S&P Affirms Professionals Direct Insurance Ratings; Outlook Continues Negative

December 15, 2004

Standard & Poor’s Ratings Services affirmed its ‘BBB’ counterparty credit and financial strength ratings on Professionals Direct Insurance Co. (PDIC). The outlook remains negative.

The ratings reflect the company’s strong capitalization, modest premium growth, and good operating performance, offset by an estimated $2.2 million reserve deficiency compared with year-end 2003.


The outlook reflects Standard & Poor’s concerns about the rapid geographic expansion PDIC undertook from mid-2002 to mid-2003 and the uncertainty regarding the level of losses that could be experienced with the new business. For 2005, Standard & Poor’s expects direct written premium growth of 3%-5%, a loss ratio of 65%-70% with an expense ratio of about 30%, and a year-end capital adequacy ratio (CAR) of more than 200%.

Major rating factors

— PDIC is a monoline writer of lawyers’ professional liability insurance. Its focus is on small firms (1-5 attorneys) in tier-two cities and rural areas. As expected, premium growth in 2004 has been at a much more modest pace than the 134% increase experienced in 2003, with in-force primary layer premium increasing only 3% through the first nine months of 2004. Through August 2004, PDIC’s renewal rate was 80%, and an average rate increase of 5% was obtained on all policies renewing during this period.

— A change in claims processing methodology, designed to enhance the consistency of claims handling as well as expedite the booking of the reserve for the ultimate claim amount, was implemented at the beginning of 2004. Primarily due to this change in methodology, PDIC’s outside actuary’s midyear 2004 reserve review indicated an overall deficiency of about $1 million, compared with the year-end 2003 loss estimates.

— PDIC’s capitalization remains strong, with a year-end 2003 CAR of 249%, as measured by Standard & Poor’s capital model, and an estimated CAR as of Sep. 30, 2004 of 240%. These ratios incorporate an additional reserve deficiency estimated by Standard & Poor’s, above the outside actuary’s estimate, of about $1.2 million, for a total estimated deficiency of $2.2 million, which was 15% of PDIC’s posted reserves as of Sept. 30, 2004.

— The company’s operating performance is good, with a loss ratio of 67% and an expense ratio of 32% generated through Sept. 30, 2004. Also during this timeframe, the actual frequency of 2.66 demands/suits per 100 lawyers was less than the five-year norm of 3.05.

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