A Story of Strength; A Proven Model that Works

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2 A Story of Strength; A Proven Model that Works Dear Policyholder, In 2009, Healthcare Underwriters Group of Kentucky (HUKY) continued to provide unparalleled value to its insured doctors/owners by spending 2 times the amount of money defending its doctors as compared to proceeds received by the plaintiffs and by providing exceptional customer service. While HUKY is by no means the largest company of its kind, it does remain one of the most financially stable, which is evidenced by its strong financial ratios. Through client-based marketing, collaborative sales execution, and benefits driven sales presentations HUKY was able to realize excellent new business growth in 2009, while not compromising the quality of the physicians who became insureds. The Company s philosophy and vision has remained unchanged: Insure the right doctors, at the right price, aggressively defend our physician s reputations and if/when there are excess premiums return them to our doctors. Hallmarks of Success From the very beginning, HUKY was founded on the principals of going back to the basic business fundamentals. Our success can be attributed to conservative management, aggressive claims defense, comprehensive underwriting, an extensive sales pipeline, focused sales outreach, and the combination of doctor ownership/governance with a highly experienced management team. These principals coupled with our physicians continuing to practice excellent medicine assisted HUKY in delivering rate stability to its policyholders and places Kentucky physicians in control of their own non-profit medical malpractice insurance company. Financial Strength HUKY s financial standing continues to strengthen despite a continuing soft market. In fact, HUKY s surplus increased 5% to $9.6 million from last year and HUKY s investment portfolio grew almost 10% for a gain of nearly $2.4 million. While level premiums and additional available credits slightly reduced HUKY s gross written premium, HUKY was able to achieve an aggregate headcount growth of new insured physicians of 9% in Furthermore, HUKY s net premium to surplus ratio of 0.66 to 1.00 continues to improve from prior years. The National Association of Insurance Commissioners (NAIC), along with the respective state s department of insurance regulates the conduct of insurance companies in all 50 States. The NAIC s Risk-Based Capital (RBC) ratio is used to measure the overall financial strength and well-being of insurance companies. HUKY s RBC ratio was 575%, which vastly exceeded the industry-wide benchmark of 300%. Claims/Aggressive Defense 2009 successes continued in our litigation matters. In demonstrating that a strong legal defense is the foundation of our model, HUKY had only one adverse verdict from a jury the entire year. However, the continued defense of that case was, indeed, warranted. The plaintiff/patient had expressed in the pleading of the Complaint damages of almost $350,000. Since we felt the amount was grossly overstated, and the patient was not reasonable in accepting a lesser amount, we continued to defend our insured physician through trial. The jury heard the testimony and determined the value to the patient was only $4,000. The legal costs to defend against this unreasonable demand was thirty times the amount of the verdict. Such strong stance through aggressive legal defense is what sets HUKY apart from the rest of the insurance carriers. We are here to protect our physicians reputation. Plan for 2010 Already, 2010 has started off well for HUKY with our physicians continuing to practice excellent medicine. In addition, now more than ever in the Company s history, our board members and physician owners/insured are getting actively involved in referring and recommending their well-qualified colleagues to HUKY. These marketing efforts along with our focused sales initiatives and the leveraging in sales of physician networks will result in another exceptional year of measured growth in the number of quality Kentucky doctors joining HUKY. We thank you for your continued support of your company and hope we can count on you to continue to help us grow. If you have any questions, please call anytime. It is our privilege to serve you. Art McLaughlin, M.D. MD Healthcare Underwriters Group Chairperson Steven L. Salman, MBA, J.D. Healthcare Underwriters Group Chief Executive Officer

3 Finding the Right Physicians and Defending Them. Solid Performance in a difficult market environment Despite the unstable market environment, your company performed admirably. Our investment portfolio grew by 10% and our aggregate new insured headcount grew by 9% in HUKY s model and vision remained unchanged: Insure the right doctors, at the right price, aggressively defend our physician s reputations, manage conservatively and responsibly and perform within our expectations successfully regardless of challenging market conditions. A market that in 2009, saw new market competition, regulatory pressures, unrealistic competitor premium quotes to buy marketshare and increased claims frequency all played a role in challenging HUKY s model. However, your company prevailed and continues to provide a viable and healthy future for our policyholders/owners. When choosing a malpractice carrier, its approach to claims is a major factor in the decision making process. Our practice joined HUKY because of their aggressive defense against claims as well as their zero tolerance of lawsuits. We liked the ownership by Kentucky physicians and the fact that the rates were based only on Kentucky claims experience. Edward C. Adler, M.D. Gastroenterology Louisville, KY Important features that set HUKY apart: Owned exclusively by Kentucky doctors Governed by Kentucky doctors Owner-policyholders elect board members on an annual basis Aggressive defense against claims ZERO tolerance of nuisance claims Peer review of claims by Physician Committee Underwriting committee comprised of insured physicians Managed by an experienced team of insurance professionals Non-profit Non-assessable Financially strong and stable Protected by Reinsurers rated A- or better 100% committed to Kentucky doctors Licensed by the Kentucky Department of Insurance Domiciled in Kentucky Protecting physicians in Kentucky is HUKY s only business Loss reserves certified by Independent Actuary Member of Kentucky Insurance Guaranty Association Defense Ownership Strength HUKY has zero tolerance for nuisance claims. Healthcare Underwriters Group (HUKY) will spend whatever is required to defend our physician s license and reputation. In fact, HUKY spends 2 times the amount of money defending its doctors as compared to proceeds received by the plaintiffs. Claims are evaluated by peers and the decision to defend/settle the claim is based solely on merit. David W. McKenney Regional Vice President - Claims

4 2009 Financial Summary Financial growth for HUKY remained solid throughout Combined ratios remained extremely competitive. The support of all our owners/policyholders coupled with an experienced management team and dedicated employee base have helped to protect our ratios in this time of economic downturn. Keeping expenses down, being prudent and frugal in using HUKY resources and having well thought out strategic initiatives to offset market volatility continues to reinforce HUKY s profitability. HUKY will continue to grow its market share throughout Kentucky, look for opportunities to enhance our service offerings and continue to be a responsible and trusted partner to our policyholders/owners. HUKY Direct Premiums Written HUKY Statutory Surplus When we researched carriers, we wanted a partner that provided us the comfort of a solid defense philosophy, strong risk management programs and was physician governed/owned. HUKY has exceeded our expectations and continues to be one of the best decisions our practice has made. Kara R. Shay, MD Internal Medicine Crestview Hills, KY Financial Highlights from 2009: Investment portfolio grew to $27.9 million Claims reserves increased to $15.3 million Statutory surplus grew to $9.6 million Measurements of Strength: Key Ratios Your company exceeds industry benchmarks for these important ratios and equals or compares positively to the composite numbers of medical professional liability companies rated A or higher by A.M. Best in % 800% 600% 400% 200% 0% Risk-Based Capital Net Written Premium to Policyholder Surplus 0 Industry Benchmark: > 300% 838% A.M. Best Comp Industry Benchmark: < 1.5x 0.6 A.M. Best Comp HUKY 1 The A.M. Best Composite represents companies rated A or higher by A.M. Best for A.M. Best is the largest and longestestablished company devoted to issuing indepth reports and financial-strength ratings about insurance organizations % HUKY

5 2009 Financial Summary Healthcare Underwriters Group is physician owned, has exceptional customer service, the senior people are always accessible, they have an excellent support staff delivering unparalleled service efficiencies and they go that extra mile for their physicians protecting them against unwarranted litigation. Marcello Pietratoni, M.D., F.A.C.O.G. OB/GYN Louisville, KY HUKY Financial Summary (Statutory) 12/31/ /31/ /31/ /31/ /31/2005 Direct Premiums Written $7,656,860 $7,979,345 $8,091,702 $7,757,883 $6,487,703 Assets Cash and Invested Assets $27,860,807 $25,430,351 $23,486,927 $18,716,391 $14,094,867 Other Assets $2,494,849 $1,376,127 $1,297,767 $648,897 $693,776 Total Admitted Assets $30,355,656 $26,806,478 $24,784,694 $19,365,288 $14,788,643 Liabilities and Surplus Total Liabilities $20,791,909 $17,663,514 $16,519,986 $11,646,506 $8,042,020 Statutory Surplus $9,563,747 $9,142,964 $8,264,708 $7,718,782 $6,746,623 Total Liabilities and Surplus $30,355,656 $26,806,478 $24,784,694 $19,365,288 $14,788,643 We succeed together as a team by providing exceptional care to our Physician Owners and their reputations. This creates the kind of collaborative purposeful business s environment that makes Healthcare Underwriters Group Best in Class Ronald Goff Vice President and Chief Sales/Marketing Officer

6 Your HUKY Leadership Team Your Elected Board (The Subscribers Advisory Committee (Board) is comprised of actively practicing HUKY insureds/owners.) Arthur J. McLaughlin, M.D. Chairperson Radiology, Louisville Gregory L. D Angelo, M.D. President Orthopaedics, Lexington Robert D. Knight, M.D. Treasurer Emergency Medicine, Owensboro Linda A. Lear, M.D. Secretary Pediatrics, Nicholasville Aaron W. Crum, M.D. Obstetrics and Gynecology, Pikeville James L. Evans, III, M.D. Emergency Medicine, Fort Thomas Keith B. Hall, M.D. Orthopaedic Surgeon, Pikeville Your Management Team (Experienced medical liability insurance professionals) Steven L. Salman, MBA, JD Chief Executive Officer David W. Lester, CPA Vice President/Chief Financial Officer Joshua M. Salman, MBA Vice President/Chief Operating Officer Morton C. Bell Vice President/Chief Underwriting Officer William C. Ludwig, JD Vice President/Chief Claims Officer Ronald J. Goff, MS Vice President/Chief Sales and Marketing Officer Thomas W. Mueller, CPA Vice President - Controller David W. McKenney Regional Vice President - Claims Ellen J. Barton, JD, CPCU Director of Risk Managment John R. Tanner, M.D., JD Consulting Risk Manager Compare the Facts HEALTHCARE UNDERWRITERS GROUP KENTUCKY MOST COMMERCIAL INSURANCE COMPANIES WHO OWNS THE COMPANY? Kentucky doctors Shareholders WHERE DO ANY PROFITS GO? Kentucky doctors Shareholders POSSIBILITY OF DIVIDENDS? Yes NO (some mutuals/reciprocals pay dividends) REASON COMPANY To defend doctors and stabilize premiums To make a profit WAS CREATED? CLAIMS DEFENSE STRATEGY? Claims are evaluated by peers. The decision to defend or settle is based solely on medical merit. Often determined by claims adjusters without the benefit of peer review. May settle claims for financial reasons unrelated to merit. STATE GUARANTY FUND ASSESSMENTS Kentucky Insurance Guaranty Association assessments not passed on to policyholder Typically each policyholder receives a separate assessment HUKY s best referrals come from its insured physicians. They know best who is qualified to share risk with them. If you would like to refer a physician, please contact Ronald Goff at rgoff@hugroups.com or at Forest Green Blvd, Suite 403, Louisville, Kentucky Phone: Fax: rgoff@hugroups.com