SecProbe.io

CORRESP
1
filename1.htm

Professionals Direct, Inc. Response Letter - 10/25/05

Warner  Norcross & Judd LLP

Attorneys at Law

900 Fifth Third Center

111 Lyon Street, N.W.

Grand Rapids, Michigan 49503-2487

Telephone (616) 752-2000

Fax (616) 752-2500

October 26, 2005

Mr. Jim B. Rosenberg

Mr. Jim Atkinson

Ms. Ibolya Ignat

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549

Re:

Professionals Direct, Inc.

Form 10-KSB for fiscal year ended

December 31, 2004

Filed March 16, 2005

Schedule 14A

Filed April 19, 2005

File No. 000-49786

Dear Messrs. Rosenberg and Atkinson and Ms. Ignat:

                    We are counsel to Professionals Direct, Inc. ("PDI" or the "Company"). PDI received your letter dated September 15, 2005, in which you provided comments on PDI's Form 10-KSB for the fiscal year ended December 31, 2004 (the "Form 10-KSB").

                    PDI strives to meet or exceed the Commission's requirements in all of its securities filings and has considered your comments very carefully. After reviewing your comments, the Company believes that, although the comments suggest enhanced disclosures, the existing filings comply with generally accepted accounting principles and all other applicable

Mr. Jim B. Rosenberg

Mr. Jim Atkinson

Ms. Ibolya Ignat

October 26, 2005

Page 2

requirements in all material respects. Consequently, the Company does not believe an amendment of the Form 10-KSB is warranted.

                    However, in order to enhance the information provided to investors and to address your comments, PDI respectfully proposes to incorporate appropriate suggestions in its future filings. Doing so will provide more detailed information about PDI's financial condition and business operations to the investing public and help meet PDI's goal of providing clear and timely disclosures to the investment community.

                    We submit for your consideration the following responses to your specific comments. For convenience of reference, each of the Commission's comments is set forth in full and PDI's response thereto immediately follows.

Form 10-KSB for the fiscal year ended December 31, 2004

Schedule 14A filed on April 19, 2005

Management's Discussion and Analysis, page A-5

Results of Operations, page A-6

Net Premium Earned, page A-6

Comment 1:

          Your explanation of the increase in net premiums earned seems unclear as to what actually caused these increases. Please disclose how the prior year premiums written impacted the current year premiums earned. In addition quantify the impact that this factor and all other factors cited had on your operations. Also include a discussion, as applicable, of any metrics such as the actual number of policies written to provide more detailed insight into what really caused the changes in these premiums.

Response:

          In future filings, the Company will include the items noted in your comment, including a more detailed description of the relationship between premiums written and premiums earned. The discussion of Net Premiums Earned set forth on page A-6 of the Form 10-KSB would be changed in future filings to be consistent with the following:

Mr. Jim B. Rosenberg

Mr. Jim Atkinson

Ms. Ibolya Ignat

October 26, 2005

Page 3

Net Premiums Earned. Net premiums earned is equal to direct premiums earned (premiums earned for policies written) less ceded premiums earned (amounts ceded to reinsurers) and is our primary source of revenue. The nominal increase in net premiums earned in 2004 compared to 2003 resulted from two offsetting factors - a significant increase in policies and premiums written in 2003 versus 2002 and a decrease in retention on 2004 versus 2003 written business. Because 2004 approximated 2003 written premium, but 2003 written premium ($24,294) was materially higher than 2002 ($10,404), 2004 net premiums earned would have been substantially higher than 2003 absent a change in retention. In 2004, the Company's retention was lower than in 2003. This decreased retention increased ceded premium which in turn reduced net premiums earned.

The effect of this lower retention on 2004 is seen in the table below.

Years Ended

2004

2003

Change

Percent

Change

(in thousands of dollars)

Beginning gross unearned premium

$10,468

$5,517

$4,951

89.7%

Beginning ceded unearned premium

(1,775)

(1,015)

(760)

(74.9%)

Beginning net unearned premium

8,693

4,502

4,191

93.1%

Direct premiums written

24,009

24,294

(285)

(1.2%)

Ceded premiums written

(9,924)

(4,176)

(5,748)

(137.6%)

Net premiums written

14,085

20,118

(6,033)

(30.0%)

Ending gross unearned premium

10,738

10,468

270

2.6%

Ending ceded unearned premium

(4,163)

(1,775)

(2,388)

(134.5%)

Ending net unearned premium

6,575

8,693

(2,118)

(24.4%)

Net premiums earned

$16,203

$15,927

$276

1.7%

Direct premiums written decreased 1.2% when compared to the prior year. PDIC's new business premiums written in 2004 were significantly less than in 2003 due, in part, to the absence of significant disruptions in the markets in which PDIC operates. For the year, new business totaled $3,583 compared to $13,722 for 2003. For 2004, the number of policies written and the average premium per policy did not change significantly from 2003. For policies with 2004 effective dates, PDIC decreased its per claim retention by purchasing more reinsurance from third party reinsurers. This reduces PDIC's net premiums written and will reduce net premiums earned as the policies are earned out. Decisions on the appropriate level of reinsurance are impacted by a variety of factors from pricing, to level of surplus, to availability and credit quality of the reinsurers.

Mr. Jim B. Rosenberg

Mr. Jim Atkinson

Ms. Ibolya Ignat

October 26, 2005

Page 4

As such, reinsurance retentions vary from year to year. In 2005, we do not expect to see material changes in the levels of direct premiums written or in our reinsurance retention.

Losses and Loss Adjustment Expenses, page A-6

Comment 2:

          Your discussion of the significant increase in loss ratio between the two periods is very limited. In particular it appears that, based on the information in note 7, most of this increase is related to current year claims. In particular we note that current year revenues were relatively flat, but that the current year charge disclosed in that note increased substantially. Please disclose why your loss ratio deteriorated so significantly in the current period. Also disclose how this current period increase impacted the significant increase related to prior periods that is disclosed in your Form 10-QSB for June 30, 2005.

Response:

           Loss reserves estimates are set after taking into consideration the results of the reserve analysis performed by our independent actuary. The loss ratio for 2003 was below our historic average. The loss ratio for 2004 was above our historic average by a similar amount. Annual loss ratios are impacted by many factors, including premium levels, retention levels, frequency of reported claims, development of prior year loss estimates and the severity of claims, and will fluctuate significantly. Volatility can be expected given the complex nature of lawyers professional liability claims and multi-year settlement periods.

          Claim frequency occurred within an expected range based on our past experience when measured against the average number of in-force insured attorneys.  The aggregate number of claims reported in 2004 was up 16% when compared to 2003.  Loss ratios are also affected by claim severity which in turn is affected by reinsurance. While severity of prior year claims has increased, it is still within expected ranges based on historical experience. This increase occurred in the latter part of 2004 when adjustments to several previously reported claims exceeded retention levels.  Another factor contributing to the increase was the increase in our estimate for adjusting and other payments resulting from the actuarial review. Due to the size of our reserves, even a small percentage change in the loss reserve liability can have a material impact on our results of operations for the period in which the change occurs.

Mr. Jim B. Rosenberg

Mr. Jim Atkinson

Ms. Ibolya Ignat

October 26, 2005

Page 5

With respect to our Form 10-QSB for June 30, 2005, the increase in losses related to prior periods represents a further increase in the estimate of losses related to accident years 2004 and prior.  This resulted from the additional development of several significant claims as well as a strengthening in the overall reserves as determined by the actuarial review performed as of June 30, 2005.  Overall loss ratios remain within our historical experience. Of course, losses for the 2004 year are still maturing and will ultimately settle for an amount different than has been provided.

Financial Condition, Liquidity, and Capital Resources, page A-7

Comment 3:

          Your current liquidity discussion does not appear to adequately address the holding company structure disclosed in note 1. Please disclose how this structure affects your ability to service debt held at the holding company level. Further include a discussion of the legal limits on dividends that can be paid by the operating subsidiaries to the holding company. Disclose specifically here and in note 12 the actual dollar amount of dividends that may be paid without prior regulatory approval.

Response:

          We respectfully direct the Commission's attention to Part I, Item 1, of the Form 10-KSB, that describes the holding company structure disclosed in Note 1. We believe adding additional discussion of the holding company structure in the liquidity discussion would be unnecessarily repetitive.

          Only the insurance subsidiary, PDIC, has specific statutory limits on the payment of dividends. The other subsidiaries are not limited, except to the extent that the Michigan Business Corporation Act prohibits payments that would otherwise cause the company to become illiquid or unable to pay its obligations when due. PDIC is prohibited from paying dividends until such time as PDIC's Surplus Certificates are paid in full, as discussed on page A-10 of the Form 10-KSB (under the heading "Dividends"). A discussion of dividend restrictions, including the amount of dividends that may be paid without prior regulatory approval, is also set forth in Part 1, Item 1 of the Company's Form 10-KSB (page 11).

Mr. Jim B. Rosenberg

Mr. Jim Atkinson

Ms. Ibolya Ignat

October 26, 2005

Page 6

          In future filings, PDI will include an expanded discussion regarding Financial Condition, Liquidity and Capital Resources, including the Company's ability to service debt held at the holding company level. The discussion of Financial Condition, Liquidity and Capital Resources set forth on page A-7 of the Form 10-KSB will be changed in future filings to include an opening paragraph consistent with the following:

Professionals Direct, Inc. is a legal entity separate and distinct from its subsidiaries. Because the parent holding company has no other business operations, management fees and dividends from its subsidiaries represent the principal source of funds for its obligations, including debt service. The management fees paid by PDIC are pre-approved by the Office of Financial and Insurance Services, the regulatory body in Michigan responsible for the oversight of the insurance subsidiary. Under the terms of the plan that governed the Company's conversion, PDIC is prohibited from making any dividend payments to the parent holding company until such time as the surplus certificates are repaid in full. The management fees paid by the remaining subsidiaries are determined from time-to-time by the Board of Directors. The payment of management fees and dividends by our other subsidiaries are limited only by solvency requirements.

          We note, however, that the information in this proposed opening paragraph merely repeats the information elsewhere in the Company's Form 10-KSB. Accordingly, the Company believes that the filing is complete and no amendment is required.

Critical Accounting Estimates and Judgments, page A-8

Loss and Loss Adjustment Expense Reserves, page A-8

Comment 4:

          We note throughout the document that management discusses the inherent uncertainty in establishing reserves for loss and loss adjustment expenses. Given this inherent uncertainty, we feel that a more robust discussion of this estimate is appropriate. Please provide disclosure that better explains the judgments and uncertainties surrounding this estimate and the potential impact on your financial statements. We believe that disclosures explaining the likelihood that any materially different amounts would be reported under different conditions or using different assumptions is consistent with the objective of Management's Discussion and Analysis. The disclosure should include the following information for each of your lines of business:

Mr. Jim B. Rosenberg

Mr. Jim Atkinson

Ms. Ibolya Ignat

October 26, 2005

Page 7

•

Reserves accrued as of the latest balance sheet date presented. The total of these amounts should agree to the amount presented on the balance sheet;

•

Because IBNR reserve estimates are more imprecise, the amount of IBNR separately from loss reserves for all lines of business;

•

The range of loss reserve estimates as determined by your actuaries.

•

If multiple point estimates are generated, include the range of these point estimates.

•

Discuss how management determined the most appropriate point estimate and why the other point estimates were not chosen.

•

Clarify whether the company actually records to the point estimate or if not, how that estimate is used.

•

The quantified and qualitative impact that reasonably likely changes in one or more of the variables (i.e. actuarially method and/or assumptions used) would have on reported results, financial position and liquidity.

Response:

          PDIC is a mono-line insurer, therefore line of business disclosure is unnecessary.

          The Company's ability to quantify the impact of overall changes in assumptions on the likely range of loss reserve estimates is difficult to accomplish without hindsight. With the passage of time, PDI can now determine that as of June 30, 2005, loss reserves originally recorded at December 31, 2004, appear to have been deficient by approximately $2.3 million. The reason they only "appear to have been deficient" is that most of these claims are still unresolved and the ultimate liability for these claims has not yet been determined and may either increase or decrease. This apparent deficiency could not have been determined when the Form 10-KSB was filed. Interestingly, our independent actuary indicated that reported loss reserves at December 31, 2004, could be overstated by as much as $1.1 million with only nominal changes in assumptions.

          In future filings, the Company will address the items noted in your comment, including an enhanced description of the Loss and Loss Adjustment Expense Reserves. The discussion of Loss and Loss Adjustment Expense Reserves set forth on page A-8 of the Form 10-KSB will be enhanced in future filings to be consistent with the following:

Loss and Loss Adjustment Expense Reserves

PDIC maintains reserves for payment of losses and loss adjustment expenses for reported claims and for claims incurred but not reported arising from policies that have been issued. PDIC

Mr. Jim B. Rosenberg

Mr. Jim Atkinson

Ms. Ibolya Ignat

October 26, 2005

Page 8

provides for the estimated ultimate cost of those claims without regard to how long it takes to settle them or the time value of money. The determination of reserves involves actuarial and statistical projections of what PDIC expects