Exhibit 2.1 / Letter to the Wisconsin OCI.
March 6, 2006
Mr. Tim Vande Hey
Insurance Financial Examiner - Advanced
Bureau of Financial Analysis and Examinations
125 South Webster Street
Madison, Wisconsin 53707-7873
Re: Acquisition of Control of Physicians Insurance Company of Wisconsin
Inc. by ProAssurance Corporation (Case No. 06-C29893)
Dear Mr. Vande Hey:
Thank you for your letter of February 28, 2006 in regards to the above captioned
matter. The following information is in response to the items that were
requested in connection with your Office's review of the proposed acquisition of
control of Physicians Insurance Company of Wisconsin Inc. (hereinafter also,
"PIC-WI").
In preparing these responses, ProAssurance has endeavored to locate all material
management communications that have been requested in your letter of February
28, 2006. Any such communications have been supplied as noted in the responses
below.
Acquisition of PIC-WI
1. Please describe the process, time frame, and deliberations by
ProAssurance Corporation's management and boards of directors
concerning the current plan to acquire PIC-WI.
In March 2005, Cochran, Caronia & Co. ("Cochran"), PIC-WI's investment
banking firm, contacted ProAssurance, among other companies, to
determine if ProAssurance was interested in obtaining a
non-controlling interest in PIC-WI. ProAssurance informed Cochran it
was not interested in pursuing this option.
In April 2005, Cochran contacted ProAssurance to discuss
ProAssurance's interest, if any, in becoming a strategic partner of
PIC-WI in a potential merger with PIC-WI. ProAssurance executed a
confidentiality agreement and met with representatives of PIC-WI to
obtain further insights.
In June 2005, ProAssurance representatives met with the PIC-WI board
to discuss a potential transaction and a non-binding proposal though
which PIC-WI would become a part of ProAssurance, and its shareholders
would receive either stock or cash, or a combination of stock and
Page 1, Cover Letter
cash, in consideration for their shares. ProAssurance initially
proposed a merger transaction in which PIC-WI's shareholders would
have a right to receive (i) the greater of the statutory book value or
$4,000 in cash, or (ii) shares of ProAssurance common stock with a
value of the greater of 105% of the statutory book value or $4,200.
By July 2005, ProAssurance had increased its offer to ProAssurance
common stock with an implied value of $5,000 per share of PIC-WI
common stock or cash equal to the greater of $4,000 or the statutory
book value per share of PIC-WI common stock. ProAssurance later
withdrew the cash option from its offer.
In October 2005, the PIC-WI board directed its management to continue
due diligence with ProAssurance and prepare a definitive agreement for
the PIC-WI board's consideration.
During October and November, 2005, ProAssurance and PIC-WI performed
due diligence on each other and evaluated the results. An oral
presentation of the findings was presented to the ProAssurance board
on December 7, 2005.
After careful consideration, at its meeting on December 7, 2005,
ProAssurance's board determined that the merger agreement and the
merger are in the best interest of ProAssurance and its stockholders.
Accordingly, ProAssurance's board, by unanimous vote of the directors,
adopted the merger agreement.
For a more complete discussion regarding the timeframe of the
transaction, please see pages 22-27 of the S-4 Registration Statement.
2. Provide copies of the portions of the board minutes of ProAssurance
Corporation that relate to deliberations on the proposed acquisition
of PIC-WI's shares or related transactions.
Due to the confidential nature of the content of the ProAssurance
Board minutes that discuss the PIC-WI transaction, copies will be
submitted supplementally.
3. Please provide page 22 of the Agreement and Plan of Merger as the page
was not provided in the filing.
Page 22 of the Agreement and Plan of Merger is attached as Exhibit A.
4. How has ProAssurance Corporation estimated the fair market value of
PIC-WI in determining what to offer for the shares of PIC-WI? Please
provide copies of any management communications that relate to this
topic.
ProAssurance management evaluated the transaction based on the book
value of PIC-WI, the strategic value of the transaction to
ProAssurance and the form of consideration being paid (the book value
market multiple of ProAssurance's common stock).
Page 2, Cover Letter
ProAssurance retained the services of an investment banking firm to
provide a fairness opinion as to the purchase price offered for PIC-WI
stock. The opinion which was presented to the ProAssurance board at
the December 7, 2005 meeting, evaluates the proposed transaction as it
relates to recent similar transactions and overall pricing
methodologies used in the industry.
Due to the confidential nature of management's evaluation and the
fairness opinion presentation, copies of these materials will be
submitted supplementally.
5. Please identify the intended benefits to the ProAssurance Group that
is expected to be achieved by the proposed acquisition of PIC-WI.
In concluding that the merger is in the best interests of ProAssurance
and its stockholders, ProAssurance's board considered information and
analyses regarding the business of PIC-WI and the proposed merger
provided by management and by outside financial, legal and actuarial
advisors. ProAssurance's board considered the following factors that
supported the decision to approve the merger:
o The merger with PIC-WI is consistent with ProAssurance's goal of
building a larger and stronger professional liability
organization with similar classes of business in states within or
adjacent to ProAssurance's geographic footprint.
o The merger will continue the expansion of ProAssurance's medical
professional liability insurance business through combinations
with other professional liability insurers.
o ProAssurance has had success integrating other companies like
PIC-WI that were originally formed by physicians and that are
close with the local physician community.
o PIC-WI's claims and underwriting staff will enable ProAssurance
to apply local knowledge to individual risk selection and claims
management in Wisconsin and surrounding states.
o The merger has been recommended by ProAssurance management and
[financial advisor] has advised that the transaction is fair to
the shareholders of ProAssurance.
o A further discussion regarding the benefits of the PIC-WI transaction
are contained on pages 35 and 36 of the S-4 Registration Statement.
Operations
6. Does ProAssurance Corporation expect PIC-WI to expand or contract its
territory of operations? Please provide copies of any management
communications that relate to this topic.
Page 3, Cover Letter
See answer to question 7 and the Plan of Operation which was submitted as
an exhibit to the Form A.
7. Which types of insurance programs and services will ProAssurance
Corporation expect PIC-WI to seek to expand, reduce or terminate
following the proposed change in control? Please provide copies of any
management communications that relate to this topic.
Post merger, it is the intent of ProAssurance to continue PIC-WI as a
Wisconsin domiciled insurer and maintain its strong presence in
Wisconsin and allow it to continue to service its core market.
PIC-WI's Madison, Wisconsin office will also serve as ProAssurance's
Northwest regional office.
The existing PIC-WI Claims office in Madison will remain in place.
ProAssurance intends to locate underwriting, policy administration,
and risk management operations for Wisconsin, Iowa, Minnesota,
Nebraska, Nevada and South Dakota into the PIC-WI office in Madison.
Any admitted business currently written by the ProAssurance in these
states will be transferred to Madison for policy administration.
Underwriting, policy administration, and risk management for the
Illinois business of PIC-WI will be consolidated into the ProAssurance
underwriting office located in Okemos, Michigan and claims will be
serviced by the existing ProAssurance claims office in Lisle,
Illinois.
ProAssurance intends to continue to write all Wisconsin business
through PIC-WI as a statutory company. At this time, a decision has
not been made as to which statutory entity will be utilized to write
the PIC-WI and ProAssurance business outside of Wisconsin. All local
offices of ProAssurance have the ability to issue coverage through any
of the ProAssurance statutory entities; and, accordingly, the Madison
office will have access to the other ProAssurance statutory admitted
companies. Initially, the business will continue to be written through
the current companies. In the future, business may be transferred
between companies upon policy renewal, with these decisions based
primarily on the capacity and rating agency considerations. For any
insureds that are ultimately moved from one carrier to another carrier
within the ProAssurance group, tenure with the prior company will be
honored for purposes of a free tail due to Death, Disability or
Retirement.
Other than administrative changes noted above, ProAssurance does not
have any plans to contract PIC-WI territories. ProAssurance is hopeful
that PIC-WI will be able to expand its current writings in its
existing territories. Any growth outside its current territories will
be dependent on its underwriting capacity to sustain further growth
and markets whereby PIC-WI will not be in direct competition with
other ProAssurance insurers.
Please refer also to the information presented in the Plan of
Operations submitted as an exhibit to the Form A filed with the OCI in
conjunction with this transaction.
Page 4, Cover Letter
8. Does ProAssurance Corporation expect PIC-WI to reduce or terminate
services in any region of this State in which it is currently active?
Please provide copies of any management communications that relate to
this topic.
ProAssurance does not intend to reduce or terminate services currently
provided by PIC-WI in Wisconsin. Please see the response to question 7
above and the Plan of Operations
9. Does ProAssurance Corporation plan to have PIC-WI purchase or sell any
books of business over the next twelve months? Please provide copies
of any management communications that relate to this topic.
ProAssurance does not have any plans for PIC-WI to purchase or sell
any books of business over the next twelve months. As a matter of
general practice, ProAssurance evaluates opportunities to purchase
books of business. Such opportunities could involve PIC-WI if the
books of business are in the states served by PIC-WI.
10. As noted in your filing, ProAssurance Corporation while licensed in
many of the same jurisdictions as PIC-WI hasn't obtained a similar
market presence in several of the jurisdictions. Please explain why
the company hasn't either more aggressively pursued business in these
jurisdictions or has been unsuccessful in its pursuit of these
jurisdictions. You may exclude Wisconsin from your response to this
specific question.
ProAssurance, through its insurance subsidiaries, has obtained
licenses in several states surrounding its domicilary states in order
to accommodate boarder situations for insureds it is currently
servicing. In addition, possessing these licenses places the company
in a position to acquire either books of business or entire companies,
whichever the case may be, when presented with attractive business
opportunities.
Much of ProAssurance's growth has been through mergers and
acquisitions of both companies and books of business. Since it is very
difficult for medical malpractice companies to successfully enter a
market with no history or ties to that market, ProAssurance typically
will only enter a market through merger and acquisition activities or
very slowly over a number of years through organic growth.
11. To what extent does ProAssurance Corporation medical liability rates
reflect distinctions specific to individual jurisdictions and to what
extent do rates charged reflect cross-jurisdictional pressures common
to medical liability market in general.
When calculating rates for a specific state, ProAssurance uses loss
cost and trend information from that particular state. If ProAssurance
has no loss experience of its own from the state with which to project
the pure premium, then information is utilized from the rate filings
of the largest writers of professional liability insurance from that
jurisdiction. Accordingly, loss costs are calculated entirely based on
state specific information. The loads for commissions, taxes,
licenses, and fees are also based on state specific requirements.
Page 5, Cover Letter
Some rating items, however, are based on ProAssurance's countrywide
experience, supplemented with industry information as compiled by the
Insurance Services Office (ISO), with their permission. These items
include increased limits factors and specialty relativities. Once loss
experience is available for a specific state, however, these two items
are reviewed on an annual basis to ascertain whether the increased
limits factors or specialty relativities need to be adjusted to
reflect state specific experience.
Other expenses which are based on companywide, cross jurisdictional
data include the load for Death, Disability, and Retirement reporting
endorsements for claims-made coverage, the load for Profit and
Contingencies, and the load for General and Other Acquisition
Expenses.
12. What changes does ProAssurance Corporation expect will occur in
regards to PIC-WI concerning the factors determining rate levels?
Please provide copies of any management communications that relate to
this topic.
In general, ProAssurance does not anticipate any significant changes
in the factors that determine the rate levels for PIC-WI. The expense
levels that underlie current PIC-WI rates are quite similar to those
currently utilized by ProNational Insurance Company, a ProAssurance
subsidiary, for its current rates in Wisconsin.
The only rating factors that are significantly different between the
two companies for the physician and surgeon programs are the Profit
and Contingencies load and the Commission load. PIC-WI does not
currently incorporate a load for Profit and Contingencies into their
rates. ProAssurance typically utilizes a profit and contingency
factor, net of investment income, based on estimated earnings as a
percent of earned premiums and the required return on equity from
insurance operations.
In the most recent physician and surgeon rate filings for
ProAssurance, this load has been calculated in the 3.5% to 4.5% range.
Over the next two years, ProAssurance would introduce a similar
provision for profit and contingencies into the ratemaking process. As
for the commission load, PIC-WI currently utilizes a 5.8% load for
commissions in their physician rates and a factor of 10% in their
hospital rates. ProNational uses loads of 8% and 10%, respectively.
ProAssurance does not anticipate any changes being made to the
Wisconsin agency force that is currently being utilized by PIC-WI.
PIC-WI currently offers medical liability coverage on both a
claims-made and an occurrence basis with 12.9% of its total writings
on the occurrence form. ProAssurance no longer offers coverage on an
occurrence basis. Going forward, ProAssurance and PIC-WI will evaluate
the desirability of maintaining the occurrence form.
Finally, the load for general liability rates for the hospital
professional liability programs are significantly different between
the two companies. PIC-WI currently utilizes a 19% charge, while the
comparable charge for ProNational is 10%. This charge would be
reviewed in future rate filings, with deference given to PIC-WI
experience.
Page 6, Cover Letter
13. Are the information technology platforms currently in place at
ProAssurance Corporation and PIC-WI relatively compatible? How long is
the integration of information technology platforms anticipated to
take?
The companies currently operate on distinct information technology
platforms. Both companies are currently in the process of evaluating
the best long-term solution for their combined information technology
needs. While it is possible to operate on separate platforms, it is
the preference to operate on one platform for medical malpractice
business.
Integration of information technology platforms takes approximately
one-year. This allows ample time for analysis, data conversion, and
testing. The discontinued system is also maintained for validation and
back-up purposes until management is fully satisfied that the
integration has been successfully completed.
Effect on Wisconsin's Insurance Market
14. The American Medical Association categorizes Wisconsin as a state that
is not in crisis or showing problem signs with respect to medical
liability. To what factors does ProAssurance Corporation attribute the
relatively stable medical malpractice environment in Wisconsin? Please
provide copies of any management communications that relate to this
topic.
While ProAssurance is not an expert on the medical malpractice
environment in Wisconsin, it sees two significant factors that have
led to the relatively stable medical malpractice environment in
Wisconsin.
The Patient's Compensation Fund with the previously existing cap on
non-economic damages has certainly been important. Generally speaking,
states with funds and states with caps have experienced relative
stability. With the elimination of the cap last summer, one pillar of
this stability has been diminished and ProAssurance fears that the
environment could change adversely in the future. The absence of the
cap has already significantly increased the rates for Patient
Compensation Fund coverage, based on projected increased loss
severity. The potential for greater recoveries may also result in more
suits being filed, i.e., greater claim frequency, which will likely
increase both indemnity and defense costs at the primary and Fund
levels.
ProAssurance also believes that the physician oriented history of
PIC-WI and its approach to the market has worked to stabilize the
market. PIC-WI and ProAssurance share the same orientation of careful
selection of risks, aggressive defense of claims, and ongoing risk
management programs designed to reduce adverse events that could
result in medical malpractice claims. Moreover, by aggressively
defending claims, PIC-WI has not only produced strong results for its
customers, but has also limited the number of claims that may have
otherwise reached the Fund. The PIC-WI approach to claims defense will
be supported and continued by ProAssurance.
Page 7, Cover Letter
15. To what extent, if any, does ProAssurance Corporation believe PIC-WI
has contributed to the stability of the medical liability market in
Wisconsin? Describe ProAssurance Corporation's plans for PIC-WI that
may affect PIC-WI's contribution to the Wisconsin medical malpractice
market, including, but not limited to, plan for maintaining a
relationship with Wisconsin physicians and operating functions aligned
with Wisconsin interests and plans for competitive products and rates.
ProAssurance believes that the physician founded insurers (including
ProAssurance and PIC-WI) contribute to the stability of the medical
liability market in Wisconsin and generally. These carriers are
devoted to their clientele and markets; they are committed to the line
of business; and, they are actively involved in tort reform and
related efforts.
In each of its previous mergers, ProAssurance has retained key
personnel, allowing it to maintain a local presence and preserve the
important institutional knowledge especially in claims management,
underwriting, and risk management. ProAssurance believes that this
ability to utilize local knowledge is a critical factor in the
operation of its companies and leads to market stability. The
successful integration of each organization demonstrates
ProAssurance's commitment to the local marketplace where it does
business.
ProAssurance also works actively with organized medicine and values
PIC-WI's positive working relationship with the Wisconsin Medical
Society. ProAssurance will look to preserve that relationship.
Post merger, it is the intent of ProAssurance to continue PIC-WI as a
Wisconsin domiciled insurer and maintain its strong presence in the
Wisconsin and allow it to continue to service its core market. PIC-WI
will serve as ProAssurance's Northwest regional office. ProAssurance
emphasizes a local approach to its insurance markets.
ProAssurance has evaluated the current rate structure of PIC-WI and is
of the opinion that the rates are generally adequate for the risks
being underwritten and does not have any plans to significantly
deviate from PIC-WI's current rate making strategies.
16. What would the proposed acquisition of PIC-WI by ProAssurance
Corporation contribute in terms of preserving and enhancing the
existing relative stability of Wisconsin's medical malpractice
environment? Please provide copies of any management communications
that relate to this topic.
ProAssurance does not have plans to make changes to the operations of
PIC-WI that relate to the relative stability of the medical
malpractice environment in Wisconsin. ProAssurance brings a larger and
stronger balance sheet and access to capital that will allow PIC-WI to
continue its mission of service to Wisconsin physicians.
Page 8, Cover Letter
17. Please comment on ProAssurance Corporation's view of the current
adequacy of medical liability rates being charged in Wisconsin. Please
provide copies of any management communications that relate to this
topic.
PIC-WI has based its January 1, 2006 rate levels on their own loss
experience in the state of Wisconsin. The selected rate increases are
considered reasonable by ProAssurance in light of the uncertainty over
loss costs attributable to the loss of the cap on non-economic
damages. In general, the requested rate levels appear to be adequate.
18. Compare and contrast rate levels charged in Wisconsin by ProAssurance
Insurance entities with those charged by PIC-WI during the last 3
years.
Following is a comparison of rate levels as charged in Wisconsin by
ProAssurance and by PIC-WI.
- --------------- ---------------------------------------------- ------------------------------------------------
PIC-WI ProNational
- --------------- ---------------------------------------------- ------------------------------------------------
2003 2004 2005 2006 2003 2004 2005 2006
- --------------- ----------- ----------- ---------- ----------- ------------- ----------- ---------- -----------
Internal 5,612 5,973 5,973 6,272 N/A 6,505 7,675 7,675
Medicine
- --------------- ----------- ----------- ---------- ----------- ------------- ----------- ---------- -----------
General 19,641 21,504 21,504 22,579 N/A 20,511 24,985 24,985
Surgery
- --------------- ----------- ----------- ---------- ----------- ------------- ----------- ---------- -----------
OB/GYN 30,304 32,255 32,255 33,869 N/A 28,915 35,371 35,371
- --------------- ----------- ----------- ---------- ----------- ------------- ----------- ---------- -----------
*Information as contained in the Medical Liability Monitor for
2003-2005. 2006 based on currently filed and approved rate levels.
Please note that ProNational rates were calculated based on the
Wisconsin rate level indications for PIC-WI, Medical Protective, and
Midwest Medical Insurance Company. The indications from these
competitors were given the following weights: 30%, 65%, and 5%,
respectively. Had the rate level indication been based entirely upon
PIC-WI indications, then the 2006 rates for ProNational would have
been as follows:
- -------------------------------------- ------------------------------------
2006
- -------------------------------------- ------------------------------------
Internal Medicine 6,760
- -------------------------------------- ------------------------------------
General Surgery 21,783
- -------------------------------------- ------------------------------------
OB/GYN 30,796
- -------------------------------------- ------------------------------------
The hospital liability rates for the two companies are significantly
different. ProNational rates were based on the filed and approved
rates and rating factors for OHIC, since ProNational had focused on
marketing to former OHIC policyholders.
Page 9, Cover Letter
- ---------------------------------------------------------------------------
Wisconsin 2006 Hospital Rate Comparison
- ---------------------------------------------------------------------------
PIC-WI ProNational
- ------------------------ ------------------------- ------------------------
Acute Care Bed 644.00 1,877.32
- ------------------------ ------------------------- ------------------------
Psych Bed 644.00 1,407.99
- ------------------------ ------------------------- ------------------------
Other O/P Visit 32.20 56.32
- ------------------------ ------------------------- ------------------------
E/R Visit 186.76 187.73
- ------------------------ ------------------------- ------------------------
19. ProAssurance Corporation has several licensed insurance companies in
the State of Wisconsin and has not yet written significantly in the
state. Does this represent the intended market presence within
Wisconsin? If so, please identify the factors contributing to
management's determination of this level of market penetration. If
not, please identify factors for the company's inability to acquire
its intended market share. Please provide copies of any management
communications that relate to this topic.
Two of ProAssurance's admitted carriers are currently licensed in
Wisconsin. Both of these companies acquired these licenses prior to
their business combination in 2001. Both companies had obtained the
licenses for the reasons stated in question 10. above. Neither
ProNational Insurance Company nor The Medical Assurance Company, Inc.
had previous intentions of gaining significant market share in
Wisconsin without doing so through a merger or acquisition. Since
PIC-WI writes the majority of the medical malpractice business in
Wisconsin, the opportunity for such entrance into Wisconsin has not
presented itself to either company prior to this transaction.
20. In March 2004, ProAssurance purchased the renewal rights to all of
OHIC Insurance Company's physician, hospital and healthcare facility
business in Indiana, Illinois, Kansas, Kentucky and Wisconsin. As a
result of the purchase, OHIC Insurance Company's writings in Wisconsin
declined significantly in 2004; however, it was unclear what entity in
the ProAssurance group wrote the renewals of this business. Please
explain the current status of this renewal business and what, if any,
challenges has the group faced with procuring these renewals.
When the renewal rights were acquired, ProAssurance publicly stated
that it expected to write no more than one-third of the expiring
business, measured by premium volume. We believed that the business
was underpriced, a portion of the accounts would not meet our
underwriting standards and the medical malpractice market was becoming
more competitive. Nevertheless, ProAssurance was interested in
completing the transaction as a way of entering or expanding its
presence in these markets for a relatively low cost. As expected, once
ProAssurance underwriting criteria and pricing were applied,
ProAssurance wrote approximately $5 million of the $17 million of
expiring premium. The business was written by either ProNational
Insurance Company or The Medical Assurance Company, Inc., depending on
which entity operates in each of the states in question.
Page 10, Cover Letter
21. How has the proposed acquisition of PIC-WI affected the marketing
plans of ProAssurance Corporation in Wisconsin? Please provide copies
of any management communications that relate to this topic.
ProAssurance had identified Wisconsin as a growth state in its
2005-2008 Strategic Plan. However, due to the strong market position
of PIC-WI, ProAssurance has not obtained any significant market share.
The references to Wisconsin contained within ProAssurance's 2005-2008
Strategic Plan are attached as Exhibit B.
22. How does the proposed acquisition change the business plans of
ProAssurance Corporation with respect to marketing in jurisdictions in
which they participate or previously intended to participate? Please
provide copies of any management communications that relate to this
topic.
With the exception of states in which both ProAssurance and PIC-WI
have a presence, this transaction does not affect any business plans
of ProAssurance with respect to marketing in jurisdictions in which
ProAssurance participates or previously intended to participate. For
the states in which there is overlap, the plan for the combination of
those books of business is addressed in question 7. above. The
combined market share in any of these overlapping states is not
significant as compared to pre-merger market share. At this time,
ProAssurance has not decided if it intends to expand its writings in
states other than the states now served by PIC-WI post merger.
23. Does ProAssurance Corporation plan to purchase or sell any books of
business over the next twelve months? Please provide copies of any
management communications that relate to this topic.
ProAssurance is continually and actively pursuing mergers and
acquisitions and may be in some phase of negotiations or potential
negotiations at any given time. When negotiations take place, they are
subject to a confidentiality agreement and due to the fact that
ProAssurance is a publicly traded company, ProAssurance would be
unable to disclose information publicly. ProAssurance will assure the
OCI that no foreseeable transactions would impact the plans for PIC-WI
as herein stated or presented in the Plan of Operation, nor diminish
the importance of the PIC-WI transaction to ProAssurance.
The Holding Company System, it Governance and Resources
24. For each of the following companies in the holding company system of
ProAssurance Corporation:
a. Medical Assurance, Inc.
b. IAO, Inc.
c. Medical Assurance of Indiana Agency, Inc.
d. Mutual Assurance Agency of Ohio, Inc.
e. ProAssurance Group Services Corporation
f. NCRIC Corporation
g. NCRIC, Inc.
Page 11, Cover Letter
h. American Captive Corporation
i. National Capital Insurance Brokerage, Ltd.
j. National Capital Risk Services, LLC
k. NCRIC Insurance Agency, Inc.
l. Healthcare Compliance Purchasing Group, LLC
m. E-Health Solutions Group, Inc.
n. NCRIC Physicians Organization, Inc.
o. Professionals Group, Inc.
p. MEMH Holdings, Inc.
q. American Insurance Management Corp.
r. Professionals National Insurance Co., Ltd.
s. ProNational Insurance Agency, Inc.
t. Physicians Protective Plan, Inc.
u. Professionals Protective Plan, Inc.
v. Professional Group Services Corp.
w. PRA Services Corporation
Please provide the following information:
a. Date of Incorporation
b. Financial statements as of the most recent reporting period (unaudited
is acceptable, if that's the best available)
c. Description of current purpose and activities
d. Capitalization structure, including the number of shares authorized,
and issued and outstanding for each class of common and preferred
stock as well as any debt issued, if any.
Please see attached Exhibit C for a complete listing of ProAssurance
subsidiaries and the requested information. Due to its confidential
nature, the financial information on these companies will be provided
supplementally.
25. Please provide us with a copy of the most recent holding company
registration statement filed with the Alabama Department of Insurance.
Form B dated May 27, 2005 (including amendments 1 and 2) filed by The
Medical Assurance Company, Inc. with the state of Alabama and Form B
dated April 27, 2005 (including amendments 1 and 2) filed by
ProNational Insurance Company with the state of Michigan are attached
hereto as Exhibits D and E, respectively.
26. On August 3, 2005, ProAssurance Corporation completed its acquisition
of NCRIC Group, Inc. Please compare the pre-acquisition anticipated
management and employment changes with actual results at this stage of
the integration and what is foreseeable at this point. If results
varied materially from expectations, please identify cause of
deviation.
The transition and integration of NCRIC continues to go as
operationally expected. While the information technology conversion
has taken a bit longer than originally expected, this delay has
Page 12, Cover Letter
occurred due to training issues and implementation of an imaging
system which took priority over the system conversion. In addition,
the timing of year-end processing and the transfer of books of
business between the various statutory companies were given priority
and schedules had to be rearranged.
The accounting transition is going smoothly. Year end 2005 was
completed by NCRIC accounting staff located in the District of
Columbia. All 2006 accounting functions are currently being performed
by personnel located in Birmingham, Alabama. The 2006 year end will be
completed by accounting personnel located in Birmingham, Alabama. The
Senior Vice President and Treasurer of NCRIC has agreed to remain with
ProAssurance through July 2006 in order to complete the 2005
accounting year and complete the NCRIC Triennial Financial Exam which
is scheduled to begin in early April 2006.
The NCRIC reinsurance program was combined with the ProAssurance
reinsurance program effective January 1, 2006.
Both the marketing and underwriting transitions are complete with the
NCRIC personnel realigning responsibilities for certain states. They
will be assuming responsibility for providing services for The Medical
Assurance Company and ProNational Insurance Company business in
Virginia and Delaware while they will relinquish the NCRIC business in
West Virginia.
The only unexpected development that varied from ProAssurance's
original plan for NCRIC personnel is that the Vice President of Claims
has recently tendered his resignation. This was always a possibility
due to the Change of Control agreement applicable to NCRIC senior
officers. This individual has agreed to continue with the organization
until June 2006 to assist with and oversee the conversion of claims
and to provide ProAssurance with ample time to identify his
replacement - including candidates from within NCRIC.
27. What is ProAssurance Corporation's view of what represents a proper
level of capitalization for an insurance subsidiary? How will this
view be implemented with respect to PIC-WI.
ProAssurance statutory companies operate within the acceptable NAIC
financial and regulatory guidelines. At a very minimum, ProAssurance
expects all of its insurance subsidiaries to operate above the
standards established by the domicilary states. The general goal is to
have the companies capitalized at levels that will obtain secure
ratings from qualified rating agencies. ProAssurance has capital
available to enable its statutory companies to remain financially
strong at levels acceptable to the regulators.
28. What is the planned level of capitalization for PIC-WI following the
change in control? What is the intended form of capitalization, that
is, among common stock, preferred stock, surplus notes, gross paid-in
and contributed surplus, and unassigned funds?
Page 13, Cover Letter
ProAssurance believes PIC-WI is currently well capitalized.
ProAssurance does not have any current plans to change either the
level of capitalization or the structure of capitalization for PIC-WI
following the change of control. From time to time, management will
evaluate capital requirements based on current and future operations,
and recommend adjustments accordingly. ProAssurance intends to
maintain the financial strength, stability and rating of PIC-WI.
ProAssurance endeavors to keep its statutory subsidiaries operating at
a premium to surplus ratio of approximately 1:1. ProAssurance intends
to retain PIC-WI's surplus note.
29. Will the acquisition of PIC-WI trigger any change in control
provisions under the terms of any executive employment agreement? What
is the anticipated amount of change-in-control payments as a
consequence of the proposed acquisition of shares?
The acquisition of PIC-WI will enable certain PIC-WI officers to
trigger the change in control provisions under the terms of their
employment agreements or severance plan if there are changes in their
employment status. The benefits and expected payouts are outlined on
pages 36 - 38 of the S-4 Registration Statement filed as an exhibit to
the Form A. Pages 36-38 of the S-4 Registration Statement are attached
hereto as Exhibit F.
30. Please describe material pending litigation in which the parties to
the proposed acquisition are involved. Has either ProAssurance
Corporation retained independent counsel that is actively representing
them concerning these matters? We are not requesting release of
attorney-client privileged information or communications, if any, only
whether there is active representation by independent counsel on these
matters.
NCRIC v. Columbia Hospital for Women - As a result of an action by
NCRIC, Inc. to recover $2 million in premium alleged owing under a
retrospective rating plan, Columbia Hospital for Women filed a counter
claim for tortuous interference with a business relationship, breach
of contract and bad faith. The jury verdict in February 2004 resulted
in no award to NCRIC on its contract claim and an $18.2 million award
to Columbia Hospital for Women on the counterclaims. The case is
currently on appeal to the District of Columbia Court of Appeals.
NCRIC has reserved the claim and posted a bond.
ProAssurance always retains independent counsel to represent it
concerning any litigation against the company.
31. What is the philosophy of ProAssurance Corporation with respect to
entry to and exit from different jurisdictions and market segments?
As stated in question 10, ProAssurance typically enters markets
through mergers or acquisitions and in smaller markets through organic
growth.
If ProAssurance decides to exit a particular market, it does so only
after making significant efforts to operate successfully in that
market. If there is a particular market in which the litigation
climate does not produce fair and reasonable verdicts, ProAssurance
will evaluate whether it can continue to operate successfully in that
market.
Page 14, Cover Letter
ProAssurance takes very seriously its responsibility to the market and
its responsibility to maintain strong, financially stable statutory
insurance companies. An example of a state where ProAssurance was
unable to achieve this balance was Mississippi, where ProAssurance
currently does not write business as an admitted carrier.
32. What are the plans under consideration of ProAssurance Corporation
concerning commitment to particular lines of insurance, segments of
medical malpractice insurance, and particular jurisdictions?
ProAssurance considers itself a general writer of physician liability
exposure and does not restrict its writing to certain specialties. On
a more limited basis, ProAssurance writes hospitals and other health
care facilities, dentists, and legal professionals.
ProAssurance has reviewed the scope of writing at PIC-WI and does not
anticipate any changes in this scope. Likewise, ProAssurance does not
anticipate any change in the geographic scope of operation. However,
as outlined in response to question 7, there will be certain
reassignments of responsibility for overlapping markets.
33. Will the existing employees of PIC-WI be transferred to become
employees of a different entity within the holding company system? If
so, which one(s)?
Currently, most employees in the ProAssurance organization are
employed by a subsidiary of ProAssurance, ProAssurance Group Services
Corporation which also houses the ProAssurance benefit plans. The
statutory companies are parties to intercompany management services
and expense sharing agreements that allow the sharing of employees
among the companies to provide services which are then allocated among
the various companies. For instance, accounting and information
technology employees service all statutory companies. A portion of
their salaries are allocated between the companies based on written
premium levels. It is anticipated that PIC-WI will participate in this
arrangement.
Regulatory Matters
34. Please provide correspondence, if any, with the Alabama Insurance
Department or the Michigan Office of Financial and Insurance Services
concerning the proposed acquisition.
ProAssurance has provided the Alabama Insurance Department and the
Michigan Office of Financial and Insurance Services with copies of the
Form A which was submitted to the OCI. Copies of the transmittal
letters dated December 21, 2005 are attached as Exhibit G.
In addition, PIC-WI has filed a request for exemption from
requalification with the Michigan Office of Financial and Insurance
Services. A copy of this exemption request dated March 2, 2006 is
attached hereto as Exhibit H.
Page 15, Cover Letter
ProAssurance has not received any communications from either the
Alabama Insurance Department or the Michigan Office of Financial and
Insurance Services regarding the PIC-WI transaction.
35. Has ProAssurance Corporation considered any future redomestication of
PIC-WI? If so, what is the anticipated time frame?
ProAssurance has no plans to redomesticate PIC-WI and has not
considered any future redomestication of PIC-WI.
We hope that the above information will enable the OCI to complete its review
and set the date for the Form A hearing. Attached please find ProAssurance's
waiver of the 10 day notice requirement.
ProAssurance representatives are available to meet to discuss these responses or
any other matters of interest with the OCI at your convenience. Please let me
know if you need anything further.
Sincerely,
/s/ Victor T. Adamo
Victor T. Adamo
President
Page 16, Cover Letter