Medical Malpractice
Now Curable?
Blair Sanford, CFA
Background


Our Firm – Cochran, Caronia & Co
Your Speaker

Prior Experience
Journalism / Software Marketing / Equity Trading /
Business School
 10 Years an Insurance Analyst




Value Focus
Company by Company Look
Firm Focus brings Benefits
2
CC&Co Universe
Brokers
Commercial
Specialty
Aon Corporation
Chubb Corporation
Argonaut Group, Inc.
Arthur J. Gallagher & Co.
Harleysville Insurance Group HCC Insurance Holdings, Inc.
Brown & Brown, Inc.
Meadowbrook Insurance Group
Markel Corporation
HUB International Limited
Old Republic International
Midland Company
Hilb, Rogal, & Hamilton Co.
Ohio Casualty Corporation
Navigators Group
Willis Group Holdings Limited
PMA Capital Corp.
Philadelphia Cons Hldg. Co.
Unitrin, Inc.
ProAssurance Corporation
Personal Lines
VESTA Insurance Group Inc.
RLI Corp
Allstate Corporation
Commerce Group
Service
Bermuda
Erie Indemnity Company
Choicepoint Incorporated
ACE Ltd.
Horace Mann Educators
Informatica
American Safety Ins. Grp.
Mercury General Corp.
PartnerRe Ltd
Progressive Corporation
Other
XL Capital Limited
SAFECO Corporation
First American Corporation
21St Century Industries
Leucadia National
Wesco Financial
3
Outline


History
Medical Malpractice Overview
Structure
 The St. Paul Factor



Trends
Expectations
4
History


1970s Liability Crisis
Widespread Distress
Walkouts
 Crisis of Care


Liquidity



Reinsurance
Tort Reform - Nationwide
Birth of the Bed Pans
5
Med Mal Overview – Structure

State by State Proposition
Regulatory
 Legislative
 Legal
 Corporate

6
Top 25 Medical Malpractice Writers
(dollars in thousands)
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
MLMIC Group
St Paul Companies
GE Global Insurance Holding Company
ProAssurance Corp
Zurich/ Famers Group
Health Care Indemnity
Doctors Co Ins Group
CNA Ins Cos
Norcal Group
Allianz of America
American International Group
Miix Group
ISMIE Mutual Ins Co.
FPIC Insurance Group Inc
SCPIE Cos
Physicians Reciprocal Ins
APCapital
ProMutual Group
Reciprocal Group
Mag Mutual Insurance Group
State Volunteer Mutual
Hanys Ins Co.
Medical Mutual Group (MD)
Fairfax Financial (US) Group
HDI US Group
Total Top 25
2001
DPW
$704,379
583,612
405,007
339,665
315,901
287,672
271,621
251,071
248,443
233,129
229,423
228,566
207,795
201,618
183,835
170,505
147,353
137,102
134,774
128,623
120,236
92,591
90,519
86,254
84,315
$5,884,009
Market
Share
9.7%
8.0%
5.6%
4.7%
4.3%
3.9%
3.7%
3.4%
3.4%
3.2%
3.1%
3.1%
2.9%
2.8%
2.5%
2.3%
2.0%
1.9%
1.8%
1.8%
1.6%
1.3%
1.2%
1.2%
1.2%
80.7%
Total Medical Malpractice Industry
$7,288,933
100.0%
Company
Source: AM Best, OneSource
7
Med Mal Overview - Structure
Medical Malpractice Market Share Summary - By State
2001
Average of
Top
Top Two
Top Two
Writer
Writers
Writers
Average
35.5%
55.0%
27.5%
Median
35.1%
55.9%
28.0%
2000
Average
Median
Top
Writer
36.1%
34.7%
Top Two
Writers
56.5%
59.2%
Average of
Top Two
Writers
28.2%
29.6%
Source: Cochran, Caronia, AM Best, OneSource
8
Med Mal Overview – The St. Paul
Factor
St Paul vs. th e Field - Med Mal Loss Ratios
St. Pa ul
Next 9 largest peers - average
Next 9 largest peers - median
Top 35 peers - average
Top 35 peers - median
2000
149%
1999
100%
1998
107%
1997
92%
1996
72%
96%
88%
109%
92%
99%
89%
102%
96%
82%
90%
134%
92%
79%
94%
79%
81%
100%
101%
71%
79%
So u rc e : On e So u rc e
9
St. Paul Cos - Major Markets
2001
Med Mal
Overview –
The St. Paul
Factor
State
SD
AR
WV
NE
ND
NV
MT
VA
MN
IA
LA
DE
KS
TN
CT
SC
MI
NC
UT
GA
ME
CO
DC
IL
AZ
Market Share
Rank 2001
1
1
1
1
1
1
1
1
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2001
46.2%
45.9%
43.2%
42.3%
36.9%
36.3%
23.3%
14.5%
27.9%
23.9%
23.2%
21.3%
20.3%
19.4%
19.3%
19.1%
17.0%
16.9%
15.5%
14.6%
13.6%
10.0%
9.9%
8.4%
7.2%
10
Med Mal Trends
Industry Aggregate
Schedule P - Medical Malpractice (Claims Made)
Calendar Year Incurred Development
Year ->
1992
1993
1994
1995
1996
Prior
(711,632) (509,395) (332,298) (280,396)
1992
(141,941) (167,848) (107,411) (98,994)
1993
(198,322) (113,081) (118,623)
1994
(158,436)
(3,603)
1995
(6,725)
1996
1997
1998
1999
2000
2001
Incurred Development
(853,573) (875,565) (711,226) (508,341)
1997
1998
1999
(263,500) (133,831)
(4,097)
(146,345) (84,109) (63,946)
(140,703) (88,926) (65,310)
(176,605) (158,255) (82,627)
(36,532) (80,587) (137,977)
3,022 (109,581)
(8,991)
(59,028)
35,779
53,375
(760,663) (714,317) (273,794)
2000
2001
(22,965) (134,831)
(36,124) (12,014)
(58,822) (18,521)
(46,031) (15,748)
(39,226) (15,037)
(95,272)
15,784
6,427
71,453
140,691 162,651
241,404 292,874
350,320
90,082
Net
Loss Ratios
87%
92%
96%
107%
106%
114%
123%
121%
120%
111%
696,931
Source: OneSource
11
Med Mal Physics



NPV Breakeven at 116% CR – Current Book
NPV of 10% requires a 103% CR – @ current
new money yields
Elasticity - 100 bp change in yields requires 3
combined points.
12
Med Mal Trends - Lower Yields
Declining Fixed Income Yields
8.0%
7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
13
Med Mal Trends - Lower
Leverage?
Premium to Surplus
250%
200%
150%
100%
50%
0%
86 987 988 989 990 991 992 993 994 995 996 997 998 999 000 001
9
1
1
1
1
1
1
1
1
1
1
1
1
1
1
2
2
14
Med Mal Trends – Public
Valuations – Low Expectations
y = 3.8268x + 0.5668
1.20x
R2 = 0.3465
PRA
1.00x
Price to Book
0.80x
ACAP
0.60x
FPIC
0.40x
-12.0%
-10.0%
-8.0%
SKP
0.20x
-6.0%
0.00x
-2.0%
0.0%
-4.0%
2.0%
4.0%
6.0%
8.0%
2002 ROE
15
Med Mal Trends – Emerging
Premium Growth
Med Mal Gross Premiums by Accident Year
2001 Data
Year
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Claims
Made
$3,435,242
3,589,563
3,905,745
4,131,306
4,086,817
4,291,501
4,394,675
4,505,353
4,630,921
5,318,157
Growth
%
4%
9%
6%
-1%
5%
2%
3%
3%
15%
Occurrence
$1,312,983
1,393,383
1,644,968
1,756,607
1,731,472
1,683,489
1,719,845
1,811,688
2,201,560
2,214,795
Growth
%
6%
18%
7%
-1%
-3%
2%
5%
22%
1%
Total
Med Mal
$4,748,225
$4,982,946
$5,550,713
$5,887,913
$5,818,289
$5,974,990
$6,114,520
$6,317,041
$6,832,481
$7,532,952
Growth
%
5%
11%
6%
-1%
3%
2%
3%
8%
10%
Source: OneSource
16
Med Mal Trends – Improving AY
Results?
Med Mal Accident Year Loss Ratios
2001 Data - Aggregated
Year
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Claims
Made
87%
92%
96%
107%
106%
114%
123%
121%
120%
111%
Occurrence
108%
110%
106%
117%
129%
140%
143%
138%
100%
111%
Averages
108%
120%
Source: OneSource
17
Med Mal Expectations





Higher Rates
“Tail” Pressure
Dislocation
Companies with Issues – ERC et al?
Outcries
Legislative / Regulatory Attention
 Provider Revolts

18
Med Mal Expectations

Tort Reform – Not a Panacea
Halo States Not Immune – Kevin Bacon
Syndrome
Headlines
Consolidation
New Vehicles

=> Gradual ROE Improvement




19
Med Mal Expectations
1975
= 2002?
20
Medical Malpractice
Now Curable?
Blair Sanford, CFA