately $284,000 for the three months
ended March 31, 2004.
INTEREST EXPENSE
Interest expense increased for the three months ended March 31, 2005 as
compared to the same period in 2004 primarily because the average amount of debt
outstanding was higher in 2005. During the three months ended March 31, 2004 our
only outstanding debt was our Convertible Debentures. We increased our debt in
April and May of 2004, when we issued Subordinated Debentures of $46.5 million.
TAXES
Our effective tax rate for each period is significantly lower than the 35%
statutory rate because a considerable portion of our net investment income is
tax-exempt. The effect of tax-exempt income on our effective tax rate is shown
in the table below:
Three Months Ended
March 31
2005 2004
---------- -----------
Statutory rate 35% 35%
Tax-exempt income (9%) (7%)
Other 1% (3%)
---------- -----------
Effective tax rate 27% 25%
========== ===========
28
RECENT ACCOUNTING PRONOUNCEMENTS AND GUIDANCE
ACCOUNTING CHANGES
In late 2004 the Financial Accounting Standards Board (FASB) issued SFAS
123 (revised 2004), Share-Based Payment, hereafter referred to as SFAS 123(R),
which is a revision of SFAS 123, Accounting for Stock-Based Compensation. SFAS
123(R) supersedes APB 25, Accounting for Stock Issued to Employees and amends
SFAS 95, Statement of Cash Flows. SFAS 123(R) requires all share-based payments
to employees, including grants of employee stock options, to be recognized in
the financial statements based on their fair values. Under current SEC rules, we
are required to adopt this statement no later than January 1, 2006. ProAssurance
plans to adopt SFAS 123(R) using the "modified prospective" method permitted by
the statement.
Under the "modified prospective" method stock based compensation is
recognized (a) under the requirements of SFAS 123(R) for all share-based
payments granted after the effective date of SFAS 123(R) and (b) under the
requirements of SFAS 123 for all non-vested share-based payments granted prior
to the adoption of SFAS 123(R).
As permitted by SFAS 123, ProAssurance currently accounts for stock options
awarded to employees using APB 25's intrinsic value method and, as such,
generally recognizes no compensation cost related to such awards. SFAS 123(R)
differs from SFAS 123 in several key computational areas, and implementation of
SFAS 123(R) will require ProAssurance to select among various assumptions in
order to perform the computations required under SFAS 123(R). Those assumptions
have not yet been selected, thus the effect that SFAS 123(R) would have had on
prior periods has not been computed. The effect of adoption of SFAS 123(R) on
future operating results cannot be predicted at this time because the effect
will depend on the levels of share-based payments granted in the future and the
methods and assumptions used to determine the fair value of those share-based
payments. SFAS 123(R) also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as required under current literature.
In the fourth quarter of 2004, ProAssurance implemented the FASB's
September, 2004 consensus regarding Issue 04-08-"Accounting Issues Related to
Certain Features of Contingently Convertible Debt and the Effect on Diluted EPS"
("EITF 04-8"). Under the new guidance, issuers of contingently convertible
(Co-Co) debt instruments must include the potential common shares underlying the
Co-Co (the Co-Co shares) in diluted earnings per share computations (if
dilutive) regardless of whether the market price contingency has been met or
not. Prior to implementation of EITF 04-8, ProAssurance followed commonly
accepted interpretations of SAFS 128, "Earnings Per Share" and did not include
the potential Co-Co shares in its diluted earnings per share computations
because the market price contingency had not been met. In accordance with EITF
04-8 diluted earnings per share for the three months ended March 31, 2004 has
been restated; the restatement reduced previously reported diluted earning per
share by $0.02.
29
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.
As of March 31, 2005, our fair value investment in fixed maturity
securities was $2,249 million. These securities are subject primarily to
interest rate risk and credit risk. We have not and currently do not intend to
enter into derivative transactions.
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.
MARCH 31, 2005 December 31, 2004
- -----------------------------------------------------------------------------------------------------------------
PORTFOLIO CHANGE IN MODIFIED Portfolio Modified
VALUE VALUE DURATION Value Duration
Interest Rates $ MILLIONS $ MILLIONS YEARS $ Millions Years
- -----------------------------------------------------------------------------------------------------------------
200 basis point rise $2,073 $(176) 4.13 $2,082 4.11
100 basis point rise $2,161 $ (88) 4.04 $2,170 4.00
Current rate * $2,249 $ - 3.86 $2,258 3.81
100 basis point decline $2,336 $ 87 3.68 $2,344 3.70
200 basis point decline $2,422 $ 173 3.65 $2,434 3.79
*Current rates are as of March 31, 2005 and December 31, 2004
At March 31, 2005, the fair value of our investment in preferred stocks was
$15.5 million, including net unrealized gains of $83 thousand. 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.
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.
Certain shortcomings 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.
ProAssurance's cash and short-term investment portfolio at March 31, 2005
was on a cost basis which approximates its fair value. This portfolio lacks
significant interest rate sensitivity due to its short duration.
30
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.
As of March 31, 2005, 99.1% of our fixed income portfolio consisted of
securities rated investment grade. 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 March 31, 2005 the fair value of our investment in common stocks was
$18.1 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. The weighted average Beta of this group of securities is 0.98. Beta
measures the price sensitivity of an equity security or group of equity
securities to a change in the broader equity market, in this case the S&P 500
Index. If the S&P 500 Index increased or decreased in value by 10%, the fair
value of our investment in common equities would be expected to increase or
decrease, respectively, by 9.8% or $1.8 million. If the value of the S&P 500
Index increased by 10%, the fair value of these securities would be expected to
increase to $19.9 million. Conversely, a 10% decrease in the S&P 500 Index would
imply a decrease in the fair value of these securities to $16.3 million. The
selected hypothetical changes of plus or minus 10% does not reflect what could
be considered the best or worst case scenarios and are used for illustrative
purposes only.
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 March 31, 2005. 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 March 31, 2005, 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.
31
FORWARD-LOOKING STATEMENTS
Any written or oral statements made by us or on our behalf may include
forward-looking statements that reflect our current views with respect to future
events and financial performance. Forward-looking statements are identified by
words such as, but not limited to, "believe", "expect", "intend", "anticipate",
"estimate", "project" and other analogous expressions. Forward-looking
statements relating to our business include among other things, statements
concerning: liquidity and capital requirements, return on equity, financial
ratios, net income, premiums, losses and loss reserves, premium rates and
retention of current business, competition and market conditions, the expansion
of product lines, the development or acquisition of business in new geographical
areas, the availability of acceptable reinsurance, actions by regulators and
rating agencies, payment or performance of our obligations under the debentures,
payment of dividends, and other matters. In addition, forward-looking statements
may also relate to the proposed merger between ProAssurance and NCRIC Group,
Inc. as well as the goals, plans, objectives, intentions, expectations,
financial condition, results of operations, future performance and business of
the combined company including, without limitation, statements relating to the
benefits of the merger, such as future financial and operating results, cost
savings, enhanced revenues and the accretion to reported earnings that may be
realized from the merger and statements regarding certain of ProAssurance's
and/or NCRIC's goals and expectations with respect to earnings, earnings per
share, revenue, expenses and the growth rate in such items, as well as other
measures of economic performance.
These forward-looking statements are based upon our estimates and
anticipation of future events that are subject to certain risks and
uncertainties that could cause actual results to vary materially from the
expected results described in the forward-looking statements. Due to such risks
and uncertainties, you are urged not to place undue reliance on forward-looking
statements. All forward-looking statements included in this document are based
upon information available to us on the date hereof, and we undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
Risks that could adversely affect our operations or cause actual results to
differ materially from anticipated results include, but are not limited to, the
following:
- underwriting losses on the risks we insure are higher or lower than
expected,
- unexpected changes in loss trends and reserving assumptions which might
require the reevaluation of the liability for loss and loss adjustment
expenses, thus resulting in an increase or decrease in the liability
and a corresponding adjustment to earnings,
- our ability to retain current business, acquire new business, expand
product lines and a variety of other factors affecting daily
operations such as, but not limited to, economic, legal, competitive
and market conditions which may be beyond our control and are thus
difficult or impossible to predict,
- changes in the interest rate environment and/or the securities markets
that adversely impact the fair value of our investments or our income,
- inability on our part to achieve continued growth through expansion into
other states or through acquisitions or business combinations,
- general economic conditions that are worse than anticipated,
- inability on our part to obtain regulatory approval of, or to implement,
premium rate increases,
- the effects of weather-related events,
- changes in the legal system, including retroactively applied decisions
that affect the frequency and severity of claims,
- significantly increased competition among insurance providers and related
pricing weaknesses in some markets,
- changes in the availability, cost, quality or collectibility of
reinsurance,
- changes to our ratings by rating agencies,
- regulatory and legislative actions or decisions that adversely affect us,
and
- our ability to utilize loss carryforwards and other deferred tax assets.
Risks that could adversely affect our proposed transaction with NCRIC
include but are not limited to the following:
- the business of ProAssurance and NCRIC may not be combined successfully,
or such combination may take longer to accomplish than expected;
- the cost savings from the merger may not be fully realized or may take
longer to realize than expected;
- operating costs, customer loss and business disruption following the
merger, including adverse effects on relationships with employees, may
be greater than expected;
- governmental approvals of the merger may not be obtained, or adverse
regulatory conditions may be imposed in connection with governmental
approvals of the merger;
- there may be restrictions on our ability to achieve continued growth
through expansion into other states or through acquisitions or
business combinations; and
- the stockholders of NCRIC may fail to approve the merger.
32
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 9 to the condensed consolidated financial statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
2.1 Agreement and Plan of Merger among ProAssurance, NCRIC
Group, Inc. and NCP Merger Corporation, dated
February 28, 2005.*
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
on Form 8-K for event occurring March 3, 2005 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 January 28,
2005 that furnished the information publicly released on January
27, 2005 regarding its treatment of contingent convertible
securities in its 2004 earnings per share calculations, in
compliance with EITF 04-8.
ProAssurance filed a Current Report on Form 8-K on February 23,
2005 that furnished the information publicly released on that
same day announcing its financial results for the quarter and
year ended December 31, 2004.
ProAssurance filed a Current Report on Form 8-K on February 28,
2005 that furnished the information publicly released on that
same day announcing that ProAssurance has entered into an
agreement that provides for NCRIC Group to be merged into
ProAssurance in an all-stock transaction.
ProAssurance filed a Current Report on Form 8-K on March 1, 2005
that furnished clarification of information publicly released on
February 28, 2005 during the conference call held that day
concerning anticipated accretion of ProAssurance's book value and
earnings per share as the result of the proposed merger with
NCRIC.
ProAssurance filed a Current Report on Form 8-K on March 3, 2005
that provided notification that it had entered into the merger
agreement with NCRIC and included that agreement as an exhibit to
the Form 8-K.
ProAssurance filed a Current Report on Form 8-K on March 7, 2005
that furnished the presentation materials publicly used on that
same day in an investor conference.
ProAssurance filed a Current Report on Form 8-K on March 8, 2005
that furnished the presentation materials publicly used on that
same day in an investor conference.
33
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
May 10, 2005
/s/ Edward L. Rand, Jr.
--------------------------------------------------
Edward L. Rand, Jr., Chief Financial Officer
(Duly authorized officer and principal financial officer)
34