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More geographically diverse med-mal group takes 2nd crack at stock conversion

A series of proposed transactions could culminate in the creation of a new publicly traded medical malpractice insurance group.

For the second time in a three-year span, two Pennsylvania-based reciprocal exchanges controlled by insurance company consolidator Diversus Inc. are seeking to convert to stock form under a newly created holding company that would issue common stock through a subscription rights offering. This time, however, they are joined by a third reciprocal exchange, which has contributed to a consolidated geographic profile less reliant on business from the Keystone State.

Physicians' Insurance Program Exchange and Professional Casualty Association originally filed in September 2015 for what would have been a novel transaction under a Pennsylvania statute enacted months earlier to facilitate reciprocal exchange-to-stock conversions for medical professional liability insurers. Under that proposal, the stock successors to those entities would have become subsidiaries of Professional Casualty Holdings Inc., a publicly traded company with a pro forma valuation appraised by Feldman Financial Advisors Inc. of between $21.2 million and $28.8 million.

The insurers withdrew their applications in September 2018 and simultaneously refiled new requests using a different transaction structure that incorporates the conversion of Positive Physicians Insurance Exchange, according to documents filed with the Pennsylvania Insurance Department. Diversus in January 2017 acquired Specialty Insurance Services LLC, the attorney-in-fact and management company for Positive Physicians.

Under the current proposal, the surviving stock insurance company and its holding company would both use the Positive Physicians name. A new Feldman Financial appraisal put the pro forma combined value of the three converted exchanges in a range from $35.7 million to $48.3 million.

Benefits of the conversions, according to both versions of the exchanges' applications, would include the creation of a single well-capitalized entity with a larger base of policyholders, greater access to capital and better ability to grow through organic and inorganic means. The exchanges said the transactions would improve the prospects for A.M. Best to issue a favorable financial strength rating to the surviving stock insurer, which could also provide a boost to growth prospects.

The inclusion of the existing Positive Physicians book and the evolution of the geographic profile of the other two exchanges might also contribute to a positive view from a ratings perspective.

In 2015, Physicians Insurance Program Exchange and Professional Casualty Association generated 99.6% of their combined physicians and surgeons liability business from Pennsylvania, but for the trailing-12-month period ended Sept. 30, 2018, that figure had fallen to 92.5%. Positive Physicians generated only 51.2% of its physicians and surgeons liability business from Pennsylvania during that same timeframe, meaning that the three-member group's Keystone State concentration would amount to 68.2%.

In addition to the group's $17.8 million in Pennsylvania premiums in that line, it also generated $5.7 million from New Jersey and $1.4 million from Michigan, with smaller amounts from Delaware, Maryland, Ohio and South Carolina. The Pennsylvania writings of all three exchanges have declined in recent years, but they have fallen especially sharply at Professional Casualty Association as it reported the loss of "major customer renewals" in August 2016 and January 2017.

With $48.8 million in premiums, Medical Protective Co. parent Berkshire Hathaway Inc. ranked as Pennsylvania's largest writer of physicians and surgeons liability business in Pennsylvania for the trailing-12-month period ended Sept. 30, 2018, followed by the group led by NORCAL Mutual Insurance Co. The University of Pittsburgh Medical Center-owned Tri-Century Insurance Co. placed third, and the combination of the three Diversus-controlled exchanges would rank fourth.

Although a registration statement had not been filed with the SEC as of this article's time of publication, Positive Physicians told state regulators that it intends to offer common stock at $10 a share. Eligible members of the exchanges would have the right to purchase stock in the subscription offering. Remaining shares would be sold in a second phase to officers, directors, employees, Diversus shareholders and standby purchasers Insurance Capital Group LLC and Enstar Group Ltd.'s Enstar Holdings (US) LLC. Griffin Financial LLC would assist in the placement of the stock.

Positive Physicians would join NI Holdings Inc., ICC Holdings and, most recently, Federal Life Group Inc. as insurers to have conducted subscription rights offerings in conjunction with stock conversions in the past two years. Medical professional liability insurers have also engaged in those transactions, albeit in the much more distant past, including American Physicians Capital Inc. and NCRIC Group Inc.