DDI Annual Report 2011

An

nu

al R

epo

rt

2011

2

Chai

rman

’s M

essa

geStanding the

Test of Time

For this reason, we have worked

very hard to develop this physician-

centered company into a high

performance organization that

will stand the test of time

MESSAGE FROM THE CHAIRJUNE 5, 2012

We are happy to present to you the 2011 Annual Report for Doctors Direct Insurance, Inc. (DDI). You are encouraged to read carefully the entire report giving special attention to the audited

The physicians and others who founded DDI six years ago set about to establish a long-

visionaries sought to build Doctors Direct into a

an innovative and enhanced level of service

carrier.

-

which is the clearest indication that the physi--

and superior service to physicians for several

dividend to its shareholders in late 2011.

Not long ago, we were saddened to hear of the passing of our friend and original Board Chair,

protecting our physician policyholders with excel-lence and steadfastness.

As a policyholder of Doctors Direct and the Chair--

-

-sible pricing. My colleagues and I have built DDI into a strong player in this area of the insurance

Sincerely,

Board ChairDoctors Direct Insurance, Inc.

4

Sev

en

Keys

SEVEN KEYS There are seven reasons why

Doctors Direct Insurance

has succeeded in the

medical malpractice arena

2. A STABLE BOARD AND MANAGEMENT

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ence. This stability of supervision has allowed DDI to grow beyond original expectations.

1. A STRONG FINANCIAL FOUNDATION

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-

3. AGGRESSIVE DEFENSE OF CLAIMS

6

6

Sev

en

Keys

4. A Persistent Long-Term View

that chose expediency over core values in critical decision points. DDI

REMAINS COMMITTED TO ITS CORE VALUE OF BEING A LONG-

TERM - YET INNOVATIVE - PROVIDER OF MEDICAL MALPRACTICE

COVERAGE.

6. CONSISTENT AND FAIR UNDERWRITING

7. EXCEPTIONAL CUSTOMER SERVICE

5. EXPANDING SCOPE OF COVERAGE

-

sive protection for the practices of the physicians who insure with us.

8

Contents

INDEPENDENT AUDITORS’ REPORT ...................... 9

STATUTORY BASIS OF ADMITTED ASSETS & LIABILITIES 10

STATUTORY BASIS OF OPERATIONS ........................ 11

STATUTORY BASIS OF CHANGES IN CAPITAL & SURPLUS 11

STATUTORY BASIS OF CASH FLOWS ....................... 12

NOTES TO THE STATUTORY BASIS FINANCIAL STATEMENTS 13

YEARS ENDED DECEMBER 31, 2011 & 2010

STATUTORY

financial

statements

au

dito

r’s

repo

rt

Mike Kollath, CPAKollath & Associates, CPA LLC

Dear Reader:

The audited financial statements of Doctors Direct Insurance, Inc. (“the Company”) are in-cluded in this annual report. Kollath & Associates, CPA LLC audited these financial state-ments. These financial statements were prepared using the statutory basis of accounting, which is required by the Illinois Department of Insurance. Statutory accounting principles (“SAP”) are intended to be more conservative than generally accepted accounting prin-ciples (“GAAP”).

We encourage you to review these documents in their entirety. The statutory basis state-ments of admitted assets, liabilities and capital and surplus are the equivalent of a balance sheet for a non-insurance company. The statutory basis statements of operations are the equivalent of an income statement for a non-insurance company. The footnotes which accompany this audit report are part of the report and serve to provide a more complete picture of the Company’s financial status as developed in the course of our audit work.

Our opinion on the financial statements addresses whether or not the financial statements are presented fairly in accordance with both GAAP and SAP. Because the Company does not prepare GAAP financial statements, our opinion states that the financial statements are not presented fairly in accordance with GAAP. Our opinion on SAP indicates that the financial statements are presented fairly in accordance with SAP.

Sincerely,

Fin

an

cial S

tatem

en

ts

DOCTORS DIRECT INSURANCE, INC.

Statutory Basis Statements of Admitted Assets, Liabilities and

Capital and Surplus

2011 2010

Cash and invested assets:Bonds 9,321,400$ 7,567,515$ Preferred stocks 192,395 196,395 Common stocks 689,255 252,645 Cash and short-term investments 254,311 846,311 Receivable for securities sold - 135,102

Total cash and invested assets 10,457,361 8,997,968

Premiums in the course of collection 936,597 1,001,901 Accrued investment income 134,532 90,694 Net deferred tax asset 124,456 116,966

Total admitted assets 11,652,946$ 10,207,529$

Liabilities:Loss reserves 3,153,990$ 2,402,528$ Loss adjustment expense reserves 1,286,092 1,041,814 Unearned premiums 1,249,190 1,202,801 Accrued commissions and expenses 51,091 35,616 Accrued taxes, licenses, and fees 3,368 (10,157) Federal income taxes payable 53,656 11,931 Advance premiums - 251,013 Ceded reinsurance payable 663,186 210,050

Total liabilities 6,460,573 5,145,596

Capital and surplus:Capital

Common stock, $10,000 par value, authorized 200 shares; issuedand outstanding 111 shares 1,110,000 1,110,000

Paid-in surplus 4,440,000 4,440,000 Unassigned surplus 32,373 (98,067) Treasury stock, at cost, 7 shares (390,000) (390,000)

Total capital and surplus 5,192,373 5,061,933

Total liabilities and capital and surplus 11,652,946$ 10,207,529$

Admitted Assets

Liabilities and Capital and Surplus

10


Statutory Basis Statements of Operations

Years Ended December 31, 2011 and 2010

2011 2010

Premiums earned 2,358,498$ 1,984,025$

Losses and expenses incurred:Losses 756,462 954,276 Loss adjustment expenses 490,122 583,241 Underwriting expenses 1,038,253 867,192

Total losses and expenses incurred 2,284,837 2,404,709

Net underwriting gain (loss) 73,661 (420,684)

Net investment income 389,296 354,249 Realized capital gains,

net of tax expense (2011 - $6,000; 2010 - $41,000) 11,107 79,029 Miscellaneous income (expense) (12,332) -

Income (loss) before federal and foreign income tax expense (benefit) 461,732 12,594 Federal and foreign income tax expense (benefit), excluding tax on

realized capital gains 139,096 58,118

Net income (loss) 322,636$ (45,524)$


Statutory Basis Statements of Changes in Capital and Surplus


2011 2010

Balance at the beginning of year 5,061,933$ 5,025,603$

Additions (deductions):Net income (loss) 322,636 (45,524) Change in unrealized capital gains (losses), net of tax (benefit)

(2011 - ($5,312); 2010 - $7,782) (34,649) 22,887 Change in net deferred income tax (2,810) 79,616 Change in nonadmitted assets 16,863 (45,749) Change in provision for reinsurance - 25,100 Dividends paid to shareholders (171,600) -

Net change 130,440 36,330

Balance at the end of year 5,192,373$ 5,061,933$

Fin

an

cial S

tatem

en

ts

2011 2010

Cash from operating activities:Premiums collected $ 2,672,314 $ 2,614,293 Net investment income received 411,436 294,904 Miscellaneous income (12,332) - Benefits paid (5,000) - Commissions and expenses paid (1,255,097) (1,037,508) Federal income taxes refunded (paid) (103,371) (95,187)

Net cash provided by (used in) operating activities 1,707,950 1,776,502

Cash from investing activities:Proceeds from investments sold, matured or repaid:

Bonds and notes 5,958,338 7,862,501 Stocks 2,412,312 869,078 Miscellaneous proceeds 135,102 -

Total investment proceeds 8,505,752 8,731,579

Cost of investments acquired:Bonds 7,761,920 9,499,909 Stocks 2,881,798 803,365 Miscellaneous applications - 135,102

Total investments acquired 10,643,718 10,438,376

Net cash used in investing activities (2,137,966) (1,706,797) Cash from financing and miscellaneous activities:

Other cash provided (used), net 9,616 (12,722) Dividends paid to shareholders (171,600) -

Net cash provided by (used in) financing and miscellaneous activities (161,984) (12,722)

Net change in cash and short-term investments (592,000) 56,983 Cash and short-term investments at the beginning of year 846,311 789,328

Cash and short-term investments at the end of year $ 254,311 $ 846,311


Statutory Basis Statements of Cash Flows


12


Notes to Statutory Basis Statements


1. Nature of Business

Basis of Presentation

--

-

-ables are considered uncollectible.

-

-

any valuation allowance.

-

-

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No

tes

Use of Estimates

-

Investments

-

Cash and Short-term Investments

-

2011 2010

Equipment and computer software-nonadmitted:Furniture and equipment 3,446$ 2,501$ Computer software 42,652 37,000Total equipment and computer software-nonadmitted 46,098 39,501Accumulated depreciation (34,420) (15,948)

Net equipment and computer software-nonadmitted 11,678 23,553

Depreciation expense 18,473$ 11,781$

14




-

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-

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-

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N

otes




3. Invested Assets

AmortizedValue or Estimated Statement

December 31, 2011 Cost Gains Losses Fair Value Value

U.S. government and agencies 1,640,765$ 48,617$ (2,257)$ 1,687,125$ 1,640,765$ Political subdivisions of states,

territories and possessions 3,773,705 163,381 (8,190) 3,928,896 3,773,705 Industrial and miscellaneous 3,292,570 56,672 (72,266) 3,276,976 3,292,570 Certificates of deposit - domestic 480,000 14,185 (7,196) 486,989 480,000 Certificates of deposit - foreign 101,929 - (21,750) 80,179 80,179 Foreign industrial and miscellaneous 54,181 (1,453) 52,728 54,181 Total bonds 9,343,150$ 282,855$ (113,112)$ 9,512,893$ 9,321,400$

Preferred stock 193,935 6,050 (7,590) 192,395 192,395Common stock 680,242 49,045 (40,032) 689,255 689,255Cash 254,311 - - 254,311 254,311

Total invested assets 10,471,638$ 337,950$ (160,734)$ 10,648,854$ 10,457,361$

Gross Unrealized

AmortizedValue or Estimated Statement

December 31, 2010 Cost Gains Losses Fair Value Value

U.S. government and agencies 1,891,697$ 438$ (29,556)$ 1,862,579$ 1,891,696$ Political subdivisions of states,

territories and possessions 1,345,488 - (76,530) 1,268,958 1,345,488 Industrial and miscellaneous 3,763,329 59,033 (58,714) 3,763,648 3,760,331 Certificates of deposit - domestic 470,000 24,783 494,783 470,000 Certificates of deposit - foreign - - - - - Foreign industrial and miscellaneous 100,000 5,986 - 105,986 100,000 Total bonds 7,570,514$ 90,240$ (164,800)$ 7,495,954$ 7,567,515$

Preferred stock 193,935 4,240 (1,780) 196,395 196,395Common stock 228,681 23,964 - 252,645 252,645Cash 846,311 - - 846,311 846,311Receivable for securities 135,102 - - 135,102 135,102

Total invested assets 8,974,543$ 118,444$ (166,580)$ 8,926,407$ 8,997,968$

Gross Unrealized

16




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and 2010. Cash and Short-term Investments

Estimated StatementFair Value Value

Due in one year or less 434,471$ 411,192$ Due after one year through five years 2,552,329 2,540,165 Due after five years through ten years 2,789,363 2,721,653 Due after ten years through twenty years 2,490,892 2,468,475 Due after twenty years 1,245,838 1,179,915

Total bonds 9,512,893$ 9,321,400$

2011 2010

Bonds 354,961$ 337,965$ Preferred stocks 13,654 8,436 Common stocks 33,116 1,819 Cash and short-term investments - 13,504

Gross investment income 401,731 361,724 Investment expenses 12,435 7,475

Net investment income 389,296$ 354,249$

2011 2010

Bonds Gross gains 104,857$ 148,557$ Gross losses (69,824) (14,178)

Common stocksGross gains 23,358 8,768 Gross losses (41,284) (23,135)

Net realized capital losses before tax 17,107 120,012 Federal income tax benefit on realized capital gains 6,000 40,983

Realized capital gains, net of tax 11,107$ 79,029$

No

tes

recovery in fair value.

value.

Months in Unrealized Loss Position

No. of Securities Fair Value

Unrealized Loss Fair Value


Unrealized Loss

U.S. government and agencies 1 247,743$ (2,258)$ -$ -$ 247,743$ (2,258)$ Political subdivisions of states,

territories and possessions 6 729,248 (8,190) - - 729,248 (8,190)

Industrial and miscellaneous 22 1,513,937 (52,693) 414,273 (26,768) 1,928,210 (79,461) Foreign industrial and miscellaneous 1 52,728 (1,453) - - 52,728 (1,453)

Total of bonds 30 2,543,656 (64,594) 414,273 (26,768) 2,957,929 (91,362)

Preferred stocks 3 22,280 (2,720) 77,550 (4,870) 99,830 (7,590) Common stocks 20 314,161 (40,032) - - 314,161 (40,032)

Total temporarily impaired securities 53 2,880,097$ (107,346)$ 491,823$ (31,638)$ 3,371,920$ (138,984)$

TotalDecember 31, 2011

Bonds and notes

Less ThanTwelve Months

TwelveMonths or Greater




18




Months in Unrealized Loss Position

No. of Securities Fair Value



Unrealized Loss

U.S. government and agencies 4 1,364,024$ (27,672)$ 348,117$ (1,883)$ 1,712,141$ (29,555)$

Political subdivisions of states,territories and possessions 11 1,318,759 (79,201) - - 1,318,759 (79,201)

Industrial and miscellaneous 20 1,903,779 (53,045) - - 1,903,779 (53,045) Foreign industrial and miscellaneous 0 - - - - - -

Total of bonds 35 4,586,562 (159,918) 348,117 (1,883) 4,934,679 (161,801)

Preferred stocks 2 93,955 (1,780) - - 93,955 (1,780) Common stocks - - - - - - -

Total temporarily impaired securities 37 4,680,517$ (161,698)$ 348,117$ (1,883)$ 5,028,634$ (163,581)$

Less ThanTwelve Months

TwelveMonths or Greater

TotalDecember 31, 2010

Bonds and notes

-

-

-

-

Assets, at fair value Level 1 Level 2 Level 3 Total

Bonds -$ 80,179$ -$ 80,179$ Preferred stocks 192,395 - - 192,395 Common stocks 689,255 689,255

Total assets 881,650$ 80,179 -$ 961,829$




No

tes

2011 2010 Change

Federal income tax expense on operations 139,096$ 58,118$ 80,978$ Federal income tax on capital gains/losses 6,000 41,000 (35,000)

Federal income taxes expense 145,096$ 99,118$ 45,978$

2011 2010 Change

Total deferred tax assets 225,785$ 230,087$ (4,302)$ Total deferred tax liabilities 11,679 18,481 (6,802)

Net deferred tax asset 214,106 211,606 2,500

Tax effect of unrealized capital gains (losses) (7,965)

Change in net deferred income tax (5,465)$

20

Ordinary Capital Total Ordinary Capital Total Ordinary Capital Total

Gross Deferred Tax Assets 225,785$ 4,670$ 230,455$ 230,086$ -$ 230,086$ (4,301)$ 4,670$ 369$ Statutory Valuation Allowance Adjustment - (4,670) (4,670) - - - - (4,670) (4,670) Adjusted Gross Deferred Tax Assets 225,785 - 225,785 230,086 - 230,086 (4,301) - (4,301) Deferred Tax Liabilities 11,679 - 11,679 10,517 7,965 18,482 1,162 (7,965) (6,803) Subtotal (Net Deferred Tax Assets) 214,106 - 214,106 219,569 (7,965) 211,604 (5,463) 7,965 2,502 Deferred Tax Asset Nonadmitted 89,650 89,650 94,638 - 94,638 (4,988) - (4,988) Net Admitted Deferred Tax Assets 124,456$ -$ 124,456$ 124,931$ (7,965)$ 116,966$ (475)$ 7,965$ 7,490$

ChangeDecember 31, 2011 December 31, 2010

2011 2010

Pre tax income 159,029$ 18,222$ Dividends received deduction (net of proration) (9,462) (2,074) Penalties 379 340 Other assets nonadmitted 4,038 (8,008) Tax rate differential - (2,792) Valuation allowance (4,670) - Meals and entertainment 5,516 1,880 Prior year return to provision adjustment (11,409) 2,872 Other 2,470 1,280

Total statutory income taxes 145,891 11,720

Federal income tax expense (benefit) 145,096 99,118 Change in deferred income taxes 795 (87,398)

Total statutory income taxes 145,891$ 11,720$







No

tes

2011 2010

Deferred tax assets:Ordinary

Discounting of Unpaid Losses 129,054$ 114,609$ Unearned premium reserve 84,945 98,859 Other assets nonadmitted 3,970 8,008 Other 7,816 8,610

Subtotal ordinary deferred tax assets 225,785 230,086 Statutory valuation allowance adjustment - - Nonadmitted deferred tax assets 89,650 94,638

Admitted ordinary deferred tax assets 136,135 135,448

CapitalInvestments 4,670 -

Subtotal capital deferred tax assets 4,670 - Statutory valuation allowance adjustment 4,670 - Nonadmitted deferred tax assets - -

Admitted capital deferred tax assets - -

Admitted deferred tax asset 136,135 135,448

Deferred tax liabilities:Ordinary

Stock, bonds and other investments 8,499 5,153 Fixed assets 3,180 5,364

Subtotal ordinary deferred tax liabilities 11,679 10,517

CapitalInvestments - 7,965

Subtotal capital deferred tax liabilities - 7,965

Deferred tax liabilities 11,679 18,482

Net admitted deferred tax asset 124,456$ 116,966$

Deferred Tax Limits

22




Ordinary Capital Total Ordinary Capital Total Ordinary Capital TotalSSAP No. 10R Paragraph 10a, 10b & 10cAdmitted Deferred Tax Assets 124,456$ -$ 124,456$ 124,931$ (7,965)$ 116,966$ (475)$ 7,965$ 7,490$ Admitted Assets XXX XXX 11,652,946 XXX XXX 10,207,529 XXX XXX 1,445,417 Adjusted Statutory Surplus XXX XXX 5,022,449 XXX XXX 4,944,967 XXX XXX 77,482

Total Adjusted Capital from DTAs XXX XXX 124,456$ XXX XXX 116,966$ XXX XXX 7,490$

December 31, 2011 December 31, 2010 Change

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--

2011 2010

Premium written:Direct 3,206,516$ 3,249,365$ Ceded to nonaffiliates (801,629) (913,033)

Net premium written 2,404,887$ 2,336,332$

Premiums earned:Direct 3,175,256$ 2,807,961$ Ceded to nonaffiliates (816,758) (823,936)

Net premiums earned 2,358,498$ 1,984,025$

Loss and loss adjustment expenses incurred:Direct 1,766,309$ 1,776,753$ Ceded to nonaffiliates (519,725) (239,236)

Net loss and loss adjustment expenses incurred 1,246,584$ 1,537,517$




Federal ID # Name of Reinsurer Amount AA-1128001 Lloyds Syndicate Number 2001 304,381 AA-1340125 Hannover Ruckversicherungs Ag 244,010 AA-1126006 Lloyds Syndicate Number 4472 233,030

-

2011 2010

Balance as of January 1, net of reinsurancerecoverables of $760,071 and $520,834 3,444,342$ 2,109,880$

Incurred related to:Current year 1,648,479 1,462,470Prior years (401,895) 75,047

Total incurred 1,246,584 1,537,517

Paid related to:Current year 96,910 53,375Prior years 153,934 149,680

Total paid 250,844 203,055

Balance as of December 31, net of reinsurancerecoverables of $1,279,795 and $760,071 4,440,082$ 3,444,342$

No

tes

24




9. Leases

2012 33,527 2013 34,535 2014 35,564 2015 36,627 2016 21,930

2011 2010Nonadmitted assets:

Net deferred tax asset (89,651)$ (94,638)$ Office equipment and software (11,678) (23,554)

Total nonadmitted assets (101,329) (118,192)

Provision for reinsurance - - Unrealized capital losses, net of taxes (2011-($5,312); 2010-$7,782) (34,649)$ 15,105$

-

-




No

tes

26

ABOUT

OUR

COMPANYWith so many choices and relative low rates, what is it that distinguishes one company from another? How does an individual doctor or a physician group decide which carrier to go with?

physicians also deserve an exceptional level of service.

Doctors Direct was founded six years ago with a

-

contacts, i.e. the agents, the doctors we insure and

-

an extraordinary panel of defense attorneys. This -

a very strong defense posture.

Clearly, the preceding two paragraphs contain a

-

--

ering superior service to the doctors. All of these -

-care. DDI is the obvious choice for affordable

service.

Scan with your smartphone to learn about the DDI Difference

AN INSURANCE COMPANY CREATED FOR AND BY PHYSICIANS

Suite 500

Documents

DDI Annual Report 2011