December 29, 2009 - Year end update

Dear PRI Partner:

I am writing to you as a part of PRI’s ongoing efforts to provide transparency around the recent discussion and speculation about what is happening with New York State medical malpractice insurance, and how the changing landscape may be affecting PRI. I wanted to take this opportunity to communicate directly about the current situation, to correct some misperceptions, and to provide some relevant facts about PRI today.

First, let me reassure you that PRI is a strong and viable company. Despite pressure from out-of-state entrants into the New York market, we have maintained a stable group of insureds that is in line with both our short and long-term projections. In 2009, we renewed the vast majority of our policies, and continued to create valued relationships with new physician groups and institutional insureds. In addition, we have more than $1.2 billion in cash and invested assets to service our policies, and are pleased to report that our investment portfolio has performed reasonably well in 2009 even with the economic recession.

We believe PRI’s reserves are well balanced, and we have not experienced any unexpected, significant rise in claim frequency or severity that would adversely impact this position. In fact, our claims reserves are running off ahead of expectations. That’s one of the reasons PRI is not advocating for or anticipating any need for the double-digit physician rate increases that some in the industry are suggesting. Indeed, PRI continues to advocate for steady, modest rate increases—only when absolutely needed—to ensure the overall viability of the system.

Of course, some financial challenges do exist. As we discussed in a communication about my recent testimony at the New York State Senate joint hearing, PRI and other insurers do feel the impact of current financial regulations governing medical malpractice insurers. One issue is the manner in which we are required to value investments in our portfolio. Under these rules, if the current value of an investment drops below its value when it was purchased, for accounting purposes it must be marked down to $0. But, the reality is that investment values will always fluctuate up and down in response to the economy and markets. However, the impact of these rules is that investments with real-world market value of millions of dollars cannot be accurately reflected on the balance sheet.

Like many assets affected by the economic downturn, a small portion of our investment portfolio is currently valued at less than we paid for it. On PRI’s balance sheet this temporary reduction in value requires that we record a surplus for the third quarter of 2009 that is substantially lower than in the prior year. It is important to understand that these are paper markdowns, not actual losses, and we expect improvement in these investments and their effect on our surplus. The markdowns do not impact our cash position or our ability to pay claims.

Insurers must also contend with a mismatch of regulation and policy that creates unwarranted financial pressure. New York State’s policy over the past 25 years has been to write medical malpractice insurance at the lowest possible rate, and secure guarantees from payers to pay assessments and surcharges in the event of financial difficulty. As a reciprocal insurer formed to guarantee access to quality insurance at reasonable rates, we support this practice. However, it does constrain our ability to generate the large surpluses typical of commercial insurance companies, and it increases the impact of economic volatility on our business.

In the coming weeks you may hear negative or misleading information about PRI from our competitors. We believe these actions are irresponsible and intended as a scare tactic used for competitive gain. If the past is any indication, we are confident there will be no effect on our ability to handle and pay your claims now or in the future.

The good news is that momentum is building for positive change on these issues. The National Association of Insurance Commissioners, the New York State Legislature and insurance regulators are seriously discussing the implementation of new financial regulatory standards that would remove the unnecessary financial burden on insurers’ balance sheets. We are optimistic about the prospects for change that would ensure the financial soundness of the system over the long term. Currently, S.5374-B, a bill which would make these changes law, is making its way through the New York State Senate. PRI is working constructively with the business and legislative communities to make progress on this legislation and related issues. It is our firm belief that creative, workable solutions will emerge from the 2010 legislative session.

If you would like to share your thoughts or have any questions for us about this matter, please feel free to email us at l.drew@medmal.com.

On behalf of PRI and our employees, I want to thank you for your ongoing support. We enter 2010 with great confidence and look forward to continuing to serve your needs in the years to come.

Sincerely,

Anthony J. Bonomo
Chief Executive Officer