Michigan-based American Physicians Capital, Inc. announced a net loss of ($77.1) million, or ($9.03) per share for the third quarter of 2003 as a result of reserve increases and accounting valuation allowances.
For the nine months ended Sept. 30, 2003, the company reported a net loss of ($76.9) million or ($8.97) per share. This compares to a net loss of ($1.9) million, or ($.21) per share for the 2002 third quarter, and a net loss of ($17.3) million or ($1.80) per share for the nine months ended Sept. 30, 2002. The significant loss in the third quarter of 2003 was the result of a $43.0 million increase to professional liability reserves ($28.0 million, net of tax) and a $49.9 million charge to establish a deferred tax asset valuation allowance.
“Our financial results for the third quarter were very disappointing,” stated President and CEO William Cheeseman. “Our third quarter analysis of loss reserves showed the business we wrote in prior years in Florida, Ohio, and Kentucky continued to develop at a much higher level of severity than previously predicted.”
“Two years ago I announced the significant actions this company would take to address the increase in losses and severity trends we encountered in 2001. Under new leadership, significant improvements were made to all key operational areas – underwriting, risk management, actuarial, and claims handling. These actions have dramatically improved current accident year results, but could not mitigate the deterioration of results from prior accident years.”
Medical professional liability results
Net premiums earned were $41.0 million in the third quarter of 2003, a 2.4% increase over the third quarter of 2002. For the first nine months of 2003, net premiums earned were $118.9 million, an increase of 10.0% from the same period in 2002. The majority of this premium increase is from the company’s rate actions, as the insured physician count at Sept. 30, 2003 has decreased 16.2% from Sept. 30, 2002. The decrease in physician count is due to the company’s exit from the Florida market, the discontinuance of the Ohio occurrence-based policies, and the elimination of poor risks in other markets.
The third quarter 2003 reported loss ratio was 204.2%, consisting of 99.5% on the current accident year and 104.7% of prior year development. These ratios compare to 111.4% on the 2002 accident year and 3.7% of prior year development for a total loss ratio of 115.1% reported in the third quarter of 2002. The company has reported $44.25 million of adverse prior year development through Sept. 30, 2003, including $43.0 million, ($28.0 million, net of tax) in the third quarter. The $43.0 million adjustment is all on prior year reserves, specifically 1999-2002. The states most affected were Ohio ($16.4 million), Florida ($16.0 million), and Kentucky ($15.0 million), which were partially offset by positive development in the Michigan market.
In the third quarter of 2003, actuarial analysis based on paid and reported losses indicated that reserves recorded on the 1999-2002 accident years would not be sufficient. This change in actuarial projections was the direct result of increased loss payments in the 2003 third quarter. These higher paid losses indicated a trend representing a major increase in the average paid severity on the 1999 – 2002 accident years. As a result, the actuarially estimated severity of future claim settlements has been increased significantly.
The increase in severity is a result of the overall market conditions for medical professional liability and specific issues associated with the company’s book of business.
In Ohio, the company has experienced an increase in the overall severity and the frequency of large losses in the Northeast portion of the state. The company has already reduced policy limits, discontinued writing occurrence policies, and significantly restricted business writing in this area. In Kentucky, the frequency and severity of large losses has also increased. The company has reduced limits, discontinued occurrence-based policies and reduced the insured physician count in this state.
The company began to exit the Florida market in December 2002. This market is reportedly plagued by large settlements and high loss adjustment fees. The company has experienced an increase in settlement costs and the frequency of claims filed since the announcement of our exit. As a result of these increasing severity and payment trends, the company increased reserves on the run-off of this book by $16.0 million.
Underwriting expenses were $7.8 million, or 18.9% of net premiums earned in the third quarter of 2003 compared to $7.4 million, or 18.5% in the third quarter of 2002. Underwriting expenses for the first nine months of 2003 were $22.7 million, or 19.1% of net premiums earned as compared to $20.5 million, or 18.9% of net premiums earned for the same period of 2002. The increases in underwriting expenses were directly attributable to an increase in commissions and premium taxes associated with the higher premium volume.
“The company experienced deterioration in results for business written in the 1999 – 2001 soft market conditions. This also carried over and affected the 2002 year,” said American Physicians Assurance Corporation CEO R. Kevin Clinton. “Today our book of business is much stronger and focused on more stable markets – Michigan, Illinois, New Mexico and selected areas of Ohio.”
Workers’ compensation results
Net premiums earned were $10.3 million in the third quarter of 2003, a 35.1% decrease from the third quarter of 2002. For the first nine months of 2003, net premiums earned were $33.6 million, a decrease of 28.0% from the same period in 2002. The decrease was the result of the non-renewal of some construction accounts and other higher risk or poor performing business. Rates on renewal business through the first nine months of 2003 increased an average of 22.8%.
The third quarter 2003 reported loss ratio was 82.2% with no prior year development. This ratio compares to 74.6% on the 2002 accident year and (3.2%) of prior year development for a total loss ratio of 71.4% reported in the third quarter of 2002. For the first nine months of 2003, the reported loss ratio was 75.9% as compared to 76.3% for the same period in 2002. The company has reported $1.4 million of favorable prior year development through Sept. 30, 2003.
Underwriting expenses were $3.0 million, or 28.9% of net premiums earned in the third quarter of 2003 compared to $3.5 million, or 22.2% in the third quarter of 2002. Underwriting expenses for the first nine months of 2003 were $10.9 million, or 32.4% of net premiums earned as compared to $11.3 million or 24.2% of net premiums earned for the same period in 2002. The increases in the underwriting expense ratio were attributable to the cost of new employees, reduced premium volume, and severance costs.
Subsequent to the end of the 2003 third quarter, the company executed a non-binding letter of intent to sell its workers’ compensation policy renewals. If the transaction is completed on the terms contemplated, the company would be paid a fee equal to 2.5% of renewal premiums over the next three years.
In addition, the company would be paid a fronting fee of 5.0% for renewed business in Michigan and Minnesota until the purchaser can obtain licenses in those states. All business will be 100% reinsured by the purchaser. The proposed transaction is subject to completion of due diligence, definitive documentation and approval by the company’s board.
Also, the company has begun the process of negotiating a loss portfolio transfer for its existing workers’ compensation loss reserves. As of Sept. 30, 2003, workers’ compensation reserves totaled $68.3 million, $62.4 million net of reinsurance.
The company will record any severance, restructuring or other charges in the quarter in which the transactions are completed. The Company currently expects these transactions to close in the fourth quarter of 2003.
Health and other operating activities
Net premiums earned for the health program were $5.3 million in the third quarter of 2003, a 4.2% decrease over the third quarter of 2002. For the first nine months of 2003, net premiums earned were $17.3 million, an increase of 2.4% from the same period in 2002. The health premiums relate to a single preferred provider program sponsored by one of the company’s major Michigan professional liability insured groups. The increase in year-to-date premiums is the result of increasing rates, as the actual number of covered lives in the program has decreased 37.4% since Dec. 31, 2002.
The health line generated a reported loss ratio of 77.3% in the third quarter of 2003 as compared to 93.5% in the 2002 second quarter. For the first nine months of 2003, the reported loss ratio was 85.9% as compared to 93.7% for the same period in 2002. The decrease in the 2003 third quarter and year-to-date loss ratios was the direct result of re-underwriting efforts and rate increases.
The company will formally notify its business partners of its intention to exit the health insurance program effective Dec. 31, 2003. Pursuant to the terms of the operating contract, the company will begin non-renewing all accounts 180 days from the effective date. In addition, the Company is in negotiations for the placement of this business with another insurance provider. During the 2003 fourth quarter as the specific terms of the exit are finalized, any additional restructuring charges will be identified and recorded.
Loss reserve development and reinsurance treaty adjustments related to the run-off of the personal and commercial lines resulted in a loss before taxes of ($371,000) in the third quarter of 2003 and ($1.4) million year-to-date.
This compares to a loss before taxes of ($395,000) in the third quarter of 2002 and ($1.6) million for the first nine months of 2002. This adverse development is associated with a small number of primarily personal injury claims that remain from this book of business. Management is aggressively working to resolve all outstanding claims, which now number less than 50, by the end of 2003.
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